Feelings of Despair

Bad Policy has Bad Consequences, even for the good guys.

The Obama Administration's inability to withdraw from Iraq and its unwillingness to apply the guillotine to the banking crisis do not portend well. There's no good alternative to Obama and the Democrats in the foreseeable future. If they fail, the alternative being prepared on the Right is a populist Fascism. So, when I see Obama embracing half-measures and dilly-dallying, I do feel some despair.

Adam Posen, via Paul Krugman:

"The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …"

Mark Kleiman channels an Anonymous Expert: "Because repairing the banking system is far and away the nation's most important policy need, I regard the Obama administration as an utter failure to date. Geithner looks every bit as clueless as Paulson, and seems determined to match Paulson in badly investing taxpayer capital."

Paul Krugman:

"on the question of fixing the banks, many of us are feeling a growing sense of despair.

Obama and Geithner say the right things. But Simon Johnson nails it:

How long can you say, “we are being bold” when in fact you are not?

Obama and Geithner say things like,

If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis."

The hope, if there is one, is that, unlike Bush and Paulson, Obama and Geithner can be reached by these criticisms. People with real power in Congress will listen and pressure will mount to change course, as things get worse. At best, we hope that there is some limit to how deep they will dig. But, right now, the policy as proposed, is to dig and dig and dig.

Digging always leaves you in a hole.

Liar, liar!

Media Matters - Media Matters: In support of shunning:

"George Will routinely makes false claims large and small, holds politicians to disparate standards, and engages in ethically dubious conduct on behalf of his preferred candidates. The Washington Post can hide behind multi-layer processes all it wants, but as long as it publishes Will, it will continue to misinform its readers. The Post doesn't need to give Will a better fact-checker; it -- along with the rest of the media elite -- should instead give him a good, thorough shunning.

Instead, he remains a respected citizen of The Village -- the same Village where, David Broder insists, people just don't like being lied to."

Libertarian confesses

BK Drinkwater: Political Stop Signs:

"I went through a phase where if, say, education or healthcare policy came up in conversation, I’d say “Markets! Markets markets markets! MARKETS!” I found these conversations astonishingly unproductive, but I didn’t think to blame myself.

Truth is, I didn’t know much about education or healthcare policy. The semantic stop sign—“Markets!”—shut down my own investigations into these matters. I was frustrated that I couldn’t convince conservatives, social democrats, and socialists to come round to my view. To myself, I blamed their intransigence."

Human intelligence places a very high value on compression. Compress a lot of thinking into a formula or a phrase, and then, maybe, create rules for unpacking that formula or phrase into a more elaborate structure of reason and interpreted fact. e=mc2, "survival of the fittest", the golden rule, "never get into a land war in Asia", "for every action, there is a equal and opposite reaction", etc.

We like to learn and know stuff, but, paradoxically, perhaps, we, humans, also dearly love to avoid getting bogged down in the detail. We love insight; reams of computer output, not so much.

A while back I saw Tyler Cowen, a well-known libertarian economist, remark off-handedly that he thought the sheer volume of the Federal Register, where Federal regulations are published, indicated that the Federal government did too much, engaged in too much, detailed regulation. And, I asked myself, as Tyler probably did not ask himself, how does he know? He was commenting, having read a particular regulation; he was commenting, merely, on the volume, the number of pages. Not what any individual page said. Tyler was generalizing, without actually knowing anything, and, in a way, invoking his authority as an economics professor. It struck me as a very curious thought process.

But, I think I understand it better, for having read Drinkwater's confession.

We're all specialists. But, we want to feel that we have general knowledge, general understanding of the world around us. But, how do we handle the details? How do we know that we know enough? As specialists, do we delegate? Do we defer to specialized experts?

There's a deep political problem lurking here.

They cannot even remember why

Is $800 Billion Too Big or Too Small? Yes. | Jeff Frankels Weblog | Views on the Economy and the World: ". . . the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang. They are still doing it today when they argue that tax cuts give stimulus and spending does not. One doesn’t even hear them give an economic argument in support of this proposition. They just close their eyes and endlessly repeat their “tax cut” mantra, like a religious cult that can’t even remember why."

Hullabaloo

digby at Hullabaloo:

"The Republicans are hedging their bets. They want to be able to use the stimulus as a bludgeon (just think of the pork stories!) and want to be on record against it for 2010. But just in case the pointy headed economists are right, they do need to take care of their rich benefactors. If America's owners really didn't want this to pass they would have twisted some corporate Democrats' arms. (Conversely, if they really wanted it to be bipartisan, they would have twisted some Republicans' arms.)

Of course, they do have the next financial system bailout to think about. Perhaps they are just keeping their powder dry for a real centrist, bipartisan lovefest."

The politics of Republican opposition to the stimulus is all about Republican leadership of the authoritarians, the dittoheads, the evangelical christians, the angry f.u. white guys. John McCain, despite being the worst Presidential candidate since Benjamin Harrison, got 46% of the vote, and a lot of discouraged Republican voters stayed home, because they did not want to be voting for the loser in the election.

Most people in this country do not understand the first thing about politics. They listen to CNN, and don't realize for one second that it is a right-wing propaganda operation. The Democrats do not know how to run against the Republicans, do not know how to tell the truth, how to appeal to populist emotions -- the Democrats talk "issues" and expect the opposition party to accept facts and to be responsible in a crisis. The Republicans, of course, ignore facts and act on their most angry, resentful declarations without heed for there even being consequences, let alone any recognition of what those consequences are.

The Costs of Bipartisanship and Centrism

Trim to Stimulus Carves Into Goals For Job Creation - washingtonpost.com:

". . . congressional negotiators have since trimmed billions of dollars from the package to satisfy Senate Republicans, diminishing its potential for job creation along with its overall cost. With the House poised to vote as early as today on the measure, analysts are slashing their estimates of its ability to counteract a deepening recession, with several prominent economists now saying the package will save or create fewer than 2.5 million jobs by the end of next year.

At $789 billion, the final package "is just not going to pack the same jobs punch" as some earlier versions, which cost as much as $100 billion more, said Mark Zandi, chief economist of Moody's Economy.com, whose analyses have been cited by White House officials as well as congressional Democrats. Zandi estimates the measure will create only about 2.2 million jobs by the end of 2010, leaving unemployment hovering around 10 percent and probably forcing lawmakers to undertake another stimulus plan.

The White House has officially pared its own projection to 3.5 million jobs in recognition of the bill's smaller size. But Christina Romer, who leads Obama's Council of Economic Advisers, said the administration remains convinced that the package of tax cuts and spending initiatives has sufficient power to boost the sagging economy toward recovery by year's end. . . . Many analysts had been more optimistic about the House version of the stimulus bill. At $820 billion, it was not much bigger than the final package agreed to Wednesday by a House-Senate conference committee. But the House version contained about $50 billion more in direct government spending -- such as payments to state governments and cash for school construction -- which economists say is spent quickly and ripples broadly through the economy. The final package, by contrast, is weighted more heavily toward tax cuts, which have a less powerful effect, according to many economists, because taxpayers tend to save a portion of the money.

Most of those changes originated in the Senate, where Democrats needed the votes of three moderate Republicans to clear a procedural hurdle. Among the biggest changes: the addition of a $70 billion provision to protect millions of taxpayers from the alternative minimum tax, a measure Congress was universally expected to approve anyway.

Because the AMT fix was built into many economic models, its presence in the package amounts to "phantom stimulus," said Nigel Gault, chief U.S. economist at Global Insight, a private forecasting firm. In part because of the AMT provision, Gault said his models show the $838 billion Senate bill would only have created about 2.5 million jobs. Because the final package is even smaller, he said, "our number would come down a little bit."

Another prominent forecasting firm, St. Louis-based Macroeconomic Advisers, this week cut its estimate for the House bill to 2.3 million from 3.3 million jobs after the CBO reported that only about two-thirds of the money could be spent by the end of next year.

Jonathan Chait comments on the above Washington Post report: "What frustrates me is that the Post didn't write this when it could have made a difference. It's possible that none of the economists the Post consulted were able to make models before today. But I suspect that the story fell victim to the conventions of objectivity. Writing a story that says, 'Centrist Changes Hurt Job Growth, Economists Agree' would be partisan.Writing it after the bill is done, and in a context that downplays the specific actors responsible for the changes, is the kind of thing newspapers can do without feeling like they're being 'biased.'"

Crisis and Action

EzraKlein | The American Prospect:

The standard history of America of American political progress -- and this is oversimplified, to be sure -- is that our system makes it very hard to get anything done in moments of normalcy, but every so often, crisis comes or dangers loom, and the sharp threat of the moment punctures the system's preference for inaction. Social Security came this way, as did the FDIC. Medicare and Medicaid are products of such a moment. This looks like such a moment: A historic economic crisis that's been worsened by the instability of our energy supply and the inadequacy of our health system. A large Democratic congressional majority brought to office over two successive elections in which voters repudiated the right. A new and popular Democratic president. And yet it still doesn't seem enough. The incentives of partisanship seem to easily outpace the urgency of crisis. But if this isn't enough, than what is? If our system can't respond to threat with cool planning during good times or quick responses during crises, then what can it do?

And, indeed, I named this blog in honor of this concept: that the country acts badly, but reacts well. And, indeed, I think the election of the "clean and articulate" Obama is evidence that a large part of the American populace wants to react well. But, much of the elite -- politicians and pundits -- seem, to me strangely complacent. Krugman is an exception:

I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

It is not enough to say, "It's only been 3 weeks." It has been three weeks of "bipartisanship", of a Senate controlled by Ben Nelson and Susan Collins and Arlen Specter, not the Democratic Majority elected by the People. It's been 3 weeks of Larry Summers. Of vague bank bailouts and stimulus too little, too late.

The Political Game

Talking Points Memo Reader BR votes for chess:

"FDR like Obama came to office with two jobs in front of him - straightening out the banking system and stimulating the economy. He punted for a year and a half on fiscal stimulus. (Very likely he didn't realize what he needed to do, but even if he did he would have been unable to do much.) He was politically dependent on conservative Democrats like Al Smith, John Raskov, Daniel Roper and Lewis Douglas and the interests they represented (e.g., the chemical industry). These people were committed to the balanced budget. After he dealt with the banks, he abandoned the balanced budget and lost political support from the conservative Democrats.

Obama is in a mirror-image political situation. He was elected with lots of support from big financial interests, and he needs to maintain that support to get his stimulus package through. He isn't strong enough right now to win a two-front war against the Republicans and the big banks.

I read this context into this morning's leak to the Times. The only people who know what was said between Axelrod and Obama are the two of them, and I don't think Axelrod would leak without Obama's OK. Obama feels he can't say no to Geithner right now without losing his stimulus package. But he's going to make the bank bailout stand or fall on its own. If it gets shot down, then - with the stimulus passed - he will be in a position to turn to a different strategy."

For the moment, Obama is walking a political tightrope between his committments to a centrism, that is basically conservative because it seeks to preserve an established order, and the expectations of a population that is more than ready for populist and progressive policy. The country needs revolution to survive. Revolution, in the circumstances, is the conservative option, by virtue of being the only truly viable option for the long run.

Obama's job is to bring the country, including himself, to the full realization of that truth.

Breaking Their Power

Simon Johnson, former IMF director of research:

"There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains.

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble? The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about. And fully escaping the grip of crisis really means breaking their power."

I can't say I'm optimistic about Tim Geithner -- or Barack Obama -- "breaking their power" any time soon.

I see digby liked it, too and added her own eloquence: "Right now, on the issue of the banks Obama is paying lip service to the populists and siding with the elites. The kind of people who try to con the bereaved and blame their own troubles on the dead. There is mass anger around this kind of buck-passing, anger that can be channeled into action. Another bailout for the wealthy and connected would do that."

And Now, the Counterargument

And Now, the Counterargument « James Kwak at The Baseline Scenario

James Kwak paraphrases Willem Buiter: "William Buiter at the FT argues that the U.S. cannot afford a major fiscal stimulus because the government (by which I think he means the entire political system, not just the Obama Administration) has no deficit-fighting credibility. . . Buiter’s argument is essentially a tipping-point argument. Yes, the markets seem unconcerned about U.S. government debt, but pass that stimulus bill and all of a sudden - or shortly thereafter - they will panic."

Buiter, a Dutchman posing as an English Tory, is convenient for this role as a Cassandra, because his alien status does not call into question the central absurdity of so-called conservatives and centrists opposing the stimulus spending as "too large", but, at the same time, favoring tax cuts that would blow a huge permanent hole in the government's finances. Because let's be clear about this: the "entire political system" does not lack deficit-fighting credibility; the conservative partisans and self-styled "responsible" centrists, who, traditionally, would be arguing for fiscal responsibility, have abandoned that role, to advocate for tax-cuts-for-the-rich as a panacea, and increased military spending as a necessity regardless of circumstance. The "conservatives", in short, are mad for Empire, however, short-lived Empire must be, when their patrons are termites munching on the imperial superstructure.

Buiter's argument is NOT a "tipping-point argument". It is a piece of demagoguery -- a "Be Afraid, Be Very Afraid!" argument, designed to keep people huddling under their blankets upstairs, while Buiter's thieving friends make off with the silver downstairs. Kwak appears to see this, but doesn't say it, though he hints. Until the U.S. government starts borrowing in foreign currencies, the financial structure doesn't exist for the kind of "tipping-point" Buiter conjures. (Buiter knows this, of course. Which makes him a liar.)

That doesn't mean that Buiter is wrong to worry about the political struggle over deficits and taxes. Deficits matter. But, a more realistic assessment would highlight a far more realistic scenario: Republicans and centrists will favor stealing the Social Security trust fund over taxing the Rich, and they will call it "Entitlement Reform" and congratulate themselves on their political courage. It does take courage of a kind to break into someone's house and steal.

There's an on-going political struggle in the U.S., as in every democratic country, and, in the main, as in every country, it is a struggle over the distribution of income, wealth and power. Who gets what, where and when. Duh.

The U.S. has no particular, global political fiscal disability, but it does have an on-going political struggle over the distribution of income and wealth, in which the Federal deficit is a weapon and Federal solvency is hostage.

The choice -- pro and con -- is whether to turn on the lights, and go downstairs, and chase the thieves until they drop the loot, or, as Buiter would have it, huddle afraid upstairs, until all is lost.

Is it time to panic, yet?

The Senate has delivered an absolutely appalling "compromise" stimulus package. But, hey, why worry? The economy is only in free-fall.

Consensus

There's a lot of criticism of Obama's attempt to fashion a politics by consensus, emphasizing compromise, bi-partisanship and a featured role for the centrists.

The bipartisanship is running up against the determined opposition of the most homogenous, thoroughly reactionary Republican Party since Alf Landon led the rump of the GOP into the catastrophic election of 1936. John Cole uses an apt analogy: "I really don’t understand how bipartisanship is ever going to work when one of the parties is insane. Imagine trying to negotiate an agreement on dinner plans with your date, and you suggest Italian and she states her preference would be a meal of tire rims and anthrax. If you can figure out a way to split the difference there and find a meal you will both enjoy, you can probably figure out how bipartisanship is going to work the next few years."

And, then there's the "centrists". They're not exactly insane -- lacking, by definition, the radicalism -- but they are not exactly grounded in the moment either. Appeasing the centrists - Paul Krugman writes:

". . . centrism is a pose rather than a philosophy. And to support that pose, the centrists are demanding $100 billion in cuts in the economic stimulus plan — not because they have any coherent argument saying that the plan is $100 billion too big, not because they can identify $100 billion of stuff that should not be done, but in order to be able to say that they forced Obama to move to the center.

Which raises the obvious question: shouldn’t Obama have made a much bigger plan, say $1.3 trillion, his opening gambit? If he had, he could have conceded to the centrists by cutting it to $1.2 trillion, and still have had a plan with a good chance of really controlling this slump. Instead he made preemptive concessions, only to find the centrists demanding another pound of flesh as proof of their centrist power."

Somewhere out there, I would hope that progressives and liberals are rousing themselves to leadership. It is not going to be easy for them to seize the dominating frames, but it is necessary, if the country is not going to slide to disaster on the back of making a habit out of too little, too late.

Follow the Money?

Thomas Philippon of the NYU Stern School produced the above graph. (He's also discussed the same results on VoxEU)

Other than that, how was the play, Mrs. Lincoln?

The Day Obama's Honeymoon Died | The Agonist:

"In the last 24 hours, that golden halo that was over Barack Obama, is over. The Senate is about to gut his version of the stimulus bill, creating a bill that is 'all tax cuts, all the time' and far too small to deal with the economic crisis. Obama has been out Reaganed, and America is set to go on a downward spiral because of it. The stimulus gutting of at least 100 billion and perhaps as much as 200 billion in spending to get just three votes: Snowe, Collins, and Ben Nelson, will mean that these Senators will get to control between 33 billion and 70 billion of spending each. 200 billion essentially ends the 'spending' part, and leaves us with a bill that will be about 400 billion tax cuts, and 300 billion spending. So much for unity and bi-partisanship.

The withdrawal of Daschle destroyed another precious Obama asset: namely the uber-competence image that they had cultivated. Cool, competent, collected. Then on one day two nominees withdrew for tax problems.

Then the Republicans struck preëmptively to make sure their kind of stimulus, defense spending, continues to increase. Cuts for the poor, war for the rich. Cuts for the poor, war for the rich."

Flirting with disaster

About that deflation risk - Paul Krugman - NYTimes.com: "We truly are flirting with disaster."

Shock and oy - Paul Krugman Blog - NYTimes.com:

". . . it was widely expected that Obama would have a stimulus plan ready to pass Congress even before his inauguration. That didn’t happen. We were told that this was because the economic team was working flat out on the financial rescue.

In fact, when it comes to bank rescue it’s hard to see much evidence that anything was accomplished during all that time; the team is still — still! — running ideas up the flagpole to see if anyone salutes. And the ideas look remarkably bad.

Meanwhile, when it came to stimulus legislation, when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway. (And Obama appears, in the name of bipartisanship, to have thrown away a Senate vote he may well need.)

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?"

Digby pointed to Michael Hirsh | Newsweek.com expressing the new conventional wisdom:

"The reason Obama is getting so few votes is that he is no longer setting the terms of the debate over how to save the economy. Instead the Republican Party—the one we thought lost the election—is doing that. And the confusion and delay this is causing could realize Obama's worst fears, turning 'crisis into a catastrophe,' as the president said Wednesday.

Obama's desire to begin a 'post-partisan' era may have backfired. In his eagerness to accommodate Republicans and listen to their ideas over the past week, he has allowed the GOP to turn the haggling over the stimulus package into a decidedly stale, Republican-style debate over pork, waste and overspending. This makes very little economic sense when you are in a major recession that only gets worse day by day."

I don't think Obama has the best economic advisers. Larry Summers is fat and obnoxious, Tim Geithner has a reputation as a technocrat, and Christina Romer is way too kind to conservative ideas. They are all neo-liberals, which is not a good thing, when what the country needs is revolutionaries.

But, politics is also a process, and it is not, primarily, an economic process, nor a rational process. It is a theatrical process.

It is kind of like a movie, where the bully has to have a series of wins, beating down the oppressed hero, before the hero can win triumphantly at the end. The Republicans may well be winning the battles, but losing the war. We'll see. But, right now, it does not look good. Stay tuned.

Bank insolvency: tips & tricks

Interfluidity | Steve R. Waldman: "Bank insolvency: tips & tricks"

Zombie banks beg for money. They are very clever. They come up with ways you can give them money while pretending not to give them money, such as guaranteeing their assets, guaranteeing new debt issues, or buying up assets at "hold to maturity" values. Just say no! A healthy financial system cannot be run by zombies. "Rescuing" insolvent banks makes about as much sense as tying string to the arms of a loved one's corpse so it can come to the dinner table as a marionette. For a while that may be comforting (or not), but pretty soon it's sure to smell really bad, and it's gonna ooze. If you think you have engineered a miraculous turnaround, you have only made matters worse. An undead bank is an abomination. It will pretend good health but hide a rot. It will afflict you, over and over and over again, with harrowing near insolvencies (cf Citibank). Dead banks must be allowed to die.