Kevin Drum

Core Principles

| Wed Feb. 25, 2009 3:54 PM EST
AP reports on Barack Obama's plans for financial regulation:

In remarks prepared for delivery Wednesday afternoon, the president offers no specific regulatory framework, but calls for "core principles." Among them are consumer protections, accountability for executives and a regulatory plan that covers a broad series of financial transactions that have escaped regulation in the past.

Atrios says Obama is "making the right noises" here, but I'm not quite so sure.  Consumer protections are fine, but frankly, not really central to what caused the financial meltdown.  "Accountability" for executives is mush.  They're already accountable in most meaningful senses of the word.

That leaves a "regulatory plan that covers a broad series of financial transactions that have escaped regulation in the past" — which is fine but could mean pretty much anything.  What's the core principle here?

I know everyone is probably tired of hearing me say this, but I wish Obama would talk more about a real core principle: regulating leverage more effectively, and doing it everywhere and for all types of securities.  This isn't easy, especially when you need to get practically the entire world on board, but more than any other single change it would force financial institutions to be more responsible; it would make future asset bubbles less destructive; and it would fundamentally put a stop to the casino atmosphere and outlandish paydays that have permeated Wall Street over the past decade.  If we really wanted to get ambitious, we might even try to set up a countercyclical regime that increased capital requirements in good times and lowered them during bad times.  But regardless of how the details turn out, if our new regs are driven by a core concern for regulating leverage, they'll do some good.  If not, it's likely to be a repeat of Sarbanes-Oxley: lots of good intentions, but not much bang for the buck.

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The First Dog

| Wed Feb. 25, 2009 2:35 PM EST
The Obama family has apparently settled on the type of dog they want:

First Lady Michelle Obama told People Magazine that the the family wants to find a rescue Portuguese Water dog.

....But the name is still a source of familial tension in the White House."Oh, the names are really bad. I don't even want to mention it, because there are names floating around and they're bad," Mrs. Obama said. "I think, Frank was one of them. Frank! Moose was another one of them. Moose. I said, well, what if the dog isn't a moose?"

As I recall, my mother pretty much let us kids name the cats when we were young.  This produced inspired names like Meow (my sister's doing, I think), Tippy (white tip on her tail — at least until the day I slammed a door on it accidentally) and Butterfly (a huge black cat who may have been the least butterflyish animal ever born).  But you know, they all seemed like pretty good names to us.  So if the Obama kids want to name their dog Moose, I say let 'em.

Democracy in the Middle East

| Wed Feb. 25, 2009 1:15 PM EST
PIPA's latest survey of attitudes in Muslim countries is out, and for the most part there are few surprises.  Long story short, most respondents don't approve of attacks on American civilians (though they largely do approve of attacks on soldiers), but that's about it for the good news.  Broadly speaking, they don't like the U.S., don't like our presence in the Middle East, and think al-Qaeda's goals (if not its methods) are admirable.

The chart on the right demonstrates the depth of our problem.  Virtually no one believes that the United States truly supports democracy in Muslim countries, and who can blame them?  We don't — and all the airy talk in the world won't change that.  Only genuine change will.  Marc Lynch:

The most important starting point is to recognise that American policy is the most critical issue. No amount of public diplomacy will convince Arabs or Muslims to embrace American actions they detest. The Bush administration’s conception of public diplomacy generally involved putting lipstick on a pig — attempting to sell policies formulated in isolation from their likely reception. Even when public diplomacy officials had a seat at the table, they have had little influence on shaping decisions.

Improved public diplomacy from Obama — including his still unscheduled big speech in a Muslim capital — will be valuable, but only if it's accompanied by policy changes as well.  Getting out of Iraq will help.  Seriously engaging in the Israeli-Palestinian peace process will help.  And supporting democracy more consistently will help.  But if the PIPA poll is accurate, it's going to be a long, hard slog.  There's a helluva lot of ground to be made up.

Coleman vs. Coleman

| Wed Feb. 25, 2009 12:32 PM EST
I haven't been following the Minnesota Senate recount very closely, but apparently Norm Coleman still has no intention of abandoning his Ahab-like quest to retain his seat even though he lost the election:

Republican Norm Coleman on Tuesday refused to rule out an appeal if a three-judge panel rules against his challenge in what he called “the race that never ends.”

....Coleman said his lawyers will wrap up their arguments by the end of the week, and he expected a ruling to come down in a “couple weeks.” If he loses, he would not say whether he would try to appeal a ruling with the state Supreme Court.

“I’m not ruling it in or ruling it out, let’s see what the court does and hopefully they’ll do the right thing,” Coleman said. He added: “This process already is Tolstoy-esque.”

Considering that Coleman is the guy primarily responsible for this Tolstoy-esque state of affairs, his complaint here is a little rich.  Still, as much as I'd like to blame him for this whole mess, I'm not entirely sure I can.  Speaking purely as a layman, what really appalls me about all this is how slowly the courts are moving.  Are the issues really so complex that things can't be expedited a wee bit?  Are Minnesotans really bound and determined to make Florida look like a model of efficiency and dispatch?  What's going on with these guys?

Obama and the Banks

| Wed Feb. 25, 2009 11:49 AM EST
I mentioned this briefly last night, but I want to highlight this short passage from Obama's speech again:

I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, CEOs won't be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet. Those days are over.

Still, this plan will require significant resources from the federal government — and yes, probably more than we've already set aside. But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.

The first paragraph starts us off with some excellent populist banker bashing.  You can almost feel the pitchforks and torches in the air.  But it's just a carnival barker's trick designed to misdirect.  In the second paragraph, delivered so quickly you could be forgiven for missing it, we get the substance: "This plan will require significant resources from the federal government — and yes, probably more than we've already set aside."

Bottom line: we intend to keep shoveling money into America's big banks.  But we don't really intend to get anything for it.

Here's the best interpretation I can put on this.  Obama knows that he's very likely going to have to nationalize one or more banks over the next few months.  But he also knows that talking about it openly is disastrous.  Like it or not, it just is.  So the only way for it to work is to deny, deny, deny right up until the day you stop denying.  Then you make a clean sweep: you take over whichever banks you need to and give the rest a firm, credible clean bill of health.  And everyone can get on with business.

Maybe this is wishful thinking on my part.  But I hope this is what's going on.

Jindal's Jaw Jaw

| Wed Feb. 25, 2009 11:07 AM EST
Greg Veis on the political world's Mission Impossible:

Is there a more dangerous assignment for a rising party star to accept than a State of the Union rebuttal?....In all the heated discussions last summer about who Obama’s running mate should be, whenever Kathleen Sebelius’s name came up, people would talk about how impressive it is that she’s a strong Democratic voice in a conservative state and that she has true policy credentials--and then they’d say, But did you see her rebuttal? Similar deal with Tim Kaine, who was plagued by his dead fish performance in ’06. Gary Locke, Obama’s likely next pick for Commerce, gave such a bad speech six years ago that it’s a breathtaking act of charity that he’s been allowed to talk in public, in front of other people, with cameras around, again.

And it's not just rising stars who bomb at this assignment.  Remember Harry Reid and Nancy Pelosi in 2005?

This was why I didn't bother listening to Jindal's speech last night.  I figured he was doomed no matter what, so why bother.  But I've since watched it and — well, holy cow.  What a train wreck.  Aside from the bizarre decision to follow one of America's most sophisticated speechmakers with an address that sounded like it was meant for a class of third graders, it didn't even make sense.  It wasn't the government that restored New Orleans after Katrina?  Tell that to the taxpayers who forked over $200 billion.  We need to spend less during a massive recession?  You betcha.  Republicans stand for universal access to affordable healthcare coverage?  Huh?  Now is not the time to dismantle our defenses?  Who's proposing that?  And the usual lie about the stimulus bill funding a train from LA to Las Vegas got even more baroque in Jindal's telling, morphing into a mag lev train.  Is that supposed to make it sound even worse?  Or what?

Yeesh.  Even the Fox News bobbleheads couldn't stomach this stale repetition of Club for Growth talking points.  Who can blame them?

And as long as I'm picking on Jindal, who picked out his tie, anyway?  Was it supposed to kinda sorta match the stripes on the American flag next to him?  Or was it just a colorful candy cane?  Or what?

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Out of Iraq

| Wed Feb. 25, 2009 2:56 AM EST
AP reports that Barack Obama has settled on a withdrawal schedule for Iraq:

President Barack Obama plans to remove all U.S. combat troops from Iraq by August 2010, administration officials said Tuesday, ending the war three months later than he had promised during his presidential campaign.

The withdrawal plan — an announcement could come as early as this week — calls for leaving a large contingent of troops behind, between 30,000 and 50,000 troops, to advise and train Iraqi security forces and to protect U.S. interests.

Reuters is slightly less positive about this, quoting an official saying only, "That's the way the wind's blowing."  And MSNBC's report adds a caveat from another official: "The 19-month withdrawal is based on assumptions — (on improved security) — and if those assumptions don’t hold up, all bets are off, and we'd have to adjust."

Still, put this together with Obama's flat statement in Tuesday's speech that "I will soon announce a way forward in Iraq that leaves Iraq to its people and responsibly ends this war," and it sounds like we're finally getting out.  Not completely out, but then, Obama never promised otherwise.  For better or worse, we'll probably be living with his "residual force" for quite a while.

The Gaussian Copula

| Wed Feb. 25, 2009 2:33 AM EST
I've been reading about Wall Street's fabulous Gaussian copula function for some time, but aside from a vague notion that it was a rocket science method of measuring risk, I've never had the slightest idea what it was actually all about.  In this month's Wired, Felix Salmon explains.  Basically, it's a clever way of figuring out whether the odds of two different bonds defaulting are correlated.  If they are, then bundling them together into a single security is risky since there's a good chance they'll both go into the toilet at the same time. If they aren't, bundling them together is fairly safe since even if one of them defaults, at least the other one is still safe.  Its inventor was a math guru named David X. Li:

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math — by Wall Street standards, anyway — Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

....When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market.....Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

Hmmm.  The implication here is that the fundamental problem with the Gaussian copula — which was the mathematical basis behind the proliferation of CDOs, CLOs, and all the other shiny new investment vehicles that imploded so spectacularly last year — is that it was based on the relatively brief historical record of credit default swaps.  I don't have any doubt that that's true, but a few paragraphs later the real villain turns out to be a familiar one:

"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."

There's just no getting around it: there might have been technical problems with the Gaussian copula function, but even if it had worked the way people thought it did it wouldn't have mattered.  The rating agencies and the sell-side BSDs were just using it as an excuse to pretend that house prices would rise forever anyway.  That was a far more fundamental problem than the statistical shortcomings of the formulae they used.

Still, it's an intriguing piece that's worth reading.  You can put it alongside Joe Nocera's piece last month on Value at Risk, yet another quant model developed at JPMorgan whose wide misuse contributed mightily to our current economic meltdown.  When common sense takes a holiday, it turns out, all the math in the world can't save you.

Obama's Speech

| Wed Feb. 25, 2009 12:15 AM EST
I don't know how meaningful this is, but listening to Barack Obama's speech tonight it struck me that there were only two places where he specifically asked Congress to send him legislation.  The first was a cap-and-trade plan to address global warming, and the second was the Hatch-Kennedy national service bill. On healthcare, by contrast, he merely said he would be bringing stakeholders together "to begin work on this issue next week."

Maybe that's significant, maybe it's not.  But I was at least a little surprised that his healthcare pitch wasn't a bit punchier.

A few miscellaneous observations.  Overall, it was a good, adult speech.  The beginning was like a punch in the gut to Republican fecklessness over the past eight years, but later on Obama somehow got plenty of bipartisan standing Os anyway, even in a few places where I wouldn't have expected it.  There was some fine populist demagoguery aimed at Wall Street ("This time, CEOs won't be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet"), but it was mainly just a cover for an admission that he planned to keep shoveling money into banks.  And he made it pretty clear that he would announce a withdrawal plan from Iraq within a few days.

That's all for now.  Consider this an open speech thread.

Obama's Mortgage Plan

| Tue Feb. 24, 2009 6:38 PM EST
Is Barack Obama's plan to help out distressed homeowners unpopular?  Rasmussen asked the following question to find out:

Some people say that having the government subsidize mortgage payments for financially troubled homeowners puts the government in the position of rewarding bad behavior. Is the government rewarding bad behavior when it provides subsidies to those who are most at risk of losing their homes?

55% said yes and only 32% said no.  But it's a leading question!  When the Washington Post and New York Times asked a more straightforward version of the question (Post: "Would you support or oppose the federal government using 75 billion dollars to provide refinancing assistance to homeowners to help them avoid foreclosure on their mortgages?") the results were reversed.  Over 60% supported the plan.  Matt Yglesias converted these results into handy chart form, which I've stolen and displayed over on the right.

The basic meme in the leftosphere is that Rasmussen deliberately chose conservative wording here and the results aren't to be trusted.  But I want to push back on that a bit.  There are two points to make here.

First, these poll results aren't necessarily contradictory.  It could well be that some people think Obama's plan is likely to reward bad behavior in some cases but they support the plan anyway.

Second, there's something to be learned here if we don't dismiss Rasmussen's results out of hand.  Here's the problem: liberals often suffer from poll literalism, a disease in which we look at simple poll questions and think they show that everyone supports us.  60% support national healthcare! 70% support more spending on education!  Hooray!

But those numbers are largely meaningless. The real question is, How many people still support national healthcare after conservatives have spent months scaring everyone into thinking it means they'll never be allowed to see their old family doctor again?  Probably not as many.  Likewise, how many people will support Obama's mortgage plan after they've heard all the conservative talking points against it?  Probably less than the Post and the Times say.

Now, my guess is that once everyone's had their say, Obama's plan will still garner considerable support.  But it might not, and understanding how Republican talking points affect public opinion is valuable.  That's what Rasmussen has told us here, and it's worth paying attention to.