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Kevin Drum - June, 2009

Chart of the Day

| Tue Jun. 30, 2009 3:16 PM PDT

Today's economic green shoot is the latest Case-Shiller report, which shows that although house prices are still declining, they're declining at a slower rate than before. Hooray!

But Henry Blodget is right about this:

We're still talking about an astonishing rate of collapse....So the folks who use this slight moderation in the rate of decline to spin tales of a "bottom" or, worse, a "recovery" are smoking something. Prices have at least another 10%-15% to fall, and they'll likely be falling for at least another year or two.

To show this graphically, I've helpfully extended the S&P chart Blodget includes in his post. It's this simple: as long as the line is below zero, house prices are dropping. And if price declines slow down at about the same rate they accelerated, it means we won't get back to zero until sometime in 2011. Put even more simply: the price decline between 2007-2009 — which started slowly and then picked up steam — will probably be mirrored by the price decline between 2009-2011 — which started with a head of steam and will end up dropping ever more slowly until it finally flattens out. And that price drop was about 25%.

So if anything, Blodget might be too optimistic. We might still have 25% to go.

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Leverage

— By Kevin Drum

| Tue Jun. 30, 2009 2:16 PM PDT

In last week's column, Martin Wolf warned that bushels of new regulations won't save us from another banking crisis. The problem, he said, is that in a highly leveraged business it makes perfect sense for shareholders (and therefore management) to take enormous risks, and nibbling around the regulatory edges won't change that. But what will? He didn't really say, prompting me to comment, "Perhaps this column was a season finale cliffhanger and we have to wait until next week for the mind blowing conclusion?"

I guess it really was, after all, because this week we get Wolf's answer:

If institutions are too big and interconnected to fail, and no neat structural solution can be identified, alternatives must be found: much higher capital requirements and greater attention to liquidity are the obvious ones. At present, big financial institutions operate with next to no capital: in the US, the median leverage ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1 (see chart). As I noted last week, this makes it rational for shareholders to “go for broke”, with the results we have seen. Allowing institutions to be operated in the interests of shareholders, who supply just 3 per cent of their loanable funds, is insane. Trying to align the interests of management with those of shareholders is then even crazier. With their current capital structure, big financial institutions are a licence to gamble taxpayers’ money.

So how much capital makes sense for systemically significant institutions? “Much more than today” is the answer. Moreover, the required capital must also not be risk-weighted on the basis of banks’ models, which are not to be trusted. Shareholders’ funds should make up a minimum of 10 per cent of capital. In the US, it used to be far higher.

....Within a far better capitalised financial system, it would also be relatively easy to operate a “macroprudential” regime, with the required capital rising during booms and falling during busts. Again, the bigger the stake of shareholders, the less one would worry if the rewards of managers were aligned with them.

Well, that turned out to be distinctly non-mind blowing, didn't it? Regulate leverage wherever, whenever, and in whatever form it appears. But though Wolf's answer may have been a bit anticlimactic, at least it has the virtue of being right.

The big remaining question, though, is: how? How do you mandate higher capital requirements in a way that's likely to be robust? As Wolf says earlier in the column, "'Never again' might be too much to ask. But 'not for a generation' is essential." So how do we build a system of stronger capital requirements likely to persist around the globe for at least a generation? I haven't yet heard a really persuasive answer to this, and unfortunately, at this point it's not clear that anyone is even trying very hard to figure it out. There are just too many people who want to believe that the crisis is over and we can go back to business as usual with just a bit of minor deck chair rearranging. Ten years from now we'll pay the price for this.

Senator Al Franken (D–Minn.)

— By Kevin Drum

| Tue Jun. 30, 2009 1:36 PM PDT

Norm Coleman has finally conceded the 2008 Minnesota Senate race. Al Franken will be sworn in soon (probably next week) and Democrats will finally have a majority of 60 in the Senate.

Which will, of course, make approximately no difference at all. The corruption of the filibuster into a routine requirement for 60 votes in the Senate (an arguably unconstitutional evolution, IMHO) combined with the continuing presence of half a dozen non-liberals in the Democratic caucus combined with an almost iron self-discipline within the Republican caucus — well, all that combined means that liberals now have the illusion of control of Congress but not the reality. In a way, it's almost the worst of all possible worlds. Dem vs. Dem is now practically the only narrative that anyone will pay attention to, and since unanimous agreement is the only way for that narrative to play out well, this means it's almost always going to play out badly.

Still, that's a glass-half-empty point of view. So let's be more positive: one more vote is one more vote. And unless events are massively unfavorable, the ground still looks favorable to pick up two or three more seats in 2010. And Franken will probably be a pretty good senator, someone who knows how to talk in plain language and get himself on the talk shows. As long as he keeps his sense of humor and shows it to us once in a while, I'm looking forward to seeing more of him.

Quote of the Day

— By Kevin Drum

| Tue Jun. 30, 2009 11:14 AM PDT

From Malcolm Gladwell, responding to yet another book length treatise from one of the information-wants-to-be-free (Free, I tell you, Free!) diehards:

So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For [Chris] Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.

That might not make much sense to you. Read the whole thing and it will.

The Power of Coal

— By Kevin Drum

| Tue Jun. 30, 2009 9:59 AM PDT

Ezra Klein notes that coal state Democrats voted against the Waxman-Markey climate bill at a higher rate than non-coal state Dems, but not that much higher. About one-in-four of the coal state Democrats voted no, compared to only a little over one-in-10 of everyone else:

Even so, that means only one-in-four of the coal state Democrats voted no. I'd like to see those results drilled down to coal-dependent districts, but still, that's quite a bit less parochial defection than one might imagine.

....Another way of putting this is that the evidence suggests that this vote was less about parochial interests than partisanship and ideology. Plenty of Democrats from coal states made the judgment that they could defend this legislation to their constituents.

I think I'd look at this a little differently. Sure, partisan politics was the main divide, but that's the main divide on everything. What's more interesting is that a quarter of the coal state Dems voted against the bill even though it had already been massively watered down to reflect coal state interests. In its current state, Waxman-Markey has very little effect on coal state interests for at least the next decade, and possibly for more like 20 years. But even so, lots of coal state Dems voted against it despite the fact that passage is a major goal of the party leadership, it's a major goal of the president, and it's the right thing to do. I'd call that pretty damn parochial.

Green Dam Spouts a Leak

— By Kevin Drum

| Tue Jun. 30, 2009 8:41 AM PDT

For years the Chinese government has relied on the "Great Firewall" to censor its citizens' access to the internet, primarily by filtering packets based on keyword detection and blocking IP addresses of sites the government dislikes (Falun Gong, pro-democracy sites, etc.). But the firewall has never been as watertight as the government would like, and the next phase was supposed to be the mandatory installation of a piece of software called "Green Dam" on every new computer sold in China. Interestingly, Chinese computer users are fighting back and apparently winning:

In a last-minute climbdown, the Chinese government announced today that it will delay the launch of censorship software that was supposed to have been sold in every computer from tomorrow.

....The Guardian struggled to find a single retailer who had Green Dam either installed or bundled with computers. Adding to the mystery, Lenovo, Sony, Dell and Hewlett Packard refused to comment on whether their PCs are now being shipped with the software, as the government ordered them to do last month.

....A group of bandit hackers, known as Anonymous, declared "war" on Green Dam and threatened to attack it tomorrow.

According to a source close to the group, they plan to create a remote computer 'bot' that pummels Baidu, Kaixin and other mainland websites with data requests containing forbidden or sensitive terms, such as expletives, Falun Gong, Dalai Lama and "Fifty-cent party member" (the derogatory name given to people paid to post pro-government comments online). They hope the volume of dirty traffic will clog up the keyword filters.

I don't have any special comment about this. It seemed like a quixotic plan from the start, and I'm not all that surprised that it's been delayed at the least, and possibly abandoned. It's just hard to see how it can work in the long term. Still, as with the twittering in Iran, it's interesting to see yet another case of how technology can be simultaneously both servant and bane of autocratic governments.

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Infinite Jest

— By Kevin Drum

| Tue Jun. 30, 2009 7:59 AM PDT

So a bunch of folks are reading David Foster Wallace's Infinite Jest this summer and blogging about it. Infinite Summer kicked things off and A Supposedly Fun Blog is the stomping grounds for IJ musings from a bunch of political types.

I feel kind of funny reading the things everyone has to say. It's an iconic book now, the kind of thing you read partly to say you've read it, and it's famously long and complex. And the footnotes. The footnotes.

But that wasn't my experience of Infinite Jest. It's absolutely not the kind of book I'd normally pick up and read, but for some reason I did back in 1997. I have no idea why. I'd never heard of the book and I'd never heard of David Foster Wallace, so I didn't suffer from any preconceptions that I was making a statement by diving into it. I was completely naive. And I loved it. It was long and complex — I could only read about 50 pages a day because my brain just gave out after that many pages — but I never found it pretentious or overly difficult, two adjectives often associated with it. (A little bit difficult, yes, but a friendly kind of difficult.) To me, Wallace was having fun with the vocabulary he used, not showing off. I got a huge kick out of the endless footnotes. And once he finally explained what the chapter headings were about, things started making a whole lot more sense. (Granted, that doesn't happen until you're a couple hundred pages in, but hey — that's less than 20% of the book!) If you're interested, my original 1997 thoughts about IJ are here.

I don't think I'm up to the task of rereading it this summer, but I'd recommend it to anyone who asks. When you're done, be sure to read the first chapter over again.

Medical Myths

— By Kevin Drum

| Tue Jun. 30, 2009 6:52 AM PDT

The New York Times summarizes a few "medical myths" today, and Ezra Klein says he's glad to hear that knuckle cracking doesn't cause arthritis. Since I'm a longtime knuckle cracker and it drives my mother crazy, I already knew this. You gotta keep up with the latest research when you're arguing with Mom. But this one surprised me:

8. Sugar makes kids hyper. Numerous studies show sugar doesn’t affect behavior, but most parents don’t believe this. In one study, parents were told their kids had sugar and they were more likely to report problem behavior — but in reality, the kids had consumed a sugar-free drink.

Seriously? Sugar has no effect on kids' behavior? This must be one of the most widely believed myths in history. I'm not sure I want to buy the book all this stuff is excerpted from, but I might head over to the bookstore just to skim this part. It sounds fascinatingly contrary.

Out of the Cities, Not Yet Out of the Country

— By Kevin Drum

| Tue Jun. 30, 2009 6:42 AM PDT

Phase 1 of the Iraqi withdrawal plan brokered by George Bush is now complete:

Six years and three months after the March 2003 invasion, the United States has withdrawn its remaining combat troops from Iraq's cities, the U.S. commander here said, and is turning over security to Iraqi police and soldiers.

While more than 130,000 U.S. troops remain in the country, patrols by heavily armed soldiers in hulking vehicles have largely disappeared from Baghdad, Mosul and Iraq's other urban centers. Iraqis danced in the streets and set off fireworks overnight in impromptu celebrations of a pivotal moment in their nation's troubled history. The government staged a military parade to mark the new national holiday of "National Sovereignty Day," and Prime Minister Nuri al-Maliki made a triumphant, nationally televised address.

The general consensus seems to be that this is a big deal. And in one sense it unquestionably is: in a lot of ways, the "surge" was less about the number of new troops sent to Iraq than it was about the way they were deployed. Gen. David Petraeus insisted from the beginning that they establish a direct presence in neighborhoods throughout Baghdad and other cities, and that presence — along with several other factors — played a substantial role in reducing violence. Now that presence is gone.

And yet — those "other factors" were a big deal. In combination, they were certainly a bigger deal than the surge itself. So the big question now is whether the Sunni Awakening holds; whether Muqtada al-Sadr has genuinely been defanged; whether the sectarian cleansing of the past couple of years is over; and whether Maliki can keep things together if and when Kirkuk blows up. And the even bigger question is whether he can do that when he no longer has American troops as a backstop to his own power.

We won't know that until U.S. troops actually leave the country, not just regroup outside the cities. That's the real test.

I'm Back

— By Kevin Drum

| Mon Jun. 29, 2009 9:13 PM PDT

New York City was lovely, thanks for asking. But imagine my surprise when I came back and discovered that my absence meant twice the usual amount of catblogging last Friday. That's above and beyond the call of duty from David Corn, who was filling in for me while I was gone.

Needless to say, I really was on vacation. My catblogging post was written last Tuesday and showed up on Friday via the miracle of prescheduled posting. Don't believe me? Here's a nice picture of the Statue of Liberty at sunset to prove that I was in the Apple this weekend. Still not enough? I also have some lingering inner ear wobbliness thanks to flying with a cold, which I plan to use as an all-purpose excuse for the rest of the week if I write anything unusually off kilter.

Anyway, this is just a placeholder to let everyone know I've returned safely, full of good deli and Italian food. Blogging on matters of actual substance will resume Tuesday morning.

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Kevin Drum - June, 2009

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