Kevin Drum

Saving the Lada

| Tue Dec. 23, 2008 1:10 PM EST

SAVING THE LADA....The government plans to bail out the country's big automakers and the public is unhappy over the deal. Old news? Sure, except it's happening in Russia too:

The dozens of demonstrations that have cropped up across Russia in recent weeks haven't been particularly big. However, they have been significant as the first notable show of widespread dissent in the near-decade since Prime Minister Vladimir Putin cemented his hold on power.

Organizers say they will keep up the pressure unless the government reverses its decision to raise taxes on imported automobiles.

....The tax hike, which will be determined for each vehicle based on a complicated formula, will drastically increase the cost of foreign cars and trucks. Vehicles older than 5 years will be slapped with a duty of at least 70%, making their importation unprofitable.

This dynamic is playing out everywhere: governments all want to bail out their auto companies, but not every auto company can survive. There's just too much vehicle manufacturing capacity in the world, and there has been for a while.

However, this story also suggests that, against all odds, it may be the consumers of the world who prevent a mass outbreak of new beggar-thy-neighbor tariff rules. National governments understandably feel a lot of pressure to protect their local industries, but it might turn out that their publics don't really agree. Americans don't like American car companies all that much, it turns out, and Russians don't like Russian car companies either. Siberians would rather buy a Toyota than a Lada.

This might not turn out to be case for every industry, of course, but I wouldn't be surprised if it restrains central governments from going too far down the protectionist path. Imports are just too popular with the unwashed masses.

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Shoeing the Prez

| Tue Dec. 23, 2008 12:35 PM EST

SHOEING THE PREZ....I agree with Daniel Davies that tossing shoes at George Bush and tossing pies at Tom Friedman are both basically funny things, not worth getting a stick up your butt about. Just have a laugh, don't let it get out of hand, and relax.

Following up on that, however, he admits: "Although seeing Bush get shoed was a laugh, it's a nervous sort of laugh for anyone who is worried about the possibility of President Obama being assassinated, which I know that a lot of people are. And statistically, they're right to be worried. Roughly 10% of all US Presidents ever elected have been assassinated (4 out of 43), which is roughly as high a death rate as street drug dealers." Then, with a few heroic assumptions and the help of some geeky friends, he quantifies the job-related mortality rates of being president compared to, say, being a member of Hezbollah or the King of France. Turns out that being president is more dangerous. Read the whole thing if you want to know how much more dangerous.

Guantanamo Update

| Tue Dec. 23, 2008 3:08 AM EST

GUANTANAMO UPDATE....In the Washington Post today, Peter Finn reports that European countries, which have had an obviously fraught relationship with the Bush administration over Guantanamo and the legal treatment of terrorist suspects in general, is looking forward to working more closely with Barack Obama on these issues. In particular, they may be willing to accept the resettlement of Guantanamo detainees into their countries:

The Europeans want a clear commitment to close Guantanamo Bay and an acceptance of common legal principles in the fight against terrorism, including those regarding the treatment of suspects, European officials said. A series of meetings between the United States and the European Union on a legal framework for combating terrorism has considerably narrowed differences on the application of human rights law, refugee law and humanitarian law, said Amado and John B. Bellinger III, a legal adviser at the State Department.

The Europeans also want Obama to agree to transfer a small number of detainees to the United States before they attempt to sell a resettlement program to their own citizens.

....Guantanamo Bay currently has about 250 prisoners, according to the Pentagon. And some European officials said a number of governments are considering the logistics of resettling a majority of the 60 prisoners already cleared for release by U.S. authorities.

The Pentagon has not identified the 60, but a study released by the Brookings Institution last week found that as well as the Chinese Uighurs, the group includes detainees from Yemen, Tunisia, Algeria, Uzbekistan, Iraq, Saudi Arabia, Egypt, Libya and the Palestinian territories. The Brookings study found that these prisoners "concentrate at the less dangerous end of the spectrum."

The whole story is a little hard to follow, which is probably because nothing even close to definitive has been settled yet. Mostly it's just a feeling that EU countries are looking forward to a more constructive relationship with Obama than with Bush, and may be willing to make some compromises on their end to start things off on the right foot.

It's all very mushy at this point, but obviously good news regardless. The question of what to do with Guantanamo detainees that nobody wants is a genuinely difficult one. If the EU helps out here, it makes it a lot more likely that Guantanamo will be shut down sooner rather than later.

Department of Labor

| Mon Dec. 22, 2008 9:58 PM EST

DEPARTMENT OF LABOR....Victor Davis Hanson is unhappy with Barack Obama's choice to head the Department of Labor:

I'm sure that the labor secretary nominee Hilda Solis is a bright and savvy politican. But a labor secretary is supposed to reflect some balance between labor and management, one that seeks to hammer out compromises in the best interests of the nation. Her record, however, is exclusively pro-union without exception or doubt.

Maybe my memory is just getting fuzzy as I get old, but I sure don't remember very much conservative concern with "balance between labor and management" when George Bush chose Mitch McConnell's wife to be Secretary of Labor eight years ago. Do you?

Let's see. Before her appointment, Elaine Chao spent four years as a fellow at the Heritage Foundation. She campaigned tirelessly with McConnell against the Employee Free Choice Act. Her choice to head up OSHA was a partner at one of the best known union-busting lawfirms in the country. Under her watch the NLRB reclassified 8 million workers as "supervisors," primarily in an attempt to throw a wrench in unionizing efforts. New overtime rules wiped out time-and-a-half for 6 million workers. The probability of union organizers being fired went up by more than half.

Now, that's about what I'd expect from an administration that's exclusively pro-business without exception or doubt. But after eight years of that, it's a little rich to complain when a liberal president nominates a Secretary of Labor who's actually pro-labor. Less whining, please.

Domestic Spying

| Mon Dec. 22, 2008 3:44 PM EST

DOMESTIC SPYING....Over the weekend Dick Cheney made a point of saying that congressional Democrats were fully on board with the NSA's domestic spying program during the 2001-04 period. This may or may not be completely true, but there's plenty of evidence that it's mostly true: the NSA program really was approved on a bipartisan level. Spencer Ackerman comments:

Cheney might not be acting in good faith, but he's nevertheless pointing to something barometrically significant. In Washington, the phrase "bipartisan" is supposed to cash out to something like "legal" or "wise" or "no longer controversial" or "kosher." The Germans probably have a word that's a more acceptable translation. In any event, that's self-evidently foolish: lots of people can make mistakes and lots of people can make venal decisions, and it's not a function of belonging to one political party or the other. Cheney doesn't get off the hook if Nancy Pelosi is on it with him. Naturally, what I imagine Cheney's doing is warning the Democrats off creating an independent commission into the abuses of the administration, lest it go after them too, but that's all the more reason one should be created.

Agreed. Unfortunately, there appears to be literally no one who has any incentive to do this. Not Republicans, not Democrats, not Bush loyalists, and not Barack Obama, who voted for the wiretapping bill earlier this year and really has no reason to want this to continue to be an issue. Unfortunately, this whole issue is probably destined to fall quickly down the memory hole.

*Stimulus and Energy Efficiency - Together at Last

| Mon Dec. 22, 2008 3:11 PM EST

STIMULUS AND ENERGY EFFICIENCY — TOGETHER AT LAST....Glenn Hubbard thinks the housing market is close to its natural bottom, and in order to keep it from overshooting it's time for the government to step in and start offering below-market mortgage rates. Brad DeLong agrees:

All in all, I approve of the plan: having Fannie and Freddie buy up mortgages at market prices and refinance them at 4.5% could do a lot of good for the country and make a fortune for the government.

I'm agnostic on how close we are to a housing bottom. My guess is that we still have a ways to go, but since it takes a while for a program like this to take effect, maybe now is the time to get started.

But if we're going to do some social engineering with mortgage loans, why not go whole hog? An outfit called Architecture 2030, founded by Edward Mazria, suggests that we offer homeowners not just low-interest loans, but a sliding scale of low-interest loans that's conditioned on renovating their homes to increase energy efficiency. Their proposed scale is on the right. The nickel explanation is below:

Mazria walked me through a hypothetical example that highlighted the huge incentives the plan could unleash. Say you're a homeowner with a $272,000 mortgage at 5.55%, paying about $1550 a month. You decide you want your mortgage rate to drop to 3%. In order to qualify for the reduction, you have to improve the energy efficiency of your home 75% below code, and it's going to cost you a pretty penny: about $40,000.

Existing tax credits would take care of about $10,000 of that cost. The rest would get tacked on to your existing mortgage, bringing it up to $302,000. But, at 3%, you'd be paying only about $1280 — saving almost $300 a month on the mortgage alone, plus another $150 in reduced energy costs. The value of your home rises, you have more disposable income, you've given work to someone to do the upgrades for you — and s/he's now paying federal taxes, and you've reduced your carbon footprint.

The Architecture 2030 folks claim that their program (which has a component for commercial buildings as well) would cost a mere $170 billion over two years, and in return would create over 8 million new jobs, jump start a new $1.6 trillion renovation market, save consumers a boatload of money, and reduce CO2 emission by about half a billion tons. What's not to like?

To be honest, I'm not sure. There's something a little too free-lunchish about this plan, and I figure there has to be a catch somewhere. I invite everyone reading this to try and figure out what it is. But if the sums really add up the way they say they do, it seems worth considering, no?

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Markets in Everything, War Edition

| Mon Dec. 22, 2008 2:38 PM EST

MARKETS IN EVERYTHING, WAR EDITION....Dan Drezner bemoans the fact that international relations scholars aren't allowed to invade other countries to test out their pet theories1, but says we're about to conduct a natural experiment anyway that might tell us why large scale warfare has become much less common than it used to be:

Liberals will point to the rise of the Kantian triad — democracies, international organizations and economic interdependence. All three of these trends have made war much more costly to leaders than it used to be....Realists offer a different explanation — the rise in nuclear weapons. The logic of nuclear deterrence is inescapable — the prospect of a devastating counterattack is sufficient punishment to prevent a conflict from breaking out in the first place.

....[But] the Kantian triad is about to take a serious beating. The global economic crisis is encouraging beggar-thy-neighbor policies in the form of new tariffs and currency manipulations. The crisis has exposed the powerlessness of international institutions (within a month of the G-20 pledge not to raise new barriers to trade, Russia, India, Brazil and Argentina went back on their word). The longer the recession lasts, the more each major power will turn inward to boost its economic prospects.

Will this lead to more war or not?

Hmmm. I have my doubts that this will really answer the question. What if we continue to have zero wars between nuclear powers (highly likely, I'd say) but an uptick in wars between smaller powers? I think we need a better natural experiment. But sometime long after I'm dead, please.

1But he's just joking, OK?

Spooked and Insolvent

| Mon Dec. 22, 2008 2:03 PM EST

SPOOKED AND INSOLVENT....Atrios sez:

Even now my interpretation is that the Wise Men Of Washington who are "dealing" with this financial crisis believe they are dealing with a liquidity crisis rather than an insolvency one. They think that big shitpile is actually worth something, but that "financial actors" are "spooked." They think that if banks aren't lending it's because they have temporary capital issues because of this, instead of the fact that maybe banks aren't lending because recession is here and it's not the most awesome time to lend money for projects.

But why can't it be both? In the previous post I said it was a bad idea for Henry Paulson to bail out all the big banks instead of reserving funds only for those banks that were genuinely close to insolvency, and this is one of the reasons. Not only did a lot of money get wasted on banks that didn't want it, but it prevented us from finding out which banks were in trouble and which ones weren't. If, say, a quarter of the banking industry is insolvent, but nobody knows which quarter, than we have both an insolvency problem and a "spooked financial actors" problem. Sweden solved both these problems in the early 90s by taking over the banking industry completely, but in their case it was really true that virtually every bank was underwater. In our case, it's not1, and we ought to be spending more time figuring out which banks are viable entities and which ones aren't. The ones that aren't can be bailed out or nationalized if there's some prospect of future recovery, and the rest can be left alone. Result: we still have a big recession, but at least the solvent banks aren't under the same cloud of suspicion as everyone else and can go about their business semi-normally.

1Well, I don't think so, anyway. I could be wrong, though!

Bailout Babies

| Mon Dec. 22, 2008 1:32 PM EST

BAILOUT BABIES....Hilzoy speaks for everyone who lacks a chauffeur when she wonders why banks that are getting federal bailouts "awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year":

The very people who are getting these bonuses and chauffeurs and private jets and financial planners have just sent the entire global economy into a nosedive. They have caused massive amounts of money to disappear. They are getting bailed out for their mistakes by the rest of us — the people who, if we're lucky, get to fly coach, and if we're not, drive across the country or take a bus.

If they had any shame at all, they would stop. More than that: if they had any sense at all of how angry a lot of us are getting, sheer prudence would do the trick. This is our money. We are giving it to them to get all of us out of a problem that they caused. They should bear that in mind, not treat us as if we were one great big cookie jar.

This is not the first time, of course. When LTCM imploded in 1998, Alan Greenspan arranged a bailout and saved the world. Yippee! But his bailout didn't wipe out the fund's backers. They took a big haircut, but they didn't lose everything. For endangering the entire world economy and bringing Wall Street to the brink of disaster (or so we're told), their reward was to take home a pretty nice piece of change when everything was said and done.

(And all the warnings about how we should prevent the kinds of practices that led to the LCTM debacle in the first place? You can guess what happened to those.)

Of course, there's another problem here: not every big U.S. bank is in trouble, but Henry Paulson forced them all to accept bailout funds anyway. Not only was that probably a bad idea in general, but it makes it hard to figure out who's really playing games with the taxpayer's dough. If Wells Fargo is doing OK, and didn't want any bailout money to begin with, there's no special reason to object to their salary and bonus structure. But AIG and Citicorp? Different story. It's yet another reason that bailouts should have been restricted to only the banks that really need it.

The Financing Problem

| Mon Dec. 22, 2008 12:48 PM EST

THE FINANCING PROBLEM....One of the things that will keep the U.S. housing market in the doldrum for years, even after prices bottom out, is that so many homeowners are upside down on their mortgages: they owe more on their homes than they're worth. Well, guess what? The auto industry has the same problem. Stephanie Mencimer, author of the terrific book Blocking the Courthouse Door, reports over at our main site:

According to industry analyst Art Spinella, president of CNW Research, fully 85 percent of Americans with a car loan have negative equity. Other studies show that these loan holders, on average, owe $4,400 more than their cars are worth.

....Unbeknownst to most car buyers, dealers [] routinely—and legally—bump up the interest rate offered by the bank or finance company in exchange for kickbacks from the lenders, which are often the manufacturers themselves. And in many cases, dealers encourage customers to trade in a car that isn't worth the amount of their current loan by offering to roll the old loan into the new one, thus inflating the principal and making the loan more lucrative for the lender. That's how people can end up owing $40,000 on a Ford Focus. This only works because auto lenders now stretch out the terms to six or seven years to make the payments affordable, a practice that virtually ensures that many cars won't last as long as the loan.

But nobody could have predicted etc. etc., right? Uh huh:

In 2004, major auto analysts noted that the lengthening loan terms and the increasing number of potential car buyers who were upside down on loans would lead to no good end for the auto industry, and GM in particular. Deutsche Bank analyst Rod Lache was prescient when he told Automotive News that the negative equity problem would only get worse if the automakers didn't address it. Observing that the average amount of money owed by someone trading in a car with negative equity had jumped from $2,900 to $4,000 in just a five-month period, he wrote, "The impact on US demand, price and mix from this phenomenon could be devastating, particularly if the impact is compounded by rising rates."

Read the whole thing here. This is yet another problem that has to be addressed if the auto industry is going to be successfully bailed out. After all, it doesn't do any good to give them a bunch of bridge loans unless they can figure out a way to get their customers back, and that's easier said than done. Caveat emptor.