Kevin Drum

January 21st

| Mon Sep. 29, 2008 1:24 PM EDT

JANUARY 21st....Matt Yglesias isn't happy with the bailout bill:

Under the circumstances, it looks like a bill that'll be good enough to stave off collapse of the financial system, but probably won't wind up addressing the full extent of the problem. This subject is going to have to be revisited after the election. But the unfortunate reality is that the current configuration of power in Washington still leaves the conservatives whose policies and ideology is largely responsible for the collapse in command of too many levers of power to simply implement a solution that's not tainted by their misconception of the problem.

I'm less unhappy than Matt. I think there's a decent chance the bill will provide enough systemic relief to prevent a scattershot government takeover of failed banks, and I'm OK with that. More to the point, though, if the bailout doesn't solve the problem completely, I'm perfectly happy to put off further action until after the election. If widespread nationalizations do turn out to be necessary, there's a way, way better chance of doing it decently on January 21st than there is today. One thing is certain, after all: we're not going to end up with a Swedish-style political solution in which both parties put down their hatchets and sing Kumbaya as they announce a rescue plan. Events of the past week have made that crystal clear. If it happens at all, it will only be because Democrats manage to push it through on sheer muscle.

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Biden vs. Palin

| Mon Sep. 29, 2008 12:33 PM EDT

BIDEN vs. PALIN....Nancy Gibbs, like many other people, wonders how Sarah Palin is going to do against Joe Biden on Thursday night:

With Charlie Gibson the waters were smooth if shallow; with Katie Couric she seemed forever at risk of drowning in her own syntax. But if she's growing less surefooted with each passing day of cramming, who can blame her, when the highly experienced Republican pols around her don't seem to trust her to talk past her talking points....All I know is that with each passing day, Palin's road gets harder, the expectations higher, the margin for error smaller.

No kidding. But there's a flip side to this too: it takes a lot of pressure off Biden. When Palin was first nominated, pundits fell all over themselves to advise Biden to watch his tongue when he faced Palin in debate. Don't look like a bully! Don't be sarcastic! Don't talk down to her!

Well, guess what? It turns out he doesn't need to. Attacking Palin — all the while worrying about whether this attack is too much or that attack will turn off women — is completely unnecessary. Biden just needs to show up, talk normally, and wait for her to implode. That's got to be a relief, no?

Hedge Fund Watch

| Mon Sep. 29, 2008 1:30 AM EDT

HEDGE FUND WATCH....The end of the third quarter is nearly upon us, and hedge fund managers are feeling nervous:

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

....The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

"Everybody's watching for redemptions," said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. "And there could be a cascading effect, where redemptions cause other redemptions."

The article says optimistically that "No one expects a wholesale flight from hedge funds." But no one ever does, do they?

The Rise of the Technocrats

| Sun Sep. 28, 2008 11:51 PM EDT

THE RISE OF THE TECHNOCRATS....The New York Times on the Paulson bailout plan:

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government's role to move it along instead of coddling the banks if the financial system is going to return to health.

...."The lesson from Japan is that tough love for the banks is what's needed," said Kenneth Rogoff, an economist at Harvard. "In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don't want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain."

Words to live by. The Treasury technocrats and asset managers who end up running the bailout are going to have a tremendous influence over whether it's successful or not. If they do it right, the plan should shine a bright light on which banks need to fail and which ones can be saved. If they do it wrong, we could be in for a long, gray twilight of economic stagnation.

In other words, we all better cross our fingers and pray that the Treasury department still has good technocrats these days. I wonder what the odds are?

Global Warming Update

| Sun Sep. 28, 2008 6:20 PM EDT

GLOBAL WARMING UPDATE....What with financial Armageddon crashing down on our heads as we speak, it's hard to believe that the worst news of the week was actually buried on page A2 of the Washington Post. But it was:

In 2007, carbon released from burning fossil fuels and producing cement increased 2.9 percent over that released in 2006, to a total of 8.47 gigatons....This output is at the very high end of scenarios outlined by the Intergovernmental Panel on Climate Change (IPCC) and could translate into a global temperature rise of more than 11 degrees Fahrenheit by the end of the century, according to the panel's estimates.

We are so screwed.

All the Right Enemies

| Sun Sep. 28, 2008 6:06 PM EDT

ALL THE RIGHT ENEMIES....Sure, maybe you don't believe me about whether the Paulson bailout will work. Why should you? But the fact that Mike Pence opposes it surely lends the plan some credibility, doesn't it?

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"Utterly Unqualified"

| Sun Sep. 28, 2008 4:35 PM EDT

"UTTERLY UNQUALIFIED"....Fareed Zakaria on Sarah Palin:

Can we now admit the obvious? Sarah Palin is utterly unqualified to be vice president. She is a feisty, charismatic politician who has done some good things in Alaska. But she has never spent a day thinking about any important national or international issue, and this is a hell of a time to start.

....In these times, for John McCain to have chosen this person to be his running mate is fundamentally irresponsible. McCain says that he always puts country first. In this important case, it is simply not true.

I don't want to overstate the importance of this, but it's definitely a sign that Palin's jig may be up. Zakaria frequently writes astutely, but he's something of an establishment weathervane, reluctant to state firm opinions unless he's got plenty of company. So if he's willing to say flatly that Palin is "utterly unqualified," it suggests that the center-right establishment pretty unanimously agrees about this. I don't know for sure that this will have a noticeable effect on the campaign, but when you add it to the growing list of conservatives who have taken similar stands (George Will, David Frum, Rod Dreher, Kathleen Parker, Ross Douthat, David Brooks, Charles Krauthammer), it suggests that dismay over Palin may be reaching critical mass.

Who Won the Debate?

| Sun Sep. 28, 2008 3:53 PM EDT

WHO WON THE DEBATE?....A non-snap poll done on Saturday suggests that Barack Obama really did win Friday's debate:

A new USA TODAY/Gallup Poll shows 46% of people who watched Friday night's presidential debate say Democrat Barack Obama did a better job than Republican John McCain; 34% said McCain did better.

....The poll suggested the debate was to some extent a wash for McCain: 21% of those who watched say it gave them a more favorable view of him, 21% say less favorable and 56% say it didn't change their opinion much.

Three in 10 said their opinion of Obama became more favorable after seeing the debate, compared to 14% who said less favorable and 54% who said it didn't make much difference.

Polls done on weekends are tricky, and "winning" debates doesn't always translate into a tangible advantage. Still, it's notable that a significant number of people who were apparently unsure about Obama before the debate now see him in a favorable light. That's a big deal, since being taken seriously is the biggest hurdle for a younger, less-experienced candidate to get over.

And while we're at it, here's the RealClear Politics poll average, which doesn't yet account for any possible bump Obama might have gotten from the debate. As of this morning, they have him 4.8 points ahead.

Quote of the Day - 9.28.08

| Sun Sep. 28, 2008 3:24 PM EDT

QUOTE OF THE DAY....From John McCain, responding to the fact that Sarah Palin repudiated his Pakistan policy in a conversation at Tony Luke's cheesesteak shop in South Philly yesterday:

"In all due respect, people going around and... sticking a microphone while conversations are being held, and then all of a sudden that's — that's a person's position... This is a free country, but I don't think most Americans think that that's a definitve policy statement made by Governor Palin."

Got that? It's unfair for someone to "stick a microphone" in the face of a vice presidential candidate during a campaign appearance and then take her words seriously. This is no longer even low farce. It's more like we're all in the middle of a bad vaudeville skit.

My Take on the Paulson Plan

| Sun Sep. 28, 2008 3:09 PM EDT

MY TAKE ON THE PAULSON PLAN....Will the Paulson bailout work? Is it the really best solution to our financial problems? Before I answer, my standard caveat: I'm a semi-informed, non-credentialed amateur who has no experience in the finance world and only barely understands exactly how this crisis has unfolded. If it makes you happy, you should feel free to echo this critique in more biting and sarcastic terms in comments.

That said, I think the answer is yes and yes. The leading alternative appears to be some version of nationalization: Recapitalize failing banks, nurse them back to health, and then sell off the government stakes sometime down the road. One advantage to doing this is that it automatically forces banks that made the dumbest mistakes to pay the highest price for rescue. Sweden, which faced a financial collapse in the early 1990s that was similar in some ways to ours (though different in others) did this and it seemed to work OK for them.

And it may yet come to that. It's not a serious alternative right now because there's simply no political support for it (there's barely political support for the Paulson plan), but I'm skeptical that it's the best solution anyway. Why twiddle our thumbs waiting for banks to fail? Why prop up entire institutions when their problems are narrowly focused on a particular class of assets? Who decides which banks are worth nationalizing and which ones aren't?

The Paulson plan, by contrast, seems to have a pretty good chance of accomplishing multiple things:

  1. Thanks to falling house prices and a general panic, toxic mortgage assets are currently valued by the market at about zero. This is plainly absurd: they're worth quite a bit less than face value, but they aren't worthless. The Paulson plan, by creating a mechanism to pay some kind of reasonable price for these assets, cleans up banks' balance sheets and increases their capital base at the same time. Doing both those things is better than recapitalization alone.

  2. Creating a controlled market in these assets should help to jumpstart the public market for all the toxic waste currently on bank balance sheets, not merely the parts of it that Treasury purchases. This will help the balance sheets of every bank in the industry, even the ones who don't participate in the bailout. In this sense, we're getting a very big bang for our buck.

  3. Once prices are set, we'll have a much better idea of which banks really are insolvent — or are likely to become insolvent shortly. This is pretty useful information. It gives us a better idea of the scope of the problem, and allows us to make rational decisions about whether to let banks fail or whether we really do have to nationalize them.

  4. If it then turns out that we have to nationalize a bunch of banks, we can still do it. But the Paulson plan seems like a better first step: more focused, easier to manage, and with a good chance of unstopping the credit markets quickly and putting the finance industry back on its feet.

Letting Lehman Brother go bust was obviously a disaster. Everyone agrees we can't let that happen again. And by all accounts, Paulson drove a pretty hard bargain when he nationalized AIG, one that quite possibly will end up being profitable for the taxpayers. The same might be true for the broader bailout, especially if the plan to get contingent equity shares in participating banks is included in the final legislation — as it seems to be. So I say: let him try to make the current bailout plan work. I think it's got a good chance of working, and if it doesn't, Plan B is still available.