"Breathtakingly Hairbrained"

Yglesias:

There are very few members of congress with whom I’ve ever had the opportunity to discuss a substantive matter of public policy. But as it happens, one of them — the one with whom I’ve had the second-longest exchange — is Mike Pence (R-IN) who I’ve seen on television today repeatedly discussing the Republican Study Group’s “plan” for the financial crisis. And I can tell you this about Mike Pence: he has no idea what he’s talking about. The man is a fool, who deserves to be laughed at. He’s almost stupid enough to work in cable television.

Ah, but not only is not working for cable, he's proposing "crisis" legislation. Let's see what Wonk Room has to say:

The phrase “breathtakingly hairbrained” comes to mind when considering the apparent tax cut proposal. We know that for the group authoring this proposal, tax cuts for the rich and corporations are the answer to every problem. But even the administration, which has relentlessly imposed that agenda for eight years, has recognized that the well was dry on that front for this crisis. But it gets worse. Not only is this another tax cut for the rich, it appears to be one that is dead-aimed at doing much more harm than good — abolishing the tax on capital gains.
[snip]
The idea of insuring mortgage backed securities almost seems like a cynical ploy to pretend to be doing something when actually doing nothing. The idea is that the government would sell holders of mortgage backed securities insurance against losses—and that it would charge such premiums that the government wouldn’t lose money on the deal. That’s akin to selling homeowners insurance in New Orleans after the dikes broke.
[snip]
What they propose on deregulation isn’t clear, but the fact that they’re even still talking about “deregulation” when it was slipshod regulatory oversight that got us into this mess shows a profound misunderstanding of what’s going on. One rumored target is the Sarbanes-Oxley regulations which, in fact, impose accountability on Wall Street — not something we want to do away with right now.

The whole thing is well worth a read.

I can't decide what the stupid to evil ratio is here. I suppose it depends on the member. Boehner, for instance, is 99% evil, with a touch of stupid to get him through the door.

Krugman: "Demolition Accomplished"

From his NYT blog:

How did we get to this point? It’s the culmination of many past betrayals.

First of all, we have the Republican Study Committee blowing things up with a complete nonsense proposal — solving the crisis with a holiday on capital gains taxes. How is that possible? Well, if a party runs on economic nonsense for 25 years, eventually many of its foot soldiers will be people who actually believe the nonsense.

More specifically, though, the failure to get a deal reflects the betrayals of the Bush years. Democrats weren’t going to trust Henry Paulson, because behind him they see the ghost of Colin Powell (and Paulson’s “all your bailout are belong to me” proposal, aside from being bad economics, showed an incredible tone-deafness.)

And after the way the Bushies and their allies double-crossed the Democrats again and again in the aftermath of 9/11 — demand national unity, then accuse you of being soft on terrorists anyway — there’s no way Pelosi and Reed will do the responsible but unpopular thing unless the Republicans agree to share ownership.

So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch.

As a friend said last night, we’ve become a banana republic with nukes.

Now that's egotiscal posturing we can believe in, my friends

Yesterday morning, principles for the Wall Street bail out seemed to have been agreed upon, by both parties and the White House.

Early yesterday afternoon, Superman John McCain flew mightily snuck onto Capitol Hill, before proceeding to a White House meeting that he had requested.

Late yesterday afternoon, everyone was fighting, Paulson was on one knee before Pelosi. Boehner, who earlier in the week was demanding the congress pass a "clean" bill (GOP shorthand for give Paulson what he wants) was circulating a secret new plan to Blue Dog Dems and rank and file Republicans.

McCain was mostly quiet on the events of the day, humbly saying that America could determine for itself what his role had been.

Ok, so I've determined that McCain has devolved into a small, angry, sneaky, obstructionist fuck.

It's not that I love the bailout plan- even the tidbits of improvement over the original that've been trickling out. It's that you know damn well that Boehner and Shelby should've been pushing their ideas all week, at the bargaining table. If they were good-faith actors, that's what they'd have done.

Instead, they blew up the talks because of what Frank correctly assessed as "a rescue plan for John McCain".

I don't trust these motherfuckers to offer anything helpful- they're talking about insurance instead of cash, but all they're going to want to do is suspend capital gains tax and ensure that consumers get nothing out of the deal, let's be honest- I have no idea if resolution has to happen today to stave off world-wide depression, or if the immediate threat is greatly overblown, or if doing nothing is an option.

I do know that this bomb was a political stunt, that it's bullshit, and that John McCain set it off because his polling numbers are- rightly- diving.

I don't know what will happen today, but I really hope this explodes in fucking Boehner's face. And McCain's.

The bailout, even with strings, is not enough

So they keep telling us that we have to invest in junk debt to the tune of a few hundred billion or maybe a trillion dollars, because the whole financial system is on the verge of collapse. President Bush explained to us yesterday that the infusion of public wealth into private enterprise is necessary to keep lines of credit open for business, otherwise many of them will cease to exist, and for citizens, who otherwise will not be able to get loans for homes, cars, college.

Everyone and their brother has screamed for oversight, and it looks like that will be part of the package (though having the mechanism does not mean oversight will occur- look at Iraq for a sobering example). Equity stake? Maybe, though that's still opposed by the administration. Limits on executive compensation may be the big "win", if anything in this can be properly called a win.

My laundry list of adds includes things that will, apparently, not gain ground: The ability of bankruptcy judges to reset loan terms, moratorium on Wall Street lobbying, these things will be tossed. Most importantly, I am not hearing anything about investment in the much mourned Main Street.

I think it's important to remember something about the Great Depression: in addition to a needed regulatory regime and insurance structures, the Depression was addressed with substantial investment in the country's Main Street. Infrastructure projects and even humanities projects put people to work, creating wealth at the bottom, which in turn created the need and means for businesses to grow.

The idea that Main Street will recover this time with simply the ability to take on more debt is, I think, deplorable.

Another thing: while the New Deal helped stop the bleeding and enabled the slow healing of wounds, the wealth of the country really only picked up after we entered WWII and commenced massive war spending.

This time around, I think we'd all like to avoid a world war, so we should probably figure out what our government's investing priorities should be outside of the Pentagon and Wall Street.

Apparently, Wall Street does have a suitcase bomb

Because what else could drag John McCain back to the Senate at breakneck speed (after a Couric interview and a stump speech, that is), when we know because President Bush has told us repeatedly that really, really important work can be done from almost anywhere?

I'm looking forward to Obama showing up for the debate, and telling the assembled press, "I don't know, I've been on the phone with Republican Senator Coburn and Harry Reid and Speaker Pelosi and Hank Paulson, and they tell me they have it under control, so I really don't know what John's doing."

Maybe Wall Street has a suitcase bomb

Via TPM:

Cheney Heads to Hill to Quell Republicans

By Kate Klonick - September 23, 2008, 12:58PM

The White House dispatched Vice President Dick Cheney to Capitol Hill Tuesday morning to help shore up support for the financial bailout of Wall Street.

Wonder what Cheney will tell them this time?

Good signs- but don't let up yet

Looks as if Paulson's ready to play, and the Democrats are pushing. Via Calculated Risk, WSJ is reporting that the administration will accept executive compensation limits, and Bloomberg says they're ready to ok an equity stake.

Light 'em up

I've sent emails to my rep, Speaker Pelosi, and my two senators. I will spend some time calling congress, too, as soon as I finish this post.

Don't think for a minute that staff isn't tallying calls and emails from taxpayers, and calculating the political consequences of their next move. Start here to find your rep's contact info.

I am so deeply angered by this situation. Talking the other night about what this means about our government, some of the terms tossed around and weighed were Communism, Fascism, Oligarchy, Hegemony.

Maybe it's because I've been reading Reformation history, but I keep coming back to Feudalism. You know, the princes (Wall Street) deplete the royal stores with their building cathedrals or fighting wars or whatever, and the Monarchy digs the country out of a hole by raising taxes on the serfs (you and me).

And yes, Senator McCain and my Republican friends, you better damn well believe that I want taxes raised on the Masters of the Universe that got us into this disaster. If I have to pay for their malfeasance, I want their responsibility to be substantially larger.

Some bright chatter from various corners this morning:
Brad at SN! shares his congressional talking points.
Matt Stoller has been communicating with members, and hopefully they fight as hard as they email. This one is my favorite:

I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.

Krugman calls shenanigans.
Josh Marshall has questions about Phil Gramm's once and future role in all of this.
Robert Reich has a pretty good list of conditions.

Get on the phone.

It is the economy; now let's ditch the stupid

I had a very interesting task assigned me a couple of months ago, by our friend Mack. He was preparing a paper for a Senate hearing on the futures trading market and whether speculation was driving up prices. He asked me to read the paper and make sure it was in English, essentially. That a reasonably smart person uninvolved with the markets could actually read the thing.

(I should disclaim before I go further that the analysis below is from my brain, not Mack's. He may or may not agree with what I have taken from this experience.)

I think the single most surprising part of this exercise for me was learning how much of the market is unregulated- the parts of the market that have brought the most staggering returns for a few people at the tops of their pyramids. The few people whom Alan Greenspan lauded for the "creative" products they packaged and sold, the very products which now are the most threatening to the stability of our economy. As explained on today's NYT opinion page:

Today, regulatory authority is divided among the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission, the Commodity Futures Trading Commission, state banking regulators and state insurance regulators. That’s too many players.
What’s more, this balkanized system supervises only half of the relevant financial universe. It neglects investment banks, hedge funds and institutions like mortgage companies that issue asset-backed securities. The assets of these unregulated entities total about $10 trillion — which is the same amount we see on the regulated side.
The unregulated institutions pose particular risks because they are highly leveraged and financed primarily through short-term money markets rather than customer deposits. And unlike big banks, many of them do not disclose their finances to the public.

This is something I didn't understand until I delved into Mack's paper, and I'll wager that most Americans don't, either.
The second most impressive thing that I took from reading this paper was not a surprise, but an illumination. The markets don't hold my interest the way, say, politics does, so I hadn't ever thought about it, but securities markets and commodities markets do not operate on the same principles.

Duh, says you. Well, sure. But the reason I hadn't thought much about it is that I'm not a commodities investor. My family is the typical passive investor model: 401ks that are diversified according to our choices, and if we buy anything else it's with a sort of Motley Fool philosophy: the market always, eventually goes up, so buy what you know and don't be afraid to hold, etc.
What I failed to realize is that the market doesn't just mean traditional securities anymore, it also includes securitized risks and futures, packaged and moved over from the commodities market.
And make no mistake: the passive investor doesn't belong in commodities. The futures market is not a hold and wait game, it is not a place for long term investment. It is not a place for Motley Fool readers. Mack likens it to a Nascar track, and the new investors (large funds that end up in, say, my 401k) are like little Ford Focuses with untrained drivers, jumping into the race without regard for the danger they're causing.

Many pundits have noted that in this election season the GOP is, in effect, asking Americans to just give their failed policies another chance. Forget accountability, they mean well, and if you can just ignore the past few years and our current realities and remember that they're the party of pragmatic no-waste government and personal responsibility, you'll see the very need to continue down their broken and debris-strewn path. Nowhere do they make this case louder than on the broad and complex topic of the economy.

They continue to broadcast that rewarding entrepreneurship (and what is Andrew Mozillo, if not an entrepreneur of the highest order) and trusting the "free" market will mean that we all can get rich- just watch the money flow and the trades grow. They toss around the threat of socialism. What they want you to fear is a country where government takes care of, and controls, the decisions of every citizen- which isn't socialism, they're actually invoking communism, but whatever.

What they want you to forget is that in this country, right now, industry's major losses are socialized for the greater good, and almost no responsibility assigned to the major players whose wealth is almost unimaginable to most of us, and whose decisions lead directly to the loss and collapse you and I pay for.

And they fail to point out that almost none of us know the rules of the game, and that once our playing dollars are gone to the guys who invented the rules and benefit most from them, we will also have to bail out their failures. In this game of Monopoly, our losing turns replenish the bank, which buys up the properties that the winners ditch after they take the Free Parking money. If we pass Go again, we try to buy up the bank's properties again. But the Free Parking guys always return, buy us out according to rules we still don't understand, and erect a bunch of hotels.

Again: many eminently more qualified than me have explained this very clearly, over and over again. It's time for all of us to start talking about the costs to the country and society, and to what sensible reform might look like. Which is why this NYT editorial today caught my eye.

I know Americans for the most part don't enjoy wonkiness. I know that sloganeering is employed throughout campaigns because it largely works. But the fact is, we are going to have to ignore the slogans of both parties and understand what a pickle we've found ourselves in, and demand some real reform in the regulation of the markets. Again, from the Times:

The next president must first create a single framework for the major financial borrowers, administered by the Federal Reserve alone. This wider regulatory umbrella should be more conservative. In particular, the minimum levels of capital and liquidity that financial institutions are required to maintain should be higher than they have been in recent years. And the institutions should put in place better and more detailed systems for reporting — internally as well as to regulators and the public — on all the risks they are taking.
These steps, as they make institutions more stable, will also reduce their financial leverage and thus their ability to generate earnings. Their managements won’t like it, but the institutions — and, indeed, the entire financial system and the Fed itself — will be less exposed when severe turbulence hits the financial markets again.
For its part, the S.E.C. should require that publicly owned financial institutions provide more data in their quarterly reports. Any risks that the institutions retain, whether on or off their balance sheets, should be disclosed. And they should better explain the methods they use to determine the values of their own assets.
To fulfill its wider supervisory role, the Fed should also be given the authority to collect data from firms that are not publicly owned, including hedge funds and commodities trading firms.
Finally, much stronger restrictions should be imposed on the kinds of predatory mortgage-lending practices that preceded this crisis. The Fed recently proposed new rules for banks that would, for example, require better verification of borrowers’ income and reduce onerous prepayment penalties. These rules should be applied to all mortgage lenders. For those institutions not managed by the Fed, the rules should be enforced by other federal agencies or state banking regulators.

A key political factor is in the 2nd paragraph above. Tightening up regulation will mean that management at the top of these institutions will have a tougher time generating earnings. They will fight hard, should any reform package be placed on the table. We will be told that the proposed regulation "inhibits entrepreneurship" and is therefore Anti-American.

But we're going to need to ask ourselves, when we talk about entrepreneurship and the American Dream, are we talking about imagination and creativity and earned rewards, or carpet bagging?

It seems to me that any system that enriches the very, very few and then corrects their failures with public money is an example of the latter. And I hope this country is grown-up enough to ditch the slogans and face that.

End note: Mack was, ultimately, depressed by the results of the Senate hearing. The results, he said, were just shallow talking points and didn't address complex market realities at all. So if the hearing was any indication of our readiness to ditch the fluff and pursue reform, it didn't bode well.

Unsurprisingly, the hearing was chaired by neo-Republican hero, Joe Lieberman.

Racing to the bottom....

This just pisses me off:

Accounting Plan Would Allow Use of Foreign Rules
WASHINGTON — Federal officials say they are preparing to propose a series of regulatory changes to enhance American competitiveness overseas, attract foreign investment and give American investors a broader selection of foreign stocks.

But critics say the changes appear to be a last-ditch push by appointees of President Bush to dilute securities rules passed after the collapse of Enron and other large companies — measures that were meant to forestall accounting gimmicks and corrupt practices that led to those corporate failures.

Legal experts, some regulators and Democratic lawmakers are concerned that the changes would put American investors at the mercy of overseas regulators who enforce weaker rules and may treat investment losses as a low priority.

When all else fails, deregulate? Because over the last 30 years, that has worked so bloody fucking well for us?

I am so very, very tired of the idea that we need to lower our standards on every fucking issue in order to be "competitive" in the "global economy".

We need to set our standards to be more in line with countries that have appalling human rights standards, no environmental standards, and, apparently, skewed and dishonest accounting standards.

Say that once, without a trace of dismay in your voice, if you can. And then tell me how that equates to American Leadership.

Bush and the GOP do not want this country to lead. They want this country to be a playground bully with wealthy parents.

Bonus reason to work to keep McCain out of the White House: Phil Gramm would most certainly set economic policy under a McCain presidency.

Deja vu

via Atrios:

Late payments and defaults in every other major category of consumer debt also rose in the first quarter, the American Bankers Association reported. Auto loans issued through car dealers have a delinquency rate of 3.13 percent, the highest since at least 1990, according the ABA.

"The rise in consumer credit delinquencies is consistent with a rapidly slowing economy," said James Chessen, the ABA's chief economist. "Stress in the housing market still dominates the story, but it's a broader tale of an overall weak economy."

Emphasis mine. Original here.

Hm. 1990. What was happening then?

Oh, yeah. We'd recently completed 8 years of spending a bunch of money the government didn't have, because the Reaganites sincerly believed that money would appear out of thin air if we just lowered taxes on the wealthy, deregulated everything, busted unions, and prayed.

The SEC

OpEd in today's NY Times:

Each of us led the S.E.C. during challenging times — the stock market crash of 1987, the price-fixing scandal at Nasdaq in the 1990s, and the accounting and governance failures and mutual fund scandals of this decade. We are in agreement with Secretary Paulson that the world of finance is changing rapidly, having eclipsed in many areas the regulatory structure put in place, piece by piece, over the past century. Yet we fear that the current conversation about the future of the S.E.C. is getting ahead of itself. Secretary Paulson’s proposals to change the structure and function of the S.E.C., if adopted, risk inflicting serious damage to investors and our capital markets.

Skeptical eyebrow raised. Mack was talking recently about changing the basis for SEC enforcement, wonder what he could tell us about this OpEd?

The current housing and credit troubles do not present a sufficient basis for reforming the entire financial regulatory system. Instead of moving hastily, policymakers need to examine what went wrong, why it went wrong and what the best approaches are for re-establishing the unequaled reputation and performance of the American capital markets.

There is precedent for such an exercise. In 1987, a presidential task force was established to investigate the Black Monday crash. Today, we need a similar exhaustive, bipartisan and impartial examination to explore a series of possible business and regulatory failures.

One thing I'm fairly sure of, and that is that the 1987 presidential task force probably gave us data that we could use today. Like, for instance, the testimony I quoted below.

Ok, two things I'm fairly certain about:

The problem with the S.E.C. today is that it lacks the money, manpower and tools it needs to do its job. The commission’s 2009 enforcement budget does not keep pace with inflation, although it does provide significant increases in the risk-assessment function.

When even Ben Stein is arguing for regulation and enforcement, you know it's gotten pretty bad.

Economy- macro

Mack has been busy, busy, busy, writing papers and giving talks and fleshing out his analysis of the problems in our speculative economy.

I love to talk with Mack about these things, because while he goes off into concepts and jargon that I am completely unfamiliar with and cannot directly address (securities, commodities, these are his things), we eventually come to places where I feel solid footing, and we tend to agree on end points.

Anyway: we've been talking a lot about structural problems, and I want to get into them in more depth here, but I have to read and think first. My essential position is what I've written about before: betting the proverbial farm on deregulation and rampant speculation, and this is deeply flawed, and we keep acting suprised every time our bets are called and the bank can't pay.

As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.

Banks that need to get money to a troubled securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.

In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.

That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.

That was testimony given before congress in 1991 by Stephen Pizzo, and recounted recently by Andrew Leonard on his (very excellent) blog, How the World Works.

If you're looking for some homework and you want to stretch your brain, try some commodities reading. Here's Mack.