Kevin Drum

Who Let Lehman Fail?

| Thu Sep. 3, 2009 10:12 PM EDT

Hmmm.  Last we heard, the official story about the collapse of Lehman Brothers blamed it on pesky legalities: Barclays was ready to do a deal to acquire Lehman at the last minute, but only if they got government backstopping as part of the acquisition.  Treasury, however, didn't have the legal authority to provide any guarantees, so there was no acquisition and Lehman went into bankruptcy.

Now, this story has always seemed a little fishy, partly because it's changed a bit from time to time, and partly because Treasury had already provided support for the rescue of Bear Stearns, Fannie Mae, and Freddie Mac, and would provide support for AIG just a few days later.  So if they had the legal authority for that, why not Lehman?

In the Guardian today, Larry Elliott and Jill Treanor report that the real reason the deal fell through was entirely different: it was just a cockup.  The Brits thought the Americans would support the deal all along, and the Americans never made it clear they wouldn't:

In London, the Treasury, the Bank of England and the Financial Services Authority all believed that the US government would step in with a financial guarantee for the troubled Wall Street bank. The tripartite authorities insist that they always made it clear to the Americans that a possible bid from Barclays could go ahead only if sweetened by US money.

....The UK tripartite authorities — the FSA, the Bank of England and the Treasury — had expected the US government to stand behind Lehman in the way that it had backed two crucial mortgage lenders the previous week and helped to orchestrate the bailout for Bear Stearns in March.

If the UK authorities were expecting the Americans to bail out Lehman, that means the Americans never brought up any legal hurdles.  And they surely would have mentioned it if that's what was really standing in the way of a deal.  Right?  So what's the real reason?

Mysteriouser and mysteriouser.  Especially since the Guardian piece has absolutely no sourcing whatsoever aside from the typically dramatic all-purpose British lead, "a Guardian/Observer investigation has revealed."  So take this with a grain of salt — particularly since the most likely British sources have an obvious interest in making sure someone else is to blame for the post-Lehman global financial meltdown.  No one is very eager to take the blame for that, after all

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What Went Wrong?

| Thu Sep. 3, 2009 4:27 PM EDT

Paul Krugman writes in the New York Times magazine this week about how economists got everything so wrong.  "As I see it," he says, "the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."  Brad DeLong puts it this way:

The big lesson, I think, is that Wall Street is much less sophisticated than we imagined it was: Goldman Sachs simply did not do any of the due diligence it needed to do to understand the AIG-specific risks it was assuming, Citigroup was unable to manage its own derivatives book to understand what "liquidity put" risks it was assuming, and as for Bear Stearns, Lehman Brothers, Merrill Lynch — hoo boy...

Oh my, yes.  Wall Street bankers are smart, and rich, and experienced, and knowledgable — but they aren't sophisticated.  They are hairless apes a few gene mutations removed from the savannah who only think they're sophisticated.

So what to do?  Krugman thinks the Great Recession will affect macroeconomics about the same way that black body radiation1 affected physics: it will uproot it completely.  Markets are no longer plausibly efficient, neoclasscial economics plainly doesn't work, and market agents are far more irrational than anyone thinks:

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

Sounds like a good time to become an economist, if you ask me.  There's work to be done.

1Sorry for the obscure reference, non-science folks.  Max Planck's solution to the black body radiation problem in 1900 was the starting point of quantum mechanics, which uprooted all of classical physics.  See here for more.

Paying for Healthcare

| Thu Sep. 3, 2009 2:23 PM EDT

Bob Somerby is unhappy about liberals' inability to construct a decent message on healthcare — or anything else, for that matter:

In the past few months, we have seen the other side churn their messages about the failures of “big government,” driving the fear of a “government take-over,” of “government-run health care.” Democrats have managed to produce little clear messaging, despite being blessed with the most comical set of data in the world’s history:

Total spending on health care, per person, 2007:
United States: $7290
United Kingdom: $2992
Average of OECD developed nations: $2964
Japan: $2581

You almost have to twist a mustachio as you read such ridiculous data. But Democrats refuse to discuss those data — refuse to say what they so plainly mean. The other side rails against Big Government. Our side is mostly silent about the Big Interests which have produced those comical data — at the people’s expense.

Well, there's a reason that data is rarely mentioned: it's because the Democratic plans on offer right now do very little to change it.  For all the sturm und drang about rationing and killing grandma and so forth, the House and Senate bills currently on the table would have a pretty modest impact on the future growth of healthcare costs.

And there's a reason for that too: the only way to cut costs is to piss off the people who benefit from those high costs: doctors, hospitals, insurance companies, device manufacturers, and big pharma — all aided and abetted by patients who never, ever want to be told no.  It would be nice to think that we could enrage all these groups and still pass a healthcare bill based on sheer populist rebellion, but that's not in the cards.  It just isn't.

So, yeah: we spend a lot more money than other countries.  Our doctors get paid a lot more.  Our insurance companies have way higher administrative costs.  The pill makers charge us twice as much as they charge Danes and Italians.  We should have spent the last ten years filling the airwaves with this stuff.

But we didn't.  Conservative were in charge of the country and we were busy with a terrorist attack, a couple of wars, endless tax cut fights, Social Security privatization, Republican scandals, warrantless wiretapping, torture in U.S. prisons, global warming, and a hundred other things.  There's only so much you can do.  So now that we have a chance to do something, our only option, really, is to bribe all the special interests and try to get something passed that does about a tenth of what it should.  And even at that, it'll pass — if it passes — by the slimmest of margins.

And then we go back and keep pushing.  And get another tenth.  And another.  Because every tenth that works well makes it easier to pass the next tenth.  And every tenth helps restore public faith in the ability of government to work.  That won't happen overnight, but at least Obama's first tenth will get it started.

And for those of you who want to get started now, the most recent international comparisons from the OECD are below.  The United States clocks in at $7,290 per person as of 2007 (the latest data available), twice as much as nearly every other country in the world.  And whether you realize it or not, that all comes out of your paycheck, one way or another.  Cut the costs and your paycheck goes up.

Helping the Prez

| Thu Sep. 3, 2009 12:44 PM EDT

In case you have better things to do with your life than trying to keep up with every outburst of political hysteria in the Age of Obama, here's the latest: the president announced yesterday that he would be giving a live speech to schoolkids next Monday, wherein he would extol the virtues of hard work, learning to read and cipher, etc. etc.  Teaching materials related to the speech were provided by the Ed Department.  Conservatives went predictably bonkers, accusing Obama of trying to brainwash our nation's youth, push his socialist agenda into the classroom, and create a cult of personality among impressionable children.

Today he backed off slightly:

In a set of bullet points listed under a heading, "Extension of the Speech," one of the points used to say: "Write letters to themselves about what they can do to help the president. These would be collected and redistributed at an appropriate later date by the teacher to make students accountable to their goals."

However, that bullet point now reads as follows: "Write letters to themselves about how they can achieve their short‐term and long‐term education goals. These would be collected and redistributed at an appropriate later date by the teacher to make students accountable to their goals."

When conservatives started ranting about death panels, Mickey Kaus suggested that if Dems had any sense they never would have inserted the language about advance directives into their bill in the first place.  They should have known it would cause problems.  I disagreed: if it hadn't been death panels, it just would have been something else.  There's no way to sanitize a bill enough to keep it safe from folks like Betsy McCaughey and Sarah Palin.

But I'm on the other side on this one.  What the hell was Obama's brain trust thinking?  The whole idea of the speech may have been misguided in the first place given the realities of modern hyperpartisan politics (be honest: you wouldn't have been thrilled if George Bush had done something like this), but including a bullet point asking kids "what they can do to help the president"?  A five-year-old could have figured out that might cause a little bit of red-state heartburn.

Obviously the president shouldn't spend all his time worrying about what the lunatic fringe thinks.  Still, the world is what it is.  Why give them obvious ammunition?

People Don't Have Any Money

| Thu Sep. 3, 2009 11:58 AM EDT

Consumer spending continues to suck:

Most stores reported significant declines — with the worst coming from chains that specialize in teenage clothing and gear.

Over all, the industry posted a 2.9 percent sales decline compared with a year ago, according to Thomson Reuters, making August the 12th consecutive month of negative growth. The August decline comes on top of a 5 percent drop in July.

Despite signs that the economy is stabilizing, consumers remain reluctant to spend. That does not augur for a good holiday shopping season, a crucial time for retailers. As analysts at AT Kearney noted in a recent back-to-school report: “thrift is settling in as a habit for consumers across the board.”

Look: thrift is not "settling in as a habit."  People are spending less because they don't have any money.  Some are unemployed.  Some have had their hours cut.  Some are paying down credit card balances.  Some are desperately trying to make ends meet after their ARMs reset.  Some are paying off home equity loans they thought they'd be able to refinance forever.  Habit has nothing to do with it.

Townhalls and the Media

| Thu Sep. 3, 2009 1:38 AM EDT

Did the country really explode in anger at townhalls across the country this summer?  Or was it just a tiny fraction of the population that got outsize attention by bored cable nets during the dog days of August?  E.J. Dionne talked to some returning Democratic House members this week and concludes it was more the latter than the former:

"I think the media coverage has done a disservice by falling for a trick that you'd think experienced media hands wouldn't fall for: of allowing loud voices to distort the debate," said Rep. Mary Jo Kilroy, whose district includes Columbus, Ohio.

....The most disturbing account came from Rep. David Price of North Carolina, who spoke with a stringer for one of the television networks at a large town-hall meeting he held in Durham. The stringer said he was one of 10 people around the country assigned to watch such encounters. Price said he was told flatly: "Your meeting doesn't get covered unless it blows up." As it happens, the Durham audience was broadly sympathetic to reform efforts. No "news" there.

....When I reached Rep. Tom Perriello last week, he divided the crowds at the 17 town halls he had held to that point in his largely rural Virginia district into three groups: conservatives, for whom the health-care battle is "about big government, socialism and all that"; the left, for whom "it's about corporate accountability"; and a "middle" for whom "it's about health care costs" and the problems with their coverage.

But the only citizens who commanded widespread media coverage last month were the right-wingers. And I bet you thought the media were "liberal."

There's unquestionably been a decline in support for healthcare reform in the polls, but is that cause or effect?  If Dionne is right, it's less a reflection of genuine discomfort than it is a reflection of distorted media coverage.  Thanks, cable news!

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Mother Jones is a Bimonthly Publication

| Wed Sep. 2, 2009 8:12 PM EDT

Dave Schuler, in a post on a different subject entirely, happens to mention this:

An auto-antonym is a word that has two meanings: it means one thing and also its opposite. The perfect example of an auto-antonym is inflammable which means incapable of burning and also capable of burning....Other auto-antonyms include fast, cleave, sanction, and let. The last means either allow or prohibit (mostly in the legal phrase “without let or hindrance”). There’s a sizeable list here.

Most of these auto-antonyms are actually kind of questionable, more examples of words with different senses than they are literal antonyms.  And in that spirit, one of the best examples of this kind of thing is biweekly (or monthly or yearly), which can mean either twice a week or every other week.  This came up yesterday in response to this post, and what makes it so special is that unlike most of these word pairs, this one is pretty much impossible to tease out via context.  If I say that David Brooks is a biweekly columnist, you have no idea which sense of the word I mean.

How does this happen?  Different senses of a word that are near opposites but pretty easy to distinguish via context are easy to understand.  That kind of thing happens all the time.  But how does a word evolve into total confusion like this?  A brief bit of googling doesn't turn up anything very helpful, but it seems like there ought to be an interesting story behind this.

(And Mother Jones?  We're the kind of bimonthly publication that comes out six times a year.)

Optimistic About Healthcare

| Wed Sep. 2, 2009 3:11 PM EDT

So why do I remain fairly optimistic that a decent healthcare reform bill will pass?  Sometimes I wonder myself.  But here are three reasons.  First, Jon Chait, who thinks getting bipartisan support for a bill was always a chimera:

The ultimate endgame entailed getting all the Democrats to pull together and pass something.

Of course, Democrats didn’t want to do this. They wanted bipartisan support, mainly for political cover. Moderate Democrats won’t do this until it becomes clear that the Republican Party is dead set against reform, completely in hoc to its right-wing base, and not negotiating seriously....In that sense, August moved the ball pretty far down the field.

Second, Carl Hulse of the New York Times, reports that conservative Democrats haven't been too fazed by the August freak show:

Even after the tough town-hall-style meetings, unrelenting Republican assaults and a steady stream of questions from anxious voters, interviews with more than a dozen Blue Dogs and their top aides indicate that many of the lawmakers still believe approval of some form of health care plan is achievable and far preferable to not acting at all.

....The political temperature of the Blue Dogs — and their ideological counterparts in the Senate — after the five-week recess is crucial. As representatives of some of the nation’s most conservative territory represented by Democrats, they potentially have the most to lose if a Democratic bill spurs a backlash....One lawmaker in the group, Representative David Scott of Georgia, said his determination to enact a health care overhaul had been increased over the recess because of what he called the spread of misinformation and other unfair tactics engaged in by the opposition.

And third, there's the fact that conventional wisdom places Dems in a very, very deep hole right now:

Some of the most prominent and respected handicappers can now envision an election in which Democrats suffer double-digit losses in the House — not enough to provide the 40 seats necessary to return the GOP to power but enough to put them within striking distance.

Top political analyst Charlie Cook, in a special August 20 update to subscribers, wrote that “the situation this summer has slipped completely out of control for President Obama and congressional Democrats.”

Now, put all this together and look at it from the Democrats' perspective.  Republicans have been given every chance and have obviously decided to obstruct rather then work on a bipartisan compromise.  So the Blue Dogs and centrist Dems feel like they're covered on that angle.  What's more, the townhalls have shown them what they're up against: if they don't pass a bill — if they cave in to the loons and demonstrate that their convictions were weak all along — they're probably doomed next year.  Their only hope is to pass a bill and look like winners who get things done.

When you're up against a wall, you do what you have to do.  Politically, Dems have to succeed, and at this point they've all had their noses rubbed in the fact that the only way to succeed is to stick together.  What's more, Barack Obama has a pretty good knack for coming in after everyone else has talked themselves out and cutting through the haze to remind people of what's fundamentally at stake.  If he can do that again, and if he has the entire Democratic caucus supporting him, they can win this battle.

Nearly every Democrat now has a stake in seeing healthcare reform pass.  The devil, of course, is in the word "nearly," but at this point even Ben Nelson probably doesn't want to be the guy to sink a deal if he's literally the 60th vote to get something done.  It's usually possible to pass a bill when everyone's incentives are aligned, and right now they're about as aligned as they can be.  That's why, on most days, I remain optimistic.

UPDATE: A commenter at James Joyner's site describes Obama's style this way: “He operates like a community organizer: let people have their say, let them wear themselves out, then step in and define the consensus.”  At his best, I think that gets it about right.

And when is Obama going to do this?  Next Wednesday in an address to a joint session of Congress.  Nice symbolism there.  I hope it works.

Quote of the Day

| Wed Sep. 2, 2009 1:37 PM EDT

From David Axelrod, commenting on how his boss plans to knock some heads and get engaged in the healthcare debate any day now:

It’s time to synthesize and harmonize these strands and get this done.

Well, that's either cunningly brilliant or terminally vapid.  I'm not sure which.  I guess it depends on whether Obama ends up passing a healthcare bill or not.  If he doesn't, his decision to keep his distance from the fight until the very end will be judged as harshly as Clinton's decision to write a 1000-page bill and dump it on Congress.  If he does, that same decision will be judged a brilliant coup.  Personally, I think it has a pretty good chance to be the latter.  We'll see.   More here.

Simple Reform

| Wed Sep. 2, 2009 1:00 PM EDT

Andrew Samwick thinks Democrats have done a lousy job of selling healthcare reform, and it's hard to argue with that.  But then he goes on to ask for evidence that any of the bills currently moving through Congress are better than a simple reform consisting only of:

1. Community rating
2. Guaranteed issue
3. Ex post risk adjustment
4. An individual mandate, with Medicaid for a fee as the backup option

I've seen a bunch of criticisms along these same lines, and I don't really get them. Granted, the bills now on the table have more to them than just these points, but not a lot more.  The core of all of them is insurance industry reform (#1-3) combined with subsidies for low-income families (#4).  With the exception of the much-debated public option, the additional stuff lies in the details (the subsidies aren't all Medicaid, children get treated differently than adults) or in modest expansions of Samwick's list (out-of-pocket caps, tax credits for small businesses).  The fact is that current reform efforts are already fairly modest.

Unless, of course, I'm misunderstanding Samwick and he means "Medicaid for a fee" literally.  That is, no subsidies and no attempt to expand coverage to the currently uninsured at all.  If that's the case, then the answer to his question is "Because they expand decent health coverage to millions of poor people."  If it's not, then I'm not quite sure what the problem is.  Putting the public option aside for the moment, are the additional details in the House and Senate bills really so abominable that he thinks they should torpedo the whole project?  Why?