Kevin Drum

Robot Cars

| Tue Oct. 14, 2008 1:14 PM EDT

ROBOT CARS....Matt Yglesias, riffing off a Tim Lee piece, says that self-driving cars could free up lots of parking spaces. Which is true, I guess, but seems sort of like saying that cold fusion would be great because it would allow us to build smaller cooling towers. If we ever do build a genuinely self-driving car, it means we're only a stone's throw away from nearly human-level artificial intelligence. More efficient parking will be the least of our worries at that point.

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Troopergate II: The Reckoning

| Tue Oct. 14, 2008 12:28 PM EDT

TROOPERGATE II: THE RECKONING....After earlier promising to cooperate fully with the Alaska legislature's probe of Troopergate (because she had "nothing to hide," natch), Sarah Palin pulled a 180 after her vice presidential nomination and denounced the probe as an obvious partisan witch hunt. Instead, she wanted the state personnel board to investigate. So how's that working out? Michael Isikoff reports:

Some Democrats ridiculed the move, noting that the personnel board answered to Palin. But the board ended up hiring an aggressive Anchorage trial lawyer, Timothy Petumenos, as an independent counsel. McCain aides were chagrined to discover that Petumenos was a Democrat who had contributed to Palin's 2006 opponent for governor, Tony Knowles. Palin is now scheduled to be questioned next week, and the counsel's report could be released soon after. "We took a gamble when we went to the personnel board," said a McCain aide who asked not to be identified discussing strategy. While the McCain camp still insists Palin "has nothing to hide," it acknowledges a critical finding by Petumenos would be even harder to dismiss.

I'm sure Scooter Libby sympathizes. I'll bet he didn't expect Patrick Fitzgerald to conduct a real investigation either. Stay tuned.

Your Salary in 2016

| Tue Oct. 14, 2008 2:47 AM EDT

YOUR SALARY IN 2016....Due to the vagaries of print magazine lead times, my swan song at the Washington Monthly is only now hitting newsstands across the globe. It's part of a package called "The Stakes," and the question put to me and a bunch of my fellow contributing editors (that's the title you get when you're a Monthly alum) was how things would change over the next eight years depending on who wins the election. The subjects include China, the courts, healthcare, broadband infrastructure, and all the other wonkiness that the Monthly is famous for. And me? No mushy predictions here, my friends. My focus was on economic fundamentals, and at the end of my piece my conclusion was blunt:

Democrats really are better for the economy than Republicans, and it really does seem to be related to differences in their economic programs. Given that, then, I'll make this prediction: If Barack Obama is elected president, the economy over the next eight years will be better than if John McCain is elected. In fact, I'll go further and put some hard numbers to that prediction. Here they are:

Click the link to get firm dollar figure forecasts for 2016 for both McCain and Obama. Plus an explanation of where they came from. Email it to all your Republican friends!

And if you want to read all the other essays, you can find them here. Enjoy.

The New Paulson Plan

| Tue Oct. 14, 2008 1:59 AM EDT

THE NEW PAULSON PLAN....Yesterday I had a couple of questions about the Treasury's plan to recapitalize America's banks. One question was, which banks would get help? Big ones? Little ones? The answer, it turns out, is all of them:

One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter....Treasury will buy $25 billion in preferred stock in Bank of America, J.P Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; and between $2 billion and $3 billion in Bank of New York Mellon and State Street.

Second question: did the banks themselves pressure Paulson into doing this? Apparently not:

Not all of the banks involved are happy with the move, but agreed under pressure from the government.

The justification for forcing all the big banks to participate is that if only a few banks got help, then they'd be instantly stigmatized as failures and no one would do business with them. So it's better to force everyone to recapitalize, thus keeping everyone's relative solvency a secret.

I get the reasoning, but I wonder if it really makes sense? After all, isn't part of the point of this exercise to figure out which banks are really worth saving and which ones aren't? And should we really be wasting money on banks that don't need help? As part of the plan the Fed is also guaranteeing new debt, and it seems as if that, combined with sufficiently large capital injections, would make the rescued banks pretty sound. Plus there's this:

While the Treasury wants to put money into banks, its main goal is to attract private capital. To make sure private investors aren't scared away, the Treasury is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said, a move that is designed to not hurt existing shareholders.

If they're forcing good banks to take government cash, this is actually reasonable. And if we do it for some banks, I guess we have to do it for all of them. But that means we're also in the business of rescuing shareholders of bad banks. Why?

I dunno. I guess I'll wait for the experts to weigh in and set me straight. The whole thing sounds a little squirrelly, though. I can't help but think that aiming the money more tightly at bad banks and driving harder bargains in the process would have been a better idea.

UPDATE: Brad DeLong is thrilled with the plan. Hilzoy has some concerns.

Regulation Followup

| Mon Oct. 13, 2008 8:26 PM EDT

REGULATION FOLLOWUP....British prime minister Gordon Brown, everyone's hero of the financial moment, talks about reform:

"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," the British prime minister, Gordon Brown, said in London in a speech calling for the adoption of a new Bretton Woods-style agreement among major countries. "We must now create the right new financial architecture for the global age."

I mentioned a few days ago that I'd been noodling about this, and I certainly think there's value in talking about specifics: imposing transaction fees on financial trades, tightening up mortgage rules, requiring that credit default swaps be traded on an open exchange, and so forth. But the big picture always seems to come back to two things:

  • Task central banks with paying more attention to asset bubbles. Alan Greenspan famously thought we should just let bubbles inflate away and then deal with the aftermath as best we can, but events of the past decade really don't make that seem like such a great idea anymore. What's more, this piece of the puzzle probably doesn't even require drastic regulation. It's not a matter of trying to get rid of bubbles completely, after all, but of trying to keep them just a wee bit more under control. If we had managed to restrain the housing bubble by even 20% or so, for example, that might very well have made the difference between tough times and global crisis. At the very least, central banks should refrain from throwing fuel on the fire, and should try to persuade government actors to do the same. Combine that with some modest monetary brakes when bubbles are plainly out of control, and we could avoid a lot of future trouble.

  • Regulate leverage everywhere, not just in the formal banking sector. This is probably even more important. If the subprime bubble had been our only problem, it probably would have meant systemwide losses of half a trillion dollars or so. Maybe a trillion. That's nothing to sneeze at, and all by itself it would very likely have led to a few big bank failures, some big losses in the stock market, and a nasty recession. But that's merely a disaster. It was the additional leverage from derivative trading based on the underlying loans that turned a disaster into a global meltdown.

    Figuring out how to fix this is a gargantuan task that's several light years above my pay grade. Simple financial leverage is straightforward enough, but effective leverage hidden in complex debt instruments, often off balance sheet, makes this a regulatory nightmare. Realistically, I suppose it probably needs to be some kind of extension of Basel II with more scope and more bite, but one way or another, after years of talking about the dangers of stratospheric leverage but taking very little actual action to rein it in, something has to be done. If we're looking for work for all the rocket scientists who have been let go from their Wall Street jobs recently, this might not be a bad place to start.

So who should be our go-to guys on this subject? It seems like liberals were caught sort of flat-footed by the Paulson bailout plan, which made it difficult (though, in the end, not impossible) to quickly sell Congress on a different strategy. This time around, when the conversation starts, it would be nice to have some coherent strategies already on the table from people we trust. Any suggestions?

New Trade Theory and Me

| Mon Oct. 13, 2008 7:01 PM EDT

NEW TRADE THEORY AND ME....I've never really paid attention to the breakthroughs in trade theory for which Paul Krugman is most famous as an economist, but Alex Tabarrok explains it this way:

Consider the simplest model [of New Trade Theory]....In this model there are two countries. In each country, consumers have a preference for variety but there is a tradeoff between variety and cost, consumers want variety but since there are economies of scale — a firm's unit costs fall as it produces more — more variety means higher prices. Preferences for variety push in the direction of more variety, economies of scale push in the direction of less. So suppose that without trade country 1 produces varieties A,B,C and country two produces varieties X,Y,Z. In every other respect the countries are identical so there are no traditional comparative advantage reasons for trade.

Nevertheless, if trade is possible it is welfare enhancing. With trade the scale of production can increase which reduces costs and prices. Notice, however, that something interesting happens. The number of world varieties will decrease even as the number of varieties available to each consumer increases. That is, with trade production will concentrate in say A,B,X,Y so each consumer has increased choice even as world variety declines.

Increasing variety for individuals even as world variety declines is a fundamental fact of globalization.

The reason this caught my eye is that it turns out I'm a disciple of New Trade Theory and I didn't even know it. Last year I wrote a piece for Mother Jones about media consolidation, and even though it made me feel like a bad liberal I said that I had never been much bothered by it. Why? Because even though the absolute number of news outlets might have declined thanks to globalization, I personally had access to many more news sources than I did 30 years ago. I called this a "paradox," but apparently it's actually now conventional trade theory. So, like Monsieur Jourdain, who had been speaking in prose for forty years without knowing it, it looks like I've been a Krugmanite for mumblety-mum years without realizing it. I guess I should get out more.

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Wingnut Watch

| Mon Oct. 13, 2008 2:40 PM EDT

WINGNUT WATCH....John Cole revives the Golden Wingnut Award today with a worthy successor to the original winner. Unsurprisingly, however, the actual recipient remains the same.

Treason Watch

| Mon Oct. 13, 2008 2:36 PM EDT

TREASON WATCH....Did Barack Obama try to persuade Iraqi leaders to delay a security agreement with the United States? Even Republican witnesses say he did no such thing during a meeting in Baghad, but how about during a June phone call with Iraq's foreign minister? Apparently not then either:

The statement by Iraqi Foreign Minister Hoshyar Zebari refutes a recent published report and a statement by Republican vice presidential candidate Sarah Palin that Obama tried to influence Iraqi politicians negotiating with the United States to score political points.

Obama "never, ever discouraged us not to sign the agreement," Zebari said. "I think this was misrepresented, and I have clarified this case in a number of interviews back in the United States recently."

The ball's back in your court, wingnuts — though I guess you've already moved on to "Bill Ayers ghostwrote Obama's book" nutbaggery, haven't you? Must be hard typing while wearing a straitjacket, though.

Econ 101

| Mon Oct. 13, 2008 1:07 PM EDT

ECON 101....Commenting on Paul Krugman's Nobel Prize, Matt Yglesias complains about the parlous state of public knowledge of economics:

In the public debate, my sense is that "economics" tends to be understood as mostly comprising a series of very simple models indicating the desirability of laissez faire (make it more expensive to hire workers by raising the minimum wage and the level of employment will go down — supply and demand, economics 101, QED) that leave it somewhat puzzling as to how this is even a field in which people do PhD-level research.

Actually, I think Matt gives the peeps too much credit here. For vast swathes of the public, their knowledge opinions about economics are approximately limited to (a) low taxes are good for the economy, (b) foreigners are taking away our jobs, and (c) Social Security is doomed. Frankly, Econ 101 would be a big step forward.

Paulson's Record

| Mon Oct. 13, 2008 12:26 PM EDT

PAULSON'S RECORD....Ezra Klein has an eminently fair and nonshrill critique here of Henry Paulson's handling of the ongoing credit crisis. I'll just add one thing. Paulson's reluctance to push the trigger on capital infusions for banks is understandable, even if it was wrong, but his resistance to having even the power to recapitalize banks is genuinely weird. After all, before the latest phase of the crisis hit, Paulson and Bernanke had spent months urging banks to raise private capital to weather the storm. Both men knew perfectly well that bank capitalization was an issue. And before he introduced his version of the bailout bill, Paulson had twice previously bowed to reality on government takeovers and recapitalizations, first in the case of Fannie and Freddie, and second in the case of AIG.

Given all this, his continuing resistance to the idea is difficult to fathom. His caution can perhaps be written off to background and ideology, but not his flat rejection of even being given the authority. I'm not sure what the explanation is.