Kevin Drum

Quote of the Day: Vampire Squid Edition

| Fri Apr. 16, 2010 1:46 PM EDT

From Goldman Sachs vice president Fabrice Tourre, on January 23, 2007, as he was in the process of putting together a CDO offering that was specifically designed to implode:

More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab[rice Tourre]...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!

Well, I guess he understands the implications now.

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Archiving Twitter

| Fri Apr. 16, 2010 1:23 PM EDT

The Library of Congress plans to begin archiving all Twitter posts. Impressive! Except, not so much:

When do you start?
The agreement has been signed, but we still have a lot of technical details to work out — how we'll technically transfer it, and when. There's a built in six-month window, so we don't have the live Twitter archive at any given time. There is a window for people if they want to delete their tweets, things like that.

There's a built-in lag?
Yes, so once the transfer is complete, if a researcher comes here, we'll let them know that it's 2006 till six months prior. And there'll be a rolling period of transfers after that.

How much will it cost?
Well, it's a gift; we didn't pay for it. But it will be the cost of storing what is, right now, around 5 terabytes, and the staff effort of maybe one full-time person over the years.

Five terabytes of storage? Seriously? That'll set you back about a thousand bucks. Make it a fancy RAID array and maybe it's a couple thousand. They needed a gift for this?

And I learned something else new: namely that (a) Twitter's archives are remarkably small, and (b) they exist. I always figured there was no good way to search Twitter because they only kept tweets for a certain length of time. But no. They've got 'em all, and the database is so small that it could be indexed in a few hours. So why is searching Twitter so hard? And will researchers really have to "come here" to search the archives? That was left unclear at the end of the interview, but it sounds like this is Twitter's call. Putting it online sure sounds like a better idea to me.

Breaking Up the Banks

| Fri Apr. 16, 2010 12:10 PM EDT

James Bullard, president St. Louis Fed, says breaking up big banks is a good idea in theory:

“If you had a clear road map, I’d be for it,” Bullard said Thursday at the Hyman P. Minsky Conference in New York. “If there was a good way to do so, if you had a clear road map about how you were going to go about it, and why you were going to break them up in this particular way.”

Matt Yglesias is "frustrated" by statements like this: "I suppose I agree with that, but 'how' is not a minor issue here. The country would really benefit from one or more of these guys — who, after all, have some real expertise and credibility in the field of bank regulation — developing some kind of more specific idea that could then be subjected to specific scrutiny and/or gain support."

I think this is unfair. If you read Bullard's remarks, he's basically saying that he's not really sure there is a practical way to do this. That's a perfectly reasonable stand to take. There are lots of things that are good in theory but hard to implement in practice, and sometimes that's the right thing to say about them.

As it happens, my primary objection to spending energy breaking up big banks is that I'm just not sure it would really fix anything. Blanche Lincoln, for example, has floated the idea of forcing big banks to spin off their derivatives trading operations. Sounds good! And from a prudential point of view, it really might be a good idea. But from the point of view of bank sector profitability and political power, I'm not sure what difference it makes. The danger of derivatives abuse would still be there and would still pose systemic danger, it would just emanate from a different source.

Still, this is quite possibly the right approach if you really do want to break up banks. Instead of placing an arbitrary cap on assets, regulate what businesses they can be it. If a single firm could only engage in (pick one) commercial banking, investment banking, trading on their own account, derivatives underwriting, insurance, or private equity, that would force a radical downsizing. Add in a requirement that capital requirements go up along with size, and individual actors even within single sectors would have a strong incentive to stay small. I don't know for sure that this would be the best approach, but it's at least feasible. And while I don't think Bullard has any obligation to flesh this out, the folks who are dedicated to breaking up the banks probably do. Not in mind-numbing detail, but at least in enough detail to explain how it would work in the real world.

In the meantime, I'd rather have ten big banks with serious leverage constraints than 50 with weak constraints, and there are plenty of good proposals for how to accomplish that. All we lack is the political will to get it done. Maybe the SEC's suit against Goldman Sachs will wake up a few people and help put a little steel in their spines.

Victimology? Seriously?

| Fri Apr. 16, 2010 11:38 AM EDT

Andrew Sullivan:

You'd have to have a heart of stone not to applaud the president's attempt to ensure that gay spouses have access to one another in hospital settings. Equally, the dynamic leaves me queasy. There is something about the well-meaning liberal mind that is often admirably eager to help the needy, but balks at offering the recipients what we really want: simple equality. The latest move — giving Obama an easy win, the gay lobby a role in mediating the transaction — perpetuates the victimology that sustains the Democrats and their interest groups.

"Well meaning liberals" have almost unanimously been fighting in favor of gay marriage for years. We aren't balking at anything. But in the meantime, surely incremental change is better than nothing? Seriously: Does Andrew really think that those of us who support progress short of complete victory are merely interested in "perpetuating the victimology that sustains the Democrats and their interest groups"? For God's sake.

SEC Sues Goldman Sachs

| Fri Apr. 16, 2010 10:30 AM EDT

This is an unusually pleasant way to start my morning:

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

....The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

Goldman claimed that the securities bundled into Abacus had been chosen by independent managers, but in fact they'd been carefully cherry picked by hedge fund manager John Paulson, who selected the crappiest mortgage bonds possible because he wanted to bet against them. Goldman apparently thought that was a fine idea, because they wanted something to bet against too. So a synthetic CDO purposely designed to do poorly seemed like a great idea.

But Goldman wasn't the only one. Hopefully this is just the first SEC suit of many.

The 4,543 Word Tax Code

| Thu Apr. 15, 2010 9:18 PM EDT

A conservative umbrella group called "Tea Party Patriots" unveiled its Contract From America today, composed of items that were the top ten vote getters from their members. Here's my favorite:

4. Enact Fundamental Tax Reform

Adopt a simple and fair single-rate tax system by scrapping the internal revenue code and replacing it with one that is no longer than 4,543 words — the length of the original Constitution. (64.90%)

I have to admit that I like the symbolism of the 4,543 word limit, but what I'd love is to see one of these geniuses actually write a modern tax code that length. And when they're done, I'd like them to build a 747 using instructions no longer than those used to build the USS Constitution.

And that's that. With this little bit of snark I've gotten through Tax Day without writing a single post about tax rates, tax shares, income tax vs. all federal taxes, who does and doesn't pay taxes, whether people know how much they pay, or anything else related to the barrage of tax nonsense that assaults us annually on this day. Can't we just celebrate the birth of Leonardo da Vinci instead?

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Birchers Yesterday, Tea Partiers Today

| Thu Apr. 15, 2010 6:37 PM EDT

I've had several conversations recently about the damage the tea party movement has done to political discourse, and I've generally taken the position that, bad as they are, we've seen it all before. Compared to the red-baiters of the 50s, the Birchers of the 60s, and the Clinton paranoids of the 90s, it's just more of the same.

But I'm not entirely sure of myself on this score. Maybe they are worse. And so I've thought, "I should call Rick Perlstein and chat with him about this. He'd know." But now I don't need to, because here he is in the New York Times today:

“When was the last time you saw such a spontaneous eruption of conservative grass-roots anger, coast to coast?” asked the professional conservative L. Brent Bozell III recently. The answer, of course, is: in 1993. And 1977. And 1961. And so on.

And so yet much of the commentariat takes Bozell at his word, reading what is happening as striking and new. I’ve studied the reactionary florescence of 1961-1962 most closely (I wrote about it in “Before the Storm”), and the parallels are uncanny.

The same “spontaneous eruption” of folks never before engaged in politics. (“I just don’t have time for anything,” a housewife told a news magazine. “I’m fighting Communism three nights a week.”) The same blithely narcissistic presumption that the vast majority of Americans (or, at least, “ordinary Americans”) must already agree with them, and incredulity that anyone might not grasp the depth of the peril....The same lunatic persecution fantasies. (In Robert Welch’s 1961 it was probable internment camps for conservatives. In Glenn Beck’s 2009 it was ... probable internment camps for conservatives.)

OK, I'm convinced. In fact, one of the most intriguing findings of the Times poll of tea partiers confirms Rick's suggestion that they're convinced that the vast majority of Americans agree with them. Take a look: a stunning 84% of tea partiers believe their views "reflect the views of most Americans." Virtually everyone else disagrees. But why shouldn't they believe that? If you watch Fox News all day and listen to Sarah Palin telling you that you're just a "common sense conservative," you'd believe it too. It's an alternate universe out there.

The GOP Dilemma

| Thu Apr. 15, 2010 2:45 PM EDT

Jon Chait points us to Politico's reporting of the great dilemma Republicans find themselves in this year:

House Minority Whip Eric Cantor wants a document, akin to Newt Gingrich’s 1994 Contract With America, that identifies specific pieces of legislation Republicans could pass if they win back the House. He thinks Republicans should “put up or shut up,” an aide close to the process said. So does Indiana Rep. Mike Pence, the House Republican Conference chairman. The party doesn’t need “sloganeering,” someone familiar with his thinking said.

....But Rep. Kevin McCarthy, the California Republican who is leading the effort to craft the document, says that including specific legislation in the contract would smack of the backroom deals the GOP accuses Democrats of making, so “you won’t see it written out.”

A backroom deal! You can't really call this Orwellian because at least Orwellianism makes a certain kind of sense. This is the kind of thing you blurt out when you can't think of anything to say but you know you have to say something.

Likewise, Steve Benen finds Sen. Scott Brown (R–Mass.) explaining that he can't support financial reform because it's "going to be an extra layer of regulation." Which is like saying that you don't want better brakes on your car because "they're going to slow me down." And when the reporter followed up to ask what he wanted fixed in the current bill, he just got completely flummoxed: "Well, what areas do you think should be fixed?" he said. "I mean, you know, tell me. And then I'll get a team and go fix it.''

Republicans must be praying that they can keep this up for the next six months. They've got a pretty good shot at it, I suppose, since people are unhappy enough about the economy that they don't really care much what the GOP is actually saying. Still, it's a risk. "Time for a change" may be one of the two all-time classic campaign slogans, but usually you need to give people at least a rough idea of what kind of change you're campaigning on. But Republicans are afraid that even a rough idea is going to expose the fundamental incoherence of their positions. It's quite a tightrope they're walking.

The Popularity of Healthcare Reform

| Thu Apr. 15, 2010 12:48 PM EDT

A lawyer friend takes a crack at explaining why the healthcare bill isn't getting more popular post-passage, as a lot of us thought it would:

I've noted alot of ground-level discussion about the tax increases in the health bill. Frankly, whenever the bill is in discussion in my professional experience, it is usually in the context of taxes — not ideologically per se, but just something our clients need to be made aware of because there are concerns of hidden liabilities (and tax lawyers could be on the hook if they fail to point them out).

So the zeitgeist seems to be that the health bill has introduced a lot of financial-related uncertainty in the near term (despite active benefits). And it's this uncertainty (whether founded or not) that people seem to be absorbing more than any messages about immediate benefits. In fact, I haven't really heard anyone talking up the benefits. Maybe they are, but the financial negatives (perceived or otherwise) take center stage right now, which I guess is to be expected given the high unemployment.

My own guess is that this is just a matter of time. Healthcare reform will, in fact, eventually get more popular, but it's going to take a while. The tea party madness needs to calm down, the tax stuff has to get sorted out, the benefits have to start kicking in, and the public has to digest everything the bill is going to do. I suspect that this will all kick in a little bit before the November elections, but not massively. Passing the healthcare bill was better for Democrats electorally than caving in and doing nothing, but in the short term the effect will be pretty small.

Cui Bono?

| Thu Apr. 15, 2010 11:15 AM EDT

Fortune magazine reports on corporate revenue:

Last year, Fortune 500 sales fell 8.7% to $9.8 trillion, the largest percentage decline since 1983.

And yet profits soared:

For 2009, the Fortune 500 lifted earnings 335%, to $391 billion, a $301 billion jump that's the second largest in the list's 56-year history....The 500's profits virtually returned to normal after years of extremes — bubbles in 2006 and 2007, collapse in 2008 — despite a feeble overall recovery that's far from normal.

So corporate profits tripled during a recession year in which sales fell 8.7%. Has that ever happened before? The key to this, of course, was layoffs: "In 2009, the Fortune 500 shed 821,000 jobs, the biggest loss in its history — almost 3.2% of its payroll." In other words, we have now been through a recession in which, essentially, nobody has really suffered except for all the workers who have been let go. Wall Street is doing great. Corporate profits are doing great. The stock market is recovering. Is it any wonder that Republicans don't really care about any further fiscal stimulus? Their constituency is doing fine, thankyouverymuch.