Monday, September 22, 2008

Tomorrow Morning's Revolution

It is well enough that people of the nation do not understand our banking and monetary system. For if they did, I believe there would be a revolution before tomorrow morning. -- Henry Ford

In this week's Sift:
  • The Bailout: Kwai Me a River. Here's how you know that you've made it into the ruling class: Your privileges are so intertwined with the workings of society that any threat to you is a threat to everybody.
  • This Week in Sarah. Keeping up with Sarah Palin is like watching the soaps or the OJ trial. I'm not proud of it, but I can't stop.
  • Short Notes. Donald Luskin's bad timing. Pakistan will shoot at us to defend the Taliban. A few conservatives are going for Obama. And an interesting article on race.


The Bailout: Kwai Me a River
While I've been trying to figure out the proposed bailout of our financial system, I've been thinking about a bridge. No, not the Brooklyn Bridge. Not the Bridge to Nowhere. Not the newly re-opened bridge in Minneapolis, the one that collapsed last summer. Not even the symbolic Bridge to the 21st Century that President Clinton promised us in 1996. (Which is still unbuilt, as best I can tell. We remain on the ever-more-barren shores of the Age of Reagan, the promise of a new era still off in the mists somewhere.)

Instead, I keep thinking about the Bridge on the River Kwai. If it's been a while since you've seen that classic film, the conflict begins when the Japanese try to make British POWs build a bridge for the strategically important Burma Railway. The ranking British officer (Alec Guinness) takes a principled, idealistic stand: the Geneva Conventions forbid forcing captured officers to do manual labor. In other words: Enslave the enlisted men all you want, but if officers have to get sweaty, the laws of war lose all their meaning and civilization collapses.

You see, that's what it really means to belong to the ruling class: Your position and privilege is so interconnected with the machinery of society that any threat to one is a threat to the other. That's what's happening now. It's unfortunate -- but not an emergency -- if an economic downturn causes middle-class people lose their jobs and homes, or if nobody can pay for little Susie's liver transplant. But if Merrill Lynch or Fannie Mae or AIG are about to go bankrupt, on the other hand, civilization is at stake. Money is no object. The government has to step in or there will be cannibalism in the streets by Thursday evening.

It would be sad enough if this were just Wall Street propaganda. But the really sad thing is that it's very close to being true.

Great Depression 101. To see why it's nearly true, you need to understand something simple but profound about economics. When people in a primitive economy save, they save some physical thing. Their savings is a pile of grain or firewood or some other good that will be consumed in the future rather than now. But in a modern economy, people save money, and no actual goods are put aside for the future. So, for example, when the workers at an auto plant save, no cars are set aside. Instead, the banking system loans the workers' money to people who want cars, so that all the cars produced now can be sold now. In a modern economy, production and consumption are always equal -- no goods are "saved".

That happens on a global scale, and the banking system serves as a big match-maker between producers and consumers. When it works, which it does most of the time, it allows production and consumption to match up at a high level. That's what we mean by prosperity.

But the system is vulnerable to what we used to call a panic (until Herbert Hoover decided that a depression sounded less scary). In a panic, everybody's net worth is changing so fast that nobody is sure who can be trusted to pay. So banks stop lending, consumers stop consuming, and everybody tries to save at the same time. In a primitive economy, they really could all cut consumption and save at the same time: Grain and firewood would pile up all over until folks realized there was plenty. But the modern economy doesn't have any capacity to stockpile actual goods, and services can't be stored at all. So instead, we have to close factories and lay off workers. Businesses go bankrupt and their debts don't get paid. And that just makes the problem worse. It creates more fear and more uncertainty about who can be trusted to pay.

In a panic, in other words, production and consumption can't match up at a high level, so they have to match up at a lower level. And that process of moving downward produces more panic. Production keeps dropping in a vain attempt to catch up with dropping consumption.

OK, that's the Great Depression in a nutshell. Since then, we've actually become more dependent on the banking system. Now we have just-in-time production, where goods move freely because businesses all have lines of credit that give their suppliers confidence. What do you think would happen if all those lines of credit suddenly vanished? Well, at every step between the iron mine in Minnesota and your local car lot, each business would have to wait for a check to clear before they delivered the goods. It could work -- it used to work -- but the transition would be really ugly.

The Bailout Plan. That's why economists are just about unanimous is saying that the government has to do something when a panic starts in the financial markets. Now we get to what the government should do.

You can think of a panic like a big-city fire: the Chicago fire of 1871 or the London fire of 1666, say. The response has to come on two different time-scales. First you have to put the fire out as fast as you can. And then you need a thoughtful process of rebuilding, where you figure out what went wrong and how it's not going to happen again.

This is when it would be really nice to have faith in our government. If we trusted that our government was both competent and had our best interests at heart, then we could give it vast temporary authority to put out the fire, trusting that the more thoughtful rebuild-and-reform process would happen later.

The bailout plan that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have put together looks just like that. It gives the Treasury Secretary $700 billion to handle as he sees fit. The bill proposed to Congress authorizes him to purchase mortgage-backed securities from any financial institution headquartered in the U.S. at any price he thinks appropriate. It exempts him from any rules about who he can hire or what duties he can contract out. And it says that his actions can't be reviewed "by any court of law or any administrative agency".

As I read it, Paulson could hire some relatives to perform unspecified duties, pay them the $700 billion, and close up shop. (Probably he could be tried for malfeasance and sent to jail or something, but I don't see how we'd get the money back.) Short of that, he could pay exorbitant prices for worthless securities, essentially piping money straight from the taxpayer to Citicorp or Morgan Stanley. And then he could take a high-paying job at Citicorp or Morgan Stanley. It would all be perfectly legal.

And when will we get around to that thoughtful restructuring of the financial system, so that this never happens again? The bill doesn't say.

I hate to be this cynical, especially when I understand the importance of doing something quickly. But I saw what happened to the Authorization for the Use of Military Force (AUMF) that Congress passed quickly after 9/11. The Bush administration read it as broadly as possible, as an authorization to attack any country, tap any phone, and lock up anyone it cared to designate as an enemy combatant for as long as it thought necessary. And I saw how the administration low-balled the costs of the Iraq War and kept coming back for more money after we were committed.

What the Blogs Are Saying. A lot of people have been writing about the plan. One of the best analyses I've seen is by investment banker Yves Smith on a blog called Naked Capitalism. She fleshes out a point that Nouriel Roubini has been making for almost two years: There's a difference between a liquidity crisis and an insolvency crisis. (Quick summary: If you're driving a Mercedes and have no cash for the tolls, you're in a liquidity crisis. But if the balance on your car loan is more than the Mercedes is worth, you're in an insolvency crisis.) The government can end a liquidity crisis just by guaranteeing loans, so that firms have time to sell off their assets at reasonable prices. But the only way to end an insolvency crisis is for somebody to eat the loss. Is that what the $700 billion is for? Nobody will say.

Paul Krugman makes a similar point. Daily Kos' New Deal Democrat pulls together a bunch of commentary. The best sound bite is by Senator Bernie Sanders of Vermont: "If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up."

Politics. The most worrisome question is whether the administration will play politics with this. The plan as written could be a very bad deal for the taxpayer. (I have to say could, because Paulson could also exercise all that power responsibly. Who knows?) We could do better. For example, the government could authorize a detailed audit of the major financial institutions, force them to mark down their mortgage-backed securities to a reasonable value, and then provide capital to bring the firms back to solvency in exchange for stock. If the economy recovers and the institutions prosper, the government could get the taxpayers' money back by selling the stock, and maybe even make a profit.

But if Congress balks at this bad deal, it risks looking like a dysfunctional institution that can't take the action we need to save our economy from meltdown. If it puts together a better deal, Bush might threaten a veto and blame Democrats for the impasse. That sounds ridiculous, but it's exactly what happens every time Congress tries to put conditions on approving more money for the Iraq War.

Down the line, if the Democrats buckle and approve the deal, the Obama administration (insh'allah) could be saddled with a monstrous debt not of its own making. "See," the Republicans will say when Obama tries to exercise some fiscal responsibility, "I told you Obama would raise taxes." The payout of hundreds of billions to investment bankers could trigger a fiscal crisis that (Republicans would claim) can only be solved by "entitlement reform" -- cuts in Social Security and Medicare.

The public needs to understand that this crisis -- just like Reagan's savings-and-loan disaster --  is the natural result of the conservative philosophy of big business and small government. (Devilstower lays out the history, including the role played by McCain adviser Phil Gramm.) Conservatives have been running against government regulation for decades and arguing that business needs to be free to innovate and be creative. Well, there's a limit to the virtue of deregulation. We're in this mess because financial firms innovated and used their creativity, and government stood by and watched.

Arlo Guthrie's response to the Chrysler bail-out -- "I'm Changing My Name to Chrysler"-- is relevant again. The same basic idea is at BuyMyShitPile.com. And Nathan Kottke cc's the NYT on his letter to Secretary Paulson: "My student loans are too big and it is hurting the economy. Can I have a bailout, please? I need $92,000. Thanks."
17% of Americans still approve of the way President Bush has handled the economy. Who are these people? Are they a danger to themselves or others?

McCain thinks the deregulation of financial markets is a model for how to handle health care:
Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.
Corporate innovation without government regulation -- what could possibly go wrong with that?


This Week in Sarah
Sarah Palin has become like the OJ trial. I complain about how much attention she gets even as I keep watching it. And like every good soap opera, each day brings just enough new information to keep me tuning in. Here's a summary.

The big news this week was that Todd Palin, under his powers as First Dude, has decided that he can ignore a subpoena from the Alaska legislature. This violates some little-known provision known as "the law", so the legislature could charge him with contempt ($500 fine and six months in jail). But they don't come back into session until after the election, so who cares?

Some bloggers have suggested that the legislative council that launched the investigation (unanimously, 14-0, with ten Republican votes) should go ahead and find him in contempt, and argue in court that when the legislature delegated subpoena power it also delegated the power to enforce a subpoena. (I can think of a state trooper who might be willing to make the arrest.) In other words, if the McCain campaign is going to court with novel legal theories to shut down this investigation, why not strike back with novel legal theories to keep it going?

Supposedly Troopergate isn't about Palin's ex-brother-in-law at all. But when Sean Hannity brought up the investigation, she started talking about what a bad guy her ex-brother-in-law is. So, this isn't about him, but it's justified because he's a jerk.

As I predicted two weeks ago, there's a balancing reaction to the evangelicals' excitement about Palin, and she's starting to hurt the ticket. Her approval numbers are plunging.

The Anchorage Daily News is annoyed that big-city lawyers from the McCain campaign are running their state government.

She lied about not using the teleprompter at the convention.

She lied about consulting the kids before accepting the nomination.

James Fallows on her interview with Charles Gibson:
What Sarah Palin revealed is that she has not been interested enough in world affairs to become minimally conversant with the issues. Many people in our great land might have difficulty defining the "Bush Doctrine" exactly. But not to recognize the name, as obviously was the case for Palin, indicates not a failure of last-minute cramming but a lack of attention to any foreign-policy discussion whatsoever in the last seven years.

One of the reasons people give for supporting Palin is that "she's like me". Salon has a story that points out the fallacy of thinking that because she's like you, she'll do good things for you: As mayor of Wasilla, she did a bad job taking care of Lake Lucille, the lake her own home sits next to. So until you see her endorse an actual policy, don't jump to the conclusion that she'd be good for women or middle-class people or parents of special-needs kids or families with pregnant teen-agers or anybody else.


Short Notes
The Bad Timing Award for 2008 goes to McCain adviser Donald Luskin. A week ago Sunday, the day before Lehman's bankruptcy knocked over a series of financial dominoes, Lusking had a column "Quit Doling Out that Bad-Economy Line" in the Washington Post.
Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.

"Jitters" -- I love that.

Boyd Reed wrote a very thoughtful article on race. He begins with an experience from his days as a black high school chess player: His East St. Louis high school team was playing at a high school in a well-to-do white suburb, and when he wandered away from the tournament area (as I used to do at chess tournaments) he was stopped by a white security guard, who marched him to the office and began calling the police. (That never happened to me.)

OK, I'm sure a lot of African-Americans have a story like that, but it's interesting where Reed goes from there: He thinks about how that one incident shaped his stereotype of whites. And he relates this insight about stereotypes to his experiences canvassing for Obama.
many people are experiencing a fundamental disconnect when they try to process Barack Obama. That disconnect is related to the images they see on the news, in movies, on ESPN, and on the streets where they live.  I think Joe and Jane Six-Pack are suspicious of Obama - despite the fine-tooth comb that's been taken to his life - because they haven't ever really *seen* anyone like him.

Some people are starting to see the light. For Elizabeth Drew, author of the glowing 2002 biography Citizen McCain, McCain's caving in to Bush on torture was the final straw:
This was further evidence that the former free-spirited, supposedly principled, maverick was morphing into just another panderer – to Bush and the Republican Party’s conservative base.
For self-described conservative editor Wick Allison, Obama is "thoughtful, pragmatic, and prudent" while "today it is so-called conservatives who are cemented to political programs when they clearly don’t work." (His example: tax cuts.) And he is obviously nostalgic for the days when conservatives knew what they were trying to conserve: "It gives me comfort just to think that after eight years of George W.
Bush we will have a president who has actually read the Federalist
Papers."

Retiring Republican Congressman Wayne Gilchrest agrees.

ShadowSD collects everything you need to know about Obama.

So the Taliban can attack Afghanistan from bases in Pakistan -- and if we chase them back there, the Pakistani army will shoot at us.

What kind of a wacko would write this? Oh, right, that was me.

2 comments:

kim said...

Arlo Guthrie may be singing "I'm Changing My Name to Chrysler", but Tom Paxton wrote it.

Doug Muder said...

Good catch. I meant to correct that in the next week's sift, but it slipped my mind.