Kevin Drum

Beyond Paulson

| Sat Oct. 4, 2008 3:15 PM EDT

BEYOND PAULSON....The Paulson bailout plan has several underlying theories. First, by buying up toxic securities at above market prices, it injects needed capital into troubled banks. Second, by creating a market for these securities, it will raise the value of the toxic waste held by all banks, thus raising their capital base. Third, by creating this backstop, it will encourage private sources to inject capital into banks, as Warren Buffett recently did with Goldman Sachs and GE. Since banks need capital to make loans, all of this additional capital will free up the credit markets and allow borrowers access to credit once again.

As critics have pointed out, though, this might not work. And even if it does, it isn't the most direct way of recapitalizing banks. The most direct way would be to simply inject government money into shaky banks in return for preferred shares. It's true that if all goes well, the indirect method of the Paulson plan might produce a bigger bang for the buck — but then again, it might not. So what's next?

There are several policy measures that the government probably ought to think about implementing quickly. The key to most of them is to apply them to all banks, not just banks that are in trouble. If the policies are voluntary, any bank that takes advantage of them is admitting that it's in weak shape, which in today's market is as good as signing its own death warrant. Make them mandatory and nobody is stigmatized since they're just following the rules. A few possibilities:

  • Doug Diamond and others suggest that banks be required raise more capital: "The authorities could require all regulated financial institutions, no matter how well capitalized, to present plans to raise 2% of their assets in additional capital over the next quarter to preserve the stability of the financial system. This increased capital will not represent an increase in the permanent level of required capital for bank holding companies, but instead give institutions the extra capital that will allow them to lend."

  • Sebastian Mallaby passes along a proposal to suspend dividends: "The government should tell banks to cancel all dividend payments. Banks don't do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed."

  • Arnold Kling suggests temporarily reducing capital requirements for new loans: "My alternative is to encourage new lending by lowering capital requirements at the margin. Tell banks that loans issued after September 1, 2008, require half the capital of similar loans issued before September 1. Some banks are in such bad shape that even with those lower capital standards they will not be able to make new loans. Fine. You don't want those banks to grow. But other banks have room to grow, and you want them to grow more than they would under the existing regulations."

Of course, there's also the suggestion that we suspend mark-to-market rules, thus magically increasing the accounting value of bad assets and thus the capital base of the banks holding the assets. However, this seems like such a patently bad idea that I'm hesitant to add it to the list above. The rest of the ideas seem at least worth looking at, though, and can be done in addition to (and in parallel with) the Paulson plan. There's no reason to put all our eggs in one basket, after all.

Advertise on MotherJones.com

Friday Cat Blogging - 3 October 2008

| Fri Oct. 3, 2008 4:05 PM EDT

FRIDAY CATBLOGGING....Here are my cats responding to today's passage of the bailout bill. Inkblot is hiding in the bushes, which must mean he thinks financial oblivion is still nigh, while Domino is perky and playful, which must mean she thinks all our problems are behind us. How is your critter taking the news?

Need more cats? Check out Cats for Obama. If it's any indication, Obama has the feline vote locked up.

Our Coming Recession

| Fri Oct. 3, 2008 3:02 PM EDT

OUR COMING RECESSION....Ezra Klein is annoyed with pundits who think we need to cut back on spending programs because we're about to devote $700 billion to bailing out Wall Street:

The underlying presumption here is that during a recession, faced with heavy spending, the president will have to cut his investment agenda. It makes a certain amount of intuitive sense. In hard times, families cut back. But the government is not a household. In hard times, it should spend more in order to stimulate the economy. That's part of the utility of having a government: When consumers and businesses fall on hard times, they cut spending. Which cuts demand. Which cuts economic activity. Which deepens your recession. All that is a bad Thing. So it's useful indeed that we have an institution able to amp up spending in order to increase demand.

....A better question would take Keynesian economics a bit more seriously. Rather than asking what spending the candidates should give up, the question is which items they should prioritize. In theory, you now want to focus on policies that will create a rapid, short-term boost. This might cut towards a tax rebate and against infrastructure development, or towards green investment and away from health reform. But a recession does not cut against government spending. In fact, it does quite the opposite, and it's a real problem that our political system seems content to lazily assume otherwise.

Right. Monetary policy doesn't have much bite left, so fiscal stimulus is our best bet for boosting consumption and keeping the coming recession shallow. Unfortunately, one of our biggest problems right now is that we also have a large and growing current account deficit. We consume way more than we produce, and our consumption is financed by the Chinese, the Saudi Arabians, and our other fine overseas friends. This can't go on forever, and if we don't do anything about it ourselves, these fine overseas friends will eventually do something themselves. That would be painful in the extreme.

So here's my question. I don't think any real economist has ever addressed any of the questions I've ever posted on this blog, so I should probably just give up, but here it is anyway: Should we try to stimulate our way out of the coming recession? If so, how much and for how long? Or should we instead concentrate on reducing consumption, boosting exports, and getting our house in order before someone gets it in order for us? Can we somehow do both? Inquiring minds want to know.

Bailout Bill Update

| Fri Oct. 3, 2008 2:23 PM EDT

BAILOUT BILL UPDATE....The House has just voted to pass the bailout bill. Final vote coming in a minute.

UPDATE: The vote was kept open for a few extra minutes. The final tally was 263-171 in favor.

Democrats voted 172-63 in favor.

Republicans voted 91-108 against.

I know a lot of people were unhappy about this bill, but this is good news. It's not the best of all possible worlds, but it is a demonstration to the world that America is willing to clean up its own messes.

Quote of the Day - 10.03.08

| Fri Oct. 3, 2008 1:45 PM EDT

QUOTE OF THE DAY....From National Review editor Rich Lowry on last night's debate:

I'm sure I'm not the only male in America who, when Palin dropped her first wink, sat up a little straighter on the couch and said, "Hey, I think she just winked at me." And her smile. By the end, when she clearly knew she was doing well, it was so sparkling it was almost mesmerizing. It sent little starbursts through the screen and ricocheting around the living rooms of America.

I think this goes in the annals of blog posts he'll someday wish he hadn't pressed the "Publish" button on.

UPDATE: Then there's this from Jonah Goldberg: "It is amazing how the press can focus on how Palin's a disaster and then the second she stops being one, the press yawns as if this is a non-story." Huh? The press is supposed to write banner headlines whenever Palin refrains from being a disaster?

An Inch Deep

| Fri Oct. 3, 2008 1:38 PM EDT

AN INCH DEEP....I imagine this point has already been made — in fact, I made it myself after last week's debate — but this is the blogosphere, so I'll make it again anyway. It's this: I'm not surprised that the insta-polls suggest that Joe Biden won his debate against Sarah Palin. (I'm also not sure it matters, but that's a different issue.) Basically, I think the debate-watching public really does appreciate a command of facts and issues. This doesn't mean they want to hear dry recitations and pedantic inside baseball, but as long as it's expressed in an approachable way, they really do want to hear about actual policy. Biden provided that.

At the same time, I'm a little surprised (I know, I know....) that Palin is getting such generous marks for her performance. No, she didn't propose invading Denmark or eliminating the Supreme Court, but she was still painfully out of her depth. She had all the usual Reaganesque phrases and prepackaged zingers at the ready, but she didn't seem to understand that these are meant to be hauled out occasionally as applause lines, not simply strung together over and over and over. By the time she was finished, she had repeated these stock phrases so often that even a dullard could tell that she was just reading off notes.

At least, that's my take. Yes, she's got a thousand-watt smile and a folksy charm, but even people who are attracted to that kind of thing want to sense some depth as well. Palin didn't provide it, and I think the press underestimates Joe and Jane Sixpack when they act as if that doesn't matter.

Advertise on MotherJones.com

Sparsely Attended

| Fri Oct. 3, 2008 12:58 PM EDT

SPARSELY ATTENDED....Virtually everyone agrees that one of the root causes of the financial system meltdown has been the vast increase in leverage at big financial firms over the past few years. It's a problem that's gotten increased attention since 1998 but one that nobody ever does much about.

In fact, it's worse than that. As the New York Times reports today, four years ago the SEC voted to change the net capital rule for the biggest investment banks — not to decrease allowable leverage or even to make sure it stayed at statutory levels, but to increase it. Pay attention to the last sentence:

Decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control....On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks. They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on.

....The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

This is surprisingly typical of how things get done in Washington. In all sorts of areas, decisions that turn out to have enormous impact are made in sleepy little commission meetings or by executive order, with hearings attended only by a few die-hard lobbyists on both sides and — at least under the Bush administration — the final decision practically foreordained in favor of whatever the business community wants. Then, like a cherry on top of an ice cream sundae, the budget for oversight is either cut or eliminated because the business community insists that market discipline will take care of such things far better than a bunch of federal bureaucrats.

Turns out that doesn't always work so well.

Economic Report

| Fri Oct. 3, 2008 12:06 PM EDT

ECONOMIC REPORT....Your economic report for the day: Factory orders plunged 4% in August; the service sector was stagnant; wages were stagnant; auto sales dropped by a third; jobless claims are up dramatically; the commercial paper market fell nearly $100 billion last week, its biggest drop since 9/11; short-term lending rates remain astronomical; employers cut 159,000 jobs in September; and credit remains so tight that Arnold Schwarzenegger is begging the Treasury for a $7 billion loan for the state of California.

That is all. For now. I recommend the House pass the bailout bill today.

Debate Liveblogging - VP Edition

| Thu Oct. 2, 2008 9:59 PM EDT

DEBATE LIVEBLOGGING — VP EDITION....It's Biden vs. Palin. The Kid From Scranton vs. the Hockey Mom From Wasilla. Are you ready?

Wrapup – I'll be honest: I genuinely didn't understand about 50% of what Sarah Palin said. She pretty overtly didn't even pretend to address a lot of Ifill's questions — probably because she couldn't — and a lot of her filibustering ended up sounding like random strings of phrases from the Hockey-Mom-o-Bot 3000. This was especially true as time wore on. If nothing else, this makes it almost impossible to judge the substance of what she believes, and despite the fact that she "connects" with ordinary people, I have a feeling that an awful lot of ordinary people weren't impressed with this.

On grounds of style and affect, Biden seemed fine to me. He had good energy, made his points pretty sharply, and didn't make any mistakes. He was also very good on substance. Palin, conversely, seemed wound up like someone on her tenth cup of coffee, and I just don't know if that seems very presidential (or vice presidential). I think she would have been better off with a lower key style. On the other hand, she had no big gaffes, and we all know that's what we were really waiting for.

As usual, I don't really have a strong idea of how other people will react to tonight's performance, but I think Biden won pretty convincingly. He didn't overdo things, but he did demonstrate a good command of the issues as well as a good command of working class folksiness. He defended himself well without seeming overbearing. For her part, Palin probably seemed friendly enough, but her obvious lack of command of the issues combined with her obvious reliance on stale talking points can't have been very impressive.

UPDATE: CNN snap poll says Biden won 51%-36%. CBS poll of uncommitted voters says Biden won 46%-21%.

UPDATE 2: Dodgers win 10-3. Hooray!

UPDATE 3: Nielsen says 45% of all households watched the debate compared to 31% for the first Obama-McCain debate.

10:26 – Palin says she's never had to change her view on anything. Good to know.

10:25 – Interesting to see Biden take on the "maverick" thing directly. I think Palin has called McCain a maverick about a hundred times so far.

10:21 – In fairness, Biden isn't answering the question either, though at least he knew what it was. But he's not babbling.

10:19 – Now Palin is just babbling. I don't think she even understood what the question was. (It was something about what her real Achilles heel is.) (Via email: "She is being very meta by actually demonstrating her Achilles heel rather than just telling us.")

10:16 – Palin: "Our founding fathers were wise in allowing so much flexibility in the position of the vice president." What the hell?

10:13 – Email from a friend: "Palin is just hyper. It's weird. She's making more sense than not, which I'm sure NRO is high-fiving about. But she is so keyed up, it's frightening. Monotone, snarky, relentless verbiage for her alotted time. Wonder if the perma-smile will wear. No dynamic in her tone. She's cramming."

10:12 – Palin: "There you go again, Joe." Oh please. Palin is desperate to insist that McCain just has nothing at all in common with Bush.

10:08 – Ifill asks how a Biden administration would differ from an Obama administration. Biden uses this as an opportunity to deliver a basic stump speech. The CNN focus group loves it.

10:02 – Palin is grinning like the cat who caught the canary while Biden talks about Iraq. Why? Because she's just waiting for the chance to say that Biden supported the war before he was against it. Childish stuff.

10:00 – McClellan? Who's that? Is Palin talking about General McKiernan? Did I hear her wrong?

9:55 – Palin: "There have been huge blunders with this administration." Glad we can all agree on that. Hopefully we'll get some specifics on that after the debate.

9:52 – I guess the format of the debate is set in stone, but Ifill really isn't pressing either Biden or Palin to actually address her questions. I guess there's a limit to what she can do.

9:48 – Not a strong response from Palin. She's just regurgitating old soundbites about meeting with the Castro brothers et. al. without preconditions.

9:46 – Biden's doing a pretty good job on Afghanistan and Pakistan being the central front in the war on terror.

9:43 – Audience reaction to Biden's "We will end this war" is off the charts. Reaction to Palin's "That's a white flag of surrender" is deep into negative territory. Interesting.

9:41 – Biden isn't always the easiest guy to understand, but Palin's statement on Iraq was just an astonishing string of soundbites and miscellaneous, unconnected phrases. I have almost no idea what she was talking about. (Except that we have to "win in Iraq.")

9:34 – Hmmm. "Drill baby drill" decidedly didn't go over well with the women in CNN's focus group.

9:31 – Wow. Palin's statement on climate change was spectacularly incoherent, even by her standards. And she still doesn't think it matters whether human activity is to blame. But she thinks we need to cut back emissions anyway. Even though we don't know if that's the cause. Sheesh.

9:29 – Biden could have done a better job defending his support for the bankruptcy bill. Or, better yet, he should have said even less and just jumped straight to his statement that we should allow bankruptcy courts to reset mortgages.

9:27 – Palin is really rambling. Biden is doing a little better, but he could stand to be even more pointed, just as a counterpoint.

9:25 – Biden wants a windfall profits tax on oil companies just like they have in Alaska! Possibly a decent attack.

9:23 – Palin: The nice thing about McCain is that he doesn't say one thing to one group and another thing to another group. Huh? What was that all about?

9:15 – Well, that's original. Palin just said outright she's not going to bother answering the questions if she doesn't feel like it.

9:13 – Biden: "The middle class needs tax relief." Palin: "Darn right we need tax relief."

9:10 – Palin: "We need strict oversight of those entities in charge of loaning us our dollars" — or something like that. "Never again will we be taken advantage of." Okey dokey. But it went over great with the CNN focus group!

9:08 – Palin is making lots of eye contact with Biden. No condescension for her!

9:06 – On the financial crisis, Biden starts off very much in Obama style, with a laundry list of policy distinctions (oversight, CEO pay, equity shares, etc.). Palin goes straight for a soccer mom story.

9:04 – According to the audience-o-meter, women really, really want to punish Wall Street CEOs.

9:02 – "Can I call you Joe?" I guess I wasn't expecting that.

8:59 – So what do I expect tonight? Honestly, I have no idea. Basically, I figure that Biden will do OK because he's not an idiot and Palin will do OK because this is a format that allows her to get away with easy soundbites and folksy homilies. Still, it does have sort of a NASCAR quality to it, doesn't it? You just never know if suddenly someone is going to crash and burn.

The Debate Looms Ever Closer

| Thu Oct. 2, 2008 6:45 PM EDT

THE DEBATE LOOMS EVER CLOSER....Today is the big debate! Exciting, no? Will Sarah Palin burble amusingly? Will Joe Biden be a mean ol' bully? Will conservatives blame Gwen Ifill if Palin claims that that she can see Pakistan from the window of her house? Will the media declare Palin the "winner" if she manages to speak in complete sentences 80% of the time? Will prepackaged small town zingers defeat Amtrak-riding liberal gravitas? Tune in and find out!

I'll be liveblogging, of course, so come on by and join us in comments. And while you're at it, head over to our fundraising page and download our debate drinking game. (You're going to need it.) Then throw a few dollars our way if you can spare it. It keeps both the magazine and the blogs going and helps keep progressive journalism alive. Pretty good deal, eh?