Kevin Drum

WHAT'S THE PROBLEM?....In response to a Paul Krugman post about the Treasury wasting time implementing a capital infusion program for distressed banks, a commenter wrote:

They still don't know why banks don't trust enough to lend commercial paper.

If it's balance sheet issues then unloading toxic debit will work.

If it's a need to de-leverage then a capital infusion is required.

But if it's trust then we need regulation of and a change in management at the banks.

And if it's fear of credit default swaps, or other essentially incalculable obligations, then they need to be unwound and banned, at least the incalculable or morally hazardous ones, going forward.

My guess is that all four of these are issues, but it's the last one that keeps me up at night (metaphorically speaking, anyway). If CDS losses turn out to be the biggest problem — and potentially, at least, they seem to be responsible for far bigger losses than the underlying subprime losses themselves — then even a big capital infusion might not make much of dent in the credit crisis. But how do we find out?

And here's another thing to be curious about. When Gordon Brown announced his capital infusion plan, Britain's four biggest banks apparently took him up on his offer almost immediately. But what about America's biggest banks? Have they been putting out feelers? Burning up the phone lines begging Paulson to get off his ass and offer them a deal? Or what? And which American banks are in weak enough shape to want fresh capital at (presumably) punitive prices? All of them? A few big ones? Lots of little ones? Wait and see, I guess.

UPDATE: That should have been "Nobel prize winning economist Paul Krugman's post." Apologies for the error.

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SUNDAY BONUS CATBLOGGING.... There's too much tension and stress this weekend over our ongoing financial tsunami. What's needed is some bonus catblogging to explain in layman's terms how we got into this mess.

In today's installment, Inkblot demonstrates graphically what happened to our banking system. Like the titans of our financial industry, last night he became convinced that the answer to all his problems was increased leverage. With enough leverage, along with some positive thinking, he was sure he could fit himself into the box lying on the floor. And he almost did it. Unfortunately, he eventually found himself forced to deleverage his position, at which point the box went kablooey and he needed to be bailed out. Sort of like our banks. Lesson learned?

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SECURITY AGREEMENT UPDATE....From Juan Cole:

Al-Hayat reports in Arabic that its sources in Baghdad say that the al-Maliki government will sign off on a security agreement with the Bush administration "within days." The report says that Grand Ayatollah Ali Sistani has assured the government that he will accept the agreement if it can pass parliament. Pundits are debating how likely the measure is to get through the Iraqi legislature, with some denying it has a chance and others saying it will sail through.

Cole suggests this might be an attempt at an "October surprise," but I don't really see that. It's been in the works for months, everyone knows it's been in the works for months, and even if it passes the Iraqi parliament it's hardly election-changing news anyway. I'm surprised it's taken as long as it has, but my guess is that the delay has been of a fairly mundane variety.

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TROOPERGATE FINALE....I read most of the Branchflower report on Troopergate last night, but the MSM seemed to be doing a fine job of reporting the results all its own so I never got around to posting about it. The basic story, of course, revolves around Todd and Sarah Palin's crusade to get their ex-brother-in-law, Mike Wooten, fired from his job as a state trooper, and their efforts to get Alaska's Commissioner of Public Safety, Walt Monegan, to do the firing. Most of this story is pretty well known already. However, Time's Nathan Thornburgh points out the aspect of the report that struck me as the most remarkable:

The result is not a mortal wound to Palin....But the Branchflower report still makes for good reading, if only because it convincingly answers a question nobody had even thought to ask: Is the Palin administration shockingly amateurish? Yes, it is. Disturbingly so.

The 263 pages of the report show a co-ordinated application of pressure on Monegan so transparent and ham-handed that it was almost certain to end in public embarrassment for the governor.

....Monegan and his peers constantly warned these Palin disciples that the contact was inappropriate and probably unlawful. Still, the emails and calls continued — in at least one instance on recorded state trooper phone lines.

The state's head of personnel, Annette Kreitzer, called Monegan and had to be warned that personnel issues were confidential. The state's attorney general, Talis Colberg, called Monegan and had to be reminded that the call was putting both men in legal jeopardy, should Wooten decide to sue. The governor's chief of staff met with Monegan and had to be reminded by Monegan that, "This conversation is discoverable ... You don't want Wooten to own your house, do you?"

Monegan pointed out to a steady stream of people that (a) Wooten was protected by civil service and there was nothing more that could be done since he'd already gone through a formal disciplinary procedure, and (b) any conversation about Wooten was discoverable in court if Wooten ever got tired of being hounded and decided to file a civil suit. And yet the contacts kept coming and coming and coming — and coming and coming. And Branchflower documents them in painful detail. It's all quite remarkable.

In fact, here's the part that really puzzles me: what exactly did Todd and Sarah Palin hope to accomplish? Surely they knew perfectly well that Monegan was right: he couldn't have fired Wooten even if he wanted to. And they must also have known that even if Monegan were replaced, any replacement would quickly check into the situation and report back the same thing. Wooten had already been disciplined, and unless something new cropped up there was simply nothing that anyone could do to force him out of his job. In fact, the Palins' efforts probably made it nearly impossible even to reassign Wooten since it would so obviously have been politically motivated. It was a completely futile crusade they were on.

So what were they thinking? Or were they?

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