Kevin Drum

Banks to Britain: Drop Dead

| Sun Jan. 10, 2010 12:39 PM EST

Great Britain has enacted a temporary 50% tax on large bank bonuses. Via Tyler Cowen, the Financial Times reports on how British banks plan to respond to this:

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders....“The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede.

I'm generally skeptical of the effectiveness of direct controls on salaries and bonuses. I think the real problem is the size and profitability of the financial sector, which is what drives the big bonuses in the first place. That's what we should be paying attention to.

But even so, the arrogance and entitlement that this displays is stunning. British banks, even more than American banks, were saved from destruction by central government action, and they desperately need to rebuild their capital cushions. The last thing they should be doing is spending it on huge bonuses, and they certainly shouldn't be cavalierly doubling their bonus payouts just because their traders are upset at Alistair Darling's tax proposals. They don't even have the excuse that they need to do it in order to retain talent, since the tax applies to all firms equally.

Back here in the U.S., Christina Romer tells George Stephanopoulos that "she is hopeful that financial institutions will show some restraint, but with a shake of her head, she indicated she’s not that hopeful." Me neither. But here's the silver lining: since banks are all about to announce their bonus payouts over the next few weeks, and those payouts are certain to be outrageous, this provides the Obama administration with a lovely opportunity to stop just "shaking its head" and instead use bonus season as an opportunity to work up some righteous anger against the entire structure of the financial system. We need to target the source of the cancer, and a wave of populist revulsion is the perfect political opportunity to do it. More spine please, Mr. President.

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Corporate Responsibility

| Sun Jan. 10, 2010 1:02 AM EST

After the Christmas bombing attempt Andrew Sullivan loudly called for Janet Napolitano's resignation. He now admits that his reaction was "ill-advised, even dumb in retrospect." Fine. But then he says this:

But once we have very specific instances of failure, after a thorough investigation, it seems to me good management to hold individuals accountable. In the private sector for the most part, profound failures of this sort that could have led to the deaths of hundreds of people would lead to resignations and firings.

Maybe so, but I wouldn't hold up the private sector as the model for this attitude. Not in America, anyway. As near as I can tell, it takes riots in the streets just to get apologies out of private sector executives who are responsible for disasters on their watch, let alone resignations. See Bhopal, release of methyl isocyanate by Union Carbide in, and Wall Street, collapse of, for more on this.

Terrorball

| Sat Jan. 9, 2010 9:04 PM EST

Paul Campos writes in the Wall Street Journal that he could subject LeBron James to humiliating defeat in a game of one-on-one if only they played by two special rules: the game continues until he scores a single point, and as soon as he scores he wins.

The world's greatest nation seems bent on subjecting itself to a similarly humiliating defeat, by playing a game that could be called Terrorball. The first two rules of Terrorball are:

(1) The game lasts as long as there are terrorists who want to harm Americans; and

(2) If terrorists should manage to kill or injure or seriously frighten any of us, they win.

These rules help explain the otherwise inexplicable wave of hysteria that has swept over our government in the wake of the failed attempt by a rather pathetic aspiring terrorist to blow up a plane on Christmas Day. For two weeks now, this mildly troubling but essentially minor incident has dominated headlines and airwaves, and sent politicians from the president on down scurrying to outdo each other with statements that such incidents are "unacceptable," and that all sorts of new and better procedures will be implemented to make sure nothing like this ever happens again.

I think that calling this a "minor" incident goes too far, but basically Campos is right: we need to stop doing al-Qaeda's PR for it by panicking over every foiled terrorist plot. AQ's public image — that they're a triumphant army forever creating fear and hysteria in the decadent West — is the oxygen they live on and a key to their recruiting efforts. We should at least make them work for it, rather handing it to them on a silver platter.

But the rest of the piece takes a tack that strikes me as fundamentally wrongheaded:

It might be unrealistic to expect the average citizen to have a nuanced grasp of statistically based risk analysis, but there is nothing nuanced about two basic facts:

(1) America is a country of 310 million people, in which thousands of horrible things happen every single day; and

(2) The chances that one of those horrible things will be that you're subjected to a terrorist attack can, for all practical purposes, be calculated as zero. (See article below by Nate Silver.)

Consider that on this very day about 6,700 Americans will die.....etc. etc.

Two things. First, this line of argument — that terrorism is statistically harmless compared to lots of other activities — will never work. For better or worse, it just won't. So we should knock it off.

Second, even in the realm of pure logic it really doesn't hold water. The fundamental fear of terrorism is that it's not just random or unintentional, like car accidents or (for most of us) the threat of homicide. It's carried out by people with a purpose. The panic caused by the underwear bomber wasn't so much over the prospect of a planeload of casualties, it was over the reminder that al-Qaeda is still out there and still eager to expand its reach and kill thousands if we ever decide to let our guard down a little bit.

So even if you agree with Campos, as I do, that overreaction to al-Qaeda's efforts is dumb and counterproductive, it's perfectly reasonable to be more afraid of a highly motivated group with malign ideology and murderous intent than of things like traffic accidents or hurricanes. Suggesting otherwise, in some kind of hyperlogical a-death-is-a-death sense, strikes most people as naive and clueless. It's an argument that probably hurts the cause of common sense more than it helps.

2008 Campaign Gossip

| Sat Jan. 9, 2010 2:02 PM EST

Ah, the 2008 campaign. Who wouldn't want to relive it? John Heilemann and Mark Halperin dig up several juicy new tidbits in Game Change, to be released shortly. Marc Ambinder on the Edwards campaign:

I don't want to give away the whole book... but I would be remiss if I did not point to the chapters about the unbelievably dysfunctional husband and wife team of John and Elizabeth Edwards. Not only, it turns out, did many senior Edwards staffer suspect that John was having an affair, several confronted John Edwards about it, and came away believing the rumors. At least three campaign aides resigned because of their knowledge of the affair well before the national media picked up on those early National Enquirer stories.

And John and Elizabeth (who the book says was known to Edwards insiders as an "abusive, intrusive, paranoid, condescending, crazywoman") fought, in front of staffers, about the affair. The authors describe a moment where Elizabeth, in a such a state of fury, deliberately tears her blouse in the parking lot of a Raleigh airport terminal, "exposing herself. 'Look at me," she wailed at John and then staggered, nearly falling to the ground."

And Jeff Zeleny on Sarah Palin:

In the days leading up to an interview with ABC News’ Charlie Gibson, aides were worried with Ms. Palin’s grasp of facts. She couldn’t explain why North and South Korea were separate nations and she did not know what the Federal Reserve did. She also said she believed Saddam Hussein attacked the United States on Sept. 11, 2001.

It looks like there's going to be plenty of other blog fodder in the book as well. Bill Clinton was having an affair. (Maybe.) Harry Reid said something slightly impolitic. George Bush didn't think much of John McCain's campaign. Etc. Should be good for 24 or maybe even 48 hours worth of nonstop cable coverage.

Netflix by Zip Code

| Sat Jan. 9, 2010 12:54 PM EST

What movies are the most popular with your neighbors? Netflix has the answer and the New York Times has the interactive graphic. Here in lovely downtown Irvine, for example, the most rented title of 2009 was The Curious Case of Benjamin Button. Draw your own conclusions. That was a broadly popular rental, but plenty of movies have strong geographic appeal. Here in Southern California, for example, Religulous, Milk, and Vicky Christina Barcelona were popular among the liberal West LA set, but not so much elsewhere. (The map on the right is for Milk.)

If you live in one of the 12 biggest metro areas, you can play around with maps for your zip code too. Not only is it good clean fun, but surely also something that can inspire plenty of amateur sociology as well as blog posts full of partisan condescension. Latte-sipping lefties didn't like Paul Blart: Mall Cop! Orange County reactionaries refused to see Frost/Nixon! Nobody liked Indiana Jones and the Kingdom of the Crystal Skull! (Which goes to show that at least there's some justice in the world.) Have fun.

Earning Some Hatred

| Fri Jan. 8, 2010 11:40 PM EST

 

Toward the end of my appearance on the Bill Moyers show I dredged up a quote from FDR but couldn't remember his exact words. So now's my chance to revise and extend my remarks. The quote is a famous one from a speech he gave shortly before the 1936 election. Here's what he actually said:

 

We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me — and I welcome their hatred.

The point of quoting FDR was simple: I think Barack Obama could use a little more of his attitude. There are times when you need to be conciliatory — I think healthcare reform is such a case, for example — but there are times when you need to let people know whose side you're on. When it comes to financial regulatory reform, Obama needs to let us know whose side he's on. Even if he picks some battles he doesn't win, drawing a line in the sand would, at a minimum, change the terms of the conversation and make future reform a little bit easier — and it probably wouldn't do any harm to the current efforts. So: more spine, please, Mr. President.

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Friday Cat Blogging - 8 January 2010

| Fri Jan. 8, 2010 3:27 PM EST

It's Friday! Hooray! Time for cats. On the left, Domino is helping Marian as she works on some pattern drafting. This help consists primarily of sitting on her left arm, which she doesn't really need anyway. So it all works out.

But what about Inkblot? What's he doing? Answer: looking wistfully at the TV wondering how long he has to wait until Kevin shows up on Bill Moyers Journal. Not long, Inkblot! It airs on PBS, and David Corn and I will be on tonight at 9 pm (though you should probably check your local listings to make sure that's when it airs in your area).  We'll be talking about the finance lobby and its almost unchecked influence over both Congress and the country as a whole during the past several decades. Hopefully I was not totally incoherent as I railed against banks, talked about the evils of excessive leverage, described the outrageously favorable treatment that the financial sector gets from Congress, and chastised Barack Obama for not doing enough to fight back. A program description is here. And the article that sparked my television debut, "Capital City," is in the latest issue of the magazine.

FUN TIDBIT ALERT: When they put on makeup for the show, they applied it to both my face and my hands. Apparently it's important to make sure your skin tone is even for all exposed parts of your body.

Employment Woes

| Fri Jan. 8, 2010 2:39 PM EST

I don't really know what kind of track record these guys have, but e-forecasting now thinks that GDP grew 5% in the final quarter of 2009. At the same time, the economy lost 85,000 jobs in December, for a total of over 200,000 jobs lost in Q4. Using the rule of thumb that we need to add about 400,000 jobs per quarter just to tread water, this means that we fell behind by about 600,000 jobs even as GDP was growing at a pretty good clip.

I don't know quite what this means. Maybe e-forecasting will turn out to be wrong. But if we're really still losing jobs at this clip even with GDP picking up smartly, it doesn't suggest anything good. I sure hope the conventional wisdom that employment is just a lagging indicator and it will soon start climbing rapidly turns out to be right. I don't think I believe it, though. A long, slow recovery still seems more likely than not.

UPDATE: More here: "Total underemployment — the famous U-6 — is still extremely and stubbornly high at 17.3%, and the total number of unemployed persons, at 15.3 million, is double what it was at the start of the recession in December 2007....The bigger picture [] is important. And it shows a US workforce which is underemployed and looking at jobs which, when they do exist, are insecure and often temporary. Capital took its lumps in 2008 and the early months of 2009; it then recovered astonishingly quickly. It’s labor which is suffering the real hangover."

Carter's Legacy

| Fri Jan. 8, 2010 1:48 PM EST

Matt Yglesias pushed back yesterday against the idea that the only people who think Jimmy Carter was a good president are "people who are too young to actually remember the Carter years." But then he conceded: "Does that mean Carter was a great president? No. Obviously, he left little in the way of enduring achievements."

I think that deserves some pushback of its own. Carter was president during a difficult period, and politically he turned out to be fairly tone deaf and ineffective. As someone who didn't vote for his reelection in 19801 I won't defend him as a great president, but substantively he left behind more in the way of enduring achievements than most people give him credit for. He was the first president to make human rights a centerpiece of our foreign policy, a stance that Ronald Reagan adopted to great effect and something that's been a part of American diplomatic relations ever since. He managed to return the Panama Canal to Panama, a brave, politically costly fight that could have been disastrous if he'd lost it. He helped make peace between Israel and Egypt at Camp David. He appointed Paul Volcker as Fed chairman and allowed him to begin squeezing inflation out of the economy — something that very possibly cost him the 1980 election. He began the wave of deregulation that Reagan and others extended for the next 30 years. He started the secret war against the Soviets in Afghanistan. And although his efforts to push energy conservation died after he left office, they look prescient now.

This is actually a pretty substantial legacy — but it isn't entirely liberal or conservative. Liberals generally look favorably on Carter's work on human rights and the Middle East. Conservatives favor — or should favor, if they're being honest — his deregulatory efforts, the appointment of Volcker, and his willingness to engage the Soviets in Afghanistan. I've always suspected this is why Carter gets so little love: his overall legacy has too many conservative elements for liberals to really embrace him, but his non-hawkish attitude toward the Cold War and his inability to rally the country make him a conservative bête noir. And of course, his achievements have been overshadowed by his ultimate association with stagflation, oil shocks, and the Iranian hostages. But none of that alters the fact that, for better or worse, he changed the country more substantially than I think most people realize.

1Since I always get asked this, no, I didn't vote for Reagan. I voted for John Anderson.

Leverage and the Housing Bubble

| Fri Jan. 8, 2010 12:08 PM EST

Paul Krugman and Megan McArdle agree: the housing bubble wasn't caused by either predatory lending or the evil CRA. How do they know? Because if either of those were the explanation, then only residential housing would have been affected. But in fact, commercial real estate went through essentially the same boom/bust cycle,as shown in the chart on the right.

I think that's basically right. There was plenty of predatory lending, but I suspect that causation goes in the other direction: the bubble provided more opportunity for predatory lending, not the other way around. And the right-wing theory about the Carter-era Community Reinvestment Act being responsible for the bubble has never been anything other than crazy. There's just no evidence for it at all.

The one thing that does tie together both the residential and commercial bubbles, however, is leverage. In both cases, prices were propped up by vastly increased use of debt and leverage at all levels. Home buyers were allowed to take out mortgages with tiny (or no) down payments. Loan-to-value ratios (the rough equivalent in the CRE world) took off. The resulting mortgages were securitized and sold off so they wouldn't count against bank capital requirements. Those in turn were transformed into derivatives with lots of additional baked-in leverage. The derivatives were then insured via credit default swaps to essentially remove them from bank balance sheets. And all along the way, both the SEC and international regulators obligingly reduced bank capital requirements. Put together, all of this allowed effective leverage ratios at big banks and hedge funds to soar and debt levels among consumers to reach record heights.

All of that affected the pool of money that drove both the residential and commercial real estate booms in multiple countries. It's not the only explanation for the bubble (fraud and predatory lending helped feed the fire, as did Ben Bernanke's "savings glut" and the insane belief in the ability of derivatives to hedge away all risk), but it's at the core. It was at the core of this bubble, just as it was at the core of the collapse of Long Term Capital Management, the Asian crisis of 1998, the Nordic bubble of the early 90s, the Japanese bubble of the late 80s, and, if you want to back further still, the stock market crash of 1929. If you want to control asset bubbles, you have to control leverage. Not eliminate it, but control it. The fact that neither U.S. nor European regulators have seriously taken this on over the past year is a very discouraging sign that all we're doing with regulatory reform is tinkering around the edges. If we don't get serious about leverage, 2008 is going to happen all over again in another decade.