Kevin Drum

My Lunch With Felix

| Fri Mar. 26, 2010 8:48 PM EDT

Here's a random assortment of topics from my lunch with Felix Salmon today at Eat Chow in Costa Mesa. He had the shrimp tostada and I had the swordfish, with olives and truffle parmesan fries on the side. Enjoy.

  1. The Spice Station on Sunset Blvd. is awesome. Even if you're not really in the market to buy any spices, you should check it out.
     
  2. We should all be more worried about the potential of a mass casualty event — an epidemic, a gigantic earthquake, a massive hurricane, etc. — to annihilate the insurance industry and take out the rest of the financial system as a side effect. The AIDS epidemic nearly did it, Felix says, and missed only because most of its victims weren't insured. A really big hurricane hitting Long Island could do it, though.
     
  3. Lunch with Tyler Cowen is always great. He unerringly picks out the best thing on the menu. (But I wonder: how does Felix know this unless he tries everything else on the menu too?)
     
  4. The corporate bond market didn't really exist before 1980. This one is actually kind of embarrassing. A little while earlier I had been telling Felix that no matter how much I read about the finance biz, I never really felt like I could acquire even a layman's grasp of it. It's just too damn deep and complex for a nonpractitioner. Then, later, in response to something he said, I sort of shook my head and muttered "fucking fixed income market." He laughed, and I explained that I was still gobsmacked about how the sleepiest, most boring corner of the financial industry had become such a world-devouring monster.

    No, he said, it was a mistake to think of it that way. In fact, the corporate bond market barely even existed before the 70s. It wasn't that the bond market morphed from boring to rocket science, it was that the bond market essentially started up and then just got ever more complex as time went on. Now, that's a pretty basic historical fact, but I really didn't know it. Though, in retrospect, I think I sort of did. But I had forgotten. In any case, the disintermediation of banks and the practice of corporations selling bonds on a large scale directly to institutional investors — as opposed to retail coupon clippers — has really only been around for a few decades. And that led, step by inevitable step, to the towering, tottering creations of the fixed income quants in 2005.

    I probably have some of this wrong. Maybe Felix will see it and point us all to a good brief history of the corporate bond market, the Eurobond market, and the changing tax status over time of debt vs. equity.
     
  5. You will never get good fish and chips in a restaurant where it's just one item on the menu. You have to go someplace where they serve it in vast quantities and people are queued up outside the door. This has something to do with the cycle time/freshness of the batter.
     
  6. I should be reading David Merkel and Bond Girl.
     
  7. Getting Congress and the Fed to impose higher and more rigid capital requirements on big financial institutions is important, but what's even more important is getting an international agreement in place to make sure everyone else does it too. However, there's really no one who does a good job of reporting on this. Largely this is because the discussions are all held behind closed doors, so we only hear about the status of negotiations when someone like Larry Summers or Mervyn King drops hints in a speech. It's like reporting on the intelligence community, except worse.

That's all. Consider this an open thread.

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Friday Cat Blogging - 26 March 2010

| Fri Mar. 26, 2010 1:58 PM EDT

It's been a long week, hasn't it? And with all the gunshots and death threats and growing panic over our imminent slide into tyranny, it's time to chill. So here they are, the world experts on chilling.

And with that, I'm off to meet Felix Salmon for lunch. Have a good weekend, everyone.

Quote of the Day: the Individual Mandate

| Fri Mar. 26, 2010 1:53 PM EDT

From Sen. Orrin Hatch (R–Utah) on why he supported an individual mandate in 1993 but doesn't support it now:

Well, in 1993, we were trying to kill Hillarycare, and I didn't pay any attention to that, because that was part of a bill that I just hadn't centered on.

Well OK then! I guess we can put this right up there with Mitt Romney's increasingly strained explanations for why the individual mandate was a good idea when he implemented it in Massachusetts but not so good when Barack Obama implemented it for everyone.

The New Math

| Fri Mar. 26, 2010 12:33 PM EDT

William Brafford on mathematics pedagogy:

I’ve always found it very handy that I have my basic times tables and division tables burned into my brain, and it seems like elementary school is a fine time to do this kind of rote learning.

Division tables? What the heck is that? Miss Jensen only taught us times tables back at Wakeham Elementary School in 1966. Is this some kind of  newfangled invention?

Chart of the Day: Women in Politics

| Fri Mar. 26, 2010 12:22 PM EDT

According to a new study of how parties recruit candidates to run for office, women just don't get asked as often as men:

They are less likely than men to be recruited intensely. And they are less likely than men to be recruited by multiple sources....These findings are critically important because women’s recruitment disadvantage depresses their political ambition and ultimately hinders their emergence as candidates.

This comes via John Sides at the Monkey Cage. The chart below shows the basic findings. To be honest, I'm surprised the numbers are as close as they are. I would have expected an even greater disparity.

Finally, Some Real Oxygen for the Drowning

| Fri Mar. 26, 2010 11:30 AM EDT

The rising tide of home foreclosures continues to be one of the biggest potential drags on economic recovery. Here's the latest news on the that front:

The Obama administration on Friday announced broad new initiatives to help troubled homeowners, potentially refinancing millions of them into fresh government-backed mortgages with lower payments.

....The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

For an example of "protests among those who have kept up their payments and are not in trouble," here's a letter reprinted by Tom Brown from a reader who learned about Bank of America's plan to begin forgiving mortgage principal for some delinquent borrowers:

I am writing to inform you that I will never bank with your firm ever again.

Principal forgiveness is an affront to every responsible, non-delinquent borrower in your book of assets....You are rewarding those who bit off more than they could chew, while those who did not take on excess leverage, or who kept their income-to-debt ratios manageable, see no benefit, even as their home equity values have declined....Moral hazard be damned. Count me as one future cashflow stream you will never see again!

Roger that — and I suspect that this is a more common reaction than you'd think. Bailing out Wall Street is bad enough, but bailing out your profligate next-door neighbor is far, far worse.

Of course, so far none of these plans to mitigate foreclosures has worked anyway. This time, however, CAP's Andrew Jakabovics says the administration's plan has a real shot at succeeding:

The big news is that the administration has come up with the first systematic set of policies to address the problem of negative equity (homeowners owing more than their home is worth) by bringing mortgages down to the current value of the properties.

....In what is essentially a modern version of the New Deal’s Home Owners’ Loan Corporation, a borrower who is current on her loan but who owes more on her home than it is currently worth can refinance into an FHA loan for 97 percent of the property’s current value. Incentives will be paid to servicers to allow these borrowers to refinance for less than the outstanding amount. Given the much larger losses lienholders would face if borrowers defaulted, cash in hand may be sufficiently attractive to allow these short-refis to proceed.

....Implementing these changes to HAMP will be difficult, and the issue of second liens remains a challenge, but insofar as the FHA refi program can largely sidestep the issue of servicer capacity, it has significant potential to alleviate the foreclosure crisis.

More at the link.

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Is Our Kids Learning, Revisited

| Fri Mar. 26, 2010 11:02 AM EDT

Just a quick followup to yesterday's post about NAEP reading scores. Over at The Quick and the Ed, Chad Aldeman suggests that reading scores have improved more than I suggested — possibly due to a statistical anomaly called Simpson's Paradox1 that can produce different results for an entire group than it does for all its subgroups. But that's not what's going on here. The main issue is that he's looking at different test scores than I am: he uses the Long Term NAEP for 4th graders to look at progress since the mid-70s, while I used the Main NAEP for 8th graders to look at progress since 2002. The former shows significant progress for all ethnic groups, while the latter is virtually flat for every group except Asians.

Click the link for more. I don't have any special axe to grind about the use of either version of NAEP or about which timeframe is appropriate to look at. It all depends on what you're investigating. But it's worth knowing that different data is out there.

1A simple example is below the fold. I either wrote this myself about a decade ago or else copied it from somewhere else. I'm not sure which.

This Time, Pot Really Might Become Legal

| Fri Mar. 26, 2010 5:00 AM EDT

Last year I wrote a piece for Mother Jones about marijuana legalization. There were lots of obstacles in the way of legalization at the time, so my conclusion was cautious: "Ten years from now, as the flower power generation enters its seventies, you might finally be able to smoke a fully legal, taxed, and regulated joint."

Well, it's been more like ten months since I wrote that, not ten years, but this week an initiative qualified for the November ballot that would legalize, regulate, and tax marijuana use in the state of California. This follows a year of growing acrimony in Los Angeles County over the flourishing of medical pot dispensaries and efforts by local officials to rein them in.

The initiative, sponsored by Richard Lee, who owns several marijuana businesses in Oakland, would legalize possession of up to an ounce of cannabis and cultivation of up to 25 square feet on private property for personal consumption. Beyond that, it would permit local authorities to go further: They'd be allowed to legalize commercial cultivation of larger amounts for sale to anyone over the age of 21.

Iraq Update

| Fri Mar. 26, 2010 1:03 AM EDT

Juan Cole surveys the state of the Iraqi electorate and suggests that the State of Law coalition, which includes Nouri al-Maliki's Dawa party, may be ready to abandon Maliki in order to make a better deal elsewhere:

The London pan-Arab daily al-Hayat [Life] reports in Arabic that that the Shiite State of Law coalition and the Shiite Iraqi National Alliance say they are prepared to make an alliance before they enter the new parliament. This move reduces the chance that current prime minister Nuri al-Maliki will get a second term.

....The fundamentalist Iraqi National Alliance groups Muqtada al-Sadr's Free Independents with Ammar al-Hakim's Islamic Supreme Council of Iraq and other religious Shiite parties....The Sadrists, the leading bloc within the National Iraqi Alliance, deeply dislike al-Maliki because he sent the army in after their paramilitary, the Mahdi Army, in both Basra and Sadr City in spring-summer of 2008. The State of Law may well have to sacrifice him to get an alliance with the more religious Shiite parties.

Abdul Hadi al-Hassani of the State of Law [...] said he expected the two to merge, given that they were most compatible in their platforms. He downplayed Sadrist dislike of al-Maliki and said what was important is that the two have a similar governing structure and could settle issues by a vote. He envisaged a further partnership, with the Kurdistan Alliance and with the Accord Front (Sunni fundamentalists).

It sounds as though the State of Law leadership is entirely prepared to throw al-Maliki under the bus to get the votes required to form a government.

With Ayad Allawi's al-Iraqia coalition running neck-and-neck with State of Law, they might not have much choice. But who will the Kurds ally with?

The Sunday Chats

| Thu Mar. 25, 2010 11:40 PM EDT

Andrew Sullivan on the Sunday morning chat shows:

My view of Sunday morning is that it should involve sleeping. But as for TV shows, what's needed, I suspect, is a reinvention of them. Real questioning of people in power; discussion of issues, not process; fewer Beltway hacks; no predictions; no sports-journalism masquerading as a serious discussion of politics. You know: what a serious version of the Daily Show would do. Its possible; just not without disturbing the balance of power in Washington.

I'd add breakfast to his view of Sunday morning, but otherwise I pretty much agree. I'm not sure anyone would accept an invitation to come on a show like the one he describes, though.

(But while we're on the subject, what's with the veneration of Jon Stewart as an interviewer, anyway? Stewart is a great comedian, but he's really not much of an interrogator. He gets in a few good licks sometimes, but most of the time he's only tolerably prepared (remember the John Yoo and Betsy McCaughey debacles?); he routinely talks over his interviewees; and he rarely asks very penetrating questions. To his credit, he doesn't play a lot of gotcha games, but he usually doesn't challenge his guests very hard either.)