Kevin Drum

Friday Cat Blogging - 19 September 2008

| Fri Sep. 19, 2008 4:17 PM EDT

FRIDAY CATBLOGGING....Fall is here! I know your puny human calendar says it's still a few days away, but I know better because my seasonal alarm clock has spoken. A few days ago, after a summer of ignoring it, Domino once again demanded (literally) that we clear the junk off the sheepskin pod and put it back up on the couch for her to sleep in. This is a much better indicator than all that solstice/equinox stuff.

Though it may be a little iffy about which season is coming up. Last year Domino demanded the return of the pod right before winter. This is either an indication of a chilly fall ahead of us, or else an indication that Domino has a brain the size of a peanut. But look: if you had a brain the size of a peanut, you'd have trouble keeping track of seasons too. So don't be too judgmental.

Meanwhile, Inkblot doesn't need a pod or any other kind of sleep aid. Just a paw over his eyes and he's set to go.

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Market Reform Update

| Fri Sep. 19, 2008 4:06 PM EDT

MARKET REFORM UPDATE....Dean Baker is unhappy with the SEC's decision to ban short selling in financial stocks:

So where does the SEC get off banning shorts? Has it determined that bank stocks are undervalued? How did it make that determination? Does it ever determine that stocks are overvalued and therefore ban buying?

....If the issue is price manipulation, it is hard to believe that this is the first time market actors have manipulated prices. If they have the ability to do it on the down side now with financial stocks, then presumably they have also manipulated stock prices on the upside on other occasions. Why is the former worse than the latter?

Point taken. I probably agree, though I don't think I object to temporary restriction during panics. For a more impassioned defense of restrictions on short sellers, "Mad Money" senior writer Cliff Mason has you covered in comments to yesterday's post on the subject.

On another subject, Jon Taplin believes that one of the financial reforms we should insist on once the immediate crisis is resolved is to do away with mark-to-market accounting. He quotes William Isaac:

Fair Value Accounting dictates that financial institutions holding financial instruments available for sale (such as mortgage-backed securities) must mark those assets to market. That sounds reasonable. But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices?

....When there are temporary impairments of asset values due to economic and marketplace events, regulators must give institutions an opportunity to survive the temporary impairment. Assets should not be marked to unrealistic fire-sale prices.

This is an old controversy, and I won't pretend to have a sophisticated opinion about it. Still, I'd be careful about "reforming" this. Mark-to-market is a basic matter of transparency, and overall it helps prevent financial abuses by keeping banks from hiding worthless crap on their balance sheets. Our goal should be to prevent (or ameliorate) panics in the first place, and if we do that then mark-to-market is a feature, not a bug. I'd be inclined to move very slowly on this one.

The Decline and Fall of Sarah Palin

| Fri Sep. 19, 2008 2:44 PM EDT

THE DECLINE AND FALL OF SARAH PALIN....The Sarah Palin chickens are coming home to roost, and I'm here to crow about it:

Me, on August 29: "Conservatives on the tube are really, really struggling to defend this choice. I almost feel sorry for them. I'm sticking to my guns that before long this will be seen for the debacle it is."

My colleague Jonathan Stein, today: "Palin is simply not the giant-killer we thought she was. Take a look at this chart....she now has the lowest approval rating of any member of either ticket."

The clear lesson from all this: more people should listen to me! Spread the word.

Meanwhile, In Iraq....

| Fri Sep. 19, 2008 2:01 PM EDT

MEANWHILE, IN IRAQ....Juan Cole reports on the latest from the political reconciliation front:

The Iraqi parliament failed for a fifth time to pass a law on provincial elections.

Al-Hayat reports in Arabic that after months of wrangling in parliament over the enabling legislation for provincial elections, parliament has failed to find a mutually agreed-upon formula. Worse, the parliamentary debates on this issue have deepened the dispute between the Kurds and a Sunni-Shiite Arab coalition. There are fears that the sectarian civil war (between Shiites and Sunnis) will now be followed by an ethnic one, between Arabs and Kurds. The escalation of this conflict has been in significant ways impelled by the imposition of the Kurdish paramilitary, the Peshmerga, on areas outside Kurdistan proper.

Goose Meet Gander

| Fri Sep. 19, 2008 1:41 PM EDT

GOOSE MEET GANDER....Matt Yglesias says he's willing to go along with the Treasury's plan to bail out Wall Street if that's what it takes to rescue Western civilization:

But tactically, I think it'd be crazy to just hand this package over for the President's signature. Every time progressives in congress try to get something done for working people, conservatives either block it or else hold it hostage to some nutty tax cut. Why not tie this bailout to something like the second stimulus package of enhanced food stamps, extended unemployment insurance, and enhanced aid to state governments straining under the yoke of Medicaid payments?

This does seem like a good opportunity to yoke all this stuff together, assuming that the legislation is ready to go. Would Republicans really be willing to hold up the entire bill just because they hate the idea of spending federal money on actual workers? I doubt it. Let's yoke away.

The Other Bailout

| Fri Sep. 19, 2008 1:28 PM EDT

THE OTHER BAILOUT....As a followup to the previous post, I will, of course, note for the record that if Uncle Sam can afford to spend a trillion bucks or so rescuing Wall Street, it would be nice if they could spend a trillion bucks shoring up all the poor saps losing their homes because they can't make the payments on those option ARMs they were talked into buying during the boom years. We could do it if we wanted to, and the risk wouldn't even be appreciably different from the Wall Street bailout. The feds would have to make distinctions (just as they will with overleveraged banks), and some homeowners would qualify for a rescue package while others wouldn't. The ones who qualified would get loan relief, which most of them would eventually make good on, in the form of restructured financing. People would be helped, the subprime crisis would get attacked at its roots, and although it would cost a lot of money up front, in the long term the price might end up being fairly modest (by present-day brobdingnagian standards, that is). Moral hazard is an issue, but no more than it is for the bank bailout.

So: why are we willing to fund an enormous RTC-like agency to bail out bankers, but not an enormous RTC-like institution to bail out ordinary people? Lack of lobbyists? Republican ideology? A desire to punish irresponsibility regardless of the disastrous sytemic consequences? Or what?

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To the Rescue

| Fri Sep. 19, 2008 12:53 PM EDT

TO THE RESCUE....The feds have finally decided to stop screwing around and rescue Wall Street once and for all:

Treasury Secretary Henry Paulson announced plans Friday to quickly set up a "bold" government program to take over troubled mortgage assets from financial institutions, along with other efforts to step up the purchase of mortgage-backed securities.

....President George W. Bush warned that a "significant" amount of taxpayer funds will be put at risk with the government's plan to bolster shaky markets, but said intervention is necessary to keep the financial system from grinding to a halt.

A year ago (like most people, I imagine) I wouldn't have supported something like this. The credit markets were freezing up because banks had trillions of dollars in assets tied down in complex debt vehicles that, thanks to the tanking subprime market, no one could value. That made every bank suspect and every extension of credit a huge and unknown risk. But eventually, I figured, all the SIVs and CDOs would get unwound, the assets would be slowly and painfully revalued, and life would continue.

Well, it's a year later and that hasn't happened. I still don't understand all the gory details, but the SIVs haven't gotten unwound and no one knows how much the subprime toxic waste they contain is really worth — and there aren't any signs that that's going to end soon. And that in turn means the credit markets are still frozen.

So I'm all in favor of the feds stepping in. Sure, I'd like to keep punishing all the corrupt bankers and boiler room operators who caused this, but I'd like to avoid a global depression even more. In the end, the bankers are going to take a massive hit on this regardless, the feds will probably break even or maybe make a few dollars on the toxic assets, and (I hope) some eyes will be opened about the need to regulate this stuff in the future. For now, though, it's time to unstop the global economy and get things moving again.

I notice that the SEC has also halted short selling in a few hundred financial stocks, just like John McCain wanted. That's maybe not a bad idea, but I wonder if it's really necessary now. With the announcement of the rescue plan, stocks are booming and the short sellers are taking a bath. The rescue is a fundamental solution, and I suspect that's really all we needed. Short selling probably would have taken care of itself.

Palin Without a Prompter....Part 7

| Fri Sep. 19, 2008 12:39 AM EDT

PALIN WITHOUT A PROMPTER....PART 7....Have I used up my quota of two Sarah Palin references today? No? Then check out this phenomenal answer she offered up at a townhall meeting today about — well, I'm not sure what it's about. But it's energy related in some way:

"Of course, it's a fungible commodity and they don't flag, you know, the molecules, where it's going and where it's not. But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first. So, I believe that what Congress is going to do also, is not to allow the export bans to such a degree that it's Americans who get stuck holding the bag without the energy source that is produced here, pumped here. It's got to flow into our domestic markets first."

Be sure to click on the video to see the whole thing. It's priceless watching Wolf Blitzer tactfully admit that it's "not exactly easy to understand what she was saying" before he tries to tease out the "nuggets" in her answer. You almost feel sorry for him.

Construction Bonds Revisited

| Thu Sep. 18, 2008 6:55 PM EDT

CONSTRUCTION BONDS REVISITED....This is not exactly a critical issue, but over at Washington Wire Easha Anand takes a stab at defending Sarah Palin's contention that the AIG bailout was necessary because of its involvement with "construction bonds," concluding that "Palin's answer wasn't as outrageous as some have claimed."

You can read the entire post for yourself, but once you cut through the clutter there's not much there. Like me, Anand believes that Palin was referring to surety bonds on construction projects, but it turns out that (a) only government projects require surety bonds, (b) AIG is the 14th largest provider of surety bonds in the U.S., amounting to a paltry $79 million out of an industry total of $5.3 billion, (c) there are about ten other companies that can underwrite even the biggest surety bonds, and (d) surety bonds are written by AIG's regulated commercial subsidiaries, which were in no danger of default and are guaranteed by state funds anyway. In other words, surety bonds played no part whatsoever in the decision to bail out AIG. Palin just pulled them out of nowhere because she happened to be familiar with them from her tenure as mayor and governor.

Basically, I figure that presidential candidates can toss out three kinds of comments during a crisis like this:

  1. Intelligent comments that actually address the issue at hand (which you may or may not agree with, of course).

  2. Random bromides designed to fill up airtime.

  3. Stupid things.

Comments in category 1 are rare, especially in a crisis like this one that has extremely arcane and technical causes. However, Obama's remarks today about the subprime meltdown, maintaining the flow of credit, ensuring liquidity in capital markets, and helping homeowners in trouble, qualifies. He's at least talking about the right things. John McCain's comments about the "casino culture" on Wall Street fall into category 2, as does Joe Biden's complaint about tax cuts for the wealthy. Both are basically harmless political posturing.

But then we have category three, which includes stuff like McCain saying he wants to fire Chris Cox and Sarah Palin claiming that AIG needed to be bailed out because of "construction bonds." These are just actively dumb comments that do nothing but make life more difficult for the folks trying to work on solutions. If they can't do better than that, they should just keep quiet.

UPDATE: Of course, I guess there's also a category 4: bromides so halting and clueless that they just scare the hell out of everyone. As Ezra says about Palin's disjointed reaction, "Meanwhile, McCain's response made Palin's commentary look like a model of analytical clarity." Scary stuff.

Quien es mas macho?

| Thu Sep. 18, 2008 4:03 PM EDT

¿QUIEN ES MAS MACHO?....John McCain, desperately searching for something manly to say about the current financial crisis, has decided to call for the firing of mild-mannered-but-extremely-conservative SEC chairman Chris Cox:

"The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino," McCain says."They allowed naked short selling — which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground."

Somebody help me out here. This all sounds more plausible than Sarah Palin's nattering about construction bonds yesterday, but does it actually parse any better? I know Jim Cramer has been bellowing about the uptick rule for several months, but it's not pressure on stock prices that's been responsible for the banking crisis, is it? It's the other way around. Do McCain's comments make any sense? Set me straight in comments.