Kevin Drum

CDS Demonization

| Thu Nov. 6, 2008 12:19 PM EST

CDS DEMONIZATION....Are credit default swaps a major villain in the global banking meltdown? Felix Salmon, responding to a piece by Nathaniel Baker, says no:

How do we know this? Well, just look at the magnitude of the exposures that Baker is talking about. Back in January, Bernstein Research analysts totted them up, and came to the conclusion that Lehman's unsecured exposure to triple-A counterparties in general — not just the monolines — was $4 billion: large, but certainly not large enough to bring down a bank with a balance sheet of over $600 billion. Bear Stearns's exposure was smaller still, just $330 million. What fraction of that exposure eventually turned up on the banks' income statements as a mark-to-market loss? That I don't know, but it's not necessarily very large: remember that AIG's troubles only really snowballed after Lehman and Bear had gone under — and AIG was by far the largest triple-A writer of CDS.

Salmon thinks the "CDS demonization meme" is dangerous, but I'm a little confused on this score. It's a little hard to get a handle on an exact figure, but within the U.S. banking system total losses on subprime mortgages themselves probably total around half a trillion dollars. That's a helluva lot of money, but it's nowhere near enough to crash the system. That can only happen if the losses are magnified several times over via derivative losses.

Now, Salmon's point is that the CDS market is only a small portion of the total OTC derivative market. And that's a fair point. But in a previous piece, Salmon wrote this:

I had lunch yesterday with Shane Akeroyd of Markit, and he had a more sophisticated take on what we're seeing. The problem isn't CDS specifically or even derivatives in general, he said: the problem is that the world had an enormous amount of leverage, and all that leverage is now being unwound at once. Do CDS make it easier to firms to lever up? Yes — but if CDS hadn't been around, some other instrument would have been found which had the same effect.

Well — OK. Maybe bankers would have found some other way to lever up. But in the event, Akeroyd is saying, they used CDS. So why then is it unfair to say that CDS exposure was a huge driver of the financial meltdown?

Salmon's larger crusade is to defend derivatives in general, and CDS in particular, as useful devices when they aren't abused, but it's not clear to me that this is especially controversial. The question is, how should they be regulated in the future to ensure that they aren't abused? I agree that leverage itself should be the primary target of regulatory reform, but surely, under the circumstances, some reasonably strict trading rules on derivatives of all kinds will end up being part of that. Leverage is a hard thing to get at directly, after all, and we're going to need to attack it from a variety of directions. A bit of CDS demonization might not be a bad place to start from.

UPDATE: More here, including a response from Salmon.

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Copy Desk Watch

| Thu Nov. 6, 2008 10:59 AM EST

COPY DESK WATCH....I'd like to nominate this for misleading headline of the year:

Prop. 2 probably won't hike egg prices

Proposition 2 is the initiative that requires hens to be kept in cages that allow them to move around a bit. I voted for it, and it passed yesterday 63%-37%. But here's the story behind the headline:

Egg prices probably will not increase for Californians, according to a study by the UC Davis Agricultural Issues Center. That's because out-of-state farmers, who already supply Californians a third of their eggs — and could provide more — are not affected by the new law, so they won't have to change their housing.

...."The most likely outcome, therefore, is the elimination of almost all of the California egg industry over a few years," says the report.

So egg prices won't go up, but only because the California egg industry will be utterly destroyed. By this logic, the headline after Black Tuesday should have been, "Apple industry opens new distribution channel on Wall Street." Sheesh.

UPDATE: Actually, this is even weirder than it looks. The print version of this story bears practically no resemblance to the online version, and doesn't even include the quote about the elimination of the egg industry. Very strange.

Dishing on Palin

| Wed Nov. 5, 2008 11:48 PM EST

DISHING ON PALIN....Don't lie: you know you want to hear it. The presidential campaign has only been over for 24 hours, but that's all it's taken for two months of accumulated bitterness and rage from McCain staffers toward Sarah Palin to finally explode onto the news pages. For starters, here is John McCain's private opinion of Palin, as reported by the Guardian:

An exasperated McCain has been telling friends in recent weeks that Palin is even more trouble than a pitbull. In one joke doing the rounds, the Republican presidential candidate has been asking friends: what is the difference between Sarah Palin and a pitbull? The friendly canine eventually lets go, is the McCain punchline.

Here is the McCain campaign's take on Palin's clothing extravaganza, as reported by Newsweek:

Newsweek has also learned that Palin's shopping spree at high-end department stores was more extensive than previously reported. While publicly supporting Palin, McCain's top advisers privately fumed at what they regarded as her outrageous profligacy.....An angry aide characterized the shopping spree as "Wasilla hillbillies looting Neiman Marcus from coast to coast," and said the truth will eventually come out when the Republican Party audits its books.

And here are some "McCain staffers" explaining that Palin is not just a moron, but a bad-tempered moron, as reported by Fox's Carl Cameron:

There was great concern in the McCain campaign that Sarah Palin lacked the degree of knowledgeability necessary to be a running mate, a vice president, and a heartbeat away from the presidency. We're told by folks that she didn't know what countries were in NAFTA, the North American Free Trade Agreement, that being Canada, the US, and Mexico. We're told that she didn't understand that Africa was a continent rather than a country just in itself. A whole host of questions that caused serious problems about her knowledgeability. She got very angry at staff, thought that she was mishandled, was particularly angry about the way the Katie Couric interview went. She didn't accept preparation for that interview when the aides say that that was part of the problem. And that there were times where she was hard to control emotionally. There's talk of temper tantrums at bad news clippings.

Regarding the last report, Shep Smith asks the obvious question: "How could they end up with a running mate who doesn't know that Africa is a continent?" Cameron explains that the vetting process "was truncated."

Earlier today, I had in mind a post about Palin that would have started out by saying that I didn't think she was stupid, just completely uninterested in national policy issues prior to August 29th. Needless to say, I'm glad I didn't write that post.

Transition Planning

| Wed Nov. 5, 2008 9:55 PM EST

TRANSITION PLANNING....A regular reader emails a question:

When do we get to start spreading some clever lies about Bush's people trashing the White House before Obama moves in? You know, something like they reprogrammed all the computers so that the letter "B" appears backwards and colored red. We need to think up some really stupid stuff that Fox News will swallow hook, line and sinker.

No time like the present! Leave suggestions in comments.

More Senate News

| Wed Nov. 5, 2008 8:54 PM EST

MORE SENATE NEWS....The Portland Oregonian reports that Jeff Merkley has won the Senate race there. That's +6 for the Democrats.

Rahm Emanuel

| Wed Nov. 5, 2008 8:00 PM EST

RAHM EMANUEL....The New York Times reports that Barack Obama has asked Rep. Rahm Emanuel to be his chief of staff. Ezra Klein is ambivalent about this:

If you thought the Obama administration would be all about bringing people together and would simply make sad faces when stubborn congressmen refused to come to the table, this is a clear sign otherwise. If good feelings don't suffice, bareknuckle politics will happily be employed.

But part of Emanuel's job will be to advise on what is politically possible. And he has always portrayed himself as a hard-headed realist on such matters, with a late-term Clintonite's allergy to ambition. In his book The Plan, Emanuel warns Democrats away from attempting universal health insurance or comprehensive reform, and suggests they content themselves with expanding S-CHIP (he also gives a plug to his brother, Ezekiel Emanuel's, health care plan, but says his "plan is well beyond Washington's current reach."). That's not change we can believe in.

Noted without comment since I don't really know anything about this. I just thought it was worth passing along.

UPDATE: Conservative Yuval Levin has a different take:

The White House chief of staff is not a chief strategist or a chief advocate. He is a manager of people and of process. Above all else, he sets the tone internally, and shapes the president's decision process and the feel of the upper tiers of the administration.....[Obama] will need a chief of staff with a sense of the gravity of the choices the president faces, and one capable of moving the staff to decision, keeping big egos satisfied and calm, and resisting the pressure to be purely reactive to momentary distractions. None of this spells Rahm Emanuel. There is definitely a place for a Rahm Emanuel type of brilliant ruthless shark in a White House staff, but not in the Chief's office.

This jibes with my understanding of the CoS position too. But what do I know?

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2012

| Wed Nov. 5, 2008 7:24 PM EST

2012....I'd like to be the first pundit to go on record predicting the result of the 2012 election. I project that Barack Obama will crush his Republican opponent and win the popular vote by 10 percentage points. You heard it here first.

The Great Persuader

| Wed Nov. 5, 2008 2:37 PM EST

THE GREAT PERSUADER....Will Barack Obama be a great president? He's got a big election victory behind him, solid congressional majorities in both houses, an electoral coalition eager to support him, and a country seemingly ready for serious change. But what kind of change? Technically, his platform is as progressive as we've seen from a Democrat in a generation. But did he really sell it to the voters? Did he even make the effort? The public face of his economic policy, after all, was almost entirely based on tax cuts, a distinctly conservative notion. His energy plan was largely based on the promise of "green jobs." He mostly avoided talking about social issues. He got people's votes, but did they really know what they were voting for?

I'm not sure. A couple of months ago I wrote a piece for Mother Jones about this, and after Obama's speech at Invesco Field I almost changed it a bit before publication. But in the end I didn't, and I think that turned out to be right. Because it's still not clear to me that Obama even tried to sell the public on specifically progressive change:

Majorities may come and go, but FDR built a liberal legacy that outlasted him because, by the time he left office, the public believed in the New Deal and everything that went with it.

Now fast-forward 70 years and ask yourself, What is it going to take to pass serious climate change legislation? A liberal majority in Congress? Check. Interest groups willing to rally? Check. But to paraphrase an old military saying, the opposition gets a vote too. And the opposition's message to a public already tired of high gasoline prices is going to be simple: Liberals want to raise energy prices. Your energy prices.

And make no mistake. Barack Obama's cap-and-trade plan to reduce carbon emissions may be technically one of the best we've ever seen, but it will raise energy prices. That's the whole point. So once the public understands that there's more to Obama's plan than green-collar jobs and serried ranks of windmills on the Great Plains, they're going to have second thoughts. And those congressional majorities, who face election in another couple of years, are going to have second thoughts too.

The right way to address this won't be found in any of Obama's white papers. There's a story there, if you dig deep enough, but it's long and complicated and relies on things like increased efficiency, consumer rebates, and R&D funding that pays off in another decade or so. In the short term someone is going to have to tell the public that, yes, there's some sacrifice required here, but it's worth it. Someone needs to come up with a garden-hose analogy to convince a financially stressed public that doing something for the common good is worth a small price.

That someone, of course, is Barack Obama, but it's not clear yet if he gets this. His speeches soar, but they rarely seem designed to move the nation in a specific direction. Is he pushing the public to support cap and trade even though it might cost them a few dollars? Or merely to vote for "change"? It's sometimes hard to tell.

I'm not arguing for hair shirt politics. Presidential candidates win office by promising to solve all the problems of the world, not by hectoring the electorate. And as I mentioned in the article, FDR ran a notably mushy campaign in 1932 and look how he turned out.

But even if that was a good excuse for holding back during the campaign season, now's the time to start using the bully pulpit. Obama has a notable streak of temperamental caution that serves him well, but it could also betray him. Maybe he could have turned the tide against Proposition 8 in California if he'd been willing to take a risk on its behalf. Maybe he can overcome conservative opposition to a progressive energy plan if he's willing to take some risks selling it to the public. But if he doesn't, all the congressional majorities in the world won't help him in the long run. I sure hope he understands this.

Whither Joe?

| Wed Nov. 5, 2008 1:20 PM EST

WHITHER JOE?....So what happens to Joe Lieberman now? If Dems had gotten to 59 or 60 seats in the Senate, it would be really tough to kick him out of the caucus. But at 56 or 57, Lieberman is a lot less important. Sure, every vote counts, but needing four or five GOP votes to break a filibuster instead of three or four — well, that's just not such a big deal.

On the other hand, politics makes for strange bedfellows, and political leaders swallow hard and make compromises for the greater good all the time.

On the third hand, dumping Lieberman, especially if Obama were behind it, would be a very dramatic way of encouraging party loyalty from the rest of the Democratic caucus in the future, wouldn't it?

So....I dunno. What do you all think happens to Holy Joe? Stay in the caucus on condition of good behavior? Stay in the caucus but lose his committee chair. Get kicked out completely? Something else?

How We Voted

| Wed Nov. 5, 2008 1:02 PM EST

HOW WE VOTED....We're going to be seeing a ton of electoral slicing and dicing over the next few day, but Andrew Gelman leads off today which a chart showing the tremendous difference in the youth vote this year compared to 2000 and 2004. In the previous two elections George Bush got nearly half of the 20-something vote. This year, John McCain barely broke 30% of the youth vote.

Gelman also notes that the election came out about the way political scientists expected. "Obama won by about 5% of the vote, consistent with the latest polls and consistent with his forecast vote based on forecasts based on the economy." He calls that "close," but I'm not sure that's right. It's true that historically it's no blowout, but presidential elections have trended pretty close in recent years, and by the standards of the last decade this is a pretty solid win — especially given the big Democratic majorities now in place in Congress. Given the state of the country, it's hard to see how it could have been much bigger.