Kevin Drum

Trade Talk

| Thu Jan. 28, 2010 1:50 PM EST

Dan Drezner was pretty unimpressed with the tiny part of last night's State of the Union speech devoted to foreign economic policy. He deconstructs it here:

1)  "We will double our exports over the next five years..."  Well, the President said this would happen, so it must be so!!  I would humbly request that the president also decree that the pull of gravity be cut in half.  The government has an equal chance of making that happen. 

2)  "we will continue to shape a Doha trade agreement that opens global markets..."  The key word there is "shape."  I have every confidence the administration will do this, because they make this pledge in every communique they ever issue.  It's a tradition now, like playing "Hail to the Chief."  Play the music, pledge to work on Doha, and then go about your business.  

3)  "we will strengthen our trade relations in Asia and with key partners like South Korea, Panama, and Colombia."  You mean, by ratifying the three trade agreements that have already been signed and negotiated?  Oh, you don't mean that?  Well, never mind, then.

Even though last night's SOTU was obviously going to be heavily focused on domestic issues, I too was surprised by the almost perfunctory attention paid to foreign policy. But I can't say that I was surprised by the perfunctory attention paid to foreign economic policy. Dan says, "I would have liked to have seen a more robust effort to link foreign policy priorities to domestic priorities — because the two are more linked than is commonly acknowledged" — and I suppose that's true. But honestly, there's only so far the professor-in-chief can go. Obama was doing a lot of explaining already last night, and trying to explain to a weary audience why they should care about exchange rates and current account deficits just wasn't in the cards.

But I'll go further: Dan should have been pretty happy with the speech. Obama might not have done much to advance that cause of trade liberalization, but in the middle of a deep recession and following an election whose message was "Americans are hurting," there was no chance of any non-suicidal president doing that. In fact, a bit of populist protectionism would have been the obvious crowd pleaser. The fact that Obama supported trade agreements even briefly, even just rhetorically, was actually a pretty big win for free traders like Dan.

On the other hand, I too Obama's out-of-the-blue pledge to double U.S. exports over the next five years. Where did that come from? And how does he plan to do it? According to Obama, the answer is a "National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security." That line about reforming export controls received perhaps the most tepid round of applause ever in a State of the Union address, I think, as a few people tentatively started to clap and then almost instantly stopped — probably because they realized they had no idea what that meant. Me neither. Streamlining export controls is certainly a good idea, but as far as I know there's nobody who thinks this is something that's seriously dampening U.S. sales abroad.

Of course, there is a time-tested way to double U.S. exports: adopt an assertive policy of weakening the dollar. That might do it, as long as the rest of the world decided not to retaliate. But it's also vanishingly unlikely, so I really don't know what Obama has in mind. I guess we'll just have to wait and see.

Advertise on

An Afghan Awakening?

| Thu Jan. 28, 2010 1:17 PM EST

Dexter Filkins reports the beginnings of an effort to replicate the success of the Iraq's Sunni Awakening in Afghanistan:

The leaders of one of the largest Pashtun tribes in a Taliban stronghold said Wednesday that they had agreed to support the American-backed government, battle insurgents and burn down the home of any Afghan who harbored Taliban guerrillas.

....In exchange for their support, American commanders agreed to channel $1 million in development projects directly to the tribal leaders and bypass the local Afghan government, which is widely seen as corrupt....The pact appears to be the first in which an entire Pashtun tribe has declared war on Taliban insurgents.

But Filkins also warns that things could fall apart pretty easily:

But the agreement, though promising, is fragile at best. Afghan loyalties are historically fluid, and in the past the government has been unable to prevent Taliban retaliation. The agreement may also be hard to replicate, since it arose from a specific local dispute and economic tensions with the Taliban.

While the Shinwaris are now united against the Taliban, if payments from the Americans falter or animosities flare with the Afghan government, the tribe could switch back just as quickly.

Moreover, it is not clear that the elders, whatever their intentions, will be able to command the loyalties of their own members. After 30 years of incessant warfare, many of the traditional societal networks in this country have been weakened or destroyed.

The main reason the Sunni Awakening succeeded was because al-Qaeda in Iraq had become so oppressive that Sunni tribal leaders were finally willing to accept any means of fighting back against them, even if that involved American help. The Taliban hasn't yet gotten to that point throughout Afghanistan, only in a few specific areas, which makes a broader Afghan version of this strategy pretty difficult to implement. But at least this is a start.

Quotes of the Day: SOTU Reax

| Thu Jan. 28, 2010 1:23 AM EST

From Jon Chait, who is singlehandedly trying to put all of us other bloggers out of business, on the clunkiness of some of Obama's lines tonight:

When he declared, “health care experts who know our system best consider this approach a vast improvement over the status quo,” I wondered if his budget freeze had already claimed the entire White House speechwriting staff.

I would have tweeted this instead of blogging it, but it was longer than 140 characters. And this from Democracy in America:

This is a much looser SOTU than I got used to under George Bush--much more house of commons--applause is shorter, but more frequent, jeers are obvious, Mr Obama is anticipating it and working off Republican hostility like a stage comic with hecklers.

This is true, and it's something I didn't really mention in my liveblogging of the speech. Obama was dead serious most of the time, but he also seemed loose and engaging, at times even sparring good-naturedly with the Republican side of the aisle. My guess is that this is a combination that works pretty well. At the very least, he didn't seem freighted down with the burdens of office, and that's an accomplishment all on its own given the events of the past couple of weeks.

SOTU Liveblogging

| Wed Jan. 27, 2010 10:01 PM EST

The chatter on CNN is all about Obama tweaking the State of the Union address right up until the last second. This makes me nervous. He really ought to have a firmer idea of what he wants to say by now. But I suppose it really doesn't mean anything. For me, it's all about healthcare. The whole speech rises or falls on that one issue. So on with the show.

Wrapup - I'm not really much of a SOTU connoisseur, and I was focused almost completely on healthcare in this one. On that front, I'd give Obama a B-. Starting off the speech with jobs and the economy made sense, but at the very least I was hoping that the healthcare section would stand out a bit from the rest. But I don't think it did. Obama never really explained what the current bills do except in the very broadest sense, and even at that he only hit a couple of points. I'm just not sure that was enough. He also declined to say what he wanted Congress to do next. I didn't want some big wonky explanation of reconciliation and so forth, but I really wished he'd at least said something about the fact that we have a bill in place right now and then urged the House to pass that bill and the Senate to agree to changes.

Maybe that just wasn't in the cards in a speech like this. But I was still hoping for more. I wanted to hear him act like the leader of his party on healthcare, and I'm not sure he did.

As for the rest of the speech, it was generally good, but not spectacular. There was a good balance between blaming Republicans for past problems and holding out an olive branch to work together in the future, but I doubt that it will have much effect. It might have played well at home, though. I was also a little surprised that it was so focused on domestic issues. I expected that, but I didn't expect national security to be practically a toss off.

And finally, one big prop: Obama did clearly call for a repeal of the ban on gays in the military. "This year, I will work with Congress and our military to finally repeal the law that denies gay Americans the right to serve the country they love because of who they are." Good for him. That's a campaign promise that it's time to keep.

10:20 - And that's a wrap.

10:16 - Obama takes on TV pundits who "reduce serious debates into silly arguments." Nice.

10:15 - And now for the inspirational wrapup.....

10:13 - Firm declaration that he wants to repeal DADT this year. Good.

10:03 - "If the Republican leadership is going to insist that sixty votes in the Senate are required to do any business at all in this town, then the responsibility to govern is now yours as well.  Just saying no to everything may be good short-term politics, but it’s not leadership." OK, that's better.

10:01 - "Neither party should obstruct every single bill just because they can." Good line, but do listeners at home all know what he's talking about? Ditto for overuse of holds on appointments.

9:59 - Yeah, yeah, earmarks. I guess earkmark bashing polls well, but I'm pretty tired of it.

9:57 - Takes on Citizens United decision by warning about possible influence of foreign corporation. Probably a pretty effective approach.

9:55 - Spending freeze won't take effect until next year. "That's how budgeting works." Got laughs, but it wasn't supposed to be a laugh line.

9:49 - That's it for healthcare. Seemed a little bloodless to me. Didn't really explain his plan very well, and never stood up for anything more specific than "Let us find a way to come together and finish the job for the American people." I was hoping for more, but maybe I expect too much.

9:47 - After a year of healthcare horsetrading, Americans wondering "what's in it for me?" It would be great to answer this, but he doesn't, really.

9:44 - Finally, healthcare reform 40 minutes in. But it gets a big round of applause from Dems.

9:42 - "No one should go broke because they chose to go to college." I get it, but that's really a strange thing to say.

9:36 - Interesting that Obama keeps giving the House lots of props and urging the Senate to follow suit. Good strategy to show solidarity with House members who feel unappreciated?

9:35 - Nukes get a big round of applause. Ditto for offshore drilling. Something for everyone!

9:34 - Wants "real reform" of financial sector. But what is real reform? He doesn't say.

9:33 - "I do not accept second place for the United States of America." Kind of empty, but it probably works. I approve.

9:30 - Bush years were a "lost decade." Ouch.

9:29 - Obama asks Senate to pass jobs bill, but doesn't say they should pass one as big as House bill. He should have.

9:22 - Impromptu joke about lack of Republican applause for tax cuts. Good idea? I say yes! Not sure everyone at home got it, though.

9:19 - Rich Lowry on Twitter: "never mentions that the "we" addressing fincial crisis included bush admin." Well, he just did.

9:15 - Obama says we're all wondering why bad behavior on Wall Street is rewarded. He's right. So what's the answer?

9:14 - "Experts across the political spectrum warned...." How convincing is that as a marker of the depth of our recession?

9:08 - Tim Geithner seemed to be getting some extra special presidential love on the walk toward the podium.

9:05 - Waiting for Obama.....

Pre-SOTU Healthcare Roundup

| Wed Jan. 27, 2010 9:10 PM EST

As we wait for the State of the Union address to begin, what's the status of healthcare reform this particular micro-instant? Here are a few miscellaneous clues:

Nate Silver counts noses in the House and concludes that all is not lost: "The math is challenging, but not impossible. Although Democrats can expect at least 7 defections among people who voted for the bill originally and possibly as many as 15-20, there are at least a dozen and possibly as many as 15-18 Democrats who could at least potentially be whipped in favor of the bill....Democrats will require both some focus and some luck. Nevertheless, the path to health care is probably still there, obscured as though it might be by the dramatics of the past eight days."

Jon Cohn senses that there's more room for compromise than it seems: "Most of the centrist senators complaining about reconciliation aren't ruling it out altogether: If you read their quotes carefully, you'll see most of them express concern but leave room to embrace reconciliation under certain conditions — if the process is "transparent," if the changes themselves are relatively narrow, and so on. It's exactly the kind of posturing you'd expect in a negotiation. The end is not here. It may not even be that near."

Chris Hayes thinks passing the Senate bill along with a reconciliation deal is hard but doable: "After spending much of yesterday talking to folks on capitol hill, it's clear there is increasingly consensus on a path forward....This does not mean, by any earthly means, this is a done deal....But there's a very doable path forward, and there are almost certainly the votes to get it done. It really is a question of political will and pressure at this point. That may not be very comforting given the lack of leadership demonstrated over the last two weeks, but it's something."

Greg Sargent reports on what kind of leadership Obama is likely to offer tonight: "White House communications director  Dan Pfeiffer told Capitol Hill staffers on a private briefing call that in his speech tonight, Obama will leave no doubt that his commitment to addressing health care is as strong right now as it was in his September speech, a White House official tells me....There had been some talk that Obama might call for a scaled-down approach tonight. Others wondered whether he would give the issue short shrift. But both of those possibilities seem unlikely, given what Pfeiffer is telling Hill staff."

Hmmm.  I hope Obama offers a whole lot more than just a vague affirmation that his commitment to healthcare is as strong as ever. What I'd like to hear from him is a clear and compelling sales job for the Democratic plan and an equally clear sign of support for passing the Senate bill along with some later fixes. We know he's in favor of healthcare reform already. Now we need to know exactly what he's willing to put the full weight of his presidency behind.

Basically, I'm with Andrew Sullivan on this: "I have one simple test: if the health bill dies from neglect and irresolution, Obama is no leader. He is a follower." It's time to lead.

As usual, I'll be liveblogging the SOTU tonight. All the cool bloggers have decamped to Twitter for their real-time response, but I'm going to continue kicking it old school this year in addition to whatever quick tweets I send out. See you in an hour.

R.I.P. Cap-and-Trade

| Wed Jan. 27, 2010 8:36 PM EST

Now that Sen Lindsey Graham (R–SC) has given up on passing cap-and-trade through the Senate, it's probably truly dead. Dave Roberts surveys the wreckage:

Graham’s comments seem to point to an alternative that’s been much-discussed recently: a scaled-back cap-and-trade program that would cover only the electricity sector. That would be coupled with some version of the (pitifully weak) American Clean Energy Leadership Act passed by Bingaman’s Energy Committee last year, with additional subsidies for offshore drilling and nuclear power.

Would the resulting bill be worth a damn? Put it this way: it would be possible to craft a good package of climate and energy legislation with a cap-and-trade system covering utilities, ambitious renewable energy mandates, stringent energy efficiency regulations, and a massive round of investments in clean energy.

That’s not what will pass. My prediction is that whatever [Kerry, Graham, and Lieberman] come up with will look more or less like energy policy over the last 20 years: a hodgepodge of subsidies and tax breaks for favored industries. At this point there seems little hope left of anything better.

There’s much to discuss about the bill, the political fight that will take shape around it, and the best way forward for clean energy advocates in coming years. For now I just wanted to mark what looks to me like the final passing of the dream of an economy-wide price on carbon.

This isn't a huge shock. Cap-and-trade was always going to be even more difficult to pass than healthcare reform, and healthcare is obviously holding on by a thread right now. But it's sad news anyway — and trust me, we're not going to get a lovely and elegant carbon tax in its place. For now, carbon pricing is dead. Another victory for the Fox/Rush/Drudge axis.

Advertise on

"The fine arts of deception...."

| Wed Jan. 27, 2010 6:30 PM EST

Three years ago former CIA operative John Kiriakou famously told ABC News that al-Qaeda insider Abu Zubaydah cracked after a single 35-second waterboarding session. "From that day on, he answered every question," Kiriakou said.

We've known for quite a while that this wasn't true. Kiriakou wasn't there, Zubaydah was a prisoner of uncertain mental stability, and he was waterboarded at least 83 times. Today, though, Kiriakou fesses up officially. FP has the story:

Now comes John Kiriakou, again, with a wholly different story. On the next-to-last page of a new memoir, The Reluctant Spy: My Secret Life in the CIA's War on Terror (written with Michael Ruby), Kiriakou now rather off handedly admits that he basically made it all up.

"What I told Brian Ross in late 2007 was wrong on a couple counts," he writes. "I suggested that Abu Zubaydah had lasted only thirty or thirty-five seconds during his waterboarding before he begged his interrogators to stop; after that, I said he opened up and gave the agency actionable intelligence."

But never mind, he says now. "I wasn't there when the interrogation took place; instead, I relied on what I'd heard and read inside the agency at the time."

In a word, it was hearsay, water-cooler talk. "Now we know," Kiriakou goes on, "that Zubaydah was waterboarded eighty-three times in a single month, raising questions about how much useful information he actually supplied."

Indeed. But after his one-paragraph confession, Kiriakou adds that he didn't have any first hand knowledge of anything relating to CIA torture routines, and still doesn't. And he claims that the disinformation he helped spread was a CIA dirty trick: "In retrospect, it was a valuable lesson in how the CIA uses the fine arts of deception even among its own."

Just thought I'd post this for the record. Via Michael Scherer.

Excess Reserves

| Wed Jan. 27, 2010 5:51 PM EST

Back in 2008 the Fed got authority to start paying interest on excess bank reserves held on the Fed's books. They took advantage of this authority immediately, and as a result banks started stashing a lot of money at the Fed. This is a very useful tool: if you raise the rate then you take money out of circulation, and if you lower rates you give banks incentives to go find better things to do with it. Matt Yglesias comments:

People have wondered for a while what’s the Fed’s “exit strategy” from the current bout of credit easing, and there you have it. Raising the interest rate on excess reserves from 0.25 percent to 0.5 percent or .75 percent or 1 percent would have a contractionary impact and help curb inflation if this becomes a problem in the future. Today, however, inflation is not a problem. Very high unemployment, however, is a problem. So if raising the rate from 0.25 to .5 produces contraction, then why shouldn’t lowering it from 0.25 percent to 0 percent percent produce expansion?

Fiddling with interest rates on excess reserves is indeed a new and powerful weapon in the Fed's arsenal. At the moment, though, it's not clear that lowering rates would do any good, because it's not clear what it is that's keeping bank lending low. The most likely reason, though, is that the private sector growth projections are weak, excess capacity still abounds, the housing market continues to suck, and there's just not a lot of demand for new loans. Lowering the interest rate on excess reserves won't change this, it will just eat into bank earnings, and right now the Fed is eager for banks to recapitalize as quickly as possible. That's probably why the Fed isn't changing its excess reserve policy right now.

Needless to say, comment from informed observers is welcome on this score.

UPDATE: Another possible reason for sluggish bank lending is here. I doubt it's really a major factor, but it's certainly a fascinating example of unintended consequences.

Preying on the Weak

| Wed Jan. 27, 2010 3:48 PM EST

So how's that program going that's supposed to help homeowners who are close to defaulting on their mortgages? Well, it turns out that banks are largely reducing monthly payment levels for people who participate in the program, but at the same time they're also increasing the principal amount of the loan — despite the fact that the whole problem with these loans is that homeowners are underwater. (That is, the principal amount of the loan is higher than the value of the house, which gives homeowners a big incentive to simply default and walk away.) Mike Konczal is properly outraged:

I’ve seen a lot of bad things during this financial crisis, but this is the most disgusting thing I’ve seen so far. At a time when one out of four homeowners are underwater, banks are using a mortgage modification program to pile on more debt on these loans. They do this even when it’s well known the correlation between the level of being underwater and default.

How? From the report: “Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification.” So fees allow them to make it look like they are doing their clients a favor, while all they are really doing is running them in a big circle.

So it's the same old story: the real action for mortgage holders is to string homeowners along because they can pocket a whole bunch of fat fees along the way. Sure, the poor saps will probably default in a couple of years anyway since they have an even more crushing principal burden than before, but in the meantime, ka-ching! More from Mike in a followup post:

So I’ll ask the obvious question. Is the current system predatory?....Within 1 year almost 45% of modified loans become “delinquent.” 7-9% reach 60-day delinquency within just the first three months after modification, which for all intents means the borrower didn’t make the first post modification payment.

....So we have a financial technique offered to consumers that (a) piles on principal unexpectedly through hidden fees and surcharges and (b) has a reasonable expectation that the consumer won’t be able to make the payments. That doesn’t sound good, does it? Lawyers in the audience, would you consider this predatory? How do those arguments proceed?

(Or, more pithily via Twitter: "I expected the mods to be ineffectual, but not that they'd bundle an extra layer of sociopathic financial engineer with it.") As it happens, the simple answer to this problem was addressed last year in a bill that would have forced mortgage holders to accept principal reductions imposed by bankruptcy judges. But the finance lobby crushed that effort. Stephen Labaton of the New York Times told the story in a piece that deserved more attention than it got:

The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.

....Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the “cramdown” provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims.

The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001.

But an industry strategy of dividing the Democrats had the most success.

One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help.

Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had “not been very receptive to some of our concerns. But this time she could not have been more cordial,” even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.

Etc. Not only did the banks utterly defeat the cramdown proposal, they actually managed to add billions of dollars in extra bailout money for themselves at the same time. Read the whole thing for the entire gruesome story. I should note that I relied heavily on Labaton's reporting for the finance lobby piece I wrote in the current issue of the magazine. If we'd had a couple dozen more like him, the public would have a much better idea of what happened last year than it does.

The Mood in Davos

| Wed Jan. 27, 2010 2:41 PM EST

So what's the mood in Davos this year? Who knows. But Felix Salmon is there, and his mood is distinctly sour:

I'm [] siding with the pessimists like Nouriel Roubini and Martin Wolf. They're both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That's something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

....My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There's a good chance that 2010 could be the year of walking away from underwater mortgages; there's no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there's another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn't reassure me in the slightest.

For what it's worth (and you can guess how much that is), I think I agree about Europe but I'm not quite so pessimistic about the U.S. The American economy seems unlikely to come roaring back to life this year, and a midyear dip seems at least plausible, but overall I suspect we're just going to see a long, hard slog to recovery, not a second disaster.

The wild card, though, is whether a disaster somewhere else will ripple across the globe and eventually touch off a disaster here. That's certainly possible, and it's part of the risk I think Tim Geithner took when he chose to rescue the banking system the way he did. It's left the entire system in fragile shape, which is OK if nothing terrible happens in the next couple of years and everyone has time to earn their way back to full strength. But if something terrible does happen, we're still not in very good shape to handle it. So let's hope for a lack of disasters, OK?