Matt Yglesias points out correctly today that during the aughts there were a lot of economists who thought that America's trade deficit was unsustainable and would shortly lead to a major financial crisis of some kind. So the questions they were asking revolved around things like how long it would take for the value of the dollar to correct, whether we'd be better off with a quick crash and recovery or a long, slow slog back to balance, and so forth. Either way, though, a crisis like this would have fundamentally required American consumption to decrease until we got our affairs back in order.

In the event, though, that's not the crisis we had. Our trade deficit may have played a role in what ended up happening, but basically it was just a huge housing/debt bubble that exploded, leaving balance sheets in tatters:

Precisely because lots of smart people foresaw the occurrence of that crisis, and because that crisis really seemed very likely, and since a crisis certainly did happen a diverse array of smart people have just sort of trundled along acting as if the crisis we're facing is that crisis.... Indeed, I would say that an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That's why [they think] long-term fiscal austerity is important and why there was no "holy crap the economy's falling apart, let's forget about comprehensive reform of the health, energy, and education sectors" moment back in 2009.

....I'm inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we're having is, for all its horror and scale, is a pretty banal monetary crunch—the natural rate of interest is below zero, nomimal rates can't go below zero, and the Fed won't act to push real rates lower. Fixing that wouldn't fix "all our problems" any more than ending the Great Depression solved all the problems of the America of its time (Jim Crow, anyone?) but it would solve the problem and it doesn't require us to fix the other stuff first.

That's an interesting theory, though I'm not sure I buy it, possibly because I'm more cynical than Matt. To some extent, I agree that early on there was some honest confusion as we tried to sort out what had happened, and even now there's probably some honest belief that a long-term trade deficit crisis is still in our future and we ought to do what we can to keep it from happening. To a much larger extent, though, I think that responses to the Great Recession were preordained by ideology and political convenience. Some beliefs about our current crisis are defensible, but there are others so far off the mark (we need to worry about hyperinflation, bond markets are terrified of U.S. deficit levels, it was all the fault of the CRA, etc.) that it's simply not plausible that these are honest mistakes. They're politically driven from the get-go, and these arguments, or similar ones, were inevitable no matter what form the crisis had actually taken. That's not because of genuine confusion about what happened, it's because there are plenty of actors all along the chain, from economists to bankers to pundits to politicians, who are invested in certain answers and dedicated to inventing problems that require those answers.

One of these days we may yet get the crisis we thought we were going to get back in the early aughts. If we do, I guarantee that all those economists and bankers and pundits and politicians who are preaching austerity and deregulation and low taxes today will still be preaching them. That might even be the right answer the next time around, but if it is, it will merely be a coincidence.

Why did all those CDOs issued by Wall Street investment banks between 2005 and 2007 do so poorly? Because the underlying mortgage bonds that went into them were crap. No surprise there. It was the height of the housing bubble, after all, and mortgage bonds backed by lots of crappy mortgages are bound to perform pretty badly.

But did they do especially badly? That is, did banks deliberately put their worst, most toxic bonds into their CDOs, knowing they'd fail but not caring because at least it got them off their books? According to a newly released study, apparently so:

Using a unique database published by the investment firm Pershing Square Capital Management, Faltin-Traeger and Mayer identified the underlying bonds in some 528 ABS CDOs issued between 2005 and 2007, and compared their performance to similar bonds that weren't included in CDOs.

They found that the bonds in the CDOs performed a lot worse. Even if one holds observable characteristics such as initial ratings and yields constant, the bonds in the CDOs suffered ratings downgrades that were 50 percent to 90 percent more severe. As of June 2010, for example, bonds with initial triple-A ratings had been downgraded by an average 11.84 notches, compared to 5.99 for those not in CDOs. The bonds in the CDOs were also more likely to have been rated by all three major credit-rating firms.

The research provides strong support for the idea that banks — with the help of pliant ratings agencies — put together the CDOs and sold them to investors in a premeditated effort to get rid of some of their most toxic assets, or to provide vehicles for clients who wanted to bet against the worst possible assets. As the authors put it: "It would have been very hard to randomly choose securities with such poor ex-post performance."

Nearly all mortgage bonds issued between 2005 and 2007 have done badly. But if this study holds up, it's plain that Wall Street banks deliberately set out to create cleverly-constructed CDOs out of the worst of the worst, not caring that their clients would lose their shirts in the process. That isn't what caused the financial crash of 2008, but it sure helped make it worse.

Over at Economix, Laura D'Andrea Tyson says it's pretty unlikely that competition between insurers will lower healthcare costs, as Paul Ryan and Ron Wyden hope. After all, private healthcare premiums — where competition should be keeping costs down — have grown at a faster rate over the past 40 years than Medicare costs per beneficiary. The actual numbers she cites, from the Center for Budget and Policy Priorities, seem a little iffy to me since they compare two different things (premiums vs. actual costs), but still, there's plenty of evidence to suggest that Medicare really is better at controlling costs than private insurers. But why?

Medicare has much lower administrative costs than private insurance (administrative costs account for about 14 percent of health care spending, or a whopping $360 billion a year).

And Medicare has considerable negotiating leverage with providers as a result of its huge enrollment. Private insurance plans are unable to negotiate payment rates with providers that are as low as Medicare’s rates, even though Medicare’s negotiating authority is tightly limited and often undermined by Congress.

This actually seems unlikely to me. Companies like Aetna and Blue Cross are plenty big enough to negotiate favorable prices from healthcare providers. And they do. I suspect the dynamic driving higher costs in the private sector actually lies mostly with private employers, who compete with each other to keep their workers satisfied. This means that they help drive costs up, not down, and healthcare insurers respond to this. What's more, employers can always make up for higher premiums with smaller wage increases, which gives them less incentive to pay a lot of attention to healthcare costs in the first place. As long as their total compensation costs stay within reason, they don't much care whether it's going out in wages or in benefits. (In fact, since healthcare benefits aren't subject to income tax, they actually have a small incentive1 to increase benefits at the expense of wages.)

So I guess I wouldn't give Medicare quite such huge props for controlling costs. There's probably less there than meets the eye. Still, even if the numbers aren't as impressive as Tyson suggests, there's not much question that private healthcare providers have never done better at controlling costs than Medicare, and have almost certainly done at least a little worse. This doesn't bode well for the notion that unleashing the forces of free market competition will do much good for Medicare.

1Austin Frakt emails to point out that the incentive isn't really all that small. The value of a dollar of healthcare benefits is actually substantially higher than a dollar of wages.

Jon Chait writes today about the tacit rules for primary attacks on front-runners: always attack from the flank, since that doesn't play into the strategy of the opposing party during the general election (Obama, for example, won't be attacking Mitt Romney as "not a true conservative"); and lighten up when it starts to look like the front-runner is a sure thing.

But Newt Gingrich is famous for his willingness to toss all the usual rules overboard and light the world on fire if that's what he thinks it takes for him to win, and now he looks set to do it again:

With the benefit of a $5 million infusion from right-wing casino mogul Sheldon Adelson, Gingrich is planning an assault in South Carolina that centers on Romney’s career at Bain Capital....The political effect of these ads is to turn Romney’s chief selling point into a liability – his private-sector experience becomes an indicator not that he will fix the economy but that he will help the already-rich. It’s a smash-you-over-the-head blunt message, with ominous music and storybook dialogue.

True enough. Here's a snippet from the "King of Bain" website:

Mitt Romney was not a capitalist during his reign at Bain. He was a predatory corporate raider. His firm didn't seek to create value. Instead, like a scavenger, Romney looked for businesses he could pick apart. Indeed, he represented the worst possible kind of predator, operating within the law but well outside the bounds of what most real capitalists consider ethical.

....He and his friends at Bain were bad guys. Any real capitalists should disavow Romney's ‘creative destruction’ model that made him wealthy at the expense of thousands of American jobs.

Yes, that's a site affiliated with Newt Gingrich arguing that there are boundaries to "real" capitalism. What's more, those boundaries are largely ones that liberals have been talking about for years. There's are also attacks on Romney's 11,000 square-foot house and his "corporations are people too" quote. Romney even took "foreign seed money from Latin America"!

This is brutal stuff, and as Chait points out, it plays directly into Obama's hands. If you didn't know better, in fact, you might think this video was created by the DNC.

In other words, Newt Gingrich is now doing exactly what everyone in the Republican Party was afraid he was going to do: destroy them utterly if they decline to nominate him. It's no surprise really, since this has been Newt's MO for decades, but it sure is a helluva spectacle.

Here is today's Rorschach test. Or a something test, anyway. Earlier this morning, Mitt Romney said:

I like being able to fire people.

Hah! Ain't that just like a plutocrat who's spent most of his career buying companies and then making millions by mounting brutal mass layoffs of their workers? Of course, this is wildly out of context. What Romney really said was that he likes being able to buy, say, health insurance from whoever he wants, so that he can switch companies if he gets bad service. It's really completely unobjectionable. So what about that out-of-context snippet? Do you think:

  1. It's fair game. After all, Romney himself, after airing a plainly deceptive quote about Barack Obama, was the guy who proposed the "what's sauce for the goose is now sauce for the gander" standard for quote doctoring. And pretty much everyone on the right backed him up.
  2. It's ridiculous. We lefties should have more integrity than to stoop to stuff like this.

Vote in comments!

John Hannah, late of Dick Cheney's office, thinks that Barack Obama is a wuss:

[In the Middle East] concerns run deep over the administration's lack of strategic vision, its instinct for retreat and its complicity in the unraveling of a benevolent imperium that has for decades underwritten the region's security.

....No good can come from the perception of the United States in retreat, a willing accomplice in the dismantling of a regional order — Pax Americana — that has been the linchpin of Mideast security for decades. It's a dangerously corrosive narrative, one that left unchecked will breed uncertainty, instability and even war. Disabusing friend and foe alike of its accuracy should be a top priority for Obama.

I don't have a ton to say about this. Hannah is mostly upset that (a) we apparently don't plan to bomb Iran back into the Stone Age, and (b) we've been reluctant to protect the interests of various Mideast thugs who happen to have been allied with America from time to time. Overall, in fact, his bill of particulars against Obama is surprisingly weak, just a couple of barely on-point quotes plus the fact that Obama is withdrawing from Iraq (a George Bush policy, though he doesn't mention this), he hasn't solved the Israel-Palestine problem yet (what a shocker), and he's failed to bomb Iran (another George Bush policy, which Hannah has been upset about for years). All that's missing is a tossed-off reference to the Obama Apology Tour™. Yawn.

No, the only interesting part of the whole piece is Hannah's obvious comfort with the idea of a "benevolent imperium" and a "Pax Americana." Plainly he doesn't think he needs to hide his preferences behind euphemisms and shilly-shallying. America ought to be the puppet master that pulls the strings in the Middle East, and that's the end of it. Anyone got a problem with that?

What causes outbreaks of various kinds? Karl Smith offers up a cheap and cheerful maxim:

A good rule of thumb — I believe — for epidemics economic, biological or social is this: If it spreads along lines of communication it's entropic information. If it travels along major transportation routes it's microbial. If it spreads out like a fan, it's an arthropod. If it's everywhere, all at once, it's a molecule.

Something tells me that Karl has a lot of these mental shortcuts squirreled away in his brain. I think he should collect them in a single place so that we can all vote for the winners and losers.

Debate Thread

For the first time in my life I'm grateful for heavy traffic. I was up in Hollywood this afternoon solving the world's problems with Brad Friedman, and the southbound traffic was slow enough that I only made it back home in time for the last 15 minutes of the debate. Something tells me that was plenty. Feel free to use this thread to update me on tonight's atrocities. Complete Mother Jones coverage is here.

Sandy Banks notes today that crime rates in Los Angeles are way, way down:

The reasons are complicated and ripe for debate: better policing and more community involvement; fewer drugs and fuller prisons; an explosion in new technology; and the fading profile of violent gangs.

The phenomenon ought to be scrutinized. We need to know what mix of forces has conspired to drive crime down, so we can — in an era of shrinking resources — plan and spend wisely to keep this going.

Don't forget lead! Lead lead lead lead. When is the connection between reduced lead levels and reduced crime levels finally going to penetrate the minds of American journalists? I know it's not sexy and I know everyone wants to ignore it because you can't tell heroic stories about lead, but it's almost certainly the single biggest contributor to crime reductions nationwide.

Plus it's good news: the fact that reduced lead levels have played a big role in this means that a lot of the decline in crime is permanent. Hooray! Get rid of even more lead, as well as other environmental neurotoxins that affect small children, and crime levels will come down even more. Double hooray!

On the left, Domino is casting a long shadow. But not long enough! On the right, you can see a picture of Domino's faux-sheepskin pod, but that's not Domino in it. A few days ago we had a changing of the guard. Inkblot jumped up on the couch, stared menacingly at Domino, and bullied her out of the pod, which he promptly took over. It's been his ever since, even though he doesn't really fit in it.

But what are you going to do? Inkblot is the alpha cat around here, and I'm not sure yet if Podgate will turn out to be good for his campaign image or not. I suspect he'll gain ground among the neocon warmonger set and lose ground among women for his retrograde attitude toward gender equality. We won't know until new polling data is available.