Kevin Drum

Terrorists vs. Detainees

| Thu Jun. 18, 2009 10:22 AM PDT

Here's something weird.  In a recent poll, the New York Times asked people if we should shut down the prison at Guantanamo Bay, but they used slightly different wording for half the sample.  Here's the response:

People were actually more in favor of shutting down Guantanamo when told it was holding "suspected terrorists."  Granted, it was only a six point difference and might just be a statistical artifact, but it sure is the opposite of what you'd suspect.  Question: is this just some kind of strange outlier, or does it suggest that the events of the past eight years have actually made people more jaded about the supposed danger of "suspected terrorists" than they are about mere "detainees"?

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The 5% Doctrine

| Thu Jun. 18, 2009 9:20 AM PDT

One of the regulatory proposals made by Barack Obama's financial team would prevent loan originators from making crappy loans and then immediately selling them off.  Instead, in an effort to make them pay more attention to the quality of their loans, they'd have to retain at least 5% of the risk of the loans on their own books.

I was skeptical about this when I first heard about it, but that was largely because I thought the 5% requirement applied to the banks who buy and securitize the loans, not the originators themselves.  Via Tim Fernholz, though, I see that that isn't true.  Here's what the administration white paper says:

The federal banking agencies should promulgate regulations that require loan originators or sponsors to retain five percent of the credit risk of securitized exposures. The regulations should prohibit the originator from directly or indirectly hedging or otherwise transferring the risk it is required to retain under these regulations.

....The federal banking agencies should have authority to specify the permissible forms of required risk retention (for example, first loss position or pro rata vertical slice) and the minimum duration of the required risk retention....The agencies should also have authority to apply the requirements to securitization sponsors rather than loan originators in order to achieve the appropriate alignment of incentives contemplated by this proposal.

The devil is in the details (what forms of risk retention will be required?), and I'd still prefer to see a higher number than 5%.  I'm also a little taken aback by the final sentence of the proposal, which explicitly allows regulators to apply the rule to securitizers rather than loan originators.  This is the kind of thing that looks harmless during ordinary times but becomes a gigantic loophole in the hands of pliant regulators when the economic mood swings into bubble mode.

Still, this regulation, along with the proposed new Consumer Financial Protection Agency, could go a long way toward cleaning up the mortgage market if Congress puts some teeth in it.  At the very least, it's a little better than I thought it was.

Iran's Rural Voters Revisited

| Thu Jun. 18, 2009 8:22 AM PDT

Babak Rahimi, who left Iran in 1980s but visits frequently, is now a professor of Iranian and Islamic studies at UC San Diego.  Today, he echoes Eric Hooglund's skepticism that rural Iranians voted monolithically for Mahmoud Ahmadinejad:

During the first couple of weeks after I arrived, I sensed little public interest in the election. But in the weeks before the election, the country underwent a dramatic change of attitude. I watched passionate supporters of Mousavi dance, sing and chant anti-government slogans on the streets of Tehran, despite a ban on most of these activities under Islamic law. From the southern port city of Bushehr to the northern towns of Mazandaran province, an astonishing sense of enthusiasm spread throughout the country. "I have never voted before, but I will vote this time," a resident of Bushehr told me, expressing a sentiment I heard again and again.

One major claim of those in power is that although there is some dissent in the cities, the countryside voted solidly for Ahmadinejad, which accounts for his win. But in my preelection fieldwork in a number of southern provinces, I observed major tensions between provincial officials — especially the local imams — and the Ahmadinejad administration in Tehran. I saw far lower levels of support for the president than I had expected. In fact, I heard some of the most ferocious objections to the administration in the rural regions, where the dwindling economy is hitting the local populations hard. As one young Bushehr shopkeeper put it: "That idiot thinks he can buy our votes. He does not care for us."

Iran Update

| Thu Jun. 18, 2009 7:47 AM PDT

The latest from Iran:

Days after it was urged to investigate last week’s disputed presidential election, Iran’s authoritative Guardian Council said on Thursday that it had invited the three candidates challenging the official results to a meeting to discuss their grievances, state media reported.

While the exact motives, timing and conditions for the invitation from the Guardian Council remained unclear, it was the first public indication that the authorities were prepared for some form of dialogue to defuse the outrage over the election results, Iran’s worst political crisis since the 1979 revolution. But the opposition seemed likely to view it warily.

Playing for time?  A genuine offer?  A sign of weakness?  Hard to say.  But the Guardian reports that today's demonstration in Tehran drew upwards of a million people.

Best in Blog: 18 June 2009

| Thu Jun. 18, 2009 6:00 AM PDT

Today's 5 MoJo must reads:

1) Tehran's declared war on satellite dishes; this email explains the methods.

2) Seattle lost its rain; The Onion wants its headline back.

3) Cheney "lost" those Valerie Plame emails; CREW found some damning docs under a big pile of his BS.

4) Remember the good old days of Obama's presidency, back when no one booed his crazytown health care ideas? Sorry Big O.

5) Last: Hey, a contest! Looks like gay pride flag designers are finally over the rainbow. Does Shepard Fairey know?

"Intolerable"

| Wed Jun. 17, 2009 3:45 PM PDT

The Wall Street Journal reports:

A state television channel in Iran said the government summoned the Swiss ambassador, who represents U.S. interests in Iran, to complain about American interference. The two countries broke off diplomatic relations after the 1979 Islamic Revolution. An English-language state-run channel quoted the government as calling Western interference "intolerable.''

Hmmm.  Is this just another instance of their usual go-to position on everything, or does it foreshadow some kind of crackdown on "agents of foreign influence" or some such?

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Green Shoots

| Wed Jun. 17, 2009 3:12 PM PDT

Martin Wolf notes that (a) trade data suggests that the current recession is as bad as the Great Depression but (b) our response has been much better.  So are we out of the woods?

Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.

The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers — and investors — nervous.

I think he's right.  Green shoots aside, economic fundamentals continue to look pretty dismal.  And since world leaders don't seem to have the mettle to face up to this, it probably means those green shoots are going to turn brown again pretty quickly.  But I sure hope I'm wrong about that.

Quote of the Day

| Wed Jun. 17, 2009 2:14 PM PDT

From Robert Kagan, allegedly the "smart" neocon, on Barack Obama's oft-stated desire to engage with Iran diplomatically:

It would be surprising if Obama departed from this realist strategy now, and he hasn't. His extremely guarded response to the outburst of popular anger at the regime has been widely misinterpreted as reflecting concern that too overt an American embrace of the opposition will hurt it, or that he wants to avoid American "moralizing." (Obama himself claimed yesterday that he didn't want the United States to appear to be "meddling.")

But Obama's calculations are quite different. Whatever his personal sympathies may be, if he is intent on sticking to his original strategy, then he can have no interest in helping the opposition. His strategy toward Iran places him objectively on the side of the government's efforts to return to normalcy as quickly as possible, not in league with the opposition's efforts to prolong the crisis.

What a douchebag.  These guys really have no shame at all.

Obama's Weak Tea

| Wed Jun. 17, 2009 11:01 AM PDT

Matt Yglesias argues that the Obama administration has done the right thing by proposing that increased systemic risk authority be given to the Fed, which is insulated from the blowing of the political winds.  But I think this is backward.  If you're going to create some kind of systemic risk regulator at all — about which I'm sort of agnostic in the first place — you want to give the authority to an agency that's institutionally dedicated to reducing risk and considers it a primary task.  That ain't the Fed.  It's just going to get buried in the bureaucracy and forgotten there.

Matt also points to a couple of things Obama got right in his new financial regulation proposal:

Their regulatory package is reasonably strong on two ideas that I think could work. On the one hand, they have this consumer protection business.....It [] continues to be somewhat unclear exactly how much of the bad lending activity was truly fraudulent, but it’s at least possible that stronger consumer protections will help keep things under control. Last and most important of all, I think, is the idea of creating a clear legal process for the “resolution” of large, complicated financial firms. This is the one aspect of the crisis where I think you really can say that policymakers did want to do something different and better than what they did (ad hoc bailouts and bankrupties) and really were restrained by a lack of statutory and regulatory authority.

These are both potentially good things — assuming Congress doesn't water them down into useless swill.  But I think it's wildly unlikely that a consumer protection agency would have prevented the housing bubble.  After all, plenty of agencies knew about the fraud in the home loan market.  They just didn't do anything about it.  And the resolution authority, although it's important, only addresses what do to after a bubble has burst.  What's more important is trying to keep bubbles from inflating quite so high in the first place.

So color me still discouraged.  There's a legitimate concern that we not go crazy and overregulate the finance sector in response to the events of the past year.  But frankly, we're not within light years of that yet, and reckless overuse of leverage is still the key issue that needs to be addressed.  Obama's plan is weak on that score, and it will probably get even weaker after Dodd and Schumer and K Street are done with it.  For more on that, read George Soros's brief column in yesterday's Financial Times.  It seems on target to me.

Housekeeping News

| Wed Jun. 17, 2009 10:03 AM PDT

Quick note: I've gotten lots of email this morning asking me what happened to the Washington Monthly site.  Answer: it got hacked last night and their tech gremlins are busily rebuilding it.  With luck it should be back up sometime this afternoon.

UPDATE: They're back up now.