Kevin Drum

Will There Be An Investor Uprising?

| Tue Nov. 16, 2010 7:17 PM EST

The Senate Banking Committee met today to hold hearings about the foreclosure fraud crisis. MarketWatch has a brief summary here. After it was over, Dave Dayen, Atrios, and Mike Konczal (rortybomb) chatted on Twitter:

ddayen: It's a national crime that this foreclosure fraud hearing won't lead the nightly news

ddayen: hearing ending, yes these things are a lot of hot air, but I think this one might have done some good

Atrios: what possible good? nice that maybe some senators get it, but... then what?

ddayen: point is that this has gone from a backwater on blogs to the chair of Senate Banking saying this is a crisis. Baby steps

Atrios: yes that's progess but..Treasury unlikely to do anything and of course congress is useless

ddayen: Congress is useless but investors, AGs not necessarily. Investors watched this hearing and $ signs lit up in their eyes

Atrios: true, long thought that the only slim hope for this mess was investor uprising

rortybomb: You only need a little bit of successful investor uprising to put ratings agencies into motion, which sends whole thing collapsing.

Atrios: true, tho i think problem with investor uprising solution is that many investors are on both sides of this

rortybomb: You could also have an investor uprising which doesn't really help homeowners/communities at all. That's a worry.

Atrios: yes i agree with that, investor uprising no guarantee of helping homeowners. just slim possibility

ddayen: That is a worry, but there are a combination of pressures here, particularly from courts denying foreclosures....pt. being, a multi-pronged attack w/courts, investors, munis and AGs, could get the banks to a homeowner-friendly endgame

So will investors who bought securities backed by fraudulent mortgages lead a revolution against the banks who sold them? Maybe! Though probably not. In any case, I just thought everyone might enjoy eavesdropping on the postgame show a bit.

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Mortgage Interest and the Middle Class

| Tue Nov. 16, 2010 5:57 PM EST

Is the mortgage interest deduction a "middle class" benefit? Sort of. Based on data from the Tax Policy Center, Ezra Klein offers the chart on the right, which shows how much it saves various income groups. If you're low-income, the average benefit is 0-0.1% of your income. If you're smack in the middle of the income range, the benefit is about 1% of your income. If you're at the top of the income range — but not in millionaire land — the benefit is about 1.6-1.7% of your income.

The reason for this is obvious. Lower income people are unlikely to own homes or have big mortgages, so they get no benefit. Median earners are more likely to own homes, but their mortgages are still small. High earners nearly all own homes and all have big mortgages. The result is a tax break that doesn't merely rise linearly with income. Even in percentage terms it's actively more beneficial the more money you make.

So what if you wanted to make it a little less plutocratic? Some ideas are here, but probably the simplest would be to reduce the cap. Currently the mortgage interest deduction can be taken on loans up to $1 million. If you cut that to, say, $250,000, the middle class would largely keep the same benefit it has now and the upper income brackets would get a benefit about the same or a bit lower (in percentage terms). Plus it would reduce the artificial incentive to buy ever bigger houses. Seems like the least we should do.

Fat Dollar, Skinny Dollar

| Tue Nov. 16, 2010 2:03 PM EST

I almost wrote this myself a couple of days ago, but Karl Smith beat me to it. Or, rather, Mrs. Smith beat me to it:

As a quick note, the Fed for good reasons does not have a mandate to maintain a strong dollar. I wish I could devote more time to this. My wife says that we could clear up a lot of confusion by replacing strong dollar/weak dollar with fat dollar/skinny dollar. Then we could just say that the dollar is morbidly obese and millions of Americans would immediately think it a moral imperative to make the dollar lose weight.

I'm pretty much convinced that conservatives instinctively believe that strong = good in all cases, and this causes all sorts of problems for currency policy. Eons ago, we happened to choose the adjective "strong" to refer to overvalued currencies, so now conservatives are hellbent on insisting that the U.S. dollar must always be overvalued even though that's about the last thing the U.S. economy needs right now. Because, you know, that's strong. And who'd choose weak over strong?

So sign me up for the fat/skinny dollar club. Right now the dollar needs to lose some weight and get into fighting trim. Doesn't that sound like a much better pitch than arguing that we need a weak dollar?

Is New START Road-kyl?

| Tue Nov. 16, 2010 1:26 PM EST

Laura Rozen reports that Jon Kyl (R–Ariz.) doesn't think the New START arms control treaty is ready for prime time:

“When Majority Leader Harry Reid asked me if I thought the treaty could be considered in the lame duck session, I replied I did not think so given the combination of other work Congress must do and the complex and unresolved issues related to START and modernization,” Kyl said in a statement.

....In further discussions between Democratic leaders and Kyl, congressional sources said, they interpreted Kyl's statement to mean "no" -- and not last-minute wrangling for more concessions from the Obama administration.

...."Issuing a press statement while sensitive private talks are ongoing strikes me as an act of bad faith," [a] nonproliferation hand said. "It only reinforces those who believe that Kyl is playing the administration for a fool, stringing out a series of concessions before abruptly calling the whole thing off."

That would be a shocker, wouldn't it? A Republican pretending to negotiate but with no intention of ever actually supporting a final product? Hard to believe.

Of course, as Kyl well knows, if New START doesn't make it through the lame duck it's dead forever. Despite the fact that both military leaders and a wide swath of foreign policy mavens of all stripes support it, it has zero chance of getting the 14 Republican votes it would need for approval in the new Senate. So it's now or never.

And, as Kyl also undoubtedly knows, it puts Obama in a touchy position. The military might support New START, and foreign policy types might support it, but guess who doesn't give a rat's ass about it? The American public. So even if Kyl eventually supports passage, by forcing Obama to spend more time on it he's forcing Obama to spend more time on yet another worthwhile but non-crowd pleasing policy. And it's time spent on a policy that's not related to jobs. Which means that if it fails, the Beltway punditocracy will rise up in a huge collective moan about Obama once again squandering his political capital when he should be focused like a laser on jobs, jobs, jobs.

So it's a smart move on Kyl's part. Cynical, but smart.

Republicans and the Fed

| Tue Nov. 16, 2010 12:30 PM EST

Felix Salmon ponders the political brawl surrounding the Fed's quantitative easing program:

For reasons I don’t fully understand, the debate over QE2 has divided along party-political lines, with the Republicans lining up against it and the Democrats attacking them....Interestingly, this is one of those old-fashioned technocrat vs technocrat policy debates, in contrast to the technocrat vs populist debates which seem to have taken over far too much airtime of late. But it’s just as shrill.

....Bernanke, then, has every reason to want to reduce the volume on this debate: the mere existence of the debate itself can easily counteract any good which comes from QE2. One way of doing that would be to admit that QE2 is an untried experiment: while QE1 worked as a weapon in the crisis-fighting arsenal, QE2 is being asked to do something quite different. So the Fed should define much more clearly than it has done until now what exactly QE2 is designed to achieve, and what criteria might be used to determine whether it is succeeding or failing. And if it’s showing signs of failing, then the Fed should also be explicit about how and when it might be unwound.

I'm not a monetary economist, and the technical arguments about the mechanics of QE2 and what it will accomplish are impossible for me to evaluate properly. However, one thing does seem to be fairly clear: despite the scary sounding $600 billion number, the actual impact of QE2 is almost certain to be fairly small. With interest rates already so low, there's simply not enough money involved to move markets substantially.

In other words, regardless of whether you think QE2 is good policy, it's next to impossible to understand the increasingly hysterical Republican reaction to it. Unless, of course, you consider the context: Republicans aren't just mounting a campaign against the Fed. They're equally dedicated to championing a damaging economic argument about regulatory uncertainty that doesn't withstand a moment's scrutiny; they've already rejected several compromise opportunities to extend the Bush tax cuts unless a permanent extension of the high-end cuts was included; and they're apparently planning to play a high-stakes game of chicken over raising the debt ceiling in a few months.

None of these things bespeaks a genuine concern with the economy. Instead, they suggest a party that's simply jockeying for political advantage and figures that maximum chaos is in its best interest. It also explains why QE2 has divided along party-political lines: it hasn't. Only Republicans are wholeheartedly on one side. Democratic reaction has been both varied and fairly subdued.

QE2 is vanishingly unlikely to either succeed or fail strongly enough for either side to make a bulletproof argument about whether it worked, and in any case benchmarks aren't really what Republicans are after. They just want the economic argument to be focused solely on taxes, taxes, and taxes. The more noise the Drudge/Rush/Fox axis can generate over everything else — in other words, the more they can argue that nothing else works — the better their tax argument looks.

Quote of the Day: Bombs for Peace

| Tue Nov. 16, 2010 11:56 AM EST

From Matt Steinglass, commenting on President Obama's offer to sell Israel F-35 fighter jets in return for a 3-month settlement freeze in the West Bank:

Paying for peace negotiations in fighter planes is a bit like paying for carbon offsets in Hummers.

Voltaire would have been proud.

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Banking on GM

| Tue Nov. 16, 2010 11:34 AM EST

The LA Times reports on this year's big coming out party on Wall Street:

General Motors Co. is set to reemerge as a public company this week in one of the year's hottest initial public stock offerings, but many American taxpayers who helped rescue the company won't be going along for the ride.

That's because most Americans won't have access to the new shares of the Detroit automaker....Some experts said an opportunity to reward average Americans is being wasted, even though the Treasury Department said two months ago that individuals would have "ample opportunity" to participate in the IPO. "Wall Street thumbed its nose at" individual investors, said David Menlow, president of research firm Ipofinancial.com. "We continue to help Wall Street out, and Wall Street seldom feels the need to say thank you."

I guess being a zillionaire investment banker means never having to say you're sorry.

Generally speaking, of course, this is no surprise. Retail investors almost never get a piece of the action in hot IPO deals. That's reserved for other bankers, rich clients, and friends and family. U.S. taxpayers might properly consider themselves "family" in this case, but Wall Street very decidedly doesn't.

Personally, I probably wouldn't recommend that retail investors get involved in a deal like this. But who cares what I recommend? The Obama administration should show a bit more common sense here. Taxpayers paid for the GM bailout, and if taxpayers want to gamble a bit of their pin money on GM's recovery then they probably ought to have first crack at it, not the Wall Street titans for whom this is just another few blips on their computer screen. Obama has been almost obsessive about demonstrating that the government isn't controlling the companies it bailed out, but for this he should have made an exception. The little guys should have come first.

Ben Bernanke's Secret Code

| Tue Nov. 16, 2010 1:47 AM EST

Over at The Corner, J.D. Foster examines the Fed's rationale for its quantitative easing program and finds it so inexplicable that he concludes it's nothing more than a pretext for their real reason — a reason so incendiary that Ben Bernanke dare not speak its name. Ladies and gentlemen, here it is:

What Bernanke is silently worried about is the possibility that Congress will allow all the 2001 and 2003 tax relief to expire at the end of the year, or that Congress will allow those provisions most important to the economy to expire — e.g., the lower tax rates on small businesses and the lower rates on capital gains and dividends. Slamming a sputtering economy with a major tax hike threatens to induce another recession, and with inflation already near zero, the possibility of deflation becomes very real. But Bernanke can’t or won’t say so.

Foster's incredulity is based on an op-ed in which Bernanke explains why the Fed embarked on its QE program. In it, Bernanke says he's worried about deflation, but also says that growth next year will probably be about average. But deflation can't possibly be a worry if the economy is growing normally, so he must be hiding the real reason for QE2.

Perhaps. But let's take a look at what Bernanke actually said in the op-ed Foster links to:

Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy — especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.

Italics mine. Bernanke could hardly be clearer: deflation is a distant and small risk. He's not immediately worried about that. What he is worried about is massive and persistent unemployment, and he thinks that with inflation well controlled he can use QE2 to stimulate the economy and reduce unemployment without risk.

He might be wrong about that. Who knows? But his explanation is simple and direct and makes perfect sense. There's no need to dig feverishly for some buried Da Vinci code in order to prove that it's really all about taxes. I know conservatives are reluctant to hear this, but marching orders or not, not everything has to be about taxes.

Israelification

| Tue Nov. 16, 2010 12:01 AM EST

So what would a better security system look like for our airports? Several readers suggested "Israelification" — which initially struck me as problematic. It's pretty intrusive, isn't it? According to Rafi Sela, president of a global transportation security consultancy, no it's not. The following summary, in an interview with Sela in the Toronto Star, describes the 6-layer security protocol Israel uses:

The first layer of actual security that greets travellers at Tel Aviv's Ben Gurion International Airport is a roadside check. (1) All drivers are stopped and asked two questions: How are you? Where are you coming from? "Two benign questions. The questions aren't important. The way people act when they answer them is," Sela said. Officers are looking for nervousness or other signs of "distress" — behavioural profiling.

....Once you've parked your car or gotten off your bus, you pass through the second and third security perimeters. (2) Armed guards outside the terminal are trained to observe passengers as they move toward the doors, again looking for odd behaviour. (3) At Ben Gurion's half-dozen entrances, another layer of security are watching. At this point, some travellers will be randomly taken aside, and their person and their luggage run through a magnometer.

....You are now in the terminal. (4) As you approach your airline check-in desk, a trained interviewer takes your passport and ticket. They ask a series of questions: Who packed your luggage? Has it left your side? "The whole time, they are looking into your eyes — which is very embarrassing. But this is one of the ways they figure out if you are suspicious or not. It takes 20, 25 seconds," said Sela.

....(5) At the check-in desk, your luggage is scanned immediately in a purpose-built area....The screening area is surrounded by contoured, blast-proof glass that can contain the detonation of up to 100 kilos of plastic explosive [and] all the screening areas contain 'bomb boxes'. If a screener spots a suspect bag, he/she is trained to pick it up and place it in the box, which is blast proof. A bomb squad arrives shortly and wheels the box away for further investigation.

....(6) You now finally arrive at the only one which Ben-Gurion Airport shares with [U.S. and Canadian airports] — the body and hand-luggage check....It's fast — there's almost no line. That's because they're not looking for liquids, they're not looking at your shoes. They're not looking for everything they look for in North America. They just look at you," said Sela. "Even today with the heightened security in North America, they will check your items to death. But they will never look at you, at how you behave. They will never look into your eyes ... and that's how you figure out the bad guys from the good guys."

Of course, Israel has one smallish airport to worry about, not dozens of huge ones, and it's possible that their system can't be scaled up adequately to work in the United States. Also, although Sela doesn't really mention it, Israel engages in unapologetic and intrusive racial profiling, which simply wouldn't pass constitutional muster in the United States. I don't know how much of a difference that makes, or whether you could import the Israeli system without it. (It's worth noting too that TSA does use behavioral profiling in a program called SPOT — Screening of Passengers by Observation Techniques. However, it got a pretty negative review from the GAO earlier this year. Whatever it is that SPOT is doing, either it's not the same as what the Israelis do or else we just don't do it very well.)

Anyway, I'm not endorsing anything in particular here. But I asked earlier for a better airport security plan, so I thought I'd pass along one possible answer. At least if we have the alternatives on the table we have something more to talk about than just the idiocy of the 3-ounce container rule.

Assignment Desk II: Airport Security

| Mon Nov. 15, 2010 7:40 PM EST

I just read what seems like the millionth article/blog post/rant about how stupid our airline security procedures are. The latest versions are inspired by the growing use of backscatter scanners that display a vague outline of what you look like naked; the increasingly intrusive patdowns that TSA is performing on passengers who refuse to go through the backscatter machines; and a cell phone video (no longer available, apparently) of a TSA agent trying to pat down a 3-year old girl going through a meltdown.

I'm glad to see these rants. Maybe eventually it means we'll actually make some changes to our security theater. But what I haven't seen is an informed take on what airport security ought to look like. We all hate taking off our shoes and pulling out our laptops and being limited to three ounces of liquid and not being allowed to meet people at the gate anymore — we hate all of that. But if it's all useless, what should we do instead? Shouldn't someone write that article?

UPDATE: More here.