Should I have called the market bottom last month?

Maybe.  On the other hand, bear markets tend to have a lot of false bottoms.  The only sure way to tell a market bottom is in distant hindsight. Paul Krugman makes the same point about broader economic indicators.

Europe Free Rides, Again

If you spend much time in the finance/policy-wonk community, you spend quite a bit of time listening to complaints about Europe's wussy little stimulus package and relatively tight monetary policy.  The Europeans defend this on the grounds that they have all of these automatic stabilizers, like generous welfare benefits and unemployment insurance, which provide stimulus on the dips.

Well, sort of.  As Paul Krugman points out, they're overselling this:

On the social front, there's a quantum difference. For given depth of recession, the human suffering in America -- where losing your job means losing your family's health insurance, and unemployment benefits are minimal at best -- is vastly greater than in Europe.

On the macroeconomic front, however, the strength of Europe's "automatic stabilizers" has been exaggerated. Yes, government is about 12 percentage points of GDP larger; so each 1 percent fall of GDP automatically increases deficits by more than in the US. But unless the slump is much deeper than even pessimists expect, that won't be enough to offset the stronger US discretionary action.

The IMF has tried to incorporate the automatic stabilizer effect; by their estimates, it still comes up short.

But as multiple people have blogged, this isn't just a matter of the infamous tight-fistedness of Germany's fiscal and monetary policy, born out of the ashes of Weimar; it's genuinely harder for Europe to run a stimulative policy.  For one thing, they can't coordinate a broad European policy, which means that any government will see substantial amount of any stimulus "leak" abroad--and also that there is great temptation to free ride.  For another, they aren't the world reserve currency, so they can't borrow on the same lavish, practically interest-free scale as the US Treasury.  And taking on massive debt is very complicated when you're facing a shrinking population:

Mrs. Merkel has exerted discreet but stubborn leadership in Europe to prevent the kind of overspending that could lead to inflationary pressure on the euro.

It is not, she pointed out, simply a philosophical difference. Borrow and spend today, repay down the road, is a particularly difficult proposition for a country with a shrinking population, she said.

"Over the next decade we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America," Mrs. Merkel said.

That's a real problem.  But how sympathetic is the US taxpayer supposed to be?  We pay for their military protection, we pay for the profits that develop the drugs and consumer goods they happily consume, and now we're supposed to pay for their economic bailout too.  Europe could liberalize its markets, let in immigrants, develop a real military, instead of just critiquing the way we do it.  We'll continue to let them free ride, because there's no way to stop it.  But I'm starting to think we should rub it in a bit more.

More Media Meltdown

The Sun-Times group has filed for bankruptcy.  I know a lot of journalists these days who are wishing they'd gone into something steady, like moving to Detroit and becoming an autoworkers.

Why we won't get an awesome appetite suppressant any time soon

Derek Lowe:

I've long been wary of these, since we've found (over and over) that human feeding behavior is protected by multiple, overlapping redundant pathways. We are the descendants of a long line of creatures that have made eating and reproducing their absolute priorities in life, and neither of those behaviors are going to be altered lightly. The animals that can be convinced to voluntarily eat so little that they actually lose weight, just through modifying a single biochemical pathway, are all dead. Our ancestors were the other guys.

By all accounts amphetamines work pretty well.  Except for the part where your teeth fall out and everything.

Department of non-leading indicators

I just booked a same-day hair appointment with the woman who cuts my hair, one of the women noted in DC for their skill with curly hair.  I used to have to book at least 2-3 weeks in advance.  My mother also booked with a few days notice recently.

I get my hair cut at Bang, where a cut and blowdry run in the $30 range, not one of the expensive Georgetown salons.  If they have a lot of openings, it means that people are cutting back on getting their hair done entirely, not merely finding a less pricey place to do it.  I'm told that hairdressing has long been thought of as a countercyclical good.  Not any more, apparently.

House prices: still free fallin'

The volume of house sales is looking a little more robust these days, but the prices they sell at continue to plummet.  In most metropolitan areas, home prices are down more than 10% from last year.

Like most renters who hope to buy, I'm rooting for a continued fall, at least in the DC area.  (Sorry, homeowners).  For people like me in other cities, a new report from Deutsche Bank provides some reason for pessimism about the economy, but optimism about their personal prospects for homeownership:  they rate overvalued cities, and are looking for price drops from 20% in San Luis Obispo all the way to 47% in New York City.

This actually won't hurt New York as badly as it sounds; only 30% of people there own their own homes, and property taxes aren't nearly as vital to the local tax base as they are in most places.  Indeed, it might slightly ease New York's notoriously tight vacancy rate--unless the legislature gets in there and rolls back stabilization decontrol, as it currently seems to be planning.  Unlike places like Florida, where the real estate market actually drives much local economic development, the price drops will be more a symptom of New York's decline than a likely cause.  

Still, 30% of New Yorkers is a lot of people.  And a fair number of them probably need to sell their largest asset so that they can get the heck out of New York, and the finance industry, and start over with a more sustainable life.

Just say no to F-Bombs

As in, using the word "fascist" to apply to the current, or indeed previous, administration.  David Henderson writes:

President Obama has done something far more serious. He has already, in less than 100 days, moved the U.S. economy further towards fascism. Sean Hannity and other critics keep criticizing Obama for his socialist leanings. But the more accurate term for many of his measures, especially in the financial markets and the auto market, is fascism.

Here's what Sheldon Richman writes about "Fascism" in The Concise Encyclopedia of Economics:

Where socialism sought totalitarian control of a society's economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the "national interest"--that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace. Entrepreneurship was abolished. State ministries, rather than consumers, determined what was produced and under what conditions.

How is this helpful?  Has clarifying the distinction between fascism and socialism really added to most peoples' understanding of what the Obama administration is doing?  All this does is drag the specter of Hitler into the conversation.  And the problem with Hitler was not his industrial policy--I mean, okay, fine, Hitler's industrial policy bad, right, but I could forgive him for that, you know?  The thing that really bothers me about Hitler was the genocide.  And I'm about as sure as I can be that Obama has no plans to round up millions of people, put them in camps, and find various creative ways to torture them to death. 

If he does, look, I take it all back.  Use the F-word freely.  Hell, I'll hide you in our spare bedroom when the state police squads come looking for you.  But until then, can we stick to less inflammatory terms? Surely creative and intelligent adults can find ways to critique Obama without pointing out that Hitler was also a very effective speaker.

The rich really are different

Matt Yglesias considers, and rejects, the notion that taxes on the rich impede capital formation:

As Ed says, the argument is that "we can't have progressives taxes because somebody's rich uncle might not have the wherewithal to subsidize somebody's business start-up."

I'm not going to dignify this with a response. I'll just note that Schramm is president and CEO of the Kauffman Foundation and I believe he was in the room when I first heard the "rich uncle" argument, so I may have been present at the creation of this particular talking point. Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs. And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States. The status quo systematically discourages talented, skilled people form leaving jobs at existing firms in order to strike out on their own, and this is one of the things the administration is trying to address in its budget proposals.

It sounds deep and smart when you call it "capital formation", and stupid and crazy when you call it "the rich uncle argument", but they're essentially the same thing.  And it should be noted that many, even most, liberals believe that this is true--or at least, they used to, back when they were discussing the Bush tax cuts.  At the time, the ground was thick with liberals complaining that it was a terrible idea to cut taxes on the rich during a downturn, because the rich save their money, while the poor and the middle class spend it. 

Then or now, saved money is where all the capital that funds startups--or any other sort of investment activity--comes from.

Of course, if we will have a government, we are going to have to tax someone to fund it, and the rich have more spare cash in their possession than anyone else.  But of course, when we tax the rich, they don't just cut back on their yachts; they also cut back on their saving and investment activity, which in the long run means that we will all be a little poorer.  Life is full of tradeoffs that can not be vanquished with even extremely biting sarcasm.

More secret bonuses

From Red State:

Many of GM's dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That's disgusting, but it's required both by GM's contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)

This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won't make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.

(h/t Tyler Cowen)

Whither GM?

The more I read about these plans, the more I wonder what the end game is supposed to be.  The administration is acting serious:  firing Wagoner, and threatening to cut off funds if Chrysler doesn't make a deal with Fiat.  Then you read the report, and the government's statements seem . . . kinda silly.  It recognizes GM's deep problems.  Some highlights:

• GM has been losing market share slowly to its competitors for decades. In 1980, GM's US market share was 45%; in 1990, GM's US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.

•  Fundamentally, the lingering consumer perception is that GM makes lower-quality cars (despite  meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM's price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers
  
•  GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.
•  GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an  attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable
•  Absent the successful introduction of a number of new-generation nameplates, as described in the Company's plan, GM's product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.
•  As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.

In other words, when competition from Japan made it impossible to continue supporting a bloated and very highly paid semi-skilled workforce with gold-plated benefits, GM tried to grow its way out of the problem by skimping on quality.  Instead it generated volume through fleet sales, and poured most of its energy into larger vehicles where higher prices and less fierce competition allowed them to preserve better margins.  When oil prices spiked, they were totally hosed.  The result is a motley collection of badly tarnished brands and an unsustainable cost structure.  The government's plan to fix all this?

•  Sustainable profitability: A viable GM should be able to generate meaningful positive free cash flow in a normalized business environment, generate net free cash flow over the course of a business cycle and invest capital in research and development and capital expenditures sufficient to maintain or enhance its competitive position while also earning an adequate return on its capital. 
• A healthy balance sheet: The restructuring must substantially reduce GM's outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements. 
  
• More aggressive operational restructuring: The restructuring plan must rapidly achieve full competitiveness with foreign transplants and more aggressively implement significant manufacturing, headcount, brand, nameplate and retail network restructurings.
  
• Technology leadership: The new GM will have a significant focus on developing high fuel-efficiency cars that have broad consumer appeal because they are cost-effective, have good performance and are reliable, durable and safe.
   
  In order to execute a new, more aggressive restructuring plan within 60 days, we will work with GM to use all available tools to implement this plan. The best path to achieve this may well be an expedited, court-supervised process to extinguish unsustainable liabilities, should an out-of-court restructuring not be possible. The Administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future. Consumers thinking about buying a GM car and workers and communities that depend on this iconic American company should have confidence that GM can and will come out of this crisis as a stronger, leaner and more competitive car company.
  

What does this remind me of?  Oh, right:




As Mark notes, the government's plan largely seems to consist of pointing out that Toyota is more profitable than GM, so GM should be more like them.  The details, like how GM is going to handle those infamous legacy costs, are not present.

To be sure, many of them still have to be worked out.  But this plan doesn't really make it clear why they're being worked out by the administration, rather than the Bankruptcy courts.  The core tangible pieces of the plan, like making creditors take a honking big haircut, are just the sort of thing that bankruptcy courts excel at--indeed, they are much better than the administration, which doesn't actually have any authority to make a single creditor do anything.  The only part where the government is even arguably making a unique contribution is in the warranty plan, which it could surely do even if the companies go into bankruptcy.

Presumably, the administration is keeping its hand in to try to minimize the impact on Michigan, and the UAW.  But this is working at cross purposes with the desire to create a healthy company.  Conservatives are too prone to exaggerate Detroit's labor cost problem--which is certainly large, but by no means the only problem the Big Three have.  It can't be denied, however, that it is a big problem.  But the bigger problem is that GM needs to get rid of a lot of its bad marques, which would mean cutting a lot of jobs even if the workers were being paid minimum wage.  A GM rescued with the explicit purpose of minimizing the impact on autoworkers will be a GM even less likely to long survive its reorganization.

And frankly, this plan doesn't make survival look all that likely at anything remotely approaching GM's current size--not if by "survival" we mean "weaning itself from taxpayer cash".  The government can guarantee warrantees.  But it will be less effective at shedding all sorts of obligations than bankruptcy court.  The administration won't be reorganizing the way a bankruptcy does; it will be negotiating.  To be sure, bankruptcy judges, too, negotiate, particularly among the various creditors.  But they do so with the power to cramdown firmly in their hands.  If the administration wants to wield that kind of power, it will have to find new and inventive threats to level at the creditors.  They may not find them.  And if they do, it's not really in the best interests of the nation for the government to find lots of new and innovative ways to threaten private investors.

But even if the administration were just as successful at cramming down, and somehow developed the will to piss off the labor movement by forcing unwilling concessions from the UAW, they would still find themselves struggling to make GM a successful car company again.  The other thing this reminds me of is a conversation I once had with a drunk management consultant about his most recent gig at an apparently unsalvageable franchise operation.  "Some companies," he said owlishly, "are . . . just . . . screwed."  Companies in trouble can enter a vicious downward spiral:  the best employees, and distributors (like franchisees and dealers) leave when the brand erodes, and so you end up with both a nasty brand legacy, and less committed or competent people available to help you execute a turnaround.  In Detroit, the problem is particularly acute because people haven't merely left the company, or even the industry, but the whole region where they need to recruit.

With what money, or starry-eyed dreams of success, is GM going to attract the top talent they will need to build an industry-leading drive train?  What charismatic leader is going to gut-rehab the corporate culture of a firm whose employees number in the hundreds of thousands?  Companies this large are like battleships--they do not turn around on a dime.  In either sense of the phrase.

Rick Wagoner is stepping down

Apparently, the Obama administration has asked Rick Wagoner to step down as part of his deal with the administration:

The chairman and chief executive of General Motors, Rick Wagoner, is resigning, just hours before President Obama was expected to unveil his rescue plans for G.M. and the ailing American auto industry, a person close to the decision said Sunday.

Mr. Wagoner was asked to step down, and agreed to do so, as part of G.M.'s restructuring agreement with the Obama administration, according to an administration official who spoke on condition of anonymity because a formal announcement has not been made yet.

Rick Wagoner is no managerial genius, but I'm not sure this will actually help much.  GM is caught in the jaws of its own structural problems--labor costs, yes, but also its corporate culture, its legacy physical plant, and so forth.  Perhaps most perniciously, GM is the victim of a brain drain--it's difficult to recruit top talent to a dying firm, especially when it's located in a dying industry.

On the other hand, it can hardly hurt.  And the symbolism, both to the taxpayer and the employees, is important.  GM can't be given vast sums without some visible sign of serious change.  Let's hope the new CEO actually brings some, rather than providing window dressing for a continuation of business as usual.

The LA Times copy desk is officially too small

It is customary for journalists, when discovering a particularly juicy typo at another publication, to exclaim, "Jesus, don't they have any editors over there?"  But that seems to be entirely superfluous in this case, which fairly screams, "No, no they don't."

Please, take the "Work" out of networking

Cliff Mason argues that while networks matter, networking doesn't.  Amen.  People with great networks aren't people who maniacally collect business cards while pumping every random acquaintance for possible signs of a career advantage.  They're people who like other people, who talk to other people because they are interested in them, who seek to help other people because, well, that's just what a decent chap ought to do.

Other peoples' lives are interesting, even if they themselves aren't fabulous raconteurs.  A good networker is someone who starts out on the presumption that you must be interesting, and looks for the things that make you so.  Along the way, they naturally find out quite a bit about you--and because they genuinely care about other people, they will remember three months hence that you said you wanted to move into new media when their friend the new media consultant starts hiring.  Maybe five years down the road, you'll help them out.  And you will genuinely be glad to, because they were glad to help you.

In other words, it can't be faked, it can't be hurried, and you can't strip out the part where YOU are a person worth knowing.  All the business-card warriors would do themselves a lot more good in the long run by focusing on getting good at their jobs, and helping other people when they can just because it's nice to be able to help.

Ask the editors is up

We're once again taking requests on the business channel.  If there's something you'd like to see tackled, please head over and ask your question.  I'm turning off comments on this post, since only questions asked over there will be considered.

Foreigners + Money = Crisis?

We have an extraordinary new piece by Simon Johnson, formerly of the IMF, which argues that America now looks all too much like an emerging market in crisis.  It's slated for the May issue, but we've put it up early because it's so timely.  I will probably blog more on this, but one of the things that really struck me was this list:

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

Particularly, that first point.  One of the similarities between the last decade and the 1920s that has not been much remarked on in the popular press is the absolute flood of foreign capital that hit Wall Street.  From John Kenneth Galbraith's Great Crash:

People were swarming to buy stocks on margin--in other words, to have the increase in the price without the costs of ownership.  This cost was being assumed, in the first instance, by the New York banks, but they, in turn, were rapidly become the agents for lenders the country over and even the world around.  There is no mystery as to why so many wanted to lend so much in New York.  One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of all investments.  They are protected by stocks which, under all ordinary circumstances, are instantly saleable, and by a cash margin as well.  This money, as noted, can be retrieved on demand.  At the beginning of 1928 this admirably liquid and exceptionally secure outlet for non-risk capital was paying around 5 per cent.  While 5 per cent is an excellent gilt-edged return, the rate rose steadily through 1928, and during the last week of the year it reached 12 per cent.  This was still with complete safety.

In Montreal, London, Shanghai and Hong Kong, there was talk of these rates.  Everywhere men of means told themselves that 12 per cent was 12 per cent.  A great river of gold began to converge on Wall Street to help Americans hold common stocks on margin.

The causes were deeper than that, tracing back to the post-World-War-I exchange rate regime and the deep imbalances of Versailles.  In a sense, Galbraith may be confusing cause and effect--the market may have taken off because of stupid money from abroad.  But these things feed on themselves, and so it's probably folly to try to separate chicken from egg.  The core point is the phenomenon he identifies:  foreign money with little local knowledge flooding into the market, helping to run up asset prices to an unsustainable level, and then departing.  This is the classic outline of an emerging market crisis, and arguably that's what happened to us, with Asian savings.

Ironically, it may be possible to trace back this flood of money to the IMF--and Timothy Geithner.  Just as the gold flows in the 1920s had their roots in Versailles, the flows of Asian money into US dollars are often thought to be an artifact of the 1998 crisis, when hot money suddenly started deserting the region in droves.  Asian businesses and central banks became determined that that would never happened again--and the way they opted to prevent it was to amass massive foreign reserves, particularly in dollars. 

Paul Keating, the former Australian prime minister who worked with Geithner during the crisis, blames his mishandling of the crisis for this desperate reserve-hoarding:

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power." . . .

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.

"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

To me, this doesn't suggest Geithner or the IMF were incompetence:  hindsight is 20/20.  What it does suggest is that global capital flows may be way more problematic than I have historically been willing to credit.  I don't want to blame all bubbles on foreign money.  But foreign money has two unpleasant characteristics:  there is so much of it that it can relatively easily swamp a nation's productive capacity, and it is relatively uninformed about the local market.

I'm not sure where that leaves me.  The capital controls of the mid-twentieth century were even worse, especially for emerging markets, where they became both focal points for, and sources of, massive corruption.  And one of the reasons America today is such a massively successful economy is that foreign money funded our industrialization.  Bubbles may simply be an inescapable side effect.  But perhaps it's time to rethink a committment to global capital liberalization.

GM gets a reality check

Joe Weisenthal at Clusterstock suggests that GM's projections for future sales are finally going to come down to earth.  I certainly hope so.  For the past few months, listening to GM talk has always reminded me of a story near and dear to the hearts of many girls--the death of Ruby Gillis in the third book of the Anne of Green Gables series:

Anne was sitting with Ruby Gillis in the Gillis' garden after the day had crept lingeringly through it and was gone. It had been a warm, smoky summer afternoon. The world was in a splendor of out-flowering. The idle valleys were full of hazes. The woodways were pranked with shadows and the fields with the purple of the asters.

Anne had given up a moonlight drive to the White Sands beach that she might spend the evening with Ruby. She had so spent many evenings that summer, although she often wondered what good it did any one, and sometimes went home deciding that she could not go again.

Ruby grew paler as the summer waned; the White Sands school was given up -- "her father thought it better that she shouldn't teach till New Year's" -- and the fancy work she loved oftener and oftener fell from hands grown too weary for it. But she was always gay, always hopeful, always chattering and whispering of her beaux, and their rivalries and despairs. It was this that made Anne's visits hard for her. What had once been silly or amusing was gruesome, now; it was death peering through a wilful mask of life. Yet Ruby seemed to cling to her, and never let her go until she had promised to come again soon. Mrs. Lynde grumbled about Anne's frequent visits, and declared she would catch consumption; even Marilla was dubious.

"Every time you go to see Ruby you come home looking tired out," she said.

"It's so very sad and dreadful," said Anne in a low tone. "Ruby doesn't seem to realize her condition in the least. And yet I somehow feel she needs help -- craves it -- and I want to give it to her and can't. All the time I'm with her I feel as if I were watching her struggle with an invisible foe -- trying to push it back with such feeble resistance as she has. That is why I come home tired."

It would be nice to take a break from the escalating unreality:  "We project that aliens will descend from the planet XXorkzz and selectively vaporize the Japanese automakers, the airlines, the busses, and the subways, leaving us with some very attractive market opportunities".  But what does that leave us with?  The sure and certain knowledge that without considerable further government assistance, the company will topple.

What does a million dollars mean to you?

A trillion is, in some sense, a meaningless number.  Perhaps this is a problem with inflation in both our currency and the size of our government--the spending figures are now beyond any normal person's imagining.  In the comments to another thread, two readers try to put some emotional weight to these hefty numbers

A couple years ago someone asked me, as an aid to visualizing the budget, how many transport flights it would take to move $1T worth of $100 bills.

So $1T is 10B $100 bills. 

10B grams is 10M kg

120,000 kg is the capacity of the C5 Galaxy aircraft. So it would take 84 flights to move $1T in $100 bills.

Imagine you're given $1T on the day Jesus Christ was allegedly crucified.

You spend $1M per day, every day, 365 days a year without stopping for any reason.

As of today, you would still need around 700 years to be completely out of money.

Don't worry, though--I assume when you do run out, there will be a government program to top up your funds.

The best bad movie in the world

We screened The Room a few weeks ago for a few friends, and it's everything the AV Club says about it, and so much more.  It is the worst movie you will ever love.  It is a low-budget romantic drama filmed at massive expense by a writer-director whose script suggests the deft social observations of an autistic Objectivist with a severe injury to the right temporal-parietal junction of his brain. The dialogue is not merely wooden, but petrified.  And the actors seem to be reading it off cue cards located somewhere over the left shoulder of whomever they happen to be talking to.

AIG gets a French kiss-off

Two executives at Banque AIG, the French subsidiary of AIG's financial products group, have resigned.  There's been talk in recent days that a major departure at the subsidiary could be a disaster, because it risks triggering cross-default provisions in various AIG contracts.  I'm tempted to say that this would send the company into a downward spiral, but then what are we in now?

Continue reading "AIG gets a French kiss-off" »

Markets in everything

So you're a surrogate mother.  And there's a trust that's supposed to pay for everything--including your fees--until you deliver.  And the company running the trust absconds with the funds.  And your broke employers don't have the money to make up the difference.  What do you do?

Institutional investment

Timothy Burke and I are having the kind of back and forth over the AIG bonuses that I'd hoped to have when we moved to registered comments.  I fear that the long siege may, however, have made me intemperate, so if so, I hope he will consider this my public apology.

Considering that the 11-year veteran executive VP says that he's not at all accountable for AIGFP's losses because he wasn't involved at all in the CDS trading and knew nothing about it, maybe the 26-year old MBA might do a fair enough job. 

A twice-told tale of AIG

Of course the AIG bonuses should go back!  They were paid to people in the very group that lost money!  They were paid to people who have already left the firm, putting the lie to the idea of retention bonuses!  Also, they couldn't get jobs anywhere else anyway, so retention bonuses are unnecessary!  And it's all just unmitigated greed!  They're lucky to have jobs at all!  They should be volunteering to work for free, wearing sackcloth and ashes, and grovelling on the ground in front of every taxpayer they can find, begging for forgiveness!

Continue reading "A twice-told tale of AIG" »

Mutual funds and sweetheart deals

A securities lawyer of my acquaintance notes two things regarding public participation in the exciting investment opportunity Timothy Geithner is offering

Maxine Waters brings the crazy

I am beginning to consider the possibility that her entire career on the House Financial Services Committee is some sort of elaborate performance art:

Upgrade, and comments

We've just upgraded my blog to Movable Type 4.2.  This has a lot of nifty features, including registered comments, which I've enabled.

Public-public partnerships

Matt Yglesias wants the public to be able to participate in these sweetheart deals we're handing banks.  A couple of problems I see with this:

All about public-private partnerships

Well, luckily, I picked an uneventful weekend to go on vacation.  Having slept in yesterday, I got the invitation to the Treasury conference call about Geithner's plan approximately an hour after it ended.  So you'll have to make do with warmed-over thoughts which were formed without benefit of input from the horse's mouth.

Continue reading "All about public-private partnerships" »

Helicopter Ben fires up the engine

So as Bernanke once promised/threatened he might, the Fed is turning to on quantitative easing.  The markets don't seem to like it much, and why would they?  It's like when your grammar school started having Fallout Drills.  On the one hand, it's nice that they're planning, but on the other hand . . . why bother finishing that math homework?  What do they know that we don't?

For those of you who are not up on the term, basically, the Fed is doing its damndest to print money, hampered by the fact that most of what we now consider "money" doesn't come out of a government printing press--actual currency is only a fraction of our money supply.  It is easy to print little pieces of paper with pictures on them--just ask Gideon Gono.  But most consumers and businesses in America are not set up to take large payments in cash.  So instead, the Fed is going to buy up about $1 trillion worth of securities in order to flood the market with new money. 

Do any other old codgers out there in my audience remember back when $1 trillion was a noteworthy figure, rather than the minimum price needed to get people to take your policy seriously?

The dollar is down, of course, since this means that there will be a lot more of them in circulation, making each individual dollar less valuable.  The stock market is also depressed.  The gold bugs are laughing all the way to the bank.

Will this work?  Damned if I know, and I bet Bernanke doesn't either.  It should work, in theory.  But while in theory, theory is the same as practice, in practice, they differ.  These days, more sharply every day.

Boom, baby, boom

Apparently births in 2007 exceeded the Baby Boom record.  This probably won't last--births tend to go down in economic hard times.  

Putting a price on carbon

Not to pick on Ryan Avent, because I'm really quite a big fan of his, but I think this is not right:

If you collect carbon tax revenue, figure out what each household spent on carbon, and refund that amount to each household, then there is no incentive to reduce carbon. You're basically just making work for bureaucrats. This is why no one, as far as I know, is proposing such a scheme.

Rather, they are (or I am, at least) advocating a plan in which revenues are chopped into equal parts and redistributed, either to everyone or to lower income households. Then, you've successfully increased the relative price of carbon-intensive goods or services, and helped to offset the impact on household incomes with the refund. And household income will be spent on a less carbon-intensive basket of goods and services, based on the relative price change.

In fact, it seems to me that as long as you raise the relative price of carbon, it doesn't matter whether you rebate back to people on the basis of their carbon consumption, or simply use a flat rebate:  carbon consumption goes down.  That's because people still have to trade more of their rebate to purchase carbon-intensive goods.  By making the terms of the tradeoff more favorable to low-carbon goods, you encourage people to substitute away from carbon.

The reason no to attempt to do this is that it would be administratively impossible.  But I think this is an important point:  in terms of carbon reduction, what's important is the price, not the distribution of the revenues from the tax (or the permit sales). 

That's why I don't buy the argument that we need to auction permits in a cap-and-trade system in order to get the maximum carbon reduction. The auction changes where the revenues go, but it shouldn't fundamentally alter the amount of carbon emitted.  A company deciding whether to buy a permit or reduce their emissions is not economically different from a company deciding whether to sell a permit or keep their emissions at the same level.

Flotsam and Jetsam

Sorry for the light posting today--I went up to New York to go on Fareed Zakaria's show, which will air this weekend.  Warning that posting will be light-to-nonexistant tomorrow and Monday, as I'm taking a few days off.

It was in the makeup chair for Zakaria's show that I found out that Natasha Richardson had died after a completely bizarre accident on the ski slope.  (Yes, I know; I'm out of the loop.  All I can say is, they didn't cover it on CSPAN or Bloomberg News, which are just about all the live television I watch these days.)  What an awful tragedy.  I don't have anything enlightening to say about it--she was lovely, she was talented, and she was far too young.  Also, her husband is my favorite actor.  Beyond that, all I have is the banal observation that we really ought to live each moment as if it were our last, because death certainly can be sneaky.

As for this, consider another banal observation about the incomprehensibility of deep evil made.

Multimedia Thursday

My entire thoughts on today's developments in AIG, brought to you in song and in glorious technicolor:

There was an old lady who swallowed a cow.
I don't know how she swallowed a cow!
She swallowed the cow to catch the goat...
She swallowed the goat to catch the dog...
She swallowed the dog to catch the cat...
She swallowed the cat to catch the bird ...
She swallowed the bird to catch the spider
That wiggled and wiggled and tickled inside her.
She swallowed the spider to catch the fly.
But I dunno why she swallowed that fly
Perhaps she'll die.

There was an old lady who swallowed a horse -
She's dead, of course.

Pay scales

David Leonhardt wants to increase taxes on the very highest incomes (h/t Felix Salmon):

Today's tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent.

That is a legacy of the tax changes of the early 1990s, when far less of the nation's income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes. In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay.

Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation?

In fact, that's sort of the point. Given the damage that's been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo.

I'm not angry and bitter; I'm about as mad as I am at the prospect of people who bought homes they can't really afford getting a bailout while I continue renting--which is to say, not very.  Life is rather too short to spend it getting angry at remote strangers.

I also note, just as an aside, that the definition of "very rich" seems increasingly to be set at "just above the level a top-notch journalist in a two-earner couple could be expected to pull down".

That said, I don't see why brackets top out at a relatively low level of income.  Indeed, I don't see why we have tax brackets.  They're inefficient, and a lot of them have pernicious marginal effects on those near the ceiling.  Why not a continuously scaling function from negative (EITC) to some maximum?  These days, people use either printed tax tables or tax software to prepare their taxes; this shouldn't present an undue hardship.   Obviously, with my preference for less government, I would recenter the scale so that people making $250,000 a year pay relatively less, and those making $10 million pay relatively more, in order to make the proposal revenue neutral.  But the basic concept seems bipartisan.

SEC files fraud charges against Madoff's auditor

This is really insult to injury, as he's already facing 105 years on the federal criminal charges.  But this offers a safety net for those worried that the criminal case might fail (though really . . . how?)  Plus they can snatch back what remains of whatever Madoff payed him to sell out his principles and his profession.

Money matters

I'm watching the AIG hearings, and there is, unsurprisingly, a great deal of ranting about the bonuses.  I'm not exactly in favor of the bonuses, but I have to wonder:  what questions aren't being asked because of these bonuses?  The people who took them are at the very best foolishly arrogant--but the cash flows are trivial relative to the overall cash flows, and the company keeps coming back for more money.  Don't the congressmen have more important problems to pursue?

Barney Frank, however, uses the bonuses to make an important point:  the compensation structure at all of these firms is seriously screwed up.  Bonuses originally intended to encourage performance have morphed into deferred guaranteed compensation, for reasons that aren't clear.   That's not necessarily a huge issue--except now, when the time-shifting leads to moral outrage.  But the really pernicious problem is that the contracts are set up so that bonuses cannot be substantially cut if profits fall. 

It's not clear to me how contracts have come to be written that way--after all, they weren't always handing out taxpayer money, and the big bosses who wrote those contracts were also sizeable shareholders in their firms.  The result, however, is that all of the employees holding these sorts of contracts have vastly excessive incentives for risk taking.  Perhaps some of them were taking big risks on the moral hazard of having Congress bail them out--but as Lehman shows, that was never a slam dunk.  And I doubt a handful of these traders and money managers thought they were betting the firm.  Most of them thought they were gambling on their own careers--just not very much of a gamble.

Frankly, Congress shouldn't need to intervene in these contracts; they're inexplicably stupid.  Shareholders, having been alerted to the problem, ought to be demanding a fix.  Of course, look who's managing a lot of that shareholder money.  Honor among thieves?

AIG clawbacks: barely legal

Our Conor Clarke asked Larry Tribe whether or not one could, legally, tax away the bonuses paid to AIG employees.  Larry Tribe seems to think that the answer is yes. 

This has interesting implications for the banks that have already taken government funds, and certainly, any banks that might be considering doing so in the future.  I suspect it would be hard to write a specific tax that applied only to AIG and not, say, to Citibank--and that's assuming that the Democrats in Congress would want to.  I think it's safe to assume that if this passes, any banks that possibly can will rush to return bailout funds to the Treasury.  And perhaps this is a good thing.  But the attempt to shield shaky banks behind a general distribution of funds will be over.

I suspect that it would also not do any good things for whatever future plans Treasury has.  All of the plans I'm currently aware of involve substantial voluntary participation from sound financial institutions.  I don't think you'll get much voluntary cooperation from banks if you declare that any acceptance of government funds will involve substantial risk that they will appropriate your paycheck.

Banking, again

Ryan responds to my response to his response . . . oy.

Yes, there is fear that some banks may fail. But there are a lot of banks in the United States, and not all of them are Citigroup. So the issue here is not that no lending is available (and this was Megan's initial point -- that a lack of lending would reduce the multiplier on the stimulus). And the Treasury has taken steps to limit the negative competitive effect of propping up zombies, by throwing open TARP money to many, many financial institutions. Is there still an argument for more intervention, in particular, to find ways to wind down the systemically important insolvent banks? Absolutely! But I don't think it's absurd to say that such actions come with intolerable risks to the financial system.

Megan says I "slam" her by saying that she's looking for a way off the Obama train. My point was this -- she said she had buyer's remorse, and given the ludicrous ideas coming out of the GOP, and John McCain, that makes no sense, economically speaking. I don't know why someone focusing solely on the policies would write that, and so I concluded that Megan was focused on something other than just the policies. Which perhaps was improper. My bad! But still, it makes no sense.

I'm still not clear on what, exactly, the argument is here.  My take is that whether you simply let banks drizzle on forever with bad loans eating up good capital, or have a massive banking panic, a banking system that is substantially impaired will eat your stimulus.  A bank panic is, I think, worse, but that doesn't make a Japan-style debacle all right.  Impaired banks lend less.  The Japanese banks poured a lot of money into the crappy construction companies that owed them money, but they didn't lend to anyone else because they needed all their capital to service the toxic sludge already sloshing around their balance sheet.

To whatever extent fiscal stimulus worked in the Great Depression, it was working hand in hand with monetary and credit expansion.  Herbert Hoover ran a sizeable deficit in 1932 but the economy stayed in free fall until the bank holiday and the establishment of the FDIC.  Bank deposits are important, of course, but they're hardly the only thing we use banks for--otherwise we could just set up a postal savings system and let everyone lend to the government at 1%.  FDIC insurance doesn't work so well because it gives people their money; it works because it prevents bank runs.

Of course, now we have the FDIC--but we also have a much more complicated financial market, with a lot of remaining run potential.  Credit can--and indeed has--drained out of the system in a lot of places; the only real growth area is in lending to the Federal government at near-zero rates.  The commercial paper markets are finally settling into an uneasy new normalcy. The entire financial system is still very much afraid of the fallout of a collapse of CIti or BofA, and reserving accordingly.

No one wants to make long-term committments with this much uncertainty.  The stimulus doesn't erase the uncertainty; it just spends in spite of that. 

But when times are uncertain, and people are not totally budget constrained, the sensible action to take is to bung as much of that government money as possible into a bank account.  And as long as banks are desperately building up capital reserves at all costs for fear of another panic, that money is going to stay right there on the balance sheet, stolidly un-multiplying.  Whether they are building up those reserves against a panic, or against the sucking vortex of their previous bad loans, is sort of a secondary consideration.

As for the buyer's remorse remark, perhaps it was badly phrased.  I am still of the opinion that Obama was a better choice than McCain--but the terrifying pace of inactivity at the Treasury, combined with the administration's obvious focus on popular ideological activity rather than grasping nasty nettles like the banking system, is eroding that conviction.  Ryan is free to believe that this is perfectly irrational, that the Obama administration's near-ideal conduct in prioritizing stimulus over bank reform and indeed, staffing the Treasury, could not possibly give anyone but a secret Obama-hater any cause for alarm.  I must simply beg to differ.

Do the banks matter?

Ryan Avent responds to my earlier post on the fixing of the banks by saying . . . well, that's not that important, and anyway, the stimulus can fix the banks, too:

This sounds lovely, but I think it glosses over all the crucial questions. Why aren't the banks lending? I think Megan would be hard pressed to show that the principle reason is something other than a decline in demand for credit and uncertainty over the path of the economy and the ability of potential borrowers to pay. That is, the way to fix the banks is to get the economy going again in order to create profitable lending opportunities for the many solvent banks out there.

That point aside, it's not clear to me that there's an obviously better way to handle the banks than what we're currently doing. There is a case for a Swedish solution -- guaranteeing bank liabilities and nationalising where necessary -- and I would approve of such a move, but it's not at all a sure thing that the benefits to such a plan are worth the potential risks. Reasonable people can disagree. The same can be said for other options out there. It's all well and good to say that fixing the banks is most important. Fine. How? What's the easy solution that everyone is missing?

I don't think it's at all correct to say that the "standard model" of the Great Depression implies a greater role for fixing the banks than for fiscal policy. The banking issues then were quite different. Moreover, there's ample evidence that fiscal policy was effective when allowed to work, and that monetary policy -- and getting off the gold standard -- were crucial. Given the circumstances, reasonable people can disagree over whether the most important thing at the moment is to pursue an appropriately sized stimulus, or engage in aggressive quantitative easing, or start guaranteeing bank debts.

Taking the last point first, I'd suggest he consult the work of people like Christina Romer, Ben Bernanke, or any of dozens of other writers on the Great Depression, all of whom are pretty much united in believing that while the bank holiday, the FDIC, etc. may not have been sufficient, they were certainly necessary preconditions for recovery.  I believe Brad DeLong has said as much in re: the awesomeness of the New Deal.  Or he could consult writers like Anil Kashyap, who say the same thing about Japan.  If you do not get the banks lending and creating money, everything else you do will fizzle.  Frankly, I have a hard time believing that we are even arguing about this.

Why aren't the banks lending?  Yes, in part, it's that the economic uncertainty is making people unwilling to borrow.  And what is a major, major source of that economic uncertainty?  The fear that a lot of banks are about to fail.  There's also, however, the fact that bank debt is not exactly trading at handsome rates, and like everyone else, banks are afraid that if they need to tap some capital to tide them over, they won't be able to.

As to whether there's a better plan than what we're currently doing:  well, if not, I wish the administration would say so, rather than making vague promises that at some point in the future . . . not today, not tomorrow, maybe not next month, but someday . . . they're going to lure a bunhc of private investors into the market to solve all the problems in the banking system.  Because right now we're not really doing much of anything.  And the uncertainty about what the government might do is making things worse.

In some sense we're in the worst of both worlds:  the size of the problems implies some radical government action may be in store, but the understaffing at Treasury suggests no way to find out what it might be.  If he hasn't, Ryan should talk to some people on Wall Street.  Doing so is, of course, generally an exercise in spin and wishful thinking about the vitalness of every single dollar of Wall Street pay to every single banker.  But there's one thing that comes through loud and clear: the uncertainty about what is going to happen is making things worse.  No one wants to lend, borrow, hire, or do anything else when the government may swoop in and change the rules tomorrow.

Ryan ends the post with a slam at me, claiming I only care about the stupid banking system because I'm just looking for a reason to dislike Obama.  I could turn that around just as easily and claim that he's only defending the complete lack of action by Treasury because he wants to prop up Obama's presidency by any means necessary.  But that's not very useful.  Perhaps we could stick to arguing the facts and theory instead of the relative unsavoryness of our putative motives.

Shovel-ready . . . ish

I've been saying for months that "shovel-ready" isn't.  Angry stimulus proponents said I was confused and probably just shilling for the monied interests I represent.

Advantage:  Asymmetrical Information.  The Wall Street Journal reports:

It turns out, though, that shovel-readiness is in the eye of the beholder. Soon after his visit, Mr. Biden found out that his model stimulus project wouldn't see a shovel for almost four more months, possibly longer, knowing how such timetables slip. In North Middleton, a White House eager for action had run up against locals eager to avoid disruption. The locals won.

States are quickly assembling their construction wish lists. But it takes time to advertise for contractors, collect bids, check the numbers, pick a winner and get work underway. A typical paving project -- easy roadwork -- takes close to three months from the time the money is approved to the arrival of work boots on the ground, according to the American Association of State Highway & Transportation Officials. "It is not an instant process," says a spokesman.

Is June too late?  Well, that depends.  if you believe the administration's economic forecasts, growth is going to turn around in the second half of the year.  The money for the easy-peasey projects will thus be arriving just as the economy stops free-falling.  Since stimulus takes more than a year to work its way through the economy, it will not have much effect.  This is why one of the main critiques of stimulus rests on political economy rather than pure economy theory:  it's simply hard for the American government to deliver stimulus in the narrow window it needs to work in.

If you don't, and think we'll continue to free fall, then June is . . . well, not fine, but okay.  On the other hand, you'd better be nervous as hell about the administration's budget numbers.

Grassley to financial executives: drop dead

You know what America needs?  It needs to instill the notion that when you've screwed up, the appropriate thing to do is kill yourself.

Iowa Sen. Charles Grassley suggested on Monday that AIG executives should take a Japanese approach toward accepting responsibility for the collapse of the insurance giant by resigning or killing themselves.

The Republican lawmaker's harsh comments came during an interview with Cedar Rapids, Iowa, radio station WMT. They echo remarks he has made in the past about corporate executives and public apologies, but went further in suggesting suicide.

"I suggest, you know, obviously, maybe they ought to be removed," Grassley said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide.

This is in the same class as joking about prison rape of financial executives--or anyone else.  Suicide is an appalling tragedy.  If you think we should have the death penalty for AIG executives, go ahead and introduce a bill to that effect.  But joking about it is sick.  People don't kill themselves because that's the honorable thing to do when you've failed badly; they kill themselves because something bad has happened and they have an uncontrolled mental illness.  Creating a public culture that reinforces the belief that suicide is the correct response to the deep shame, guilt, and sense of worthlessness that accompanies depression isn't a good idea.  It's certainly not funny.  And this kind of macho performance art where we compete to come up with ever-worse fates to wish on financial executives is frankly a little sickening.  When did our primary national pasttime become hate?

I know what is going to happen in these comments threads, and I would like to suggest that before you press "submit" on that ever-so-righteous endorsement of the notion that financial executives should off themselves, you talk to someone who has attempted suicide, or had a friend or loved one who succeeded.  Find out just how often those people seem to have believed that they were doing the "honorable" thing by relieving the world of the burden of their presence.  What you suggest in three minutes of "gee aren't I clever" typing means a lot of other people paying with a lifetme of grief.  Consider, too, that by suggesting that suicide was an honorable solution to a big problem, Grassley may well have already provided some listener with a big problem the final reason he needed to end it all.

Measurement error

Mortgage fraud rose last year even though the number of mortgages issued fell sharply.  Or did it?  The Washington Post article notes that reporting has probably gone up, because banks are more worried about tracking fraud.  There's also the fact that, as I said in the last post, recessions uncover what auditors can't:  undoubtedly, a number of people who might have gotten away with the fraud in kinder, gentler times, got caught short.

A propos of which, I offer this quotation from John Kenneth Galbraith:

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle. 

What do do about AIG?

For all my sympathy with people whose stupid bets got us into this mess, I am not overeager to hand them more of my hard-earned money.  But the AIG retention bonuses raise a question the government is going to have to ask again and again before all this is over:  do we want to make a point, or do we want to make money?

This is a very common problem in business literature, and bankruptcy law.  One of the unnoticed provisions  of the 2005 bankruptcy reform made it much more difficult to use KERPs, or Key Employee Retention Plans.  The problem is that these funds, often large, were frequently used by management as a slush fund to keep themselves from suffering too much in bankruptcy.  The other problem is that without these funds, bankruptcy often doomed hurting companies, because the only employees willing to stay on a sinking ship were the ones who couldn't get a job anywhere else.

Which is it, at AIG?  The problem is, there's no way to tell from the outside.  The employees of AIG know which traders are good, and which ones are idiots who made a bad mess worse.  But they're not going to tell us--or rather, they'll tell us, and the idiot traders will point the finger at someone else.  From what I understand, you can't even just ask which traders lost money--some of the traders will be able to argue, with justice, that they lost money because they were helping the company cut its risk exposure rather than taking bets they might win.  Others made good trades that were Overtaken By Events. 

Why not just say "no bonuses for anyone at AIG"?  To hell with the bums!  Well, we now own the company.  If we hasten the flight of quality employees out of the company, that will cost us money.  The answer might be some kind of performance bond.  But as in other financial firms, traders often take as bonus what should be salary, which means that they need at least part of their bonuses to maintain their lifestyle.  If they're faced with bankruptcy, the traders who are talented will go elsewhere--the financial market is shrinking, but the top traders still have other opportunities.  AIG has a lot of positions to unwind.  Do we want to leave the job to the dregs of the organization?

I don't know the answer to this question.  Perhaps it is true, as my interlocutors accuse, that I am too stupid to understand the obvious.  On the other hand, perhaps excessive confidence in your diagnosis means that you just haven't asked the right questions.

Collective action

Commenters and emailers are mad because I won't take a side and join them in their witch hunt for someone to blame for all of this.  The general run of the comments seems to be that I am attempting to excuse either my personal malfeasance, or that of my shadowy corporate masters.  Sadly, the only shadowy corporate masters I have pay me a modestly generous sum to bombard you with whatever I happen to be thinking about at the moment.  And I did about as well predicting this as anyone else, which is to say that I called the housing bubble, the savings glut, and the global imbalances, but not the specific disaster that would follow from them.  I just don't happen to think that in systemic crises, looking for some person or small group who was too greedy/stupid/venal/corrupt/arrogant is much help. 

You can perhaps understand my point of view if you think of unemployment.  It is absolutely true that people are often fired because they are lazy, criminal, or stupid.  But when unemployment skyrockets from 5% to 10%, it isn't because laziness, criminality, and stupidity have suddenly shot up.  Some people in the class of unemployed people are all of these things, and most of them could probably have avoided unemployment if they had exercised better judgement about their choice of career or employer.  But just because they could, in some theoretical universe, have avoided their involuntary redundancy, doesn't mean that we should look for ways to blame them.  Systemic effects sometimes swamp personal choice.

This is how I feel about homeowners.  They were caught up in a mania to buy a home, and most of the ones in trouble were at least a little greedy.  They were desperate to buy rather than renting because they thought that buying a house was a way to make money without working, and they bought more house than they could afford because they thought rising prices would help them get away with it.  But they were also getting bad information from the system.  Home prices had been rising for two decades.  How long are you supposed to ignore your lying eyes and put your faith in economic theory?  Especially if you have two years of junior college and never really learned the theory?

But by the same token, I don't harbor any particular animus towards most of the bankers.  The mortgage brokers and the smaller number of bankers who actively conveyed fraudulent information to the borrowers about the terms of their loans, or to the lenders about the income of the borrowers, yes.  (And for all the frothing from left and right, I haven't seen anything beyond very sketchy anecdotal evidence that one type of fraud was more prevalent than the other.  But most of the bankers were getting bad information from the same crazy system that was giving bad information to the borrowers about the risk of mortgages.  If one banker, or a few bankers, make a bad bet, I think we can focus on stupidity and greed.  But when almost all of them do, then I think it's not much more helpful to ask "What did they do to deserve this?" then it is to ask that question about the unemployed.

It's not that I don't think bankers are greedy.  I'm sure they are.  I also think homeowners are greedy. I think community organizers are greedy.  I think greed is a trait fairly evenly distributed throughout the human race, though the focus of that greed varies quite a bit.  That makes it unsatisfying as an explanation for . . . well, almost anything.  It's like blaming the financial crisis on oxygen.

So all of this "Why didn't you stop this!!!!" where "you"=anyone the screecher previously disliked for any of a myriad of reasons, leaves me cold.   Bernie Madoff is lying scum who should be buried in the darkest hole we can find.  But doing so won't fix the sad, sad state of your 401(k).  No one person, or even group of people, in America is powerful enough to bring down the economy, and thank frakking God they aren't.

It is much less satisfying, of course, to have history without villains.  Oh, sure, we've got Allen Stanford and Bernie Madoff, but in some sense they're a symptom of the crisis, not a cause of it:  recessions uncover what auditors can't.  We want someone who can be blamed, ridden out of town on a rail, and his successors hamstrung with so many regulations that they'll have to phone up Tim Geithner and beg for permission to sneeze.  Preferably, they will also be paid in Necco wafers.

But I think that the systemic fixes that will work will be ones that don't really involve blame:  things like preventing banks from getting too big to fail, and empowering regulators who can oversee banks at the holding company levels, rather than having each piece of the elephant examined by a different blind man.  Indeed, I think the biggest systemic fix, though temporary, has already taken place:  it will be a long, long time before anyone takes those kinds of bets on asset markets again, or lets their leverage ratios get so out of control.

And I think the biggest issues are ugly, thorny questions that don't map well onto some neat ideological framework. 

• Do we measure banks by a single standard, and risk that standard going wrong (as some of the Basel stuff arguably did) or do we give regulators more discretion, and risk them getting it wrong? 
  
• Does America want to break up its banks and thereby lose its financial edge to countries willing to have national champions? 
  
• Did the consolidation of banking in countries like Canada and Britain help or hurt?
  
•  What's the biggest way to put the Too Big To Fail (TBTF) institutions on a diet? 
  
• Should we require 20% downpayments, which will stabilize the housing market in the long run, but shrink prices further, and seriously delay homeownership for young people whose parents can't stake them?  Homeownership is not an imperative, but it's at least arguably a boon for communities. 
  
• What should countries--even big, rich, developed countries do--when capital flows swamp the ability of their markets to usefully absorb the investments?  Some theory favors capital controls, but in practice, they are often a source of political corruption.
• (The one that comes to me at 3 am) Does the information problem inherent in investing in a foreign country mean we should rethink financial globalization?  Are foreigners a source of bubbles?
  

I also think that most of the people blogging on this often misunderstand what the fundamental questions are, because they are so excessively focused on the United States.  This crisis is global, and indeed, we aren't even suffering particularly badly.  When a crisis is global, it's hard to assign a lot of causal responsibility to something like Gramm-Leach-Bliley or the CRA.

This will not satisfy anyone looking to grind their ax . . . and then bury it in the head of some convenient political enemy.  But there you are.  The universe is not here to please us.

What's the matter with Jim Cramer?

I've seen a number of people making some variant of the claim that Jon Stewart is the only one brave enough to stand up to the financial journalists who helped get us into this mess. 

This is purest poppycock.  Jim Cramer had no influence over the twin manias that afflicted America in the last ten years:  the madness of homebuyers for ever more expensive houses, and the madness of bankers for buying bonds based on those homes.  Jim Cramer did not persuade the Asian savers to pour moronic amounts of capital into oversaturated American markets.  He did not talk up MBS or CDOs to any level that could be vaguely said to have meaningfully increased the amount of leverage in the system.  If you want a television host, or network,  to blame all of our troubles on, you'd do better to cast your ire on Home and Garden Television, and Flip This House.  They're the ones who told Americans, over and over and over and over, that it was possible to get rich by installing granite countertops.

Jim Cramer ran a show on trading.  You can say it might have been nice if he'd run a show on financial regulatory theory, but there's no reason to think that he would be any good it it--the guy's a trader, not a regulator, not a crack investigator.  The skills that make someone a good trader, like a short attention span and an appetite for risk, are not what makes someone good at economic theory or managing regulation. We lost precisely nothing, as a society, when he decided to tout stocks instead of take a dive into public policy.

Individuals, of course, did lose something by following his advice.  I'm sure a number of his viewers stuck with Bear and regretted it.  On the other hand, I'm sure a number of his viewers sold out of the stock market in October on his advice and saved themselves a bundle.   Do you know whether he has cost viewers more than he made them?  I tend to suspect he has, but I have no actual data on which to base that conclusion, only a general belief that ordinary investors can't beat the market and shouldn't try.

No, neither Jim Cramer nor CNBC created this mess.  They focus mostly on stocks, and though people tend to think of the stock markets as synonomous with the financial system, they just haven't had much to do with the current problems.  And thank God, really.  I'd rather not hand over the responsibility for the US financial system, or even my retirement account, to a guy who goes on camera to bite the heads off of plastic bulls.

The problem with Jim Cramer is the problem with the Jonas Brothers:  what he does simply isn't much good, for all that people seemingly have a large appetite to consume it.  And he encourages people to pursue a destructive activity, trading their own portfolios, when most economic research shows they'd be better off in an index fund.

But this is a minor sideshow.  Going after Jim Cramer is like trying to fix your marriage by getting new drapes.

Ask the editors: What difference does it make to the recession if Citibank and Bank of America fail?

Good question.  Here's a roundabout answer.

In some sense, all of history's progress from lives that were nasty, brutish and short to today's splendiferous buffet of iPhones, nine-month courses of physical therapy, and year-round fresh broccoli can be summed up in three words:  gains from trade.  We live better than a tribe of chimpanzees roaming through the primordial forest because we specialize and then exchange the fruits of our skills with each other.  Trade, as the ecoomists say, increases the size of the economic pie to be divided between us.

But trade introduces an element of uncertainty into our lives above and beyond the possibility that we will be eaten by something bigger than ourselves, or starve to death when the rains fail.  We still have to worry about those uncertainties, although the monsters now most likely to hasten our demise have four wheels and cost entirely too much to service.   But now we also have to worry about our trading partners.  In an advanced economy like the United States, that means millions of other people who are somehow involved in either making the things you buy, or buying the things you make.  We spend more and more of our energy trying to guess what is going on in their pointy little heads.  Since we haven't even met 99.9% of them, these guesses are necessarily somewhat imperfect.

Now, to finance.  Finance is, in most essentially, the way that we distribute gains from trade across space and time.  Money, by giving us a universal unit of account and medium of exchange permits us to make simple trades within large networks--it takes care of the tedious yet complicated business of swapping barter commodities around between myriad players until everyone has what they (think they) want.  Money has somehow, mysteriously, become the world's most sophisticated swap-meeter.

Credit allows us to time-shift those trades.  I give you something you want now in exchange for something I want later.  These days, that thing I want later is almost always money.

In modern America, financial institutions stand between the players and most of these transactions.

But remember, we're now not only guessing about droughts and hurricanes and monster trucks; we're also guessing about the ever-shifting desires of all the people we trade with.  If I lend you money to build widgets, I need to guess how great the demand for widgets will be, what other companies might try to beat you at your own game by making cheaper and better widgets, whether the government might decide it's in the public interest to outlaw widgets, whether you're likely to be the sort of fellow who runs his widget factory into the ground and runs off to Baja with his secretary, and so forth.  I also have to make guesses about the future value of money.  Will the government print to much of it?  How much of the stuff I actually want will this money buy when I get it?

As you probably notice when you look at your TD Waterhouse statement, sometimes we get those guesses very wrong.  When too many of us guess wrong at the same time, and it turns out that America doesn't actually need a Starbucks on every corner and seventeen varieties of social networking site, we get recessions.  So add to the list of things you worry about the possibility that you, and everyone around you, have guessed wrong about your future desires.

If you have ever known someone who guessed drastically wrong about their desire to spend the rest of their life with their spouse, you know that when excessive optimisim crashes, it usually overshoots on the downside.  And financial institutions, which are the collective repository of all of our guesses about the future, are often the locus of the economic equivalent of a nasty, nasty divorce.  We are currently enduring the Alec Baldwin and Kim Basinger of economic corrections.

All this is very interesting, I hear you cry, but what does that mean for Citibank and Bank of America?

Well, when credit markets contract, the time horizon of our trading also shrinks.  We start taking economic activity like Bill W. said--one day at a time.  Credit markets are already contracting because people have realized that they are not nearly as good at predicting the future as they thought they were, and had therefore better neither a borrower nor a lender be.

A major bank failure accelerates this process.  It's the difference between rolling slowly into your garage, and hurtling into it with the pedal to the metal. 

First, their credit disappears from the market, which shrinks the economic pie by making it more difficult to trade goods and services between our current and future selves.     The economic pie shrinks.

Second, the shrinkage of the current economic pie changes peoples' estimation of the future.  Much of economic forecasting is, after all, trend extrapolation.  To make matters worse, we are basically hard-wired to over-weight recent events when predicting what will happen next.

Third, the changed expectations shrink even further the amount of future trade that people are willing to do between current and future selves.  No one wants to defer consumption now and lend some business the money on the wan hope that Snozzleberry soda is the Next Big Thing.  The economic pie shrinks further.

This is all somewhat airy-fairy; perhaps you want to know exactly what will happen if Citibank and America will fail.  Will CDS markets blow up?  Insurance companies in receivership?  Bank runs across the land?

But as the Lehman bankruptcy illustrates, we have no idea exactly what will happen.   The Fed anticipated what might go wrong as best as it could, and actually did a pretty good job preventing those problems from getting out of hand.  But they didn't foresee that the bankruptcy would cause the failure of a smallish money-market fund, or that this would, in turn, cause the entire commercial paper market to lock up.  Where the credit contraction will occur is much harder to predict than the near-certainty that it will happen.

Cramer v. Stewart

The buzz today is Cramer's appearance on Jon Stewart's show.  I've been of two minds about this whole fooforaw, which is why I haven't blogged about it.  On the one hand, I am not a fan of financial cable news (Bloomberg usually excepted).  I think Jim Cramer should be illegal.  Anyone who invests money based on one of these networks, or Wall Street Week, should seriously consider making themselves a ward of the court.  Anyone in the business who goes on one of those shows is talking their book.  If anyone has a good way to make money above and beyond broad, boring strategies like stock indices or bond funds, will not tell you about it. 

On the other hand, the Jon Stewart video that touched this off was clearly misleading.  I do watch these channels, not for the interview but for the tickers and the breaking financial news.  And it was obvious from the clips that half of them were anchors and reporters simply quoting someone else--it's the equivalent of dinging someone for using a racial epithet in the context of discussing racial epithets. 

Ultimately, I find Stewart disturbing because in some sense he's doing exactly what Cramer is--making powerful statements, and then when he gets called on him, retreating into the claim that well, you can't really expect him to act as if he were being taken seriously.  Jim Cramer, whose stockpicking acumen seems slightly worse than your average monkey with a dartboard, frequently issues recommendations that people act on, then brushes off the failures with a shrug. 

Jon Stewart also shapes peoples' decisions.  Video is a medium with powerful claims to reality--people tend to think that if they saw it, it must be true.  This makes it uniquely good at manipulating its audience with skillful editing.  I'm very sympathetic to Stewart's deep critique of financial shows, but I don't think the way to go about it was to string together a bunch of very misleading clips.  Nor to imply that Santelli, who has been vocally against all bailouts from the beginning, was merely frothing on the forclosure program because ordinary taxpayers were finally getting a taste of federal largesse.  But Stewart carefully claims he's just an entertainer, so he has no obligation to hew to journalistic standards on things like quoting out of context.

Financial journalism isn't, as Stewart argues to Cramer over and over, entertainment.  So how come Stewart acted as if it was?

We like Obama, but not as much as we used to

In response to yesterday's comment that Obama has a lot of political capital to spend, a reader sends me this from the Wall Street Journal:

It is simply wrong for commentators to continue to focus on President Barack Obama's high levels of popularity, and to conclude that these are indicative of high levels of public confidence in the work of his administration. Indeed, a detailed look at recent survey data shows that the opposite is most likely true. The American people are coming to express increasingly significant doubts about his initiatives, and most likely support a different agenda and different policies from those that the Obama administration has advanced.

Polling data show that Mr. Obama's approval rating is dropping and is below where George W. Bush was in an analogous period in 2001. Rasmussen Reports data shows that Mr. Obama's net presidential approval rating -- which is calculated by subtracting the number who strongly disapprove from the number who strongly approve -- is just six, his lowest rating to date.

Overall, Rasmussen Reports shows a 56%-43% approval, with a third strongly disapproving of the president's performance. This is a substantial degree of polarization so early in the administration. Mr. Obama has lost virtually all of his Republican support and a good part of his Independent support, and the trend is decidedly negative.

A detailed examination of presidential popularity after 50 days on the job similarly demonstrates a substantial drop in presidential approval relative to other elected presidents in the 20th and 21st centuries. The reason for this decline most likely has to do with doubts about the administration's policies and their impact on peoples' lives.

Obviously, Obama has done more in his first fifty days than most presidents, and hence, has given people more reason to change their minds about him--I myself opined that it was only natural his high approval ratings couldn't last.  But I hadn't realized the landscape was changing so fast.  Still, I think the president has considerable political capital, and if it really is true that only Republican obstructionism stands between him and a fully staffed Treasury, he has enough juice to take on that obstruction and win.

Maxine Waters: crazy like a fox

I've long criticized Maxine Waters for seeming to display a truly astonishing lack of knowledge about the financial system her committee regulates.  Apparently, however, she does have some sources in the financial industry:

Top federal regulators say they were taken aback when they learned that a California congresswoman who helped set up a meeting with bankers last year had family financial ties to a bank whose chief executive asked them for up to $50 million in special bailout funds.

Representative Maxine Waters, Democrat of California, requested the September meeting on behalf of executives at OneUnited, one of the nation's largest black-owned banks. Ms. Waters's husband, Sidney Williams, had served on the bank's board until early last year and has owned at least $250,000 of its stock.

Treasury officials said the session with nearly a dozen senior banking regulators was intended to allow minority-owned banks and their trade association to discuss the losses they had incurred from the federal takeover of Fannie Mae and Freddie Mac. But Kevin Cohee, OneUnited's chief executive, instead seized the opportunity to plead for special assistance for his bank, federal officials said.

"Here you had a tiny community bank that comes in and they are not proposing a broader policy -- they were asking for help for themselves," said Stephen Lineberry, a former Treasury aide who attended the meeting. "I don't remember that ever happening before."

Ms. Waters declined on Tuesday to comment on the meeting, or to say whether her husband still owned shares of OneUnited. Her staff released two letters that showed the meeting had been initially called to discuss industry concerns broadly.

Ms. Waters, a member of the House Financial Services Committee, did not disclose her ties to OneUnited to Treasury officials, who said they learned of them only later.

Er, what?

Ryan Avent says that my claim that the stimulus won't work unless we fix the banking system is "flatly untrue".  Okay, for some value of the word "work" he's right--the government will spend the money.  It will be spent.

But the stimulus is being sold, at least to us econobloggers, on the multipler.  What's the multiplier on spending or tax refunds in a system where the marginal propensity to save is rapidly rising, and the banks aren't lending?  What's the multiplier on future spending when the relevant companies are capital constrained?

Given that the standard model of the Great Depression has the FDIC and the fixes to the banking system playing a vastly more important role than any FDR spending program, I'd say that the liberal econobloggers bear the burden of proof that fixing the banks is NOT vastly more important than whizzing through green energy spending at the lowest possible level of scrutiny.

The US is not France

Henry Farrell argues that the worries that national healthcare will turn the United States into France are overblown:

. . . the claim that America is going to become 'France' ² if we're not very careful doesn't really hold up. If this kind of change were likely, then the US would no longer have a France to become like.

This may require some explaining.There is a thriving literature in political economy on the forces driving convergence and divergence in the world economy. Much of this work sought to discover whether or not countries were converging in the 1990s and the early years of this decade on a single Anglo-Saxon model, given international economic pressures and the success of the US. France was a case in point. Francois Mitterand's efforts to revive and strengthen French social protections when he came to power in the early 1980s led to near economic collapse, and the momentous decision by the French socialists to accept the capitalist straitjacket of liberalized international markets. The succeeding two decades saw the steady erosion of the more social democratic (and socially protective Christian Democratic aspects) of the political economy in France, Germany and other European countries, the withdrawal of the state from ownership of large chunks of the economy and the spread of various more free-market oriented institutions and social practices.

France and other countries faced a profound crisis - a crisis which in some ways was even more profound than that facing the US today. They have faced continuing pressures to 'reform' institutions in a more market-liberal direction over the succeeding two decades. And they have indeed changed in some very important ways. But France did not converge onto the US model despite these pressures. If it had, presumably Crook's and Cohen's criticisms would be rather different than the ones that they are making Instead, it has reformed along a divergent trajectory to the US, with continued heavy state involvement in the economy but of a different variety than previously.

This reinforces a near-universal finding of the relevant literature in political economy as I read it. While there is some diffusion of policy lessons across states, it tends to have limited consequences. Different countries respond to common shocks in very different ways, because of their existing institutional structures. National economic trajectories are quite robust. Even in major crises, advanced capitalist countries tend to tinker around the edges of their institutional systems rather than opt for wholesale reform, let alone converging on a perceived 'better national model' elsewhere.

And this is what is happening in the US. The Obama proposals are not particularly radical departures from existing practice in the US. They are certainly nothing like traditional European social democracy. Even David Brooks effectively acknowledges this, when he says that they are potentially problematic in combination rather than individually. They aren't going to set the US on a different national trajectory, let alone make it 'French' or 'European.' Some of us might like to see this happen, but it isn't going to, even given the ideological trauma that the US is undergoing. And arguing that American individualism is likely to wilt if exposed to nasty foreign influences smacks more of a kind of capitalist-road José Bové-ism than any serious kind of intellectual analysis.

I think he's right:  the United States is not going to become France, or Sweden, or Britain.  But I also think that argument cuts both ways.  When conservatives object to national healthcare, liberals tend to put France front and center.  France only spends 11% of GDP on healthcare, patient satisfaction is high, etc. 

But, as Henry so ably points out, the United States is not France.  We are not going to get the French health care system, because whatever we build will be layered on top of our own institutions.  Unless you can meaningfully reform Medicare to do things like control physician salaries and ration care, there is no reason to expect that you will be able to do this under a wholly national system.  Medicare cost growth isn't significantly better controlled than inflation in the private system.  All of the problems with the Medicare reimbursement structure--and the problems are large--are a result of a historical legacy that has hardened into a nearly immovable system.  You can add to it, but no one has so far had much success with the substantial changes that would be necessary to make the system function better.  It's like trying to maneuver an aircraft carrier in your bathtub.

If we get national healthcare, we will not get anything like the neat little systems proposed by academics who can assume away many of the political problems.  I am aware that proponents would rejoinder, that yes, they know it won't be perfect, but . . . But I'm not making the perfect the enemy of the good.  A national healthcare system in the United States will not merely be something sadly less than ideal--it will be nothing like most of the internally coherent proposals.  It will be something jury rigged out of Medicare, S-Chip and insurance mandates, ugly and very expensive.

No, we won't be like France.  In this narrow instance, it might be better if we were. Instead, we'll be like America, where public institutions are costly, inefficient and generally not very well respected. 

Rodge Cohen: never mind

It looks like he, too, has withdrawn his name from consideration.

My liberal commenters want me to excoriate the Republicans for making the president worry about tax trivia.  I thought I did, yesterday.  But okay, consider them excoriated.  Now, back to The President.  The one with the really sizeable majority in both houses and the stellar approval ratings. 

Mr. President, it's time to get serious.  Go on the road and complain about Republican obstructionism, if it's such a big problem.  You've got a lot of political capital to spend.  Use it.  Tell the public why this issue is important.  Tell them the Republicans are irresponsibly grandstanding and that sainthood cannot be a job requirement for these appointments.  Because unless you think Jesus is coming back, like, tomorrow, we can't really afford to wait for his return to call 144,000 potentially qualified Treasury undersecretaries out of their graves.

Gaming the requirements

We want more fiber in our food, because it's good for us and maybe makes us thin.  We do not, however, seem to much desire fibrous foods; fruits, vegetables, and oatmeal are nowhere near as popular as highly processed carbohydrates.  Manufacturers have willingly stepped in with products that have a lot of fiber . . . on the label.  The question of how much heart-healthy, colon-friendly, waistline-trimming fiber is in the food, on the other hand, remains open:

 For example, Campbell's V8 High Fiber, which Liebman calls "high fibber," claims on its label to offer "20 percent of the recommended daily value" of fiber per 8-ounce glass. As Liebman pointed out in a recent report, the fiber that Campbell's is talking about is maltodextrin, which she says has not been shown to have "any impact on regularity, or any aspect of digestive health." You may have seen the goofy Fiber One Yogurt commercial in which a supermarket employee watches an older woman wolf down yogurt after yogurt. "That's her fourth free sample. ... She's almost had a whole day's worth already," he says, flabbergasted. "And I still can't taste the fiber," the woman replies incredulously. There's a reason for that. The makers of Fiber One Yogurt haven't invented some magically creamy and delicious version of wheat bran. They simply stuffed the yogurt with inulin. A spokeswoman for General Mills, the makers of the yogurt, defends the advertising by pointing to studies showing that inulin suppresses appetite and promotes regularity. Inulin has not been shown to reduce cholesterol levels or lower blood pressure and has a much smaller laxative effect than wheat bran, says Liebman.

Ironically, the rise of these faux-fibers is driven by the greater attention that consumers are paying to nutrition labels. The food companies, in other words, are teaching to the test. Whether it's reducing fat and calories or adding fiber and vitamins, the industry is getting ever more clever at manipulating ingredients of snacks and other treats so that the stats mimic the nutritional data of fruits and vegetables.

I predict a wave of pressure on the FDA to change the labelling requirements.  I propose that instead we funnel the money into a public advertising campaign.  Message:  "If it tastes that good, it isn't good for you."  Evolution has hard-wired us to seek out simple carbohydrates and fat.  If something tickles that deep reptilian longing for deep fried sugar cubes, it's not healthy.  Slapping an RDA number on it won't change that fact.  Things that taste too good to be true, aren't.

Obama too sunny?

Our sister publication asks analysts whether the administration's economic forecasts are too optimistic.  They would have gotten a more interesting discussion if their query had been "Is the Pope Catholic?"  Of course they're too optimistic.  In fact, the word optimistic is too optimistic.  A better choice might have been "insane".  Like Greg Mankiw, I would love to find a sucker investor who is willing to take the other end of a bet that both growth and revenue will fall short of the administration's predictions.

Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse.  Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury.  Meanwhile, the administration is clearly prioritized a stimulus package that will not work without fixing the banks over, um, fixing the banking system.  Unlike most fiscal conservatives, I'm not mad at him for trying to increase the size of the government; that's, after all, what he got elected promising to do.  But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological agenda without much scrutiny, with the heaviest focus on programs that will be especially hard to cut.

The budget numbers are just one more blow to the credibility he worked hard to establish during the election.  Back then, people like me handed him kudoes for using numbers that were really much less mendacious than the general run of candidate program promises.  Now, he's building a budget on the promise that this recession will be milder than average, with growth merely dipping to 1.2% this year and returning to trend in 2010.  Isn't there anyone at BLS who could have filled him in on the unemployment figures, or at Treasury who could have explained what a disproportionate impact finance salaries have on tax revenue?  These numbers . . . well, I can't really fully describe them on a family blog.  But he has now raced passed Bush in the Delusional Budget Math olympics.

It's therefore frankly more than a little disappointing that the free marketers are represented by Grover Norquist, who trots out conservative boilerplate to the effec that we'rea ll going to hell because of EFCA and marginal tax rate increases.  Republicans will not fight delusional accounting by demonstrating that they're still tangled up in the Laffer Curve.  Growth can still hit 1.2%--or even 3.2%--if EFCA passes.  But it manifestly cannot in the middle of an ugly recession.

GE downgraded

This morning, the giant conglomerate exited the now-even-more-select ranks of companies with a AAA bond rating.   S&P announced that is was downgrading the company's debt to AA+, with a note that it mostly meant you should start worrying about GE's long-term debt . . . though not worrying very hard.

What happened next was surprising, in a "What the goddamned $@%! hell just happened?" sort of way:  the stock price rose 8%.  This is about 1600 basis points more than you would expect.  The market had clearly already priced in the risk of a downgrade, and Immelt's statement that the company was prepared to operate as a AA+ company sounded soothing even to me.

Douthat to the Times

Offering congratulations to my colleague, Ross Douthat, on his new job as a New York Times columnist seems almost redundant--he was so clearly the only man for the job.  If conservatism, and the Republican Party, can be rescued from their current crisis, I expect Ross to be the one swinging on a rope through the flaming wreckage to pull them to safety.  That he has managed to become the leading voice of thoughtful conservatism at such an appallingly young age is a constant source of wonder to his colleagues--and crises of confidence in those who have meandered all the way to thirtiy without getting a New York Times column, or even leading a small band of Oakeshottian guerillas on a suicide mission against HHS.

Of course, it's a blow for us--he will be missed from both the offices, and the website.  But we have extracted a promise from him to visit regularly in return for our best wishes in his new gig.

Banks start giving back

Apparently, the restrictions that Congress is putting on bailout monies is pushing a number of institutions to give the money back. 

What to think of this?  One's first instinct is to say that this is an unalloyed good--the restrictions have made taking the funds costly enough that only truly troubled institutions will do so.

The problem is, that's precisely what the Fed was trying to avoid.  Central bankers have long made a practice of keeping it a secret who borrows from them at the discount window, because publishing the names of those who need a temporary cash infusion could trigger a bank run.  In order to get the money into the banks that needed it to stave off a liquidity crisis, Bernanke and Paulson very deliberately asked banks that were widely believed to be sound to take the money too.  Otherwise, the government bailout funds might have touched off the very crisis we were trying to avert.

It doesn't do us much harm to put taxpayer funds into banks that don't need it--we're borrowing at low rates right now, and the banks that don't need the money are the ones with very low default rates.

It's also possible that some of the measures that express our collective rage at the bankers could tip the banks over the edge.  It's satisfying to make AIG cut out junkets for independent insurance agents, but it also probably means that fewer AIG policies will be sold.  Since we now own the company, we probably cost ourselves money in order to express our outrage. Similarly, watching the conga line of Merrill's top performers snaking up Wall Street to other firms, one can't help but wonder if B of A shareholders did themselves any favor by complaining about the bonus structure.  The major assets of these institutions are client relations and human capital that tend to adhere to the individual, not the firm.

Yes, yes, I quite realize that many of these bankers are not nearly as smart as they think themselves.  But they aren't nearly as stupid as popular legend would have it.  I've sat in the investment banking department at Merrill Lynch, and found the whole thing quite ludicrous.  I also grew quite amused at the confidence of vast swathes of America's educated class that of course they could do a much better, and more socially responsible, job running banks and corporations if they weren't much too busy finishing up their thesis on early renaissance poets.  Successful bankers are really, as a class, quite bright, and also have a whole lot of skill sets, like OCD-level attention to details, that pretty much every one of the journalists and bloggers snarking at them lack.  Moreover, the really stupid ones have already been fired.

But even if they are splendid all around chaps, I don't actually want to give them large sums of my hard-earned cash.  Deeply sympathetic though I may be to the problems of maintaining a moderately large co-op apartment and a really modest place in the Hamptons on a mere $500,000 per annum, I fear that unless the need is dire, I must reserve my dollars for the more pressing problem of maintaining a miniature row-house and a bullmastiff on journalist wages.

The only reason I'm willing to give any of them any money is if failing to do so will cost me even more money in the future.  And I'm not sure that I buy the notion that spreading the funds around keeps needy banks from sending a potentially disastrous signal.  At least at the "too big to fail" end of the market, everyone's pretty much clear on which banks need the money, and which could squeeze by without it.  If Goldman wants to return their funds . . . well, they know where to find us.

Jamie Dimon: "Bad regulation drives out good"

I'm watching Jamie Dimon talk.  Like many people, including, er, me, he's calling for a systemic risk regulator to pay attention to global risks.  Unlike many of the regulatory functions that people are currently calling for, this is genuinely something that the government is better at than private actors, because the government has the credibility to function as a netural repository of information. 

There's a decent case to be made that instruments like CDS's essentially became instruments of regulatory arbitrage--a way to get around prudential regulations on things like issuing insurance.  The bank holding companies became a way to amalgamate risk in an entity that was not directly regulated by anyone; each piece had its own regulatory agency that was not responsible for the whole.

Still, I have niggling doubts.  Our financial regulation system is hopelessly fragmented, to be sure.  On the other hand, other countries, with clean central systems, have banks that are in even worse shape than ours.  Centralizing regulation eliminates overlap at the cost of the one regulator you have getting the whole system badly wrong.

Good question

Tigerhawk asks:  "If the CEOs of banks that take federal money, including those who took federal money only after Hank Paulsen essentially ordered them, have their salary capped at $500,000, under what principle do we allow universities that request federal funding to pay their own presidents much more money?"

I spent ten minutes trying to come up with a rationale.  Is it that the universities aren't being bailed out?  No--at least to hear them tell it, the system would fold up and die without federal grants.  Is it that they're performing a service we want?  Well, presumably we also want banks to be providing capital to the private sector.  Perhaps it's that they haven't just cost us a lot of money?  Beg pardon, but aren't educational costs some of the fastest rising major expenses Americans face?  Indeed, the industry's power is so entrenched that many universities are actually raising tuition in the teeth of the recession.

Maybe the reason I find it so hard to figure is that universities are in a mental basket along with investment banking:  services that seem to cost too much for no good reason.  I never could figure out how, in an allegedly competitive industry, bankers were able to charge 7% on their transactions.  And I don't understand why tuition costs rise out of all reason.  They seem to have no link to personal income, the payoff from a college education, or any other metric I can think of.

Maybe you can do better.

Is the cabinet Caesar's wife?

Regarding Chas Freeman's withdrawal, David Rothkopf of Foreign Policy wrote:

The genesis of that crisis is that we have lost perspective on what the criteria for selecting and approving government officials ought to be. Financial trivia, minutiae from people's personal lives and political litmus tests have grown in importance while character, experience, intelligence, creativity and wisdom have fallen by the wayside. Ridiculous threshold obstacles stand alongside obscene ones and when taken with the relentless personal attacks associated with high level jobs in Washington -- the low pay, and the extreme difficulty of getting anything done -- we are seeing even those selected for senior jobs turn away in droves. We are at a moment of not one but an extraordinary array of great crises and challenges for America and we are effectively keeping the people we need most out of the positions we most need filled. 

That's in the defense/foreign policy area, which is comparatively well-advanced in finding staff compared to Treasury.  At least in those areas, a powerful government position is the apotheosis of the field, which means that people are often willing to put up with the hassles.  In areas where there are more lucrative options with near-equal prestige--i.e., nearly all the rest of them--it's getting harder and harder.

This new tradition of bulldogging every appointee in the hope of embarrassing the president has to stop.  We should be focusing on whether or not the nominee can do the job, not whether there is some small breach of an onerous regulation in his history that can possibly be dug up.  It feels good in the short term, but when ability to find a native-born nanny becomes a more important qualification for the presidential candidate than experience relevant to the job to be done, it's time for a national rethink.

Is Apple moving into touch-screen PCs?

If this rumor is correct, they are:  a source tells Reuters that Apple has just ordered 10-inch touchscreens from Taiwan.

My first reaction is "I want one!!!"  But my second reaction is "for what?"  Given my profession, I really need to be able to type; I can't use a jumped-up iPhone as my main computer.  And I can't think why I would carry a ten-inch extra computer around with me.  If the touchscreen is simply an add-on to a laptop with a regular keyboard, I might be interested--but I'm not sure how much extra I'd pay.

This goes to the question everyone is asking about Apple--can they survive, and thrive, without Steve Jobs?  The product that will answer this question isn't a touchscreen being installed this fall; it's the first product to be designed and executed substantially without him, which is still eighteen months or more away.

The face of despair

Rampage shootings in Alabama and a German school.  As a friend pithily noted that other day, "2009 just, well . . . sucks, doesn't it?"  Yesterday seems to have been the distilled essence of 2009.

Update:  On the other hand, every cloud has a silver lining.

Penny wise, pound foolish

Timothy Burke has a nice post on the problems of trying to make small budget changes in order to finesse a revenue contraction--the famed "wasteful spending" that politicians and CEOs are always promising to cut.  These small changes are, in some ways, harder to implement than simply slashing a few big line items.  There are free rider problems, and difficulties establishing a cost-benefit ratio.

Burke talks a lot about transparency, but he doesn't make quite explicit the related problem of monitoring costs.  If you cut a department, it's easy to monitor--you no longer have that department.  But if everyone's supposed to spend 1% less on everything, it requires a phenomenal amount of administrative overhead to design those changes, and then keep track of them.  Transparency can help by effectively outsourcing some of the monitoring to the community.  But you still need someone to, say, formulate a lightbulb policy, hear complaints about the lightbulb policy, and ensure that the lightbulb policy is being enforced.

An extreme example of this is a temp job I once worked where the company, which seemed to be on a fairly rapid downward spiral, had cut costs by rationing office supplies.  The office manager had decreed that everyone got only one pen at a time.  In order to get another pen from supplies, you had to bring her the empty one in trade.

You can imagine the results:  the office rapidly developed a new collective hobby, pen theft.  Once one person in the company had misplaced their pen, the entire system broke down.  By the time I arrived, at any given time one or two people were on the prowl for a pen they could appropriate, and the rest were seeking ever-more-elaborate ways to permanently stamp their ownership on a Bic.  (As I recall, this included the purchase of a fairly expensive gold paint marker to do the labelling).  I'm sure the budget showed an annual savings of several hundred dollars a year, but I can't imagine this outweighed the man-hours that were wasted on their new pasttime.

Most companies aren't this stupid.  But they certainly do make other little cuts that cost as much to monitor as they save.   It's probably particularly tempting for government and universities, because output is hard to directly measure, and the central administration is weak in the face of powerful constituencies.  But anyone who's worked in corporate IT will be happy to tell you about the brilliant ideas that corporate managers come up with to "save money" on IT when budget troubles hit--my favorite was the chap who wanted a fairly well-paid help desk tech to walk around at night, turning off all the computers.  Since this was a financial firm whose traders went home late, this would have involved adding a full time night staff person.  But he just couldn't imagine that it wouldn't work--the arithmetic was so neat in the spreadsheet.

Has the market bottomed?

It has to sometime--why not yesterday?

The chatter on Bloomberg is the most optimistic I've heard in a long while. And Vikram Pandit sounds positively giddy with the news that Citigroup was profitable in January and February; his stock is up more than 40% on the news, which would be more impressive if that didn't represent a gain of less than 50 cents per share.

But as traders say, even a dead cat will bounce if you drop it from high enough.  I'd put my money on short covering before I'd bet on a bottom.

The search for blame

This is the worst thing I have read in a long, long time.  (Warning:  safe for work, but maybe not safe for parents).  I don't even have kids, and I can't imagine how I could survive the pain of having left my kid in a car to die.  I'm pretty sure I'd at least seriously consider suicide.

The worst part about it is that if the article is to be believed, it's not just something that happens to bad, inattentive parents.  It can happen to anyone if they are stressed and distracted enough, because when we're driving, our brains go on autopilot.

"Memory is a machine," he says, "and it is not flawless. Our conscious mind prioritizes things by importance, but on a cellular level, our memory does not. If you're capable of forgetting your cellphone, you are potentially capable of forgetting your child."

Diamond is a professor of molecular physiology at the University of South Florida and a consultant to the veterans hospital in Tampa. He's here for a national science conference to give a speech about his research, which involves the intersection of emotion, stress and memory. What he's found is that under some circumstances, the most sophisticated part of our thought-processing center can be held hostage to a competing memory system, a primitive portion of the brain that is -- by a design as old as the dinosaur's -- inattentive, pigheaded, nonanalytical, stupid.

Diamond is the memory expert with a lousy memory, the one who recently realized, while driving to the mall, that his infant granddaughter was asleep in the back of the car. He remembered only because his wife, sitting beside him, mentioned the baby. He understands what could have happened had he been alone with the child. Almost worse, he understands exactly why.

The human brain, he says, is a magnificent but jury-rigged device in which newer and more sophisticated structures sit atop a junk heap of prototype brains still used by lower species. At the top of the device are the smartest and most nimble parts: the prefrontal cortex, which thinks and analyzes, and the hippocampus, which makes and holds on to our immediate memories. At the bottom is the basal ganglia, nearly identical to the brains of lizards, controlling voluntary but barely conscious actions.

Diamond says that in situations involving familiar, routine motor skills, the human animal presses the basal ganglia into service as a sort of auxiliary autopilot. When our prefrontal cortex and hippocampus are planning our day on the way to work, the ignorant but efficient basal ganglia is operating the car; that's why you'll sometimes find yourself having driven from point A to point B without a clear recollection of the route you took, the turns you made or the scenery you saw.

Ordinarily, says Diamond, this delegation of duty "works beautifully, like a symphony. But sometimes, it turns into the '1812 Overture.' The cannons take over and overwhelm."

By experimentally exposing rats to the presence of cats, and then recording electrochemical changes in the rodents' brains, Diamond has found that stress -- either sudden or chronic -- can weaken the brain's higher-functioning centers, making them more susceptible to bullying from the basal ganglia. He's seen the same sort of thing play out in cases he's followed involving infant deaths in cars.

"The quality of prior parental care seems to be irrelevant," he said. "The important factors that keep showing up involve a combination of stress, emotion, lack of sleep and change in routine, where the basal ganglia is trying to do what it's supposed to do, and the conscious mind is too weakened to resist. What happens is that the memory circuits in a vulnerable hippocampus literally get overwritten, like with a computer program. Unless the memory circuit is rebooted -- such as if the child cries, or, you know, if the wife mentions the child in the back -- it can entirely disappear."

But no one can bring themselves to believe this--indeed, I guarantee that this comment section will fill up with people proclaiming that they never forgot their kids, that they never could forget their kids.  Every single person profiled in the article, of course, would have said the same thing right up to the point where they did. 

We have a phenomenal need to believe we are in control.  I experienced this when I was unemployed.  I'd been laid off from a management consulting firm at the same time as my entire associate class, none of us having worked a day for the firm.  I couldn't return to my pre-MBA professional life, because that life had involved tech consulting, the only industry then doing worse than management consulting.  It was the middle of a recession--I was almost-hired for three different positions, only to be told there was a hiring freeze. But time and again, I, and every other unemployed person I knew, encountered friends and strangers who were determined to prove to us that our lack of employment was somehow our fault.  If only we had tried harder to find a new job, we would have found one--because, you see, if it really was that hard to find a job, that would be pretty terrifying, so therefore, it must not be that hard to find a job.

But the belief that you cannot possibly leave your kids in a car seat on a warm day is very dangerous to your kids.  It is a virtual certainty that someone who read that article, and said to himself "That's BS--I could never leave my kid in a parked car"--will leave their kid in a parked car.  It is the people who are afraid of it, who think that they could do the unthinkable, who are most likely to avoid that fate.

Rodge Cohen to Treasury after all?

It looks like it will be Rodge Cohen for Deputy Treasury secretary after all.  The administration seems to have figured out that it's not going to find qualified people who don't have some substantial contact with the US financial system.

But why not, demand my interlocutors.  Why can't we have regulators who aren't tainted with the blood of Main Street's investment portfolios?  Matt Yglesias snarks:

And yet, look, we're only looking to fill a relatively small number of positions. Timothy Geithner needs a Deputy Secretary. And then there's a need for an Under Secretary of the Treasury for Domestic Finance, an Assistant Secretary for Financial Institutions, and an Assistant Secretary for Financial Markets. There are other positions in the department, but those are the four where you might think that experience with high finance specifically was vitally necessary. It's only three jobs. And you can't tell me that there aren't four people alive in the United States who have experience with finance but lack compromising relationship.

Well, that depends on what you want.  If you want a really nice chap who's spent a lot of time studying one fairly small aspect of the financial system, academics abound.  If, however, you define experience as having a broad sense of how all this stuff works, and an intimate knowledge of the broad US financial regulation system . . . well, where exactly do you get experience with the whole US financial system without, like, working in the US financial system, as either a banker or a regulator?

Financial expertise is not nearly as interchangeable as most people think.  For the same reason that you do not want your dermatologist removing your gallbladder, someone like Nassim Taleb would not make a good regulator of the financial system.  Nassim Taleb knows a lot about the markets he trades in.  He does not, I would wager, know much about the theory behind US securities law.

In normal times, this doesn't matter as much as it does now.  We're already months behind where we should be on a plan to fix the banking system, because the administration put its focus on passing a stimulus plan instead.  We don't really have time for on-the-job training for the undersecretaries. 

Moreover, even the people that I suspect most commentators think of as untainted often aren't.  Professors can have nanny trouble or tax problems as easily as bankers--easier, maybe, because they get a lot more relative gain from chiseling on small amounts, and they don't have expensive lawyers to help them chisel legally. 

Besides, if they have actual expertise that is relevant to the financial industry, you will often find that they have done work for said financial industry, because that pays much better than being a professor.   Or they go into government, to Treasury or the SEC, and thereby become tainted by association with the whole gigantic revolving-door system.

So I suspect that the list of people who:

1. Are US citizens
2. Have never worked in any significant capacity for a failed bank or regulator
3. Have made no substantial "errors" in their taxes or hiring practices
4. Know enough about the global and especially the US financial system to hit the ground running
5. Are prominent enough to come to the attention of Obama's vetting people
   

 . . . is actually pretty short.

It's also worth noting that the notion of the everyman who brings a fresh, outsider's perspective to a bad system, sweeps the scoundrels out, and rebuilds everything fresh and new, is great in the movies.  In real life, it's less effective.  Systems are very complicated things, and the various feedback mechanisms are often not readily apparent to outsiders.  Consider shock therapy in Russia.  What Russia had in the way of an economic system in 1991 was really terrible.  But getting a bunch of outside experts in to make sweeping changes created the environment in which the Russian oligarchs emerged, while the lives of ordinary Russians often got worse.

That's not to say that I'm happy with the notion that we'll get people who are tied to the system, because I actually agree that they are all too likely to protect bankers interests--not because they're corrupt, but because human beings are inherently sympathetic to the problems of those they know best.  I just don't see what the alternative is.  Appointing people with no ties to the financial system just means months of more delay while those people develop some.

Markets in everything

Will trade concert tickets for new job.  Welcome to the barter economy, I guess.

Is nationalization contagious?

One problem that the proponents of nationalization have sometimes considered, but never really addressed, is the possibility of contagion:  capital drying up for banks that are still solvent, forcing them to be nationalized too.  Kevin Drum thinks he has the solution:

This is a real issue, but there's also a fairly straightforward answer: do all the nationalizations at once.  The Treasury Department is already moving ahead with its "stress tests" of large banks, and if they chose to, these tests could be used to decide which banks need to be nationalized and which ones don't.  Then, once the tests are done, the findings are announced at a stroke.  Banks A, B, and C are being taken over.  Everyone else gets a clean bill of health.

With respect, that won't work.  Nationalization implies more than merely wiping out the shareholders, who are virtually wiped out anyway, in stocks like Citibank.    The way it is being talked about now, it also implies cramming down many of the creditors--if it didn't, there wouldn't really be any reason to do it.  It is easily possible to operate with a stock trading for pennies.  It's cash flow that brings companies down.

Creditors, naturally, will not want to lend to any bank that might be nationalized.  Even in today's more stringent environment, banks still depend on access to credit in order to run their operations--especially because without profits coming in, the banks need to roll over their outstanding debt.  If no one will buy their paper or their bonds, they will suffer a collapse that will not look substantially different from a bank run.

Once you nationalize any banks, creditors have to alter their models to take into account the risk that if things go badly, the government may step in and cram their debt down.  This is a fundamental change in US policy, which has always striven to protect at least senior debt holders of distressed financial institutions.  The market for bank capital may not dry up, but it will shrink.

Now, it is possible that the credit markets will believe the government when it says that everything at JP Morgan and Wells Fargo is hunky dory, and these are not the toxic mortgage assets you're looking for.  European countries have managed to nationalize a few banks without nationalizing them all, which is encouraging.  On the other hand, they might not.  In financial markets, because of the high leverage ratios that are inherent in any fractional reserve system, appearance is pretty close to reality.  You may be perfectly solvent, but if the market thinks you're not, suddenly you aren't any more.  It is less important to know whether JP Morgan's books warrant nationalization, than to know whether potential lenders think they do.

There's another issue:  the banks that aren't nationalized will suddenly be competing with banks that are.  Those banks will have access to capital on government-guaranteed terms, which is to say, very cheaply.  That will further stress the healthy institutions.

Bed, bath and beyond

Mattresses join the long list of goods which are supposed to be durable, but aren't this time around.  You would think people would need them, at least as safes.  But Select Comfort and Simmons are both in trouble.  Based on my experience, Select Comfort ought to be--I lived in a place with one for a while, and it was not a gigantic improvement over an aerobed.  But Simmons makes a perfectly fine mattress.

Mattresses, however, were part of the great American fad for upscaling ordinary consumer goods into luxury items.  Companies expanded, went private, and levered up in the expectation of steady cash flows.  By the end of this year, sales are expected to be down around 20%, and both manufacturers and retailers are in deep trouble.

Not all consumer durables will fall off so sharply--when your refrigerator breaks, you have to get a new one, even if you don't fancy spending the money.  But mattresses don't break; the only reason you get a new one is either that you're flush, or you've changed your living situation.  But recessions impede new household formation.  People are much more likely to be sleeping on Mom's spare bed than finally moving out right now. 

Still, once traditional recession-proof stalwarts like alcohol and mattresses start to slip, what's left for your counter-cyclical cash stash?  Canned goods and ammunition are looking better every day.

Credit cut to the bone

Another in the flood of stories on people having their credit lines cut  This has nasty repercussions for their credit scores, pushing their balances to 50% or more of their total credit.

As in many of these stories, what's not made clear is why the credit lines are being cut.  The man featured claims to have carefully kept the credit cards he uses to finance his business used at no more than 1/3 of maximum capacity.  This seems like an ideal customer.

But, like many of the people featured in these stories, their Exhibit A is in the construction business.  The companies cutting his credit lines are probably right that it's dangerous to give him too much room to run them up.

No experience necessary

Economics of Contempt delivers a ringing endorsement of Rodge Cohen for deputy treasury secretary, but points out that there's no way he'll get confirmed, because he's too tied to the financial system.

Cohen would be a fantastic choice for any top government position, and Treasury would be lucky to have him. Few people in the world have a deeper understanding of the global financial system than Cohen.

In today's political environment though, I have a hard time believing that Cohen could get confirmed by the Senate without a bruising political fight. He was heavily involved in the events of last September. He represented Lehman during the weekend negotiations before it filed for bankruptcy, then a few days later represented Barclays in its acquisition of Lehman's U.S. investment banking unit. He also represented Wachovia (his longtime client) in the Citi/Wells Fargo debacle, and presumably advised Wachovia's board of directors that its fiduciary duty required it to accept Wells Fargo's offer, even though that meant violating its exclusivity agreement with Citi. I'm sure Cohen has represented other Wall Street financial houses at various points in the financial crisis as well.

Perhaps we should just give up entirely on the idea of putting someone who, like, knows something about the financial system, in charge of the financial system.  Is Dr. Phil available?  Sure, he may not know much about banking, but he's very popular, and people like to watch him bossing other people around. 

Bank of America unhires foreign MBAs

Apparently Congress' "buy American" clause in the bailout funds is having its desired effect:  Bank of America has rescinded its job offers to foreign MBAs.  I suspect that Bank of America is at least as motivated by a need to reduce headcount as it is by fear of Congress.  But cutting your recruitment based on country of origin, rather than skills and fit, does not seem like the most efficient way to do it.

As a committed free trader--and an MBA who went through the mass layoffs of the last recession--my sympathy is all with the MBAs.  These are people who mostly aren't eligible for scholarships or subsidized student loans; they've borrowed or spent close to $100,000 in America to get their degree, many of them in hopes of staying here.  They're intelligent, highly skilled, and promise to be net contributors to the tax system . . . so America kicks them in the teeth and sends them home without a job.

Ask the editors: What happens if Citigroup fails?

A lot of people have been asking that question, for obvious reasons.  The short answer is that no one quite knows, and that's the problem.

During the Lehman failure, the Federal Reserve and other agencies put quite a lot of effort into making sure that the ripple effects didn't spread too far in the markets where Lehman was a major counterparty.  They were successful:  the unwinding of Lehman's positions has actually been rather smooth, though slow and not particularly happy for the counterparties.  What they hadn't known, and indeed, couldn't really have known, was that the effect on Lehman debt would cause the value of a smallish money market fund aimed at institutional investors would break the buck.  And because breaking the buck is so rare--the last major one had occurred in 1994--they certainly didn't see what would happen next, which is that the commercial paper market would completely freeze up, threatening massive effects in the real economy, like firms not being able to make payrolls.

Continue reading "Ask the editors: What happens if Citigroup fails?" »

Moral bankruptcy

Four weeks ago, I bought a grill on my credit card.  It was not the best grill Home Depot had--indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models. 

It's a nice grill.  But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200.  Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200.  For that matter, I can't even sell it for the value of the loan with which I financed it.  The equity in my grill has dropped by about 50%.  Given all that, I don't see why I should be required to pay back the credit card company.  After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to.  Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan.  I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts.  The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you're the one I borrowed the grill money from.  I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200.  So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?

Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed.

Now, if you can't repay the money you've borrowed, I think bankruptcy is an excellent thing.  And I have always staunchly resisted the tide of Republican moral outrage at people who make stupid decisions about borrowing money and then have to declare bankruptcy.  People make stupid decisions, yea, even unto stupid decisions about their ability to afford large flat-panel televisions and jet skis.  Any system that punishes stupid decisions so harshly that it makes people a prisoner to the dead past cuts off its nose to spite the faces of people who wouldn't be in that kind of debt in the first place if they had been any good at predicting the consequences of their behavior.

By the same token, however, I can't really buy the argument that people who made stupid decisions about lending money perpetrated some kind of moral outrage on the borrower that renders any obligation to repay them moot.  It is all very well to note that the originators may not have cared because they just repackaged the loans into securities and sold them on, but that just pushes back the stupid decision one more level.  Felix is urging his namesake to shaft the people who bought those securities, on the grounds that because they were stupid enough to have bought them, he has a perfect right to push the costs of his own stupid behavior off on to them.

Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people.  This strikes me as fundamentally wrongheaded in two ways.  First, the bourgeois belief that an honorable man repays his debts if he is able is one of the unnoticed underpinnings of a stable, prosperous democracy.  Countries that believe that one can pick and choose whom one is obligated to repay on the basis of how good a person the lender is, how tight their relation to you, or whatever, are low-trust societies with extremely high transaction costs and underdeveloped markets.  If you think you're only obligated to repay regular folks like yourself, then no one but your close friends and family will lend you money.  This makes capital formation tricky.

But second of all, just as there is no way to tax a corporation, there is no way to default on a corporation.  Whenever you default, you are taking money from some person:  a shareholder, a creditor, an employee who loses their job when the corporation is liquidated.

And to return to the question I asked earlier:  what if Felix were defaulting on you?  Because he probably is.  His mortgage bonds are owned by pension funds, bond funds, and of course, investment companies whose debt is in turn held by bond funds, pension funds, and insurers.  If they suffer gigantic losses, they will either leave a bunch of people unprepared for various forms of financial distress, like retirement or a house fire--or the taxpayer, aka you, will bail them out.

Should Geithner go?

Henry Blodget thinks it is time for Timothy Geithner to go.  So far, Geithner's performance has been shockingly unimpressive.  It's not as if he's walking into the crisis anew; he's been the head of the New York Fed for years, and dealing with these issues from the very beginning.  Yet on the really crucial problem of what to do about the banking system, he's been very nearly silent, going to Congress with a non-plan-plan that terrified the very markets it was supposed to reassure.  Blodget also has a point when he says that Geithner has been mysteriously stuck on his original ideas.  I would add that he seems mysteriously stuck on them, but not willing to pay the political cost of executing them, which is the worst of both worlds.

On the other hand, though I've so far been underwhelmed by his performance, we can hardly fire him, because who on earth would replace him?  The administration's vetting procedure has gotten entirely out of hand.    Two candidates for Treasury slots have already withdrawn their candidacy in the face of the delays and Mossad-style interrogation procedures the candidates have to submit to.

The inability to get anyone confirmed has to be laid at the feet not of Geithner, but of Obama.  We're in the biggest financial crisis in living memory, and the administration has so far failed to staff treasury because it is unwilling to take any political risk that a nominee will have a tax or a nanny problem.

These problems are simply the hazard of staffing a treasury department, which often involves people who have made enough money to have tax and nanny issues.  And without those people, we cannot fix the banking system.  The gigantic stimulus package that Obama passed will fall flat on its face, as contracting credit markets absorb the multiplier.  That the Obama administration has been conserving political capital for its stimulus package and its budget, rather than its treasury nominees, is a radical misallocation of priorities.

In these circumstances, I find it hard to come down too hard on Geithner for failing to come up with a newer, better plan; he could hardly be expected to do so without any deputies or staff to help.  

Payrolls fall

The unemployment rate hit 8.1% in February, according to a Labor Department report out this morning.  The numbers were not a surprise, and every sector lost jobs, though constuction has been hit the hardest.  The only moderately surprising news is that average hourly earnings continue to rise, presumably reflecting a concentration of job losses among less skilled workers.

The New York Times story reports:

Some economists expect that the nation's businesses could cut another two million jobs and that unemployment could reach 9 to 10 percent by the time a recovery begins.

Some economists?  I haven't talked to a single one who estimates unemployment peaking below 9%.  Unemployment is a lagging indicator--it will keep falling after output has bottomed out. And output is not yet ready to bottom out, for all of our public officials slapping happy face stickers over all their official reports.  The other day I was talking to another economics journalist at a lunch, and in re: Ben Bernanke's stated public opinion, asked whether he'd met anyone who actually believed that growth would recover in the second half of the year.

"No," quoth he, then added "and neither does Bernanke."

By which he claimed no special knowledge, but rather pointed out the obvious:  the Chairman of the Federal Reserve is not going to start screaming "fire!" in a market that is already primed to stampede.

Ask the editors

Over at the Business site, we've got a new version of the assignment desk.  Ask a question by 3:00, and we'll do our best to answer it tomorrow. (Volume depending).  Anyway, ask away.

Worst. Story. Ever.

The friend who twittered this nailed it when he said that this story is so revolting, it's hard to know which bit of revoltingness to blog.  I don't think I can improve on that, so offered without further comment.

Pennies from heaven

Barry Ritholtz lists blue chip penny stocks:

• AIG (39 cents)
• Citigroup (98 cents)
• E*Trade (66 cents)
• Fannie Mae (39 cents)
• Freddie (39 cents)
• Unisys (37 cents)

What will be the next to go?  I'm betting on GM, but readers may have better nominations.

Why not nationalization?

That's the chorus in the financial pundit community.  Peter Davis of Capital Gains and Games offers a cogent summary of the reasons why not, channeling the FDIC's Sheila Bair.  In summary:

1. No US institution currently has the legal authority to take over a multinational financial conglomerate.  Banks are relatively simple operations, and the FDIC has extensive experience in resolution of a liquidation.  But banking and insurance and stockbroking and securities underwriting and capital markets trading all piled into one institution are vastly more complicated--there is, after all, a reason why each of these businesses have different regulators.  The argument for breaking banks into commercial and investment banking doesn't seem to have made much sense from an economic standpoint, but it may have made sense from a regulatory standpoint.  At least in the US, no regulator had the expertise to oversee these giant companies.
2. The FDIC does not have the funding to perform these kinds of takeovers.  The FDIC is basically an insurance pool--it is structured to handle a market with enough small players to constitute an actuarial universe.  Since it was set up, however, we have built up institutions big enough, and idiosyncratic enough, to swamp the actuarial pool.
3. Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover.  Our global institutions are woefully inadequate to regulate global capital markets.  I think that capital controls are a terrible idea, for reasons I will outline anon, but if we don't want them we'd better figure out better ways to coordinate global actions like these.  We need the financial equivalent of war--specifically, World War II, when countries terrified of existential threats cooperated more than they really wanted to.  

This tracks what I am hearing elsewhere.  In brief, the banks we want to nationalize are too big and complicated to be nationalized; the banks we could nationalize don't need it.

I'm beginning to have a lot more sympathy for Japanese banking regulators.

GM is toast

Image from flickr user D'Arcy Norman

After today's annual report, I don't think there's any question of GM's staying out of bankruptcy.  The company's revenue fell from $180 billion in 2007 to $149 billion in 2008, with the worst crash in the fourth quarter.  Car sales have continued to plunge into the new year.  The company's current asset position continues to deteriorate by about $2 billion a quarter even with massive Federal injections of cash.  With cash & equivalents now down to just over $14 billion, they can't go on this way for much longer.  Though no one knows exactly how much working capital the company needs on hand at any time, the estimates tend to fall around $10 billion.  Dip below that, and they'll rapidly be catapulted into insolvency.

But don't take my word for it--listen to their auditors:

GM warned last month that its auditors, Deloitte & Touche, could raise those concerns, but the announcement underscored the stakes for G.M. as it sought up to $30 billion in government aid to restructure with a bankruptcy filing.

"Our recurring losses from operations, stockholders' deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern," the company said in the filing.

GM has burned through $13.4 billion in less than six months.  What will $30 billion buy us?  Another year, at best, with no signs of a turnaround in the market for cars.  Autos, like other big consumer durables, are especially sensitive to downturns like this.  There's only so much food you can cut out of the budget, but you can certainly drive the 2001 Grand Caravan for another year.

Too, auto companies have a hard time downsizing to deal with crashing demand.  They are, in a way, highly leveraged, as Tyler Cowen describes Asian countries:

The usual story is that these nations are "heavily dependent upon exports."  But if I may wear my Don Boudreaux hat for a moment (or more), is not the state of Kentucky also heavily dependent upon exports?  Is not the Cowen household heavily dependent upon exports?  Why is being dependent on exports so especially bad for parts of Asia?

One answer is that Asian exports, which travel great distances, are often consumer durables and such purchases are especially easy to postpone. Services are often more robust.

Another answer is that many Asian producers have chosen high fixed costs in a way that requires steady or rising revenue over time.  That is their version of being highly leveraged without taking on much explicit debt.  Again a central lesson of this depression will be how many different ways there are to leverage.

Their fixed costs include not just the infamous pension and healthcare costs for retirees, but also plants, environmental liabilities for cleaning up manufacturing sites before they can be sold, and an operating structure that makes it extremely costly to shut down plants for any length of time and then open them up again.  If you plan to keep operating the plant in the future, you have to do things like heat the factory to keep the pipes from freezing, and service the machines; also, the costs of reassembling a laid off workforce mount with every month that the plant remains shut down.  People will not hang around a dying factory town indefinitely, though the depressed state of the Michigan economy actually does help mitigate these costs relative to a place like Japan.

Though I've been against the bailout, on the grounds that failing automakers simply don't pose systemic economic risks, some of the advocates have made a reasonable argument that it was worth spending a tiny fraction of the TARP funds to get the automakers over a temporary hump.  But the hump is clearly, at this point, a rapidly inclining mountain of problems.  And given the reasonable assumption that Chrysler will also need repeated future infusions, the fraction of TARP we will spend on these two companies alone no longer looks that small.

There's another problem:  how long before having to compete against government subsidized bankrupts forces Ford to jump into line for funds?  If we keep funneling money to GM and Chrysler, expect to see Ford at the lending window sometime soon.  Their retained earnings borrowings cannot compete with an unlimited well of federal money.

It's time to stop talking about keeping GM out of bankruptcy, and start talking about what measures might be necessary to keep GM as a (smaller) going concern rather than outright liquidation.  One thing to look at is warranties:  consumers are understandably worried about buying a car where the warranty may not be good in a year.  There may be a government role in guaranteeing that coverage.

Mad money

I hadn't seen this before, but yes, it sure does look as if Bernie Madoff is trying to shelter $62 million from creditors by leaving it in his wife's name.

Bernard Madoff is seeking to keep a $7 million Manhattan penthouse and an additional $62 million in assets, saying they are unrelated to the fraud that authorities say cost victims more than $50 billion. In court papers filed Monday in U.S. District Court in Manhattan, Madoff and his lawyer claim the apartment, $45 million in municipal bonds and $17 million more in a separate account all belong to Madoff's wife, Ruth.

This is--what's the word I'm looking for?  Oh, right--the words I'm looking for can't be printed on a family blog.  It is true that the money will not do much to make $50 billion worth of investments whole, but a little money is better than nothing, and those investors certainly deserve it better than Ruth Madoff, who has been living high off of ill-gotten gains for years.

Help the homeowners

The Obama mortgage plan looks set to help one in nine homeowners.  The Wall Street Journal says "Administration officials made a point of noting that the loan-modification program will not aid people who bought homes merely as investments; the program is designed for those who live in their homes."  Of course, most of them were taking a flyer on a leveraged investment in housing too.

There are a lot of arguments that this won't help--that only principal reductions work.  I'm not sure whether this is so.  Many of the mortgage modifications have failed haven't succeeded in reducing payments--they reduce the interest rate, but pile penalties and arrearages onto the principal, so that payments don't drop much.  As far as I can tell, the Obama plan will result in actual payment reductions, which should reduce the pressure to default.

How successful you think it will be depends on your view of human nature--do you think people are basically good, and will pay if they can; or do you think that once arrears on their mortgages have already trashed their credit, they'll rationally walk away from any house that doesn't have substantial equity in it?  I suppose I take a middling view.  Some people will default, live rent free until the bailiffs come, and meanwhile trash the house, because they think they're entitled not to make payments on a house that has fallen in value.  On the other hand, people are very attached to their homes.  They will often do irrational things to keep them.  And at least a few of them actually believe that they ought to repay money they've borrowed, even if it might be to their advantage to default.

The bigger difficulty, I think, is that with interest rates currently pretty low, there's just not all that much room to modify them down to affordability.  Very few people default because there's a gap of, say, $50 a month.  The gaps are in the hundreds of dollars.  If people were paying interest rates of 10%, there'd be a lot of room to adjust interest rates to make their payments affordable.  Most people in trouble have fairly new mortgages; a couple of years in, the payment on a 10% 30-year fixed-rate mortgage is nearly all interest, no principal.  But as the interest rate falls, the percentage of the payment that's principal goes up, making it harder and harder to eke out enough savings on the interest rate to keep the borrower in the house.

If you can't make enough on the interest rate to keep people in their houses who are really in danger of foreclosure, then all this ends up as is a transfer to people who would rather spend the money for their mortgage payment on something else.

Atlas raised his eyebrows

Perhaps predictibly, Ayn Rand is making a comeback on the right, with Congressmen handing out her books, and loose talk of rich people "Going Galt". 

I don't think that we will see a mass exodus of productive people to secret hideouts.  I look to Atlas Shrugged more for conveniently totable beach reading than an economic blueprint.  What's interesting to me, though, is how many details Rand did get right--like the markets in "unfreezing" Ukrainian bank deposits, so similar to the frozen railroad bonds of Atlas Shrugged.  Or the cascading and unanticipated failures, with government officials racing to slap another fix on to fix the last failing solution.  If only the people in her novels had acted remotely like actual people, rather than comic book characters, I, too, would be rereading the thing now.

She was able to describe these things so well, of course, because she'd seen what an economy looked like while it was being wrecked.  All of Rand's writing is dominated by the fact that she lived through the birth pangs of Soviet Russia, and saw her family's business destroyed by Lenin's ideology, and extraordinarily incompetent economic management.  Her philosophy does not work, at least if by work we mean generate a framework by which a person or society can order itself.  But she was actually a really very gifted observer, and she had a quite subtle understanding of how all the interconnected elements of an industrial economy fit together.  It's a pity she didn't quite get how human beings worked, especially herself.

Full disclosure

. . . my previous thoughts on the topic.

Lunatic idea of the week: why not take banks private?

Felix Salmon notes that in the public mind, top earners=top executives.  In banking, at least, it doesn't work that way.  This means that capping pay on executives does not necessarily cap bonuses that seem to Joe Q. Public to be outrageously, outlandishly large.

When the US government started talking about paycuts for banks' "top executives", it seemed at the time that they were talking only about the top four or five C-suite officers of the company. When the press uses the term, however, it seems to mean "anybody at the company who makes a lot of money".

The WSJ reports that "David Gu, head of Merrill's global-rates division, made $18.7 million in 2008" -- but Gu doesn't even appear on Merrill's old "executive management team" list, which includes no fewer than 34 different names. Merrill's top earner, Andrea Orcel, is on the list, but only in 13th place. And I suspect that many of the 11 eight-figure earners were either on guaranteed bonuses or were traders with essentially no executive role in the company.

Which is not to say that they deserved their bonuses, of course. If the company you work for loses billions of dollars every quarter of the year, then you can't reasonably expect that company to give you a whopping great bonus, even if you personally did well.

From the employee's perspective, why not?  These guys don't think of themselves as part of Merrill; they're free agents.  They're at Merrill for the money, not because they have some great loyalty to the firm; they might as well be contractors.  I doubt Merrill's IT consultants offered to give back performance bonuses because the firm was having a bad year.  Besides, from their perspective, they kept a bad situation from getting worse.

The public wants these employees to identify with the firms, to accept the group responsibility for what happened.  And in the old partnership days, they probably would have felt some responsibility--a partner's fortunes rose and fell with his firm. (And in return, partnerships took care of partners whose production fell off).  But that 40+ year model of employment is gone.  Not just because people got greedy--though anyone who watched one of the banking houses go public can testify, the partners got greedy.  But because markets change too fast.  The current travails of GM workers illustrate what happens to people who bank everything on the fortunes of one firm.

In the case of banking, however, I might be willing to make an exception.  Pretty much everyone agrees that two of our biggest problems are, first, excess risk-taking by banks, and second, the existance of institutions that are too big to fail.  So why not force banks to operate the way they used to:  as partnerships?  I don't think that anyone believed they were creating the kind of massive systemic exposure we ended up with, and in fact the heads of the banks tended to have their personal fortunes tied up in the bank's operations.  But the lower level employees, the ones who actually knew what was going on in their trading books, didn't.  If the banks had been partnerships, I'm willing to bet that a lot fewer of them would have been tempted to lever up quite so far.

They also wouldn't have been able to get too big to fail; the rationale behind going public, other than sheer greed, was the ability to raise more capital.  We'd have a lot of little banks, no one of them big enough to take the whole system down with it.

I'm not saying that this would have been a panacea; it would have costs, of course, and some banks would probably still have failed.  But things might not have gotten so bad so fast if everyone hadn't had such huge incentives to make highly leveraged bets. 

FULL DISCLOSURE: I am in love with Peter Suderman, which is convenient, because we are dating

So Yasha Levine and Mark Ames are claiming victory for their Playboy piece claiming Rick Santelli was a plant by a vast Koch-funded conspiracy to spill tea all over the streets of our nation's cities.  We know this because I am dating Peter Suderman.

This does not quite seem to follow, does it?  I offer their explanation:

Right, so even though Megan has about as gigantic a conflict-of-interest as is humanly imaginable-namely, she spoons every night with a guy who was on Freedomworks' payroll--and even though her article absolutely defends Freedomworks by attempting to discredit Freedomworks' critics--she nevertheless concludes, against all logic, "I think it's kosher." Speaking as two Jews to a McArdle, we want you to know that your conflict-of-interest is about as kosher as a bacon-cheese-and-crab-melt sandwich.

Megan leaves out a few other details--like what exactly her partner Peter Suderman did for FreedomWorks, and how long ago he left.

One project that Megan's life-partner, Peter, produced for FreedomWorks is a video that he directed last year for the site angryrenter.com, which the Wall Street Journal described in its subheader as: "Angry Renter' Web Site Has Grass-Roots Look, But This Turf Is Fake". Fake grass-roots: exactly like the Tea Party/Santelli campaign . . .

And now, here is Megan McArdle's life-partner Peter Suderman's brilliant work for the site that even the Journal says is designed to deceive people into thinking it was representing the disgruntled masses in order to mask its real purpose--to serve the super-wealthy:

What other projects, one wonders, do the Megan-Peter team produce that masquerade as one thing (like for example a non-partisan blog) that really serves another interest (like for example, a certain mega-wealthy rightwing Republican advocacy group)? We may never find out the answer to that, but we sure know the answers to other important matters in Megan's life. Like for example, here is the freakishly-tall Megan McArdle showing the world her "look at me and my life-partner Peter Suderman being a pair of vile consumerists dipshits, I think it's so fun that I'll blog it to the world because that's how vain and shallow I am"

. . .  Ha-ha! Omigod Megan, seriously! It's like, you go girl! Ha-ha!

If you've ever looked at those horrible middle-aged Republican couples who attend Washington balls and fundraisers for soulless reptiles like Mitt Romney, and wondered how they got there, because they look like they must have been born in that horrible middle-aged reptilian state--well, here they are, captured in their middle-youth larval stage, just as vile as ever. And now they're coming after us.

. . . Another late-night development: obsessed Freedomworks groupie/life-partner-of-the-inimitable-Peter-Suderman/I'll-stand-in-any-line-out-there-so-long-as-it's-selling-something-no-one-fucking-needs Megan McArdle, reports on her blog an amazing admission-of-guilt by Freedomworks which pretty much puts this whole controversy to rest. Victory: Ours. The head of Freedomworks tells Megan that they were behind the tea party "grassroots" "protests." Poor Megan, first she was their attack poodle, but now that FreedomWorks knows its cover has been blown, Megan's been demoted to the role of disgraced Freedomworks watergirl: . . . The head of Freedomworks tells Megan that they were behind the tea party "grassroots" "protests." Poor Megan, first she was their attack poodle, but now that FreedomWorks knows its cover has been blown, Megan's been demoted to the role of disgraced Freedomworks watergirl. . . 

Sorry Megan, but it looks like you just queefed all over your first big Republican hit-job. Our advice: go back to blogging your petty shopping habits, you've got a serious future in that.  . . .

So, to sum up the events of the past few days boys 'n' girls: We publish an investigation into the fake-grassroots "Tea Party" protest campaign underwritten by rich Republican rightwing interests, exposing Rick Santelli's role as the launch event MC, and three days later, Santelli is bitchslapped down by his bosses, he's cancelled from the Daily Show, forced to issue a Bukharin-like confession, FreedomWorks confesses that it was behind it from the start as we wrote, and every media outlet in the country from the New York Times on down is writing up the scandal. 

Yes, it's a victory for us and for the forces of independent journalism. Sure, we're doing a dirty chicken dance in the endzone now. But the truth is, it's a bitter victory, because we've also been forced to confront the awfully familiar face of America's own version of the Soviet Union at work: giant scary corporations threatening and scaring smaller fish into censorship, while their bought-off minions in the media do their dirty work to try to protect the mega-conglomerate's brand.

I hadn't realized that my romantic life was a threat to the very foundations of Democracy.  I just thought we were, like, decorating.

Their piece contains yet another factual error:  on July 10th, when Peter and I slept out in line for the iPhone, we weren't dating.  We were good-ish friends.  In the interests of absolutely full disclosure on this vital topic, Peter Suderman had that very week left his job at Freedomworks, and was about to join the ill-fated Culture11.  The two of us decided to camp out in line three weeks before, at a party which I believe to have been hosted by Matthew Yglesias and his roommates, though it could also have been at one of a half-dozen other friends.  We met up that evening at a book party for Reihan Salam and Ross Douthat, and then decamped for Virginia.  While it is true that we shared a queen-sized air mattress for several hours, Peter was a perfect gentleman.

Peter and I started dating two weeks after that, on July 24th, if you can refer to his invaluable help cleaning up my apartment after a fairly lengthy cocktail party as a "date".  Several months later we decided to seek a rental lodging together, thereby permanently depriving both of us of the opportunity to be shocked and a little horrified when people we know get engaged after four months--something we both noted at the time.

I want to make this clear despite what I presume is a general monumental lack of interest in how, when, and where Peter Suderman and I first lost our hearts.  I apologize for the excessive detail, but I don't want any question about a lack of disclosure to linger.

So forward:  during our seven months together, I have learned very little about Peter's work at FreedomWorks, other than the location of his former office, the fact that he had to wear a jacket and tie, and that his FreedomWorks supplied Blackberry was easier to type on than an iPhone.  This was not because he went to any great lengths to conceal the details of his employment from me, but simply because it didn't really come up.  I venture to say that Peter couldn't tell you much about my time at The Economist, other than the fact that I met Hernando DeSoto on my first day, and Hernando DeSoto buys suits at the same New York clothing shop as my father.  We were busy finding out about each other's favorite colors, albums, and preferences in coffee and candlesticks. 

Indeed, until Peter himself pointed it out on Monday, it hadn't occurred to me that anyone would think I had a conflict of interest.  I don't know much about the group except that Dick Armey heads it, and Dick Armey is apparently a genuinely funny guy, as his impromptu response to a question about Monica Lewinsky seemed to indicate.  Peter's tenure with the organization did not overlap his tenure with me.  I don't know what projects he worked on there. I have no financial interest in the future of the organization, as Peter has no plans to work there.  I have not, as far as I know, ever met or spoken to anyone else who works there, except Brendan Steinhauser, who I spoke to for the first time on Monday, a conversation I already blogged about.

But of course, I know all that, and you don't.  It's reasonable to weigh anything I say about the group in light of the fact that someone I love used to work there.  That's why I made sure to disclose it as soon as I realized that it presented the appearance of a conflict of interest.  It's not possible to write a broadly focused blog without having some conflicts of interest--we all have families and friends.  All we can do is tell you about them when they come up.

Ames and Levine, however, seem to think that merely pointing out a potential conflict of interest constitutes a rebuttal.  It doesn't--it just changes how you weigh both sides assertions.  As I see it, the central problem with their original article still stands:  they make a large number of unsupported assertions, one of which I am told by multiple sources is highly unlikely.  They have no source for their statement that Koch funds FreedomWorks.  They have no source that gives them any positive reason to suspect that Santelli said what he said at the behest of some shadowy conspiracy.  They have no source proving any connection between the various groups they accused of "astroturfing".  They're not even right in the follow-up post that calls Angry Renter a secretive FreedomWorks operation: the bottom of the front page notes that the content is copyrighted to FreedomWorks.

If Levine and Ames are so confident in their thesis, why have they not attempted to fill any of the gaps in the follow-up?  Why haven't they offered any explanation for their article's sudden disappearance from Playboy's site, other than the obvious inference that the editors and lawyers concluded they could not back up their claims?

They certainly haven't provided any source for their implication that Peter and I are working on some secret to undermine my allegedly nonpartisan blog.  Aside from a little freelance work and a few speaking gigs, all of the money that I am paid comes courtesy of The Atlantic.  The only person or entity who has paid me to write any of the content on this blog is The Atlantic Media Group.  The only joint project Peter and I have ever worked on, aside from the construction of Ikea furniture, is the videoblogging we did from the iPhone line before we dated.  And I don't think I can rightfully be accused of ever having hidden my politics on this blog, though to be fair, Ames and Levine seem blissfully unaware that I supported Obama.

All I will say about their victory dance for "independent journalism" is that I don't see what their journalistic efforts have actually, y'know, proved.  That FreedomWorks helped organize the tea parties?  Finding that out didn't require "independent journalism"; it required reading the FreedomWorks press release to that effect.  The relevant question is not whether a donor-funded group spread the word about a protest it supported--MoveOn does that every day.  The question is whether, as they basically asserted, Charles Koch masterminded a vast attempt to create the impression of popular support for a project in order to apply political pressure, while hiding his involvement through front groups that manufactured wholly imaginary popular support.

As far as I can tell, FreedomWorks a) isn't funded by Charles Koch and b) hasn't hidden its involvement.  Their central thesis does not jibe with the facts available to me.  Indeed, it seems deeply weird, because getting tea and a hundred or so people together in front of a government building isn't exactly an expensive endeavor.  Last I heard, the DC operation was borrowing the megaphone they used, and getting the tea for free from some tea company.

This doesn't mean I endorse what FreedomWorks does--I frankly don't know enough about the organization to have an opinion on its operations.  It merely seemed to me that their specific charges about the tea parties were insufficiently backed up with specific facts.  Playboy has published some great journalism in its time.  The ratio of speculation-to-evidence in the Levine and Ames piece was thus disappointing, especially since it was rapidly taken up as gospel truth by substantial sections of the lefty blogosphere.

Perhaps Yasha Levine and Mark Ames have some hard facts--or hell, even an untrustworthy anonymous source--who can substantiate some of these claims.  If so, I wish they would provide them.  Or at the very least, stop hurling unsubstantiated accusations at anyone who dares to point out the weaknesses in their case.

Update:  Two commenters and one emailer have already made this mistake, so just to be completely clear, I did not write about FreedomWorks without disclosing that I was dating someone who had worked there.  The very first post I wrote on the topic contained the disclosure that Peter and I were dating.  This was, I presume, how Ames and Levine learned of it.  If they had contacted me before writing their updated post, I would have been happy to give them the timeline, including how long Peter worked for Freedomworks (part of the year before we started dating), and tell them what I knew about the group.  This would have prevented their multiple errors.  But apparently, this is not the sort of thing their "independent journalism" encompasses.

GM's European engine runs dry

GM's European division is in even bigger trouble than the US operations.  The US division at least has some clean options:  liquidation, Chapter 13 reorganization, or government bailout.  But the European operations sprawl across borders and regulatory regimes.  The EU has so far proven unable to muster the kind of coordinated government action that the US is capable of, as its stillborn efforts to deal with Eastern Europe illustrate quite plainly. 

For all our bitching about regulation, Americans rarely appreciate just how important it is to have a central mechanism for disposing of insolvent firms.  Our bankruptcy code is the best in the world: transparent, quick, and focused on making people better off rather than punishing firms that have made mistakes.  When you don't have that kind of authority or skill, you get what is apparently happening to GM as it struggles to sell off Opel before the cash crunch hits.  This has big ramifications for us:

Much like the company's midnight-hour plea for U.S. aid in December, GM is now racing against a tight deadline in Europe. GM Europe needs a $4.2 billion injection by mid-April or it will run out of cash and potentially be forced to cease operations despite its massive presence in the European market, according to people familiar with the company's cash position.

The auto maker accelerated negotiations with the German government this week, saying that it needs that country to provide two-thirds of the Europe loans. GM's biggest operation in Europe, Opel, is based in Germany, and the company employs tens of thousands of factory workers, engineers and workers at dealers in the region.

Mr. Henderson said the company doesn't have a solid backup plan for its European operation. Unlike its unit in the U.S., which could be put into bankruptcy court protection, the European business weaves throughout Western and Eastern Europe, making a bankruptcy scenario almost impossible to pull off, he said.

"It's always a good idea to have a contingency plan, but bankruptcy is not a good plan," he said. Mr. Henderson plans to meet with German officials later this week. If GM Europe fails, it threatens to spoil the company's viability plan, which was recently filed to the Treasury Department in order to meet requirements related to the White House's $13.4 billion loan. In the plan, GM said that $6 billion in aid from governments outside the U.S. is needed in order to make the company viable.

The unwinding of global leverage in the absence of a global regulatory regime may produce a lot more of these kinds of problems.

Rooting for the apocalypse

At business school, I was a notable bear in a classroom full of bulls--I had more than one classmate who took out $100,000 in loans to pay for their education because they couldn't bear to sell any of the Webvan stock they'd so painstakingly accumulated.  In the winter of 2001, Austan Goolsbee asked the class I was taking on technology strategy to predict where the NASDAQ would be at the end of the term.  My prediction of 1724 was over a hundred points lower than the rest of the class.  Unfortunately for me, the class ended too soon; had it lasted another month, I'd have hit it nearly on the nose.

Naturally, when the market crashed, and kept crashing, I took a certain amount of satisfaction in being proven right, and also, in seeing a real, genuine stock market crash.  I was (and remain) a big fan of John Kenneth Galbraith's Great Crash of 1929, and it was fascinating to see what such a legendary episode firsthand.

It was therefore only right and just that the associated contraction in the economy, and the market for newly-minted MBAs, should have sucked me into an eighteen-month vortex of unemployment.  Or rather, unemployment--I managed to scrape enough work together to get by.  But I never knew where my next paycheck was coming from.  I was one of the most deserving people in America to suffer the results of the busting bubble.

Of course it is true that if you have spent any significant time studying economic crises, including our own past ones, you cannot help but have a little intellectual thrill of recognition at understanding emotionally a phenomenon that you previously only grasped intellectually--"So this is what it felt like!"  But for an adult, it's the same kind of thrill that you get when you finally age enough to grasp the sadness behind all those essays about lost youth.  You don't root for cancer to spread just because it gives you a deeper perspective on Keats.

I suspect that this is a lesson that Chadwick Martin will eventually learn in some currently unexpected way, which is why I can't get as irritated by this piece of silliness as some of the people who wrote me.  Young people are excited by epic events, which is lucky for us older and wiser heads, or else who would volunteer to go abroad and get shot at?  Reality will strip the glee away soon enough, along with his hair and his ability to consume vast quantities of liquor.

Markets in everything

CAPTCHAS harnessed to decipher old texts.

What is Jean-Claude Trichet thinking?

A year ago, if you had asked me, or most economics journalists, or most economists, if America would have another Great Depression, I would have said no.  Thanks to Milton Friedman, we knew what had caused the Great Depression:  the Fed's inappropriate tightening in the wake of a financial panic.  We could not do that thing, and would therefore not have another major crisis.

Though in the public mind, all of economics is a war between Keynesians and Friedmanites, this wasn't particularly controversial between left and right (though people on both fringes disagreed).  A generation of PhD candidates built their burgeoning careers on writing about "The Great Moderation"--the kinder, gentler business cycle we seemed to have discovered in recent decades.  Financial regulators certainly bought it--indeed, who wouldn't love a theory that told them that the world no longer suffered through crippling economic declines because they'd just gotten so darned good at their jobs?  That confidence was the genesis of the 2004 SEC rule allowing investment banks to lever up to 30-to-1 and other follies--many of them merely mirroring similar developments in Europe.

Alas, the pundits and the professors and the regulators all turned out to be wrong.  We were wrong in part because we thought the theory was much better than it actually was at recognizing and preventing disaster.  But as Matthew Yglesias points out, we were also wrong because central bankers can't always do the right thing:

But the central banker who holds sway over the largest economic unit is no longer the Fed Chair. Rather, it's the head of the European Central Bank, Jean Claude Trichet. His decisions have vast influence over the fate of the entire global economy. And he seems to not be doing a very difficult job, arguing confidently that there's no risk of deflation and maintaining the ECB's lifelong obsession with inflation.

This is a problem for Europe. But it's a problem for us, too. American households are increasing their savings rates which is macroeconomically counterproductive in a downturn. Counterproductive but probably unavoidable considering the past years of dissavings. But the world needs someone to be reducing savings and generating demand. And many of the people in a position to do that live in Germany. But absent a central bank that appreciates the gravity of the situation and is interested in stimulating demand, it won't happen. And all of us around the world will suffer for it. I think confidence had developed over the past few decades that whatever might come to pass, policymakers wouldn't just repeat the blunders of the Great Depression era. But that confidence seems to some extent misplaced.

Indeed--just look at the rising pressure for protectionist measures a la Smoot-Hawley.  History may not repeat itself, exactly.  But it stammers.

The ECB's inflation hawkery is partly just contagious German nuttiness.  The German government attempted to inflate its way out of the heavy reparations exacted for World War I.  The result was a grotesque hyperinflation, with workers famously being paid twice a day to counteract the daily upward march of prices.  Inflation got so bad that a loaf of bread cost more than 100 million marks, and workers hauled their paychecks around in wheelbarrows. This episode has gripped the national imagination at least as powerfully as guilt over the Holocaust, leaving a powerful legacy of anti-inflationary sentiment that borders on mania.  The entire northern European central banking culture is noticeably more conservative about inflation than its counterparts elsewhere.

So, of course, is the political culture in which it operates, and that seems to play a sizeable role.  But it shouldn't--after all, that's why we make the banks independent.  The big mystery is why the ECB behaves as if it were an arm of the German government. 

Some of it is understandable.  The ECB wants to establish credibility as an inflation hawk, because that credibility is a lot easier to maintain than to regain--just as Paul Volcker.  And the Euro has several profligate members with a history of inflating their way out of debt problems or export woes--the ECB wants to keep it crystal clear that this will not be tolerated.

But even with the most sympathetic view of their actions, Europe is dropping the ball here.  The euro area is being notably stingy with bost fiscal and monetary stimulus, and I'm not the only one who's stonkered by it.  If fiscal policy remains too tight, it threatens the very union they're supposed to be protecting--how long can Greece and Italy, Ireland and Spain, suffer under a tight regime before one of them pulls out?  And if one of them pulls out, the other weak sisters will pay sharply higher interest rates to compensate for currency risk, probably forcing them out as well.

It may be as simple as not wanting to face an outraged public.  In which case, the theory of the Great Moderation, the independent central bank, may be even weaker than we thought.

How low will the stock market go

According to Henry Blodget, probably a lot farther:

There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000.  During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.*  After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X.  We're still in the middle of the last one.

The most recent bubble peak, 2000, was by far the most extreme we have ever experienced.  In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X.  (See chart above.)

Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)

So where are we now?

Based on Professor Shiller's latest numbers, we're at about a 12X P/E.  (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E.  Plugging in today's 700 on the same earnings number, we get about a 12X P/E).  The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.

Incidentally, if you think that people still have a vestigial view of housing as an investment asset rather than a consumption good with residual value, this implies that housing will substantially undershoot as well.  Right now, what consensus there is on the housing market thinks that it will fall just about half again as far as it has fallen, to the historical average.  But if it follows a stock-like pattern, you should see it plunge to about 50% of the historical price-to-rent ratio, which has generally stood around 1.1.  That implies prices well below where they were in the 1990s.

A ratio of 0.55 seems too low, but 0.8 doesn't seem out of the question.  With rents falling, that means housing prices would drop at least another third if they overshoot badly on the downside.

Tea party follow up

Several people have pointed out an obvious reason that conservatives might have registered tea party domains last August--Ron Paul was fond of them.  To be sure, I'm not sure that timeline works out either, but it's at least as plausible as believing that some entry-level activist started plotting this months and months ago.

Meanwhile, I've spoken with Brendan Steinhauser, the chap at FreedomWorks who has helped organize the tea parties.  FreedomWorks has been, as far as I can tell, completely open about their interest in furthering the tea parties, which is not surprising because they've been completely open about opposing bailouts since before Obama took office.  As Brendan describes it, he and FreedomWorks were calling for demonstrations against the stimulus even before it passed, but he got the teaparty idea from Michelle Malkin's blog.  FreedomWorks emailed its members and set up a website to encourage people to join in.  This seems like pretty standard political organization tactics.

Overall, I'm pretty surprised that Playboy let the piece go up, left it up so long, and then took it down with no notice.  To be sure, bloggers speculate all the time.  But they make it clear that that's what they're doing.  And when it seems clear that they've made an error (and those assertions about the Koch family now seem to, at best, require some good sourcing), bloggers update their posts.  They don't vanish them and hope that no one will notice.  I'm contacting Playboy's offices for comment, but not holding out all that much hope.

(Grass) roots

JP Freire, the American Spectator's managing editor, who organized the DC tea party, writes:

People have jobs, and yet were angry enough to show out in strong numbers all over the country. We don't pull the tricks that other organizations pull -- hiring hobos, staging some sort of publicity stunt, employing extremely harsh rhetoric. I'd say it was a group of people who wanted to say something for themselves rather than have others say things for them.

The weirdest part for me was walking to the protest site and see that people were already hard at work, doing some rally cries. These were small business owners, families -- not grassroots activists. These were regular people. It looks like this stimulus is the change even conservatives and libertarians have been waiting for.

It does strike me that perhaps some of the people who linked the article without wondering about its weak sourcing just couldn't quite believe that ordinary people would be moved to protest a gigantic government spending package.  They don't think of that as something one protests about.  War, yes, taxes no.

JP also has something to say about his alleged connection to the "Kochtopus".

Is this why Playboy took the article down?

Regarding my earlier post, a friend from a libertarian think tank who's been around long enough to know where the bodies are buried writes,

As you note, the Kochs used to be a major funder of Citizens for a Sound Economy.  FreedomWorks was created after a major rift within that organization led to CSE's dissolution and the creation of the Koch-backed Americans For Prosperity on one side and FreedomWorks on the other.  Relations between the two groups are civil.  But, it'd have to be a cold day in Hell for the Kochs to be cozying up to FreedomWorks. . . . It's possible there's been some rapprochement in recent years.  But I rather doubt it.

This is roughly what I heard from others.  In other words, the central thesis of the article, that the Kochs are engaged in a broad astroturfing effort through Freedomworks, is most likely bunk.  That story should never have gone up with absolutely no verification of a fact so central to its core thesis.

If Santelli or Koch sues,  the rest of us big media bloggers are going to have to work hard to reassure our employers that we won't put them on the hook for a lawsuit.

Playboy dips a toe into investigative journalism

This morning, my twitter feed was all abuzz with this piece from Playboy purporting to prove that the Tea Party phenomenon was all a Koch-funded astroturf operation, with the implication that the initial Santelli rant that touched it off was some sort of a plant.

What's that you say?  The link is dead?  Indeed it is.  Fortunately, as it happens, I happened to have a second browser open with the article; text below the fold. 

Continue reading "Playboy dips a toe into investigative journalism" »

Spenders turn into savers

This morning's BEA report on personal income and expenditures was quite a surprise:  personal income and expenditures rose 0.4% and 0.6% respectively in January, much better than expected.  Much of the increase seems to be linked to COLA adjustments for government workers and people on government benefits (Social Security, etc) and is therefore probably not reason to hope that economists have been taking this banking crisis thing a little TOO seriously.

Savings, meanwhile, is on the march:  personal saving rose to 5% in January.  As Paul Krugman notes, that means that in the short run we can expect the economic contraction to continue, especially since banks aren't doing much to transform the savings into new investment (in part because businesses aren't much interested in investing in new productive capacity while demand is slumping).  The personal savings rate isn't even particularly high right now by historical or international standards--something closer to 8-10% would be more in line with everything except very recent history.

There is a lot of talk about the paradox of thrift out there, including from Krugman.  But just as I think the time has passed for attempting to cure the banking system's problems by pretending they'll get better if we just wish spend hard enough, at this point it seems to me that there is no realistic policy which can, or should, deter people from saving more of their income.  It doesn't matter how much stimulus you pump into the system; overleveraged households still need to delever, because their previous level of leverage wasn't simply predicated on a belief that things wouldn't get worse; it rested on a belief that they would get *better*.  Since they are obviously not going to do so, people are trying to rebuild their balance sheets.

Given that savings are probably going to increase to something closer to 10%, what does that mean for policy?  Well, for starters, it has big implications for our predictions for stimulus multipliers.  The money going directly to highly budget-constrained people will be spent--unemployment benefits, for example.  But much of the rest of it will be saved because our marginal propensity to save just radically shifted.

Freddie Mac CEO resigns

Only a few months after he stepped into the head spot, David Moffett is stepping down as the CEO of Freddie Mac.  He'll leave by March 13th, and an interim CEO will replace him.  All rather sudden, but no word on why.  Developing . . . 

Have the Republicans "lost" Jindal?

That seems to be the decisive opinion of the left.  I haven't blogged his speech because I didn't see it--I was speaking at an Atlantic event and was shuffling around the stage during the response.

I have to say I was shocked at how bad he was--a reader nailed it when he noted that Jindal sounded like he was narrating an educational video.  I was shocked because I've seen him in person, and he was really good, not in Obama's stentorian "I Am a Statesman" way, but with a warm, understated charm.  The only thing warm about Jindal's speech was the cheeks flaming in sympathetic shame as they watched it.

But does that really mean that he's stuck at governor? Sebelius seems set to make the jump to HHS even though her response to Bush's state of the union was even worse than this.  Responses to the state of the union are difficult to do well--very few people, even politicians, are naturally gifted at talking to a camera as if it were a humn being.  It seems unlikely that a single bad one is actually going to prove the end of his chances at a 2012 run.