Kevin Drum

Is Greece the Next Shoe?

| Sun Feb. 7, 2010 7:32 PM EST

Simon Johnson is following the economic crisis that's mounting daily in Greece — and in Spain, Portugal, Ireland, and Italy — and is deeply pessimistic:

The IMF cannot help in any meaningful way.  And the stronger EU countries are not willing to help — in part because they want to be tough, but also because they do not have effective mechanisms for providing assistance-with-strings.  Unconditional bailouts are simple — just send a check.  Structuring a rescue package that will garner support among the German electorate — whose current and future taxes will be on the line — is considerably more complicated.

The financial markets know all this and last week sharpened their swords.  As we move into this week, expect more selling pressure across a wide range of European assets. 

As this pressure mounts, we’ll see cracks appear also in the private sector.  Significant banks and large hedge funds have been selling insurance against default by European sovereigns.  As countries lose creditworthiness — and, under sufficient pressure, very few government credit ratings will hold up — these financial institutions will need to come up with cash to post increasing amounts of collateral against their derivative obligations (yes, the same credit default swaps that triggered the collapse last time).

I can't pretend to have any kind of deep knowledge about this. But ever since the 2008 bank bailout I've had a persistent buzz in my head telling me that another shoe is likely to drop somewhere. I thought it might be Eastern Europe, channeled through Austria, or maybe something in Asia. The Dubai default seemed like a canary in the coal mine. Or even some kind of shock in the U.S. related to ARM resets. But now it looks like it might be Greece.

Hopefully Johnson is just being overly pessimistic. But one of the key lessons of the 2008 crash was how fast things can go south when markets lose confidence. If Greece fails, it won't just slowly slide into default, it will get pushed there by opportunistic investors who suddenly decide to place huge bets on its failure, aided by panicked investors who see what's happening and all try to head for the exits at once. If and when that happens, Europe or the IMF or the United States will have only a few days to act to prevent it from becoming a continent-wide rout.

On the other hand, Greece's sale of treasury bonds last week went pretty well. So maybe things aren't as bad as we think. That's what I keep telling myself, anyway.

UPDATE: More here: "The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity — while admirable in one sense — is to misjudge how fast confidence is ebbing. Greece's drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes."

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More on the Sugar Lobby

| Sun Feb. 7, 2010 4:47 PM EST

Earlier this morning I posted a chart showing how much money had been spent lobbying against a tax on sugared beverages by Pepsi, Coke, and the American Beverage Association. I just want to make one more point about it.

Assuming the LA Times did its sums correctly,1 this is one of the clearest examples you'll ever see of how much money can be spent lobbying on one specific piece of legislation. Usually that's hard to figure out, since industries spend a lot of money lobbying all the time, and it's hard to say how much is spent on one issue vs. another. But for six straight years, these three companies spent about $3 million on lobbying activities. Then in 2009 that suddenly jumped to $37 million. Since there wasn't much else going on that would have seriously affected them, that means they spent $34 million just to defeat the sugar tax.

For comparison, that's nearly as much as the entire aerospace industry spends on lobbying for the entire defense budget each year. It's five times more than the sugar lobby itself spends lobbying on all sugar-related issues each year. It's about as much as organized labor spends on all lobbying activities for everything.

That's the kind of muscle that the business community can bring to bear when it cares to. As much as the entire annual lobbying budget of organized labor or the aerospace industry, all for one single piece of legislation that never really had a ton of support in the first place. That's a lot of leverage.

1The caveat here is that the Times used CRP figures for 2003-08 but its own research for 2009. So it's possible that the comparison isn't apples-to-apples due to different methodologies.

Photo of the Day: Cheat Sheet Edition

| Sun Feb. 7, 2010 12:39 PM EST

Sarah Palin is a PR genius. The same way that Madonna is a PR genius or Al Sharpton is a PR genius. No matter how tired we get of them, somehow they always figure out a way to keep themselves in the public eye.

Yesterday Palin delivered a routine stemwinder to a medium sized crowd and managed to get a ton of publicity for it. But that's not all! It turns out that last night's speculation was right: she really did have a cheat sheet on the palm of her hand that she consulted during the softball Q&A after the speech. Just like your average seventh grader taking an algebra test. Has any politician in history ever done this before?

And even the notes themselves are fascinating. Here's what she wrote down:

Energy

Budget Tax Cuts

Lift American Spirits

The most obvious question is: why would anyone need to write this stuff down? It's not like she's trying to remember the quadratic equation or anything. For someone who swims in the seas that Palin swims in, this is about the equivalent of writing down a note to remember your birthday.

But enough mockery. At this blog we prefer a more high-minded, policy-oriented critique of our major politicians. So here it is: it turns out that Sarah Palin doesn't believe in budget cuts. In fact, she went to the trouble of deliberately crossing it out. Just like every other garden variety faux fiscally conservative Republican, she doesn't really want to cut the budget because that runs the risk of annoying some interest group or another. She only wants to cut taxes. Normally, though, we don't have graphological proof of this. With Palin, now we do.

Quote/Chart of the Day: The Sugar Lobby

| Sun Feb. 7, 2010 12:03 PM EST

Today's all purpose post begins with the quote of the day. It comes from the LA Times:

From the beginning, fast food and beverage company executives were uneasy about President Obama. He and his wife were known advocates of healthy eating.

That is scary! Advocates of healthy eating could pose a real problem. The industry's response is our chart of the day:

The entire story is worth reading. As a policy matter I'm not sure whether I support a tax on sugared beverages or not, but in the end it really doesn't matter. What matters is that the food industry doesn't want it, they're willing to spend a lot of money to make sure it never happens, and both interest groups and politicians are unwilling to risk losing their support. So, no tax.

Chart of the Day: The Volcker Rule

| Sun Feb. 7, 2010 12:45 AM EST

Commercial banks typically make long-term loans, something that can be risky because it ties up their money for years at a time. But usually this isn't a big problem, since commercial banks also have a very stable deposit base that provides the bulk of their funding.

Conversely, investment banks get a great deal of their funding from overnight loans in the repo market. This can be inherently risky too, but usually it's not a big problem either because their investments aren't in long-term loans, but in liquid securities that can be bought and sold quickly if their funding goes south.

But what happens when you have a mismatch? What if institutions with volatile, short-term funding are tying up their money in long-term loans? Via Mike Konczal, Raj Date says this is the real problem we need to address, not Paul Volcker's plan to prevent commercial banks from doing proprietary trading:

Many of the credit bubbleʼs excesses can be traced to the “shadow banking” sector, which is essentially the intersection between commercial banking and investment banking business models: shadow banks take illiquid credit and interest rate risk (like commercial banks), but fund themselves principally through the wholesale markets (like investment banks). Because of long-recognized regulatory loopholes, shadow banks were also frequently able to operate with significantly lower capital requirements than commercial bank competitors. With both capital and funding advantages in hand, shadow banks grew to some 60% of the U.S. credit system.

....With that context in mind, the focus of the Volcker Rule, as currently described, seems misplaced — or at least too narrow. The crisis did not stem from commercial banks stumbling into investment banking businesses; the crisis did stem, in the main, from allowing firms that fund themselves in the wholesale markets to take on credit and rate risk as though they were commercial banks or hedge funds.

Note that cheap credit + low capital requirements = enormous leverage. And that makes the entire shadow banking system extremely fragile. The key chart in Date's presentation is below, but the entire thing is short and worth reading. More later.

The Power of Palin

| Sat Feb. 6, 2010 11:50 PM EST

Andrew Sullivan watched Sarah Palin's speech to the tea party convention tonight and came away scared:

Above all, she is capable of generating a personality cult — much, much more so than Obama, because she can harness Christianism to her divine destiny. The power of this kind of appeal — of a charismatic, beautiful woman, an icon of the pro-life cause, persecuted by the evil elites, demonized by libruls, and commanding the biggest military on earth — should not in my view be under-estimated.

I totally get this. On the other hand, here's the New York Times:

The convention had gathered here to try to turn the activism of the Tea Party rallies over the last year into actual political power. Her speech was the keynote event of the convention, and the big draw for many of the 600 people who had paid $549 to attend — another 500, organizers said, paid $349 just to see for her speech alone.

Granted, that's a fair chunk of change for the average tea partier. Still, only about a thousand people were willing to pay it, and a thousand people is really not a huge number. Palin obviously has an impressive gut feel for the politics of resentment, but over time I think her Fox News gig is going to have the same effect that running for vice president did: it's going to make her less popular. As she makes the inevitable transition from fascinating pop icon to dreary regular commentator with nothing original to say, her star is going to wane.

Plus there's the apparent fact that she writes notes on her hand to remind her of things to say. Or so it seems. You be the judge about 45 seconds into this clip. (Alternative explanation: There was nothing on her hand. Looking down was a deliberate stunt designed to start lefty tongues wagging, thus providing her with yet another example of how liberal elites are so threatened by her that they have to invent ridiculous sneers every time she so much as moves her head a few inches. But does she have the animal cunning to plan something like that? Your call.)

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Our Dysfunctional Left

| Sat Feb. 6, 2010 1:59 PM EST

Jon Cohn thinks Barack Obama should be working harder to broker a healthcare deal, but at the end of a long review of the current state of play he adds that nothing is likely to happen unless progressives start pushing for it too. Armando comments:

Progressives have been marginalized and insulted throughout the process. Many, if not most, do not care for the Senate health bill. And now one of the people who did the marginalizing and insulting (one of the big proponents of the bill killing excise tax), insists progressives have to fight for the Senate health bill? Amazing.

More importantly, it is not going to happen. Unless someone is offering up a public option (which is not on the table of course), forget about progressives whipping for the passage of the Senate health bill. The Senate health bill is Jon Gruber's and Max Baucus' and Barack Obama's and the Villagers' baby. It is on them. You can't spend a year ridiculing, ignoring, and insulting progressives and then expect them to rally to YOUR cause.

This is both absolutely true1 and utterly pathetic at the same time. It's true because....well, it's true. Obama has always kept his distance from both the netroots and the broader lefty base, and the congressional leadership largely did the same during healthcare negotiations. And it's not just that they ended up with a policy choice that progressives were unenthusiastic about. It's that they never even pretended to take progressives seriously. This is a mistake that George Bush and Karl Rove never made. The conservative base frequently didn't get what it wanted from them, but they always felt like they had a friend in the White House whose heart was in the right place. Progressive groups, conversely, have mostly felt like they got the back of the hand from the White House on healthcare. So it's understandable that they've either given up or, in a few cases, actively turned against the whole process.

But this is also utterly pathetic because....well, it just is. So Max Baucus didn't listen to us. Big deal. So we didn't get invitations to White House tea parties. Who cares? It may be understandable that progressives feel dissed, but are we really all such delicate flowers that we're going to give up on a cause we've spent a century on because the current bill isn't quite what we'd like and Rahm Emanuel is mean to us? Jesus.

In 20 years this bill will be entirely forgotten except as the first step toward broad national healthcare. The excise tax, the public option, the subsidy levels, the exchange — all forgotten because they will have been steadily replaced by an entirely different infrastructure. It's true that some of that infrastructure will be path dependent on the details of the current bill, but most will simply evolve as a result of technology and public demand. By 2030 arguments over the public option will seem as antiquated as rants against the tin trust.

But that's 20 years from now, and we won't get there unless we take the first step. So the White House needs to start listening seriously to progressive ideas and progressives need to suck it up and understand that they're going to lose most of the battles. That's just the nature of consensus politics. But speaking for me, that's OK as long as we win the war. And the only way to do that is to pass the damn bill. So let's pass it.

1Absolutely true in general, that is. To the best of my knowledge, though, Jon Cohn has done absolutely no "marginalizing and insulting" of progressives during the past year. I really don't know why Armando insists on saying stuff like this.

Friday Cat Blogging - 5 February 2010

| Fri Feb. 5, 2010 3:04 PM EST

As I said in the previous post, I got home just in time to produce Friday catblogging. Which means that all I had time to do was pull out the camera and take a picture of what the cats were doing right at the moment. So here it is. On the left, Domino is staring out the door at the rain wondering if she should go out. She decided not to. On the right, Inkblot is engaged in his second favorite activity: eating. I left loads of food for the furballs while I was gone, but when I got back their food bowls were empty. I can't believe they ate it all. But not only did they eat it all, they were begging for more. So, softy that I am, I gave them some. Starting tonight, though, Daddy's back in town and we're back to the usual measured portions.

Up is Still Up, Down is Still Down

| Fri Feb. 5, 2010 2:50 PM EST

I'm back! It was (mostly) dry in San Francisco, but it's raining here in Southern California. This is not the way the world is supposed to work. However, just to prove that the world hasn't been turned completely unpside down, it turns out that Republicans are still Republicans:

Sen. Richard Shelby (R-AL) has put an extraordinary "blanket hold" on at least 70 nominations President Obama has sent to the Senate, according to multiple reports this evening. The hold means no nominations can move forward unless Senate Democrats can secure a 60-member cloture vote to break it, or until Shelby lifts the hold.

....According to the report, Shelby is holding Obama's nominees hostage until a pair of lucrative programs that would send billions in taxpayer dollars to his home state get back on track. The two programs Shelby wants to move forward or else.

And this:

The senator who is shepherding the Obama administration’s package of Wall Street reforms through Congress said on Friday morning that talks with his Republican counterpart had broken down.

The senator, Christopher J. Dodd, indicated that Democrats would forge ahead with their own bill, after months of talks that had been aimed at reaching a bipartisan consensus.

I am shocked, I tell you, shocked. A leading member of the party that's the scourge of earmarks is blocking all nominees for everything1 unless his earmarks are hustled back onto the fast track, and months of negotiations with the party that insists it's willing to negotiate with Democrats in good faith have broken down because, in fact, they aren't. They aren't, as most of us with three-digit IQs already knew, willing to agree to any financial regulation that has even the slightest chance of actually regulating the behavior that caused the 2008 meltdown.

(And "slightest chance" is all we're talking about here. It's not as if the Democratic version of financial regulation was likely to put much of a dent in Wall Street in the first place.)

But I'll take my good news where can I get it. And here it is: I got home late enough that I really don't have much time to blog this latest bout of GOP hypocrisy and kowtowing. So I won't. Catblogging is coming up next!

1No, that's not a typo. All nominees. For everything.

Tax Cut Fail

| Thu Feb. 4, 2010 4:00 PM EST

Flickr/Ben Ward (Creative Commons).Flickr/Ben Ward (Creative Commons).Democrats' inability to inform the public that the stimulus plan cut taxes in a big way should go down as one of their biggest political screw-ups in recent years. Barack Obama felt it necessary, during the State of the Union address, to spend a big chunk of time hammering home the fact that his party cut taxes. And PolitiFact recently decided it had to to check David Axelrod's claim that the Democrats passed 25 tax cuts last year without the help of Republicans. (PolitiFact has a list of all the tax cuts—they rated the claim "true.") Both of these events are signs that the fact that the Democrats cut taxes has not sunk in to Americans' psyches. It's not common knowlege. If it were, would the Tea Partiers be talking about how they're "Taxed Enough Already?" Well, probably. But they'd at least be challenged on that. 

The second part of Axelrod's claim is basically true, too. Only three Republicans (including Arlen Specter, who is now a Democrat) voted for a stimulus bill that included hundreds of billions of dollars of tax cuts. And yet the Dems are still hoping that the GOP is going to lend them a helping hand on their jobs bill. Good luck with that.

Kevin is traveling today.