Kevin Drum

Carbon Policy

| Wed Apr. 15, 2009 11:52 AM EDT

Obama's big speech yesterday about the economy was.....fine.  I don't think he addressed our banking problems quite as forthrightly as a lot of people seem to think, but he didn't do too badly either.  I was more pleased, however, that he said this about transforming the economy to be less carbon intensive:

The only way to truly spark this transformation is through a gradual, market-based cap on carbon pollution, so that clean energy is the profitable kind of energy....We can no longer delay putting a framework for a clean energy economy in place. If businesses and entrepreneurs know today that we are closing this carbon pollution loophole, they will start investing in clean energy now. And pretty soon, we'll see more companies constructing solar panels, and workers building wind turbines, and car companies manufacturing fuel-efficient cars.

OK, it's not much.  But one of my complaints about Obama during the primary was that he didn't take the chance to actually sell the country on carbon caps.  Sure, cap-and-trade was always part of his plan, but on the stump it was all windmills and green jobs and other happy talk.  What would happen, I wondered, when the time came and suddenly Joe Sixpack realized that Obama was planning to raise energy costs via a cap-and-trade program?  That's still going to be a huge fight, but at least he's beginning to mention it in public now.  It's a start.

And as long as I'm writing about yesterday's speech, what's the deal with the White House website?  The speech is blared across the entire front page of the site, but if you click on "Read the Remarks" you cannot, in fact, read the remarks.  You can read a blog post excerpting a few of the remarks, but the blog post doesn't link to the full remarks.  If you click on "Speeches" instead, the most recent entry is from February.  Maybe the full speech is somewhere on the site, but I couldn't find it.

What gives?  Bush's website wasn't as pretty, but at least it was usually pretty complete and easy to navigate.  I never had trouble finding his speeches.

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Stress Test Follies

| Wed Apr. 15, 2009 11:26 AM EDT

Apparently the results of the stress tests being done on big banks will be revealed publicly after all.  Sort of:

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.

....The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.

....“The purpose of this program is to prevent panics, not cause them,” said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures were still being debated. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”

I'm not quite sure if this qualifies as good news or bad news.  Transparency is generally good, especially where billions of taxpayer dollars are concerned, but at the same time, there's no way Treasury would be doing this unless they've already decided that everyone is going to pass the tests pretty handily.  That's not so good.  Judging from the tone of this piece, it appears that there are going to be two grades handed out: "Great!" and "Maybe just a wee bit shy of great but still pretty damn good!"  If that's what we end up with, this is transparency we can probably do without.

Where Your Money Goes

| Wed Apr. 15, 2009 11:05 AM EDT

To commemorate Tax Day, the fine chartmakers at the Center for Budget and Policy Priorities have created this look at where your tax dollars go.  It's nothing new for regular readers of this blog, but for lovers of wonky eye candy it's a nice way of showing that about 70% of the budget goes to a mere four things: defense, interest on the debt, Social Security, and Medicare/Medicaid.  This means that if you're serious about cutting the budget, you need to tell us what you're going to cut in those areas.  Hacking away at the remaining 30% just won't get you very far.

One nice touch is labeling all the various welfare program funded by Washington as "Safety Net Programs."  That's good framing!  Regardless of what you call it, though, that and education, which are usually the main target of the budget cutting crowd, only amount to 13% of the budget.  Scrooge himself couldn't squeeze more than few percent out of that slice of the pie.  Bottom line: cutting the federal budget in any way that's more than just symbolic is really tough.  Maybe that's why Republicans only get serious about it when they're out of power.

 

Trivia of the Day

| Wed Apr. 15, 2009 10:49 AM EDT

The average time between major pushes for healthcare reform is 19.5 years.  If we blow it this time, our next chance won't roll around until 2028.

Deflation is Here

| Wed Apr. 15, 2009 10:19 AM EDT

The latest economic news:

For the first time since 1955, prices fell from the same month a year earlier, reflecting a stark drop in the cost of gasoline and automobiles. Overall, consumers paid 0.4 percent less for a range of goods and services last month than they did in March 2008.

The Labor Department reported that its consumer price index fell 0.1 percent in March from February as lower consumer demand for a range of goods and services kept a lid on rising prices.

The party line on this is that it's not too big a deal because the decline was mostly centered on energy-related products and services.  Maybe so.  But I wouldn't bet the ranch on it quite yet.

How to Think About Taxes

| Wed Apr. 15, 2009 2:52 AM EDT

Here's my contribution to today's tax day festivities: an effort to get you to think about federal taxes a little bit differently than usual.  Normally, when we talk about taxes, we end up talking about percentages of people: the top 1% pay a certain amount, the bottom third pay a different amount, etc.  But this is the wrong way to look at things.  What we ought to be looking at is percentages of income.

Have your eyes glazed over yet?  Just wait!  It's going to get worse.  But first a caveat: the numbers that follow aren't exact.  I don't think they're way off the mark, but they're the result of some rough interpolation from several different data sources.  Anyone with access to more detailed data is welcome to correct this, but in the meantime it should be close enough to give you an idea of how to look at this stuff.

So: percentages of income.  What I mean by this is that you'd expect a group of people with, say, one-fifth of the nation's total income to pay one-fifth of total federal taxes.  (Note: one-fifth = 20%, or one quintile in tax-speak.)  It doesn't really matter if that group has one-fifth of the people or not, just that it has one-fifth of the money.  Like this:

But hold on.  That's a flat tax, and I want to appeal to your native sense of fairness here.  Even most conservatives agree that taxation ought to be at least mildly progressive, so let's make this mildly progressive.  First, let's say that the middle quintile, almost by definition, ought to pay 20% of total taxes.  Like so:

The next quintile up ought to pay a higher share, and the quintile above that even more.  The slope of the increase doesn't need to look like a hockey stick, but it should trend clearly upward.  Let's say it should be 8% more for each quintile:

Likewise, the quintile below the middle ought to pay a lower share, and the poorest quintile ought to pay even less.  Something like this:

Question: does this seem roughly fair to you?  If you're a die-hard flat-taxer, it won't, but for most people, even conservatives, it ought to seem reasonable.  It's progressive, but the slope is moderate and consistent.  So now let's take a look at the income cutoffs that produce our five quintiles.  Here they are:

Most people are surprised at how high the income cutoffs are.  But that's how it works out.  If you add up the incomes of every single household that makes less than $50,000 — all 50 million of them — they earn only a fifth of the total income.  If you add up the tiny number of people who make more than $300,000, they also earn a fifth of total income.  So now, instead of looking at our theoretical progressive system, let's see the actual numbers.  Here they are:

As you can see, when you add up all federal taxes and compare it to where the money is, our system is only barely progressive at all.  The bottom quintile doesn't do too badly, though they're probably paying a little more than they should, but CEOs and bankers are paying only slightly more than teachers and engineers.  And if you add in state and local taxes, even this small amount of progressivity goes away.  You can come at this from a lot of different angles, but you always end up with the same answer: taken as a whole, our tax system is close to flat.  Does this seem fair to you?  It shouldn't.

NOTE: As I said above, these numbers are rough interpolations from several sources.  The high-end income data is from Piketty and Saez, here.  The middle income aggregates and cutoffs are from Census figures, here and here.  Tax shares are from the CBO, here.

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Paying Back the Feds

| Tue Apr. 14, 2009 10:39 PM EDT

Over at TNR, Simon Johnson talks about what might happen if Goldman Sachs is allowed to pay back the TARP bailout money it was given back in October.  The government money came with certain restrictions, including restrictions on executive compensation, and Johnson argues that removing these restraints would allow Goldman to go back to the swashbuckling business model that got us into our current mess in the first place.  Plus there's this:

Another risk is the effects on other banks.  If Goldman can really attract all the talent, which is what they're arguing, and really go back to an earlier business model, that's going to take away profits and remove future profitability from other banks, and that could increase the pressure on them.

Hold on a second.  I thought high earners didn't deserve their pay because it turns out they produced huge losses instead of huge gains?  So why would Goldman Sachs be so eager to hire them all back?  And even if they do, who cares?  The rest of the industry is better off without them.  Isn't that the party line?

Not anymore, I guess.  Johnson is basically admitting here that if Goldman can use high pay to attract top talent, then they'll be more profitable and competitors will suffer.  But if that's the case, no direct cap on executive pay is ever going to stop firms from bidding top talent into the stratosphere.  They'll always figure a way around any cap we put in place, and trying to keep up is a mug's game.

Much better is to let them pay whatever they want, and focus instead on ways to shrink both the size and profitability of the industry as a whole.  A limit on bank size is one possibility.  Limits on leverage are another.  Stricter regulation of opaque credit derivatives and off-balance sheet accounting is yet another.  Or, if you want to focus on pay itself, do it indirectly by creating tax advantages for long-term restricted stock grants that motivate better investing behavior.  And needless to say, do this for everyone, not just banks that took TARP funds.  Do this, and deflation of the Wall Street pay bubble will follow naturally.

Quote of the Day #2 - 04.14.09

| Tue Apr. 14, 2009 3:57 PM EDT

From Robert Farley, on the problem with the feeding frenzy of pundit bloviating about how to solve the pirate crisis:

Long story short, the super-simple proposal you've developed for ending piracy has probably already been thought of, and probably has a host of problems that you haven't considered.

Actually, that's pretty sound advice for nearly everything more complicated than tying your shoelaces in the morning.

But as long as we're talking about pirates, here's my pet peeve: the endless rounds of joking and snark that they provoke.  I know it's kind of hard to resist, but latter day pirates have actually been around for a long time, and the particular problem with them in the Gulf of Aden has been in the news for over a year now.  We really ought to have the giggling out of our systems by now.

Those Toxic Assets

| Tue Apr. 14, 2009 1:31 PM EDT

Valuing mortgage-backed toxic assets is hard.  They've been sliced and diced and synthesized and swapped so thoroughly that by now no one knows quite what's in them or what they're worth.  So Tim Geithner has a plan to jump start the sale of these assets and try to get the market to value them.

Fair enough.  Maybe it will work, maybe it won't.  But Zach Carter wants to know why so much of Geithner's plan isn't aimed at toxic securities at all.  It's aimed at toxic loans, and those aren't nearly so hard to value.  Banks do it all the time.  So what's going on?

A bank that trades heavily in mortgage-backed securities is in trouble if the market for those assets dries up — and it has, and they are — but regular loans are different. So long as a bank intends to sit on them and collect the interest rather than sell them to another company, the government lets that bank use its own secret financial formula to determine the loan values. In short, banks have carte blanche to claim their assets are worth far more than they really are....

Given this long leash, banking executives have naturally inflated the book value of their mortgages. And even as more and more of their customers fail to make payments, bankers have proved reluctant to admit their hubris and take a hit on the balance sheet. Why is that? Well, the government says banks have to keep enough assets on hand to cover their behinds if things go south. So if a bank that has foolishly overextended itself admits it was overvaluing its loan assets all along, it will fall short of this critical regulatory requirement. And when that happens, under the "prompt corrective action" laws enacted after the savings and loan crisis of the 1980s, federal regulators are obliged to invoke the N-word: nationalization.

But Geithner's plan is voluntary, meaning that if the naughty banks don't like the price that hedge fund investors are offering, they can simply turn the deal down. And no bank on the precipice of nationalization is going to voluntarily sell loans to Wall Street for less than it has been claiming they're worth. Doing so would be corporate suicide. Instead, the only way a troubled bank will likely participate is if it receives an absurdly generous price for its dubious assets — a full-fledged bailout, in other words.

Carter's basic thesis here is that while the Geithner plan in general is likely to subsidize the price of toxic assets, thus propping up insolvent banks, this subsidy is at least fairly subtle — and maybe even defensible — in the case of complex mortgage-back securities.  But in the case of ordinary loans, the subsidy is blatant and entirely indefensible.  Its only purpose is to keep banks out of receivership by literally shoveling money into their laps.

My first thought when I read this was skepticism.  The Geithner plan has come under a ton of criticism, but this particular criticism is one I haven't really heard before.  That seems odd, since there are plenty of smart people who'd be happy to jump on this bandwagon if it's really as bad as Carter says.

So here's the deal: hopefully some smart critics of Geithner's plan will read this piece and talk about it.  Is there something missing here?  Or is Geithner's plan worse than even its critics think?

Under Stress

| Tue Apr. 14, 2009 12:39 PM EDT

Frederick Cannon, an analyst with KBW, says that if unemployment hits 12% Wells Fargo is likely show over $100 billion in losses and will need to raise another $25 billion in capital.  Matt Yglesias comments:

This is why nothing you near from the financial sector about how all’s well should be taken too seriously. It’s true that given very bank-friendly monetary policy it’s easy for banks to run an operating profit. But most of these large banks are zombies — insolvent. They’re only able to run an operating profit because they’re not going out of business and being liquidated. And the reason they’re not being liquidated is government guarantees. It’s as if I had a profitable business selling cookies, except I didn’t actually have any cookies to sell and was just putting government-provided cookies in boxes, then bragging about how profitable my company is and how the government should stop hassling me about paying myself a bonus.

Without actually signing on to the cookie metaphor here, there's a pretty good chance this is right.  Without the combination of TARP and the extraordinary bundle of loan guarantees and liquidity tsunamis engineered by the Fed over the past couple of years, Wells Fargo might very well be out of business.  It's impossible to say this for sure, of course, just as it's impossible to say if unemployment is going to hit 12%.  But if it weren't for government intervention, it's a good bet that nearly every big bank in the United States would either be insolvent or so close as not to make any difference.  And instead of losing a few points of GDP, we'd be in another Great Depression.

Megan McArdle thinks that, from a libertarian perspective, maybe this is what should have happened.  Ben Bernanke may have saved the economy, but he only did it by intervening against the market, and worse, doing it in ways that the public and its elected representatives never would have supported if they'd had a say:

I think that the political process will hopelessly screw up the management of this crisis....But maybe The People, God bless them, deserve to screw up their economy if they want.

....On the other hand, do they have a right to screw things up for everyone else?  Should a populist 60% be allowed to plunge their neighbors deeper into crisis?  In the case of America, to plunge the whole world deeper into crisis?

The uncomfortable conclusion I'm coming to is that yes, they should.  Ben Bernanke should be hamstrung even though it's likely that this would make everyone worse off.  And people who advocate for ending the independence of the central bank should be willing to accept all that this entails:  inflationary monetary policy (the people love inflation!), bad and unpredictible banking policy, the collapse of the US economy.  I just wish I didn't have to go along for the ride.

Me too!  This may be the best argument I've ever read for not being either a libertarian or a pure small-d democrat.