Kevin Drum

What Should Obama Do?

| Mon Aug. 30, 2010 12:25 AM EDT

Paul Krugman writes today that if Republicans win control of Congress in November, they're going to party like it's 1994:

So what will happen if, as expected, Republicans win control of the House? We already know part of the answer: Politico reports that they’re gearing up for a repeat performance of the 1990s, with a “wave of committee investigations” — several of them over supposed scandals that we already know are completely phony. We can expect the G.O.P. to play chicken over the federal budget, too; I’d put even odds on a 1995-type government shutdown sometime over the next couple of years.

....If I were President Obama, I’d be doing all I could to head off this prospect, offering some major new initiatives on the economic front in particular, if only to shake up the political dynamic. But my guess is that the president will continue to play it safe, all the way into catastrophe.

Consider this an open thread regarding Krugman's final paragraph. What could Obama do to help galvanize his base? Or shake up the political dynamic? Anything? Or is it all about the economy and Democrats are just doomed this year? What advice do you have for the White House?

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Did Uncle Sam Cause the Housing Bubble?

| Sun Aug. 29, 2010 4:11 PM EDT

Matt Steinglass is arguing with his "Hayek-inflected" colleague W.W. about the origins and causes of the housing bubble. Roughly speaking, the two sides take the following positions:

(a) Federal government policies played a strong role in promoting the housing bubble.

(b) No, it was primarily the excesses of the private sector that powered the housing bubble.

Just to be clear: by position (a) I don't mean the kind of childish Fox News dimwittery that blames everything on the CRA and Fannie Mae. I mean the grown-up critique that more generally blames federal encouragement of homeownership, Fed monetary policy, federal tax policy, and various kinds of federal regulation of the financial industry. What's interesting here is that these two positions can collapse into each other pretty quickly. Let's rephrase them like this:

(a) Government regulations encouraged the private sector to lever up and make lots of bad loans in the housing sector.

(b) The financial industry used its enormous influence to lobby for deregulatory legislation, which allowed the private sector to lever up and make lots of bad loans in the housing sector.

Both of these statements are more or less accurate. And of course, deregulation is merely shorthand for a different set of regulations and policies, so our two positions can collapse even further if we like:

(a) Changes in government policy encouraged home buyers to borrow too much and encouraged the financial industry to lever up and make too many bad loans.

(b) Changes in government policy encouraged home buyers to borrow too much and encouraged the financial industry to lever up and make too many bad loans.

The difference here becomes more one of inflection than anything else. If the federal government created policies that allowed the financial sector to behave recklessly, whose fault was this? The government qua government? Or was it a specific and remediable failure of government caused by its capture by the financial industry? There's a sense in which it doesn't matter: government policy is government policy, and if federal regulations were too lax, that means the government was at fault.

But in another sense, it makes all the difference in the world. If we use government in its traditional civics class sense, where policy changes are driven by politicians of different parties responding to different swathes of public opinion, that leads us to one set of possible fixes. But if we use government in the sense of a political institution that primarily responds to lobbying by the rich and powerful — which is my preferred sense — that leads us to quite a different set of possible fixes. In both cases, it's quite accurate to say that "the government" played a big role in the problem, but they could hardly be more different in the kinds of solutions they suggest. The problem, then, is that when someone says this you have to listen more to the accent in which they talk than to the words themselves, and that can be pretty tricky. Caveat emptor.

Customer Service Blues

| Sun Aug. 29, 2010 1:18 PM EDT

Keith Humphreys says that dealing with the DMV is one of the most common ways that Americans interact with their government, and the fact that DMV performance is generally horrible makes people hate the entire enterprise of representative democracy. "DMVs undermine our faith that the public sector can do anything right or that it even cares if it does," he writes, "and that undermines a basis for a democratic society." Even granted that Keith was having a bad day (at the DMV, in case that's not clear), Mark Kleiman has a question:

If poor DMV performance threatens democracy, does the equally unhelpful attitude and operational design I’ve encountered in dealing with cable companies, power companies, health insurance companies, credit card companies, and USAir and United Airlines threaten capitalism?

Excellent question! Here's my best guess at an answer. People complain about customer service from big, faceless corporations all the time. But when they do, they complain about a specific corporation: "Time-Warner sucks," "I hate Verizon," "I'm never flying Delta again," etc. In their minds, these are separate companies that have performed badly, but they don't necessarily reflect badly on the entire enterprise of capitalism. Besides, in many of these cases there's at least theoretically the possibility of taking your business elsewhere.

In the case of governments, people don't distinguish as well. If they have run-ins with the IRS (federal government), the DMV (state government), the zoning commission (city government), their trash pickup (county government), and the municipal water company (an independent agency), these are all "the gummint." And, of course, in all these cases there's not even a theoretical chance of dealing with anyone else. If you need a business license, the only place you can get it is the county clerk, and if their hours happen to be 9-5 on weekdays and they require you to show up in person and wait in a long line — well, that's what you have to do.

But it's still a bit of a quandary. If I had to guess, I'd say that the average joe actually gets more grief from dealing with big corporations (cell phone provider, cable company, airlines, etc.) than from all levels of government combined. Most of us, after all, don't interact with the government all that much aside from mailing them checks now and again. What's more, there are institutional reasons that explain lousy customer service in both cases — though, ironically, they're mirror images: lack of competition in the case of government (so they don't have a lot of incentive to improve) and too much competition in the case of corporations (which forces them to cut service to the bone in order to stay price competitive on their main products).

So which is worse? My mother was complaining last night about the LA Times' inability to deliver her paper correctly. "How long has this been happening?" I asked. "About fifty years." And recently it got even worse because they've installed a new payment system that's shot full of bugs, leading to missed deliveries and bad billing. But then there's my sister, who owns a condo and has spent the last several months fighting the County of Los Angeles, which recently decided to update its property records and determined that her garage (which is attached to the main building, not a separate structure) didn't belong to her anymore and auctioned it off. That was after she'd called several times and was assured it was just a mistake and not to worry about it.1 So now her association has had to hire a lawyer of its own to straighten this out.

Which is worse? My sister's problem is certainly more severe, though it will eventually get cleared up. My mother's is merely annoying, but chances are her service from the Times will stay terrible forever. Take your pick.

1Quick hint for life improvement: whenever anyone tells you something is just a mistake and "not to worry about it," start worrying. This is almost a certain sign that you should immediately panic and start burning up the telephone wires demanding a resolution in writing at the earliest possible time.

Quote of the Day: Glenn Beck, Scholar

| Sat Aug. 28, 2010 1:07 PM EDT

From Dick Armey, PhD University of Oklahoma, former economics professor at the University of North Texas, and former Republican majority leader in the House of Representatives:

One of the things that we see as we look at Glenn Beck's work that's been fascinating to me, is we see a more true and accurate history of the United States, and we see it documented at levels of rigor that, in fact, one would expect out of Ph.D. dissertations — it is serious, scholarly work....[Liberal critics] don’t have to argue with Glenn Beck. They have to argue with his documentation and they can’t match that level of rigor.

Somebody just shoot me now.

Friday Cat Blogging - 27 August 2010

| Fri Aug. 27, 2010 3:07 PM EDT

Today we have twin cats. In fact, until I put these side by side, I didn't quite realize just how identical they were. And yes, for the nerd watchers among you, these are lids to comic book boxes. They are, apparently, much preferred as cat snoozing spots than the actual boxes themselves. And with that, I'm off to lunch. Have a good weekend, all.

The Tale of Fannie and Freddie

| Fri Aug. 27, 2010 3:02 PM EDT

Karl Smith has read the just-released Conservator’s Report on Fannie and Freddie and has a detailed post summarizing it. His conclusion:

The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers.

These adjustment left Fannie and Freddie exposed to a large decline in housing prices. This is exactly what happened and Fannie and Freddie reaped enormous losses because of their exposure.

Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less.

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

Read the whole thing for the full story. Overall, it really does seem like the right take to me. Fannie and Freddie obviously made huge mistakes that are going to cost the taxpayers a boatload of money, but the evidence just doesn't support the idea that they helped provoke the housing bubble. They were followers, not leaders. It was Wall Street that lit the fuse, not Fannie and Freddie.

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Read My Lips, Don't Look At My Record

| Fri Aug. 27, 2010 1:39 PM EDT

George Bush's former budget director, Rob Portman, who's doing well in his campaign for a U.S. Senate seat in Ohio, says voters really don't care that he was part of the administration that helped wreck the economy over the past decade:

"What the people in this plant want to know is what you are going to do for me going forward," Mr. Portman said. "That is all they care about, and frankly that's what voters care about."

"The world has moved on," he added. "Maybe the Democrats haven't."

Steve Benen is gobsmacked that Ohio's voters seem eager to support Portman "despite his background of failure" — though in fairness to Ohio's electorate, Portman has a long record as an Ohio congressman prior to his two years as an obscure official in the Bush administration, and that's probably what most voters are responding to.

More broadly, though, there's no reason to be surprised anyway. As near as I can tell, Portman is right: policywise, voters really don't care much about what you've done in the past. They only care about what you say you're going to do in the future. They care about scandals in the past, and they generally seem to give politicians credit for the past policies of their parties — so Republicans get automatic credit for being budget hawks even if they've spent freely in the past and Democrats get credit for protecting Social Security even if they've voted to cut it in the past. Beyond that, though, voters don't care much. They just vote for whoever talks the best talk.

This is a pretty handy thing for politicians.

Quote of the Day: PowerPoints in Afghanistan

| Fri Aug. 27, 2010 1:13 PM EDT

From reserve colonel Lawrence Sellin, formerly assigned as a staff officer at ISAF Joint Command in Afghanistan:

For headquarters staff, war consists largely of the endless tinkering with PowerPoint slides to conform with the idiosyncrasies of cognitively challenged generals in order to spoon-feed them information. Even one tiny flaw in a slide can halt a general's thought processes as abruptly as a computer system's blue screen of death.

It gets better. Unsurprisingly, Sellin was sacked yesterday.

Eating Your Own Toxic Waste

| Fri Aug. 27, 2010 12:27 PM EDT

What's that? The housing bubble is starting to show its age and you're having trouble finding buyers for all the crappy CDOs you've put together? That won't do at all: if the market gets wind that no one actually wants the toxic waste lying around on your books, the show could be over. What to do?

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

....An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.

ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other's unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows.

Not only does this hide the fact that there's low demand for your toxic waste, but it generates fees for all on both sides of the deal. It's a twofer!

The chart below shows how much of its own inventory Merrill Lynch bought at the height of the bubble. For all the gory details, just click the link and read the whole story.

(Via Felix Salmon.)

Stimulus vs. Austerity

| Fri Aug. 27, 2010 12:07 PM EDT

According to David Brooks, the returns are in: during the first half of this year the U.S. spent more on stimulus than Germany, and the German economy is doing great. Score: Austerity 1, Stimulus 0.

Needless to say, this didn't sound quite right to me. Why look only at the first half of this year? It takes a while for stimulus spending to have an effect, after all. So what about 2009? Here's the Wall Street Journal on March 12, 2009:

According to IMF figures, Germany's 2009 emergency spending is 1.5% of gross domestic product, compared with 2% for the U.S. But Germany's automatic stabilizers will narrow the gap, contributing an additional 1.7%, for a total of 3.2% of GDP. The U.S. stabilizers add 1.5% for a total of 3.5%.

Look: these numbers don't really prove anything either. The German economy is different from the American economy in several important ways, and in any case the global economy is so intertwined that stimulus in an importing country like the U.S. has knock-on effects on an exporting economy like Germany. Still, Brooks's column is the dumbest kind of cherry picking. Last year stimulus spending was nearly identical in both countries. Both countries adopted robust Keynesian policies, and if you can draw any conclusions from that at all, it's only that it apparently had a bigger effect on Germany than it did on us. That means only that they no longer need stimulus and we do. What's so hard about that?