Kevin Drum

Credit Report

| Tue May 5, 2009 1:52 AM EDT

The latest on credit conditions:

Although credit conditions remain strained, an April survey of loan officers by the Federal Reserve found a smaller number of banks were tightening loan standards compared with a few months ago.

Glimmers of improvement were most notable in commercial lending. The Fed said 40% of the 53 domestic banks it surveyed between March 31 and April 14 said they tightened standards on commercial and industrial loans, a smaller percentage than the 65% that said in January that they tightened standards.

Other metrics apparently show the same thing: banks are still cutting back on lending, but they aren't cutting back quite as much as before.  In other words, the economy is still getting worse, but not quite as fast as it was earlier this year.  These days, that counts as good news.

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Quote of the Day - 5.4.09

| Mon May 4, 2009 7:34 PM EDT

From Paul Krugman, ruminating over the recent leaks about the results of the Treasury's stress tests:

Even Brad DeLong, who has been relatively sympathetic to the administration here, is disturbed by the idea that regulators are negotiating with the banks about the test results. Now it seems as if the report's contents may also be dictated by what, based on the response to leaks, the informed public is willing to swallow. ("Would you believe it if we say Citi is fine? OK, what if we say they need $5 billion? Not enough? How about 10?")

The source of the stress test leaks is mysterious, but it's the numbers themselves that baffle me more.  Most of the leaks, for example, suggest that Citigroup will be told it needs additional capital of $10 billion, a figure so low it would barely be worth bothering with.  Conversely, most of the numbers I've seen thrown around from independent analysts come to ten times that amount or more.  If it turns out that Citi really is short by only $10 billion, it means we can all breathe a sigh of relief and declare an end to the banking crisis.  I woldn't count on that, though.

Lovely, Lovely Pears

| Mon May 4, 2009 6:44 PM EDT

Taylor's Gold pears are back in my local supermarket!  Hooray!

The Bloated Financial Industry

| Mon May 4, 2009 6:27 PM EDT

James Surowiecki writes that the reason the financial sector has grown so spectacularly over the past couple of decades is because, compared to the boring 50s and 60s, the demand of modern businesses for capital has also grown spectacularly:

The financial sector’s most important job is channelling money from investors to businesses that need capital for worthwhile investment. But in the postwar era there wasn’t much need for this....Thomas Philippon, an economist at N.Y.U., has shown that most of the increase in the size of the financial sector [during the period 1980-1999] can be accounted for by companies’ need for new capital....Philippon suggests that, given the demands of businesses for capital, a normal financial sector would be about the size it was in 1996.

But this is only part of the story.  The need for capital may well have gone up considerably, but the combination of globalization, automation, and greater competition should also have made the finance industry far more efficient at providing it.  As Felix Salmon says:

One would hope and expect that between sell-side productivity gains and a rise in the sophistication of the buy side, any increase in America's financing needs would be met without any rise in the percentage of the economy taken up by the financial sector. That it wasn't is an indication, on its face, that the financial sector in aggregate signally failed to improve at doing its job over the post-war decades — a failure which was then underlined by the excesses of the current decade and the subsequent global economic meltdown.

Most information technology sectors — and finance is decidedly one of them — have become far more efficient over the past few decades.  They may be bigger in absolute terms, but the price per unit of whatever they're selling — MIPS, bandwidth, gigabytes, etc. — is far lower.  In the case of finance, the units they're selling are dollars of capital.  But has the per-unit cost of providing capital gone down substantially since, say, 1980?  If not, why not?

Bankers and Congress

| Mon May 4, 2009 3:02 PM EDT

The power of the financial lobby, even in the wake of an epic economic collapse fueled largely by its own excesses, never ceases to amaze.  The current front, of course, is a Senate proposal to curb credit card abuses.  Mike Lillis of the Washington Independent reports:

The proposal, sponsored by Senate Banking Committee Chairman Chris Dodd (D-Conn.), would prohibit rate hikes on existing balances, give cardholders longer notice to pay their bills, and prevent card companies from charging fees when customers pay their bills on time.

....A similar credit card reform proposal, sponsored by Rep. Carolyn Maloney (D-N.Y.), passed the House easily last week, but the Senate bill goes even further to protect card users from unexplained fees and surprise rate hikes. The question now on the minds of many anxious consumer and lending advocates is this: How strong can Senate Democrats keep those consumer protections and still have the bill pass the upper chamber?

....For consumers, there’s a great deal hinging on what credit card reform provisions the Senate can pass. The Maloney bill in the House, for example, allows card companies to hike rates on existing balances when the borrower is more than 30 days late on a payment. The Dodd bill, by contrast, prevents retroactive rate increases in all cases. An analysis conducted by The National Consumer Law Center found that roughly 10 million Americans would still be vulnerable to those retroactive hikes if Maloney’s version of the provision were adopted instead of Dodd’s.

Really, this is beyond belief.  Retroactive rate hikes on existing balances are indefensible under any circumstances.  A third grader on a playground would understand why.  Despite this, every single effort to ban the practice has failed.  Over and over and over, they've failed.  And now, even with the finance industry on its knees, hated and despised for its lavish compensation packages financed by trillions in taxpayer bailout cash, there's still some question about whether Congress can pass this no-brainer of a bill.  Instead, we might end up merely banning retroactive rate hikes for 30 days.

This practice (which goes by the charming name of "universal default") should have been banned the first time it ever reared its ugly head.  The fact that there's even a chance of it continuing to survive in any form at all after the events of the past couple of years should dispel any questions about the death grip the finance industry has on American politics.  It's the smoking gun that bankers own the country.

Healthcare in Holland

| Mon May 4, 2009 1:28 PM EDT

So what does Russell Shorto think of Dutch healthcare after spending 18 months in Amsterdam?

My nonscientific analysis — culled from my own experience and that of other expats whom I’ve badgered — translates into a clear endorsement. My friend Colin Campbell, an American writer, has been in the Netherlands for four years with his wife and their two children. “Over the course of four years, four human beings end up going to a lot of different doctors,” he said. “The amazing thing is that virtually every experience has been more pleasant than in the U.S. There you have the bureaucracy, the endless forms, the fear of malpractice suits. Here you just go in and see your doctor. It shows that it doesn’t have to be complicated. I wish every single U.S. congressman could come to Amsterdam and live here for a while and see what happens medically.”

Amen to that.  But there's also this:

One downside of a collectivist society, of which the Dutch themselves complain, is that people tend to become slaves to consensus and conformity. I asked a management consultant and a longtime American expat, Buford Alexander, former director of McKinsey & Company in the Netherlands, for his thoughts on this. “If you tell a Dutch person you’re going to raise his taxes by 500 euros and that it will go to help the poor, he’ll say O.K.,” he said. “But if you say he’s going to get a 500-euro tax cut, with the idea that he will give it to the poor, he won’t do it. The Dutch don’t do such things on their own. They believe they should be handled by the system. To an American, that’s a lack of individual initiative.”

I actually ran into that once myself.  Back in my marketing days, I was once in charge of a product launch that, among other things, included a contest for the salesperson who sold the greatest amount of our new gift to the high-tech world.  Pretty standard stuff.  So I went on the road for a couple of weeks presenting the new product to our distributors in the U.S. and Europe, and everything went basically as expected until I got to the Netherlands.  They didn't like the contest.  Why?  Because it singled out a single individual who did especially well, and this was unfair since sales was a team effort.  They wanted a contest that rewarded whichever group sold the most stuff.  And they were pretty serious about this.  They really, really didn't like the idea of a single person being held up as an individual success.

I've always remembered this as a good example of how ingrained our own cultural predilictions are.  At the time this happened I'd been dealing with European distributors and resellers for over a decade, so I was already pretty familiar with the various cultural differences in how sales teams worked.  But this one came out of nowhere.  It never occurred to me for even a second that anyone would object to a sales contest.  Why, it's as American as apple pie!  Which, it turned out, was exactly true.

On the other hand, no one else had a problem with it.  Only the Dutch.  And it still strikes me as an odd attitude.  But they run a pretty nice country over there, so I guess it works pretty well for them.

More here from Steve Aquino.

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Religious Freedom

| Mon May 4, 2009 12:47 PM EDT

Should a Baptist minister be required to marry a gay couple?  Of course not.  Should an adoption service run by the Catholic church be required to place children in gay households?  Probably not.  Andrew Sullivan asks the obvious followup:

But how far do you go? Should a Catholic caterer, for example, be able to refuse to provide food for a second marriage? My own view is: yes. But then I'm a libertarian in many ways. I see protecting religious freedom in the civil sphere as a core principle. And by exposing such religious prejudice so baldly, and allowing the market to disadvantage the bigoted, we may even help jump-start the conversations that will eventually persuade people that they're wrong.

God knows, if Andrew is OK with this, I suppose I should be.  And I think there's a strong case to be made that in practice this might not be a big deal.  After all, do same-sex couples really want to hire photographers and caterers who make it clear they loathe them?  Probably not.  But then, you might have asked the same thing 50 years ago: do Southern blacks really want to eat at lunch counters where they obviously aren't welcome?  As it turned out, yes.

This has become the latest front in the gay marriage wars, and I'd be careful about ceding too much ground here.  Laws guaranteeing religious freedom are fine as long as they cover actual religious practice.  But once they start covering bog ordinary commercial establishments that don't have even a tenuous connection to a church and want to discriminate merely because they don't like gays — well, that's a line that gets pretty hard to draw pretty fast.   What's worse, in some places it's a line that would essentially take over entire towns.  If a caterer can refuse to sell me a wedding cake just because I'm gay — despite state law that would normally outlaw such discrimination — can a landlord refuse to rent me and my newly married partner an apartment despite fair housing laws saying he has to?

I haven't thought this through in a lot of detail, but I'm uncomfortable extending these "religious freedom" exemptions beyond actual religious establishments.  I'm all for compromise that turns down the volume on the culture wars, but once these laws are in place they run the risk of cementing bigoted practices in place for years or decades longer than they'd otherwise survive.  Count me as a skeptic that, in the long run, this is workable.

Awakening Update

| Mon May 4, 2009 12:13 PM EDT

The Sunni Awakening played a major role in the reduction of violence in Iraq in 2007 and 2008, as Sunni tribes that had been fighting the government turned their attention to fighting al-Qaeda in Iraq instead.  So how's that working out?  In Anbar Province, Liz Sly of the LA Times reports that things look pretty hopeful:

"The Awakening is an economic and political entity now, and our strategy is financial and economic," said Abu Risha, who has led the Awakening since his brother's assassination in 2007....Here in Anbar province, birthplace of the Awakening movement, the Sunni Arab paramilitaries who turned their guns on fellow Sunni insurgents have become the government.

....It promises to be quite a transformation for a movement that started out in 2006 as a tribal uprising against the insurgents who had sought to impose a vicious interpretation of Islamic law on the western desert province. Photographs on Abu Risha's wall show his slain brother, Abdul-Sattar, who founded the movement, dressed in robes, slung with bullets and surrounded by Kalashnikov-wielding militiamen.

In Baghdad and Mosul, however, the London Times reports that the news is grim:

A leading member of the Political Council of Iraqi Resistance, which represents six Sunni militant groups, said: “The resistance has now returned to the field and is intensifying its attacks against the enemy. The number of coalition forces killed is on the rise.”

The increase in attacks by such groups, combined with a spate of bombings blamed on Al-Qaeda, has had a chilling effect on the streets of Iraq. More than 370 Iraqi civilians and military — and 80 Iranian pilgrims — lost their lives in April, making it the bloodiest month since last September. On Wednesday, five car bombs exploded in a crowded market in Sadr City, Baghdad, killing 51 people and injuring 76. Three US soldiers were killed on Thursday and two more yesterday when a gunman in Iraqi army uniform opened fire near Mosul.

Broadly speaking, this is the result of a missed opportunity.  The point of the surge was to provide "breathing space" for political reconciliation, but Nouri al-Maliki, for reasons that are ultimately unknowable, either couldn't or wouldn't take advantage of it.  In Anbar, the Sunni tribes acquired political power and the Awakening is still a going concern.  In Baghdad, they were shut out, and violence is on the rise.

It's not clear to me that there's anything the United States can do about this.  It's true that George Bush's open-ended commitment to Iraq probably reduced the pressure on Maliki to make concessions to the Sunnis — after all, why bother if the Americans are going to be around forever to protect you? — but aside from that Petraeus and Crocker and the rest of the Bush team worked pretty hard to press Maliki into coming up with a political settlement that was broadly agreeable to all.  He didn't.  American influence just wasn't enough to make a difference then, and it probably isn't now.  This is still, at root, a political problem, not a military one.  It's up to Maliki to solve it, not the U.S. Army.

Party Platform Follies

| Mon May 4, 2009 11:16 AM EDT

I've written before about the lunacy of the Texas GOP state platform, but Publius informs me today that it has competition: Oklahoma's may be even worse.  Entertaining details here.

Monday Morning Miscellany

| Mon May 4, 2009 1:18 AM EDT

Has Missouri passed a law that outlaws emergency contraception?  Appearances to the contrary, no.

If Goldman Sachs pays back its TARP money, can Tim Geithner put it back into the pot and give it to somebody else?  Geithner's desires to the contrary, apparently not.

Are America's banks actually well capitalized and in good shape?  The Treasury Department's stress testers seem to think so, but appearances can be deceving.  If banks are reducing their capital exposure by clamping down on credit lines even to blue chip customers, then perhaps they're not quite as healthy as they're claiming?

Finally: Are wage cuts a good way to save jobs?  Appearances to the contrary, Paul Krugman says no.