Matt Miller's Blog

Blog Update

2009-04-27T10:38:00.000-07:00

With my formal book tour over and the press of other commitments, I won't have time for now to do much blogging (as many of you have already noticed and pointed out!). However I do expect to be doing regular columns for The Daily Beast, and contributing op-ed columns as well to The Financial Times, The Wall Street Journal, and other such outlets. If you're interested in following this work please do sign up for the email list on the site -- I'll be sending out new pieces as they appear. Many thanks for your interest.

Another Beast column

2009-03-23T16:15:00.000-07:00

This one on Ben Bernanke's latest moves.

Wall Street Ethics In Brief

2009-03-19T10:49:00.000-07:00

From The Big Picture, one of my favorites blogs:
When a fireman sees a house on fire, he sounds an alarm, dons his turnout gear, bravely rescues the occupants and puts out the fire.

When an investment banker sees a house on fire, he quietly sells the burning house short, uses the proceeds to buy a larger house for himself and, when someone suggests that his taxes be raised to help the homeless, he rails against the dangers of socialism.

Give The Bonuses Back --Or Else

2009-03-17T05:14:00.001-07:00

I have a new piece up on The Daily Beast today on the AIG bonuses.

Obama's No Socialist

2009-03-12T09:01:00.000-07:00

I have new piece in The Daily Beast today on why top earners should relax because Obama's new tax plan still subsidizes them very generously.

The AIG Black Hole

2009-03-07T17:01:00.000-08:00

Barry Ritholtz lays out the awful truth about how the AIG bailout is really just bailing out the brand name Wall Street firms who made bad derivative bets. That's where much of our $170 billion or so has gone. In the name of "preventing systemic risk." Maybe there will be a revolution once people really understand what's happened...

Forbidden Environmental Fruit

2009-03-07T10:23:00.000-08:00

Interesting piece in Foreign Affairs about geoengineering, the idea that we might try to directly re-engineer stuff in the atmosphere to address climate change if we can't get our global act together to reduce carbon emissions in the decades ahead. This has generally been considered fringe stuff with real sci-fi overtones (as well as something no one wants to talk about because if pols think this can really work they'll skip the hard work of actually cutting emissions). So FA's publication of a serious piece making the case for examining this option more fully marks a new moment in the evolving debate methinks. Worth a look.

Lerach's Letter From Prison

2009-03-07T10:18:00.000-08:00

Have another piece in the Daily Beast based on an idea from Jody that I blogged about here, about siccing Bill Lerach on the banks to get back their ill-gotten bonuses. Lerach himself replied with a long letter from prison on how the feds can do it, which you can read at the Beast. Here's hoping the authorities follow up....

The Failure of Economics

2009-03-01T10:46:00.000-08:00

Mark Thoma has great post on new paper about the systemic failure of economics as a field in not helping us avoid today's crisis or having enough relevant things to say about our most pressing problems.

Beastly Again

2009-02-27T07:28:00.001-08:00

I have another new piece up today on the Daily Beast as the budget wars begin....

Beastly

2009-02-26T10:02:00.000-08:00

FYI I've got a piece up today on Obama's new budget on The Daily Beast.

Quick Morning After Thoughts On Obama's Speech

2009-02-25T09:01:00.000-08:00

1 - These thing are always a Rorschach test, but in our household Obama was king of the world last night. In fact, my wife Jody (as usual) had the best quick take when he was done. "After he does eight years as president," she said, "he'll clearly go on to be president of the world." She meant that since we'll increasingly be looking for new forms of global governance to deal with all the important stuff that can only be dealt with across borders, Obama will create or lead whatever premiere institution has emerged or is being set up in this regard. Yes, I know, we've got a recession to conquer and health care, energy and education to fix first. Still, sounds like a plan!

2 - During the always amusing cutaway shots I couldn't help noticing the wistful looks on many of the presidential wannabes in the audience, all of whose faces had the same sentiment grudgingly etched in italics: "I really wanted this, but this guy's got the goods in ways I never will." On my list that captured John Kerry, Evan Bayh, John McCain and Jay Rockefeller. Maybe I missed some.

3 - Can't wait to see what Obama said was the $2 trillion in budget savings over ten years they've already identified when the budget outline gets unveiled Thursday. Team Obama is laying the groundwork for the kind of budget honesty we haven't seen since -- well, since Clinton, in whose OMB I proudly served. If the $2 trillion over ten is real stuff (and not magic asterisky) it will be fabulous. Fingers crossed.

4 - Wonder if anyone else was as struck as I was by Obama's message to kids about not dropping out of high school. If you drop out, he said, "you're not just quitting on yourself -- you're quitting on your country." Why hasn't a president put it that way before? Another great example of Obama's instinct for using the bully pulpit to make a difference. Look for that quote to be up on placards in high poverty schools across America soon. Hope they develop a more detailed "hang in there" You Tube message from Obama that schools and other caring adults can show to every kid who's at risk of dropping out.

A Case for Hope

2009-02-23T20:31:00.000-08:00

Lots of people I know are deeply depressed as they watch the Dow spiral down toward 7000 -- I'm no less gloomy when it comes to the market because we've been been riding it down, too. And I'm no stock market guru (if such a thing exists), so I have no idea when things will turn.

But I'll tell you what gave me supreme hope Monday: watching Obama conduct what amounted to a national teach-in at the end of his Fiscal Responsibility Summit at the White House. Find the clips on You Tube and watch them. (Start here, here, here, and here.) Obama led a conversation about our fiscal and economic challenges with a hundred or so assembled pols and other community and interest group leaders, and in its seriousness, civility, candor, and humor, it was a thing to behold.

He called on John McCain first, led the conversation through assorted Democratic and Republican leaders, including GOP House leader Eric Cantor (who clearly looks in the mirror each morning and imagines he sees the next Newt Gingrich). Obama's masterful framing of the issues, the respect and deftness with which he treated and integrated all views, his shrewdness in knowing how much coveted national TV airtime he was giving even to those who disagreed with him...all of this amounted to a new model of presidential leadership that I think we're going to see much more of.

Obama is trying to create a climate in which our real long-term challenges can actually be talked about and addressed. These necessarily involve finding ways both parties can work constructively together, in spite of their simultaneous ambition to clobber the other at the polls. This bipartisan gambit - a determination to create a new space in our political culture where real problem-solving can take place across party lines -- is at the core of Obama's real audacity (a point I argue in a Wall Street Journal op-ed on Tuesday, and which I think many liberals who've bashed Obama's GOP outreach have failed to appreciate).

It gives me real hope even amidst the bad economic news because Obama's eye is plainly on long-term problem solving -- which is what our economy needs -- no matter the day to day fears and rumors that hold so many Wall Street traders in their myopic grip.

Beastly

2009-02-22T10:32:00.000-08:00

FYI I have a new column up at The Daily Beast entitled, "You Don't Deserve To be Rich." It's about what we might do now that it looks like capitalism isn't a meritocracy after all.

Always Nice To See

2009-02-19T10:10:00.000-08:00

WSJ reports that a number of top mutual fund managers did very well for themselves in 2008 even as those who invested with them lost their shirts. Some CEOs and chief investment officers pulled down $4 to 5 million while their funds were off 16% and 38%. Always nice to see merit rewarded in the free market....

Health Scandal

2009-02-19T09:49:00.000-08:00

A new report from my colleagues at the Center for American Progress shows that 100,000 people are losing health insurance each week in this recession. Only in America does a president need to seek "emergency" funding as part of an economic stimulus to try to stem this calamity that comes with rising unemployment - all because America remains uniquely in the grip of the dead idea that health care should be tied to one's job. For those who say we can't afford to do health reform, the fact that an economic downturn leaves people at risk of medical bankruptcy (and worse) is proof that we can't afford NOT to do health reform. Hopefully Obama will make that clear in his State of the Union and budget presentations next week.

Harold's Point

2009-02-18T20:37:00.000-08:00

Make-you-think column by Harold Meyerson in the Post on how unions might have mitigated today's woes in context of the US-China imbalances. Highlights:

At the center of the global meltdown, then, is the misshapen economic codependency of the United States and China. Each has followed a fundamentally unstable economic model, with one nation suppressing wages so that it could export more and the other living on borrowed funds so that it could purchase more. Despite the sharply different roles that each nation carved for itself, though, a shared characteristic allowed them to chart their ultimately disastrous course...What do the United States and China have in common? They are the only two major economic powers that are resolutely hostile to unions....

But suppose that China and the United States did have powerful unions. In China, such unions might have pushed for higher wages, social insurance and more domestic consumption. Here, such unions would have preserved more of a manufacturing sector and boosted wages in the service and retail sectors, so that American consumers could have relied more on income than on credit to make their purchases. The two nations would have had more sustainable economic strategies.

I'm not sure he's right, but I'm also not sure he doesn't have an important point. Worth mulling, especially for those who reflexively oppose unions.

Shocking bank factoid of the day

2009-02-18T13:18:00.001-08:00

Fascinating op-ed in NYT today that points out something I had not been aware of - the TARP money went to bank holding companies, not the bank subsidiaries themselves, which seems like an enormous benefit to shareholders and incumbent management but not at all a way to assure capital adequacy in the actual banks. Highlights:

While TARP has been generous with bank holding companies, these companies have not been so generous with their banks. Four large holding companies — JP Morgan, Citigroup, Bank of America and Wells Fargo — initially received a total of $90 billion in TARP money in the fall, but by the end of 2008 they had contributed less than $15 billion in equity capital to their subsidiary banks....[This] means that when it comes time to recapitalize banks there is a bigger hole to fill, and when banks fail there is less capital available to meet the government’s obligations to insured depositors and other creditors. Keeping money at the holding company may benefit its shareholders, but it is costly for taxpayers.

If there's a credible rebuttal I'd like to hear it. Otherwise this looks like (yet) another source of justifiable outrage in the way the bank bailout has been structured to date.

Detroit Blackmail?

2009-02-18T13:12:00.000-08:00

Can anyone explain why GM and Chrysler say they'll need $100 billion and $25 billion in financing respectively if they have to file bankrupcy, but far far less if they stay out under the latest hat in hand plans they've brought to DC? The enormous difference in magnitudes feels like it's part of Detroit's rhetorical blackmail to get the fix it wants (i.e. not bankrupcy), but maybe I'm missing something.

The Voodoo We Need

2009-02-18T13:09:00.000-08:00

NYT has fun piece on the new Bernie Madoff doll turning heads at the Toy Fair -- with the epic Ponzi man dressed as a devil, and a bonus hammer included to take your own revenge. Also apparently hot is the John Thain doll that sits on its own golden toilet.

Housing confusion

2009-02-18T10:24:00.000-08:00

Heard NPR report this morning that gloomily lamented the fact that housing starts were down some record amount last month, but I don't understand the arm-waving about this. Don't we need fewer new homes until the housing market in general settles down? When prices have been plummeting and are seeking a bottom, MORE new houses is the last thing we need -- boosting supply would just push prices down even more.

Trouble at Treasury?

2009-02-17T13:43:00.000-08:00

Krugman's blog usefully points to Washington Post piece today that shows that Geithner's bank plan was so vague largely because he decided close to the deadline set for announcement that the approach they'd been focused on wouldn't work -- and there wasn't time to fully develop the alternative he decided would be better. Coupled with other details about how shorthanded the working group seems to be, the episode says troubling things about the team's insularity, the needless commitment to false deadlines, and more. To keep an eye on...

Judd Gregg...

2009-02-12T20:33:00.000-08:00

...looks like a horse's ass. What else can one say? How can he not have thought this through before he sought -- affirmatively sought -- the Commerce job? As I wrote when this first came up, the idea that he'd do this was mystifying in the first place. Several people wrote to say that he was desperate to revinvent himself as New Hampshire swung Demcoratic and he faced certain defeat next time. Fair enough. But it's very bad form to jerk a president around like this. Gregg has made the president a casualty in his own drama of personal reinvention. Another disappointing low in official behavior.

Obama's Bipartisan Gambit

2009-02-09T22:04:00.000-08:00

Can't tell you how exciting it is to see a president close his debut news conference, as Obama just did, by saying, apropos of his desire to bring people together, including even people from the other party, that "People over time respond to civility and rational argument -- and that's the kind of leadership I'm going to try to provide."

So many folks -- including the usually sound Paul Krugman -- seem to think this goal of bipartisanship is a sucker's game. I disagree: it's the essence of the change Obama can bring to the country, and a measure of his audacity that he's willing to try. He also plainly feels this in his bones -- witness the long riff at the press conference on why conservatives need to get past their "money doesn't matter" canard on schools even as he challenges liberals to get past their resistance to making systemic reforms in exchange for new investment. A lot of folks think getting both parties to to come together is a naive fantasy, and that Obama is just giving small groups like the moderate Senate Republicans undue power in the current stimulus battle, for example. This critique is shortsighted. Obama has his eye on a bigger prize -- literally changing the political culture in ways we need if we're to tackle a host of major challenges -- and he's taking risks to set that tone from the get-go. It's a big wager, but when your real project is to redefine the political center in the country, it's essential.

More on this -- maybe a column -- when I have time to develop the thought.

Capital, Lloyd, Capital

2009-02-09T20:00:00.000-08:00

Goldman chief Lloyd Blankfein in the FT Monday gave a modified "wea" culpa, saying:

Much of the past year has been deeply humbling for our industry. People are understandably angry and our industry has to account for its role in what has transpired...Financial institutions have an obligation to the broader financial system. We depend on a healthy, well-functioning system but we failed to raise enough questions about whether some of the trends and practices that had become commonplace really served the public’s long-term interests.

But in a 1000 word piece he had scarcely a word for capital adequacy. If all the casino gamblers on Wall Street had been forced to rely on equity instead of leveraging up 30 or 40 to 1, the impact of a price decline in one asset sector -- housing -- could never have brought down the entire economy. How can one of the chiefs of Wall Street weigh in and not make this central to the lessons he says we should learn?

Blankfein also is a master of understatement:

...complexity got the better of us. The industry let the growth in new instruments outstrip the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system.

Well said. Still, it will be interesting to see how Goldman lobbyists react to efforts to sensibly reign in bank discretion in these matters.

Spaghetti Economics

2009-02-07T09:22:00.000-08:00

The Big Point being lost in all the back and forth over the stimulus plan's flaws is this: there is no such thing as a perfect stimulus. First, we don't really know what will work best; second, no giant bill like this gets through Congress without massive amounts of unattractive stuff. But with consumer demand collapsing and business retrenching, government is the only entity that can lift demand in ways that avert a self-reinforcing downward spiral. We need to throw lots of spaghetti against the wall, and fast -- and continue to throw lots of spaghetti against the wall for at least a few years. This is not a case against trying to make the spaghetti tossing as smart as we can -- it's just an acknowledgement that we're unlikely to know what's really best and the most important thing is the volume and speed of the spaghetti we start tossing. And yes, once we get things stabilized, we'll have to come back and figure out a pasta withdrawal diet (i.e. long term budget reform, slowing the growth of health care costs, raising taxes, etc). But that will be a comparatively good problem to have once we're past this mess.

The Lerach Solution

2009-02-01T13:36:00.000-08:00

My wife Jody has the perfect answer to how we can get these crazy bank executives to disgorge the ill-gotten bonuses they've paid themselves even while they're on the taxpayer dole: the feds need to hire Bill Lerach to bring their case. Lerach, you'll recall, is the premiere shareholder suit litigator/corporate shakedown artist in the country. The only problem is that he's in jail right now, serving time because his law firm paid plaintiffs illegally in his assorted class actions over the years.

Whatever else you may think of Lerach, the guy scares corporate America, and he knows how to use that fear to get big settlements for his clients. Today the U.S. government is the client that needs him, in its role as major shareholder of all these badly behaving banks. Lerach's skills are too perfect for this moment for him to be paying his debt to society sitting in some country-club federal prison. Let Lerach reduce his time by bringing the cases that are tailor-made for his particular brand of hardball.

Until now the president's men have made wimpy noises about it likely being "hard" or "impossible" to claw back these recent bonuses, not to mention the other bogus zillions many bankers made while wrecking the economy. Sic Lerach on them and this entire conversation will change overnight.

The Gregg Conundrum

2009-02-01T13:28:00.001-08:00

If reports are right that Judd Gregg will be named Commerce secretary, the only question is: why is Gregg doing this? Commerce is typically a backwater cabinet post far from the action on anything. Even the most creative reinvention of the job would leave it nowhere near the thick of key issues like the budget and the future of Social Security and Medicare, which Gregg's Senate posts give him a real voice in. Plus, if Al Franken is finally seated, and New Hampshire's Democratic governor appoints a Democrat to replace Gregg, Senate Democrats would reach the magic 60 votes that could give them the power to really get things done. I can see why it's a brilliant move for Obama if he can pull it off, but what Gregg is thinking escapes me. Thoughts, anyone?

Can You Say 'Tone Deaf' In Japanese?

2009-01-30T18:21:00.001-08:00

Another fun factoid from a letter to the FT this week: "The hot new word in Japan is KY. An abbreviation for kuuki-yomenai, it literally means 'unable to read the air.'"

Very useful in explaining why, e.g., John Thain initially asked for a $10 million bonus even as he decorated his office lavishly with taxpayer funds. As the letter writer puts it, "he was astoundingly KY."

Banking line of the week

2009-01-30T16:37:00.000-08:00

"If you want to end up with the economy of Pakistan, the politics of Ukraine and the inflation rate of Zimbabwe, bank nationalization is the way to go."

-- Peter Boone and Simon Johnson in the FT

Excuses, excuses

2009-01-30T16:15:00.000-08:00

Have been a bit on run with book tour commitments and so slower to post in recent days. Hope to get back in flow next week with the econ debates heating up, and also reporting on reactions to Dead Ideas from my travels.

Can Conservatives Face Up To Their Dead Ideas?

2009-01-26T09:54:00.000-08:00

Essential piece in Politico today by Bruce Bartlett, the former Bush I and Reagan aide who makes a cameo appearance in my new book, "The Tyranny of Dead Ideas," as the last honest Republican when it comes to taxes. Bartlett, who comes from the libertarian wing of the party, but who is an intellectually honest analyst, was basically banished from the GOP a few years back when he started writing that taxes would need to rise to fund the boomers' retirement, and that therefore the GOP's tax cutting mantra was doomed. Instead, he said, Republicans should be figuring out how to finance the revenue we'll need in ways that are smartest for the economy. Today's piece updates some of these points:

Conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty, rather than fighting a losing battle to slash popular spending programs. But this will require them to accept the necessity of higher revenues...It is simply unrealistic to think that tax cuts will continue to be a viable political strategy when the budget deficit exceeds $1 trillion, as it will this year. Nor is it realistic to think that taxes can be kept at 19 percent of GDP when spending is projected to grow by about 50 percent of GDP over the next generation, according to both the Congressional Budget Office and the Government Accountability Office. And that’s without any new spending programs being enacted.

These truths are obvious to anyone who bothers to look at the fiscal facts. It's a measure of the GOP's intellectual bankruptcy that none of its leaders are willing to acknowledge this publicly (and that they exiled an honest fellow like Bartlett for daring to utter the unpleasant truth). But one thing is certain: until the party sheds this Dead Idea, it has no chance of developing a new and coherent governing philosophy that bears any relation to the real world. Yes, I'm sure it's painful for Republicans to let go of the tax cutting mantra that has been so powerful for the party since 1980. But, as Ronald Reagan loved to say, "facts are stubborn things."

Do conservatives have the guts (and honesty) to face up to the Dead Ideas in their midst, and update their thinking for a new era? My guess is that Rush Limbaugh, Sean Hannity and Bill O'Reilly can't handle the truth on taxes. This much intellectual honesty would be devastating to their "brand." But if the entire GOP community can't handle reality either, it'll be a long few decades in exile...

The Ross Plan

2009-01-25T15:18:00.000-08:00

Private equity king Wilbur Ross floats intriguing mortgage reform fix in the NY Post. As a way to use $100 billion to get 12 million underwater homeowners back in the black, with lenders and government sharing in any upside if prices recover in years ahead, it looks interesting.

CDS anxiety continued

2009-01-24T21:03:00.000-08:00

Gretchen Morgenson floats some potential fixes for the credit default swap hangover - worth reading.

The Empathetic Pundit

2009-01-23T04:55:00.000-08:00

Eliot Cohen, fresh from his stint as a counselor in the Bush State Department, notes in WSJ the essential quality of a good pundit:

Invariably, a pundit will prescribe solutions. In doing so, he should follow the advice of the late Raymond Aron, the wisest French policy intellectual of modern times: Never criticize a policy unless you can convincingly depict a better course of action. Aron, like many of the greatest commentators on policy, had virtually no experience in government, but great empathy for those in a position to decide. Empathy -- the capacity for imagining what it is like to be the other -- is an essential quality for the thoughtful pundit.

Couldn't agree more. I've always felt this way, probably because of the lucky experience I had of serving in the Clinton White House and before that at the FCC. It's always surprised me since how few commentators think this way.

Overheard on CNBC

2009-01-23T04:35:00.000-08:00

Reporter on the floor of the stock market saying that while everyone agrees government has to do something big to stimulate the economy, "investors just don't trust the government to get it right." That's as opposed to the private sector -- especially discredited/graced leaders and firms like John Thain and Ken Lewis and AIG and Citigroup etc -- who can be trusted to get it right?

Barro Says No Free Lunch

2009-01-22T06:32:00.000-08:00

Robert Barro in the WSJ argues that there's no multiplier effect from increased federal spending in terms of its impact on GDP -- if he's right the Obama folks would be overstating the potential impact from a spending side stimulus. I'd like to see the rebuttal from the Democratic economists.

UPDATE: Krugman responds to Barro here.

More outrageous bank factoids

2009-01-21T17:10:00.001-08:00

The FT had a piece yesterday I almost missed with more maddening facts. After injecting $45 billion in capital into the idiotic Bank of America, the US government apparently owns just 6% of the bank. Yet the entire market cap of B of A is less than the $50 billion it offered to pay for Merrill Lynch last September. How on earth does this happen? Whatever your fears may be of temporary bank nationalization, shouldn't taxpayers at least get the banks they've bought and paid for? When we don't, we're simply lavishing windfalls on shareholders who are supposed to bear the brunt of awful managerial decisions in the market. Astonishing. You don't need to resort to demagoguery at this point to be calling for many bankers' heads....

Inaugural memories

2009-01-20T15:50:00.000-08:00

On January 20, 1993 I reported to OMB to work as Alice Rivlin's top aide. I remember when we came in, shortly after noon, and seeing Richard Darman's boxes packed up in the hallway of the Old Executive Office Building, ready to go. The evil GOP budget genius (poor Darman died a few years ago, at too young an age) was meeting with Leon Panetta and Alice. I was filled with great hope then for the progressive goals we in the Clinton Administration might accomplish -- hopes that were largely dashed when you look back at what was actually done over eight years (I served for the first two). In the end, Clinton had two years on "offense" and six years on "defense" -- the affirmative phase of his presidency ended after the 1994 midterm blowout.

Now I'm filled with even more hope as Obama enters the White House. And I feel sure that Obama has a real chance to get things done on health care, education and other public investments that eluded us years ago. Here's hoping...audaciously!

Let the Republican Rethinking Begin!

2009-01-20T13:02:00.001-08:00

David Frum, my former radio sparring partner on "Left, Right & Center," has launched a new group blog today called NewMajority.com that aims to be a Republican version of the Democratic Leadership Council circa 1989. Worth keeping an eye on if you want to track GOP rethinking in the age of Obama

Close to normal

2009-01-20T10:14:00.000-08:00

My wife has always said something that rang true for me today watching Obama - part of his appeal is that he's so close to normal, only a few years away from having the concerns and behaviors that regular people have. He and his wife still had student loans until his books became real income generators. His meteoric rise means that unlike most who become president, he hasn't been in the rarified, cosseted world of political leadership for years (as governors or senators, for example). Obama is new to the bubble. That means there's still a freshness and connection with the real world that seems precious to have in a president. Here's hoping he finds a way to keep that quality.

America the diverse

2009-01-20T10:07:00.000-08:00

If you're celebrating America's remarkable diversity today, a few of the articles in the current Atlantic Monthly are really worth reading. In particular, try The End Of White America? (on the post-white culture already taking hold), and Race Over? (on the persistence of race's relevance in politics as seen through the eyes of the folks who helped get Obama elected).

Roberts Blows It!

2009-01-20T09:53:00.000-08:00

Can you believe Chief Justice Roberts got the oath of office wrong, and almost made Obama look bad because Obama was trying to say it correctly? You could see Obama making the split second decision to go with Roberts' incorrect phrasing because the justice was obviously flailing. A very generous moment by Obama, when in a nanosecond he had to be thinking, 'I can't believe this guy is muffing it, but I forgive him and let's go on." So much for brilliance (in Roberts) being a reflection of any ability to perform simple tasks under pressure! Would be fun to know what Obama and Michelle have to say about that moment when they debrief the day privately tonight....

UPDATE: Roberts mouthed to Obama at the luncheon that "It was my fault."

Banking outrage

2009-01-18T10:08:00.000-08:00

Where is the taxpayer equity in all these bank bailouts? NYT details how little is being lent from the new capital infusions, and how the banks are treating it as a "windfall." But it can't be a windfall so long as Uncle Sam -- i.e. all of us --gets equity stakes in these banks commensurate with the taxpayer money we've poured in. That way, at least, once the economy recovers and the banking system is on a sounder footing, we'll get some return for these extraordinary moves. But if government has given these firms sweetheart deals it's intolerable. Yet that's what it looks like Paulson & Company have been doing. Citigroup looks like exhibit A -- we've put $45 billion in capital into the reeling bank, and guaranteed $300 billion in toxic assets, yet so far as I can tell the government owns only 8% or so of the company. How can this be when the capital we put in exceeds the market value of the firm? Once we get the fine print on the Bank of America bailout this week the same is likely to be true. How can it be that Warren Buffet drives a harder bargain than the US government? Obama has to alter all this somehow or the devastation wreaked by these reckless banks and their greedy leaders will be compounded by government incompetence in assuring that the unavoidable rescues only deepened the ripoffs.

Geithner anxiety

2009-01-16T00:03:00.000-08:00

The Geitner tax thing has me worried. What the press will eventually turn to is that $34,000 or thereabouts for a guy who has been in public service his whole career, and thus isn't rich, is a lot of money, which will raise questions about how "accidental" his "oversights" may have been. I hope I'm wrong but I fear this is where the story may be headed. If it was a Paul O'Neill type -- already wealthy from a dozen years as Alcoa CEO - you'd say $30-40,000 in missed tax payments wasn't about the money. If any Republicans force further delays, the press will dig deeper on this, so here's hoping Geithner has explanations that can withstand a few more rounds of scrutiny.

Those NYT front page ads

2009-01-16T00:01:00.000-08:00

Each new one seems like a cultural marker to me. Today's from Citigroup -- there's no link to it because its an ad, thouht maybe they'll soon add links -- was filled with marketing jibberish to the effect that their point of view is that we should know their point of view. Presumably that means they'll be running haiku style op-eds in future installments of the little two inch space they have at the bottom of page 1. They closed by saying that in troubled times its good that "Citi never sleeps." At a time when the bank is tottering and being split up, has devoured zillions of taxpayer cash without apparent effect, and lost tens of billions on bum investments, the perky upbeat marketing slogan feels really off-key. It's a marketing/reality disconnect. There are things that marketing can't fix. Though at least we know where some of the TARP money is going -- to boost NYT ad revenue.

Press coverage update

2009-01-15T22:51:00.000-08:00

Check out Newsweek.com's interview with Matt; plus LA City Council President Eric Garcetti interviews Matt on KCRW"S "Politics of Culture" here.

Not So Fast

2009-01-15T19:15:00.000-08:00

If you're convinced TARP is a disaster because bank lending is still stalled, and think Congress needs to thus require banks to push the money out the door, think again. Martin Baily and Charlie Schultz, both former chairs of the Council of Economic Advisors to Democratic presidents, offer a needed corrective in the Post. This makes the satisfying urge to assail the failed efforts of Paulson more ambiguous, but them's the facts.

Casey At The Bat -- Bernanke Edition

2009-01-14T00:05:00.000-08:00

Bernanke gave an important speech in London yesterday on the economic situation and the road ahead (NYT on it here, the speech itself here). He said the emerging stimulus plan, while important, won't be enough to right the ship without doing more to fix the financial system. But there's another way to look at where we may be heading on Bernanke's watch this year, which I thought I'd lay out in a fun little poem - a form that is often underestimated as a mode of economic analysis. If you know the great American baseball ditty, "Casey At The Bat," you'll recognize the meter. Enjoy!

Bernanke at The Fed!

Things were looking down for GDP that fateful year
Retail sales had sunk, with the consumer crouched in fear
The S&P had cratered, while the banks their cash did hoard
But still there’s hope, they said, with Ben Bernanke at the Board

George Bush had all but washed his hands – Obama hadn’t started
Though Larry Summers thought big thoughts, the waters hadn’t parted
Hank Paulson, who had tried his best, could not get out of bed
But don’t despair, they told us, Ben Bernanke’s at the Fed

Now Ben, from back in Princeton days, had studied doom and gloom
Though soft of voice his brain was oft the biggest in the room
Unlike the vanquished Greenspan he was no Rand devotee
And when he went to bed, Ben didn’t sleep with NBC

To fight the dip Bernanke had hurled thunderbolts galore
He lowered rates and bought up debt from here to Bangalore
He rallied global central banks who feared his vengeful sting
Though shove had come to push, big Ben still pushed his mighty string

But now Ben had to face grim facts - with interest rates at zero
The standard cures had failed and Ben Bernanke was no hero
Jobless claims were soaring and the TARP had all run dry
From sea to wailing sea came forth a deep collective sigh

And so Bernanke pulled the final arrow from his quiver
A tool so blunt and fearsome that it made his colleagues shiver
“The lesser of two evils!” cried Bernanke to his board
And then Ben flipped the switch – and then the printing presses roared....

O somewhere in this fruited plain the Chinese plan to poach
Obama’s talking fireside; Nardelli’s flying coach
AIG is RIP – and Britney’s a sensation
But there is no joy on Wall Street – thanks to Big Ben’s Big Inflation

***

Press coverage update

2009-01-13T20:49:00.000-08:00

Newsweek.com's interview with Matt; plus LA City Council President Eric Garcetti interviews Matt on KCRW"S "Politics of Culture."

The Return of Gene Sperling

2009-01-13T00:50:00.000-08:00

Gene Sperling is back, working for Tim Geithner in a new post advising the new Treasury secretary on fiscal policy and more. I predicted he'd end up at State working with Hillary, but wherever he is, Sperling is a tireless force. See my earlier post on this back on December 3 here, and the unpublished, "too favorable" version of my New Republic profile of Gene from a decade ago here.

This Depression May Be Good For Your Health

2009-01-13T00:40:00.000-08:00

One virtue of the pickle we’re in is that it's going to provide cover for the infusion of federal cash we need to finally get health care IT going. Everyone’s who’s looked at this knows that doctors in particular typically won’t invest in electronic medical records and seamless connections with others in the system because most practices are small shops that won’t see a payback for what can be a costly investment; the benefits are really for the system as a whole. Because of this dynamic (fueled as well by the fact that many docs who were early movers on IT felt they got burned and wasted their money), Newt Gingrich told me a few years ago we might need $50 billion from the feds to prime the pump on health care IT. He figured we’d have to find some national security rationale to make this politically viable, just as Eisenhower did with the interstate highway system. At the time, Newt thought the threat of bioterrorism in the wake of 9/11 might be one potent argument for why we needed to get docs and providers on a sophisticated, integrated IT grid.

Flash forward to today, though, and the economic emergency has done the trick. Health care IT can make for good stimulus, and helps get in place the things we’ll need to boost the value we get from the health sector over time. My hunch is that folks on all sides will share the Obama team’s view that this is the moment to make it happen. If done right the long term benefits should be huge.

Indispensable Health Wonkery

2009-01-13T00:30:00.000-08:00

One of the central fights in any health care reform Obama pursues will be over having a new public health plan for non-seniors offered to compete against the private health plan options offered to people who lack secure workplace coverage. If you want to think intelligently about this, the place to start is Jacob Hacker’s 20 page paper making the case for the public plan option. Hacker, who recently moved to Berkeley from Yale (proving once again that all the interesting people eventually settle in California...:)), is the thinker behind this reform – his work on it from several years back was picked up by John Edwards, Hillary Clinton, and of course Obama, and he’ll be a critical behind-the-scenes voice in the evolving debate. Unless the health insurers can mount a convincing rebuttal to Hacker’s arguments and analysis, it’s hard to see how they can win this battle – at least on the merits.

China Deal

2009-01-12T00:25:00.000-08:00

High anxiety these days as to whether China will continue to buy up our Treasury debt now that the deficits could close in on a stunning $2 trillion a year for a couple of years. But I have an idea. Instead of worrying about whether they’ll show up at our public Treasury auctions, why don’t we reach out to cut a deal with China directly via a private debt placement, as often happens with private companies who need cash from lenders? We’d ask the Chinese to pick up, say, another trillion or so in Treasury debt over the next few years, and let them lock in an interest rate that feels attractive to both sides.

Yes, the optics of this private placement would be unprecedented (I think) and stunning, but so what? These are extraordinary times, Chian still has big savings surpluses that need to be invested, and we need to borrow bigtime for a few years. Why worry month-to-month about who will show up to buy our debt demanding what interest rate? This would let China feel Warren Buffet-like to boot – an heroic investor at a time of crisis. Maybe as part of the deal we’d give China, for free, a big chunk of the green energy technology we want them using instead of all those dirty coal plants that could lock in emissions woes for decades. Readers who are much smarter on finance (and green tech) than I am should feel free to tear this idea apart – or improve upon it.

The Unreal Economy

2009-01-12T00:20:00.000-08:00

How detached from reality did we become as the world of derivatives grew ever larger and profitable for those who peddle them? Here’s a story one Fortune 500 CEO told me when I shared my fears that credit default swaps could be the next big shoe to drop:

I have no unique perspective on CDSes, but I have to admit that when I first learned of them, some years ago, and got an explanation of how one worked on our own company, it went like this: “Say you own company X’s bond but don’t want to take company X’s credit risk. Then you sell a CDS, pocket the difference, and you’ve eliminated your risk of default by X. You basically then own a government bond.” My reply was: “I used to work on Wall Street. In those days, if you owned an XYZ bond and didn’t like the credit risk, you would sell the XYZ bond and buy a government bond. Then you didn’t 'basically' own a government bond. You actually owned a government bond.” The banker I was talking with had no reply to that.

Backstage with Colbert

2009-01-12T00:18:00.000-08:00

A number of you have asked what it’s like to do Colbert, does he ever talk to you as his real self offstage, etc. The answer is it was unbelievably fun (I’ve said to a few people it was the most fun I can imagine having in 5 minutes, which invariably leads people to offer other options they think would be better...). The man is a comic genius, and the “real” Stephen also seems like a very decent person.

Colbert did come back to the green room before the show to say a brief hello and offer two cents of advice. “I play a character,” he said. “That character is an idiot. You need to disabuse him of his ignorance. Just approach it like that and have fun.” Talent producer Emily Lazar offered similar counsel. Whatever he throws at you, she said, just come back and explain to “Stephen” why he’s not seeing things right, and make your case.

One of the funniest parts of the experience was off-air . A few minutes before the taping started, a staffer came by to give a sense of what the writers had brainstormed as potential lines of “questioning” Colbert might take. He might not use these at all, she said (and Colbert didn’t that night – it was all basically improvisational riffs). The idea is to have you not be totally blindsided by the wackiness that might be coming.

Here are the things I recall from what they said he might ask about The Tyranny of Dead Ideas. These totally cracked us up in the green room.

-Why should we get rid of the old ideas, when the new ones suck?

-Even if the old ideas don’t work anymore, shouldn’t we continue them out of respect for tradition?

-You say the economy is creating too many of the “undeserving rich.” But isn’t that the American Dream – to be rich and useless?

-What about undead ideas?

When they put me at the interview desk on the set just before my segment started, I glanced over at Stephen at his anchor desk to have a look. Just before the camera went on he looked over at me and snapped deadpan, “The free ride is over, Miller.” He’s just really funny.

I took some improv classes while in law school in the mid 1980s and recall what they stressed (at Chicago City Limits in New York) about the importance of listening and then making a choice and committing to it. Colbert does this with such intensity and at such a peerless comic level that it was really exciting to watch him work up close – even if that meant watching him reckon instantaneously how to create some very funny moments at my expense!

Economists in Trouble

2009-01-12T00:16:00.000-08:00

Yes, they’re the only economists we have, but the profession really is in a dismal state. Very few were ahead of the curve in warning us about the looming credit and housing bubbles. Now they have little authoritative to offer about the precise nature of a stimulus package that would be most effective. And when it comes to the trade debate, as I argue in The Tyranny Of Dead Ideas, they’ve let down the country (and jeopardized their own ideals) by treating the need to provide health and pension security for average Americans as an afterthought in the case for trade, rather than as a crusade the profession itself needs to lead if we're going to avoid a protectionist backlash.

Some respected economists need to lead their academic colleagues in a rethinking of the profession’s priorities. We need economics to make a bigger social contribution. As a glance at the agenda of the American Economic Association’s recent annual meeting suggests, too many of these folks spend their careers drilling down into highly quantitative trivia instead of developing fresh ideas on the broader challenges of political economy. It’s not just Wall Street that’s diverted too much of the nation’s economic talent into unproductive channels – it’s the narrow, tenure-producing but irrelevant work in too many economics departments, too.

Suicide Question

2009-01-12T00:05:00.000-08:00

I can understand how people who feel ashamed for having done something irretrievably wrong in the current economic mess might kill themselves – like a Bernie Madoff (though his smirking pictures make you think he’s not close to contemplating that). But it’s harder to understand why someone like that German multi-billionaire killed himself the other day. Unless there’s more that will come out, it seems like he was losing control of much of the empire he’d spent decades creating – but thanks to bad bets and mismanagement, not because of improprieties or fraud. If that’s the case, he killed himself basically because he had lost most of his money.

Maybe I’m not thinking about this right, and obviously someone else’s emotional state is a mystery to outsiders, but to kill yourself because you don’t have as much money as you once did seems an awful reason to want to die. Of course this stuff happens (indeed, I just heard about a Palm beach wife who’s leaving her husband because he just lost everything, and she doesn’t want to support him with her trust fund. Nice.) Maybe it was because the German guy felt he let down employees and investors? I don’t know. Wonder what others think.

Web site updates - Washington Post column

2009-01-11T10:07:00.000-08:00

Kathleen Parker's nationally syndicated column says Dead Ideas belong at the center of the national debate...check it out in the press section here.

Web site updates - press coverage

2009-01-08T22:30:00.000-08:00

Check out new press coverage here.

And...

Newsweek/Slate columnist Dan Gross' interview with Matt that's running on The Big Money, Slate and iTunes. It's from Dan's new book podcast series, "Every Day I Read The Book."

Book tour feeds

2009-01-08T08:47:00.000-08:00

Some of you who subscribe to the blog feed have asked us to post links to various book interviews and appearances so you can easily know of things you might want to check out. My wonderful web designer and site maintenance guru Madeira James will be posting that information going forward. Thanks for your interest.

What About Stimulus Vouchers?

2009-01-08T08:36:00.000-08:00

Here's a creative idea sent from Will Lewis, a management consultant at KCRW-FM in Santa Monica, where "Left, Right & Center" originates. He writes:

Individual grants of cash may not work because of fear. People will save the dollars or pay down debt. But if you made the grant in the form of script or coupons, you could force the money to be spent for goods and services. The value of the script could be limited to say 90-days. It could not be used to pay down debt. It could not be saved. Redemption by merchants of the script for dollars could be handled by commercial coupon redemption centers. Now, of course, it's possible that this idea has already been floated. But you never know.

In my experience it's never safe to assume that everything has been considered. I haven't seen this idea anywhere. What about it, folks?

UPDATE 1/11 - Len Burman of the Tax Policy Institute wrote that he offered a proposal in this spirit in mid December on the NYT economics blog:

Finally, there will almost surely be some sort of consumer rebate. The last two times, this was done through cash payments from the I.R.S. and the results were somewhat disappointing. A significant fraction (40-50 percent) of the money went into savings or reducing debt rather than additional spending. While saving is a virtue, it does not boost the economy in the short run.

An alternative that might produce a bigger boost would be to send everyone with a Social Security number a prepaid card, like the ones offered by major credit-card companies. The money could be spent at any retailer that accepted the company’s credit cards. In principle, the card would be the same as cash, and might still allow consumers to save more. In practice, we know from behavioral economics that labeling matters. If people get a card that they can only use if they spend the money, their spending is likely to increase more than if they can bank a rebate check. And the experiment would produce fascinating data for economists to study.

There would be some administrative issues. To deter theft or fraud, card recipients should be instructed to activate their cards by telephoning an automated number and saying their Social Security number (which would not be on the card). Some people would not get cards because their addresses changed. Presumably they could apply for one on their income tax return or by filling out a form if they are not required to file. And card issuers should be required to compete to offer the new cards to minimize the cost to the government.

If nothing else, the proposal would create jobs in the credit card industry.

Stimulus musings continued

2009-01-08T07:00:00.000-08:00

1. As Krugman points out, the new CBO economic forecast shows why the stimulus being discussed is still too timid, despite its eye-popping size. It's a 3% of GDP stimulus to address what CBO believes is an 8% gap we face between actual and potential GDP. This is the ball people need to keep their eye on.

2. Republicans like John Boehner continued their deeply confused and almost certainly disingenuous critique, saying that the new dismal budget projections -- a $1.2 trillion deficit next year before the stimulus is added -- proves "we can't borrow and spend our way to prosperity." Wrong, wrong, wrong. We have no choice in the next two years but to borrow and spend our way to recovery. Yes, of course, we have to get back to fiscal sanity afterwards, but that is then and this is now. As I argued recently in Fortune and Politico, the answer is to committ to deficits of no greater than 2-3% of GDP (vs. what could be an epic 10% next year) once unemployment goes back under 5-6%. Make this the stated goal. Require a supermajority vote of Congress to run deficits any bigger. Then empanel a bipartisan commission or some such now to show the way as part of the stimulus bill, to signal to markets that we know the madness must be temporary.

3. Martin Feldstein deserves profound credit for stepping up to support a big stimulus (even though he's not quite to the size we need yet either). If a Republican economist of his stature had not been supporting extraordinary measures from the beginning, the debate today might be totally different.

4. More on this down the road, but one way to get back to fiscal sanity on the spending side after the economy recovers won't only be long-term entitlement reform. From my OMB days under Clinton I was always impressed by the incredible potential power of a one year freeze on large classes of spending. When the moment is right a few years from now, I think Obama could sell such a move politically as part of a shared sacrifice to get our fiscal house in order. The interest groups scream, but the impact is huge -- it lets revenues "catch up" for a year, and in a strongly growing economy this shaves huge amounts off the deficit. I'll come back to this at some point more concretely as the debate unfolds, but wanted to put the marker down as food for thought early.

5. Of course taxes will also have to rise as a share of GDP -- which means we'll need to explode one of the Dead Ideas featured in my book, that "Taxes Hurt The Economy (And They're Always Too High)." Obama should charge any long term "fiscal fixes" commission to hit the road explaining the tax facts to the public over the next few years as well.

Meta Irony

2009-01-07T20:31:00.000-08:00

Was anyone else struck by the fact that that first-ever page one ad in the NYT this past Monday was placed by CBS? A TV outlet desperate for ad revenue bought the newfangled ad in a print outlet desperate for ad revenue. Something meta-ironic about that, if that's a concept.

If You Believe This One....

2009-01-07T20:16:00.000-08:00

This was how Neale Donald Walsch, best-selling author of the "Conversations with God" books, explained how he happened to lift a story verbatim from another author.

Mr. Walsch now says he made a mistake in believing the story was something that had actually come from his personal experience...

“All I can say now — because I am truly mystified and taken aback by this — is that someone must have sent it to me over the Internet ten years or so ago,” Mr. Walsch wrote. “Finding it utterly charming and its message indelible, I must have clipped and pasted it into my file of ‘stories to tell that have a message I want to share.’ I have told the story verbally so many times over the years that I had it memorized ... and then, somewhere along the way, internalized it as my own experience.” In a telephone interview, Mr. Walsch, 65, who said he regularly gave 10 to 20 speeches a year, said he had been retelling the anecdote in public as his own for years. “I am chagrined and astonished that my mind could play such a trick on me,” he said.

So much for the Responsibility Era. My mind made me do it.

Your Dead Ideas Here!

2009-01-06T08:02:00.000-08:00

To mark the official launch date of my new book, "The Tyranny of Dead Ideas," we're kicking off a contest here for the top Dead Ideas you think need to be exploded in American society. After all, while I focus on six big Dead Ideas in the book, there are surely dozens more in our public life, and probably hundreds if not thousands in our business and personal lives. Let your creative juices (and angst) flow -- tell us why your Dead Idea nominee needs to be blown up, the damage it's currently doing, and anything else that helps people understand the urgency of rethinking. Submit your nominees in the comments here, or email me at the site. I'll showcase the best Dead Ideas from readers in the period ahead. Winners will get signed copies of the book, as well as other forms of everlasting recognition tbd....

Stimulus shortfall - back of the envelope

2009-01-06T05:15:00.000-08:00

I'm still worried the Obama stimulus won't be big enough. Today's NYT had Harry Reid saying economists had told him we need to look at $800 billion to $1.2 trillion over two years, but that Obama's team is so far talking about $775 billion as a two year max. Apparently GDP declined at 5% annualized rate in the fourth quarter. If we therefore need at least 5% of GDP government stimulus to keep things from tanking, in a $14 trillion economy that's $700 billion per year. And who knows if GDP will be contracting at a deeper rate as early '09 figures come in? My business friends and colleagus think the first quarter could be a holocaust. We need more radical stimulus numbers fast from credible sources that make any Obama call for $700-plus billion a year the "sane, reasonable alternative." Over to you, Paul Krugman....

Still True Today!

2009-01-05T10:04:00.000-08:00

I've added to the top of blog a new feature called Still True Today, an idea for the media I proposed in my first book, The Two Percent Solution, as a way the top media outlets could regularize attention to the things that remain important every day even though there isn't news on them. Here's how I described it in the book, when I presented then-Washington Post editor Len Downie with a mock up of the idea:

Still, I’d always thought, wasn’t there some way that the most important daily bulletin boards in our public life – page one of the Post and the Times -- could institutionalize regular attention for things that are important even though there’s not “news” on them? Some device that would be consistent with these editors’ sense that they should not be directing an agenda, but which would nonetheless perform a public service by mitigating the gap left when officials prefer not to address important issues.

“Can I throw out a crazy idea?” I said, laying on the table a mockup of the front page of the Post I had prepared. “Why not have a feature called ‘Still True Today’?” I explained that this would be a small but visible line or two across the bottom of the front page; a kind of tickertape, nothing that would interfere with 98 percent of the usual front page, where the big news of the day would always appear. But, in addition, in this small daily feature, you’d highlight facts that were, well, still true today. My own list would include things like "42 million Americans uninsured – 80% in family with full time worker,” “2 million teachers need to be recruited in the next decade, while average teacher salary is $40,000,” and so on, in the Two Percent spirit. You might go with a different subject each day, I suggested – say, health on Monday, education on Tuesday, the working poor on Wednesdays -- but repeat the same facts each time. Obviously there are countless permutations. The exercise would require our top papers to put forward what they think are the most important things citizens need to remain aware of even as the news changes each day. It might help set the agenda for the papers’ in-depth reporting projects. The art department could make sure this recurring feature was fun and lively. Who knows? If the Times or the Post started such a feature, the ripple effect might be huge.

I still like the idea so I've added it to the top of the blog. I've started it with some of my own "favorite" troubling things that are Still True Today. Feel free to nominate your own ideas in the comments here, and I'll work the best ones into the rotation. And feel free to prosyletize the Still True Today idea to your favorite media outlets.

A Guide to the Good Life

2009-01-04T11:17:00.000-08:00

Over the holiday I read a truly wonderful new book called A Guide to The Good Life: The Ancient Art of Stoic Joy, by William B. Irvine. Irvine is a professor of philosophy at Wright State in Dayton, Ohio, and, unlike virtually every other modern academic philosopher, he's decided to devote his energies to the question of how one ought to live (instead of writing arcane papers for other academics that have little to do with what philosophy should really be about). Irvine shows how the Stoic approach to attaining virtue and tranquility -- and the day to day techniques they developed more than 2000 years ago to pursue these ends -- has deep relevance to modern life. The book really resonated with me (from what little I knew of the Stoics before, I was already convinced I was tempermentally kind of a Stoic myself - especially re their counsel that while one can't control what happens in life, one can control how one reacts to what happens). I can't do justice to the book's many pleasures in a brief squib here. Suffice to say I find myself referring to the book almost every day now in ways that are driving my wife and daughter a little crazy (Jody is definitely not a Stoic, but I am working on her...and since she gave me the book for Hanukah she has only herself to blame!) Irvine also includes suggested further readings, which has me heading next for Seneca's essays. You can find more at Irvine's website here.

Climate clash in White House

2009-01-03T10:48:00.000-08:00

Piece in the Times details the likely showdown between the cap-and-traders on Obama's team - -Carol Browner, and of course, Obama himself, at least for now -- and carbon tax advocates Larry Summers and Peter Orszag. It talks about Obama being against a carbon tax because he doesn't want any hit of higher energy prices at a time when average folks are already reeling in the recession. Fair enough. But the missing piece in these discussions is that cap-and-trade only works by creating a de facto tax anyway via higher energy prices as the cost of emissions permits gets built into prices. It just doesn't look like an explicit tax, which supposedly helps the pols. I'm dubious. Especially when cap and trade also looks like it means a big bureaucracy to administer and allocate it all, a system that is sure to be gamed. The best idea I've heard is "carbon-tax and dividend" (see one version here), which would would simply be a re-jiggering of the tax system. You'd add stiff new carbon taxes, but then rebate, say, 90% of the proceeds via, say, payroll tax reductions. Maybe you'd keep 10% to invest at the federal level to jumpstart new alternative energies, in hopes of hitting on a DARPA-like win (the Pentagon program 25 years ago that helped bring us the Internet). Carbon tax and dividend means there would be no impact on the average consumer -- indeed, with a little creativity you could design it so that lower income folks got back more in lower taxes than they paid in higher energy prices. And if you have strict reporting requirements on emissions you can track progress against what the cap and traders say needs to be achieved in overall emission cuts, and dial the tax (and rebates) up if need be. Conservatives could support it, too. Something like this needs to get on the agenda.

UPDATE 1/4: Charles Krauthammer makes passionate conservative case for carbon tax and dividend in the Weekly Standard.

Education news

2008-12-28T19:23:00.000-08:00

Had an op-ed in the NYT today on education today as part of their series offering transition suggestions to Obama -- read it here.

Happy Holidays

2008-12-21T17:15:00.000-08:00

Won't be posting as much in next weekish fyi, but will return in force as we head toward the new year. Happy holidays to you and yours.

Ulysses S. Grant, Ponzi scheme victim

2008-12-19T19:15:00.000-08:00

Wonderful piece in WSJ this week by John Steele Gordon on how President Grant was duped after he left office by a Madoff of his day. A great story with a happy ending of sorts -- and a reminder that cons, even of presumably savvy people, have always been with us.

Speaking of Banking Compensation

2008-12-18T15:17:00.000-08:00

There's been no pickup that I've seen of striking news in an excellent mid-November page one profile in the Washington Post on Hank Paulson's ideological evolution. To wit:

....in the coming weeks, he is planning to announce a valedictory set of proposals to modernize Washington's aging regulations and extend their reach into matters that traditionally have fallen beyond the purview of federal officials....Paulson said he will urge Congress and the administration to grant the Fed broad discretion to examine the books of any firm, regulated or unregulated. This would require large hedge funds, private-equity firms and other now-unregulated financial entities to accept a charter from the Fed and open their financial records to its officials...

He added that executive compensation for financial firms also needs substantial reform, which could be accomplished partly through banking regulation...Paulson said he pushed the five major federal banking agencies over the past weeks to release a guidance document that would require firms to eliminate compensation that encourages risky behavior by traders and executives.

Paulson came to DC a free-market Republican; he'll leave (hopefully) with public calls for compensation reform in his old haunts. Despite the critics he'll face at the club, let's hope he really steps out on this.

Wall Street Wall of Shame, Anyone?

2008-12-18T14:44:00.001-08:00

Front page NYT piece details the belatedly obvious about i-banker compensation leading to systemic risk because so many people got zillions in bonuses peddling mortage-related securities that were fated to implode. Now there's no ability to get the money back when the profits firms booked on all this flimflam turns out to have been illusory. Highlights:

....Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning...For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

It's hard to believe there's no legal theory that would let shareholders or creditors claw back some of these billions in ill-gottens gains. But even if not, there ought to be creative ways to shame these folks for their behavior. After all, it's probably only a few thousand people at these top banks (and maybe far less) who got filthy rich doing something that's soured the economy for the other 300 million of us. So here's a thought: Why can't the feds condition any use of the TARP money on access to each bank's records so that the names of people who got rich peddling stuff that later sank the national economy could be published in a very high-profile way. I'm thinking of some public display that looks like the Vietnam Memorial in DC -- a simple but devastating list of names (and maybe the amount of each person's misbegotten earnings). Except this time the people wouldn't be heroes who gave their lives, they'd be on the Wall of Wall Street Shame - people who got rich literally sinking the country.

Borowitz on Caroline

2008-12-18T11:11:00.001-08:00

The humorist strikes again with a piece over at HuffPost.

CAROLINE KENNEDY ASKS TO BE TIME'S PERSON OF THE YEAR

Caroline Kennedy would like to be considered Time magazine's Person of the Year for 2009 and has let the magazine's editor know of her interest in the honor, aides to Ms. Kennedy confirmed today....In addition to the Person of the Year honors, Kerry Kennedy said that Caroline had also expressed an interest in next year's Nobel Peace Prize.

Read it and enjoy. Have to say Andy's funny-bone hit rate is very high.

Enough, Nouriel

2008-12-18T10:51:00.000-08:00

I've been as impressed as anyone with Nouriel Roubini's prescience and insights on our current economic mess, and find his commentary at RGE Monitor must reading. But is anyone else out there getting a little irritated at the way each new Roubini piece now seems to begin with the boast that, unlike all the other fools, he predicted the situation we're in ages ago? Enough, Nouriel -- everyone who matters knows you were prophetic. Just focus on what we should be thinking about where we are and where we go from here!

Stop The Heirs!

2008-12-17T11:26:00.000-08:00

Caroline Kennedy is a fine lady, but Nick Kristof has it right on his blog re the aristocraticization of American politics. My own entry on this demoralizing phenomenon was a column back in March 2001, reprinted below. Nothing's changed.

FORGET SOFT MONEY -- STOP THE HEIRS!

I know we’re all supposed to moan about “soft money” this week, but to my mind there’s a bigger campaign scourge that John McCain has missed altogther: the plague of heirs running amok on the political landscape. Surely the Heir Factor does more to undermine the morale of our democracy than a thousand Clinton coffees or Republican Eagle fundraisers ever could.

You can hardly turn on the tube these days without stumbling over some smiling scion primping himself for high office. Like most rot this starts at the top, as last year’s emblematic showdown between George Walker Bush and Albert Gore Junior proved. But the specter of inherited political power is so commonplace nowadays that it’s getting hard to keep track.

There’s Andrew Cuomo, the former housing secretary under Bill Clinton, now readying himself to run for governor of New York, like his father. Presidential wannabe Evan Bayh holds the Indiana senate seat held by his father. So too with Connecticut Senator Chris Dodd. New Hampshire Senator Judd Gregg’s daddy was governor. Lousianna Senator Mary Landrieu’s father was mayor of New Orleans. West Virginia Senator Jay Rockefeller has two uncles who were governors. And, as Ron Brownstein quipped in a 1998 look at this trend in The American Prospect, Chicago Mayor Richard Daley’s father was emperor.

Jesse Jackson Jr. waltzed into the House as Jesse Johnson never could have -- as did Rep. John Sununu (son of the former New Hampshire governor and White house chief of staff) and Charlie Gonzales (who inherited papa Henry’s Texas seat). Three generations later there are so many Kennedys in power that no one actually knows the number anymore. Does anyone think Colin Powell’s son Michael would be chairman of the Federal Communications Commission today if his last name were Powers?

This weird inventory could go on (and on). James Hahn, son of legendary Los Angeles county executive Kenneth, has a lock on this year’s mayoral race in LA. Before long we’ll doubtless see Karenna Gore, Chelsea Clinton and Jeb Bush’s son George P. join the parade.

Many of these folks are fine people. And going into the family business is a proud American tradition. But at some point the sheer volume of political heirs gets a little ridiculous for any self-respecting democracy.

It’s bad enough to have these constant reminders that the system is rigged. Yet governance by heir may also be dangerous. The men and women who inherit their power tend to be far more bland and cautious than their dashing forbears -- who had to make their name, after all, and not simply avoid squandering it.

It’s not unlike the ethos of those who inherit great wealth, who are more concerned with preserving their pile than with taking risks to build a fresh one. This means we’re increasingly led by a species of timid tacticians, groomed from birth to censor any impulse that might make them more interesting as human beings but less viable as politicians.

No wonder politics seem so dull and unimaginative, except when enlivened by political Gatsbys like Ronald Reagan and Bill Clinton [update: or obviously Obama today].

What to do? Any reform has to address the enormous built-in advantage heirs have when it comes to name recognition, the family fundraising rolodex, and opportunities for political apprenticeship.

One option would be to offer huge amounts of compensating public financing to any average Joe who finds himself in a race against an heir. Lawyers will naturally quibble over what relationship should trigger this provision, but you get the idea.

But more radical steps may be needed. Taking a page from trust and estate law, Congress could adopt a “generation skipping” rule, under which the children of high officeholders would simply be barred by law from seeking office themselves -- only the grandchildren could.

This would nip the whole Chelsea and Karenna thing in the bud.

Of course, it might also present a few little First Amendment problems -- but then that makes it a perfect fit with every other campaign finance reform being debated.

Come on, John McCain, do something before we morph entirely into an aristocracy. Flabby heirs are as big a threat as soft money!

Ed Reform Wars Move to Next Front

2008-12-16T14:44:00.001-08:00

Now that Arne Duncan has been picked, ed reform crusaders tell me it was "inevitable" and even "brilliant" in retrospect, because Duncan has solid reform credentials while also having managed to retain good relations with the unions. But which way will Obama really go on ed policy if the top man seems able to straddle both worlds? The new fretting is over who will be Duncan's deputy secretary - a Jon Schnur (the uber-reformer who founded New Leaders for New Schools), or a Linda-Darling Hammond? Or will Arne somehow split the baby and confound the search for clarity by naming two equal deputies? And thus force ed reform angst all the way down to the critical Deputy Assistant Secretary for Blackboard and Chalk post?

Sky-High Wi-Fi

2008-12-16T14:37:00.001-08:00

I'm writing this from the first flight I've had where they have Wi-fi on the plane and it's great (it's an American NY to LA flight). I know there are downsides -- like never being unplugged from the office etc -- but the upside is fabulous. Kind of extraordinary the world we live in, even with the coming Depression and all (kidding, kidding).

Just wanted to share.

Housing Woes Query

2008-12-16T14:21:00.000-08:00

Yes, we're in uncharted territory with the economy dipping and the Fed making up new plays for its playbook. But one thing I don't get is the hand-wringing over housing starts. In the Daily Beast one summary noted:

...builders broke ground on the fewest number of homes in at least a half century...November housing starts were down 18.9 percent from October and 47 percent since November 2007...“The horrifying thing about the housing-starts number is we’re likely to keep going down from here,” said one economist told Bloomberg.

When we've gone through the biggest housing bubble in history -- which means the biggest oversupply of housing inventory ever -- don't housing starts have to dry up until the market settles out? Isn't that what we need? Isn't that why some folks -- like Holman Jenkins at the Wall St. Journal, or Jim Cramer -- keep saying only half in jest that the best government response would be to destroy some of the excess unoccupied housing? Housing gurus please feel free to connect my synapses here if I'm missing something.

Step Right Up

2008-12-16T05:09:00.000-08:00

Interesting two page open letter to Obama from higher ed worthies in NYT today (not available online that I can see - will add link if find one) asking for $40-45 billion of the coming stimulus for higher ed infrastructure, research facilities, etc. They say this would be 5% of the package, so they're expecting it to come in at nearly $1 trillion. Can't fault these folks for thinking small! Someone will need to tally up all the requests as groups line up for their piece of the pie, and position their desires as "stimulating."

UPDATE: The WSJ editorial page weighs in with "Shovel-Ready On Campus"

An Air Traffic Controller Moment

2008-12-15T19:20:00.000-08:00

One Republican-voting business leader who's been hopeful about Obama tells me his action on the Detroit bailout will tell him all he needs needs to know about the new president's mettle. Everyone knows, my friend says, that whatever the process is actually called, we need a quasi-bankruptcy result that wipes out shareholders, forces bondholders to take a haircut, gets labor costs in line with Toyota's US operations, slims down dealerships, and pushes legacy health and pension costs to the government somehow. If Obama can face down his own constituencies to make this happen, it'll be an "air traffic controller" moment in terms of the signal it sends about this president's strength. But "if he just throws money at the same old same old, there's no hope for the guy."

Open-minded Republicans are watching!

The Shoe on (Endless) Instant Replay

2008-12-15T19:04:00.000-08:00

Whatever else you want to say about Bush, he moved pretty quickly to duck out of the way of that shoe. And he looked composed and good-humored, not afraid. Yes, he may be the worst president in American history, but this was a moment of old-fashioned American aplomb.

Chu vs. Obama on Gas Taxes

2008-12-15T18:55:00.000-08:00

Obama's nominee for energy secretary, Steven Chu, is a man after my own heart when it comes to gas taxes. From the WSJ:

In a sign of one major internal difference [with Obama], Mr. Chu has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work. "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe," Mr. Chu...said in an interview with The Wall Street Journal in September. But Mr. Obama has dismissed the idea of boosting the federal gasoline tax, a move energy experts say could be the single most effective step to promote alternative energies and temper demand. Mr. Obama said Sunday that a heightened gas tax would be a "mistake" because it would put "additional burdens on American families right now."

Note the "now," which leaves Obama wiggle room for "later." Kudos to Obama for naming Chu when his views will surely make headlines during his confirmation hearings. Can we ever have a president who on gas taxes tells us "what we need to hear, not what we want to hear"? Maybe we can!

Which Way, Arne?

2008-12-15T18:31:00.000-08:00

Arne Duncan, Chicago schools chief and Obama hoops pal, will be education secretary. A "compromise choice," I'm told, in the first battle for Obama's education soul. The National Education Association welcomes the appointment. The NEA also loathes Michelle Rhee's landmark initiative to dramatically hike teacher pay in exchange for tenure and other reforms, to me a kind of litmus test for whether you're serious about fixing schools. Does the NEA think it knows something that we don't?

Oops!

2008-12-15T18:11:00.001-08:00

The Washington Post reports that the bailout provision meant to assure limits on executive compensation at banks being rescued by taxpayers was essentially nullified by fine print the Bush administration added when no one was looking.

Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules. But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money. Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

For an incompetent bunch, isn't it interesting how clever Team Bush can be when it really wants to be?

Spitzer, Thinking!

2008-12-12T17:31:00.000-08:00

The former NY governor has a smart piece in Slate today arguing that the inevitable auto bailout will be the first installment of endless billions to come unless we find a way to do this more intelligently. His answer: a competitive bid.

Why don't we tell the current Big Three that $25 billion in capital is available—but only to two of them? The surviving two will be those that submit the best, and final, binding bids, supported by all the necessary constituencies: boards, managers, suppliers, vendors, creditors, and the UAW. The plans that are the best, as judged by a panel of private- and public-sector figures—Jack Welch, Warren Buffet, or Felix Rohatyn, plus Office of Management and Budget and Congressional Budget Office officials—are the plans that will get funded...The company with the least impressive plan will be denied funding. To avoid letting the third parties—creditors, the UAW, or vendors—pick the winner by refusing to sign on with their least favorite of the Big Three, third parties will be required to offer the same deal to each of the three. This process will force the companies to bid against one another for aid, giving us the benefit of genuine competition. This is better than an "oversight board" of Cabinet members who have no real understanding of the industry.

I'm sure there are all sorts of complications with such a notion, but doesn't it immediately seem like a fresher idea than anything we've heard in days of hearings and official bloviating? Which brings us to the tragedy of Spitzer. His personal behavior (and before that his temperament in his rocky first year as governor) has left the huge promise he showed as attorney general unfulfilled. But the man is too talented and energetic to simply vanish; the question is, what plausible road to what feasible public role can he take? Spitzer did another piece recently outlining a way forward in the current crisis in the Washington Post, so it's fair to surmise we're seeing a mini-campaign for resurrection on the strength of his ideas.

That's good as far as it goes, but my wife has long had a better idea on what Spitzer should do to build himself back into a useful contributor: He should become the Ralph Nader of financial products and services. Spitzer could do for mortages, credit cards, insurance products etc what Nader did for cars and other consumer products back in his early days. Goodness knows we need some savvy entity looking out for ordinary consumers and society more broadly as we pick up the pieces of financial capitalism in the decade ahead. It's a perfect fit with the mark Spitzer made policing Wall Street as AG. Done right, Spitzer could build a new nonprofit institution devoted to this mission into an important force in American life.

Eliot, please, listen to my wife.

Bernard Madoff - Another FOE Factor Shocker

2008-12-12T17:04:00.001-08:00

It's sad but true: not a day seems to go by without fresh examples of how the Failure Of Elites is sinking American society. The Bernard Madoff scandal is the latest. Here we have a respected Wall Street player who once served as chairman of the NASDAQ busted at 70 years of age in what turns out to have been a long-running Ponzi scheme. He may have defrauded investors of $50 billion, which has to make it the biggest Ponzi scheme in human history. It looks like he was already a very rich man when he hatched it. What's the matter with these people? Guess we'll have to wait a few months now for the definitive Vanity Fair profile or Michael Lewis assessment. See original lament on the Failure of Elites here.

Stimulus Silliness

2008-12-12T16:53:00.000-08:00

There's a growing chorus of tut-tutters fretting that Obama's coming Super-Stimulus is dangerous because it's unfunded. "How are we going to pay for it?" they cry. These critics are either disingenuous or deeply confused. The whole idea of a stimulus is NOT to pay for it. If we paid for it (as opposed to running up a bigger deficit to do it), it wouldn't stimulate the economy. Every time you hear someone on TV saying "how is Obama going to pay for this," just imagine text popping up beneath them that reads, "I have no idea what I'm talking about."

The FOE Factor

2008-12-11T10:20:00.000-08:00

One of my pet theories is that the depressing implosions we're experiencing are evidence of the Failure Of Elites in virtually every sector of society. Call it the FOE Factor. Obviously Governor Blagojevich is the most stunning new example, but at least his scandal ruins only his own life. The broader extent to which all of us been harmed by the failures of our "betters" includes the fallout from greedy or errant CEOs, priests, pols, ratings agencies, bankers, accountants, lawyers, you name it. These are people who by virtue of their privileged positions are supposed to act (at least in part) as stewards of the common good. Instead, every day the rot at the top produces headlines that make American society seem utterly debauched.

My new operating principle: Just when you thought there couldn't be any more emperors without clothes, another naked one pops up! Today's FOE Factor highlight comes courtesy of the WSJ from the latest post-mortem grilling of the unrepentant Fannie and Freddie CEOs.

As the hearings found:

"The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets. Fannie "'has one of the weakest control processes I ever witness (sic) in my career," Enrico Dallavecchia, then chief risk officer of the company, wrote in a July 2007 email to Michael Williams, chief operating officer.

More WSJ:

Four former chief executives of Fannie and Freddie appeared before the committee to answer questions about their financial woes. They generally dodged demands by committee members that they accept the blame for those problems. "We did what we thought was the right thing at the time" but were then surprised by the most "violent" housing downturn for decades, Mr. Syron said.

Hey, coulda happened to anybody. But tell me again, why did you guys all get tens of millions of dollars for running these operations?

How Obama Can Spark An Education Revolution

2008-12-10T15:19:00.000-08:00

Reports yesterday here and here on the latest TIMSS results (that's for Trends In International Mathematics and Science Study), one of the gold standard reports that show how we stack up against the world on student achievement. Bottom line: we've made a little progress, but still trail many other nations we generally think we're smarter than (full report here). Depressing but accurate quote from savvy Mike Cohen, who runs Achieve: "If we put our mind to it and aim high, we can get our performance up to the level of top Asian countries."

So much for another American century.

But there's one fascinating bright spot, which Barack Obama can use to spark a low-cost revolution. Massachusetts and Minnesota, who've led the way in adopting rigorous standards, arranged to get themselves measured independently from the U.S., and these two states performed on a par with the best in the world. They're the only states with the guts to have had their schools broken out separately. You see where I'm heading. As a condition of receiving their federal funding, Obama should require all states to agree to have their results broken out in TIMMS (and also to participate in another respected international comparative study known as PISA). The feds can pony up the modest costs associated with this. It's a perfect fit with Obama's money-for-reform theme. "If we're going to invest more in education," he can say, "we need to know how we're doing. That's just common sense."

Why do this? The idea would be to assure periodic but regular headlines across the country like, "Alabama Schools Rated Worse Than Uganda's," or "California Trails Uzbekhistan Again In Math And Science." Polls show today that most people think the education system is a mess, but that their own schools are fine. They're wrong to be complacent, and with this little step Obama could go a long way to provoke the reality-based uproar we need. I'm hoping my favorite Eduwonk, Andy Rotherham, who has the ear of the transition team (and who would make a great senior DOE appointment), gets this into the mix asap.

Better Than Under the Mattress?

2008-12-10T15:06:00.000-08:00

Investors rush to put their money in short-term Treasury bills yielding 0%. That's right, zero. Safety trumps yield. At least you won't lose money. (And the feds can finance the coming trillion dollar deficits on the cheap). Tell your grandchildren you were there for this.

The Glamour of Travel

2008-12-10T14:53:00.000-08:00

Stuck in New Orleans airport for about 6 hours trying to get home to LA today because Houston (where I was to connect) seems totally shut down. Maybe it's weather, but I've had so many of these sit-on-the-tarmac-for-hours delays in the last year that I'd prefer to blame our increasingly Third World-style infrastructure. That massive Obama public works plan can't come soon enough for me! At least there's Wi-Fi in the airport...

Tom Tomorrow on The Invisible Hand Run Wild!

2008-12-10T14:48:00.000-08:00

Fab cartoon that captures so much. Thanks to (newly crowned Nobelist) Paul Krugman for flagging it.

Gladwell's Blindspot on Teachers

2008-12-09T20:56:00.000-08:00

Typically interesting piece by Gladwell on why it's hard to identify who will be a good teacher before they’re in the classroom, which bolsters the case for abolishing tenure, opening the field of entry wide, and being tough-minded about developing people and deciding who’ll make the cut in the first few years. That’s fine as far as it goes. But as often happens with Malcolm, his elegant storytelling obscures a vital truth about today’s teacher crisis. Especially for poor kids, we’re recruiting teachers from the bottom third of the college class, a stark change from the 1960s and 1970s, when we recruited from the top-third because women and minorities didn’t have as many career options outside the classroom. The quality of the teacher corps was subsidized by discrimination. That wave of talent is now set to retire in droves, but teaching simply isn’t an attractive career for today’s better college grads. Yes, they may try it via Teach for America for two years, but as Wendy Kopp would be the first to admit, the scale of TFA is puny compared to the national need.

Bottom line: unless we make the profession of teaching more attractive as a career, we’ll never lure the talent we need to lift student achievement (and sustain U.S. living standards) in an era of global competition. And while money isn’t the only answer, it has to be a big part of it, because starting salaries of $35,000 to $45,000 that top out after 25 years at $80,000 simply won’t change the choices that today’s better college students make. This is a policy fetish of mine – a chunk of my first book was about how to get starting salaries in high poverty districts to $65,000, and top salaries toward $150,000, in ways all sides could support. When a smart young couple graduating from college sees that if they’re good in the classroom they could aspire together to earn $200,000 to $250,000 before too long, the societal benefit would be enormous. (It's not just two more good teachers, after all -- it’s two less lawyers). DC chancellor Michelle Rhee’s current plan is the one serious hope on the scene right now for getting the breakthrough we need.

Micro-management defined

2008-12-09T20:04:00.000-08:00

NYT today notes that under the Democratic proposal, "the automakers...must seek permission from the car czar for any business transaction of $25 million or more." You probably can’t buy new pencils and paper clips for firms on the scale of the Big Three for less than $25 million a year. Quick, somebody please tell us what level of executive at well-run companies typically has the authority to make $25 million decisions. If it’s the Assistant VP for Purchasing, do we really want the Car Czar saddled with this kind of minutia, when he needs to be busy issuing diktats on body designs and new fuel cell technology?

Waiting for Gigot

2008-12-09T19:54:00.000-08:00

Classic fear-mongering editorial today in the WSJ about the dangers of what Dems will try to do re universal coverage. Look, it’s fine for conservatives to raise questions about Democratic hubris given the power they’ll have starting in January, and I don’t rule out the prospect that editorial page editor Paul Gigot & his team will raise some useful cautions. But the striking thing about today’s latest in the genre is that it acts as if the paramount public priority of the coming health care debate is restraining Democratic excess. What about solving the scandal of the 50 million uninsured and the 25 million underinsured? Or costs that our private sector-centric system has pushed to 16% of GDP on their way to 20%? Memo to Gigot: instead of just taking predictable potshots, why not lay out what comprehensive reforms the WSJ would endorse that would (1) assure basic health coverage for every American while (2) restraining cost growth and (3) boosting quality. Put out a plan that meets those goals in ways that honor the WSJ’s values, and it would help kickstart a conversation that eventually brings a bipartisan deal. Come on, Paul. As Washington Monthly guru (and one of my mentors) Charlie Peters always told me, "Don’t just tell people what you’re against – tell them what you’re for."

Not So Super

2008-12-09T18:51:00.000-08:00

Looking for more bad news on the schools front? Consider the pathetic tenure and now departure of LA schools chief David Brewer. Two years ago the former admiral was jammed in as a hire by then-school board president Marlene Canter in a power play meant to upstage Mayor Antonio Villaraigosa, who was trying to wrest control from the school board at the time (he failed to get Bloomberg-style control, but finally got a group of schools to supervise; in my consulting life I played a small role in helping develop the reform blueprint for them). At the time, Canter said it was so urgent that a talent like Brewer be brought in that he had to be named while the Mayor was out of town and unable to meet with him. Some talent. Brewer has been virtually a cipher; as an LA resident and reform-watcher I can’t name a single important thing he did for two years. Now, with a critical mass of civic leaders finally demanding something better, he’s gotten what looks to be a $500,000 buyout of his contract. Meanwhile the clock has counted off two more ineffective years of education for hundreds of thousands of kids stuck in low-performing schools – losses that will blight their life chances merely because of where they happened to be born. As usual, it’s all about the children.

CDS anxiety

2008-12-08T17:42:00.000-08:00

For two weeks I've been in a state of rising anxiety about Credit Default Swaps. Now I'd like you to join me.

The question is whether CDSes are the last huge bubble left to pop, and how much further economic damage that will cause. After being vaguely aware of CDS issues but not anything like alarmed, my fears were stoked on November 24 by a report on one of the blogs I find indispensable in following the financial mess, Barry Ritholz's The Big Picture. The report featured an analyis by Chris Whalen of Institutional Risk Analytics, a guy (and firm) I've never heard of but whose analysis seemed plausible enough to frighten me.

It started by filling in the blanks on AIG, because I had not understood what all that money going into AIG's black hole was being used for. Had you?

Whalen: "Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or “CDS,” insurance written by AIG against senior traunches of collateralized debt obligations or “CDOs.” The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best."

I guess I had vaguely known we were bailing out gambling activities (which is how CDSes strike me) but hadn't focused on the fact that so much of the federal money is being used to honor these CDSes, or, more precisely, the collateral calls AIG faces as they go south.

Then Whalen had this chilling scenario:

1) Start with the $50 trillion or so in extant CDS.

2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.

3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.

4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.

Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full.

Our answer to this cowardly view is that AIG needs to be put into bankruptcy. As we wrote on TheBigPicture over the weekend, we’ll take our cue from NY State Insurance Commissioner Eric Dinalo and stipulate that we pay true hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches and pitchforks catch up to them.

President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.

(Whalen's whole post is here if you want to read for yourself).

Every since reading this I've been asking smart financial people if they think he's right and CDS is the Next Huge Awful Shoe To Drop. First I asked Pete Peterson and Robert Greifeld, who runs the NASDAQ, on a panel at the Fortune 500 Forum in Washington last week. Pete seemed to think this was serious stuff; Greifield agreed but felt the amounts were likely overstated. But I didn't take comfort from their body language.

Then I asked Alan Blinder at Princeton when in his office last Friday. Blinder agreed it was serious but it was hard to know just how serious. When he was at the Fed in the 90s, he said, they developed a rule of thumb, which may or may not apply in today's situation, to discount the "notional value" of outstanding CDSes to real exposure (after netting out, for example, contracts through which some firms bet on both sides of the same development). Back then they reckoned that 4% of the notional value represented real risk.

If that rule of thumb held today we'd thus be looking at around $2 trillion of potential losses governments could be asked to bail out, not $15 trillion. This is what passes for good news nowadays!

The truth is no one knows. Presumably the Obama team has to have a handle on this or they can't think intelligently about where we go from here. But the problem is that because these instruments are unregulated there's no one place to get a handle on the exposure. Tim Geithner & Co ought to immediately (like, by close of business today) require an inventory of this exposure. I'd like to think this was happening -- but after all we've been through, who can assume anything sensible is happening? The big question is whether this is manageable without, as Whalen suggests, some form of massive multi-firm bankruptcy reorganization that puts these instruments behind us, once and for all.

I'll keep asking folks. But in the meantime, why haven't the WSJ and NYT gone after this last big bubble with the full court press it deserves?