Yes, Andrew, Sarah Palin is a disaster

What am I so afraid of?

The best case scenario: The bad banks continue to be bought up, there is no run on hedge funds next Tuesday, only mid-sized European banks fail, money market funds keep on buying commercial paper, and the Fed and Treasury continue to operate on a case-by-case basis.  Since Congress doesn't have to vote for something called "a bailout," it can give Paulson and Bernanke more operational freedom than they would have otherwise had.  The American economy is in recession for two years and unemployment does not rise above eight or nine percent.

The worst case scenario: Credit markets freeze up within the next week and many businesses cannot meet their payrolls.  Margin calls cannot be met and the NYSE shuts down for a week.  Hardly anyone can get a mortgage so most home prices end up undefined rather than low.  There is an emergency de facto nationalization of banks to keep the payments system moving.  The Paulson plan is seen as a lost paradise.  There is no one to buy up the busted hedge funds, so government and the taxpayer end up holding the bag.  The quasi-nationalized banks are asked to serve political ends and it proves hard to recapitalize them in private hands.  In the very worst case scenario, the Chinese bubble bursts too.

Tyler notes "I still think some version of the best case scenario is more plausible, but I wish I could tell you I am sure."

I'm not sure I have a good p-value on the worst case scenario.  More importantly, I'm not sure how to weight risks with small probabilities but catastrophic consequences--an issue we've been struggling with in assessing climate change action, among other economic policy questions of the day.  If there's a 5% chance of the above scenario, how much should we be willing to pay to avoid that risk?

It is worth noting, in answer to the libertarians who are wary of government intervention in the economy, that if there is a serious crash, we will get even more government intervention in the economy--and intervention that is much less to our liking.  That cost has to be weighed in your assessment.  On the other side, to those who are averse to bailing out Wall Street rather than Main Street, it's worth noting that Main Street will suffer worse than Wall Street.  Because of the way that their compensation is structured, Wall Street bankers tend to do things like buy their houses for cash.

Raising Arizona

Open thread on alternate plans

Please, enough with the metaphors

1)  Markets good, government bad
2)  Markets bad, government good

The politics of the bill

Prisoner's dilemma

Dan Drezner has a great post:

There have been two problems from the beginning with the proposed rescue plan.  First, it was labeled a bailout, which is a really, really bad public opinion frame. 
(Let me add that neither presidential candidate has helped.  McCain's
interventions seem to have bolstered the House Republicans who said no;
Obama's frame of Wall Street vs. Main Street made it easy for voters to
believe that a financial meltdown would not affect them in the
slightest. 

Second, the idea of the package was to prevent a financial
mewltdown.  But here's the thing -- no one gets credit for stopping a
meltdown if it doesn't happen.  To use a security analogy,
think about what would have happened if either the Bush or Clinton
administrations had killed the leadership of Al Qaeda and the Taliban
prior to June of 2001.  Even if they had claimed that they were foiling
a terrorist plot against the United States, no one would have known
about it, and it would have been pretty easy to attack either
administration for belligerent unilateralism.  In other words, it was
only after 9/11 that the American public was ready to take the actions
that would have prevented 9/11. 

I'm wondering if ther same thing will happen now.  If the public, or
House members, sees how Wall Street is reacting to what they are doing,
they might have time to change their mind (I'm not sure how long the
vote will stay open).  Will the evidence of a meltdown be sufficient
cover for politicians to do what they have to do?  Or will the meltdown
be sufficiently melt-y to make government intervention futile by that
point? 

You might see several members who were opposed to the bailout financial rescue before they were in favor of it.

I think Aesop described the problem rather well:

Once upon a time all the Mice met together in Council, and discussed the best means of securing themselves against the attacks of the cat. After several suggestions had been debated, a Mouse of some standing and experience got up and said, "I think I have hit upon a plan which will ensure our safety in the future, provided you approve and carry it out. It is that we should fasten a bell round the neck of our enemy the cat, which will by its tinkling warn us of her approach." This proposal was warmly applauded, and it had been already decided to adopt it, when an old Mouse got upon his feet and said, "I agree with you all that the plan before us is an admirable one: but may I ask who is going to bell the cat?"

Why not nationalize, like Sweden?

The devil made me do it!

So what happens now?

Meanwhile, back in the Old Country . . .

House votes down the bailout

You are entering . . . the twilight zone

Okay . . .

Negative, ghost rider, pattern is full

Le mot juste

It's time to bomb Iran . . .

Administrative costs

Senior moments

Mid-debate mood check

Yay nuclear!

Morally bankrupt

Blown budget

Whoda thunkit?

Micromanagement

In March 2004, White House Counsel Alberto Gonzales made a now-famous late-night visit to the hospital room of Attorney General John Ashcroft, seeking to get Ashcroft to sign a certification stating that the Bush administration's warrantless wiretapping program was legal. According to people familiar with statements recently made by Gonzales to federal investigators, Gonzales is now saying that George Bush personally directed him to make that hospital visit.

The hospital visit is already central to many contemporaneous historical accounts of the Bush presidency. At the time of the visit, Ashcroft had been in intensive care for six days, was heavily medicated, and was recovering from emergency surgery to remove his gall bladder. Deputy Attorney General James B. Comey has said that he believes that Gonzales and White House Chief of Staff Andrew Card, who accompanied Gonzales to Ashcroft's hospital room, were trying to take advantage of Ashcroft's grievously ill state--pressing him to sign the certification possibly without even comprehending what he was doing--and in the process authorize a government surveillance program which both Ashcroft and the Justice Department had concluded was of questionable legality.

The Large Hadron Collider is shut down until spring

Suspended animation

The Yankees announced yesterday that they were suspending their campaign for the American League pennant due to the dire state of the economy. "This is not the time for partisan attempts to win baseball games," said Hank Steinbrenner. "I have called Commissioner Selig and suggested that the World Series be postponed or cancelled altogether until we have come up with a solution that unequivocally fixes everything."

When it was pointed out to Mr. Steinbrenner that the Yankees had already been eliminated from pennant consideration, he replied, "Yeah, so?"

Asked for a comment, team captain Derek Jeter said, "Huh?"

How much is the bailout going to cost?

How do we know something bad is going to happen?

To help or punish?

Culhane then put together a database--the first of its kind--to track who was coming in and out of the shelter system. What he discovered profoundly changed the way homelessness is understood. Homelessness doesn't have a normal distribution, it turned out. It has a power-law distribution. "We found that eighty per cent of the homeless were in and out really quickly," he said. "In Philadelphia, the most common length of time that someone is homeless is one day. And the second most common length is two days. And they never come back. Anyone who ever has to stay in a shelter involuntarily knows that all you think about is how to make sure you never come back."

The next ten per cent were what Culhane calls episodic users. They would come for three weeks at a time, and return periodically, particularly in the winter. They were quite young, and they were often heavy drug users. It was the last ten per cent--the group at the farthest edge of the curve--that interested Culhane the most. They were the chronically homeless, who lived in the shelters, sometimes for years at a time. They were older. Many were mentally ill or physically disabled, and when we think about homelessness as a social problem--the people sleeping on the sidewalk, aggressively panhandling, lying drunk in doorways, huddled on subway grates and under bridges--it's this group that we have in mind. In the early nineteen-nineties, Culhane's database suggested that New York City had a quarter of a million people who were homeless at some point in the previous half decade --which was a surprisingly high number. But only about twenty-five hundred were chronically homeless.

It turns out, furthermore, that this group costs the health-care and social-services systems far more than anyone had ever anticipated. Culhane estimates that in New York at least sixty-two million dollars was being spent annually to shelter just those twenty-five hundred hard-core homeless. "It costs twenty-four thousand dollars a year for one of these shelter beds," Culhane said. "We're talking about a cot eighteen inches away from the next cot." Boston Health Care for the Homeless Program, a leading service group for the homeless in Boston, recently tracked the medical expenses of a hundred and nineteen chronically homeless people. In the course of five years, thirty-three people died and seven more were sent to nursing homes, and the group still accounted for 18,834 emergency-room visits--at a minimum cost of a thousand dollars a visit. The University of California, San Diego Medical Center followed fifteen chronically homeless inebriates and found that over eighteen months those fifteen people were treated at the hospital's emergency room four hundred and seventeen times, and ran up bills that averaged a hundred thousand dollars each. One person--San Diego's counterpart to Murray Barr--came to the emergency room eighty-seven times.

"If it's a medical admission, it's likely to be the guys with the really complex pneumonia," James Dunford, the city of San Diego's emergency medical director and the author of the observational study, said. "They are drunk and they aspirate and get vomit in their lungs and develop a lung abscess, and they get hypothermia on top of that, because they're out in the rain. They end up in the intensive-care unit with these very complicated medical infections. These are the guys who typically get hit by cars and buses and trucks. They often have a neurosurgical catastrophe as well. So they are very prone to just falling down and cracking their head and getting a subdural hematoma, which, if not drained, could kill them, and it's the guy who falls down and hits his head who ends up costing you at least fifty thousand dollars. Meanwhile, they are going through alcoholic withdrawal and have devastating liver disease that only adds to their inability to fight infections. There is no end to the issues. We do this huge drill. We run up big lab fees, and the nurses want to quit, because they see the same guys come in over and over, and all we're doing is making them capable of walking down the block."

The homelessness problem is like the L.A.P.D.'s bad-cop problem. It's a matter of a few hard cases, and that's good news, because when a problem is that concentrated you can wrap your arms around it and think about solving it. The bad news is that those few hard cases are hard. They are falling-down drunks with liver disease and complex infections and mental illness. They need time and attention and lots of money. But enormous sums of money are already being spent on the chronically homeless, and Culhane saw that the kind of money it would take to solve the homeless problem could well be less than the kind of money it took to ignore it. Murray Barr used more health-care dollars, after all, than almost anyone in the state of Nevada. It would probably have been cheaper to give him a full-time nurse and his own apartment.

The leading exponent for the power-law theory of homelessness is Philip Mangano, who, since he was appointed by President Bush in 2002, has been the executive director of the U.S. Interagency Council on Homelessness, a group that oversees the programs of twenty federal agencies. Mangano is a slender man, with a mane of white hair and a magnetic presence, who got his start as an advocate for the homeless in Massachusetts. In the past two years, he has crisscrossed the United States, educating local mayors and city councils about the real shape of the homelessness curve. Simply running soup kitchens and shelters, he argues, allows the chronically homeless to remain chronically homeless. You build a shelter and a soup kitchen if you think that homelessness is a problem with a broad and unmanageable middle. But if it's a problem at the fringe it can be solved. So far, Mangano has convinced more than two hundred cities to radically reëvaluate their policy for dealing with the homeless.

"I was in St. Louis recently," Mangano said, back in June, when he dropped by New York on his way to Boise, Idaho. "I spoke with people doing services there. They had a very difficult group of people they couldn't reach no matter what they offered. So I said, Take some of your money and rent some apartments and go out to those people, and literally go out there with the key and say to them, 'This is the key to an apartment. If you come with me right now I am going to give it to you, and you are going to have that apartment.' And so they did. And one by one those people were coming in. Our intent is to take homeless policy from the old idea of funding programs that serve homeless people endlessly and invest in results that actually end homelessness."

Believe it or not, the Bush administration was putting a fair amount of juice into this strategy before they got distracted by the war, and I was in favor of it.

The chronically homeless are not, as fable would have it, people who have had some hard luck.  They are people who have repeatedly made bad decisions--mentally ill people who stop taking their medicine, drug addicts and drunks.  Those who have merely had a spell of bad luck get in and out of the shelter system pretty quickly.  The people on the street are people who can't stay in the shelter system because their behavior is so extreme.

For many people (including me) giving someone an apartment as a reward for refusing to deal with their drug addiction violates our inherent sense of fairness.  And for many bleeding hearts (including me) simply giving someone an apartment without forcing them to get help for their underlying conditions violates our inherent sense of mercy.  We don't want them to just have a roof over their heads; we want them to stop drinking themselves to death and/or hearing voices.

Reverse auctions

Thought for the day

McCain asks for a time out

1. It is dumb.  The world is not crying out for John McCain's exquisite financial acumen to help shepherd us through this.
2. It is politically brilliant.  John McCain gets to polish his somewhat tarnished "above politics" image.
3. Democrats who are mad are mad because it is politically brilliant, not because it is dumb.  There is, as far as I can see, no actual harm in postponing campaigning, or the debates; we can just as easily learn McCain's terrifying plans for the country next week.

The pigs line up at the trough

With Congress preoccupied with the massive, $700 billion bailout plan for the financial industry, General Motors, Ford, and Chrysler have finally secured Part One of their own federal rescue plan. A bill set to be passed by Congress and signed by President Bush as early as this weekend--separate from the controversial Wall Street bailout plan--includes $25 billion in loans for the beleaguered Detroit automakers and several of their suppliers. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small."

But please don't call it a "bailout"--Detroit is too proud for that. Exact details will come later, but the loans would probably amount to at least $5 billion for each of the Detroit 3, plus smaller amounts for suppliers. That would allow them to borrow money at interest rates as low as 4 percent--a steep discount compared with the double-digit rates they're paying now. Over several years, the automakers could save hundreds of millions in financing costs. Plus, they'll have five years before they have to start repaying the loans.

It might seem like a stealth rescue, but the plan has been in the works for at least 18 months. Approval for the loans was first included in last year's Energy Independence Act. Earlier this year, the automakers sought a first installment of loans totaling about $6 billion. But the nationwide credit crunch severely crimped their ability to borrow, and besides, next to bailouts like $200 billion for Fannie Mae and Freddie Mac, a mere $6 billion started to seem unduly modest. So Detroit raised the ante to $25 billion, the most allowed under current law.

Shame on the Bush administration for considering this.  And shame on Debbie Stabenow, though I know she's just pulling as much pork as possible for her constituents.

Yes, I favor intervention when it looks like there's a risk of a really severe recession.  But there is no such rationale here, not even arguably.  It's pure pork, with a soupcon of economic nationalism thrown in.  If the Big Three can't make autos people want to buy, then they should liquidate and open up the market to those who can.

Further signs of the apocalypse

The country's largest Chevrolet dealer just closed up.  14 locations, mostly Mid-South/Texas, Bill Heard Chevy sold TWENTY-FIVE PERCENT of all new Chevy's sold in the USA last year.

Great minds think alike

True just sending money is not incentive compatible. But there is no reason to bail out homeowners. Just intervene in any mortgage default. Seize the property and continue making the mortgage payments. In the short run rent the property back to the homeowner.

This is what I have been advocating to my colleagues. I don't know why it is not under discussion. Before going with the arbitrary implememtation that Paulson is proposing now there should be some convincing argument that it's more efficient than this alternative. It is clearly the most direct approach and therefore should be the default (so to speak.)

There are inherent issues here:  at what rate do we rent to the current occupants?  How do we make the banks pay for their folly? Also, the government is not a notoriously effective landlord.  On the other hand, it punishes the homeowners without putting them on the street, and eventually the houses will be worth something.

And it spreads . . .

American Honda (the finance arm of the car company) just issued 5 and 10 year bonds similar to Catapiller.  They are rated AA, and the offering went off at 400 over.  Things are getting ridiculous.

The bad news continues to spread

Just wanted to say that you've been doing an excellent job describing the happenings over the last few days.  In regards to the credit crunch here's another piece of evidence of how the credit markets are starting to freeze up.

http://seekingalpha.com/article/96992-caterpillar-s-troubling-bond-issue?source=yahoo

There is a new issue corporate bond today from Caterpillar (CAT) and the pricing of that issue is troublesome - quite troublesome, and reflective of the dire straits of the credit market and the dysfunction which has engulfed the corporate market.

Caterpillar announced a 5 year and a 10 year this morning. The size has yet to be determined, but it is likely to be around $500 million for each tranche

In early August Caterpillar brought a 5 year bond to market, the 4.90 of August 2013. That bond priced 175 basis points cheap to the benchmark 5 year Treasury note. With the turmoil in the credit markets the last several weeks, the issue has widened on spread and this morning it was quoted 225/ 210.

The talk on the new issue is T + 325 basis points. That is fully 100 basis points cheap to the outstanding issue and 150 basis points above where the same maturity was priced six weeks ago

This is very disturbing because Caterpillar is an industrial company, unsullied by association with the credit crunch. If it takes that much concession to sell a solid stable industrial, what might the outcome be when a large financial seeks to tap the market

Rest assured that the result will be gory.

What I think about the bailout plans

I am sure that Henry Paulson, Ben Bernanke, and Eugene Ludwig know more than I do about the current health of the banking system, the state of credit markets, and the potential risks to the economy. Note, however, that the news hour transcript also includes comments by Allan Meltzer, a historian of central banking, who argues that the financial crisis is not as bad as it is being portrayed.

But an issue about which they know less than I do is mortgage credit risk. To them, the problem of pricing mortgage assets is a detail to be worked out later, as when Ludwig sniffs that he is sure that "the plumbing can be taken care of." Well, I'm a plumber, and I don't think so. Based on my knowledge of pricing mortgage credit risk, I believe that the bailout proposal is far riskier than other alternatives.

How did we get into this mess in the first place? We got here because financial executives took on mortgage credit risk without understanding what they were doing. Some of them were new to the business, like the high-flying Wall Street firms who entered the industry during the boom. Some of them thought they were insulated from risk, because of new derivative hedging instruments. Some of the executives never belonged in the business in the first place, including Dick Syron at Freddie Mac, who in 2003 took over a firm where there was lots of knowledge of mortgage credit risk and proceeded to flout the warnings of experienced middle managers and the Chief Risk Officer about the firm's plunge into subprime lending. Congressional and Administration meddling in support of "affordable housing" played a role, and those folks are still around working on the latest legislation.

I am wearing two hats in opposition to the bailout idea. One hat is my libertarian hat, which does not like the power grab. The other hat is the applied financial economics hat, which was my career in the late 1980's and early 1990's. Speaking from the latter point of view, I have to warn that nobody involved in the bailout proposal has sufficient knowledge of mortgage credit risk. They are like Dick Syron--in over their heads without realizing it. The last thing we need in the mortgage market is another large, inexperienced player.

You can say that after the bill is enacted, the big boys will hire technical economists to deal with the plumbing. But that will be too late. Technical economists will not be able to fix a concept that has such poor risk-reward trade-offs built into it.

Why isn't our politicianz edukated?

"Part of what being a leader does is to instill confidence is to demonstrate what he or she knows what they are talking about and to communicating to people ... this is how we can fix this," Biden said. "When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed. He said, 'look, here's what happened.'"

Reverse payday

The FBI investigating major financial houses

In defense of borrowing short and lending long

Dollar obsessions

Schadenfreude

Act now before supplies run out!

Let the lawsuits begin!

Even the easy answers aren't easy

Explaining AIG

Why we need a bailout, even if not this bailout

Living on borrowed prosperity

How close was the financial system to melting down?

• Commercial paper:  unsecured debt issued by corporations, with a duration of under 270 days, which avoids certain kinds of SEC paperwork. 
  
• Repos:  aka Repurchase agreements.  Basically, the holder of a security sells that security to someone with an agreement to buy it back at a later date, usually measured in days rather than months.
• Banker's agreements:  basically, a short-term financial instrument created by a non-financial firm, but guaranteed by a bank.
• CD's:  You know what these are; you probably have one.  CD's are what paleolibertarians would like the entire banking system to look like:  you loan money at a guaranteed interest rate for a set period of time.
• Treasury bills:  Government securities.

Paul Krugman learns rule #1 of making a case

Insiders save themselves

I used to think the brain was my most important organ. But then I thought: Wait a minute, who's telling me that?  ~Emo Philips.

Every time I ponder this bailout, I come back to that quote.  Wall Street is telling us that Wall Street needs to be bailed out.  A Goldman man has run the Treasury for six of the last thirteen years.  I am sure that they think what they are doing is necessary.  But anyone who works long in any industry comes to view it as having an outsized importance in the world.  If you doubt this, spend a few moments listening to journalists prate about the sacred privileges of the press.

The problem is that they're sort of right.  There is no industry in America that does not depend upon Wall Street.  If credit seizes up and the banks fail, everyone will suffer deeply as businesses cut back for lack of capital, mortgage capital dries up, credit card rates rise and car loans become hard to get.

But that doesn't mean one has to support the current bailout--you can add me to the list of libertarians standing athwart history shouting "stop!!!"  I don't think we can punish risk taking managers and the shareholders who enabled them as thoroughly as we might like without possibly taking the rest of us down with them.  But allowing banks to selectively offload their crap on the government without so much as a rap on the knuckles for having bought the crap in the first place is taking things too far.

Of course, I'm not Hank Paulson and Ben Bernanke, and I'm not privy to their information about the markets.  What information I do have from various insiders suggests that the financial system was perilously close to simply ceasing to function on Thursday night.  So I'm loathe to opine too certainly about the necessity of bailouts.  But I'm pretty sure that we don't need to hand the bankers hundreds of billions worth of treasuries as a reward for a job well done.

Brave new world

Demon short-selling

How can short-selling destroy a good company?

The simple answer is that it can't.

First of all, short-selling can't force down your share price. Short-selling only forces down your share price if buyers don't emerge to defend your share price.

Banning short-selling cannot protect a bad stock. If nobody is willing to buy XYZ at a price higher than $.02 a share, then the price at which XYZ will trade will be $.02 a share (or lower). It doesn't matter whether you have short-sellers or not.

What drives stock prices down is the lack of people willing to buy them at the higher price. If the company has sufficient value, there will be sufficient buyers.

I think this is a tad strong.  If short-sellers flood a market, they can overwhelm the buyers, especially when you have a massive credit contraction in the markets.  Also, short-sellers are not historically known to be above spreading untrue rumors in order to drive prices down further.  Felix Salmon speculates that institutions with deep pockets and long time horizons are probably going to do very well out of the market's current problems. 

If you read the above excerpt, you will see that the selling of some traders becomes a substitute for the short selling of others.  This is a very general mechanism in financial theory, namely the ability to recreate a desired net position in a synthetic manner through other markets.

Clear as Glass (Steagall)

• It regulated interest rates, including setting a rate of zero on demand deposits.  This was rolled back decades ago, which is why you now get interest on your checking account, and banks strive to offer you an attractive interest rate rather than a free toaster when you open an account with them.
• It established the FDIC to insure bank deposits.  Last time I looked, the FDIC was still there, keeping my $7.67 safe from harm.
• It separated investment banking and commercial banking, which is why Morgan Stanley and JP Morgan are two different institutions.  This was effectively dead letter when Traveler's bought Citigroup in 1998, but Gramm-Leach-Bliley officially repealed this provision in 1999.

Given a history like this people wonder how repealing the law could have been a good thing.  But a significant academic literature has investigated these claims and rejected them.  Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates.  Randall Kroszner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks.  A powerful book by George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham.  My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor).  Finally, my own work (pdf) unearthed the real reasons for the separation in a titanic battle between the Morgans and Rockefellers.

Is McCain suffering from Alzheimers?

What the hell just happened?

Sure glad I got that MBA

• Cast a wide net.  I did both journalism and technology consulting after my management consulting firm blew up; I figured one of them would hit.  I was right.
• Try to get a job that's going somewhere.  It's better to be flexible on pay and hours than to take a job that doesn't lead anywhere you want to go.  The first job out of business school is important.
• Reassess your goals.  Did you really want to be a management consultant?  Or were you bored with your job and hoping business school would let you find your bliss?  Now's a good time to figure out if you really wanted to go into investment banking, or just couldn't think of anything better to do.
  
• Network like hell.  I sent out about 1400 resumes blind after my firm failed.  I got not one response.  All the jobs I interviewed for came from personal contacts.
• Look back to your old firm or industry.  Unless you really hated it, they'll be more willing than most to take you in.
• Cut expenses now.  Right after you lose a job is the last time you want to give up your fun--you feel entitled.  But you will regret it if you run through your savings before you find a job and have to move in with Mom and Dad.  Allow yourself exactly one feel-good treat of under $150, such as a spa day or a really epic night of drinking.  Then promise yourself something really good after you find a job.
• Find other people in the same boat.  Being unemployed in America often feels like being invisible.  Other people are made uncomfortable by it, and if it drags on, they may start to get irritated with you, as if it must be your fault. That's their own psychological protection:  they need to believe it couldn't happen to them.  Protect yourself by finding people who know what its like.  Also, those people will be amenable to hanging out on a tight budget.  PBR:  it's not just for hipsters any more.
  
• Find some way to make money.  You can't job search all the time, and it's easy to sit in your apartment getting depressed.  Even if you're walking dogs, as one friend did, it both smooths your budget and gives your life some structure.
• Don't panic.  Everyone I went to school with is gainfully employed, except for those who have chosen to stay home with children.  No one is living on cat food.  It's hard to believe it, but you will come through this, even if it takes you, as it did me, eighteen months to get back on your feet.  Believe it or not, losing that job was the best thing that ever happened to me.  More than a few of my classmates say the same.
  

Watch the budget

• McCain will probably not be able to make the Bush tax cuts permanent.  It's possible that tax revenues will recover by 2010, though frankly I think the magnitude of the cuts on Wall Street will take years for the tax base to digest.  But we won't know that until early 2011, after the tax cuts have already expired. He'll likely have to push this through with the grim memory of a plummeting 2009 revenue line fresh on everyone's minds.  But Democrats shouldn't smile too much, because this also means
  
• Barack Obama will not get his middle class tax cut.  Raising taxes on the rich will not raise all that much revenue in the next year or so.  He'll need the stable middle-class base just to sort of cover current expenses.  Plus,
  
• Barack Obama will probably have to radically trim back his spending plans.  Unlike John McCain, he can't just wait a year or so and see if Wall Street bonuses rebound.  He needs the political momentum that he will presumably derive from election to get a big package like his health care plan through. Given the budget problems, unless he's willing to spend money like  a drunken sailor, those programs will come attached to a hefty tax increase that will need to fall, at least in part, on middle-class voters.  Otherwise,
• The Democrats will have to abandon Paygo.  It's not clear how much good this will do them, however.  The price of money after the fallout settles may make this pretty unattractive--if not to Democrats, then to their constituents.
  

Money market fund or money market deposit account? The difference matters.

A money market deposit account, on the other hand, is entirely different. It is an interest-bearing bank account that is insured -- up to $100,000 per account and up to $250,000 for some retirement accounts -- by the Federal Deposit Insurance Corporation. Joint accounts are insured for $100,000 per account holder.

Putnam closes a money market fund: how worried should you be?

The Board of Trustees of the Putnam Funds announced today that it has voted to close the institutional Putnam Prime Money Market Fund, effective as of 5:00 p.m. on September 17, 2008, and distribute all fund assets. Putnam Prime Money Market Fund is offered to institutional clients with a minimum initial investment of $10 million. The Trustees' action was not related to the portfolio's credit quality, but was instead a reaction to marketwide liquidity issues. The fund, like Putnam's other money market funds, has no exposure to securities of Lehman Brothers, Washington Mutual or AIG at the parent-company level. The fund's net asset value calculated on September 16, 2008 was $1.00 per share. On September 17, the fund experienced significant redemption pressure. Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities. In the face of these challenges, the Trustees determined to close the fund to ensure equitable treatment of all fund shareholders.

This is dubious as regards Vanguard which is a nonprofit owned by the funds it manages. The only way they could bail out one of their funds would be by assessing the remaining funds and I doubt they would do that.

Why did the Fed bail out Bear?

Don't cry for me, America

One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.

That about sums it up

Obama: We're in this mess because the fundamentals are bad, and the fundamentals are bad because the Republicans have been ignoring ordinary working people and their needs. Most of what I think we should do is not particularly germane, and what is germane I don't want to explain in too much detail because I'm worried I might get it wrong. I'm sticking to my platform.

McCain: We're in this mess because a bunch of Wall Street hot shots got us into it, but they won't dare to pull that stuff when I'm in the White House, because I survived five years in a POW camp. Do I look like the kind of guy who hangs around with a bunch of Wall Street sissies who buy their shirts at Thomas Pink? Not on your tintype girlie-girl.

Shocking statistic

Today, there are 43,317 apartments where tenants (or their heirs) pay rents first frozen in 1947. There are another 1,043,677 units covered by rent stabilization. All told, about 70% of the city's rental apartments are either rent controlled or rent stabilized.

Morgan Stanley and Wachovia

Open thread on the financial crisis

A fool and his money . . .

Gallows humor

Eddy Elfenbein:

At one point today, the yield on the three-month Treasury bill (^IRX) hit 0.01%!!

One Freakin Bip!!

This means that the risk-free rate is now in direct competition with the underside of your mattress.

Palindrones

Honestly, the other guy is the worst candidate ever!

There comes a time in each election cycle when even well-meaning partisans start believing their own press releases.  The campaigns and the grassroots start looking for long past or far-off whiffs of corruption that might somehow be attached to the opposition candidate, policy positions that can be twisted into something that sounds bad, tenuous connections to controversial figures, and slips of the tongue that can be taken out of context and magnified into endorsements of rape, incest, and genocide.  If the candidate is already in office, they aver that a failure to psychically foresee some issue and act upon it were the same thing as gross malfeasance.  They claim to believe that the lies their candidate tells are true, or at least an understandable concession to an easily swayed electorate, while the lies the opposition tells clearly render him unfit for that office.  What's worse, I think they really do believe this.

We have clearly reached that point in this campaign.

I am not prepared to indict people for doing this, as it seems like a nearly universal human instinct.  But neither am I prepared to participate in it.  And I find it irritating when people who are harping on flaws in the opposition candidate that they would easily overlook in their own side demand that I join them in their fantasy world.

Tim Burke chides me for failing to understand that the scandal at the Mineral Management Service raises deep and serious questions about John McCain's qualifications for office. 

Now, as scandals go, this is actually pretty weak tea.  Regulators dating regulatees, employees accepting valuable considerations from firms up to and including Toby Keith tickets, one supervisor who may have sexually harassed two subordinates.  Some of the employees used drugs, which given my ideological bent just makes me applaud them for their rascally courage in flouting an unjust law.  It's not exactly Watergate.  It's not even on the Bush administration's Top Ten.

Nonetheless, I am more than prepared to believe that the Bush administration dropped the ball, and clearly the agency needs to be cleaned up.  Where I draw the line is when people try to claim that because John McCain sits on the Commerce Committee, he could and should have stopped this:

Wow--just the sort of thing that would have called for vigorous Senate oversight during this time. If, say, the chair of one of the committees with jurisdiction over all this didn't uncover it, then you might say that such a person would be unfit for national office. You certainly wouldn't call him a candidate for change. If he was also getting millions from energy companies, you might suspect that any claim to be a change candidate might stink like fish in a newspaper--or even look like lipstick on a pig.

And who was the chair of the Senate Commerce Committee during most of this time, which has jurisdiction over (among other things) pipelines, interstate commerce, and coastal zone management?

You peeked, didn't you?

PS Commerce obviously isn't the only committee with jurisdiction, but the MMS sells oil and gas on the open market. That's an interstate commerce issue if there ever was one. And last I checked, oil goes through pipelines.

This is nonsense on stilts.  The Mineral Management Service was, last time I looked, overseen by the Energy and Natural Resources committee.  Sure, John McCain could have, using his commerce authority, called for an investigation.  So could Barack Obama, as a member of Homeland Security and Governmental Affairs.  And why didn't Joe Biden notice?  After all, he's on the drug caucus.

Timothy Burke concedes in the comments to his post that okay, so maybe McCain doesn't actually have anything to do with the Mineral Management Service, but still, it matters, because . . . er . . . he's a Republican:

Is he taking any interest whatsoever in describing an administrative philosophy that will comprehensively break with the previous administration's policies and conduct, which WERE responsible for this scandal? No, he's not. It's not partisan bullshit to say that McCain at present gives every indication that he will govern JUST AS the people responsible for the scandal have. His vice-presidential candidate has governed in exactly that way in her limited time as an executive, using loyalty and sycophancy as her primary standards for selection of administration officials. McCain is the leader of a party that has massive numbers of these kinds of scandals to its name to show for eight years in office. It is anything but routine, banal partisanship to demand that the burden is on him to speak concretely, specifically, and clearly how he will thoroughly break with those practices on every possible level. He needs to describe how he will govern, what kinds of consultative practices he will employ, what his standards for appointment to high office are, and how or if he intends to make thorough executive oversight a part of his expectations for appointees in his administration.

Are you saying, in terms of your last point, that this specific scandal in no way reflects on the leadership of the Department of the Interior, and is in no way similar to other scandals among the Congressional Republicans or elsewhere in the Administration during the past eight years? If so, why do you think this scandal is specifically different? That is a quite specific claim that calls for specific evidence, not a generic wave-off that sometimes corruption isn't the fault of the leadership. To me, this particular scandal very much looks like a lot of the indifference to oversight practices that the present Administration has practically made an official policy commitment.

I don't even understand what most of this is supposed to mean--it reminds me of the startups I used to work for, when every time the company took another big blow, we'd be asked to sit around in a circle and brainstorm mission statements.  

He's running for president, not department chair, and I am not sure what his "consultative practices" are supposed to be, or how he should describe them.  Nor what, specifically, would constitute breaking with prior practices "on every level".  Moreover, I don't think that most people believe that the problem with the Bush administration is too little executive control of the bureaucracy.

John McCain has said, thoroughly and repeatedly, that he thinks Washington is corrupt and run by insiders, and that he wants to change that; he has made it clear that he wants to roll back many of the Bush administration's most odious practices, like its tacit support of torture.  You may not believe him when he says these things, but he has said them.  It is not reasonable to expect him to stand up and deliver a three hour address on how he plans to ensure that the employees of the Mineral Management Service do not use cocaine--other than perhaps cutting their salaries so they can't afford it.

Has Barack Obama issued a statement on how he plans to pick his advisors?  Or shake up the excessive coziness that the Democrats are already eagerly developing with the lobbying apparatus? And if he did, what would we learn from it?  It's like those questions in interviews about what your biggest weakness is--you can expect something anodyne and thoroughly, monotonously typical.

But here's the challenge that I issue to Burke, Jonathan Zasloff, the defenders of John McCain's sex-ed ad, and other partisans who purport to be thoroughly and honestly outraged by the behavior they are discussing.

As we go through the rest of this campaign, every time one of these pseudoscandals comes up, I will note the particulars.  From now on, I will watch the news cycle for the inevitable misstatements, scandals, and lies.  And you will agree that if anything similar happens on your candidate's watch, you will repudiate him.  So if there is, say, a scandal at the Department of the Interior under President Obama*, you will not only promise to vote Republican, but urge your readers in good faith to do the same.  Similarly, if John McCain calls his wife more names in public, Republicans will vote Democratic, because after all, that's what they expect voters to do over Sarah Palin and the lipstick comment.

Of course, pseudoscandals are rarely exactly equivalent, so I will put close calls up to Julian Sanchez and Jim Henley, who I think Democrats and Republicans can both agree are not on their side.

Perhaps you will say that one scandal is not enough; it is the weight of the evidence.  Fine.  We'll set up a point total of all the pseudoscandals currently outstanding; when your candidate passes that, you vote for the other side.  That is no more than you are asking swing voters do to right now.  Hell, we can double the point total, to allow for your sheer hatred of the other candidate.

If you aren't willing to take this deal, then I have a hard time taking your protestations seriously.  I don't fault partisans for doing this, because it works.  But it doesn't work on me.

*  Megan's sixth law of politics:  there is always a scandal at the Department of the Interior

What does it all mean?

Dealbreaker has the latest on AIG

Part of the deal requires that existing management be fired, according to CNBC. They'll be replaced by the Turnaround Team of Chuck Prince, Stan O'Neal, and Jimmy Cayne, who are all currently living together and can thus use the carpool lane.

Here's a brain buster for you, that I'm mostly asking of the AIG inner sanctum members joining us this evening but anyone can feel free to answer-- when they were sitting around making the decision to say "thanks but we're good" to PE, who did they think was going to come along with a more desirable alternative to the shit that's gone down tonight? Really, who or what gave them the confidence to say "we're holding out for something better," besides a severe blow to the head?

How dare the Fed buy AIG?

The Fed bails out AIG

In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for the company to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.

This is the Hail Mary Pass of the end game.  The Fed can't keep jamming bad debt into its portfolio indefinitely.

On an amusing note, this gives whole new meaning to the words "social insurance".

McCain bucks for a commission

Reserve Primary Money Fund "breaks the buck"

Hindsight regulation

So no responsibility for not recognizing the problem and not doing anythng about it for almost eight years? I'm not an expert but blaming the current meltdown entirely on ... Clinton seems a stretch to me.

• Should the Fed watch asset price bubbles?  It's obviously tempting to give a glib yes, but there are deep problems with this.  The Fed already has a lot on its plate; adding asset prices would vastly multiply the complexity.  And it's not clear we'd be happy with the results.  If the Fed is too conservative, it will tamp down growth prophylactically.  I'm not confident that regulators can correctly identify the moment that we enter an asset price bubble.  And asset price bubbles are really, really hard to pop.  I refer you to John Kenneth Galbraith's description of the government's attempts to shut down the 1929 boom.
• How should the Federal Reserve have dealt with the river of money flowing into American markets from central banks and savers abroad?  This was the primary culprit in the credit expansion, not the Fed--indeed, that's why the yield curve got so funny looking at the end.
• What standards should we use for evaluating derivatives?  Derivatives don't just create risk; they can also lower it, by allowing firms to hedge.  When Robert Shiller tells me that overall they're a good thing for the financial system, I'm inclined to listen.
• Is mark-to-market accounting a good idea?  A lot of the problem can be traced to the practice of marking all assets to market value at the end of the day.  This has advantages, in that it gives investors a better idea of the breakup value of the firm.  But it can also touch off downward spirals--they open up balance sheet holes that create ratings downgrades and force asset sales, which further depresses the value of those assets and opens up similar holes at other firms.
  

• Keep Fannie Mae and Freddie Mac out of risky mortgages, and give OFHEO some teeth. Bush and several Republicans tried, and failed, to do this.  My preferred solution, an explicit strip of the government guarantee and a supervised breakup, wouldn't even have gotten on the radar.  Fannie and Freddie were politically powerful, as were voters who wanted to buy houses.
• Regulate mortgage brokers at the federal level.  Given the way mortgage funds now flow across state lines, this made sense.  But the state governors would have screamed bloody murder.  Moreover, no one knew about the fraud when it would have helped--i.e., before most of it happened.
  
• Mandate 20% down payments.  Political suicide.  Affluent people would continue to borrow downpayments in private family loans, while the poor were shut out of the housing market.  Poor neighborhoods would have been devastated by the credit cutoff.  House prices would have dropped sharply everywhere.
  
• Change regulatory standards to take more account of small-probability, devastating systemic risk.  Nassim Taleb has been talking about this for the last few years.  But I didn't hear more than academic interest in this until mid-2007.  Most people on the Street really believed that they had gotten better at assessing credit risk.
• Unify the bank regulators, including the SEC, into one agency.  At least some of this crisis might be traced to the fact that the regional banks who originated many of the bad loans were often regulated by a different body from the investment banks who bought them.  It might have been done, I suppose.  But each of those agencies has powerful constituencies among their employees, and the firms they regulate.  Moreover, the transition process would have involved some ugly internicene warfare that probably would have eroded regulatory effectiveness in the short run.
• Mandate contingency plans for the dissolution of large firms, and other unlikely but devastating scenarios.  If people had some certainty about the likely outcome of an insolvency, the panic selling wouldn't be so rampant, and people would be more willing to loan money, albeit at a discount.  But again, I didn't hear anyone talking about this in, say, 2006.  I certainly didn't think of it.  Is it reasonable to say that this should have been utmost on the mind of Bush or his advisors, while other big priorities, like trade deals, loomed large?
• Make subprime loans illegal.  As long as most subprime borrowers are still making their payments, I can't endorse cutting them off to protect the fools.  Moreover, this would simply not have been possible, no matter who controlled congress or the presidency.  Cutting off subprime loans would have prevented more people from buying homes.  The politics of it are terrible.
• Make option ARMs or negative amortization loans illegal.  Option ARMs are debateable-they're actually useful for people who have uneven income flows, like, er, a lot of journalists.  But clearly they were abused, and negative amortization loans are nuts.  However, these exotic instruments are only a fraction of the toxic subprime loans.  They appeared mostly late in the process, when lenders were scraping the bottom of the barrel to keep the boom going.
• Change the way that these securities were accounted for.  Most risk models for ABS and MBS were focused on prepayment risk, not default risk, which was assumed to be fairly well known.  This assumes a rather stunning level of prescience on the part of regulators or legislators.
• Force banks to keep some amount, say 10% of the loans they originated.  Spain does this, and its housing market is even more bubbleicious than ours was, believe it or not.  It might have made the banks more secure.  But there are good reasons to want banks, especially small banks, to have the flexibility to match the durations of their asset portfolios to those of their liabilities.  When interest rates skyrocketed in the early eighties, banks were stuck with long-term mortgages at low rates, but forced to offer high interest rates on savings accounts in order to keep business. The result was, ultimately, the S&L crisis.  And again, while there may have been someone proposing this somewhere, I didn't see a lot of people talking about it in 2003, when it really might have helped.

• Repealing Gramm-Leach-Bliley, or at least the provisions that repealed Glass-Steagall's ban on commercial banks entering other lines of financial business.  If this were part of the problem, it would be the commercial banks, not the investment banks, that were in trouble.
• Lowering CEO pay.  Whaaaaaa?  If Dick Fuld had been paid a dollar a year, we'd be in exactly the same mess.  Probably worse, because what kind of CEO do you get for a dollar a year?
  
• Raising the Fed Funds rate  The MBS money was long money, not overnight funds.  And when a bubble is truly going, raising rates may just attract more long money, without deterring speculators who are expecting double-digit annual returns. 
  
• Requiring better disclosure of loan terms  Disclosure of loan terms is already quite exhaustive, including a term sheet right on top that provides a congressionally mandated summary.  You can't make people read things, and the extra disclosure you mandate goes into the "fine print" that people claim they can't read.  Moreover, the fundamental problem for most borrowers are things that aren't hard for buyers to understand, like "I have an adjustable rate mortgage"; "Interest rates can go up"; and "My housing payment should not be two-thirds of my gross income". 
  
• Changed the neo-liberal "culture"  The president and congress are not the parents of Wall Street, and believe me, bankers do not look towards Washington for moral guidance.  The "Miasma Theory" of political influence is the last refuge of partisans who know they are full of it.
  

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

New York, New York

If AIG fails, what happens to my policy?

Rethinking regulation

Now that's synergy

Memewatch

D'oh

Gallows humor

What should Bush have done

I disagree strongly with McCardle on this one. In the run up to being admitted as an attorney, I spent one summer at the SEC's division of Market Regulation under Donaldson. I was shocked and appalled at the excessive coddling of industry that was standard operating procedure and consequently chose not to return after law school. And as disturbing as practices were then under Chairman Donaldson, an industry insider appointed by Bush, the situation deteriorated even further after he was pushed out in favor of the ham-handed Republican ex-congressman Cox. The ideology of achieving "small government" by reducing or eliminating regulatory oversight is a pandemic throughout Washington and state government. The current meltdown is a direct consequence of the lack of oversight combined with the effect of Gramm Leach Bliley stripping all remaining profitability out of the basic business of banking, leaving only leveraged speculation as a possible source of income. Much the same can be said about lack of oversight causing the run of crude from $60 to $147 under Wendy Gramm's CFTC -- a surge inexplicable in terms of supply and demand fundamentals but entirely accounted for by the combination of 1) oil traders taking control of Cushing oil storage facilities 2) the subsequent reporting of false inventories 3) profiteering from highly leveraged positions 4) a complete lack of transparency into speculation via massive swap positions with investment banks and 5) an influx of highly leveraged momentum investors.

Of course the best part of all of this is that the cash (please recall all those budget surpluses under Clinton) that might have used to bail us out of this mess has been more than entirely squandered on or embezzled via the the occupation of Iraq. But lacking the funds to manage an orderly resolution of the mess, the entire country will suffer through a prolonged and uncertain period of reduced economic growth (or recession), currency depreciation and attendant inflation, diminished foreign investment, individual anxiety arising from lack of confidence in banks and the FDIC, and depleted international prestige. These effects aren't the consequence of "the invisible hand" they are the consequence of a philosophy of government that derives from the elegant yet fictional universes crafted by the likes of Ayn Rand, Milton Friedman, Myron Scholes, and Robert Merton rather from the reality that the rest of us live in.

I infer that you're proud of your Chicago MBA, but Megan, the paper is worth more as kindling.

This is a first class example of what I like to call "Supertwaddle":  thoroughgoing nonsense wrapped up in just enough technical knowledge to be more thoroughly, amusingly wrong than the ordinary twaddle you buy at your local drugstore or neighborhood bar.  Sadly, it often sounds very convincing to people who a) have no idea what any of the jargon means and b) badly wish to believe the twaddler.

We start by asking what beefier SEC enforcement was supposed to do to portfolios and banks that were in full legal compliance with the SEC rules until the subprime market collapsed.  Aside from standing there with their superdetective tweezers and magnifying glass in hand, clicking their tongues and saying, "That looks like it might be infected.  You should get it looked at."

As an aside, we point out that the more lightly regulated hedge fund industry is weathering this storm better than the more heavily regulated banks.

Then we move on to Gramm-Leach-Bliley, bugbear of Glass-Steagall nostalgists everywhere.  We first observe that GLB passed under the Clinton Administration.  We second note that it passed in 1999, too late to have had any effect on the stock market bubble.

Then we pass into la-la-land, where we try to figure out which of the provisions of Gramm-Leach-Bliley created any of the major contributing factors to the current crisis:

• Steadily rising prices in the housing market
• A flood of foreign capital flowing into US debt markets
• A conviction among ordinary Americans that housing purchases were an easy, and possibly even quick, way to get rich
• A 20 year government committment to ever-expanding homeownership
• A global shift towards increasingly exotic financial instruments for pricing and distributing risk
• Resistance in the Democratic controlled Senate to the Bush administration's 2003 attempt to put some teeth in OFHEO (which regulated Fannie and Freddie)
• Lunatic bankers who confused beta with alpha.

My Chicago MBA may not have taught me everything, but somewhere along the way I did learn not to opine on legal matters based on my one summer as a paralegal.

Brooksfoe, ordinarily one of my favorite commenters, admits he doesn't know enough about finance to get specific, but he's nonetheless very sure that the Bush administration could have stopped this in his tracks.  As evidence, he points out that there have been analysts urging Bush to do just that.

Okay, let's explore this.  What those people were talking about, by and large, was the easy credit provided by the central bank, over which Bush has no direct control.  During both speculative booms, there were people who thought that the markets were in a bubble, and that Greenspan/Bernanke should have acted to shut it down.  But prior to the actual crashes, those people were in a minority.  The considered opinion of Robert Shiller, probably the greatest living expert on bubbles (and a Democrat) is that any Fed or regulatory action would have had at best marginal effect on the housing bubble--or at least so he told me when I interviewed him. 

The problem is that we think we know what to do to pop bubbles.  What we know how to do is to make it very, very difficult to borrow money. (The reason I say we think we know is that when foreign capital is involved, it gets complicated--the Fed raised interest rates on margin loans in 1929, but that just attracted more lenders).  The problem is, if you do this whenever you might be in a bubble, you will throw a lot of people out of work unnecessarily.  And if you wait until it's clear you are in a bubble, you will have to raise interest rates high enough to throw really a lot of people out of work.

At that it might not have worked; there was so much long term capital flowing into the US from abroad, eager to lend to Americans, that it might have required shutting the economy down to reverse the flood.  Arguably, our budget deficits actually helped the problem by soaking up some of that excess capital.

At the Federal level, we might have forbidden securitization, or more exotic instruments.  But this wasn't even on peoples' radar before the subprime market went sour.  The bank regulators could probably have done something to tighten lending standards, but this would have amounted to saying "Don't lend money to poor people".  A Democratic congress saying "don't lend money to poor people".  

Obviously, in hindsight we wish we had done this.  And in hindsight, I wish I'd played the winners at the track last weekend.  The things that might have worked were not among the solutions that were being proposed at the time. The only thing a Democrat could obviously have done differently, other than dial the psychic friends' network for economic advice, was appointed a more hawkish Federal Reserve Chair--one who was willing to tolerate higher unemployment in return for lower inflation.  That's exactly the opposite of normal Democratic policy direction.

Democrats seem unable, or unwilling to grasp, that to the extent that this is a regulatory problem, the seeds were laid under Clinton, not Bush.  There simply haven't been any significant financial regulatory changes over the last eight years that we can point to as the culprit; nor does "stronger enforcement" work as the solution to a crisis when the companies in trouble seem to have been in full compliance with the law.

And these are the good comments.  The rest are ordinary twaddle--and not even good twaddle.  Stale twaddle that's been sitting around on the back of the shelf for six months.

The story of life

This hilariously bad 1946 Disney film titled--I'm not making this up--"The Story of Menstruation" reminds me of my mother's description of sex-ed in the 1950s.  As she came out, she turned to the girl who had been sitting next to her and said "I understand everything except one thing.  How does the sperm get to the egg?"

Anyway, hopefully this will take your mind off your market worries.  I know it did wonders for my morale.

Obama goes for the jungular

I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years - one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It's a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.

Well now, instead of prosperity trickling down, the pain has trickled up - from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.

This country can't afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market - rules that would protect American investors and consumers. And I've called for policies that grow our economy and our middle-class together. That is the change I am calling for in this campaign, and that is the change I will bring as President.

This is high-test hooey.  This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit.  (These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership.) Lehman, Bear, Merrill and so forth did not sneakily lend these people money in the hope of putting one over on the American taxpayer while ruining their shareholders and getting the senior executives fired.  They got it wrong.  Badly wrong.  So did everyone else.

What, specifically, should the Bush administration have done, Senator?  Don't tell me they should have beefed up SEC enforcement, since this is not a criminal problem (aside from minor lies by Bear execs after the damage was already done).   Perhaps he should not have reappointed Greenspan, or appointed Ben Bernanke?  Both moves were widely hailed at the time.  Moreover, to believe that a Democrat could have done better is to assert that a Democratic president would have found a Fed chair who would pay less attention to unemployment, or a bank regulator who would have tried harder to prevent low-income people from buying homes.  Where is this noble creature?  And why didn't Barack Obama push for him at the time?

Indeed, I ask the Senator to name one significant thing that Bush has done to create this crisis that couldn't also be laid at the feet of St. William of Little Rock.  If Democratic policy is so good at protecting the little guy from asset price bubbles, how come the stock market crashed in 2000?

This kind of foolish grandstanding is not the change we need.  It's just more of the same.

Lehman files for bankruptcy

Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.

Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.

At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.

At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.

In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.

"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.

As it happens, I was on a panel about new technology regulation this morning.  This crisis can be seen as a failure to adequately regulate new financial products that came out of the revolution in financial theory that took place in the late 20th century.  One of the main problems, I think, is that regulators became obsessed with certifying things as safe.  The agency was supposed to check them out, make sure they were safe, and then approve or disapprove. Thus we hoped to make life in America as safe as a whiffle ball game.

But it is not possible to make things perfectly safe, not least an enormously complicated financial system like ours.  But having declared things safe based on the verdicts of 3 government approved rating agencies, we didn't put much focus on how to wind things up if they failed.  The FDIC has a very smooth system for handling the liquidation of commercial banks, and as a result, no one panics.  We should have been thinking about something similar for investment banks.

We need to shift our focus on regulation from a fruitless search for 100% safety to accepting risk, and trying to make the markets more robust to withstand it.  The government should encourage, rather than discourage, multiple sources of information and analysis.  It should pay more attention to outlying risks.  And it should have systems in place to wind down the inevitable failures, rather than letting the outcome depend on how Hank Paulson is feeling this morning.

Heard on the street

Should the Fed start bailing out insurers?

All a-twitter about the crisis

The personal is political

Low blow

"Greenberg also crowed that she had tricked McCain into standing over a strobe light placed on the floor - turning the septuagenarian's face into a horror show of shadows.

Asking McCain to 'please come over here' for a final shot, Greenberg pretended to be using a standard modeling light.

The resulting photos depict McCain as devilish, with bulging brows and washed-out skin.

'He had no idea he was being lit from below," Greenberg said, adding that none of his entourage picked up on the light switch either. 'I guess they're not very sophisticated,' she said.

Just say no to usury laws

Ohio lawmakers sought last spring to aid borrowers like Ms. Minda by capping annual interest rates for payday lenders at 28 percent, a sharp reduction from 391 percent. But lenders are fighting back in a novel way, collecting enough signatures, once certified, to force a vote in November on a ballot measure that could overturn legislation that established the rate cap.

"You can't make a payday loan cheaper than the industry does," said Steven Schlein, a spokesman for the Washington-based Community Financial Services Association of America, which represents lenders."

Yet somehow, banks and credit cards remain in business. I wonder how?

By lending to people who are better credit risks.  If you have a credit card or a bank willing to lend you money, you don't take out a payday loan (except for an economist of my acquaintance who is researching payday loans).  The people who get them are the most financially marginal members of society--i.e., the people least likely to pay them off.

Nonprofits have tried to enter the market in order to offer the loans at lower interest rates.  People without other access to credit say they need them to cover emergencies.  What those non-profits have found is that in order to cover their default risk, and the transaction costs of manking a lot of small-denomination loans, they need to charge shockingly high interest rates--291% annual, at one non-profit covered by the New York Times.

If that's the interest rate at which payday loans break even, it's pretty obvious that capping the interest rates at 28% will put an end to the industry.  Hurrah!  Say the credit nannies.  Not so fast.  If people really need the money, and don't have anywhere else to get it, you've just put them in a nasty fix.  Ban payday loans and you'll drive them to even worse alternatives:  pawnbrokers, loan sharks, or losing their job because they can't afford to fix the car.  Loan sharks didn't used to be just for gambling debts and illegal finance; they used to be staples of poor neighborhoods.  And you can't declare bankruptcy against an illegal debt.  Especially not with your kneecaps broken.

Random Friday question

Vegetarians and their tiny little brains

It's been a long, long time

Intelligent design

Thus for someone who knows, really knows, that god(s) exists (and there are many people who claim to know that god(s) exists) then some form of creationism follows as a rational deduction from the premises.  It's no point telling these people that creationism is unscientific because given the premise that god(s) exists creationism is scientific. If god(s) exists then evolution is almost certainly false, if not in every particular then surely in the grand claims of a undesigned nature.

I agree with Philip Kitcher that the response of evolutionists to creation science and intelligent design should not be to rule them out as "not science." He argues that the objection should rather be that they are bad science, or dead science: scientific claims that have been decisively refuted by the evidence. ... However, the claim that ID is bad science or dead science may depend ... on the assumption that divine intervention in the natural order is not a serious possibility. ...

So far as I can see, the only way to make no assumptions of a religious nature would be to admit that the empirical evidence may suggest different conclusions depending on what religious belief one starts with, and that the evidence does not by itself settle which of those beliefs is correct, even though there are other religious beliefs, such as the literal truth of Genesis, that are easily refuted by the evidence. I do not see much hope that such an approach could be adopted, but it would combine intellectual responsibility with respect for the Establishment Clause. ...

I think the true position of those who would exclude intelligent design ... is that ... the very idea of design is as dead as Ptolemaic astronomy ... To exclude the possibility of divine intervention in the history of life is scientifically legitimate, and to assign it any antecedent positive probability at all is irrational. ... Most evolutionary scientists ... believe that there are no supernatural explanations, and that trying to show that they are incompatible with the evidence is a waste of time. ... They think, Anybody who is willing even to consider supernatural explanations is living in the past.

We cannot, however, make this a fundamental principle of public education. I understand the attitude that ID is just the latest manifestation of the fundamentalist threat, and that you have to stand and fight them here or you will end up having to fight for the right to teach evolution at all. However, I believe that both intellectually and constitutionally the line does not have to be drawn at this point, and that a noncommittal discussion of some of the issues would be preferable.

I don't know how willing I am to ratify the scientific assumption that the supernatural is never a possible explanation.  I am a radical skeptic; I think that the supernatural is generally a very unlikely explanation, but I can evince no proof that the laws of physics as generally observed operate always and everywhere.

Nor do I think that even Young Earth creationism can be ruled out by science, if you are willing to posit the possibility of a creator; God might have created the world looking old for His own inscrutable reasons.

But that's no good way to set curricula.  I also can't rule out the possibility that Brahma made the world out of a lotus flower at Lord Vishnu's command.  Or that Gaia and Uranus spontaneously generated the world out of the primordial chaos.  You can't teach the debate.  Once you open the door for supernatural explanations, there's no debate.  There are merely statements of faith.

Market movers

Giggle of the day

Bank of America to buy Lehman?

A forced sale of Lehman Brothers at a fire sale price appears to be the most likely option in the wake of the massive drop in Lehman's share price over the last few days, people familiar with the matter add. "The only question now is what price," says one person who has been in discussions with Lehman over possible asset sales as well as with regulators.

While the details of any proposal haven't yet been fully worked out, a bid from the BofA-led group may involve losses for holders of the debt as well as shareholders. That would be a dramatic departure from recent deals where holders of debt were saved even as shareholders suffered heavy losses.

Regulators will most probably remain on the sidelines, monitoring the situation but unwilling to offer any potential buyer the sort of guarantees that JP Morgan received in mid-March when it bought Bear Stearns.

Some thoughts:

• When it comes to the rumor mill, Felix Salmon had some very sage advice:

Today could quite possibly be the most rumorlicious in Wall Street history. Goldman's buying Lehman! No it isn't! The Fed's going to cut rates between meetings! Maybe a private-equity shop can help! Interestingly, Lehman stock has not been particularly volatile today, trading in a band between $4 and $5 all day. (OK, that's volatile on a percentage basis, but not on an absolute basis.) And the credit default swaps, too, seem to be keeping some grip on reality.

The fact is that anything could happen at this point, and the situation is very much up in the air. Lehman, with the help of the Fed, will probably muddle through today and tomorrow; I suspect that it won't exist in its present form come Monday morning. But the range of possible outcomes for shareholders and bondholders is enormous, and anybody playing in Lehman securities right now is a gambler, not an investor.

If you think you know something, you're wrong. Even Dick Fuld doesn't know what's going to happen: hell, he doesn't even know if he's going to have a job come Monday morning. Speculation and rumor can be fun, but they don't really achieve anything. So go back to your day job, safe in the knowledge that the game will have played itself out within a week, tops.

• It is best if this plays out without government intervention.  The capital markets need to convincingly demonstrate that they can handle these kinds of liquidations internally, both to shore up investor confidence, and to mitigate the moral hazard created by the Bear bailout.
• This is the first time we're hearing talk of creditors taking a haircut.  That's a pretty big step for what used to be a rock solid investment bank with a long and storied history.  I'm of two minds on this.  On the one hand, if you've got a liquidity problem, you probably don't want to make people more afraid to lend money.  On the other hand, stockholders were hardly the only ones who made foolish choices during the bubble; I don't even think they were the greater fools.  Wiping them out, while leaving the creditors whole, takes away the just and good lesson that people should now be learning about excessively loose credit standards.  Failure is nature's way of saying:  "Don't do that!"

Whalin' on Palin

In the tank for McCain, in the tank for Obama . . . what's a girl to do?

How dare I say public school teachers are just in it for the paycheck?

Should we pay teachers more?

Vouchers and education: do the kids make the school or do the schools make the kids

Vouchers: what to do about special ed?

Hypocrisy, or hyperbole?

Where I now live, I pay a water bill. In my previous home, water was covered by city taxes. It varies from place to place.

You could come up with almost any comparison you want. Almost any public service (paid for by taxes) can be supplemented with a private version (paid for by individuals). My point is that individuals who choose the private version should pay for it themselves rather than expect public support.

The public pays for roads; if you want to use a private toll road, you don't get a voucher for that.

The public pays for parks; if you want to visit a private park, you don't get a voucher for it.

The public pays for police officers; if you want private security, you don't get a voucher to pay for it.

I don't see why education should be any different. AND THIS DOESN'T MAKE ME A HYPOCRITE.

I don't think this quite works.  Parks are nice, but I don't think they're an entitlement--I could deliver a stirring paean to the joys of public parks, but a UN campaign to provide more playgrounds in the third world wouldn't move me the way that a plea for education or malaria eradication would.

Police and roads, on the other hand, generally are viewed as public goods.  (Yes, yes, anarchocapitalists--I know.  You may excuse yourself to study hall for the rest of the period with a copy of Anarchy, State and Utopia and two cans of Red Bull.)

But they are public goods that the affluent actually use.  There are no wealthy people, even ones living in gated communities, who never share highways with the hoi polloi.  No matter how wealthy you are, you still rely on the police to ensure that you don't get mugged walking into a restaurant, or smashed by a drunk driver as you motor out to the Hamptons.  That's because they are true public goods, as economists use the term:  something from which it is impossible (or in the case of public streets, impractical) to exclude others.  Once they exist, everyone, including the affluent and the powerful, benefits from them, and benefits from improving them.

On the other hand, wealthy people can and do send their kids through sixteen or so years of private education.  One can make a good argument that in the long run, education is a public good--that the network effects of a highly educated populace benefit everyone, including the affluent.  But protecting people from muggers is a tangible benefit in a way that protecting them from a 0.0001% fall in GDP thirty years hence is not.

Politically, education is less of a public good than a positive right.  (A positive right I endorse, by the way).  And that positive right is to a minimum standard of decency, which America's largest school districts are not providing.  If the government is unable to provide that service, then the poor should have the same right as the rich:  the right to look for a better option.  I find myself struggling to understand why so many people think that exercising school choice through a tax-subsidized real estate purchase is "supporting the public schools", while exercising it through a voucher is horrible and destructive.

Will it be perfect?  No it will not.  And if it does work, it will take a long time for the system to adjust to competition.  But we've been doubling down on the current system for 30 years with no result.

Unfair advantages

The hypocrisy of Democratic politicians

Scandalous!

So it turns out that there is a "culture of ethical failure" in the Interior Department's Minerals Management Service. The Inspector General's reports "portray a dysfunctional organization that has been riddled with conflicts of interest, unprofessional behavior and a free-for-all atmosphere for much of the Bush administration's watch." It's all there: sex, drugs, cash--just the sort of thing that makes a good scandal. Wow--just the sort of thing that would have called for vigorous Senate oversight during this time. If, say, the chair of one of the committees with jurisdiction over all this didn't uncover it, then you might say that such a person would be unfit for national office. You certainly wouldn't call him a candidate for change. If he was also getting millions from energy companies, you might suspect that any claim to be a change candidate might stink like fish in a newspaper--or even look like lipstick on a pig. And who was the chair of the Senate Commerce Committee during most of this time, which has jurisdiction over (among other things) pipelines, interstate commerce, and coastal zone management? You peeked, didn't you? PS Commerce obviously isn't the only committee with jurisdiction, but the MMS sells oil and gas on the open market. That's an interstate commerce issue if there ever was one. And last I checked, oil goes through pipelines.

To Lehman's Credit

As Lehman Brothers Holdings Inc. stock teetered in recent weeks, Chairman and Chief Executive Richard Fuld Jr. called Wall Street executives to make sure they were still trading with his embattled firm and offering it credit. Rumors about the firm's health kept popping up, he groused to other executives.

"I feel like I'm playing whack-a-mole every day," Mr. Fuld said, according to people familiar with the calls.

It's hard to read the article and not picture Mr. Fuld at home, hiding behind the bannister while his 8-year old talks to a debt collecter and whispering:  "Tell them I'm not home".

Lipstick on a pig

In essence we already agreed to the bail out some time ago.  Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"?  Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice.  They live in a world of secret agreements with leaders, not transparent democratic arrangements.  So when it comes to the U.S government decision, we're not just starting from scratch here.  How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?

"Are you *sure* that paper is safe enough for us to keep on buying?"

We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time.  The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy.  (In fact Paulson is in a total bind once that phone call comes in.  He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)

So should we try this: "Oh, is that what you thought?  Guaranteed?  Did we use that word? Sorry, try reading our signals better next time.  We love you.  Great job with those Olympics.  And when it comes to those Treasury Bills, we really do still mean it."

The libertarian critique of the mortgage agencies is, in my view, very much on the mark.  But still the error has been made and we must pay up.  As Steve Chapman points out, the bailout is a necessary evil, but with emphasis on the word "evil."

Hard libertarians often give short shrift to both the moral and practical consequences of just letting things fall apart with a bang.  Yes, we all concede that Social Security and Medicare are bad programs that should, at the very least, be structured very differently than they are.  But that doesn't mean we can just try shock therapy.  For one thing, a lot of old people would starve because they believed their government--a valuable object lesson in the problem with relying on government programs, to be sure, but it is perhaps a mite rough to let millions of old people die pour encourager les autres.  For another, there is no political possibility of enacting a law that causes millions of old people to starve.

Likewise, it might be fun to let the financial markets collapse catastrophically in order to teach people that they oughtn't to speculate, either on securities or government bailouts.  On the other hand, the Great Depression sort of sucked, and not just for people who took a flyer on AT&T at 87. 

Going forward, of course, we should take pains to make sure this sort of thing doesn't happen again, first among them ensuring that the shareholders and managers suffer for the mistakes made by their firms---and of course, by refusing to make those sorts of implied guarantees for ostensibly private companies.  Perhaps we should even pass a law forbidding the government to bail out insolvent banks.  But we already lost this round.

We know from Larry Bartels that inequality tends to go up under Republican presidents, and down during Democratic presidents. If Obama is elected, when can certainly expect some increase in inequality. He'll raise taxes on the wealthy, and if the Employee Free Choice Act is passed, wages in the middle should go up some. Tack on the traditional Democratic focus on unemployment as opposed to inflation, along with the possibility of minimum wage increases, and some decrease in inequality is certain.

But it will be a modest decrease, and it won't satisfy those who's major objection to inequality is that the tippity-top of the income distribution having vastly more money than everyone else is necessarily bad. That's because there are two different types of income inequality, and your standard Democratic policy solutions, or an increased investment in human capital as suggested by Ed Glaeser, only affects one. Robert Gordon and Ian Dew-Becker wrote a paper explaining these two types of inequality. One type of inequality is "90-10″ inequality. This is the standard, skills based technological change explanation of inequality. Basically, managers got more money and benefited the most from productivity gains, which were unchained from median wages in the late 1970s. There's also the unbounded increase in the college wage premium, which is no longer cyclical. This is the 90th percentile, and above, running away from everyone else - or, everyone else staying behind, while the 90th percentile's income inequality shoots up.

But that's not the entire inequality story, the other is inequality within the top decile. This is the inequality that liberals and progressives find so objectionable. This inequality that isn't driven so much by technological change, lagging minimum wage, or decreased unionization, but instead by the "superstar effect" (JK Rowling can sell more books than any other author in history) or the institutional failures behind skyrocketing CEO pay. And the only way to address that inequality is massively increasing marginal income rates. 

Take a simple thought experiment.  Family A makes 50,000 a year.  Family B makes 100,000 a year.  Family C makes 500,000 a year.  Further imagine that they are taxed as follows:  Family A at 10%, Family B at 20%, and Family C at 30%.

That means that Family A takes home 40,000, Family B takes home 80,000, and family C takes home 350,000.  You've got a roughly 9X difference between Family A and Family C after tax, and a roughly 10X difference pre-tax.

Now say that Family A's income goes up by 20%, Family B's income goes up by 100%, and Family C's goes up by 1000%.  

Now family A has 55,000 pretax, and 49,500 post-tax.  Family B has 120,000 pretax, and 96,000 after tax.  And Family C has 5,000,000 pre-tax, and 3,500,000 after tax.  So now Family C makes roughly 100 times as much as Family A pretax, and about 70 times as much as them post tax. 

To get back to the original ratio, you'd have to raise Family C's tax rate to roughly 90%.  If you merely wanted to let inequality double, we'd still have to take away $4 million worth of income, an effective tax rate of 80%--which implies a marginal rate even higher than 80%.

We can't do that, either politically or economically.  For all that I despise the way that supply-siders have abuse the Laffer Curve, at those kinds of rates, the deadweight loss is enormous.  We'd be costing everyone else economic growth just to punish the rich.  I know, I know--some bright young thing is going to claim that since the rich get all the growth anyway, this doesn't matter.  That is, not to put too fine a point on it, USDA Prime hogwash.  Compare the consumption basket of any demographic group you'd care to between 1970 or now.  There's no question that even poor families are better off materially (the War on Drugs is a different matter).  And I'm not talking about iPods; I'm talking about housing, health care, automobiles, telephones, and other things that we think of as basic accoutrements for a decent life.

Lehman loses its shirt

Future perfect

Housing: put it down

If I were the czar of the mortgage market, I would attempt to bring back the 30-year amortizing fixed-rate mortgage with a 20 percent down payment. As recently as fifteen years ago, this was the workhorse of the housing market.

I think that a housing market that is based on mortgages with low down payments is inherently unstable. The buyer's equity comes almost entirely from house price appreciation. That means that in a rising market, everybody can buy a home. In a flat or falling market, nobody can buy a home. [note: Bob Shiller wants mortgages that are indexed to home prices. Such mortgages might adapt to this problem, but I would rather avoid the problem in the first place.]

I don't think the fixed rate is what matters.  In fact, though I'm not sure that I've seen this reported anywhere, fixed rate mortgages make the housing market more unstable, because house prices vary more sharply with interest rates.

Of course, the lurid stories we're hearing now are all about people locked into houses with rates they can't afford.  But that's because their downpayments were so miniscule.  In a normal market, they could sell and walk away, taking perhaps a small loss.  But with little or no downpayment, even a small movement in the value of their home wipes out all their equity, leaving them with no way out except foreclosure or bankruptcy.  If you can't come up with the cash for your mortgage payments, you certainly can't come up with a big check to hand over at closing to make up the difference between the mortgage and the sale price.

Liberals are blaming the banks, and conservatives the government, for the push into no money down housing purchases.  But the fact is, we're all at fault.  Everyone in the country--buyers, sellers, financial advisors, bankers, regulators--became convinced that owning a home was a surefire ticket to wealth, and that therefore everyone could and should buy one.  Now we're surprised that we've gotten into exactly the same trouble as everyone else who thinks they've got a way to make money without working.

Coastal privilege

Some of it, of course, is driven by cultural and religious conflict: fundamentalist Christians are sincerely dismayed by Roe v. Wade and evolution in the curriculum. What struck me as I watched the convention speeches, however, is how much of the anger on the right is based not on the claim that Democrats have done bad things, but on the perception -- generally based on no evidence whatsoever -- that Democrats look down their noses at regular people.

Socialized mortgages

• This is better than nothing.  I would have preferred an outright breakup and privatisation--which may still happen, someday down the road.  But the government providing an implicit guarantee meant that Uncle Sam was taking on the risk without taking on the benefits.
• As usual, the regulators are locking the barn after the horse has been stolen.  This should have happened months ago.
• There wasn't that much new information in the market to trigger the takeover--it's not as if capital requirements have plummeted.  Rather, the existing regulatory requirements were found to provide inadequate capital in a broadly sinking market.  We knew a long time ago that the current real estate market had made traditional capital adequacy requirements absurdly inadequate.
• Fannie and Freddie are the reason that the US has 30 year fixed mortgages; they can borrow capital at government rates.  The ability to borrow money on these terms is probably not worth the distortion in the markets, and the constant regulatory tsuris of managing these behemoths.  Better to borrow money on variable rates, like the rest of the world, than to have the mortgage market dominated by either the government, or two quasi-private companies.
• The claim that this represents the failure of markets is more than a tad silly.  Fannie and Freddie weren't truly private companies, didn't act like truly private companies, and wouldn't have been allowed to so dominate the market if they had been.  This is yet another failure of a government program.
  

Media matters

[N]eurological studies have shown that people's feelings toward a political party dramaticallyThe Political Brain, Drew Weston described a great study he and two colleagues conducted during the 2004 election. Westen and his colleagues studied the brains of 15 self-identified Democrats and 15 self-identified Republicans as they were presented with a series of slides that showed undeniably inconsistent statements by John Kerry. The partisans were asked to consider whether Kerry's two statements were inconsistent, and were then asked to rate the extent to which Kerry's statements were contradictory, from 1 (strongly disagree) to 4 (strongly agree). They then repeated the process with undeniably inconsistent statements by George W. Bush, and again with inconsistent statements by politically neutral males. Here's how Westen described the results:

They had no trouble seeing the contradictions for the opposition candidate, rating his inconsistencies close to 4 on the four-point rating scale. For their own candidate, however, ratings averaged closer to 2, indicating minimal contradiction. Democrats responded to Kerry as Republicans responded to Bush. And as predicted, Democrats and Republicans showed no differences in their response to contradictions for the politically neutral figures.
...
The results showed that when partisans face threatening information, not only are they likely to "reason" to emotionally biased conclusions, but we can trace their neutral footprints as they do it.

When confronted with potentially troubling political information, a network of neurons becomes active that produces distress. ... The brain registers the conflict between the data and desire and begins to search for ways to turn off the spigot of unpleasant emotion. We know that the brain largely succeeded in this effort, as partisans mostly denied that they had perceived any conflict between their candidate's words and deeds.

Not only did the brain manage to shut down distress through faulty reasoning, but it did so quickly -- as best we could tell, usually before subjects even made it to the third slide [which asked them to consider whether the statements were inconsistent]. The neural circuits charged with regulation of emotional states seemed to recruit beliefs that eliminated the distress and conflict partisans had experienced when they confronted unpleasant realities. And this all seemed to happen with little involvement of the circuits normally involved in reasoning.

But the political brain also did something we didn't predict. Once partisans had found a way to reason to false conclusions, not only did neural circuits involved in negative emotions turn off, but circuits involved in positive emotions turned on. The partisan brain didn't seem satisfied in just feeling better. It worked overtime to feel good, activating reward circuits that give partisans a jolt of positive reinforcement for their biased reasoning.

This is basically the root of the well-known "confirmation bias."

So given that (1) journalists are overwhelmingly Democrats, and (2) party affiliation dramatically affects the way our brains interpret political news, is it really possible that there isn't a liberal media bias?

No empirical study of newspaper stories or talking heads on TV is ever going to be able to objectively determine whether there's a liberal media bias, because what people think constitutes "liberal bias" depends on their party affiliation also. I don't perceive a liberal media bias, but then again, I'm a Democrat, so my brain would presumably interpret political news the same way a biased liberal media would.

But if we know that the inputs are heavily biased, it's very likely that the output is biased as well.

Bittersweet moments

Absence makes the heart grow fonder

McCain's acceptance speech

• The words "I fought corruption" should never pass the lips of a charter member of the Keating Five.
• "I fight for you" is a clever tag line, and I presume the image that the McCain campaign has settled upon.  This will allow them--just barely--to keep making the ridiculous claim that John McCain doesn't like to bring up the fact that he was a POW.  If John McCain didn't want to bring it up, he would have instructed his staff not to mention it to every single person they talk to, including the barista at Caribou Coffee.
• Ack!  The dreaded "Free America from Dependence on Foreign Oil" meme rears its ugly head.  This is high definition hogwash.  Drilling isn't going to save us from Demon Oil any more than windmills will.  It might make us some money.  But we'll still be part of a world economy that will be pigheaded about buying their oil from funny people who don't even speak English.
  
• John McCain does not seem particularly comfortable talking about God.  The lines are there, but they're mechanical, clearly recited by rote.
• McCain claims he'll cut government spending.  I'll believe it when I see it.
• Boy, the folks at the RNC really hate national health care.
• Just as with Obama, the actual policy/issues content could have been taken straight from the RNC! Greatest Hits 1980-2004 compilation album.  McCain's main contribution is the shocking revelation that--you probably didn't realize this--he was a POW.  I'm more impressed by his delivery than I was by Obama's, but that's because my expectations were lower than they were for Obama--objectively, Obama's delivery was still probably better.  Frankly, the Fog of War has erased the thing from my mind.  It's probably PTSD from all the blinking things on the convention stages.
  
• The other major change isn't really a change--it's a relative shift to emphasizing the martial virtues.  This, I think, is why Kerry seemed so ridiculous "reporting for duty"--his political persona was about as far as you could get from the warrior ethos.  McCain is the real thing.  Too much of the real thing, for my taste--he seems to think that the values that guide a brigade should also guide the nation at large.  This is a bad idea for the same reason that we should not be run by the codes of the Bar Association or the Hippocratic Oath.
  

The John McCain video

More on Sarah Palin

More on comments

More media me

Okay, I lied

Announcement on comments

1.  Many lefty commenters think that I am a stupid, ignorant bitch.
2.  I am not writing things they want to read.

Rural identity politics

Palin exudes sexual confidence and maternal authority, which in a relatively conservative culture like ours is the most recognizable and viscerally comprehensible form of female power. It makes a lot of men uncomfortable, but that's because it's the kind of female power they are most often subject to, and most often fail to successfully resist. I spent much of my life taking orders from women a lot like Sarah Palin -- women like my mother and my Iowa public school teachers. Indeed, it makes a lot more emotional sense for me to feel led by by a woman like that than by some hotshot Air Force pilot. When a guy with a buzzcut says "jump," I say "screw you." When a woman like Sarah Palin says "jump," I am inclined to deferentially inquire into the requirements of this jump.

Palin's speech, I think, set in stark relief what Hillary was/is lacking. Again, I think O'Rourke gets it right when she says,

Ironically, [Palin] may have an easier time bringing what CNN called "toughness and femininity" together precisely because she never assumed at the outset of her adult life that she'd end up in a role like this.

I have very mixed feelings about this. I do not think politics is noble, and I deplore career politicians like Barack Obama, John McCain, Joe Biden, and, yes, Hillary Clinton. I would in fact rather be ruled by competent small-town mayors than accomplished professional rent-seekers. (Palin, being very smart, made great strides in this regard during her short time as Governor, because opportunistic predation is what politics is.) But I feel that Hillary's struggle to connect as a strong leadership-worthy woman was part of an attempt to forge a sense of feminine authority not founded an maternality and female sexual power. That she almost succeeded in this is astounding, and I think hugely to her credit.

But we all know that politics is a primate sport. We're used to marveling over the fact that the taller man usually wins, that a commanding, alpha-male jock toughness is de rigeur for successful presidential candidates. Palin's gut appeal drives home the perhaps inevitable but nevertheless regrettable fact that female political success is at some level going to be grounded in primate appeal, too. And, as a female primate, Palin is evidently "a force to be reckoned with" -- as the pundits kept saying.

But I don't want to push too hard on the biopsychology of this. Biology is heavily strained through through the filter of contingent culture and identity. That Palin reminded my of my school teachers is a matter of her acquired manner and the assumptions beneath them, a matter of her Upper-Midwest-sounding accent. I'm from a small town. She's from a small town! And damn straight: people who study at the University of Idaho (which is, in fact, where my sister is currently studying law) are every bit as smart as all you snide elitist Ivy League cosmoplitans!

The overwhelmed Republican delegates interviewed after the speech were at a total loss when asked to pin down specifically what they had liked about Palin's address. What they liked is that they saw a feminine yet powerful conservative Christian mother -- someone they understand, someone they would like to have as a friend, someone they are or would like to be. What they liked was the thrill of such direct cultural identification, of being on that stage and commanding attention and respect. I do not doubt that conservative Christian moms all over the country were brought to tears by the power of this. There are a lot of conservative Christian moms.

Palin made my gut want John McCain to win and then suffer a fatal heart attack. But I am a studied skeptic of my gut, and no wordly force could deliver my vote to him.

My favorite line: "Contra my Democratic friends, I'm not sure that voters will see "But McCain really might die in office!" as a bug, rather than a feature."

In terms of political psychology, I loved the bait of Palin comparing herself to Obama. If people get itching for a Palin-Obama debate, Obama is in trouble. You're right to say that the Democrats should ignore her.  The problem is, if she continues to be successful, rural America will flock to her anyways.  I'm not a huge fan of McCain's nor of Palin's reported social conservativism, but my rural symptathies involutarily switched on during her speech and I couldn't help but root for her.  You can love and live the life of the elite, and I'm certainly living it, and still appreciate the cultural world that people build for themselves when they can't afford Whole Foods, and moreover wouldn't shop there even if they could.  I'm not sure the Democrats are there yet (geez, I'm still channeling my roots this morning).

Yes, the culture war is in full swing.  It's an evolutionarily deep tendency that kicks when people are given either-or choices.  I'm afraid reason doesn't and won't ever trump that as long as we're human.

* Mom's vote has correctly predicted the outcome of every presidential election since Nixon.

How can I say Obama's in trouble when he's leading in the polls?

Because he's falling, and the campaign hasn't managed to find a successful new line against McCain in two months.  Look at the InTrade graph:

Obama got very little bounce from his convention despite an astouding television and live viewership for his acceptance speech.  The McCain contract, on the other hand, got a 1.3 bounce this morning before he even spoke.

When I say that the Obama campaign is in trouble, I don't mean by any means that a McCain victory just became inevitable, or even probable.  But Obama is no longer going to have the walk everyone was expecting three months ago.  They need to find a more successful means of attacking McCain than they have so far come up with, because the overall trend of their polls is downward, and I'm told that many internal polls, which project likely voters, already show McCain with at least a 50/50 chance of winning. Obama's got a fight on his hands.

Lipstick on a pit bull

Thoughts on Sarah Palin

• This woman is an Obama-level political natural.  She is a ferociously good speaker, and almost preternaturally composed.  
• Sarah Palin is what the McCain camp has badly needed:  an attack dog who can be deployed against Obama.  She slides the stiletto in without either losing her femininity or coming across as catty, and given that she's married to an eskimo, it's going to be hard to fit her into the narrative of conservative closet racists trying to perpetuate white domination.
  
• She's going to be a hard act for McCain to follow tonight
• The Democrats are, as my colleague Clive Crooks notes, in trouble.  Whatever you think of her as a potential president,  she is a politically brilliant choice, and Democrats are going to have a very hard time finding traction to attack her.
  

Well, the Democrats have a problem. They had a few days of calling her a clueless redneck, a stewardess, a nonentity, and she has hurled that back in their bleeding gums. (If I were Joe Biden, I'd start practising for October 2nd right now.) Even before tonight's speech, they had backed off the "no experience" strategy, because (as the Republicans intended) that was sending shrapnel in Obama's direction. Their line right now is their default mode, that McCain-Palin is four more years of George Bush. But this too is a completely untenable strategy, since the Republican ticket now looks stunningly fresh to voters, as fresh in fact as Obama-Biden. Where they will have to end up is obvious: McCain-Palin is an extreme right-wing ticket. It is a team that will prosecute the culture war against all that is decent and civilized in the United States: that must be the line.

• Many Democratic bloggers are itching to go after this woman for all of her perceived flaws.  I understand why, but if they do so, they are very likely to get McCain elected.  If I were a Democratic strategist right now, I would be telling the campaign to pretend she doesn't exist.  There is simply no way to attack her without alienating the swing voters they need by sending the message:  "People like you are idiots who can't be trusted to make important decisions", and also, triggering the social opprobrium that falls on men who say nasty things about women.  What can I say?  Sometimes sexism works in womens' favor.
• The McCain/Palin ticket represents something that I think is fairly troubling:  a sort of parody of traditional gender roles.  McCain is, and is running as, a hyper-macho flyboy, one whom I personally find disappointingly adolescent.  Palin's speech seemed to imply that her main qualification for office is having five kids and a great husband.  What man would have characterized himself as a "hockey Dad" when introducing himself as a candidate for the second highest office in the land?  Being a parent is hard and important, but it is no more a good qualification for higher office than is being a journalist, which is also hard and important.  Palin's entire persona seems crafted to be the anti-Hillary: no man will find her a challenge to his masculine ego.  I do not like the fact that this seems to be more successful than running on, say, actual policy positions.
• I have no reason to think that she would be a particularly bad president.  Obama hasn't any more relevant experience than she has; he's simply been coaching for the thing longer.  If he can get up to speed to be president in 18 months, presumably so can she, and I think its reasonable to expect McCain to live that long.  We do not elect presidents because they are experts on everything that will come up during their presidency--they couldn't possibly be.  We elect them because we think they have good judgement and values that match our own.  Contra my Democratic friends, I'm not sure that voters will see "But McCain really might die in office!" as a bug, rather than a feature.
• The "hockey Mom" schtick is a political lie.  You could not possibly be a hockey Mom and the vice president of the United States, or for that matter, governor of Alaska.  Todd is a hockey Mom.  Sarah Palin, whatever she has done in the past, is now exactly like male politicians:  someone else is doing the main work of raising her kids.  I don't think there's anything wrong with that, of cours, and as political hogwash goes, it's pretty low-grade.
  
• She really is more like ordinary voters than the other politicians here.  Wail all you want about how she's super-pro-life, has five kids, and lives in a tiny town.  Sarah Palin is not a member of an upper-middle-class elite that has been groomed all its life to seize the power they've been told they're entitled to.  She doesn't vacation in Europe or go to the opera.  Neither do most of the voters she's trying to attract.
• I'll be surprised if McCain doesn't get a sizeable convention bump.  Democrats are in denial about the trouble--which I too find inexplicable--that the Obama campaign is in.
• As a person I like her.  Politically, I dislike what she represents:  populism, culture warmongering, and especially, the notion that if a woman is to hold power, she has to make herself non-threatening by emphasizing her domesticity and fertility.  I don't blame her for doing these things, since they seem to work. But I don't like living in a society where this works.
• Obama is already having HUGE trouble with the union rank and file in the old guard unions.  I don't know what's happening in up-and-coming unions like the SEIU, but in traditional unions like the Laborers, leadership endorsement has failed to translate into support from the membership.  The fact that Todd Palin was a steelworker is probably going to pull more of those people into the Republican camp, though of course, McCain's stance on trade will continue to cost him a lot of votes with the Steel and Auto workers.
• We might as well not bother to talk about policy issues in this campaign; we're now in all out culture war, with the coasts and the heartland fighting for control of Ohio.
  

Attack of the asthma

Mollycoddling terrorists and ruining America

John McCain is, and as Larison says, John McCain would be everything anyone hated about the Bush years minus the occasional bouts of temperance. Eve and Nat Hentoff (whom she links) wonder if Palin would be "as flip-flopping as Mr. McCain on the Bush torture policy," which is an odd way to put it. There's no evidence that Palin has a preexisting torture policy to flip away from, let alone what it would be. What there is evidence of is: Sarah Palin is John McCain's running mate, not the other way around. Sarah Palin and John McCain are running under the aegis of the Republican Party, which has made support for torture a litmus-test issue.

Free fall

U.S. auto sales continued their slide in August despite stepped-up incentives to buyers, with Ford Motor Co. posting a 27% drop from a year earlier as sport-utility-vehicle sales plunged 53%.

Ford also lowered its second-half North American production forecast and revised its overall industry forecast to the low end of its range.

"We expect the second half of 2008 will be more challenging than the first half, as weak economic conditions and the consumer credit crunch continues," said Jim Farley, group vice president of marketing and communications.

Just as car purchases lagged oil prices on the way up, I'd expect them to lag on the way down.

REALLY random bleg

Pro-choice?

More turnabout is fair play

Blog of the week

If something can't go on forever, it won't

The commodities reversal is beginning to punish some large investors. Ospraie Management, one of the largest players in commodities, said it is shutting down its biggest fund following significant losses. The fund declined 27% in August alone on bets on oil, natural gas and structured products. Formerly high-flying commodities-related stocks have also taken a beating in recent sessions, hurting stock investors who had hoped to ride the commodities wave.

Turnabout fair play?

Minnesota arrests

Bolstered by emergency help from the Minnesota National Guard, police in St. Paul arrested 284 people Monday after outbreaks of violence and road obstructions linked to rogue bands of demonstrators among an otherwise peaceful throng estimated at 10,000 people.

The demonstrations, on a steamy first day of the Republican National Convention, began with block after block of marchers -- far fewer than the 50,000 some had predicted -- chanting and peacefully waving signs on downtown St. Paul's narrow streets. As the day wore on, the carnival atmosphere turned ugly.

Before most of the demonstrators had finished their march, a few hundred protesters splintered off and became confrontational and sometimes violent. Some smashed windows at Macy's and a downtown bank building. Others challenged police by blocking roads.

Police are arresting journalists, which is generally an indication that they're in full-on flip-out mode.  And in my own experience as a protest kid, the police are generally way too willing to use force on protesters, particularly ones they find politically distasteful.  This is a small minority, but once they start something, the other officers generally have to follow them in or stand silent witness to a riot. So my natural assumption with these kinds of arrests is that the police were somehow at fault.

Those crazy kids

Abstinence only education: no better, no worse

Why vaccinate for HPV?

But some experts remain unconvinced, saying policy makers rushed into a pricey immunization program when there is no epidemic of cervical cancer, which can already be screened through regular Pap smears.

In a Canadian Medical Association Journal article last year, four researchers led by epidemiologist Abby Lippman of McGill University urged a more prudent course.

The New England Journal of Medicine echoed similar feelings in an editorial two weeks ago. "With so many essential questions still unanswered, there is good reason to be cautious about introducing large-scale vaccination programs," it said.

Says the reader:

This study on its own won't change your mind, but maybe the drip, drip of these findings will eventually give you pause.

Let's think about this.  Effect of allergic reactions:

The allergic reactions included nausea, itchy red rash, difficulty breathing and other symptoms.

Now let's talk about what happens when you get an abnormal pap.  First, they test for HPV.  If that comes back positive, they microscopically examine your cervix for cancer.  If they decide you're in danger, here are your treatment options:

• Total hysterectomy: Surgery to remove the uterus, including the cervix. If the uterus and cervix are taken out through the vagina, the operation is called a vaginal hysterectomy. If the uterus and cervix are taken out through a large incision (cut) in the abdomen, the operation is called a total abdominal hysterectomy. If the uterus and cervix are taken out through a small incision in the abdomen using a laparoscope, the operation is called a total laparoscopic hysterectomy.
• Bilateral salpingo-oophorectomy: Surgery to remove both ovaries and both fallopian tubes.
• Radical hysterectomy: Surgery to remove the uterus, cervix, and part of the vagina. The ovaries, fallopian tubes, or nearby lymph nodes may also be removed.
• Pelvic exenteration: Surgery to remove the lower colon, rectum, and bladder. In women, the cervix, vagina, ovaries, and nearby lymph nodes are also removed. Artificial openings (stoma) are made for urine and stool to flow from the body to a collection bag. Plastic surgery may be needed to make an artificial vagina after this operation.
• Cryosurgery: A treatment that uses an instrument to freeze and destroy abnormal tissue, such as carcinoma in situ. This type of treatment is also called cryotherapy.
• Laser surgery: A surgical procedure that uses a laser beam (a narrow beam of intense light) as a knife to make bloodless cuts in tissue or to remove a surface lesion such as a tumor.
• Loop electrosurgical excision procedure (LEEP): A treatment that uses electrical current passed through a thin wire loop as a knife to remove abnormal tissue or cancer.

Nausea and/or a rash, or hysterectomy?  We report, you decide.

Sarah Palin: the importance of being earnest