Kevin Drum

Income Inequality Still Rising

| Tue Sep. 29, 2009 5:48 PM EDT

The Census Bureau reported today that income inequality increased in 2008.  Megan McArdle reacts:

I'm a little surprised; the work of Piketty and Saez seems to suggest that the incomes of the wealthy are disproportionately affected by crises, because they destroy so much asset value.  This effect may show up in the 2009 numbers, when the full effect of the carnage in the markets will be seen in high-end incomes.

My guess is that the destruction of asset values disproportionately affects only the very rich.  The top 10% are mostly just like the rest of us, but with a little more money, while the top 1% are quite different, relying for a lot of their income on capital gains and bonuses tied to asset values.  (And demonstrating a lot more income volatility, too.)  When Piketty and Saez produce their numbers for 2008, I wouldn't be surprised if income inequality has increased a bit if you look at 90/10 comparisons, but decreased a bit if you look at 99/10 or 99.9/10 comparisons.

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Politics and Art

| Tue Sep. 29, 2009 5:26 PM EDT

The NEA conference call nano-scandal has probably gotten all the attention it deserves already, but Conor Friedersdorf brings up an issue I'm curious about.  Ben Davis says the whole thing was a tempest in a teapot, "essentially a pitch for artists to make glorified PSAs about volunteer work," and Conor responds:

That sounds about right to me — the call wasn’t about furthering controversial elements of President Obama’s agenda, but it was about deliberately politicizing art — that is to say, encouraging artists to advance particular public policy goals rather than enabling them to spend their time and energy creating works of truth or beauty to the best of their ability....It is that effort that I find objectionable, as should anyone who values art or the autonomy or creative people.

So if this conference call had been with, say, a bunch of educator types, urging them to promote public service among schoolkids, would that have been OK?  Or how about law enforcement groups?  Or veterans groups?

Because I don't quite see the difference.  Artists don't exist on some kind of pristine plane of their own and they don't do their work in a vacuum.  They're all part of the same culture as the rest of us, and they react to it and try to influence it just like everyone else.  In fact, artists themselves probably view their work as more explicitly political, in the broad sense of the term, than practically any group of people outside of politicians themselves and the professional pundit/lobbyist/think tank industry that hovers around them.  The whole idea of "politicizing" art is as redundant as the idea of militarizing the Pentagon.

It seems to me that trying to persuade people to promote public service is either a good idea or it's not.  If it's too heavy handed, it's not.  If there are overtones of political payoff, it's not.  If there are insinuations that people who play along will get more grant money, it's not.  But I have a hard time buying the idea that it's affected one way or another by the allegedly delicate artistic sensibilities of the people involved.

The Politics of Climate Change

| Tue Sep. 29, 2009 1:03 PM EDT

Did you see prediction guru Bruce Bueno de Mesquita on Jon Stewart last night?  He's the guy who claims that the CIA says his judgments are accurate 90% of the time.  Fellow forecasting guru Philip Tetlock describes his methodology:

Bueno de Mesquita declares that, once we have mapped the option space, we simply need to follow his four-step formula for making accurate predictions. First, get the best-possible experts to identify every individual or group with a “meaningful” interest in trying to influence the decision. Second, get the experts to estimate as accurately as possible which options each of the identified players is advocating in private — that is, what they want. Third, get experts to estimate how big an issue this is for each of the players — how motivated they are to prevail. Fourth, get experts to estimate the relative political clout or influence of each player in this issue domain.

OK then.  So what does Bueno de Mesquita think about the odds of getting any kind of serious global action on climate change?  Our own Michael Mechanic asked him:

MJ: What's the outlook for Copenhagen?

BBdM: Our analysis shows that the Copenhagen setting will be used to put together what I would describe as a feel-good agreement without teeth....The analysis shows that over the first few years there will be improvement, and then commitment will erode steadily and move away from enforcing the agreement. At the same time, technology changes will be pushing in a positive direction. The other thing this shows is that if the US were committed to a fundamental change in greenhouse gas emissions, it doesn't need Copenhagen; it doesn't need an international agreement. This could be done unilaterally. If Congress decided that it's gonna put a fixed tax on gasoline to ensure that gas doesn't fall below some optimal price, say $5 a gallon, people would change their behavior. There's nothing stopping the US from doing that.

MJ: So somebody has to commit political suicide to make this happen?

BBdM: That's probably correct. Every sensible politician will be in favor of something happening off of their watch: Yes, we will commit to reducing greenhouse gas emissions starting year X — X being the year they're no longer in office.

MJ: Was anything surprising about these results?

BBdM: What surprised me is that support built a head of steam, but it collapses quite dramatically within 5 to 10 years. I was surprised at how quickly and sharply it erodes.

Well, that sucks.  The only glimmer of good news here is that Bueno de Mesquita didn't do this analysis himself.  A bunch of his undergrad students did it.  They were "a particularly smart group of kids," he says, but still.  Undergrads have been known to be wrong before, haven't they?

Eating Your Own Dog Food

| Tue Sep. 29, 2009 12:32 PM EDT

Wall Street has a demonstrated aptitude for bundling up and securitizing pretty much anything: mortgages, credit card debt, parking meter collections, naked swaps, bundles of bundles, etc. etc.  So why not put this ability to good use as a way of motivating ratings agencies to care about the accuracy of their ratings?  A reader emails with this elegant suggestion:

Require them to sell collateralized rating obligations. The idea is that they will bundle tranches of ratings together into a form of a put. If the tranche of, say, AAA ratings fail at a rate greater than whatever the published risk of default of the class is, they will be forced to pay a contracted amount to the purchasers.

I like it!  There's no income stream associated with ratings, which is a problem, but surely one that Wall Street can solve.  Instead of paying a fee for getting their securities rated, maybe issuers should instead be required to set aside 0.1% of the income stream from each of their products to be bundled into a Ratings Backed Security.  Agencies would be allowed to sell half the RBS immediately, but would have to hold on to the other half for a set period of time related to the maturity period of the underlying securities.

Or something.  Details are left as an exercise for the reader.  But I like the out-of-the-box thinking here!

Chart of the Day

| Tue Sep. 29, 2009 11:25 AM EDT

Republicans took their best shot at sinking healthcare reform over August, but it turns out that public support for their position was sort of a like a convention bounce: sharp but short-lived.  At least, that's the takeaway from the latest Kaiser poll, which shows that support for healthcare reform has already recovered from the beating it took during the summer townhalls.  This is pretty much what I expected all along, and I wouldn't be at all surprised to see public support creep back into the low 60s if Obama and the Democrats continue to lower the temperature and work steadily to produce a solid, defensible bill with demonstrable benefits for the average consumer.  With this level of support, healthcare reform is decidedly doable.

Warning: Don't Tease the Prosecutors

| Tue Sep. 29, 2009 10:41 AM EDT

I've managed to avoid blogging about Roman Polanski before now, but I have to admit to sharing some curiosity about the timing of this whole affair.  After all, Polanski has been flitting around Europe for decades and owns a home in Switzerland.  So why did prosecutors in Los Angeles suddenly feel the need to go after him now?  The LA Times thinks it has the answer:

Sources have told The Times that Polanski's attorneys helped to provoke his arrest by complaining to an appellate court this summer that Los Angeles County prosecutors had made no real effort to capture the filmmaker in his three decades as a fugitive.

The accusation that the Los Angeles County district attorney's office was not serious about extraditing Polanski was a minor point in two lengthy July court filings by the director's attorneys.  But the charge caught the attention of prosecutors, who had made several attempts to apprehend Polanski over the years.

Lesson of the day: keep an eye on your lawyers.  Sure, they're clever, but sometimes they can be a little too clever.

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The Empire Strikes Back

| Tue Sep. 29, 2009 12:46 AM EDT

Apparently the Vatican has finally decided that the best defense is a good offense.  According to a bellicose statement issued Monday, the Catholic Church doesn't have a paedophilia problem, it has an ephebophilia problem, thankyouverymuch.  Plus this:

The statement, read out by Archbishop Silvano Tomasi, the Vatican's permanent observer to the UN, defended its record by claiming that "available research" showed that only 1.5%-5% of Catholic clergy were involved in child sex abuse.

He also quoted statistics from the Christian Scientist Monitor newspaper to show that most US churches being hit by child sex abuse allegations were Protestant and that sexual abuse within Jewish communities was common.

Only 1.5-5%!  Not bad!  And anyway, Protestants and Jews are doing it too.  So there.

Admittedly, I'm not a theological expert, but to my ears this sounds only slightly more sophisticated than something you might hear from a red-faced five-year-old.  Augustine must be spinning in his grave.

Fixing the Ratings Agencies

| Mon Sep. 28, 2009 9:03 PM EDT

Matt Yglesias comments on the packaging of crappy loans back in the heyday of the credit bubble:

The mysterious thing isn’t that people made bad loans that they were able to package and sell off, the mysterious thing is that they found buyers for the securities.

Ultimately this looks to me to go back to the ratings agencies, an issue [Barney] Frank sort of dodged. But the ratings agencies are private for-profit companies that also enjoy a kind of government-sponsored monopoly status. In theory their behavior should be subject to market discipline, but in practice it’s not. They screwed up badly. But while lots of companies have gone bankrupt and lots of people have lost their jobs, the ratings agencies are all still in business. And no new competitors are coming to the fore and there’s no real way for anyone to break into the industry.

No question about it: over the past decade ratings agencies were, at best, negligent, and at worst, perpetrators of outright fraud.  "It could be structured by cows and we would rate it" is surely one of the all-time great quotes of the bubble era.  And the fact that agencies shared their models with issuers so they'd have an easier time tweaking their products to get high ratings is prima facie evidence of corruption.  Slapping a AAA rating on every cobbled-together junkpile that slithered its way out of a Wall Street structured finance group certainly helped fuel the fantastic expansion of risky investments that all came crashing down in 2008.

Still, I have to admit that over the past year ratings agencies have moved down my personal league table of bad actors.  If you take a look at the list of possible causes for our recent financial meltdown here, I probably would have put the ratings agencies in the top five a year ago, while today I'm not sure I'd even put them in the top ten.

Partly this is because I've become more sympathetic to fundamental macroeconomic explanations for the bubble: easy money, current account imbalances, massive abuse of leverage, and huge increases in both debt and risk that were masked by ever more baroque credit derivatives.  Partly it's because widely accepted1 risk models based on CDS spreads mostly produced the same results as the ratings agencies.  Partly it's because the negligence/fraud involved in producing high ratings was pretty clearly a two-way street: buyers and sellers of structured investments were every bit as anxious to get them as the ratings agencies were to provide them.

Beyond that, I'm also a bit flummoxed about what the answer to the ratings agency problem might be.  There's probably a reasonable regulatory solution for fraud and negligence, but there seems to be wide agreement that the real problem is incentives: since issuers are the ones paying for ratings, it's inevitable that agencies are going to lean into the wind to provide ratings the issuers like.  I've read dozens of proposals for ratings agency reform, but the only one that really gets at this fundamental conflict-of-interest problem is to simply do away with them and turn debt rating into a government function.  I'm a little skeptical of that, though, since it's not at all clear to me that a government agency could hire the kind of talent it takes to keep up with Wall Street's rocket scientists.  What's more, it's not at all clear to me that anyone — Fed regulators included — would have rated SIVs much differently during the boom years than the ratings agencies did.

So....I'm not sure what the answer is.  Tighter regulation would obviously be welcome, but how do we get rid of the underlying conflict-of-interest problem?  How do we align agency incentives in favor of long-term accuracy?  How do we encourage real competition between the agencies, rather than a race to the bottom?  None of the regulatory reforms I've seen really get at this in a fundamental way.  Does that mean that a government takeover is the only real answer?  Or does it mean that there is no real answer and we've collectively decided to shrug our shoulders and allow this to happen all over again in a few years?  Somebody should ask Barney Frank.

1Whether they should have been widely accepted is a different question.  But they were.

800 Years of Financial Folly

| Mon Sep. 28, 2009 6:00 PM EDT

Carmen Reinhart and Kenneth Rogoff have done something that, apparently, no one has done before: rigorously collect data on debt and risk management (or lack thereof) over the past 800 years, rather than only since 1980.  Their conclusion: excessive debt accumulation is always and everywhere a very, very bad thing.

Also: credit booms and busts happen over and over throughout history, with only the details changing; public sector debt crises are common and devastating; banking crises hit every country, rich and poor alike; and when credit bubble pop, everything pops along with it.  And finally, a fifth lesson, as summarized by Martin Wolf:

The final lesson is that financial liberalisation and financial crises go together like a horse and carriage. It is no surprise, therefore, that the last 30 years have seen waves of financial crises, of which the latest one is merely the biggest. The current crisis is the worst since the Great Depression. Yet, argue the authors, no one should have been surprised by this outcome. The US showed all the classic symptoms of a country heading for crisis: a huge current account deficit; soaring house prices; headlong credit growth; and, let us not forget, excessively complacent regulators.

It always comes back to debt and leverage, doesn't it?  There are lots of other things to watch out for too, but the bottom line is that if you keep leverage at reasonable levels, your financial crises are likely to be manageable.  If not, not.  Tim Geithner, please take note.

Assignment Desk Watch

| Mon Sep. 28, 2009 1:07 PM EDT

If the New York Times is serious about its shiny new plan to cover the conservative noise machine more thoroughly, they better jump on this one right away.  By tomorrow it will probably be gone, yet another important story missed by the mainstream media.  Get cracking, guys.