Kevin Drum

Our Debt to Ronald Reagan

| Thu Oct. 1, 2009 1:28 PM EDT

Paul Krugman looks at this chart of the personal savings rate in the United States and concludes that Reaganomics is the most likely reason that it fell off a cliff.  Matt Yglesias admits the timing is right: "But is there a causal link? I think it’s suggestive, but I don’t know what it would be."

Krugman suggests that part of the cause was Reagan's blithe acceptance of federal deficits.  After all, if the government didn't need to balance its books, why should anyone else?  Thus was born an era of binge spending.

Fine.  But I'd point to two other things that Krugman mentions: financial deregulation and stagnant median wages.  Those seem like much more likely villains to me.  Starting in the late 70s, middle class wages flattened out, which meant there was only one way for most people to support the increasing prosperity they had long been accustomed to: borrowing.  At the same time, financial deregulation unleashed an industry that marketed itself ever more aggressively on all fronts: credit cards, debit cards, payday loans, day trading, funky home mortgage loans, and more.  It was a match made in hell: a culture that suddenly glorified debt; an easy money policy from the Fed that made it available; a predatory financial industry that promoted it; and middle-class workers who dived in to the deep end without ever quite knowing why they were doing it.

So, yeah, Reagan did it.  Sort of.  But he had plenty of help.

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Ben Bernanke and You

| Thu Oct. 1, 2009 12:52 PM EDT

The AP reports that Ben Bernanke didn't talk much about consumer protection in today's testimony before Congress:

Rep. Melvin Watt, D-N.C., was stunned by what he thought was Bernanke's short shrift to the consumer protection issue. "Five sentences on consumer protection when everything else gets substantially more space," Watt said. "It is just not a good message to send."

During the hearing, Bernanke conceded that the Fed didn't do the job it should have in protecting consumers, but said improvements are being made. He suggested the central bank could take further steps to strengthen such oversight.

"We are competent and have the skills ... I think we can do that," he said.

You could take this two ways.  First, maybe Watts is right: this is evidence that Bernanke just fundamentally doesn't care about consumer protection.  Second, it might mean that Bernanke has decided not to continue opposing the creation of an independent consumer protection agency.  He's still making some pro forma remarks about the Fed's capabilities, but he's not really fighting to keep hold of its consumer protection portfolio any longer.

Either way, though, the next step is still the same: strip the Fed of its consumer responsibilities and put them in a CFPA that will actually make them a top priority.  Bernanke's testimony puts us a step closer to that.

Chart of the Day

| Thu Oct. 1, 2009 11:38 AM EDT

The Office of the Speaker of the House emails to nominate this for chart of the day.  Sure.  Why not.  It's a good chart.  Bottom line: the public really likes the idea of having a choice between either a private or a public health insurance plan.

In case you missed it, Jon Stewart had a good riff on this last night.  His question: Why are Democrats so lame?  It's a good one!  They have a huge majority in the Senate, the public is strongly in favor of a public option, and yet....for some reason they can't round up the votes to pass it.  Hell, they can't even round up a normal majority to pass it out of the Finance Committee, let alone a supermajority to overcome an eventual filibuster.

If Democrats really do lose the House next year (about which more later), this will be why.  If they don't pass a healthcare bill at all, they'll be viewed as terminally lame.  If they pass a bill, but it doesn't contain popular features that people want — like the public option — they'll be viewed as terminally lame.  At a wonk level, a bill without a public option can be perfectly good.  But wonks aren't a large voting bloc, and among people who do vote, the public option is very popular.  So, um, why not pass it?

Wall Street's Latest Trick

| Thu Oct. 1, 2009 1:44 AM EDT

As you probably know by now (you have been paying attention, haven't you?), banks are required to retain a certain amount of capital on their books.  The capital is there to keep them solvent even if their assets lose value, so the amount they're required to have depends on how risky their assets are.  If they have, say, a bunch of crummy C-rated securities on their books, they have to maintain a full load of capital to back them up.  But A-rated securities are less likely to lose value, so for those they only have to maintain 50% of the normal capital levels.  And for AAA securities, they can get by with only 20% or less.  After all, AAA securities are pretty unlikely to lose value.  Right?

This was one of the reasons behind the CDO frenzy of the past few years.  If you slice and dice a bundle of securities so that most of them are AAA-rated, then you can reduce the capital you need to back them up, which frees up that capital for other uses.

But then everything came crashing down, the ratings on those bundles tumbled, and suddenly banks had to pony up more capital to back them up.  What to do?  Answer: slice 'em and dice 'em all over again.  Welcome to the re-remic:

The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

....A hypothetical example cited in research by Barclays Capital said that a $100 million asset that required $2 million in capital at a triple-A rating may require $35 million if downgraded to double-B-minus. At triple-C, the capital requirement might rise to 100%, or $100 million.

In a re-remic, three-fourths of the same asset may regain a triple-A rating, requiring just $1.5 million in capital, Barclays said. The remaining one-quarter may require 100% capital, but the total capital requirement would fall to $26.5 million.

...."There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."

Shiny new AAA securities!  Hooray!  And there's more!  Ratings for re-remics come from the same ratings agencies that bollixed up the original ratings.  And investment banks pocket fat fees for performing the financial alchemy.  What could possibly go wrong?

Revisiting Banker Pay

| Thu Oct. 1, 2009 12:24 AM EDT

Is banker compensation one of the root causes of last year's financial meltdown?  The Epicurean Dealmaker says no.  A lot of things changed when investment banks evolved from moderate-size partnerships into gigantic public companies, but pay wasn't one of them:

Large public banks did retain much of the partnership compensation model, which deferred ever more of a banker's pay the higher up he got and the more he made. But [...] deferred pay lost its effectiveness as a distributed risk management tool. As investment banks grew ever larger and more complex, each banker had less and less impact on the overall results and health of his bank, almost no matter how much he made.

....Notwithstanding what legions of indignant and self-righteous commentators contend, the incentive system currently in place operates exactly as most of them propose: a large portion of banker pay is deferred for years and is tightly tied to the overall health and success of the firm. Bankers are not incentivized to print huge risky trades and run away as soon as they collect their bonus at the end of the year. In fact, they are more closely tied to the long-term health of the firm and its stock price than any other stakeholder. They just can't do anything about it. Unfortunately for them and for us, such a system does not seem to have prevented anything.

I basically believe this.  The problem wasn't so much that bankers didn't care about long-term results as it was that they never realized they were taking on so much risk in the first place.  They thought they had safely hedged it all away.  Reining in compensation may still be a good idea, but it's just a backstop.  The real fixes to the system are deeper and more fundamental.

Senate Climate Bill Arrives

| Wed Sep. 30, 2009 9:17 PM EDT

Brad Plumer has a very good brief roundup of the Senate climate bill that Barbara Boxer and John Kerry introduced today in the Senate.  In one sense the details of the bill don't matter too much: it still has to get reconciled with other Senate bills and then go into conference to get reconciled with the Waxman-Markey bill in the House, and pretty much everything is going to be thoroughly sanded down before that process finishes up.  Still, it's interesting to at least see the general direction they're pushing toward: basically a little more ambitious than Waxman-Markey but with a few technical adjustments that wonks should like.  The full post is here.  Kate Sheppard has more here.

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From the Annals of Great Punditry

| Wed Sep. 30, 2009 7:07 PM EDT

Jim Henley explains counterinsurgency in terms even a U.S. senator can understand:

In a counterinsurgency strategy, America hangs around a foreign country for years and years, occasionally killing people who live there, while pretending it’s for their own good. This takes a lot of people because the military, and the civilian parts of the government that control the military, are very specialized. You need people to do the hanging around, people to do the occasional killing of people that live there, and even more people to do the pretending. As you might imagine, pretending to foreigners that killing them is for their own good is hard! Not just anyone can pull that off with a straight face, and you need a lot of people who can.

This is part of Jim's entry in the Washington Post's "America's Next Great Pundit" contest — a sort of reality-show-in-print where ten promising entrants get chosen and are then kicked off one by one as they compete with each other over the course of three weeks1.  Think Project Runway for the opinionated but poorly dressed.  It's an idea so mind-blowingly dimwitted that it could only have come from the same people who brought us Mouthpiece Theater.

Still, every cloud has its silver lining, and mocking the Posties by writing amusing entries for their contest is one of them.  Get cracking, bloggers.  Jim has set the bar high.  I expect great things.

1To make this gruesome spectacle even worse, the winner gets to write 13 op-ed pieces but isn't even guaranteed that the Post will run them.  In fact, the winner isn't even guaranteed that the columns will be run online.  What the hell kind of contest is this?2

2Though I admit it might have possibilities if the Post made their current writers compete, with the loser getting a final 13 columns before being booted off the op-ed page for good.  I'd certainly pay to watch the championship round, where Richard Cohen and Robert Samuelson battle each other desperately to avoid the title of America's Next Laid Off Journalist.

Chart of the Day

| Wed Sep. 30, 2009 6:08 PM EDT

Longtime political analyst Charlie Cook thinks there's a good chance that Democrats could lose control of Congress in next year's midterm elections.  Independent voters, he says, are "viscerally" worried about the deficit and hyperactive government.

I wonder.  The deficit is a pretty abstract thing, and "hyperactive government" doesn't necessarily mean healthcare and the stimulus bill.  When it comes to voter discontent, I think I'd put my money elsewhere.  First, as the chart below, from the Economic Policy Institute, shows, people are pretty strongly convinced that the finance industry has gotten huge amounts of help from Obama and Congress, while ordinary people have gotten squat.  As Ezra Klein says, "The economic logic behind preserving the financial sector was bulletproof. But the electorate is not composed of economists. And all they know is that the banks got a lot of money, and this is the worst recession in memory."  In other words, "hyperactive" might be a lot more acceptable if all that activity were aimed somewhere other than Wall Street.

Second, there's jobs.  John Judis tells the story here: if you want to be a popular president, you'd better be able to demonstrate some job growth.  End of story.  Obama still has some time on that front, but probably not very much.  If the economy is starting to recover by next spring, he and the Democratic Party will probably be in decent shape when the midterms roll around.  If not, not.

Catblogging News

| Wed Sep. 30, 2009 3:27 PM EDT

Attention cat fans: We recently redesigned our thrice-weekly email newsletter into three separate newsletters.  One of those newsletters is based around yours truly, and you know what that means: catblogging.  Or, I guess, catlettering.

Or something.  In any case, we've decided that once a week is plenty of exposure for Inkblot and Domino, so we're soliciting photos of guest cats to appear in the newsletter.  If you want some temporary stardom for your adorable furball, just email a photo to:

cats@motherjones.com

Include a couple of sentences of description (names, ages, what they're up to, favorite tricks, whatever else you feel like) and we'll select one each week.  Dogs are welcome too!  And if you want to sign up to receive the newsletter, you can do it here.  Sign up for one, two, or all three.

Quote of the Day

| Wed Sep. 30, 2009 2:07 PM EDT

From an "industry expert" explaining why Sarah Palin is having trouble booking speeches at $100,000 a pop:

The big lecture buyers in the US are paralyzed with fear about booking her, basically because they think she is a blithering idiot.

I don't understand this.  Since when is being a blithering idiot any kind of drawback for a politician on the lecture circuit?