Kevin Drum

Stuck in Neutral

| Fri May 21, 2010 12:01 PM EDT

Paul Krugman says the United States isn't in any danger of turning into Greece:

The truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

.... It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

That's true. But the core problem is that growing government debt is a problem in the long term. Ideally, then, what we'd do is gather support for a strong stimulus now by credibly promising to address our various fiscal imbalances in the future. But how do we do this? As far as I know, it's not possible. There's simply no way to guarantee future behavior in any way that the market would take seriously. So we're stuck.

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Making Finance Safer

| Fri May 21, 2010 11:06 AM EDT

I think Edmund Andrews has a pretty solid take on the financial reform bill that passed the Senate last night:

Before all the armchair pundits begin carping and tut-tutting, let us first appreciate how much the Senate bill actually does accomplish and how difficult it is to do anything at all when the full force of the financial industry is against you. Remember also that Dodd and the other Democrats had to contend with the hardball intransigence of the Republican Party, whose leaders tried to obstruct or gut just about every meaningful reform in the bill without proposing any of their own. This was not, repeat not, a philosphical disagreement between those who believe in the wisdom of government regulation and those who believe in the wisdom of free markets. However sincere Alabama's Dick Shelby might be in his fear of overbearing government, this fight was about denying Demorats a "victory." It was all straight from Mitch McConnell's playbook for political success: just say no, no, a thousand times no — no matter how venal it makes you look.

Against that backdrop, it's astonishing that the Senate bill actually became stronger as the process dragged on. The proposed consumer financial protection agency is stronger and I believe more independent than it would have been in the original Senate bill (more on that in a moment). The multi-trillion market in financial derivatives, which is almost unregulated right now, would for the most part have to be take place on exchanges or at least through clearinghouses — either of which require greater transparency and more upfront capital by the players. Banks, whose deposits are federally insured, would be prohibited from trading derivatives. And as an added surprise bonus, from none other that freshman Senator Al Franken, the bill includes a very smart reform to fix the corrupt busines model of credit-rating agencies.

I'd add Susan Collins' amendment tightening bank capital standards to this list. If both her regs and the House's 15:1 leverage limit survive the conference committee it will have a substantial effect on the way banks do business. It's not the root-and-branch breakup of the banking system that Simon Johnson and James Kwak would like to see, but let's face it: that was never anywhere within light years of getting support from 60 senators. Given what the realm of the possible included, I'd say that clearing derivatives, limiting leverage, regulating the ratings agencies, and creating a Consumer Finance Protection bureau are surprisingly strong responses to the financial crisis. What's even more surprising is that the first three of these things got added as the bill progressed and the fourth got improved (I've come around to the view that putting the CFPB in the Fed is probably a good thing since it guarantees a stable funding source for its activities). Aside from some early losses over vanilla consumer products and reinstating a version of Glass-Steagall, the only thing that got seriously watered down was resolution authority — and frankly, I never thought resolution authority was a key part of the bill. I still don't, and I suspect that it's virtually never going to get used early enough to make a big difference. It's obviously nice to have a clear legal regime for winding up a big failed bank once its failure is obvious, but that's all we're getting out of it.

In the end, this goes to show how strong a role public opinion can play in the legislative process. It's obviously not always decisive, but in this case anti-bank sentiment was so strong that senators spent the past few months one-upping each other to introduce amendments that Wall Street hated. And the upcoming election, which normally makes serious legislating nearly impossible, actually made this legislation better. Celebrate this while you can because you're not likely to see an election year make a bill better again in your lifetime.

All in all, not bad. Not as good as I hoped for, but better than I expected. Now let's hope that Wall Street can be fended off just enough longer to get this thing through conference in decent shape. (Read Andy Kroll for more on that.) The fat lady hasn't sung quite yet.

How Big is the Oil Spill?

| Thu May 20, 2010 8:04 PM EDT

We got a small bit of good oil spill news the other day when BP announced that its attempt to insert a smaller pipe inside the broken end of the main undersea pipe had succeeded. But it turns out there's bad news too:

BP said Thursday that it is now capturing 5,000 barrels a day of crude oil and 15 million cubic feet of natural gas from a leaking pipe at the bottom of the Gulf of Mexico, the first official admission that earlier estimates of the amount of oil spilling into sea were too small.

The amount of oil being captured is only a portion of the total because the company is catching oil from only one of two leaks. BP has also released a video that shows additional unquantified amounts of oil continuing to spurt out of the damaged pipe where the company is capturing oil through a new tube insertion. The smaller of the two leaks continues to spill unobstructed and accounts for 15 percent of the total flow, BP officials reiterated Thursday.

If BP's siphon is catching 5,000 barrels a day, the main pipe must be spilling a whole lot more than that. How much more?

The latest glimpse of video footage of the oil spill deep under the Gulf of Mexico indicates that around 95,000 barrels, or 4 million gallons, a day of crude oil may be spewing from the leaking wellhead, 19 times the previous estimate, an engineering professor told Congress Wednesday.

If that's the case, it means that probably more than 100 million gallons has already spilled into the gulf. That will soon make this, by far, the biggest peacetime oil spill in history. Kate Sheppard has more here and here.

And why has BP been so cagey about the size of the spill? Because the smaller it is, the lower their liability will be. “It’s always a bottom-line issue,” says Marilyn Heiman, a former Clinton administration Interior Department official who now heads the Arctic Program for the Pew Environment Group. “Any company wouldn’t have an interest in having this kind of measurement if they can help it.”

Sometimes a Primary is Just a Primary

| Thu May 20, 2010 2:21 PM EDT

Speaking of volatility, how about Matt Bai? He seems to swing between genuinely keen insights and the laziest of conventional wisdom on almost a weekly basis. Today, unfortunately, is the latter: Tuesday's election results, says Bai, demonstrate an anti-incumbent wave, a new era of divisive primaries, the loss of party power, and the end of issues-based politics. I'm pretty sure I've been hearing about all four of those things since at least the mid-70s, but this in particular was gobsmacking:

What all this probably means is that we are living in the era of the upstart. Thirty years ago, when you needed a party infrastructure to make a serious run for higher office, taking it to the establishment was a quixotic venture undertaken on the national level, where a Jesse Jackson or a Pat Buchanan could at least make a powerful statement along the road to obliteration. (Recall Jimmy Carter’s indictment of Jerry Brown in 1976: “Don’t send them a message, send them a president.”)

Jonathan Bernstein comments acerbically:

It seems that Bai has heard of Jimmy Carter. That's good! Now, my assignment for Matt Bai: go back and read about Jimmy Carter's 1976 campaign....Citing Jimmy Carter to make a point that thirty years ago "you needed a party infrastructure to make a serious run for higher office" is like citing Spiro Agnew to make the point that at forty years ago, only seriously accomplished politicians with a deserved reputation for personal integrity were considered for the Vice Presidency.

The rest is an epic takedown of the entire piece. Read it. Reporters really, really need to stop drawing monumental conclusions from a few tiny data points. Especially when they have to twist even the few data points they have in order to do it.

And speaking of things reporters should stop doing, Somerby is good on the Richard Blumenthal affair today. Be sure to read down to the summary of Christopher Keating's appearance on The NewsHour two nights ago. Blumenthal may be guilty of misstating his service record once — twice at a stretch — but Keating has been covering him for years and was never under the slightest misapprehension about Blumenthal's past. Based on the evidence to date, the New York Times seems to have overplayed its hand on this pretty seriously.

The Fear Index

| Thu May 20, 2010 1:34 PM EDT

The VIX index is a measure of stock market volatility. When it goes up, it means investors are afraid that the market is likely to swing wildly and unpredictably. Thus its nickname: the fear index.

And, as you can see on the right, the market is plenty fearful these days. Not as fearful as late 2008, when the VIX index broke 80 for a couple of months — at least, not yet — but it's heading there.

Why? Let us count the ways. Problems in the eurozone. Inflation fears in the U.S. The housing bubble in China. Persistent unemployment. The "flash crash" earlier this month that no one seems able to properly explain. Rising oil prices in the midst of flat economic conditions. Continuing global imbalances that are starting to seem nearly intractable. Mortgage delinquency rates in the U.S. that have risen to nearly 10%. Etc. And fear is the economy's worst enemy. If it doesn't abate, panic is next.

Rand Paul and Civil Rights

| Thu May 20, 2010 12:51 PM EDT

Last night Rand Paul, fresh off his primary victory in Kentucky, explained that he didn't support the Civil Rights Act of 1964. "I think it's a bad business decision to exclude anybody from your restaurant," he said in an interview, "but, at the same time, I do believe in private ownership." And if private lunch counter owners want to prevent blacks from eating there, that's their right. "This is the hard part about believing in freedom."

Bruce Bartlett, hardly an enemy of the free market, goes to town:

In 1883 the Supreme Court, then in its most libertarian phase, knocked down the 1875 [Civil Rights] act as well as many other Republican measures passed during Reconstruction designed to aid African Americans. The Court's philosophy in these cases led logically to Plessy v. Ferguson in 1896, which essentially gave constitutional protection to legal segregation enforced by state and local governments throughout the U.S.

....The libertarian philosophy of Rand Paul and the Supreme Court of the 1880s and 1890s gave us almost 100 years of segregation, white supremacy, lynchings, chain gangs, the KKK, and discrimination of African Americans for no other reason except their skin color. The gains made by the former slaves in the years after the Civil War were completely reversed once the Supreme Court effectively prevented the federal government from protecting them. Thus we have a perfect test of the libertarian philosophy and an indisputable conclusion: it didn't work. Freedom did not lead to a decline in racism; it only got worse.

....Rand's position is that [the Civil Rights Act] was wrong in principle in 1964. There is no other way of interpreting this except as an endorsement of all the things the Civil Rights Act was designed to prohibit, as favoring the status quo throughout the South that would have led to a continuation of segregation and discrimination against African Americans at least for many more years. Undoubtedly, changing mores would have broken down some of this over time, but there is no reason to believe that it would have been quick or that vestiges wouldn't still remain today. Indeed, vestiges remain despite the Civil Rights Act.

Bartlett's recommendation: "I believe that Rand should admit that he was wrong as quickly as possible." It's good advice. I'll bet Rand Paul doesn't take it.

UPDATE: I'm playing catchup here. Sorry. Here's Rand Paul's latest statement: "Let me be clear: I support the Civil Rights Act because I overwhelmingly agree with the intent of the legislation, which was to stop discrimination in the public sphere and halt the abhorrent practice of segregation and Jim Crow laws."

OK. But why did he say otherwise yesterday? Inquiring minds want to know.

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Quote of the Day: Holograms

| Thu May 20, 2010 12:20 PM EDT

From Sen. Ben Nelson (D-Neb.), admitting that he's never used an ATM machine:

It's true, I don't know how to use one. But I could learn how to do it just like I've . . . I swipe to get my own gas, buy groceries. I know about the holograms.

The Omaha World-Herald notes that after mentioning the holograms, "Nelson clarified that he meant the bar codes on products read by automatic scanners in the checkout lanes at stores such as Lowe's and Menard's." Glad we got that cleared up.

(Via Steve Benen.)

Is Iraq's Middle Class Giving Up?

| Thu May 20, 2010 12:07 PM EDT

In the LA Times today, Borzou Daragahi provides one of the most pessimistic assessments I've seen yet of Iraq's future. The continuing stalemate over the election, he says, along with the violence it's provoked, is causing the Iraqi middle class to give up once and for all:

Over the last 30 months of relative security and economic progress, Iraq's middle class and intelligentsia had emerged from the shadows of war and exile, strutting around town without head scarves or cruising through gleaming new shopping districts.

But now, as they watch the camp of Prime Minister Nouri Maliki, whose allies control the nation's security apparatus, jostle with that of Iyad Allawi, backed by some of the same Sunni Arabs who support the insurgency, they are preparing to dash back into hiding.

....Whether Iraq slides back into the despair or manages to limp forward, the gloom threatens to undermine what little faith Iraqis had in the country's future, say dozens of Iraqis across the country. "We made sacrifices," said Hassan Raheem Rahoun, 40, a hairstylist who moved back to Iraq from Libya two years ago and is considering leaving again. "We put our lives on the line when we went to the polls and voted for the most appropriate person. It didn't work.

...."Now the street is afraid of the return of sectarianism," said Ahmad Mohammad, 36, a computer and telecommunications specialist who works at a vendor of Canon photocopy machines, where sales have dropped by two-thirds since a few days before the election. "I can describe the situation as a time bomb. You don't know when it's going to explode."

This is just one data point, and like any "trend" story in any country that's based primarily on anecdotes it needs to be taken with a grain of salt. But the picture it paints is a bleak one.

Reining In Leverage

| Thu May 20, 2010 11:32 AM EDT

Mike Konczal, after noting that U.S. officials are trying to weaken European proposals for tougher capital requirements, explains how Susan Collins' Senate amendment to tighten up capital requirements would work:

No more capital loopholes! No more playing BS games where a firm creates a trust and does financial engineering alchemy to pretend that debt is equity. Serious, quality capital is required for our largest and most systemically risky banks.

This is probably the real fight. When it comes to increasing capital under the Dodd Bill you can practically hear the banks say: “Yes we’ll hold more capital as long as massive amount of risky debt turned into ‘safe’ equity through the shenanigans of our financial engineers can count as that capital.” Do we need to do that all over again?

Enough people think these points are implied in Section II of the bill, but the ability to have discretion on this point is something the regulators are fighting tooth and nail over. And here’s something fascinating: for all the talk about how Basel III and “international agreements” will fix our bank capital problems, the US is fighting this over there too. Check out the bold above; having serious quality capital for our banks is a major disagreement between the US and the Europeans, with the US wanting weaker requirements, and if their hands are tied here then they’ll be tied over there where they could possibly win this.

There's no way to get around the fact that regulators need a fair amount of discretion no matter what kind of rules you set up. That's just the nature of a highly complex, fast moving area like high finance. But we can set reasonable floors, and when both Treasury and the banks are fighting those floors tooth and nail it doesn't bode well for how seriously they take this stuff.

The CFPA is great. Resolution authority is great. Clearing derivatives trades is great. But if we pass financial reform without addressing financial system leverage in any kind of serious way, we've wasted our time. Keeping Collins' amendment intact ought to be a key goal for the progressive community — or, for that matter, for any community that cares about creating a sane banking system. Read Mike's post for more.

Financial Reform in Limbo

| Thu May 20, 2010 1:20 AM EDT

We've got good news and bad news today. The bad news is that Harry Reid tried to invoke cloture on financial reform and failed. The good news is that it's primarily because a couple of Democratic senators voted against cloture in order to give themselves time to introduce amendments that would make the legislation tougher.

If it works — if their amendments pass quickly and cloture gets invoked soon — it will have been worth it. But if the bill gets delayed much longer, it's in trouble. The reason, as usual, is Republican obstructionism. Ezra Klein explains:

It's worth saying why Reid wants to move to a final vote. The answer is floor time. Next week, the Senate is scheduled to take up the next war supplemental, which will have funding both for Iraq and Afghanistan and also for various disaster-relief efforts, and it will take up a bill to extend economic supports for the jobless. If the Senate doesn't finish financial regulation this week, it probably can't do those bills next week because the GOP's routine filibusters mean that each vote will require days of floor time. And the plan, as of now, is for the Senate to adjourn come Memorial Day. Of course, the Senate could just choose to work past memorial Day, which would solve the problem of floor time.

Most Republican filibusters aren't really meant to kill bills. In fact, in a lot of cases, once the bills finally come to the floor they get overwhelming Republican support. What they're meant to do is delay. The longer it takes to pass bills, the fewer bills get passed. Mitch McConnell knows that financial reform is going to pass eventually, and given the anti-Wall Street sentiment among the electorate it's likely that a lot of Republicans will feel like they have to vote for it. But if you can make it eat up a lot of floor time, it means Democrats can't do much of anything else. And as far as Republicans are concerned, the less that Democrats can do the better.