Tuesday, January 27, 2009

bad economic arguments

It’s looking increasingly likely that Republicans in Congress will vote en masse against President Obama’s economic recovery program despite his efforts to win them over, like the inclusion of $275 billion in tax cuts. The logic of the Republican political calculus is hard to argue with: If President Obama is successful, he and Congressional Democrats will get most of the political credit regardless of whether Republicans join in. So best for Republicans to oppose the plan and position themselves to benefit if President Obama fails. (I love typing “President Obama.”) Sure, it is irresponsible (in the literal sense of the term), but that is the advantage of being in the minority – you can reject responsibility. Republicans, as the anti-government party, are better at opposition than at governing, as they decisively demonstrated when they were in control.

All this is playing out pretty much according to form (despite hopes that our current economic crisis might galvanize more bipartisanship). But some of the arguments being put forth in opposition to the economic recovery plan nonetheless drive me nuts.

I just heard a Republican making the case for a stimulus plan consisting of tax cuts over government spending by arguing that, “Government can’t create wealth – only the private sector can create wealth.” I’ve been hearing this a lot lately and it is just ridiculous on its face. How are the efforts of government workers fundamentally different from the efforts of private-sector workers? If you see someone out landscaping some property or sweeping a street, do you need to know who his employer is to figure out whether or not he is contributing to the economy? If a guy shows up at your door with a package does his economic contribution depend on whether he works for the postal service or UPS? By this logic, someone processing medical claims for veterans at the VA is a leech sucking wealth out of the economy while someone performing exactly the same task for Humana or Aetna is a valuable contributor to society. A private university like Stanford is a source of national wealth while a public university like the University of Washington detracts from that wealth. The interstate highway system is a creation of “government spending” and therefore, by definition, can’t be part of our collective wealth, but if you sold off a stretch of highway to foreign investors (as former Bush budget director and now Governor Mitch Daniels
has been doing in Indiana) that new toll road now becomes a valuable asset. I could on. But you get the idea. This argument makes no sense whatsoever.

A variation on this argument is that, “taxpayers can spend their money more efficiently than government can.” That is a more subtle argument but equally bogus. It depends on what you are spending the money on. I defer to Paul Krugman (“
Bad anti-stimulus arguments”):
A number of conservative economists have been arguing against a stimulus plan centered on government spending. Fair enough. But one argument I keep reading bugs me: it’s the claim that spending-based stimulus is bad because economic theory tells us that a marginal dollar of private spending is better than a marginal dollar of government spending.

That’s just wrong; it’s a misreading of basic, Econ 101 level, economics.

Yes, the standard theory of consumer choice says that a consumer gains more utility if he or she gets to freely allocate a dollar of spending than if someone else makes the choices: I’d rather buy myself a $10 meal than have you feed me $10 worth of food that you select.

But that’s not what we’re talking about when we talk about stimulus spending: we’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. things like roads, communication networks, sewage systems, and so on. And every Econ 101 textbook explains that the provision of public goods is a necessary function of

When we’re asking whether it’s better to have the government stimulate the economy or to try to stimulate private spending, we’re asking among other things whether a marginal dollar spent on public goods is worth more or less than a marginal dollar spent on private consumption. And there’s nothing, even in Econ 101, that clearly favors private spending on private goods over public spending on public goods.

In other words, the attempt to claim the authority of economics for the idea that stimulus in the form of tax cuts is better, at a microeconomic level, than stimulus in the form of infrastructure spending is a case of bait and switch. Don’t fall for it.

More Krugman (“Bad Faith Economics”):
[W]rite off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey,
stuff happens.

Some percentage of any tax cut will be saved. (In the current environment, with taxpayers as over-leveraged as they are, that would probably be a very high percentage.) That’s a good thing under certain circumstances, but not when you are trying to stimulate the economy. And some percentage of whatever spending results from a tax cut will be spent on foreign-made goods – again, not good if you are trying to stimulate the domestic economy. Whereas, 100% of government spending represents … spending. Whether it is spent on something worthwhile is another question. That is where the argument should be focused. But it is not a zero-sum game. When you have high unemployment and productive assets are sitting idle, government spending does not necessarily displace private demand. For example, we have unemployed construction workers and contractors without business. If the private sector isn’t putting them to work, isn’t it better to have them repairing roads and bridges or building new solar or wind power generation facilities?

Bipartisanship is a nice goal. But there are some pretty fundamental differences in the world views of the two parties in this country. If the objective is a massive government stimulus program, it’s hard to find common ground with folks who ideologically despise government and believe it can do no good. At some point you have decide which approach you are going to take and pursue it as effectively as possible.

Friday, January 23, 2009

farewell notes

[See This Modern World and the Salon cartoon archive.]

We’re still organizing our photos from the inauguration – I look forward to writing about that. And every day brings more good news from the Obama administration that I’m eager to share. I’m so focused on the positive now that it seems churlish and almost irrelevant to look back. But there are a couple of items backlogged that I want to dispense with before trying to forget about Bush, Cheney and that gang forever. (Of course, as long as their “legacy” project is ongoing, a certain amount of rebuttal will be necessary from time to time. We wouldn’t want any Reagan-like myths to take hold.)

Pop quiz: For most of the Clinton years the capital gains tax rate was 28%. For most of the Bush years it was 15%. Under which president did investors do better?

Here is the final accounting for the equity markets under Bush and Clinton:

The Dow Jones Industrial Average went up from 3253 to 10,587 under Clinton (+325%). On Bush’s final day in office it closed at 7949 (-24.9 %).

The S&P 500 went up from 447 to 1342 under Clinton (+300%). Under Bush it went down to 805 (-40%).

The NASDAQ went up from 700 to 2770 under Clinton (+395%). It has gone down to 1465 under Bush (-47%)

That was a trick question, of course. The capital gains tax rate doesn’t determine how investors do in the equity markets. But that is the point. Had the markets done well under Bush it would have all been attributed to his tax cuts. Republicans try to attribute magical qualities to cuts in taxes on capital, especially the capital gains tax. Their current prescription for the country’s economic woes is further reduction – or elimination – of the capital gains tax. Next time you hear that pitch, ask, “How did those tax cuts work out under Bush?”

The job market didn’t do any better. The narrow measure of unemployment went from a 4.2% rate when Bush took office to 7.2% at the end of December (and certainly higher still when he left office on Tuesday). And, then, there was the more than $5 TRILLION that he added to the nation debt (roughly doubling it during his two terms). He had the six highest deficits in history, including a $485 billion deficit in just the first three months of fiscal 2009.

The Economist is generally considered a conservative publication (in the old not-completely-radical-right-crazy sense of that term). They endorsed George W. Bush and they supported the Iraq war from the start. But the latest issue has a pretty devastating summary of the Bush presidency (“
George Bush’s Legacy: The Frat Boy Ships Out”). I highly recommend reading the whole thing – don’t rely on my edited version:

Few people will mourn the departure of the 43rd president

HE LEAVES the White House as one of the least popular and most divisive
presidents in American history. At home, his approval rating has been stuck in the 20s for months; abroad, George Bush has presided over the most catastrophic collapse in America’s reputation since the second world war. The American economy is in deep recession, brought on by a crisis that forced Mr Bush to preside over huge and unpopular bail-outs.

America is embroiled in two wars, one of which Mr Bush launched against the tide of world opinion. The Bush family name, once among the most illustrious in American political life, is now so tainted that Jeb, George’s younger brother, recently decided not to run for the Senate from Florida. A Bush relative describes family gatherings as “funeral wakes”. …

Mr Bush’s role model throughout his presidency was not his father but the patron saint of the modern conservative movement, Ronald Reagan. He regarded Reagan as a man who had unleashed free-enterprise and defeated the Soviet Empire, and he tried to do the same with his huge tax cuts and his global war on terror. He mimicked Reagan’s Western style, even relaxing on a Texas ranch where Reagan had taken his holidays on a Californian one; and he echoed Reagan’s enthusiastic use of the word “evil”.

Other facets of Mr Bush’s personality mixed with his vaulting ambition to undermine his presidency. Mr Bush is what the British call an inverted snob. A scion of one of America’s most powerful families, he is a devotee of sunbelt populism; a product of Yale and Harvard Business School, he is a scourge of eggheads. Mr Bush is a convert to an evangelical Christianity that emphasises emotion—particularly the intensely
emotional experience of being born again—over ratiocination. He also styled himself, much like Reagan, as a decider rather than a details man; many people who met him were astonished by what they described as his “lack of inquisitiveness” and his general “passivity”.

This led Mr Bush to distrust the Washington establishment, and even to believe that establishment wisdom was probably wrong simply by virtue of what it was. Fred Barnes, a conservative journalist, entitled his book on Mr Bush “Rebel in Chief”. He
quotes one Bush confidante as saying: “One tux a term. That’s our idea of outreach to the Washington community.”

Lack of curiosity also led Mr Bush to suspect intellectuals in general and academic experts in particular. David Frum, who wrote speeches for Mr Bush during his first term, noted that “conspicuous intelligence seemed actively unwelcome in the Bush White House”. The Bush cabinet was “solid and reliable”, but contained no “really high-powered brains”. Karen Hughes, one of his closest advisers, “rarely read books and distrusted people who did”. Ron Suskind, a journalist, has argued that Mr Bush
created a “faith-based presidency” in which decisions, precisely because they were based on faith, could not be revised subsequently.

Mr Bush relied heavily on a small inner core of advisers. The most important of these was Dick Cheney, who quickly became the most powerful vice-president in American history. Mr Cheney used his mastery of bureaucracy to fill the administration with his protégés and to control the flow of information to the president. He pushed Mr Bush forcefully to the right on everything from global warming to the invasion of Iraq; he also fought ruthlessly to expand the power of the executive branch, which he thought had been dangerously restricted since Watergate.

The two other decisive figures were Karl Rove, Mr Bush’s longtime political guru,
and Donald Rumsfeld, his defence secretary. Mr Rove was obsessed by pursuing his
dream of a rolling Republican realignment, subordinating everything to party politics. Mr Rumsfeld regarded the Iraq war not, like his boss, as an exercise
in democracy-building, but as an opportunity to test the model of an “agile
military” that he was pioneering at the Pentagon.

The fruit of all this can be seen in the three most notable characteristics of the Bush presidency: partisanship, politicisation and incompetence. Mr Bush was the most partisan president in living memory. He was content to be president of half the country—a leader who fused his roles of head of state and leader of his party. He devoted his presidency to feeding the Republican coalition that elected him. …

Relentless partisanship led to the politicisation of almost everything Mr Bush did. He used his first televised address to justify putting strict limits on federal funding for stem-cell research, and used the first veto of his presidency to prevent the expansion of that funding. He appointed two “strict constructionist” judges to the Supreme Court, John Roberts and Samuel Alito, turned his back on the Kyoto protocol, dismissed several international treaties, particularly the anti-ballistic-missile treaty, loosened regulations on firearms and campaigned against gay marriage. His energy policy was written by Mr Cheney with the help of a handful of cronies from the energy industry. His lacklustre attorney-general Alberto Gonzales, who was forced to resign in disgrace, was only the most visible of an army of over-promoted, ideologically vetted homunculi.

The Iraq war was a case study of what happens when politicisation is mixed with incompetence. A long-standing convention holds that politics stops at the ocean’s edge. But Mr Bush and his inner circle labelled the Democrats “Defeaticrats” whenever they were reluctant to support extending the war from Afghanistan to Iraq. They manipulated intelligence to demonstrate that Saddam Hussein possessed weapons of mass destruction and had close relations with al-Qaeda. This not only divided a country that had been brought together by September 11th; it also undermined popular support for what Mr Bush regarded as the central theme of his presidency, the war on terror.

Sean Wilentz, a historian at Princeton, remarks how unusual it is for a president to
have politicised such a national catastrophe: “No other president—Lincoln in the
civil war, FDR in world war two, John F. Kennedy at critical moments of the cold
war—faced with such a monumental set of military and political circumstances,
failed to embrace the opposing political party to help wage a truly national struggle. But Bush shut out and even demonised the Democrats.”

The invasion of Iraq was like much else in the Bush years—an initial triumph that
contained the seeds of disaster. Thomas Ricks, the author of “Fiasco”, argues
that “the US-led invasion was launched recklessly, with a flawed plan for war
and a worse approach to occupation.” Mr Rumsfeld’s decision to invade with too
few troops led inexorably to the breakdown of law and order, which turned the
Iraqi population against the Americans, and to the Abu Ghraib scandal, which
solidified world opinion against America. But Mr Bush responded to the unfolding
disaster with a mixture of denial and stubbornness, refusing to force Mr
Rumsfeld to adjust his plans. He engaged in an absurd photo-op to declare
“Mission accomplished”, and he also gave medals to three of the architects of
the debacle, George Tenet, Tommy Franks and Paul Bremer.

Mr Bush’s weaknesses were on display again in the second great disaster of his
administration, Hurricane Katrina, which struck New Orleans in August 2005. The
hurricane exposed Mr Bush’s congenital passivity: he did not visit New Orleans
until five days later, after first viewing the damage from the safety of Air Force One. It also exposed the consequences of filling your administration with third-rate hacks. The head of the Federal Emergency Management Agency, Michael Brown, a former commissioner for the International Arabian Horse Association, made a hash of dealing with the disaster but nevertheless received an encomium from the president—“Brownie, you’re doing a heckuva job”—that rang around the

How will Mr Bush be judged in the light of history? “Many historians”, says Princeton’s Mr Wilentz, “are now wondering whether Bush, in fact, will be remembered as the very worst president in all of American history.” …

Meanwhile, his policy of cutting taxes while increasing spending—of simultaneously pursuing big government and small government—dramatically swelled the deficit. He inherited a projected ten-year surplus of $5.6 trillion and bequeaths a ten-year deficit of $6 trillion, assuming his tax cuts remain in place. Hardly the makings of a positive judgment from future historians.

In pursuit of his fiscal ambitions, Mr Bush helped roll over or sweep aside long-standing rules and conventions designed to keep the deficit in check. …

For years the president refused to include the cost of the Afghanistan and Iraq wars in his budget. He also acquiesced in the expiry of 12-year-old budget rules that made it difficult to cut taxes or increase spending if it raised the deficit. In coming years deficit reduction will be hard enough, with the recession-induced collapse in tax collections and the cost of the bail-outs. Jim Horney, a former Democratic congressional staffer now at the liberal Centre on Budget and Policy Priorities, a think-tank, says it has been made even harder by the disappearance of any culture of restraint in Congress.

A president who laboured to produce Republican hegemony ended up dramatically weakening the Republican Party. The Democratic Party is now in a more powerful position than it has been at any time since the second world war. In the Senate, the Democrats have a majority of 59 seats to 41 (including two independents who caucus with the Democrats); in the House, they hold 256 seats to the Republicans’ 178. Americans who came of age during the Bush years identify with the Democrats by the largest majority recorded for any age cohort since the second world war.

A president who believed that America’s global supremacy was guaranteed by America’s unrivalled military power ended up demonstrating the limits of both. Many of America’s closest allies in Europe refused to co-operate with the Iraq war. Many of America’s rivals used America’s travails in Iraq to extend their power: Iran is more powerful than it was in 2000, and closer to acquiring a nuclear bomb; Russia and China have extended their web of alliances and strengthened their regional influence. Mr Bush’s recalibration of his policies in his second term suggests that even he recognises that America’s loss of soft power has cost it dear.

The American military machine is under intense strain. The demands of tackling the
Iraq insurgency have forced America to short-change Afghanistan. Deployments
have grown longer and redeployments more frequent. Recruitment standards are
going down. The neoconservative dream of a muscle-bound America knocking down
the “axis of evil” and planting democracies from North Korea to Iran looks, more
than ever, like an overheated fantasy cooked up in a think-tank.

… The administration was also wedded to the fundamental tenets of Reaganomics: cut taxes and free the supply side and everything else will take care of itself. Mr
Cheney even argued explicitly that “Reagan taught us that deficits don’t matter.”

Mr Bush now leaves behind a tax system in some ways less efficient than the one he inherited, in need of annual patches, and unable to fund the government even in good times. He also leaves behind a broken budget process. … Reaganomics helped to produce a giant deficit. The financial crisis has made re-regulation rather than deregulation the mantra in Washington, while government has acquired a much bigger role in the economy through its backing of banks and car companies.

… Unfortunately, that economic legacy is littered with wasted opportunity, bad judgments and politicised policy. The budget surplus he inherited is now a deficit, the fiscal hole in America’s retiree programmes is bigger than ever, the tax system is an unstable, patched-up mess.

It is not all his fault. But for the most part, good policy repeatedly took a back seat to Mr Bush’s overweening political ambition. Both the country and, ultimately, the Republican Party are left the worse for it.

And if you had any doubt whether Republicans would embrace President Obama’s post-partisan appeal or revert to form as the party of opposition and obstruction, check out Jon Stewart’s take on the FOX News reaction to President Obama’s first day in office. [Hint: We’re all going to die.]

alternate universe

Still getting caught up on the email that accumulated while we were in DC for the inauguration (when I went five days without booting up my computer). Got this UK Guardian piece from our friend, the science-fiction author, David Brin (check out his blog, Contrary Brin):

The change we need
After eight long, tiresome years, President Al Gore won't be missed. Even if he did save the planet

TA Frank

No one thought Al Gore would be a loveable president, but, after eight years in the White House, he has gotten truly tiresome. The droning voice, the purchase of an eco-friendly robot dog, the campaign for carbon-free diamonds - all these things were hard to take, and he has been way too smug about reversing global warming. I think we've gone too far in the opposite direction, especially in light of the glacier that recently crushed Wasilla.

I think I started to dislike Gore when he stirred up a media storm after the Feds broke up the terrorist ring conspiring to fly airplanes into buildings back in 2001. He could have let it pass quietly, as Bill Clinton did with the millennium plot arrests in 2000. Instead, Gore held a press conference to milk it for political gain and scare us into a 15 cent per gallon gas tax. But who can afford to pay over a dollar and a half per gallon? No wonder we're resorting to electric cars these days.

And why did he pressure the universally admired Fed chairman Alan Greenspan to step down early in 2002? Replacing him with that old warhorse Paul Volcker was a nasty surprise, especially when Volcker choked off a promising housing boom in 2002 and imposed old, outdated regulations on lenders. Some properties lost as much as 8% of their value that year. Now housing prices are rising really slowly, and GDP barely grew by 3% this year.

To be sure, Gore did accomplish some good things in foreign policy. The Middle East is definitely better off now that Israel and Palestine are separate states. It was clever to transfer the most diehard West Bank settlers to the Gore Biosphere in North Dakota. But in Iraq, even after the demise of Saddam from virulent salmonella, Qusay has proved to be no more agreeable than his father, and Uday is simply out of control. (Grinding up the players of the national football team and roasting the remains on a stadium-sized spit was the nadir of his coaching.) When a group of
foreign-policy luminaries - from Bill Kristol to Paul Wolfowitz and Kenneth Pollack - urged Gore to invade Iraq and remake the entire Middle East, the president didn't even listen. That's rude.

Then, of course, there were the countless scandals and ethics problems. Recall that in 2003 a department of justice official failed to report receiving a bottle of Bordeaux wine from the French government, even though experts agree that its value would be in excess of the amount permitted as a gift. Then there was the case of politicising federal agencies, when Gore officials were accused of changing the wording in a report on global warming to say that it was a "severe" rather than a "serious" threat. The Republicans held hearings on that for weeks.

Of course, the biggest disappointment was Gore's failure to handle Hurricane Katrina properly. Not only did the massive evacuation of New Orleans prove a costly and time-consuming overreaction, since the levees - fortified in 2003 - held up fine. The emergency management agency also took over 24 hours to set up trailers for evacuees along the Gulf Coast, leaving them without government housing assistance for a full day. And Gore's decision to single-handedly venture into a flattened house in Mississippi and free a trapped two-year-old showed him to be an irresponsible showboat. Sure, President Gore knows CPR, hears like a German shepherd, and has the strength of 10 men - but we didn't need to see it.

All in all, the Gore combination of psychodrama and condescension won't be missed. It's also time for the Democrat stranglehold on power to end. What we need now is a bit of adult behaviour: a Dick Cheney presidency won't be eventful, but at least it will be calm.

• TA Frank is an Irvine fellow at the New America Foundation

Thursday, January 22, 2009

good luck/bad luck

There is a Chinese story, sometimes attributed to Lao Tzu:

A farmer used an old horse to till his fields. One day, the horse escaped into the hills and when the farmer's neighbors sympathized with the old man over his bad luck, the farmer replied, "Bad luck? Good luck? Who knows?"

A week later, the horse returned with a herd of horses from the hills and this time the neighbors congratulated the farmer on his good luck. His reply was, "Good luck? Bad luck? Who knows?"

Then, when the farmer's son was attempting to tame one of the wild horses, he fell off its back and broke his leg. Everyone thought this very bad luck. Not the farmer, whose only reaction was, "Bad luck? Good luck? Who knows?"

Some weeks later, the army marched into the village and conscripted every able-bodied youth they found there. When they saw the farmer's son with his broken leg, they let him off.

Good luck? Bad luck? Who knows?

I thought of this story during President Obama’s inauguration.

It was only a little over four years ago, after John Kerry’s agonizingly close loss to Bush. I was as depressed as I can ever recall being. I couldn’t believe the American people had elected George W. Bush with the knowledge of his first four years in the White House. And now we would have four more years of him. For days I felt like crying. I wanted to forget about politics altogether, forever. Maybe move to a surf beach in Baja and home-school the kids. No Internet connection and no periodicals. Just a duffel full of good books to last a few years.

If only I could have known then that the young African-American Senate candidate from Chicago who came out of nowhere in July 2004 to deliver an electrifying keynote address at the Democratic Convention … would be our next President of the United States. In the 109th Congress, which convened in January 2005, Republicans had just picked up four Senators and three House members. They had a 55 to 45 majority in the Senate and a 232 to 201 majority in the House. Four years later, the 111th Congress will have 59-member Democratic majority in the Senate and a 256 to 178 majority in the House – bigger than anything the Republicans ever had under Newt Gingrich or Tom Delay.

And just as a sort-of maraschino cherry on top, Congress will include a Senator Al Franken.

Oh, and Al Gore and Paul Krugman have Nobel Prizes.

It would have sounded like some kind of fantasy of a parallel universe.

What a difference four years makes.

As I was watching Barack Obama sworn in as president one of the many thoughts that went through my head was one that would have been unthinkable four years earlier: I was glad John Kerry hadn’t been elected. Because if he had, Obama wouldn’t have become president – at least not at this time, with the mandate for change that he has now. I don’t say this lightly. Had Kerry been elected, John Roberts and Samuel Alito wouldn’t be on the Supreme Court. New Orleans might have been spared much of the human tragedy it endured in the wake of Hurricane Katrina. Any number of things might have been managed more competently and many better policies would have been put in place. But the full consequences of Bush’s disastrous first term would not have manifested themselves on his watch, leaving a highly-divided electorate to argue over the blame. And, yes, for all of his talents, Kerry is an aloof elitist whose lack of inspirational leadership skills would probably not have allowed him to overcome a weak mandate from a narrow win. There is a good likelihood he would not have been re-elected. And who knows what Republican would have replaced him.

Instead, we have elected as president the most remarkable politician of my lifetime. I have no problem predicting he will be a great president. With Republican policies thoroughly discredited and things in shambles, the country is ready for major, generational change. But polls show people are also patient, with realistic expectations for the near term, and willing to give the new president the time and support he needs to bring about the desired change. Obama has a solid electoral mandate, having won a 365 to 173 landslide in the Electoral College and a popular vote margin of over 7%. And he has the leadership skills to build on that – indeed, he already has. Sure, he is inheriting a mess. But all but a few Bush dead-enders acknowledge it.

Good luck? Bad luck? Who knows?

But it sure feels good.

Friday, January 16, 2009


The final CBS/New York Times poll of the Bush presidency has his approval rating at 22%:
Mr. Bush's final approval rating is the lowest final rating for an outgoing president since Gallup began asking about presidential approval more than 70 years ago.

The rating is far below the final ratings of recent two-term presidents Bill Clinton and Ronald Reagan, who both ended their terms with a 68 percent approval rating, according to CBS News polling.

Seventy-three percent say they disapprove of the way Mr. Bush has handled his job as president over the last eight years. But, on the positive side, Bush is doing a lot better than Cheney, who has a 13% approval rating.

obama song

Michael Franti is one of my favorites. (He's playing at the inaugural Green Ball on Monday.) He has his “Obama Song” available here as a free download (look for the mp3 download under “featured songs”).

It’s fun.

(Less than 100 hours until Obama becomes president. Actually less than 90 hours. But who’s counting. Our family is off to DC tomorrow morning.)

"bush kept us safe"

I was driving around yesterday when Bush was giving his “farewell address.” Much to the annoyance of my wife, I found myself providing real-time rebuttal:

“So around the world, America is promoting human liberty, human rights, and human dignity.” If you don’t count torture, secret prisons, warrantless surveillance and indefinite imprisonment without access to the judicial system.

“Every taxpayer pays lower income taxes.” Lower current taxes. But spending has skyrocketed and the federal debt has increased by over five trillion dollars on Bush’s watch. Just the interest alone on that five trillion dollars will cost today’s taxpayers – and our children and grandchildren – roughly $200 billion a year in perpetuity. A chimpanzee can cut taxes if all you have to do is add them to the national debt.

“America’s air, water, and lands are measurably cleaner.” Huh? Who’s doing the measuring?

“And the Federal bench includes wise new members like Justice Sam Alito and Chief Justice John Roberts.” Res ipsa loquitur.

“Facing the prospect of a financial collapse, we took decisive measures to safeguard our economy.” Might it not have been better to take “decisive measures” before we faced the prospect of financial collapse?

“Yet I have always acted with the best interests of our country in mind.” Oh, really? Turning the overwhelming national unity in the immediate aftermath of 9-11 into a narrow partisan wedge issue to win the 2002 and 2004 elections was noble selflessness?

“But I hope you can agree that I was willing to make the tough decisions.” Dude, that’s your job. You don’t get credit for making decisions – only for making good decisions.

“The decades ahead will bring more hard choices for our country …” Yes, thanks to your bad decisions.

“We must always be willing to act … to advance the cause of peace.” By starting an unprovoked war on the basis of lies leading to hundreds of thousands of deaths?

(As Bush starting going on about freedom, justice, truth and good & evil, I couldn’t stand it any longer and had to switch over to the latest John Doe CD.)

But the line that really set me off was this one: “America has gone more than seven years without another terrorist attack on our soil.” This has become the primary defense of the Bush presidency. In the seven years since 9-11 there has been no terrorist attack on US soil. But there was also no terrorist attack on US soil in the seven years before 9-11. So, what are we ignoring there? Oh, yes: 9-11. The worst terrorist attack on US soil ever. On Bush’s watch. After he ignored the frantic warnings of the intelligence services.

There was that memorable testimony before the 9-11 Commission that various CIA officials were running around DC with their “hair on fire” warning of the prospect of an imminent attack by Al Qaeda. In July 2001, CIA director George Tenet and counterterrorist chief Cofer Black met with Bush’s national security advisor, Condi Rice, to warn of the Al Qaeda threat and the increase in intelligence traffic on that subject, but left dejected. And, of course, there was the infamous August 6, 2001, Presidential Daily Brief title, “Bin Laden Determined to Strike in US.” CIA analysts flew to Crawford, Texas to intrude upon the longest presidential vacation in history to deliver that message, to which Bush replied, "All right, you've covered your ass, now.” Bush didn’t even bother to pick up the phone and call his CIA director or national security advisor. He just continued blithely clearing brush and riding his bicycle..

In tort law there used to be a concept known as “one free bite.” It referred to the notion that a dog owner can’t be expected to know that his dog is likely to bite someone until the dog … actually bites someone. Thereafter, if he fails to properly restrain his dog, he is liable. But he gets “one free bite.” This concept has largely faded away in tort law. But it apparently persists in Bush’s concept of national defense (or “homeland security” as it is now known, thanks to Bush). A president is allowed one catastrophic terrorist attack on his watch – and he is off the hook as long as there isn’t another one before he leaves office. But that only applies to threats to the nation’s security that take exactly that form. So, for example, if he fails to “keep us safe” by incompetently managing the devastation of a US city by hurricane and flood – well, he gets “one free bite” on that one, too. Hey, he hasn’t lost a major US city in the three years since Katrina!

Bush “kept us safe” – if you don’t include 9-11, or Katrina, or the 4200 US soldiers who died in Iraq and tens of thousands of soldiers badly wounded in that war. And if you ignore the fact that Osama bin Laden is still alive over seven years after 9-11. And you disregard the
July 2007 National Intelligence Estimate and the report from the National Counterterrorism Center that same month, both of which concluded that Al Qaeda is stronger than at any time since 9-11 and has reconstituted in the tribal areas along the Afghanistan/Pakistan border.

Bush has “kept us safe”. In fairness, I guess it’s true that most Americans didn’t get killed during his eight years in office. Ya gotta give him credit for that, I suppose. (We’re all just poorer.)

Arianna Huffington has a
good post on Bush’s farewell address (she even uses the same term I did: delusional):
Bush's Farewell Address: Still Delusional After All These Years

Thursday night's valedictory speech was quintessential Bush: delusional from beginning to end.

He made Afghanistan sound like a swell place to take a vacation when, in truth, only those with a death wish venture out these days without an armed convoy.

He lauded Iraq as "a friend of the United States" -- without ever mentioning the fact that if Iraq has a BFF it is Iran, not America.

He said his Medicare prescription drug plan "is brining peace of mind to seniors." Hardly. It's been widely derided as a poorly conceived, chaotic mess.

He claimed that, on his watch America's "air, water, and lands are measurably cleaner." Who is doing the measuring, the same eco-unfriendly companies to which he handed both his environmental policies and our public lands? This is a man whose administration refused to open emails from its own EPA because they contained information about greenhouse gas emissions that are endangering public health.

In a particularly jaw-dropping moment, Bush asserted that when people "live in freedom, they do not willingly choose leaders who pursue campaigns of terror" -- a remarkable claim given the fact that Hamas, which has kinda been in the news lately, has leaders who "pursue campaigns of terror" and were willingly chosen by people given the freedom to elect who they wanted.

Another striking moment was watching the great pride the president took in saying that even though we might not have liked all of his decisions, we have to admit that he "was willing to make the tough decisions." The Crawford Cowboy to the end.

Yes, he made tough decisions... but what is the value in that if the decisions you make are consistently wrong? And Bush has made the wrong decisions again and again and again.

He was wrong about Iraq and Saddam and WMD. He was wrong to take his eye off the ball on Afghanistan. He was wrong about tax cuts being the answer to our economic woes. He was wrong about Wall Street being able to regulate itself. He was wrong about Katrina. He was wrong about torture. He was wrong about extraordinary rendition. He was wrong about warrantless wiretapping. He was wrong about Gitmo. Wrong, wrong, wrong.

The speech was spin at its most dangerous. It's easy to feel a pang of pity for a guy who was on top so long and is now heading out the door. But the more sympathy he evokes, the more susceptible we are to the lies he is telling. Before we know it, his revisionism becomes accepted as the truth.

So if there was any value in the speech it was this: it should remind us of the importance of refusing to allow this delusional revisionism to stand.

Thursday, January 15, 2009


"Reagan proved deficits don't matter."
Dick Cheney

JPMorgan Chase has held up through the financial crisis better than most of its rivals. Its CEO, Jamie Dimon, was quoted in the Financial Times this morning saying, “The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009.” That’s consistent with the consensus of economists – things are going to get worse before they get better and don’t expect a lot of good economic news in 2009.

While some bloviating shills in the right-wing media have taken to blaming Obama for the current state of the economy, most Republicans have been holding back until he actually takes office. But you can bet that as of next Tuesday they will attribute every fresh piece of bad economic news to his remedial efforts. So it is useful to take note of the where things stand as of January 2009.

When Barack Obama steps into the White House next week the US government will already be almost four months into the current 2009 fiscal year, which began October 1. Last week the Congressional Budget Office
forecast the 2009 deficit at nearly $1.2 trillion, swamping the previous record of $455 billion set in 2008. (Bush already owns the five largest federal budget deficits of all time, not including 2009, after inheriting the largest budget surplus in US history.) The CBO assumes the US economy will decline by 2.2% in 2009. But the CBO estimate doesn’t include spending for the wars in Iraq and Afghanistan (which the Bush administration has treated every year as if it was some kind of surprise that couldn’t have been anticipated). And it doesn’t take into account any economic recovery program – no tax cuts or spending increases to stimulate the economy. So add another $500 billion or so to the deficit number -- $1.7 trillion.

[click to enlarge]

This is not wild conjecture. It was announced earlier this week that the federal budget deficit for just the first three months of fiscal 2009 was $485 billion. Not an annualized projection – that is actual amount for just three months. That means that even if the year ended even before Obama took office next week, the 2009 budget deficit would already have set a new record. That is on pace for a $2 trillion deficit. It is sort of like Bob Beamon’s world long jump record at the 1968 Olympics when he became the first person to jump over 28 feet and 29 feet in the same jump. We are sailing right over $500 billion, past $1 trillion, and almost certainly exceeding $1.5 trillion as we approach a $2 trillion deficit. Not bad considering that the record budget deficit before Bush took office was a mere $290 billion run up by his dad in his last full year in office.

That’s what you get when you cut taxes multiple times while fighting two wars and abandoning all control over spending.

Why it was only eight years ago, in January 2001, when then-Fed chairman Alan Greenspan
testified to Congress in favor of Bush’s first round of massive tax cuts. After having been a fiscal hawk during years of Democratic government, Greenspan had a change of heart. His logic? We risked paying off the Federal debt altogether too soon. The horror!

[T]he Fed head said, "the most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade."

And that could be a bad thing.

Running surpluses without a debt, Greenspan warned, would result in the "longer-term fiscal policy issue" of a government paying off its debt, particularly long-term Treasury bonds, before the bonds mature — costing it extra money by buying back those securities from private investors before they mature.

Buying back Treasury bond in the public markets is only costly if prices go up, which means interest rates are going down. How is that a bad thing? It’s called “capital formation” – savings being recycled as private sector investment. Conservatives used to consider that a good thing.

The Bush tax cuts, Greenspan testified, would put us on a “glide path to zero federal debt." He was also concerned that the federal government, in the absence of debt to pay off, would have to invest surpluses in the private capital markets. "The federal government should eschew private asset accumulation," he said (yes, Greenspan actually used the word “eschew”), "because it would be exceptionally difficult to insulate the government's investment decisions from political pressures." Of course, Greenspan didn’t raise this as a concern when Bush was peddling the idea of privatizing Social Security. Then, diverting Social Security dollars into private capital markets would be a GREAT thing – raining down riches on retirees (and, coincidentally, raining down fees on Wall Street).

(It’s too bad we didn’t turn over Social Security to the “Masters of the Universe” on Wall Street, isn’t it? According to the 2008 Social Security Trustees report, the system will only be able to pay 100 percent of forecast benefits through 2041 – and then only 78% thereafter in perpetuity. If only Democrats had let Wall Street do to the Social Security system what it has done to your IRA – the “Final Solution” to the “Social Security problem.” Maybe it would have prolonged the financial bubble long enough for Bush to leave office before the inevitable burst.)

Economists have a concept called fiscal space, defined as room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. It is actually not a complicated concept. It’s pretty intuitive. For example, if you are running large budget surpluses during a time of healthy economic expansion, the budget can take a hit during a downturn without it doing serious damage to the country’s finances. On the other hand, if you are already running record budget deficits during an unsustainable credit bubble (for example), and the economy subsequently plunges into the worst economic crisis since the Great Depression, there isn’t much slack in the budget for an accommodative fiscal policy without completely blowing the budget apart. The boost to demand required to arrest the downward spiral risks damaging the value of the country’s currency and its terms of access to the capital markets. To take a more concrete example, in fiscal 2000 the US ran a budget surplus of $236 billion (the largest in history). When the economy experienced a mild recession (but a big drop in taxes from capital gains) in 2001, Clinton was still able to bequeath to Bush a budget surplus of $128 billion that year. But when Bush, in turn, hands Obama a $485 billion deficit – in only the first quarter of 2009 – in the face of a full-blown economic crisis, policy options are more constrained.

But Bush is just following in the footsteps of his role model, the Republican saint Ronald Reagan. Bush has almost doubled the national debt on his watch, but Reagan almost tripled it. In Reagan’s first address to Congress in February 1981. He said:

I've been trying ... to think of a way to illustrate how big a trillion is. The best that I could come up with is that if you had a stack of $1000 bills in your hand only four inches high you would be a millionaire. A trillion dollars would be a stack of $1000-dollar bills 67 miles high.

Reagan's speech-writers missed an opportunity. Most Americans have never seen a $1000 bill because they were discontinued in 1969. Using $20 bills, a trillion-dollar stack would be an impressive 3150 miles high. The national debt nearly tripled on Reagan's watch, from $993 billion to $2.6 trillion, a stack of Jacksons soaring 8450 miles high. But Reagan was frugal. When George W. Bush wandered into the White House on January 20, 2001, the national debt had climbed to $5.7 trillion. When he leaves next week, it will be pushing $10.8 trillion, a stack of twenties 34,000 miles high.

Using inflation-adjusted dollars, in the past 28 years, since Reagan took office, the national debt has risen $800 billion during Democratic administrations, and a staggering $7.5 trillion during Republican administrations. Or, looked at another way, it has risen $100 billion a year during Democratic presidencies and $375 billion a year during Republican administrations. In the Cheney-Bush administration, it has averaged over $500 billion a year (adjusted for inflation and including “off-budget” increases to the debt).

But now isn’t the time for short-term deficit concerns. To paraphrase Donald Rumsfeld, “You confront a depression with the budget you have, not the budget you might want or wish to have at a later time.”

Even conservative Republican economists are urging a two-year economic recovery package in the general range of $1 trillion. That includes Martin Feldstein, Ronald Reagan’s economic advisor and a conservative stalwart, who has endorsed a major fiscal stimulus, saying, “We're down to fiscal policy, which pains me a bit, more than a bit, but I don't think we have a choice.” He even took the stage with Clinton labor secretary Robert Reich to endorse plans along the lines being proposed by Obama. "It pains me to say that because I am a fiscal conservative who dislikes budget deficits and increases in government spending,” Feldstein said in Congressional testimony. “Reviving the economy requires major fiscal stimulus …”

So now we are hearing a lot of belly-aching from Congressional Republicans about the deficit. It might have been nice to have heard that when we were running record budget deficits during an unsustainable credit bubble. But that might have constrained their tax cuts. In the meantime, well ...

Reagan proved deficits don’t matter. Right?

[click to enlarge]

The numbers are understated – this cartoon is from April 6, 2008. But the concept is more relevant than ever.

Wednesday, January 14, 2009


Today's Gallup poll, the last of Bush's presidency (ooohhh... it felt good to type that), showed a bit of a bump in his popularity, which at 34% may allow him to skirt behind Nixon to become only the second-least popular president on his way out the door since modern polling began. Bush probably got a few bonus points for screwing up so badly he made it possible for a young, liberal African-American from Chicago with the middle name "Hussein" to get elected. And for that, I'm grateful.

But that's about it.

That poll shows pretty dramatically that we have become two (or more) countries. Bush's bump came from his support among Republicans, which has risen from 67% to 75%. Think about that. Three out of four Republicans think Bush has actually done a good job. That compares with 28% of independents and only 6% of Democrats.

Bush and Cheney have been on a Rove-orchestrated "legacy" tour of all the major media, trying to convince the country that the worst terrorist attack in US history, torture, secret prisons, two unpopular wars, the loss of a major American city, the worst economic crisis since the Great Depression, environmental degradation, and global distain -- just to hit on a few highlights -- were all good things. I was going to write something about this, but Jon Stewart and the crew at the Daily Show did a good job of it.


Sunday, January 11, 2009

financial reading

One silver lining from the current financial meltdown: It’s a sure bet we eventually are going to get some great books out of it. Better than Barbarians at the Gates about the Reagan-era leveraged buy-outs. Better even than Roger Lowenstein’s outstanding When Genius Failed about the how the hedge fund Long Term Capital Management almost brought down the global financial system. We’ve already gotten to the stage where we are seeing some good, long pieces in The New Yorker and Vanity Fair or serialized in places like the New York Times and Washington Post.

Here are a few from recent weeks.

The new Vanity Fair has a good (long) piece (“
Fannie Mae’s Last Stand”) on Fannie Mae and Freddie Mac, the so-called “Government Sponsored Enterprises” (GSEs). As you would expect from Vanity Fair, it focuses on the personalities and the politics more than the economics. During the campaign, Republicans tried to blame the whole financial meltdown on the GSEs and Democratic support for these entities. According to this narrative, it was basically poor minorities (surprise!) that caused our financial crisis. I kept intending to write the comprehensive post refuting that nonsense. At some point, especially after the election, it seemed moot. But in hardcore right-wing circles (like the 24% of the population that still approves of Bush’s job performance) it has become a firmly entrenched mythology that will endure beyond the graves of its current adherents to confuse the world view of generations of right-wingers to come. For that reason, I still might get around to writing that post one of these days. (In the meantime, if you want to dig into it a bit more yourself, you can read here, here and here.) But the Vanity Fair piece at least does a good job describing the politics and players behind the GSEs. (The right-wing narrative isn’t helped by the fact that lobbyists and “consultants” for Fannie and Freddie include John McCain’s campaign manager, Rick Davis, who had served as the president of the Homeownership Alliance, an advocacy group for the GSEs, right-wing godfather Grover Norquist, Newt Gingrich, and the original leader of the Christian Coalition, Ralph Reed.)

One concluding bit:

But a few things are clear. One is that the argument that Fannie and Freddie caused our entire economic calamity is absurd. Yes, the volume of bad mortgages that Fannie and Freddie bought may have blown the bubble bigger than it otherwise would have been. But to put the blame entirely on Fannie and Freddie is to exempt all the other players, including the mortgage originators who sold subprime mortgages and Wall Street, which packaged up the bad mortgages and sold them to investors around the globe.

Another thing that’s clear is that the critics were both right and very wrong about
Fannie and Freddie. Yes, their executives and shareholders made fortunes in the
glory years, and, yes, taxpayers are now bearing the brunt of whatever losses
there are. Just as critics always warned, it’s “the privatization of profits and the socialization of risks.” But what the critics missed is that that wasn’t unique to Fannie and Freddie. It turns out our entire financial sector was operating under that same premise—and to a far greater degree than Fannie and Freddie.

In the pantheon of right-wing demonology, Massachusetts Congressman Barney Frank, chairman of the House Financial Services Committee, has a special place – and only in part because he was the first openly gay member of Congress. Jeffrey Toobin has a good piece (“
Barney’s Great Adventure”) in the latest New Yorker.

Barney was sort-of a law school classmate of mine (he graduated the same year I started). He was 36-years-old at the time, which made him seem like an old man to those of us fresh out of college. He was already a major figure in Massachusetts politics, even then. He is one of the smartest, funniest (if not necessarily most congenial) people you will ever meet. (My favorite recent line, in response to Obama’s statement that we only have one president at a time: "I'm afraid that overstates the number”.) As Toobin writes, “In a 2006 poll of Capitol Hill staffers by Washingtonian, published shortly before the elections that gave Democrats control of the House for the first time in twelve years, Frank was voted the brainiest, funniest, and most eloquent congressman—a notable achievement, since he often speaks in a barely comprehensible mumble.”

In line with the Vanity Fair article, here is a bit from the Frank piece on the topic of Fannie and Freddie:
… Frank pointed out that when [conservative Congressman Scott] Garrett [R-NJ] had attempted to tighten regulations on Fannie and Freddie, Republicans had controlled the House. “Had a Republican majority been in favor of passing that bill, they would have done it,” Frank said. “Now he has claimed that it was we Democrats—myself—who blocked things. The number of occasions on which either Newt Gingrich or Tom DeLay consulted me about the specifics of legislation are far fewer than the gentleman from New Jersey seems to think.

“I will acknowledge that during the twelve years of Republican rule I was unable to stop them from impeaching Bill Clinton,” Frank went on. “I was unable to stop them from interfering in Terri Schiavo’s husband’s affairs. I was unable to stop their irresponsible tax cuts, the war in Iraq, and a Patriot Act that did not include civil liberties.” In other words, Frank insisted, if the Republicans had wanted to try to prevent the mortgage crisis, they would have had plenty of opportunities to do so.

… Frank went on, “In 2004, it was Bush who started to push Fannie and Freddie into subprime mortgages, because they were boasting about how they were expanding
homeownership for low-income people. And I said at the time, ‘Hey—(a) this is
going to jeopardize their profitability, but (b) it’s going to put people in homes they can’t afford, and they’re gonna lose them.’ ” (In a recent op-ed piece in the Wall Street Journal, Lawrence B. Lindsey, a former economic adviser to President Bush, wrote that Frank “is the only politician I know who has argued that we needed tighter rules that intentionally produce fewer homeowners and more renters.”) Frank recalled with disdain a Bush Administration proposal to allow time limits on rental vouchers for poor people. “They said, ‘Well, don’t you agree that we should limit the amount of time people have a voucher?’ I said, ‘Yes, if you limit the amount of time they can be poor—“I’m sorry, you can only be poor for four years.” ’ ”

In 2005, while the Democrats were still in the minority, Frank contributed to a bipartisan effort to put his objectives—tighter regulation of Fannie and Freddie and new funds for rental housing—into law. At the time, Fannie and Freddie were regulated by a small agency within the Department of Housing and Urban Development; the bill proposed to create an independent agency to monitor their operations. Frank and Michael Oxley, who was then chairman of the Financial Services Committee, achieved broad bipartisan support for the bill in the committee, and it passed the House. But the Senate never voted on the measure, in part because President Bush was likely to veto it. “If it had passed, that would have been one of the ways we could have reined in the bowling ball going downhill called housing,” Oxley told me. “Barney, to some extent, is misunderstood—with this image of him as a fierce partisan. He is an institutionalist. He believes in the House and in the process. He eschews the grandstanding style that so many members use and prefers to work behind the scenes and get something done.”

Frank’s prescience on the housing crisis should not be overstated, because Fannie and Freddie represented only one aspect of the problem. “Fannie and Freddie were contributors to the bubble, but they came late in the really bad loans, after the private issuers like Merrill and Citigroup,” Dean Baker, the co-director of the Center for Economic and Policy Research, in Washington, said. “The law probably would have curtailed their lending, but it’s hard to say it would have made any difference.
The real problem was outside of Fannie and Freddie, with the banks, and nobody
in Congress was talking about it.” …

Fannie and Freddie got into the subprime mess late in the game – pretty much at its peak – primarily because it was hemorrhaging market share to the Wall Street banks that were buying up junk from the likes of Countrywide, Indy Mac, WaMu and Lending Tree and packaging them into toxic securities. Indeed, the term “subprime” originally referred to those mortgage loans that did not qualify for resale to Fannie Mae. Although the GSEs held something like 60% of all US mortgages at their peak, they only held around 20% of the subprime junk (none of which they originated).

To get an idea how lax lending standards got, read
this episode dealing with WaMu, from the New York Times series “The Reckoning.” It’s filled with anecdotes, but here’s the gist:
On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year [2008], the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. …

During [former CEO Kerry] Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the
bank’s executives. WaMu pressured appraisers to provide inflated property values
that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.” …

Revenue at WaMu’s home-lending unit swelled from $707 million in 2002 to almost $2 billion the following year, when the “The Power of Yes” campaign started.

Between 2000 and 2003, WaMu’s retail branches grew 70 percent, reaching 2,200 across 38 states, as the bank used an image of cheeky irreverence to attract new customers. In offbeat television ads, casually dressed WaMu employees ridiculed staid bankers in suits. …

For WaMu, variable-rate loans — option ARMs, in particular — were especially
attractive because they carried higher fees than other loans, and allowed WaMu
to book profits on interest payments that borrowers deferred. Because WaMu was
selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. …

If the financial crisis was limited to subprime mortgage loans, it would have been easy to contain. But what caused it to infect the entire global financial system was the hundreds of trillions of dollars (in nominal value) of derivatives of all kinds, particularly “credit default swaps” which created almost infinite leverage and tied all the financial institutions of the world together in ways that no one really understood. That, in turn, resulted in a complete breakdown of trust in the system as no one knew where the ultimate risk of all these trades resided.

The Washington Post had an excellent three-part series on the insurance giant AIG, whose bailout has already cost taxpayers $152 billion. It became “too big to fail” as it cranked out hundreds of billions of dollars worth of unregulated derivates. Highly recommended.

Part one: “
The Beautiful Machine”:
They would create an elegant and powerful system that earned billions of dollars, operating in the seams and gaps of the market and federal regulation. They and their firm would alter the way Wall Street did business, particularly in the use of derivatives, and eventually test Washington's growing belief that capitalism could safely thrive with little oversight.

Then, they would watch in disbelief as their creation -- by then in the hands of others -- led to the most costly rescue of a private company in U.S. history, triggering a federal investigation into AIG's near-collapse and making AIG synonymous not with safety and security, but with risk and ruin.

Over the past two decades, their enterprise, AIG Financial Products, evolved into an indispensable aid to such investment banks as Goldman Sachs and Merrill Lynch, as well as governments, municipalities and corporations around the world. The firm
developed innovative solutions for its clients, including new methods to free up cash, get rid of debt and guard against rising interest rates or currency fluctuations.

Financial Products unleashed techniques that others on Wall Street rushed to emulate, creating vast, interlocking deals that bound together financial institutions in ways that no one fully understood and contributed to the demise of its parent company as a private enterprise. In the panic of mid-September's crash, the Bush administration said that AIG had grown too intertwined with the global economy to fail and made the extraordinary decision to take over the reeling giant. The bailout stands at $152 billion and counting -- almost 10 times as large as the rescue for the American auto industry.

Many of the most compelling aspects of the economic cataclysm can be seen through the story of AIG and its Financial Products unit: the failure of credit-rating firms, the absence of meaningful federal regulation, the mistaken belief that private contracts did not pose systemic risk, the veneration of computer models and quantitative analysis.

Part two: “
A Crack in the System”:
For months, several executives at AIG Financial Products had pulled apart the data, looking for flaws in the logic. In phone calls and e-mails, at meetings and on their trading floor, they kept asking themselves in early 1998: Could this be right? What are we missing?

Their debate centered on a consultant's computer model and a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company's corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.

The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations. As AIG's top executives and Tom Savage, the 48-year-old Financial Products president, understood the model's projections, the U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events
that would require Financial Products to cover defaults.

If that happened, the holders of swaps would almost certainly be wiped out, so how could they even collect? Financial Products would receive millions of dollars in fees for taking on infinitesimal risk. …

Credit-default swaps exemplify the contradictions of modern finance. At a basic level, they serve as insurance, but they aren't regulated as such. They have allowed companies to free up untold amounts of capital that otherwise would be tied up as collateral for loans. They were sold both to reduce risk and, in some cases, to give clients room to take on more risk -- a key component to making money on Wall Street.

But in the end, neither the buyers nor sellers truly understood the enormous risks they were creating. Anyone could sell such a swap, and anyone could buy one, even if he had no stake in the transaction. Some buyers used them to bet against failing
companies, prompting a debate among state regulators about whether this type of
swap was a form of gambling.

Part three: “
Downgrades and Downfall”:
The contracts were flying out of AIG Financial Products. Hardly anyone outside Wall Street had ever heard of credit-default swaps, but by early 2005, investment banks were snapping them up to insure all kinds of deals in case of default, fueling one of the great financial booms in U.S. history. …

Once a small part of the firm's business, the increasingly popular contracts had helped boost the company's profits to record levels. The company's computer models continued to show only a minute chance that the firm would ever pay out a dime on the contracts …

The swaps business had bound Financial Products to hundreds of counterparties in New York and Europe. Wall Street firms such as Goldman Sachs and Merrill Lynch favored the credit-default swaps as an extra layer of protection for mortgage-backed securities, one of the many investment by-products helping to fuel the overheated housing boom. European banks liked them because they could treat the swaps as a form of collateral, which freed up cash that the banks would ordinarily have to set aside as protection against losses.

The interlocking, complex nature of these contracts would speed their downfall. When the housing market began to unravel in 2007, it set off a chain of events that would prove disastrous: downgrades in the ratings of securities that Financial Products had insured; demands by Financial Products' counterparties for billions of dollars in collateral; AIG's desperate search for cash to meet the collateral calls; a panicky weekend of negotiations in New York and Washington; and, finally, Treasury Secretary Henry M. Paulson's conclusion that AIG could not be allowed to collapse.

The taxpayer rescue of AIG stands at $152 billion, including $60 billion in loans, a
$40 billion investment in AIG preferred stock and a $52 billion purchase of troubled AIG assets that the government hopes to sell off to recoup its investment. …

So there you go. That should be enough reading to fill the rest of your Sunday.

Or you can wait for the book.

Wednesday, January 7, 2009

the anti-torturers

As I wrote recently, no aspect of the Bush legacy, "is more shameful than its torture practices. It is a shame borne by the entire country. We can’t erase it. But we can – and must – account for it."

I failed to note (because I assumed it went without saying), that we must begin by ending it. President-elect Obama just took a big step in that direction with his (not yet officially announced) nomination of Leon Panetta to head the CIA and his (announced) nomination of Dawn Johnsen to head the Justice Department's Office of Legal Counsel. Of all his nominations to date, these two are among my favorites (along with Carol Browner as White House energy czar and Tom Daschle heading up Health and Human Services and White House health care policy).

Senator Diane Feinstein, the incoming chair of the Senate Intelligence Committee, (with the backing of the outgoing chair of that committee, Jay Rockefeller) immediately threw a fit over the Panetta choice, ostensibly because he is not a CIA insider -- like it's really important that the person heading the CIA be someone who sat by while the agency broke domestic and international law and violated the Constitution. More likely, she was upset because she hadn't been consulted about the choice of Panetta (who was an old rival of hers from California Democratic politics). In any event, after some groveling by Panetta and the Obama team, Feinstein seems to have been mollified and now
appears to be on board. (If only Feinstein and Rockefeller had shown as much spine during the past eight years of the Bush administration's lawlessness. Nothing like a little turf battle to bring out the real fighters in them. Torture and illegal wiretapping ... not so much.)

This is what Panetta wrote in an
op-ed last March:

More recently, President Bush vetoed a law that would require the CIA and all the intelligence services to abide by the same rules on torture as contained in the U.S. Army Field Manual. But all forms of torture have long been prohibited by American law and international treaties respected by Republican and Democratic presidents alike.

Our forefathers prohibited "cruel and unusual punishment" because that was how tyrants and despots ruled in the 1700s. They wanted an America that was better than that. Torture is illegal, immoral, dangerous and counterproductive. And yet, the president is using fear to trump the law.

Similarly, this is part of what Dawn Johnsen wrote on a
Slate's legal blog last April (in an on-line discussion with Slate's excellent legal correspondent, Dahlia Lithwick -- it's worth reading the whole exchange):

I want to second Dahlia’s frustration with those who don’t see the newly released Office of Legal Counsel (OLC) torture memo as a big deal. Where is the outrage, the public outcry?! The shockingly flawed content of this memo, the deficient processes that led to its issuance, the horrific acts it encouraged, the fact that it was kept secret for years and that the Bush administration continues to withhold other memos like it — all demand our outrage.

Yes, we’ve seen much of it before. And yes, we are counting down the remaining months. But we must regain our ability to feel outrage whenever our government acts lawlessly and devises bogus constitutional arguments for outlandishly expansive presidential power. Otherwise, our own deep cynicism, about the possibility for a President and presidential lawyers to respect legal constraints, itself will threaten the rule of law — and not just for the remaining nine months of this administration, but for years and administrations to come.

Dahlia's aptly summarizes this just-released memo's constitutional conclusion: "if the president authorizes it, it isn't illegal."

OLC, the office entrusted with making sure the President obeys the law instead here
told the President that in fighting the war on terror, he is not bound by the laws Congress has enacted. That Congress lacks the authority to regulate the interrogation and treatment of enemy combatants. The earlier-leaked 2002 OLC torture memo said the same in connection with the CIA (a program the Bush administration sought to reassure us was extremely limited and controlled). Here, the military is the group exempt from the laws.

As Johnsen notes, the OLC is "the office entrusted with making sure the President obeys the law" but under Bush it had been the office entrusted with making absurd legal arguments, in secret memos that couldn't withstand the light of day, intended to immunize administration lawlessness. The most infamous of these secret OLC memos was
John Yoo's infamous "torture memo" wherein (among many outrages) he re-defined torture downward to being only actions that inflict "intense pain or suffering of the kind that is equivalent to the pain that would be associated with serious injury so severe that death, organ failure or permanent damage resulting in a loss of significant body functions will likely result." Even if it causes death, it isn't torture unless that death was "likely." So, for example, pulling out someone's fingernails is OK. Suspending someone from the ceiling for days so that any time they start to fall asleep handcuffs dig into their hands -- no problem. According to Yoo, Congress couldn't even outlaw these things if it wanted to.

How delightful it is to go back and read the exchange between Dawn Johnsen and Dahlia Lithwick now with the knowledge that Johnsen will likely become the new head of the OLC. (Much more on Johnsen -- and a bit on Panetta --
from Salon's Glenn Greenwald.)

The Panetta nomination is even more delightful. The big question is why the heck he is willing to take the job. Panetta won't even be reporting directly to Obama but rather to the Director of National Intelligence (expected to be Admiral Dennis Blair). But as former White House chief of staff under Clinton, I have no concerns over his ability to navigate the politics and make the changes required at the CIA.

The idea that one needs be a CIA insider to head the CIA is ridiculous. Two of the worst CIA directors in my lifetime were Richard Helms under Nixon -- a lifelong CIA insider -- and Porter Goss under George W. Bush -- a former CIA officer and former chair of the House Intelligence Committee. Helms was prosecuted and convicted for lying to Congress (he denied CIA involvement in the overthrow of Chile's democratically-elected president, Allende, which was later disproved by documents discovered by the Church Committee investigating CIA abuses) -- but was considered a martyr within the agency.

Goss came into the job as CIA director determined to (as Richard Clarke said) "turn Langley into a cheering section for Bush's policies." He replaced competent senior CIA officials with partisan loyalists from his House staff. He made a complete mess of things and lasted only two years. The guy Goss made the executive director of the CIA (the #3 job), "Dusty" Foggo, was later indicted for fraud, conspiracy and money laundering in connection with the bribery case of convicted Congressman "Duke" Cunningham. ("Dusty & Duke" -- sounds like a country western duo. Live from Folsom Prison.)

By contrast, George H.W. Bush, after whom the CIA headquarters in Langley is named, had no CIA experience prior to becoming head of the agency. Indeed, most CIA directors over the past 30 years have not come from inside.

My own view is that there is WAY too much unnecessary secrecy in government. Most secrecy is intended to shield people from embarrassment or accountability or to keep questionable practices or deals from public scrutiny. In the case of the intelligence community, even the budgets are secret. How can you have any kind of accountability if even the budgets are secret? (And how much harm would it really do to national security if Russia or Al Qaeda knew what we were spending on spy satellites and secret operatives? What would our adversaries do differently?) Precisely because of all the secrecy, it is important to bring in outsiders at the top of the intelligence agencies from time to time to uncover incompetence and abuse. And I can't imagine anyone better to do that than Panetta.

Panetta is former head of the Office of Management and Budget and former chair of the House Budget Committee. To get any kind of control over a secret agency like the CIA, you have to be able to dissect the budget. (I would say that this is probably true of any large organization, public or private. But it is particularly true of an organization cloaked in deception and secrecy. Follow the money.) Among other things, he is credited with developing the 1993 budget package that would eventually result in the balanced budgets of the late '90's and the early years of this decade (before Bush blew the budget apart with his tax cuts).

It is also important that Panetta is an experienced customer of the intelligence agencies, both as White House chief of staff and as part of the Iraq Study Group. Above all, he is a competent manager -- an underrated skill over the past eight years.

Obama's appointments to date have reflected his moderate, pragmatic nature and he has made some significant nods toward post-partisanship. In doing so, I think he reflects the majority of the voters in this country who, despite attempts by partisans and the media to make every issue a study in "Crossfire" polarization, are moderate and pragmatic. But they also made it clear in the last election they want change. Don't confuse moderation and pragmatism with the status quo. (There has been nothing moderate or pragmatic about the Bush administration.) When it comes to torture, as with much else, change is coming.

It can't happen soon enough.

Here are some others praising the Panetta pick:

Fred Kaplan (
Scott Horton (
David Ignatius (
Washington Post)