Kevin Drum

Throw the Bums Out

| Wed Nov. 26, 2008 1:07 AM EST

THROW THE BUMS OUT....Hilzoy is peeved at the terms of the Citigroup bailout:

The people who either ran Citi into the ground or were asleep at the wheel need to go. That should be the condition of a bailout: if you turn out to need public assistance, you lose your job. No golden parachutes either.

As I've said before: we absolutely need to make sure that the people who run these banks do not conclude from our unwillingness to let them take down the entire financial system that it's OK to run these risks. The best way I can think of to do that is to make sure that they, personally, pay.

Agreed. But how? Sure, the government could insist on resignations in return for a bailout, but what can it do beyond that? We can't take away money these executives have already earned, nor can we take away their pension benefits or anything else they're contractually entitled to. Like it or not, that's how limited liability corporations work.

So, yeah, we could fire a bunch of people, and I suppose we probably should — though that's hardly without some risk too. But let's face it: that's not really much of a lesson to future generations. If we want banks to limit their risk, our only real option is to put rules in place that force them to limit their risk. The threat of being fired has never kept BSDs from taking chances in the past, and I doubt it will do us much good this time around either.

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Smiling Obama

| Tue Nov. 25, 2008 6:03 PM EST

SMILING OBAMA....Fred Davis III, John McCain's advertising guy, tells Time's Michael Scherer that he felt handcuffed in several ways during the campaign:

Davis says that concern about race played a major role in the entire aesthetic of McCain's ads. The photographs of Obama that the ads used, for instance, which often showed Obama elongated and smiling, were carefully selected, he recalls. "We chose them with only one thing in mind, and that is to not make them bad pictures because bad pictures would be seen as racist," Davis says.

I'm disappointed to hear this. I had assumed all along that his use of a smiling Barack Obama was a masterstroke. Instead of the tired old schtick of using awkward or glowering photos in grainy black-and-white, he was instead trying to portray Obama as slick and shallow, a beaming tent preacher trying to sell you a bill of goods. Not only did it play up the stereotype they were trying to sell, but it made them impervious to criticism. How can you complain that your opponents are making you look too good, after all?

But no. That wasn't it at all. They were just trying to avoid charges of racism. How banal.

GSE Debt

| Tue Nov. 25, 2008 5:38 PM EST

GSE DEBT....When I read last night that the Fed planned to buy up $600 billion in Fannie/Freddie debt, I didn't have the nerve to ask the obvious question: aren't Fannie and Freddie government enterprises now? Why is the government buying up government debt? But I guess it wasn't such a stupid question after all, because Paul Krugman is wondering the same thing:

It's true, as the Fed's statement says, that

Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.

But that's presumably because the Bush administration, weirdly, has refused to declare that GSE debt is backed by the full faith and credit of the US government. Why not just make that declaration, turning GSE debt into Treasury obligations, rather than stuff the obligations onto the balance sheet of the Federal Reserve?

Is this some kind of strange political game? Is there something else going on here? Inquiring minds want to know.

Nobody ever answers my questions, but this time I got lucky. I'll bet Krugman eventually gets an answer.

Letters of Credit

| Tue Nov. 25, 2008 3:01 PM EST

LETTERS OF CREDIT....A reader at TPM provides three reasons why allowing Lehman Brothers to collapse was a bad idea, including this one:

Third, global trade is (still) largely conducted via letter of credit. With the possibility of well-known names disappearing, that system has broken down catastrophically. (Pull up the Dry Goods Shipping Index for confirmation.)

Right. I've read about this problem before, so I pulled up the Baltic Dry Index to see what he was talking about. This is a measure of the cost of shipping raw goods (iron ore, grain, coal, etc.), and sure enough, it's cratered: from a peak of nearly 12,000 in May, it's plummeted to a value of 824 this week.

But what's the cause? Partly it was the commodity bubble earlier this year, which was unsustainable. Partly it might be weak demand from China. And partly it's just a reflection of the recession we're entering. It's not easy to mothball ships, so even a small downturn in shipping demand can have an outsized effect on shipping prices. But what about those letters of credit? Are problems with the LoC market shutting down the shipping industry even beyond normal recessionary levels? Here's John Dizard's take in the Financial Times from a couple of weeks ago:

While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy....I had followed shipping in past years, but had never seen a rate of change like that. So I called friends of mine in that world to get closer to the car wreck. I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be. Nope. Ships really are that cheap. As one broker told me: "I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate."

A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 a day. On top of that, figure another couple of thousand dollars a day for the capital costs....Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another. It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business.

There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

So here's a question I can't find an answer to with my meager Google skills: Is there some direct measure of the availability of letters of credit? Problems in the shipping industry suggest that LoCs are in trouble, but is there some index that actually tracks the total volume of LoCs over time? Is it really true that no one wants to accept anyone else's LoCs anymore, or is this more rumor than fact? Anybody know of any pointers to hard evidence on this score?

POSTSCRIPT: As long as we're at it, how about some measure of total global shipping? Is this a gigantic black hole, the way it is for the oil segment of the shipping market, or do we actually have any decent hard data for the total volume of shipping worldwide?

More Geithner

| Tue Nov. 25, 2008 2:03 PM EST

MORE GEITHNER....Dan Drezner reinflates the Tim Geithner bubble:

If Tim Geithner weren't so nice, he would probably be insufferable right now....This is a good thing too, because one could forgive Geithner right now if his head swelled just a little bit. The Dow Jones Industrial Average shot up five hundred points on Friday as word of his appointment leaked. The Dow jumped close to another four hundred points yesterday after Obama officially introduced him. One has to wonder if, sometime this week, when Geithner's wife asks him to do the dishes, he will be tempted to respond, "Have you caused the Dow to jump by more than ten percent? I didn't think so!"

But the real question is: who will Geithner bail out for Thanksgiving? Yet another turkey?

Public Service

| Tue Nov. 25, 2008 1:52 PM EST

PUBLIC SERVICE....In the New York Times today, David Kocieniewski tells us the story of the Charles B. Rangel School of Public Service at City College of New York. The school was having trouble raising money, so in the summer of 2006 a friend of Rangel's, Manhattan district attorney Robert Morgenthau, suggested that he hit up Eugene Isenberg, CEO of Nabors Industries.

Isenberg, unsurprisingly, was open to the idea of helping out the future chairman of the House Ways and Means Committee. Nabors Industries, you see, was one of the companies that had rushed to reincorporate offshore in 2002 even though they knew legislation was in progress that would retroactively prevent them from doing so. Rangel, who loudly blasted the companies who were moving offshore, favored the anti-Nabors legislation, but Republicans eventually killed it and Nabors retained its tax haven.

Fast forward to 2007, and the same legislation was introduced again. This time, though, Rangel opposed it:

On Feb. 12, the day the bill was being marked up by the committee he leads, Mr. Rangel held two discussions at the Carlyle Hotel in Manhattan. First, the congressman sat down for breakfast with Mr. Isenberg and Mr. Morgenthau to further talk about Mr. Isenberg's support for the Rangel center, Mr. Morgenthau said. Mr. Isenberg said that after breakfast, he escorted Mr. Rangel across the room, where the lobbyist for Nabors, Kenneth J. Kies, was waiting.

Over sweet rolls and coffee, Mr. Kies asked Mr. Rangel if he would maintain his opposition to the efforts to take away the company's loophole. Mr. Rangel said he would, Mr. Kies and Mr. Isenberg said in interviews.

.... Eleven days later, a check for $100,000 from Mr. Isenberg was cashed by City College....The next month, Mr. Rangel presided over Ways and Means hearings during which he presented four witnesses who testified that the effort to eliminate the loopholes was bad policy because it was a retroactive tax increase. No testimony was taken from those on the other side, and nothing was offered to explain why Mr. Rangel was now defending Nabors and the other companies.

In their defense, Isenberg committed the money to CCNY before the breakfast with Rangel, and Rangel says that he's philosophically opposed to retroactive tax increases. But this still doesn't look good, does it? As Michael Kinsely likes to say, the real scandal is what's legal.

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Job Creation

| Tue Nov. 25, 2008 12:30 PM EST

JOB CREATION....As word of Barack Obama's stimulus package starts making the rounds, conservatives are reviving one of their favorite tropes: that's sure an expensive way to put people to work! Basically, they divide $700 billion by 2.5 million jobs and announce that the cost of the plan is $280,000 per job, a whopping figure in anyone's book. But Mark Thoma does the actual math, and it turns out that the numbers at hand are actually $490 billion and 5.4 million jobs:

If we actually get the 5 million jobs the estimates say we will get, what is the cost per job? It is $490 billion divided by 5,425,000, or $90,323. (Note that by targeting spending to places that have a high employment rate per dollar spent, we may be able to do even better than this.)

But this is GDP per job, it includes wages, rent, interest, and profit, it's not the amount labor takes home. About 70 percent of income goes to labor....If we take 70% of $90,323, we get about $63,000 (actually, $63,226). That's less than a quarter of the $280,000 figure.

Read the whole thing for more. I'm just presenting this as a public service, since this talking point is almost certain to get extensive play on Fox News and elsewhere. Forewarned is forearmed.

FEMA

| Tue Nov. 25, 2008 12:08 PM EST

FEMA....Via Steve Benen, Al Kamen reports that FEMA may be getting a facelift under Barack Obama:

First off, the likely plan is to break off the agency from the Department of Homeland Security, a move that by itself would help restore the pride that folks at FEMA felt when it was an independent agency.

Second, there's increasing talk that former director James Lee Witt, who took over the then-troubled agency at the start of the Clinton administration and left it eight years later with a much-enhanced reputation, is coming back from retirement to run FEMA for six months to a year, to whip it into shape.

I assume this is one Clinton "retread" that no one will complain too much about?

Dishing on Geithner

| Tue Nov. 25, 2008 11:35 AM EST

DISHING ON GEITHNER....Andrew Ross Sorkin punctures the Tim Geithner bubble today, asking if he's really the financial star he's been portrayed as:

Perhaps what has most people on Wall Street stirring is Mr. Geithner's role in the fall of Lehman. At the time of its bankruptcy, he, along with Mr. Paulson, appeared to be the most vocal in supporting the government's refusal to bail out the firm, according to people involved in various meetings. With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government's decision to let Lehman crumble.

Bloomberg tries to restore some of his luster:

Timothy Geithner was among the first policy makers to shine a light on the unregulated $47 trillion credit-default swap market back in 2005. The New York Federal Reserve president has struggled since then to get dealers to carry out reforms.

...."In classic Tim and New York Fed style, the work has been done behind the scenes, among technocrats, largely by consensus," said Adam Posen, a former Fed official who is now at the Peterson Institute for International Economics in Washington. "The downside is that it takes awhile to get consensus."

Of course, the problem here is that virtually everyone who's qualified to deal with the financial meltdown had at least some role in it while it was happening. And given the speed and ferocity of the meltdown, there probably isn't a person in the country who got every call right during the past year, including Geithner. (And that rather pointedly goes for the kibitzers, too, none of whom got every call right either.)

Anyway, Geithner seems like a pretty good pick, but it never hurts to remember that these guys are human. I don't think Obama could have done much better, but that doesn't mean the guy is a superman.

The Rise and Fall of Lobbyists

| Tue Nov. 25, 2008 1:47 AM EST

THE RISE AND FALL OF LOBBYISTS....On K Street, the free market is hard at work:

An assistant department secretary leaving the Bush administration three years ago, with Republicans in control of the House, Senate and White House, might fetch as much $600,000 to $1 million a year in the influence business, recruiters and lobbyists said. But the same person might now expect less than half as much.

....But for Democrats, the bidding is fierce. Three years ago, a Democratic staff director for an important House or Senate committee might have earned about $130,000 a year on Capitol Hill, and jumped to K Street for an annual salary of about $250,000. Now, the same person might command as much as $500,000 to $800,000 a year, several recruiters said.

OK, but it still sounds like Republicans work at a higher pay scale than Democrats. How come? The answer, perhaps, comes from Republican John Feehery, a former MPAA lobbyist who lost his job after Democrats took over in 2006:

A spokesman for the association declined to comment on the departure. So did Mr. Feehery, who now runs his own lobbying shop. But he said Republican lobbyists would always be in demand because Democrats lack the stomach to push for industry goals that go against their party, like rolling back environmental regulations.

"At the end of the day," Mr. Feehery said, "Democrats don't like to ask for the order" — the client's objective.

So there you have it. Democrats just aren't willing to screw their own party and violate their own principles quite enough. It's a pretty sad state of affairs.