Saturday, September 20, 2008
Friday, September 19, 2008
But it turns out that the whole financial crisis and upcoming government intervention boils down to five easy steps.
Liberal blogger Atrios hits three of these in one sentence.
Again, the problem is that  lots of bad loans were made,  lots of people made highly leveraged investments in those bad loans, and  still more people bet on those loans by insuring them.That's exactly right.
There are two other steps as well.
 The banks and money-market funds covered their butts by beginning to shut down the economy.
 The Bush administration wants to prevent total economic collapse by buying the whole load of bad debt from everybody involved.
That's the whole story in a nutshell and readers can stop here if they like.
But, because I'm an academic, I feel an obsessive urge to explain the nutshell further.
First. The "really smart guys" at mortgage banks like IndyMac and Countrywide Financial made billions of dollars of "really dumb" sub-prime mortgage loans that large numbers of people were unlikely to pay back.
Second. The "really smart guys" then sold those loans to the Wizards of Wall Street who inflated a derivatives market with a dazzling array of financial instruments rooted in bad mortgage debt. At this point, lenders like Countrywide Financial, investment banks like Merrill Lynch, and supposedly safe money-market funds were heavily invested in the bad mortgage debt and in all the derivatives from the debt as well. So were all of the stockholders in these companies and everybody with money in the money market funds.
That's not good.
Third. Companies like AIG wrote insurance contracts for the sub-prime loans. It also appears that there was a market for the insurance contracts. AIG lost more than $100 billion over the last six months, but there might be a lot of other entities on the hook for the insurance contracts as well.
A Reality Interlude. At this point in September 2008, the first waves of sub-prime loans have gone bad (there will be more), several of the major players have collapsed under the weight of bad debt, and the spectre of bankruptcy hangs over everybody playing in the sub-prime mortgage, derivatives, and credit default swaps markets.
Here's where we move to step four.
Fourth. Financial companies started to cover their butts by bringing the economy to a halt. According to the Wall Street Journal that's what Secretary of the Treasury Henry Paulson saw on Wednesday. Worried about their obligations from the derivatives market, banks had stopped making the short-term loans that allow American companies to function on a daily basis. Money market funds were also hoarding cash to cover their butts as large numbers of people began withdrawing money from their accounts. In other words, the financial wheels were grinding to a halt.
Fifth. The Federal Government was forced to change its policy from addressing one company at a time to resolving the problems of the whole financial system. As a result, they've decided to buy up the bad debt that's hanging over the marketplace and give all the players in the financial system a new beginning. The details haven't been fleshed out yet, but the "bad debt" probably includes the sub-prime loans, the complex obligations entailed by derivatives instruments, and the bad insurance contracts.
The current price-tag being floated around is $700 billion. My own non-expert and extremely humble opinion is that we'll get off lightly if the final cost is only twice that.
As Atrios and others on the right and left point out, the banks, insurance companies, money-market funds, and other entities don't deserve the massive bailout they're getting.
What really needs to happen is that the "financial game" needs to be reformed and redefined in a much more highly regulated way.
Given that it's all about "depression prevention" in the short term, Congress would do best to build structural remedies into the short-term legislation.
Specifically, the banks, insurance companies, investment companies, and insurance companies should be forced to meet a series of conditions to be eligible to have their debt assumed by the federal government. It's especially imperative that banks resume "normal lending" for business operations and home mortgages as William Greider suggests in The Nation. That would loosen up the short-term credit crunch that was threatening the economy. There should also be a demand for tight caps on top executive salaries, bonuses, and stock options, limits on the amount of debt that can be accumulated in merger transactions, and some sort of federal oversight on risk management.
Given that the Bush administration is proposing to wipe away so much of the "debit" side of financial sector balance sheets, the players will now be operating with government money under government protection.
They should pay a high price for that.
Joey Harrington has been a media punching bag ever since he was drafted third in 2003. But Harrington never deserved the abuse. The team that originally drafted Harrington, the Detroit Lions, is the single worst organization in professional sports. Harrington has also played for Miami and Atlanta in terrible situations that were getting worse while he was there.
But as bad as things were in all three of these jobs, Harrington didn't complain, didn't whine, and didn't make himself into yet another problem for dysfunctional organizations.
I give Joey Harrington a lot of credit for that. I'm sure I wouldn't have done nearly that well myself.
Obviously, Joey Harrington is not a Tom Brady/Peyton Manning talent. But who knows. He might turn out to be a Matt Hasselback type who can be a plus for a good team.
Here's hoping that he gets the chance.
But what about the rest of the voting public?
The final answer on the effect of the Palin nomination isn't in yet, but the St. Petersburg Times in Florida finds that a panel of independent voters and some moderate Republicans are so offended by the Palin nomination that they have moved off the fence and have started supporting Obama.
Although the Palin nomination has created conservative enthusiasm for the McCain campaign, it has also created a number of problems for McCain. Perhaps the most immediate difficulty is that the "questions" surrounding Palin have put McCain on the defensive with the media. Distaste for Palin's mocking demeanor and strident social conservatism has also helped Obama's fundraising (bias alert: I sent $50 to the Obama campaign the day after Palin's acceptance speech) and probably solidified support for Obama among Democrats.
Five weeks ago, the St. Petersburg Times convened a group of Tampa Bay voters who were undecided about the presidential election. Their strong distrust of Barack Obama suggested it was a group ripe for John McCain to win over.
Not anymore. The group has swung dramatically, if unenthusiastically, toward Democrat Obama. Most of them this week cited the same reason: Sarah Palin.
"The one thing that frightens me more than anything else are the ideologues. We've seen too many," said 80-year-old Air Force veteran Donn Spegal, a lifelong Republican from St. Petersburg, who sees McCain's new running mate as the kind of "wedge issue" social conservative that has made him disenchanted with his party.
If the Palin nomination is starting to push swing voters away from McCain in important states like Florida, Palin might be the rock that gradually drags the McCain campaign under.
That's good news.
Marriage is a civil rights issue and gay activists should be complimented on the enormous progress they've made on marriage issues since the ugly gay-baiting election of 2004.
It should be emphasized that polling on an issue gay marriage probably isn't that reliable because of the volatility of the pool of those likely to vote on the issue and possibility of a "Bradley Effect" where people lie to pollsters in order to hide their prejudices.
Still, good news is good news.
But the Republicans are doomed for a long time if Obama wins Indiana. Indiana would be the last of the New England, Mid-Atlantic, and Midwestern states to go Democratic. Indiana going Democratic would have a significant symbolic resonance in that it would tend to make the Republican Party a regional party of the South and rural areas.
Sarah Palin posed herself as the candidate of small town America. It might not be that long before small towns, farm areas, and the old Confederacy might be all the America the Republicans have left.
Thursday, September 18, 2008
Moreover, McCain falling flat in his attempts to articulate a populist stand in relation to the Wall Street financial crisis. Few people believe McCain when he says that failed companies like Lehman Brothers were greedy and that he would fire the chairman of the SEC. But why does McCain have so little credibility? Much of McCain's problem is that the "McCain Maverick" brand has been tarnished with dishonesty as McCain and Palin have continued to push the false claim that Palin stopped the infamous "bridge to nowhere" project. Given the widespread belief that McCain is lying about one of his central advertising points, voters and pundits are right to doubt that he's being honest in his denunciations of Wall Street.
So, how does McCain re-establish the "Maverick" brand that would give him more credibility as he attacks "the Establishment" on economic issues?
The best thing McCain could do would be to endorse Bruce Lunsford over incumbent Republican Mitch McConnell in the Kentucky Senate race.
Endorsing Lunsford over McConnell would bring John McCain's populist slogans to life.
The McCain/Palin ticket wants to "shake things up" in Washington. Nothing would shake things up more than a Republican presidential candidate endorsing the Democratic candidate over the Senate Republican leader.
McCain wants to attack what Palin calls "the old boys network." Mitch McConnell is the hub of the old boys network in the Republican Party. In fact, McConnell has driven the driving force in the Senate Republican fundraising apparatus for years. According to the Lexington, KY Herald-Leader.
McConnell's rise to the top of Congress is testament to the power of money in modern politics. He has raised nearly $220 million over his Senate career; he spent the majority not on his own campaigns but on those of his GOP colleagues, who have rewarded him with power.John McCain should have personal knowledge of that because McConnell has usually been the most determined opponent of McCain's efforts to limit the influence of money in politics.
A leader in the field of tapping the wealthy for campaign cash, McConnell also led the opposition against efforts to rein in such donations through campaign-finance reform -- a fight that has taken him to the U.S. Supreme Court and put him toe-to-toe against another emerging Republican leader, presidential hopeful McCain.McCain also says he wants to get beyond partisan gridlock. Certainly, there's nobody who is more dedicated to Republican partisanship and Washington gridlock than Mitch McConnell. McConnell even refers to himself as "a proud guardian of gridlock." Even worse, McConnell has set new records for obstructive filibustering in the Senate since he became Republican leader.
Even better, McCain can claim that he's putting "country first" over friendship by talking about how he's endorsing McConnell's opponent despite twenty-four years of serving in the Senate with Mitch McConnell.
If McCain wants to reclaim his "inner maverick," he'll endorse Bruce Lunsford over Mitch McConnell as soon as possible.
Wednesday, September 17, 2008
Tuesday, September 16, 2008
As liberal blogger Matthew Yglesias notes, it's almost like the Bush administration has achieved "socialism in our time."
But the financial mess also leaves American economic and political elites with a significant choice--economic regulation or socialism.
If the U. S. continues down the road of laissez-faire deregulation recommended by the Republicans and the right, we'll end up with a semi-socialist economy in which the government owns the financial sector. That's because the lure of high profits will continually lead investors to assume that high-risk strategies are "sure things." In the current crisis, everybody involved thought that sub-prime mortgages were a route to big profits even though it was always highly unlikely that homeowners would pay off the mortgages. As a result, banks, mortgage lending businesses, and financial companies invested heavily in the mortgages and then packaged them as securities and sold them to other companies.
AIG's was heavily invested in all aspects of the sub-prime morgage pyramid scam, and so far, it's cost AIG more than $100 billion and taxpayers are now on the hook for $85 billion of that.
Of course, a loyal free-marketer would just say to let AIG default. But smaller banks and money-market funds are heavily invested in AIG's financial instruments. As a result, an AIG failure would destroy a significant chunk of working capital and have heavy ripple effects through the economy. Consequently, the Fed concluded that AIG was too deeply integrated into the economy as a whole to allow to fail and decided to make an $85 billion bridge loan in exchange for 79% of the company.
In other words, the laissez-faire policies of the Republican Party are a prescription for socialism. Indeed, the Bush administration took 100% of Fannie Mae and Freddie Mac.
The other route is for the federal government to more actively regulate the financial sector in a way that's generally advocated by the Democrats. Stricter forms of regulation would discourage the development of extremely risky strategies like making sub-prime loans, bundling those loans into securities and seemingly flooding the market with those securities. Thus, they would function to stabilize the financial markets. Of courese, going the regulation route would suppress short-term financial sector profit and marginally lowering short-term economic growth as a whole. But the financial sector and the economy as a whole would be more stable in the long-run.
In this sense, Democratic approaches to regulation would preserve capitalism against the massive shifts toward government ownership that result from Republican policies.
Save American capitalism, vote for Barack Obama.
Monday, September 15, 2008
Great minds think alike, but I'm a lot happier when I post on my great ideas before Yglesias.
But in fact, obsessive tanning is American to the extreme. After all, all those actors and singers don't look so bronzed because they spend a great deal of time outside.
Nothing says “just folks” working class credibility like owning your own tanning bed. My understanding is that this is fairly common among reasonably prosperous Alaskans — in the wintertime, of course, there’s very little sun. A tanning bed can help make you feel better during those long, dark months. And nothing says “I own a tanning bed” quite like walking around with a tan in the Alaskan winter.
But that’s all pretty weird. Normal Americans don’t live in Alaska, don’t experience 22 straight hours of darkness ever, and don’t own personal tanning beds. Long story short, tanning beds are about as all-American as moose stew, which is not to say not all-American at all but rather idiosyncratic elements of the culture of an odd state located northwest of Canada.
Tanning is especially American in Eastern Kentucky. Here's my crushing reply to Yglesias:
Matt really needs to get out into the country some. Tanning is ubiquitous in rural America. I live in a town of 8,000 in rural Kentucky (and yes, our mayor IS thinking about a run for the presidency in 2012) and there are tanning beds everywhere. There’s a least five or six businesses in town devoted entirely to tanning. Then, there’s the several gas stations/convenience stores which have tanning sidelines. I think there are a bunch of home tanning parlors as well.
The trick is that tanning is a business with heavy demand and low start-up costs.
The population here is 98-99% white and white men and white women both do a lot of tanning. It's not like tanning helps much in this area. With a very fair-skinned Scots-Irish population, Kentucky tanning usually creates a yellowish color. But tanning is as American in Eastern Kentucky as shooting hoops, growing marijuana, and going to church on Wednesday.
Well, maybe not as American as growing marijuana.
Sunday, September 14, 2008
That gain was almost entirely a result of his nomination of Sarah Palin for vice-president.
But the downside of the Palin nomination is also coming into focus.
The first effect is that the furor over the Palin nomination has taken the steam out of McCain's advertising. Despite being slightly behind through most of July, McCain seized the initiative through his campaign's attack ads on Barack Obama's "celebrity" status. Winning most of the battles for the short-term "media cycle," McCain could have reasonably hoped that the Palin nomination would build on that success and he would take a significant lead.
But it's not working out that way.
Investigative reports and pundit debates have focused so much on Palin that McCain's current attack ads on Obama's support for early sex education and Obama's "fading star" aren't getting any traction.
As a result, the McCain campaign has not been able to keep Obama on the defensive.
That's a problem for the McCain campaign.
Obama has tremendous charisma, more people trust the Democrats, and Obama has had success in tying McCain to the Bush presidency. It also looks like Obama is going to have a significant financial advantage over McCain. If the McCain campaign can't keep Obama on the defensive, they leave the door open for Obama's "structural" advantages to start having more of an effect on voters.
In fact, the Palin nomination has put the McCain campaign itself on the defensive. Much of what the McCain campaign has been doing over the last week is mounting a defense against charges that Palin has no foreign policy experience, knows little about domestic policy, and has used her power to pursue an ugly vendetta against a former brother-in-law. Because they've been forced to defend Palin to such an extent, the McCain campaign is now stuck in defense mode.
And as the Obama campaign could tell them, that's not a good place to be.
In fact, the defensive mode may turn out to be a dangerous place because the McCain campaign put such emphasis on Palin's opposition to the Bridge to Nowhere pork-barrel project in Alaska as a symbol of her effectiveness as a "reformer." It emerged that Palin was a strong supporter of the bridge project while she was running for governor in 2006 and only came to oppose the project after it was clear that it was doomed in Congress. As a result, the liberal blogs and the Obama campaign are beginning to use the McCain's campaign's efforts to pose Palin as a determined opponent of the bridge as a symbol of the McCain campaign's willingness to be systematically dishonest in order to get elected.
This could be dangerous to McCain. A variety of media sources are now questioning McCain's honesty about the Palin nomination and are raising issues concerning McCain's basic integrity as a public figure. This could be especially dangerous for McCain because he changed his position on a number of important issues like the Bush tax cuts and immigration in order to win the Republican nomination. If the Obama campaign and the media are able to establish McCain's flip-flopping and distorted statements concerning Sarah Palin as symbols of McCain's general dishonesty, the McCain campaign will be in for a rough ride.
Not that they don't deserve it.
But Matthew Yglesias beat me to the point.
That's the second time in two days that Yglesias has posted one of my ideas before I could.
He must be stopped.