Geithner's Plan

After a months of discussion, The Obama administration's plan for the banking sector was revealed today by Treasury Secretary Timothy Giethner. He unveiled it today in a Wall Street Journal op-ed and a press conference this morning:

The U.S. government will offer hundreds of billions of dollars in equity and loan guarantees to investors who bid against one another to buy troubled assets from banks, officials said today.

The "Public Private Investment Plan" detailed this morning, a long-awaited but risky piece of the government's financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.

Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks. The government will use up to $100 billion from the Troubled Assets Relief Program, matched by private funds, to capitalize the purchases.

The hope is that instead of hoarding cash in case those assets continue to lose value, banks will resume lending money once the toxic assets are off their books.

The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does.

As with many of these issues, it's good to check in with the people who got the economic mess right the last time around and see what they say about these current developments.
Paul Krugman:

Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September. To understand the issue, let me offer some background.

Start with the question: how do banks fail? A bank, broadly defined, is any institution that borrows short and lends long. Like any leveraged investor, a bank can fail if it has made bad investments — if the value of its assets falls below the value of its liabilities, bye bye bank.

But banks can also fail even if they haven’t been bad investors: if, for some reason, many of those they’ve borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank’s debts. And this opens up the possibility of a self-fulfilling panic: people may demand their money back, not because they think the bank has made bad investments, but simply because they think other people will demand their money back.

Bank runs can be contagious; partly that’s for psychological reasons, partly because banks tend to invest in similar assets, so one bank’s fire sale depresses another bank’s net worth.

So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]”

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

James Galbraith:

If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.

Dean Baker:

Treasury Officials Who Missed $8 Trillion Housing Bubble Still Haven't Noticed It

If the NYT description of the Treasury Department's bank rescue plan is accurate, then this should have been the headline to the article. The article reports that the Treasury Department is confident that it will not lose money by buying mortgage backed securities at far above their market price because: "the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come."

House prices are currently falling at more than a 20 percent annual rate. If they fall another 20 percent in real terms, they will be back at their trend level. A further 20 percent decline will hugely increase the percentage of mortgages that are underwater, reducing the value of mortgage backed securities from their current level. There is no obvious reason that house prices should then again rise above their trend level.

The failure of people like Ben Bernanke and Timothy Geithner to recognize the $8 trillion housing bubble led to this crisis. It appears as though they somehow still don't understand it. This fact should have been the headline of the news article since their continued failure to understand the housing market could cost taxpayers trillions of dollars and further damage the economy.

Atrios (While he writes things in a much funnier way, don't forget that he has PhD in economics):

People are spending too much time trying to make sense of a plan which doesn't make much sense, certainly not as advertised.

The Geithner plan will:

1) Funnel more government money to the banksters.
2) Allow the banksters to pretend for a bit longer that their hunks of big shitpile aren't quite as shitty as we thought by using the bullshit price that this process comes up with, allowing too big to fail businesses to stay in business for a bit longer.

This might make sense if you truly believe the magic market you believe in fervently is genuinely incorrectly pricing the assets, perhaps because you genuinely believe that if you could turn around the economy fast enough that you could massively reduce expected foreclosures.

But if you genuinely believe that, I don't think you've been paying too much attention to just what's been going on in the housing market. I don't think you paid too much attention 3 years ago when you didn't realize that it didn't quite make sense that so many people could afford $700,000+ homes in Orange County. I don't think you paid too much attention to the degree of speculation and outright fraud that was happening in parts of the country.

And adding a non economic perspective to the mix, Chris Bowers:

The question of the day is whether or not the Obama administration's "new" bailout plan, presented today by Treasury Secretary Geithner, will work.

Over the weekend, Paul Krugman was the leading voice of "no, it probably won't." On the other side, Brad DeLong was the main proponent of "yes, it probably will."

Lacking relevant policy expertise, I am not going to pretend that I can determine whether Krugman or DeLong is correct. And even if I had the expertise, economics is a field of study where, like all areas of social science, "experts" disagree with each other all the time. So, no matter if you are in the "nuh-uh" or "ya-huh" camp on this one, it isn't hard to find someone smarter than you, and more well-versed in economics than you, who agrees with you. So expertise and smarts aren't really the main sources of disagreement in this case. People don't disagree with you just because they don't know what they are talking about.

Instead, disagreement in this case comes down to a more fundamental, personal disposition. Do you trust the people running the financial sector, or not? Do you think that the current crisis was simply a blip in an otherwise well-functioning economic financial system?

Personally, I don't trust it. I don't think the people running the financial system have anyone but their own best interest at heart. Further, I don't think that what is good for them has ended up being good for us. I don't think there is anything stopping them from ripping us off with taxpayer money the way they ripped us off with 401k money. I don't think there is anything stopping them from just making more bad assets that sink us, while they get rich. My belief is that we need to impose stricter limits on executive compensation, place increased restrictions on financial speculation, and to reorganize government spending and create a much larger, non-bailout and non-military oriented public sector in a way that protects us from these financial speculation bubbles. Whether or not the bailout plan will work, this should prevent us from ever getting into this situation again.

Sorry for the extensive quoting, but I wanted to get it all out there. While no plans are a guaranteed success, this just seems like a much riskier strategy than was required. And even if the plan works, I'm not a fan of using taxpayer money to cover the asses of same people who were gambling our money away in the first place. In this plan none of those people lose their jobs, in fact they are essientially rewarded for their actions.

I liked the section in Geithner's speech about regulation, but like Chris Bowers said it seems to be a bit backwards. You give them piles of money to keep the current system in place, AND THEN you come up with a plan for new "sweeping" regulations? Wouldn't you put in the new sweeping regulations, and then hand them piles of money? What's stopping these people from taking our money and engaging in the same risky behavior? They clearly don't have a problem buying new jets or throwing lavish parties while we're propping up their businesses and they know they're under the microscope - so why would any of that suddently change?

To paraphrase Dean Baker, if Geithner isn't smart enough to resolve the banking crisis without enriching those who gave us the banking crisis, then he proably shouldn't be Tresury Secretary.

Putting meaningless compromise over "doing what works"

Barack Obama wants to change the status quo. He won the election on a promise to unite the country, to end the era of red and blue states, and most of all against partisanship. He garnered plenty of republican support during the election (insanely impressive for a black guy whose middle name is Hussein), and there are plenty of people out there who believe in his message, and are willing to put aside partisanship for the sake of change. That's great, but he needs to remember that republicans (the people) may have embraced him and helped approval ratings into the 70s, but the Republicans in congress are a very different animal.

The debate over the stimulus started with Barack pushing a bill that while large in size, didn't dedicate much of the money to things that will actually stimulate the economy. There were good things in the bill, but there were also huge amounts of money devoted to tax cuts, and relatively small amounts dedicated to transportation and infrastructure spending as a result. When talking about the stimulus plan, Barack has always said that he didn't care who said it, he just wanted to go with "what works". Well, here is what works, according to a chart that was even made up by a right leaning economist:
And from Obama's meeting with the republicans today, we KNOW he doesn't think they'll work:(a rough live transcript by some anonymous hero):

This is just the first step.
Says would love to not spend this money
Has no interest in increasing government just to increase the size of government.
But he talked to many economists who told him almost uniformly that they needed to get a stim bill up and running asap to avoid huge unemployment------------
So... We put together a package with direct spending and tax cuts.
Mentioned martin Feldstein.
Spending has a more simulative [sic] affect than tax credits.
For every dollar of direct spending, we get 1.5 dollars of stimulus
For every dollar of tax cuts, we get 75 cents of stimulus

So even Obama's economic team has told him they won't work, and and Obama doesn't think they'll work. So why waste a third of the money to tax cuts that won't stimulate the economy, you ask?

Well after electing a Democratic president with a wide margin and an overwhelmingly Democratic congress, for some reason it's always about pleasing republicans, and hoping they'll play nice:(Msnbc's first read and Digby's repsonse)

Looking For Bipartisanship Down The Road: Why does bipartisanship support for the stimulus matter? Let's get one thing straight: Obama's stimulus plan is going to pass Congress, and the vote won't be that close. But this isn't the goal this week -- or next. For Team Obama, it's about winning over Republicans. And for some on the left, this doesn't compute. After all, some might ask, "Who cares? The election just happened and voters overwhelmingly chose Democrats to run the government, both in the White House and in Congress." But what Obama needs is a Republican Party that isn't consistently confrontational, because he's going to be asking for some trickier bills, including more money for the financial industry, potentially support for nationalizing some parts of the banking industry, and a bunch of money to shore up the housing crisis. So while Obama doesn't need GOP support for stimulus, he wants the opposition to be against him in a way that he can win them over for more favors and -- most importantly -- prevent potential filibusters.

Right. Because it's in their best political interest to give Obama "favors."

They will cooperate if they get what they want and they won't if they don't. If Obama comes to them and says "we capitulated on your demands on the stumulus package a year ago, so now you need to fulfill your end of the bargain" they'll say "what bargain?" And that isn't something that just applies to Republicans. It's the way politics works. The idea that the Republicans will eschew a filibuster on, say, health care, because Obama gave them some extra tax cuts in the stimulus package is just absurd.

Obama seems to under the impression that the Republicans are negotiating out of good faith. The problem is they aren't. And they won't, no matter how many concessions you give them. They won't say it outright like he did, but there is no doubt that the majority of them agree when Rush Limbaugh said he wanted Obama to fail. Of course they do! If he fails, they have a shot to get back into power, this isn't rocket science. And if the bill fails to stimulate the economy, it's on Obama and the Democrats. No one will go back and see that it got 10 republican votes as opposed to 5. This is his bill, and it's in Obama's interest that it works.

So where are we now?

After Obama made the massive initial concessions to win Republican support, the Republicans still won't support the bill. As usual, Atrios says is it best:

Lucy And The Football

I am just shocked to discover that Republicans will vote against the bill which has been made shittier to please them.

Just shocked.

It's also even more frustrating when you think of how this could have gone down differently.

Instead of starting by preemptively appeasing Republicans with tons of tax cuts, why not aim high and write a progressive bill of similar size but only containing things that will actually stimulate the economy? When the republicans bitch about the bill (like they did even after the crappier compromise bill), you can compromise on minor stuff if you want, but no need to go crazy, people elected you because they didn't like how Republican economic policy crashed the economy. When they keep whining about the bill, kindly remind them that you won the election because of their policies, have a 70% approval rating, and if they don't want to get on board they can follow Thomas Friedman's advice and "Suck. On. This."

Again, this bill will pass regardless, there's no need to make it suck. You only need a vote or two in the senate, and there are few republicans running for re-election who won't want to look like they don't care about the economy no matter how much they hate what you're doing.

Then when the bill comes up, and the Republicans mostly vote against it (Surprise! This will happen with the appeasement bill too!), and you take ownership of the bill, and that's not a risk this time, because you got a bill that people agree will do the most to stimulate the economy.

I realize this will never happen because it would be to "partisan" and that would make it evil or something, but I still don't get it.

The thing that bothers me is that the political result of both plans would be fairly similar.

After a "partisan" stimulus plan, the Republicans would be mad at Obama, claim he's running up the deficit, making the economy worse and ruining the bipartisan climate. But at the same time he could rest assured that he did as much as possible to turn around the economy, the results of which will have a large say on how his presidency (and hopefully his second term) play out.

After the current plan passes, the Republicans will claim he's running up the deficit, making the economy worse, and ruining the bipartisan climate. But unlike before, he is on the hook for a shittier plan to stimulate the economy.

This isn't to say that the stimulus won't do good, it has good elements and any help is desperately needed. But this was a massive opportunity for progress that slipped through our fingers. We had the opportunity to aim big, and chose not to.

Barack is a very smart person and politician, and I'm pretty sure I understand what he's trying to do here. He ran on this type of bipartisan and inclusive government, and unlike so many politicians, he ACTUALLY means this stuff. We shouldn't expect anything different, and it is somewhat refreshing to watch a politician does what he says he will do. I just hope that he chooses his own words of "doing what works" over the "compromise for compromise sake" approach in the future.

Obama's Cabinet, Progressive faith in his economic team, and why I don't share it

I've always liked Openleft's right to respond policy, so I figured it would be a good idea to put Obama's response to criticism of his nominations up here, as well as some other thoughts, defenses and theories about Obama's appointments.

First, Obama's response to criricim of his cabinet nominees:

"Understand where the vision for change comes from, first and foremost," he said. "It comes from me. That's my job, to provide a vision in terms of where we are going and to make sure then that my team is implementing [that vision]."

"The last Democratic administration we had was the Clinton administration," said Obama. "So it would be surprising if I selected a Treasury Secretary who had had no connection with the last Democratic administration, because that would mean that the person had no experience in Washington whatsoever. And I suspect that you would be troubled and the American people would be troubled if I selected a Treasury Secretary or a chairman of the National Economic Council, at one of the most critical economic times in our history, who had no experience in government whatsoever. What we are going to do is combine experience with fresh thinking."

"I think when you ultimately look at what this advisory board looks like, you'll say this is a cross-section of opinion that in some ways reinforces conventional wisdom and in some ways breaks with orthodoxy in all sorts of ways," he went on. "And that's the kind of discussion we want. We want ideas from everybody. What I don't want to do is to somehow suggest that somehow suggest that since you served in the last Democratic administration, that you're somehow barred from serving again. Because we need people who are going to be able to hit the ground running."

Paul Krugman's take on the economic team:

A thought I’ve had: there have been some complaints from movement progressives about the centrism/orthodoxy of Obama’s economics appointments. To some extent this was unavoidable, I think: someone like the Treasury secretary has to be an experienced hand who can deal with Wall Street, and I haven’t heard anyone proposing particular individuals with clearer progressive credentials to hold that position. (And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC.)

The now fairly widespread in progressive circles theory that Obama is using centrists to pursue progressive policy, put into words by Robert Kuttner:

As progressives, we can view President-Elect Obama's emerging economic team in one of two ways. Either he has disappointed us by picking a group of Clinton retreads--the very people who brought us the deregulation that produced the financial collapse; the fiscal conservatives who in the 1990s put budget balance ahead of rebuilding public institutions. Or we can conclude that he has very shrewdly named a team of technically competent centrists so that he can govern as a progressive in pragmatist's clothing--as he moves the political center to the left.

Which will it be? Certainly, Obama's press notices are phenomenal, and Republicans have almost been more enthusiastic than Democrats. When Arianna Huffington and I debated George Will and David Brooks on George Stephanopulos's This Week Sunday morning, the conservatives were, if anything, more approving of Obama's picks than we were.

On another channel, Republican guru Ed Rollins could be heard exulting about the Obama cabinet. I even had the out-of-body experience of debating Pat Buchanan on Hardball, to find that he thought Hillary Clinton was a terrific choice for Secretary of State. Obama now has the highest approval ratings on record for any president-elect, and he has the entire Republican pundit class in a swoon.

. . .

Obama is the president, and he will do what he deems necessary. In my writings during the campaign, I sometimes found myself second-guessing Obama's strategy--and he invariably turned out to be smarter than I was.

And finally, David Sirota's take on Kuttner's theory:

As Rachel says, he seems to be saying he's going to put policy over personnel. Or, as I noted, it's what David Axelrod told the New York Times: "He's not looking for people to give him a vision - he's going to put together an administration of people who can effectuate his vision."

There's no real precedent for this in politics. Sure, presidents have hired bureaucrats or functionaries to implement their vision, but there's not many examples of them hiring high-profile ideologues like, say, Larry Summers and getting them to carry a vision that's very different from their own ideological vision.

In other words, it's usually the case that "personnel is policy," as Grover Norquist once said. That's especially true in an executive branch that's so large it tends to demand policy delegation. But if that truly is Obama's strategy, and he can pull it off - that is, if he can get ideological free-market fundamentalists (and nobody credible on either side of the aisle really argues that Summers, Geithner, et. all are anything but that) to carry progressive FDR-ish legislation - then he will indeed be one of the master politicians of history. And if anyone seems to have the political skills to do it, it is Obama.

Ok, that's a lot to throw out there at once, but I figured it would be the best way of making the point that if you ever decided to take my opinions with more than a grain of salt, there are a lot of very smart people out there who disagree with me on this one.

I also think that some people misinterpret the criticism of his appointments, and now is as good a time as any to clear that up.

While some of the nominations make zero sense in my book, in no way do I think that Obama's foreign policy team will somehow make him want to bomb Iran or prolong the war in Iraq as members of his cabinet have advocated. I believe him when he says that he sets the mission, and it's his team who carry out the mission. And as for the economics team, if you did your homework on Obama's economic policy beliefs during his time in the senate and throughout presidential run, a center right team shouldn't be much of a surprise.

So why am I still disappointed by many his choices in both teams? Believe it or not, it has very little to do with ideology.

One of the ideals of this country is our belief in a meritocracy. If you are right, then you will be rewarded for being right and rise to the top. (Granted this is rarely true in practice, especially in politics, but I do believe that the ideal matters) When Obama's cabinet is described in the media, you hear the words "pragmatic" and "technocrat" quite a bit, and he seems to be getting praised for picking people who "put policy over partisanship", and just about every other Broader-y cliche in the books. But all of the lofty team of rivals rhetoric seems to exclude what should be the biggest question of them all: Who was right and who was wrong?

It was Barack Obama during the primary who made the powerful case against Hillary Clinton that experience doesn't count if it's experience getting things wrong. And to a large degree his appointments fail that same test.

• Robert Gates was wrong about the Iraq War when it began and was wrong about it in 2007 when he stated that leaving Iraq would have "dire" consequences for the U.S.

• Hillary Clinton was wrong about the Iraq war, and was wrong on her vote for the pointlessly-threaten-Iran amendment.

• Larry Summers was wrong when he supported the deregulation of the banking industry that is partially responsible for the crisis we have today.

• Tim Geithner screwed up the handling of the citigroup bailout less than a month ago.

This has nothing to do with ideology, this has everything to do with not rewarding the same people who got us into the mess we're in today. There are quite a few well respected economists who predicted the housing bubble, decried this financial deregulation and were right to be worried about the bailout. There are plenty of experienced people who were right about the war in Iraq and right about the Kyl-Lieberman amendment. When you run your campaign based on good judgment, one would assume you'd fill your cabinet with people who have shown that same good judgment in the past, instead of promoting those who have repeatedly lacked it.

And as for Kuttner's(and others) argument about Obama's economic team secretly executing a progressive policy, I would be lying if I didn't see it as anything other than moderately insane.

I say this knowing that plenty of people who I greatly respect believe this to be true, but having followed Barack Obama's career and economic advisers for some time, they are making a leap that I'm just not comfortable making. Barack Obama's economic policies will be tremendously better than anything we've seen in some time (this speech is a great start), but people need to be realistic with their expectations. If he's had people like Summers, Rubin, Furman, Goolsbee as his closest economic advisers with very little progressive economic representation during his time in the senate and throughout his presidential campaign, then it is more than likely that he believes in their economic philosophy.

No one, and I mean NO ONE, would be happier to be wrong about this than me. And like I said before, the economic crisis has gotten to the point that it may force Geithner and Summers to do something more radical than they had planned, the way it forced Paulson to take equity in the banks. But to think that somehow Obama nominated a bunch of center right economists to carry out an amazingly progressive economic agenda that even Obama himself hasn't mentioned or committed to seems a bit off the deep end to me. Not impossible, but in my mind it's about as probable as him making this Jim Jones National Security adviser, or naming Hillary Clinton a high ranking member of his cabinet.

Oh, yeah, that last one actually happened. Whoops.

Well, if we learned anything this year, it's that ANYTHING IS POSSSIIIIBBBBLLLEEEE!!!

Prove me wrong Barack, the ball's in your court.

The Obama Econ Team

As Announced Monday:

• Treasury Secretary: Timothy Geithner

• Head of National Economic Council: Larry Summers

• Council of Economic Advisors Chair: Christina Romer

• Director of Domestic Policy Council: Melody Barnes

Let's start with the good: In Melody Barnes we have our first real life progressive in the Obama administration! She seems very passionate about immigration, income inequality, so I'm really looking forward to what she can accomplish in charge of the domestic policy council. In 2007 she wrote this:

Here at home there is urgent work to do to fight the historically high -- and growing -- gap between our richest and poorest citizens. While the mean income of households on the low end of the income spectrum -- the bottom 20 percent -- is just $10,655 a year, the income of the top twenty percent of households averages almost $160,000. That's 15 times as much. At the same time, according to the latest census figures, the middle class, beset with stagnant wages and mountainous debts, is shrinking. The sad fact is that one of our most cherished values as a society, namely equality of opportunity, is fading as a reality for far too many people. Economists have shown that a child born into a lower-income family has only a 1 percent chance of making it to the top of the income distribution, while children from prosperous families have a 22 percent chance. To restore fairness to our system, I will embark on a multi-faceted approach including increasing our investment in public education, promoting genuine health care reform, and backing a higher minimum wage.

Very Impressive to say the least. What about Christina Romer? Ezra Klein:

So far, Christina Romer, Obama's pick for chair of the Council of Economic Advisers, is attracting many more plaudits from the right than the left. Tyler Cowen, Will Wilkinson, Greg Mankiw, and Justin Fox are very pleased, as much of Romer's work centers on the injury taxation inflicts on the economy.

It seems like a pretty straight-forward pick, nothing that will rock the boat or differ much from Furman/Goolsbee/Summers ideologically.

Speaking of Larry Summers, here is what the economically centrist-right New York Times Editorial Page said about his and Geithner's appointments:

Both men, however, have played central roles in policies that helped provoke today’s financial crisis. Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multibillion-dollar bailout of Citigroup. Given that history, the question that most needs answering is not whether Mr. Geithner and Mr. Summers are men of talent — obviously they are — but whether they have learned from their mistakes, and if so, what.

We are not asking for moral mea culpas. But unless they recognize their past mistakes, there is little hope that they can provide the sound judgment and leadership that the country needs to dig out of this desperate mess.

As treasury secretary in 2000, Mr. Summers championed the law that deregulated derivatives, the financial instruments — a k a toxic assets — that have spread the financial losses from reckless lending around the globe. He refused to heed the critics who warned of dangers to come.

That law, still on the books, reinforced the false belief that markets would self-regulate. And it gave the Bush administration cover to ignore the ever-spiraling risks posed by derivatives and inadequate supervision.

Mr. Summers now will advise a president who has promised to impose rational and essential regulations on chaotic financial markets. What has he learned?

At the New York Fed, Mr. Geithner has been one of the ringmasters of this year’s serial bailouts. His involvement includes the as-yet-unexplained flip-flop in September when a read-my-lips, no-new-bailouts policy allowed Lehman Brothers to go under — only to be followed less than two days later by the even costlier bailout of the American International Group and last weekend by the bailout of Citigroup. It is still unclear what Mr. Geithner and other policy makers knew or did not know — or what they thought they knew but didn’t — in arriving at those decisions, including who exactly is on the receiving end of the billions of dollars of taxpayer money now flooding the system.

Confidence in the system will not be restored as long as top officials fail or refuse to fully explain their actions.

Well that's not exactly a ringing endorsement, and this is from people who agree with their economic ideology! And about that Ideology: (Also from the New York Times)

The president-elect’s choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief of staff in the Treasury Department who followed him to Citigroup, and James S. Rubin, Mr. Rubin’s son.

All three advisers — whom Mr. Obama will officially name on Monday and Tuesday — have been followers of the economic formula that came to be called Rubinomics: balanced budgets, free trade and financial deregulation, a combination that was credited with fueling the prosperity of the 1990s.

But times have changed since then. On Wall Street, Mr. Rubin is facing questions about his role as director of Citigroup given the bank’s current woes. And in Washington, he and his acolytes are calling for a new formulation to address the global economic crisis that Mr. Obama will inherit — and rejecting or setting aside, for now, some of their old orthodoxies.

The Times even added a chart to make sure you got their point, how nice of them!
Add in nice things like Summer's nice note to Ken Lay About how "I'll keep my eye on power deregulation and energy market infrastructure issues." and you can guess I'm not a big fan.

It's at times that it saddens you even more that progressive economists like Dean Baker, Paul Krugman, James Gailbraith, Brad Delong, Josef Steiglitz aren't around to see this, because this would have been their time to clean up the mess that the conservative economics created.

Oh wait, you mean they're all alive and well, and no one asked them to be a part of the administration? So it's not like the Rubinites were the only ones left... Obama simply chose them over the people who actually got these things right in the first place?

Cause that makes sense. Honestly, I'm just glad I'm not a progressive economist because it's really hard to think of a more frustrating job. You can be right about just about everything from the housing bubble to our trade policy, and when "your" party comes in to power, they turn to the same old losers who screwed things up to begin with.

In the end, this somewhere around what I guessed Obama's economic team would look like. Aside from some popluist rhetoric here and there, these are the type of people he trusted throughout his senate career and his run for president, and so it makes sense that he'd want them crafting economic policy for his administration. I may think they suck (and I do), I'm not at all upset or disappointed the way I was with his Foreign Policy team. He's an economic centrist, and other than a few populist speeches towards the end of his campaign, it's not like he ever signaled anything wildly different.

But ending on something positive, here is a press release from the president of the Campaign for America's Future, Bob Borosage:

It's not the personnel, it's the policy. And on this, Obama has been clear. He's announced a massive recovery plan based on putting people to work with public investment in areas vital to our future.

The crisis we face makes Rubinomics irrelevant. Deficit spending must go up, finance must be re-regulated, trade imbalances must be reduced and manufacturing can no longer be scorned.

Obama is choosing experienced hands for the crisis, trusting that their experience does not impede the new thinking needed to get us out of this hole. He'll set the direction. And so far, he’s on course.

While I honestly don't know if I share Borosage's optimism, one thing that I do believe in is this quote from Brad DeLong:

"These are not moderate times. To be moderate now is to be radical. To be radical is to be moderate."

Hank Paulson probably never imagined he'd be taking equity in U.S. Banks, but when he was forced, he pulled the trigger. Desperate times might call for putting aside failed ideologies, enriching friends, and doing things that actually work. And those things that actually work are a hell of a lot further to the left of anything these people are proposing. But if this is the pragmatic administration we're being told it us, we just might see some very radical moves.

UN Report: Inequality in US soars due to trade liberalization, could lead to unrest

A new UN report includes two major bombshells:

Growing inequality in US cities could lead to widespread social unrest and increased mortality, says a new United Nations report on the urban environment.

In a survey of 120 major cities, New York was found to be the ninth most unequal in the world and Atlanta, New Orleans, Washington, and Miami had similar inequality levels to those of Nairobi, Kenya Abidjan and Ivory Coast. Many were above an internationally recognised acceptable "alert" line used to warn governments.

"High levels of inequality can lead to negative social, economic and political consequences that have a destabilising effect on societies," said the report. "[They] create social and political fractures that can develop into social unrest and insecurity."

So the UN thinks the United States' levels of inequality are high enough that they could create "social and political fractures that can develop into social unrest and insecurity." Maybe no bombshell there, but shouldn't it be newsworthy that the UN officially warned us in the same breath as the Ivory Coast, a country which has been in and out of civil war for the past 6 years? Then, the report touches on racial inequality, and assesses blame for these problems.

According to the annual State of the World's cities report from UN-Habitat, race is one of the most important factors determining levels of inequality in the US and Canada.

"In western New York state nearly 40% of the black, Hispanic and mixed-race households earned less than $15,000 compared with 15% of white households. The life expectancy of African-Americans in the US is about the same as that of people living in China and some states of India, despite the fact that the US is far richer than the other two countries," it said.

Disparities of wealth were measured on the "Gini co-efficient", an internationally recognised measure usually only applied to the wealth of countries. The higher the level, the more wealth is concentrated in the hands of fewer people.

"It is clear that social tension comes from inequality. The trickle down theory [that wealth starts with the rich] has not delivered. Inequality is not good for anybody," said Anna Tibaijuka, head of UN-Habitat, in London yesterday.

The report found that India was becoming more unequal as a direct result of economic liberalisation and globalisation, and that the most unequal cities were in South Africa and Namibia and Latin America. "The cumulative effect of unequal distribution [of wealth] has been a deep and lasting division between rich and poor. Trade liberalisation did not bring about the expected benefits."

So, directly from the UN, you have a direct repudiation of Neo-liberal economics. It's amazing that in our presidential race the candidates have to fall over each other to prove that they believe in "free" trade to be considered serious, yet the UN can release a report essentially blaming that economic philosophy for the massive increase in income inequality to no press attention, whatsoever.

Partisan Bickering at its Best

Thanks, Margaret, for the tip-off.

Today, Rolling Stone contributor and often controversial writer Matt Taibbi published an online conversation in which he totally schools Byron York, a National Review columnist and general blowhard. After a few pleasant banalities about the horrific straits of the McCain campaign, the conversation turned to the economy. Tiabbi blames it on Credit Default Swaps. York blames it on the poor, "particularly minorities."

It gets awesome pretty fast after that:

[Matt Taibbi]: ...Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don't understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I'm interested to hear.

I wish they'd put the time stamps on it:

[Byron York]: When you refer to "Phil Gramm's Commodities Future Modernization Act," are you referring to S.3283, co-sponsored by Gramm, along with Senators Tom Harkin and Tim Johnson?

M.T.: In point of fact I'm talking about the 262-page amendment Gramm tacked on to that bill that deregulated the trade of credit default swaps.

Tick tick tick. Hilarious sitting here while you frantically search the Internet to learn about the cause of the financial crisis — in the middle of a live chat interview.

B.Y.: Look, you can keep trying to make this a specifically partisan and specifically Gramm-McCain thing, but it simply isn't. We've gone on for fifteen minutes longer than scheduled, and that's enough. Thanks.

And then the conclusion,

M.T.: Thanks. Note, folks, that the esteemed representative of the New Republic has no idea what the hell a credit default swap is. But he sure knows what a minority homeowner looks like.

B.Y.: It's National Review.

Translation: "Fuck you." "No, fuck you."

Maybe not so productive, but it's gratifying in a 1970s sorta way to see a writer for what used to be the country's most esteemed and intellectual conservative outlet get his ass handed to him by a Rolling Stone reporter.

This is the same National Review, not incidentally, that has just lost two of its major contributors: Kathleen Parker, who received 12,000 angry emails from right wingers in response to her call for Palin to resign; and Christopher Buckley, son of the Review's founder William F. Buckley and author in his own right, who has endorsed Obama from a conservative framework.

Given the implosion of the McCain campaign and the outright rebellion of so many intelligent, true conservatives, I'm not sure that this incarnation of the Republican party would capable of self-sustenance even if McCain did somehow pull off a win.

In the words of Kos, this election isn't just about winning anymore. It's about crushing the spirits of the American radical right.

Two Tools For Understanding the Economic Crisis (& One Bonus!)

The first is ProRepublica's Degrees of Hank Paulson spinwheel, which conveniently spells out Paulson's explicit links to the banking executives he's trying to bail out. Put some names and faces to those shadowy connections of his!

The second is LolFed.com, which punctuates what looks to be intelligent explanations of the economy with LOLCat-inspired images. There's a part of me that thinks this represents the future of education, or at least commentary, and I can't say I'm too broken up about it.





And as a bonus, here's "Really?! With Seth & Amy" from SNL's Weekend Update:

(I set it to start at the beginning of their "Really?!" segment, but you can watch the whole Update by pulling the slider to the beginning)

A Larger Economic Worry than the Banking Crisis

As Richard Feynman's father supposedly put it, "What makes it go? Everything goes because the sun is shining." The sun provides the energy for plants to grow. Without that, there's no energy for us to move. Without that, there's no energy to turn the key of a wind-up toy, let alone any of the other complex machinery we've built over the millennia.

In this vein, my only real answer to musings and questions about where on earth "money" comes from is that on some level it's all built on the cultivation of natural resources. There's plenty of leeway built in, once you add the idea of trading services instead of just goods, but that's the bit that seems to have become so unstable in recent times. In the end, it all comes down to our use of nature – the beginning, and the end, of our economic and physical life.

Well, this article is entitled Nature Loss 'Dwarfs Bank Crisis'. It puts some scary numbers on how the whole process is going right now: "whereas Wall Street by various calculations has to date lost, within the financial sector, $1-$1.5 trillion, the reality is that at today's rate we are losing natural capital at least between $2-$5 trillion every year." (emphasis mine) Which is to say, around 7% of the entire world's GDP.

Obviously, it's impossible for work like this to get truly accurate results, since the calculations required to analyze every economic and environmental system in the world would be infinite even if we had a good idea of all the variables (which we don't). But a limitation like that isn't reason not to at least estimate the hard cost of increasing environmental degradation, and economists have started to come up with ways to do it:

Key to understanding [Deutsche Bank economist and study leader Pavan Sukhdev's] conclusions is that as forests decline, nature stops providing services which it used to provide essentially for free.

So the human economy either has to provide them instead, perhaps through building reservoirs, building facilities to sequester carbon dioxide, or farming foods that were once naturally available.

Or we have to do without them; either way, there is a financial cost.

The Teeb calculations show that the cost falls disproportionately on the poor, because a greater part of their livelihood depends directly on the forest, especially in tropical regions.

The greatest cost to western nations would initially come through losing a natural absorber of the most important greenhouse gas.

To put on a Analogy-Hat that fit me better in more radical days: the way things are headed, capitalism is the atom bomb that will set off the hydrogen bomb of civilization itself. If we don't want the whole human race to get lost in the blast, we've got to figure out more efficient ways to live.

Background on the Bailout

Not enough time to backtrack completely, but here are a few articles on the bailout and recent events:

• A background on the financial crisis, and how it relates to John McCain. (Kos also called this the best thing ever written on his site in it's history)
• A good graph on executive pay:
• No time for a full post, but let's just go ahead and give this guy the Joe Buck Disgusting Act of the Week. I love it when conservatives accidentally say what they actually mean.
  
• What the hell is Warren Buffet doing? This definitely fails every possible smell test, and we'd be flipping our shits if this was a McCain adviser. I don't care how progressive he is on some things, he needs to be dropped from Obama's team immediately for appearances sake if nothing else.
• Dean Baker has progressive conditions for a bailout.
• As of now, there may be a deal on the bailout proposal. The statements coming from the democratic leadership sound an awful lot like their usual routine of excepting essentially the entire GOP bill with several minor changes, and then declaring victory. I'll have more later, but at the moment it's not looking great.
  

Whoah

Just moments after admitting how little I know about the "economy," I discover that it's a common affliction.

Why is $700 Billion the precise amount needed to bail out our struggling "economy?"

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

Some Totally Uninformed Remarks About the Economy

I know pretty much nothing about economics aside from what this guy on a train told me last week, so, to say the least, there are some questions I'd like answered.

1. Given that we're the richest nation in the world yet don't seem to produce all that much, where does our national wealth come from? I'm pretty sure part of the answer is the ready availability of natural resources during the 18th-20th centuries (lumber, coal, oil, etc.); and part of it is circumstance, like WWII taking place in Europe so we could lend them money to rebuild and profit from their success. But both of those are long gone now, so I'm stuck with the question: what the hell do any of us produce that covers the cost of our lives?

2. No matter what angle I take, I keep running into the same conclusion in my thesis: the patent system was designed during a time when machines were built out of bricks and mortar and metal rods, so it's only natural that it hits insurmountable difficulties trying to regulate a world where a "process, machine, manufacture, or composition of matter" can be information or a living thing. By the same token, it doesn't seem like today's stock market – or even today's "economy" as a whole – bears any resemblance to the stock market as it could have been conceived or designed to function. Nor does it seem like a coincidence that the two big boom/busts of the last hundred years (assuming that this crash gets real bad) coincided with technological advances that encouraged investors and financial planners to think of money in terms of pieces of paper (in the case of ticker tape machines) or numbers on a screen (in the case of computers and the internet).


PS: NASA funding = $16.8 billion in 2007. Just sayin. We could do this bailout thing or we could colonize mars, straight up. Or better yet, keep up with Japan's plans to build a functional space elevator.

Unthinkably stupid. Part 2.

I'm honestly not trying to be this lazy, but back in March, I wrote this:

Look, I know a little something about doing stupid things. I had Clemson taking out Kansas and then losing to Georgetown in my NCAA tournament bracket. I spent a solid amount of time with dcjonesy, Lsouth and others this past week rating 80s songs from one to ten based on how well you can pump your first and stomp your foot to them. Several weekends ago when I went out into Adams Morgan wearing a DC United flag as a cape. I bet 25 dollars on the redskins winning the super bowl last year at 50-1 odds. All of that stuff happened within the last couple months, and I haven't even started with the stories that involve my lime blazer. So I think we've established that I know stupid when I see it.

And so I mean it when I say that this is possibly one of the dumbest ideas I have ever heard. (Or a least to emerge in this election cycle):

[Hillary] Clinton also called on President Bush to appoint "an emergency working group on foreclosures" to recommend new ways to confront housing finance troubles. She said the panel should be led by financial experts such as Robert Rubin, who was treasury secretary in her husband's administration, and former Federal Reserve chairmen Alan Greenspan and Paul Volcker.

It's hard fight through the rage enough to form complete sentences after you reads something like that, but Economist Dean Baker does a pretty good job in his post titled "Senator Clinton Calls for Barry Bonds and Roger Clemons to Head Commission on Steroid Abuse":

Actually Senator Clinton's proposal was far more ridiculous. She suggested having former Federal Reserve Board chairman Alan Greenspan and former Treasury Secretary and current Citigroup honcho Robert Rubin lead a commission (along with former Federal Reserve Board chairman Paul Volcker) to analyze the country's current economic crisis.

There is certainly no one more directly responsible for the current crisis than Alan Greenspan, who allowed the housing bubble to grow unchecked for almost a decade. Also, as the country's preeminent bank regulator, he looked the other as the predatory mortgage market exploded.

While Greenspan is undoubtedly villain #1 in the housing bubble story, Robert Rubin has claim to #2 status in his post near the helm of Citigroup. Citigroup provided the secondary market for many of these predatory mortgages with its creative financial engineering and structured investment vehicles.

April

May

June

July

August

September

Today:

MIAMI - Barack Obama turned to a team of advisers that shaped America's economy in happier days to fashion fresh ideas for calming the stomach-churning financial crisis that has thundered from Wall Street to Main Street.

Some of the most respected names in the business world were pitching in Friday, including billionaire investor Warren Buffett, former Federal Reserve Chairman Paul Volcker, former Treasury secretaries Robert Rubin, Lawrence Summers and Paul O'Neill and Laura Tyson, former head of the Council of Economic Advisers under President Clinton.

"In the coming days, I'll work closely to examine the details of the Treasury and Fed proposals and as I do, I'll work to ensure that it provides an effective emergency response," said Obama. While laying blame for the crisis at the feet of Republicans, Obama said he would steer away from partisanship.

"I think it's critical at this point that the markets and the public have confidence that their work will be unimpeded by partisan wrangling, that leaders in both parties work in concert to solve the problems at hand," said Obama.

What a fucking joke.

And I'm sure glad that partisan wrangling won't interfere with his ability to bring in both republicans and corporate shills.

Alan Greenspan must be waiting by the phone in tears.

John McCain understands the economy

John McCain, earlier today:

"You know," said McCain, "there's been tremendous turmoil in our financial markets and Wall Street and it is -- people are frightened by these events. Our economy, I think, still the fundamentals of our economy are strong.

AP headline a few minutes ago:

Dow Plunges 450 Points to Below 11,000 on Lehman Bankruptcy, Merrill Sale, AIG Woes

How to attack John McCain on the economy

After being infuriated with Obama's unwillingness to speak about the economy with a populist tilt, imagine my reaction when I wake up this morning to see this awesome headline: (Via TomP)

Obama sounds populist themes in Virginia bus tour

Holy Crap. It gets even better:

MARTINSVILLE, Va. (AP) — Democrat Barack Obama pledged Wednesday to create millions of union jobs in alternative energy and end tax breaks for companies that move jobs overseas, using tough new populist language to convince voters that he, not rival John McCain, is best positioned to lift the limping U.S. economy.

. . .

Obama stuck mostly to economic themes during his appearance, adopting a pitch that sounded much like Hillary Rodham Clinton in the waning days of her primary campaign. The former first lady defeated Obama in eight of the last 13 primaries using populist language that strongly resonated with rural and working-class voters.

. . .

Obama said it was wrong that the Iraqi government has been sitting on billions of dollars in oil revenue while the U.S. spends billions to rebuild the country.

"We should be using some of that money to rebuild Virginia, laying roads, building broadband lines and putting people back to work," Obama said.

As for tax breaks to companies taking jobs overseas, Obama said: "We sure as heck don't have to give them incentives to move. ... We should give companies tax breaks that are right here."

. . .

"If you give me that opportunity, if you give me that chance, I will fight for you every single day," he pledged. "I'll wake up every day in that White House thinking about those people in Martinsville."

The article references how this type of talk helped Hillary Clinton, and that's actually a bigger tribute to the power of populism more than anything else. If it can make Hillary Clinton sound like a good idea... well then think what it can do for Barack Obama!

Granted, he throws in that line about us spending all of our money to rebuild Iraq, while those greedy Iraqis hoard their oil money, ( a statement that is so absurd I'm gonna write about it at some point very soon) but if use that line in the midst of all those others, it's hard to stay mad at him for too long. And if you thought that was good, and that ad that I posted here yesterday was horrendous, well then get ready for this:

I don't understand how the campaign can put out two ads like that in the span of several days. This ad gets everything right:

• 1 Theme- Taxes
• Introduces John McCain's shitty tax plan
• Good specifics of who McCain's plan helps
• Rails on outsourcing
• Rails on corporate greed
• Rails on Oil companies
  
• Says McCain's tax cuts wont help you
• Says that Obama's tax plan will help you
  

What a difference a day makes, huh? One theme, reinforcing examples, and then how your plan is better!

Genuinely populist rhetoric, and and genuinely populist ad that should be tremendously effective... I don't even know what to say. This turn around could be a legitimate change of heart on how to attack John McCain on the economy, or it could be message testing. I'd rather it be a change of heart, but we should win either way when this ad tests through the roof.

With more messaging like this this, he'll turn this thing around in no time.

How not to attack McCain on the Economy

Last night I saw Obama's new economic ad for the first time:

Funnily enough, Sirota had the same reaction that I did:

I agree that McCain represents a third Bush term on economic and national security issues, and I agree that it is an outrage that we are spending $10 billion a month on the war. But there's something troublingly imperialistic about the underlying message of this ad.

About 15 seconds into the ad, the Obama campaign starts criticizing Iraq for selling oil and making money off those sales - as if that is an outrage, as if, in fact, we should be able to simply take their oil for free.

Don't get me wrong - I think multinational oil companies are gouging consumers and profiteering off a global energy crisis, I think that's awful, and I think we need to much better regulate those companies. But I don't think its bad that the nation of Iraq is making money off a natural resource that it owns, and I don't think that Iraq should have to give away that natural resource to anyone for free.

Yeah, this ad sounds more like a Joe Biden speech than what we've heard from Obama during this cycle. Obama was one of the best at avoiding discussing Iraq in colonial terms during the primary, so let's hope this isn't a trend. But let's ignore the colonial rhetoric for a minute.

The ad straight up sucks, and does nothing to present a clear message or line of attack. There's just too much there to digest, and all of it goes in different directions. The ad mentions all of these topics in 30 seconds:

• John McCain is like Bush on the Economy
  
• Spending money on Iraq
• The fact that Iraq thinks it's a sovereign nation that can profit off it's own oil
• The high price of oil in general
• Getting out of Iraq
• Better schools
• No more oil company tax breaks.

Better Schools?!?!? What the fuck is that doing in there? You should include 3 of these at most, and they all need to be directly related, or connected with some common theme. What's the common theme? After watching the ad 5 or 6 times I still couldn't tell you. Something about McCain, Bush, those greedy Iraqis, and Barack will fight back with better schools and taxing oil companies. Not exactly a concise message.

This isn't rocket science, this is attacking John McCain on the economy. This should be as easy as it gets. At worst it's appealing to the lowest common denominator by using colonial rhetoric to place blame on a country that we destroyed. At best, it's a terrible ad that tries to do put 6 or 7 different attacks and remedies (Better schools?!?!??!) in 30 seconds, and makes no sense as a result. Neither one is acceptable.