Kevin Drum

Holbrooke to Islamabad?

| Wed Nov. 26, 2008 9:11 PM EST

HOLBROOKE TO ISLAMABAD?....Spencer Ackerman thinks Barack Obama ought to ask Richard Holbrooke to be his ambassador to Iraq:

Is there any U.S. diplomat more qualified than Holbrooke — a former U.N. ambassador, among other things — to preside over and cajole the creation of a national sectarian political compact in Iraq? Unlike anyone else in the U.S. foreign policy community, Holbrooke actually did this before, in the middle of a Balkan shooting war, and he's given a lot of thought to the ways in which his Balkan experience is relevant to Iraq. If we're to take seriously the idea that the U.S. needs energetic diplomatic action to broker a political settlement in Iraq to accompany withdrawal, there isn't really anyone else for the job.

Sure, but here's another thought. If he's willing to stay on, why not keep Ryan Crocker in the job and ask Holbrooke to go to Pakistan? Crocker gets pretty good marks from everyone and he already knows the lay of the land in Baghdad, while Pakistan is really ground zero these days for a hard ass diplomat who can figure out a way to get people who hate each other's guts to somehow work together. For my money, it's the most important diplomatic post in the world right now.

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How Bad Is It?

| Wed Nov. 26, 2008 1:57 PM EST

HOW BAD IS IT?....Andy McCarthy asks:

The Worst Economic Crisis Since the Great Depression?

That's the Obamanomics mantra. Should be we really be letting that slide by without a response? Going to high school in the Carter Seventies, I remember sitting in the gas lines. Toward the end of Carter's tenure, interest rates were around 20%, inflation was at close to 14%, and unemployment was just over 7% (it soared over 10% before the Reagan recovery kicked in).

I don't mean to minimize the straits we're in, and I appreciate that things are likely to get worse — maybe a lot worse — before they get better. But aren't Democrats skipping over a pretty awful bit of history when they say this is as bad as it's been in 75 years?

Well, look: interest rates hit 20% because Paul Volcker put them there in order to fight inflation. But it's not inflation that that's the measure of a recession, it's output growth and employment. And at least at the moment, the projections for output and employment over the next year are about as bad as they were in 1980-82 — and that's even without an oil shock to kick things off. Add to that the fact that the financial system is collapsing worldwide, entire countries are going bankrupt, a couple of dozen really big banks have gone bust, and credit markets are still frozen despite trillions of dollar in various interventions from national governments, and yeah, I'd say this is the worst financial crisis since the Depression. Does anybody really want to take the other side of that debate?

Atlas Hedged

| Wed Nov. 26, 2008 1:31 PM EST

ATLAS HEDGED....Via Alex Tabarrok, McSweeney's presents "Atlas Shrugged Updated for the Current Financial Crisis":

"Damn it, Dagny! I need the government to get out of the way and let me do my job!"

She sat across the desk from him. She appeared casual but confident, a slim body with rounded shoulders like an exquisitely engineered truss. How he hated his debased need for her, he who loathed self-sacrifice but would give up everything he valued to get in her pants ... Did she know?

"I heard the thugs in Washington were trying to take your Rearden metal at the point of a gun," she said. "Don't let them, Hank. With your advanced alloy and my high-tech railroad, we'll revitalize our country's failing infrastructure and make big, virtuous profits."

"Oh, no, I got out of that suckers' game. I now run my own hedge-fund firm, Rearden Capital Management."

Your mileage may vary, especially if you haven't read Atlas Shrugged. I thought it was pretty funny.

SOFA Update

| Wed Nov. 26, 2008 12:28 PM EST

SOFA UPDATE....The Iraqi parliament has postponed its vote on a security agreement with the United States. The holdup comes, unsurprisingly, from the Sunni bloc:

Rashid Azzawi, a parliament member with the Iraqi Islamic Party, one of the Tawafiq parties, said members of the bloc would boycott today's session if they did not receive promises that their demands would be met.

"The most important demand is the political process reform. We have demanded the Iraqi government not allow any side to monopolize decision-making," he said, reflecting Sunni fear of being marginalized in the parliament by the majority Shiites and the Kurds.

Azzawi also said Sunni lawmakers wanted amnesty for detainees in U.S. custody, who number about 16,000 and are overwhelmingly Sunni. In addition, he said, Tawafiq wanted a national referendum on the pact, even if the parliament passed it. If the public voted against the pact, he said, the Iraqi government would be obliged to cancel it.

I have a hard time seeing Maliki accede to a referendum on the agreement, but the amnesty and political reform demands can probably be fudged enough to get the Sunnis on board. Alternately, Maliki could just decide to go ahead without their votes and pass the agreement solely with votes from the Kurdish bloc and his own Shiite bloc. Juan Cole has more.

When His Lips Move

| Wed Nov. 26, 2008 2:58 AM EST

WHEN HIS LIPS MOVE....Fred Kaplan warns us not to trust a single word that Donald Rumsfeld writes:

During his six years as defense secretary, Rumsfeld famously wrote hundreds, maybe thousands, of memos to subordinates — they fell so rapidly from on high that his aides called them "snowflakes." According to several officials, many of these snowflakes contradicted one another; he seemed to be staking out several positions on key issues so that he could later claim that he'd taken the right side. In his forthcoming memoirs, he will no doubt quote chapter and verse from just the right snowflakes. Readers, be forewarned — he's blotting out the full storm.

Read the whole thing. He's already got a couple of examples and Rumsfeld's book hasn't even been written yet.

The Cost of the Bailout

| Wed Nov. 26, 2008 2:52 AM EST

THE COST OF THE BAILOUT....Here's a sentence from the Guardian today:

The glut of government initiatives, which included a $326bn bail-out of Citigroup on Monday....

Can we please stop this? Calling this a "$326 billion" bailout is crazy. It's a $20 billion capital injection plus a bunch of asset guarantees with a maximum cost of $250 billion and a probable cost in the low billions. (Possibly zero, in fact.) The capital will probably be repaid eventually, but even if it isn't it's highly unlikely that Uncle Sam is on the hook for more than $30-40 billion.

This stuff has gotten completely out of hand, with "estimates" of the bailout these days ranging from $3 trillion to $7 trillion even though the vast bulk of this sum comes in the form of loan guarantees, lending facilities, and capital injections. The government will almost certainly end up spending a lot of money rescuing the financial system (I wouldn't be surprised if the final tab comes to $1 trillion over five years, maybe $2 trillion at the outside), but it's not $7 trillion or anything close to it. People really need to stop throwing around these numbers as if the bailout is comparable to World War II or something. That's not reality based, folks.

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Throw the Bums Out

| Wed Nov. 26, 2008 2:07 AM EST

THROW THE BUMS OUT....Hilzoy is peeved at the terms of the Citigroup bailout:

The people who either ran Citi into the ground or were asleep at the wheel need to go. That should be the condition of a bailout: if you turn out to need public assistance, you lose your job. No golden parachutes either.

As I've said before: we absolutely need to make sure that the people who run these banks do not conclude from our unwillingness to let them take down the entire financial system that it's OK to run these risks. The best way I can think of to do that is to make sure that they, personally, pay.

Agreed. But how? Sure, the government could insist on resignations in return for a bailout, but what can it do beyond that? We can't take away money these executives have already earned, nor can we take away their pension benefits or anything else they're contractually entitled to. Like it or not, that's how limited liability corporations work.

So, yeah, we could fire a bunch of people, and I suppose we probably should — though that's hardly without some risk too. But let's face it: that's not really much of a lesson to future generations. If we want banks to limit their risk, our only real option is to put rules in place that force them to limit their risk. The threat of being fired has never kept BSDs from taking chances in the past, and I doubt it will do us much good this time around either.

Smiling Obama

| Tue Nov. 25, 2008 7:03 PM EST

SMILING OBAMA....Fred Davis III, John McCain's advertising guy, tells Time's Michael Scherer that he felt handcuffed in several ways during the campaign:

Davis says that concern about race played a major role in the entire aesthetic of McCain's ads. The photographs of Obama that the ads used, for instance, which often showed Obama elongated and smiling, were carefully selected, he recalls. "We chose them with only one thing in mind, and that is to not make them bad pictures because bad pictures would be seen as racist," Davis says.

I'm disappointed to hear this. I had assumed all along that his use of a smiling Barack Obama was a masterstroke. Instead of the tired old schtick of using awkward or glowering photos in grainy black-and-white, he was instead trying to portray Obama as slick and shallow, a beaming tent preacher trying to sell you a bill of goods. Not only did it play up the stereotype they were trying to sell, but it made them impervious to criticism. How can you complain that your opponents are making you look too good, after all?

But no. That wasn't it at all. They were just trying to avoid charges of racism. How banal.

GSE Debt

| Tue Nov. 25, 2008 6:38 PM EST

GSE DEBT....When I read last night that the Fed planned to buy up $600 billion in Fannie/Freddie debt, I didn't have the nerve to ask the obvious question: aren't Fannie and Freddie government enterprises now? Why is the government buying up government debt? But I guess it wasn't such a stupid question after all, because Paul Krugman is wondering the same thing:

It's true, as the Fed's statement says, that

Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.

But that's presumably because the Bush administration, weirdly, has refused to declare that GSE debt is backed by the full faith and credit of the US government. Why not just make that declaration, turning GSE debt into Treasury obligations, rather than stuff the obligations onto the balance sheet of the Federal Reserve?

Is this some kind of strange political game? Is there something else going on here? Inquiring minds want to know.

Nobody ever answers my questions, but this time I got lucky. I'll bet Krugman eventually gets an answer.

Letters of Credit

| Tue Nov. 25, 2008 4:01 PM EST

LETTERS OF CREDIT....A reader at TPM provides three reasons why allowing Lehman Brothers to collapse was a bad idea, including this one:

Third, global trade is (still) largely conducted via letter of credit. With the possibility of well-known names disappearing, that system has broken down catastrophically. (Pull up the Dry Goods Shipping Index for confirmation.)

Right. I've read about this problem before, so I pulled up the Baltic Dry Index to see what he was talking about. This is a measure of the cost of shipping raw goods (iron ore, grain, coal, etc.), and sure enough, it's cratered: from a peak of nearly 12,000 in May, it's plummeted to a value of 824 this week.

But what's the cause? Partly it was the commodity bubble earlier this year, which was unsustainable. Partly it might be weak demand from China. And partly it's just a reflection of the recession we're entering. It's not easy to mothball ships, so even a small downturn in shipping demand can have an outsized effect on shipping prices. But what about those letters of credit? Are problems with the LoC market shutting down the shipping industry even beyond normal recessionary levels? Here's John Dizard's take in the Financial Times from a couple of weeks ago:

While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy....I had followed shipping in past years, but had never seen a rate of change like that. So I called friends of mine in that world to get closer to the car wreck. I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be. Nope. Ships really are that cheap. As one broker told me: "I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate."

A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 a day. On top of that, figure another couple of thousand dollars a day for the capital costs....Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another. It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business.

There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

So here's a question I can't find an answer to with my meager Google skills: Is there some direct measure of the availability of letters of credit? Problems in the shipping industry suggest that LoCs are in trouble, but is there some index that actually tracks the total volume of LoCs over time? Is it really true that no one wants to accept anyone else's LoCs anymore, or is this more rumor than fact? Anybody know of any pointers to hard evidence on this score?

POSTSCRIPT: As long as we're at it, how about some measure of total global shipping? Is this a gigantic black hole, the way it is for the oil segment of the shipping market, or do we actually have any decent hard data for the total volume of shipping worldwide?