Kevin Drum

Cui Bono?

| Tue Feb. 24, 2009 2:24 PM EST
Bond king Bill Gross thinks it would be a bad idea to nationalize banks and force bond owners to take a haircut.  This would "create an instability policymakers should not want to risk," he says, and might undermine other financial sectors such as insurance companies and credit unions.  Megan McArdle is unimpressed:

The problem is that seeing as he's a gigantic manager of bond funds, this is also the policy that will make Bill Gross best off.

This is, writ large, the problem faced by Geithner and Bernanke:  the people who know the most are those with the most to lose or gain by their actions.  If they do not talk to the experts, they will do something incredibly stupid through not having thought through the possible consequences.  If they do talk to the experts, their ears will be filled with advice that is both plausible and self-serving.

....I am concerned about the sudden consensus about nationalization — I haven't yet seen a good reason to believe that a tiny bank in a tiny nation like Sweden presents a good model for tackling the problems of the largest financial services company in the world.  But the fact that Bill Gross is worried about bondholders taking a loss makes me more inclined to favor the notion.  It's perverse, I know.

Nationalization should be a last resort.  And there's no question that nationalizing a multinational giant like Citigroup is a far more complex undertaking than nationalizing Nordbanken.  On the other hand, there's just no way that taxpayers can be expected to continue shoveling capital into big banks in return for tiny minority shares.  In the case of Citigroup, for example, the government has so far handed over $45 billion to a company that could be purchased lock, stock and barrel for only $10 billion.  There's just no way that taxpayers are going to keep putting up with that, and they shouldn't.

In any case, it's also possible to overstate the difficulty of nationalizing a big money center bank, I think.  It's not as if we'd fire the entire staff, after all.  What would happen in reality is that the board of directors would be dissolved, some of the senior staff would be replaced, shareholders and bondholders would take a hit, and the bank would continue running as normal except with a stronger capital base and government guarantees behind it.  Then, in a few years, it would be refloated and put back in private hands.

It would be nice if it doesn't come to that.  But there's a pretty good chance that it will.  Not because anyone wants it to, but because, eventually, it will probably be the least bad option left for the weakest of the banks.

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Take It Or Leave It

| Tue Feb. 24, 2009 1:59 PM EST
Chuck Schumer says that grandstanding governors who hope to score political points by turning down some minuscule proportion of the stimulus money earmarked for their state have another thing coming:

No language in this provision [] permits the governor to selectively adopt some components of the bill while rejecting others. To allow such picking and choosing would, in effect, empower the governors with a line-item veto authority that President Obama himself did not possess at the time he signed the legislation.

Take that, Bobby Jindal!  Or, rather, thanks, Chuck Schumer!  After all, if Schumer is right, it means that guys like Jindal are off the hook.  "I tried to be fiscally responsible, folks, I really did, but the Democrats didn't give me any choice."  Long sigh.  "So I guess I'll have to take all their money after all."  Even longer sigh.

But I guess that's OK.  A bit of Republican theatrics won't hurt us, and at least this means that Louisianans will get the unemployment benefits that Jindal tried to deny them.  Which is not only good for them, but good for the economy too, as even commie pinko Fed chairman Ben Bernanke recognizes:

BERNANKE: If unemployment benefits are not distributed to the unemployed, then they won't spend them and it won't have that particular element of stimulus.

SEN. JACK REED (D-RI): So if this was done on a wide basis, it would be counterproductive, not productive?

BERNANKE: It would reduce the stimulus effect of the package, yes.

If you have some principled objection to the idea that fiscal stimulus works, then fine.  But if you don't, there's no reason to object to extended unemployment benefits.  In terms of bang for the buck, it's probably one of the best uses of stimulus funds in the entire package.

Growing Your Own

| Tue Feb. 24, 2009 1:32 PM EST
Mark Kleiman repeats his longtime favorite proposal for decriminalizing pot:

Substantively, I'm not a big fan of legalization on the alcohol model; a legal pot industry, like the legal booze and gambling industries, would depend for the bulk of its sales on excessive use, which would provide a strong incentive for the marketing effort to aim at creating and maintaining addiction....So I continue to favor a "grow your own" policy, under which it would be legal to grow, possess, and use cannabis and to give it away, but illegal to sell it. Of course there would be sales, and law enforcement agencies would properly mostly ignore those sales. But there wouldn't be billboards.

I get his point: decriminalizing marijuana is one thing, but do we really want the Philip Morris marketing machine working overtime to produce endless PR campaigns allegedly aimed at adults but in reality doing nothing of the kind?  Probably not.

But I wonder if there's some middle ground here?  I'm always dubious of proposals that rely on law enforcement to "mostly ignore" technical violations of a law, since that's an open invitation for them to abuse their discretion.  So I'd prefer to legalize commercial operations. But practically speaking, is there some way to open up commercial cannabis sales but limit their operations to a fairly small size?  It seems like there ought to be, and it would certainly be a boon to those of us without green thumbs.  Ideas?

UPDATE: Another objection here.

The Home Mortgage Deduction

| Tue Feb. 24, 2009 12:59 PM EST
The home mortgage deduction is regressive, pushes up housing prices, motivates people to buy bigger houses, and doesn't increase homeownership rates anyway.  So Ed Glaeser says we should get rid of it:

Now, I do understand that drastically reducing the cap on the mortgage interest rate now, in the midst of a housing crash, would be kicking the markets when they are down. Yet this crisis provides us with an opportunity to act that will be lost if we wait until housing prices rise again.

So here is my utterly quixotic proposal. Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 a year over the next seven years until it hits $300,000.

Sure, fine by me.  The home mortgage deducation is a perfect example of a policy that might have made social sense at one time, but outlived its usefulness years ago and now continues a zombie-like existence as one of the third rails of American tax policy.  But why bother decreasing the cap?  Why not just decrease the amount of interest you can deduct from 100% to 95% to 90% and eventually to zero over 20 years, starting, say, in 2011?  And replace it each year with a proportionate increase in the standard deduction.  (Or maybe something else.  Ideas welcome.)

Or replace it with nothing at all, in the name of fiscal responsibility.  Not many votes in Congress for that, though, are there?

The Dow

| Tue Feb. 24, 2009 12:40 PM EST
Matt Yglesias is annoyed at the undue attention paid to the Dow Jones Industrial Average:

Not only is it obviously stupid for political commentators to be assessing the quality of economic policy by tracking the ups-and-downs of the stock market but the fact that the commentators who want to do this keep wanting to specifically use the Dow Jones Industrial Average just highlights their ignorance....Why not use the S&P 500? Or the Wilshire 5000?

To be clear, that wouldn’t make this idea any less dumb on the merits. But if we’re going to have stock-based punditry then it could at least be informed stock-based punditry. Back in the real world, the key issues are the trajectory of employment and income.

Clearly, the answer is that nobody makes or loses money based on betting on the unemployment rate.  And we don't have exciting video of traders going nuts on exchange floors when hourly wage numbers are announced.  And anyway, all that stuff is only available on a monthly basis.  You can hardly run a 24/7 cable show based on that, can you?

In CNBC's defense, it's worth noting that they're just giving the people what they want.  Lots and lots of fairly ordinary people have money invested in the stock market, but virtually nobody has a bunch of money invested in derivatives based on, say, the TED spread, even though right now it might be more important than the DJIA.  What's more, it's sort of interesting just how good a proxy for the economy the Dow Jones is.  Take a look at a historical chart and you'll see that its ups and downs correlate pretty well to the overall state of the economy.  If you're looking for a sexy, fast-moving, gut-wrenching indicator of the economy's animal spirits, you can do a lot worse than the DJIA.

And why the DJIA instead of the S&P 500?  It's the power of the first mover.  The S&P didn't get started until 1923, and even then was published only once a week.  Boring!  By the time they finally got around to doing things daily, the DJIA was the king of quotes, and it's stayed that way ever since.  And since the two indexes follow each other so closely anyway, I guess there's never been any really compelling reason to switch loyalties.  Plus it helps when the guys who own the average also happen to own the country's biggest financial newspaper.  That kind of synergy is hard to beat.

Carbon Fail

| Tue Feb. 24, 2009 11:28 AM EST
This is a huge disappointment.  The Orbiting Carbon Observatory, which was designed to fill in missing gaps in our understanding of greenhouse gas levels in the atmosphere, failed to reach orbit:

Three minutes [after liftoff], during the burning of the third stage, the payload fairing — a clamshell nose cone that protects the satellite as it rises through the atmosphere — failed to separate as commanded.

....“The fairing has considerable weight relative to the portion of the vehicle that’s flying,” said John Brunschwyler, manager of the Taurus rocket program for Orbital Sciences of Virginia, which built both the rocket and the satellite.

“So when it separates off, you get a jump in acceleration,” said Mr. Brunschwyler. “We did not have that jump in acceleration. As a direct result of carrying that extra weight, we could not make orbit.”  The satellite fell back to Earth, landing in the ocean just short of Antarctica.

More here from Jonathan Hiskes at Gristmill about what the OCO was supposed to do.

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More Trouble on Wall Street

| Tue Feb. 24, 2009 1:52 AM EST
Even the relatively healthy banks are starting to bulk up in anticipation of Timothy Geithner's stress tests:

J.P. Morgan Chase & Co. cut its quarterly dividend by 87% to a nickel a share, a surprise move aimed at beefing up the bank's capital cushion as the economy deteriorates and putting it in a position to potentially repay funds received from the government more quickly.

....[CEO James] Dimon said the decision, which came as the government is preparing to test whether banks' portfolios can hold up under a severe economic stress, was voluntary and doesn't reflect any unexpected problems in the bank's results. In fact, he said the bank remains profitable more or less in line with Wall Street's expectations.

....The reduction in the dividend will let J.P. Morgan hang on to an extra $5 billion a year — enough, Mr. Dimon said, to help the bank weather a scenario in which the recession drags on for two years, unemployment tops 10% and home prices ultimately drop 40% from their peak.

JP Morgan has been widely viewed as the strongest of the big money center banks, so the fact that even they're feeling nervous about their ability to pass Geithner's test doesn't bode well for the rest of them.  It's a smart thing to do, but it's still a little unnerving that they feel like they have to do it.

Cap and Trade

| Mon Feb. 23, 2009 3:17 PM EST
Hey, guess what?  I've got a piece on cap-and-trade in the latest issue of Mother Jones.  You should go read it.  It's designed to explain cap-and-trade for people who kinda sorta know what it is but are still a little vague on the details.  The basic structure is "Ten Things You Should Know About Cap-and-Trade," and here's #10:

10. It's not a panacea. "Cap and trade is just a tool," says the NRDC's [Dale] Bryk. It might be the backbone of any effective long-term carbon reduction policy, but it's not the only tool we need. Or even necessarily the best. If you want to improve vehicle mileage, for example, raising federal fuel-efficiency standards is "much cheaper for consumers than raising the price of gas," she says. Michael O'Hare, a public-policy professor at UC-Berkeley, emphasizes the need for the government to take a more active role than just setting carbon prices. Sure, higher energy prices might motivate people to change their behavior. "But," he points out, "even if I want to take the tram, I can't do it if there's no tram."

In other words, command and control will remain absolutely necessary. As will taxes. Even with a well-designed cap-and-trade plan in place, we'll need tougher efficiency standards, higher fuel taxes, more sensible land-use policies, green research programs, and plenty more. But in the same way that cutting calories is the core of any weight loss no matter which fad diet you follow, raising the price of carbon is the core of any climate plan. With luck, this could be the year we finally figure that out.

Bottom line: cap-and-trade is just one piece of an overall energy/environment policy.  But it's a good piece!  And it helps make all the other pieces work better.  Read the whole thing for more.

On an inside-baseball note, I wrote this article back in October, but thanks to the miracle of print magazine lead times it's only now hitting the stands.  My hope was that this would be good timing, because Barack Obama would be introducing his cap-and-trade plan in March and everyone would be eager to learn what it all meant.  In the event, the stimulus bill and budget have pushed everything else off the stage for the moment, but with any luck cap-and-trade will still make its debut sometime soon. So be prepared!  Read all about it now!

(But stay away from the comments.  Yeesh.  Some wingnut organization has apparently already gotten wind of the piece and sent its slathering hordes over to let us all know that GLOBAL WARMING IS A HOAX!  You have been warned.)

Chart of the Day - 2.23.2009

| Mon Feb. 23, 2009 1:52 PM EST
The changes here are mostly pretty small, but Gallup reports that Barack Obama's approval rating has increased over the past month among Democrats and Independents, but dropped among Republicans.  The drop is especially big among conservative Republicans — which is hardly a surprise.  If I spent all day listening to Rush Limbaugh and watching Fox News, I'd probably think Obama was a herald of the end times too.

Gobbledegook From the Treasury

| Mon Feb. 23, 2009 1:23 PM EST
Felix Salmon ran the latest missive from the Treasury through a readability calculator and says that it scored only 15 out of 100.  Funny.  Except that I ran the passage through the same calculator he used and it actually produced a score of 0.  Ka-ching!  As near as I can tell, that means it's unintelligible even if you have a PhD in finance.

Anyway, the Treasury's statement is all about further capital injections into banks, and Felix takes his best shot at deciphering it:

I'm not sure I understand this myself, but the government here seems to be coming up with ever-more-obscure forms of capital which it can inject into the banks. We're relatively familiar with preferred shares, common equity, and warrants to buy common equity; now we must add to that list this new animal: mandatory convertible preferred shares, which had a brief moment in the sun back when banks were raising private capital rather than having to go to the government for bailouts.

....What's weird is that the government starts off talking about capital being "in the form of mandatory convertible preferred shares", which implies that those shares are capital, before then going on to say they will "be converted into common equity shares only as needed over time to keep banks in a well-capitalized position" — which implies that they're not really capital unless and until they convert.

Clear as mud, right?  And even the financial press doesn't seem to agree on what message is being sent by all this gobbledegook.  The Wall Street Journal said the Treasury's statement was designed to "quell fears about the viability of major U.S. banks," while the New York Times called it an "unexpectedly assertive" statement that "amounted to a roadmap under which the federal government could, if it wants to, demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America."

So which is it?  My take is this: the Obama brain trust understands that they're almost certainly going to have to nationalize one or two big banks sometime in the next few months.  So they need to prepare the ground for that.  At the same time, fear of nationalization is bad for everyone, so they're also doing their best to publicly claim that it's the farthest thing from their minds and they remain fully dedicated to the idea of keeping the banking system in private hands.  That's a pretty tough tightrope to walk in plain English, so they really have no choice except to resort to Greenspanian gobbledegook.  We should probably expect more of this in the future.