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September 2008

Obama More Trustworthy than McCain on Iraq?!



  • Who Did the Best Job In the Debate? Obama 51% McCain 38%

  • Who Would Better Handle Economy? Obama 58% McCain 37%

  • Who Would Better Handle Iraq? Obama 52% McCain 47%

That last is a huge victory for Barack Obama. Simply huge.

Debate Reactions: Looks Like Obama Won a Much Bigger Victory in the Debate than I Had Thought. He Looked Like a Future President. McCain Did Not

A bunch of them. Looks like Barack Obama stomped all over McCain:

Focus Groups, Undecideds For Obama

CBS News / Knowledge Network Undecideds Give Debate To Obama

Halperin: Obama A- McCain B-

Philadelphia Inquirer: McCain Uncertain - "McCain has been uncertain - Obama not."

Talking Points Memo: Much Clearer Strategy- "Obama seems to have come into the debate with a much clearer strategy."

Washington Post: Fact Check- McCain seriously misstated his vote concerning the marines in Lebanon. He said that when he went into Congress in 1983, he voted against deploying them in Beirut. The Marines went in Lebanon in 1982, before McCain came to Congress. The vote came up a year into their deployment, when the Marines had already suffered 54 casualties. What McCain voted against was a measure to invoke the War Powers Act and to authorize the deployment of U.S. Marines in Lebanon for an additional 18 months. The measure passed 270-161, with 26 other Republicans (including McCain) and 134 Democrats voting against it.

Washington Post: Fact Checker- John McCain raised an old Republican canard, repeated often in the primaries, when he claimed that Obama's health care plan would eventually turn the health care system over to the federal government. The Illinois senator proposes helping individuals purchase health insurance through a system of subsidies and tax credits. He is also in favor of mandatory health insurance for children. But he is not advocating a state-run health system, such as the one that exists in Britain and some European countries.

New Republic (Jonathan Cohn) Obama Tells It Like It Is on Economics - Obama just gave a terrific, honest explanation of his economic agenda.

CNN (Bill Schneider) Obama Scores a Direct Hit- Obama scores a direct hit, saying that McCain wants tax cuts for the wealthy. He's associating McCain with the Bush record on tax cuts.

CNN (Bill Schneider) Obama hits familiar chord on Iran- Obama's answer on Iran was interesting and important.because he's talking about something that a lot of American's understand. Our involvement in Iraq has strengthened Iran. LINK

FL- Tampa Tribune (Blog) "Israel-The Next Big Argument" After arguing over Iraq, John McCain and Barack Obama moved quickly to probably the next most emotional argument in foreign policy-Israel. They got into it over a question from moderator Jim Lehrer over Iran, and McCain went for the most crucial line: "We cannot tolerate another holocaust." That hits a weakness for Obama, whose enthusiasm for Israel is questioned by some in the U.S. Jewish community. Then McCain went for another claim that's been debunked: That Obama refused to call the Iranian Revolutionary Guard a "terrorist" organization. Obama had sponsored legislation that did just that, but voted against a bill including that measure which, he said, also included authorizing an open-ended effort in Iraq. LINK

The Caucus (Katharine Q. Seeyle) Using the Tax Word -Mr. McCain tosses out a barb to Mr. Obama, saying that you ought to hear Mr. Obama's definition of rich, but didn't provide it. Mr. Obama almost took the bait - and then switched! Instead of being driven by Mr. McCain he described his tax cut plan, saying 95 percent of people will get a tax cut "and if you make less than 250,000, you will not see one dime's worth of tax increases." LINK

Washington Post (Live Blog) Fact Check: McCain accused Obama of wanting to stage "military strikes" inside Pakistan, which is a misleading account of what Obama famously said in 2007: That he would be willing to go after Al Qaeda targets inside that country with or without the approval of the Pakistani authorities."If we have actionable intelligence about high-value terrorist targets and President Musharraf won't act, we will," Obama said.

Miami Herald: Obama engages McCain on his diss to Spain-Barack Obama just scoffed at John McCain's assertion a week ago or two ago that he wouldn't meet with Spain's Prime Minister. "Spain!" exclaimed Obama. "Spain!" "I'm not going to set the White House visitor list before I'm president," McCain replied, getting in a dig at the presidential-seal like sign Republicans have ribbed Obama for displaying. "I don't even have a seal yet." LINK

ABC News: That's pretty close to an outright lie by Sen. McCain -- saying he wants to hand over healthcare to the federal government.

First Read (Athena Jones) Longer format helps- He's on message, hitting his talking points on the contrasts with John McCain on taxes, his plans for healthcare and energy independence. He seemed to cover more ground than McCain whose main points were about cutting government spending.

Even Kissinger Backs Obama Against McCain

Even Henry Kissinger backs Obama against McCain:

Political Radar: Kissinger Backs Direct Talks 'Without Conditions' with Iran: ABC News' Rachel Martin Reports: Former U.S.Secretary of State Henry Kissinger today told an audience in Washington, DC that the U.S. should negotiate with Iran "without conditions" and that the next President should begin such negotiations at a high level. The former Nixon and Ford U.S. Secretary of State early in the year indicated his belief that the U.S. should hold direct talks with Iran when speaking to Bloomberg Television.

Kissinger spoke at a CNN sponsored forum at George Washington University along with other former Secretaries of State Madeleine Albright, James Baker III, Warren Christopher and Colin Powell. The leaders were asked to pinpoint the major challenges the next president will face around the world and to offer advice about how to handle those critical issues. The secretaries named the fight against terrorism, restoring America's reputation abroad , re-building the country's economic power, and global climate change as a top priority.

When asked what specifically should be done to repair America's reputation and standing in the world, Powell, Baker and Albright all immediately said "close Guantanamo," referring to the U.S. detention facility. Powell added, "and I think that's something we all agree on"...

Democrats and Republicans Both Get It Wrong

Re: the debate. Both Democrats and Republicans think Obama's "John is right" was ineffective and that McCain's "Senator Obama doesn't understand" was effective.

Both are wrong.

I address them: Y'all should remember that it's not about you. It's about undecided, independent voters. They don't want to see a partisan attack dog. "John is right" beats "Senator Obama doesn't understand." A president who recognizes truth wherever he sees it is a much better bet than one who has contempt for and won't listen to the other people in the room.

Memorable Debate Moments...

  • Kissinger is for sitting down with Iran/no he isn't! -- advantage, Obama
  • In invading Iraq we took our eye off the ball with respect to Al Qaeda -- advantage, Obama
  • McCain's "Senator Obama doesn't understand" followed by Obama responding with something substantive that shows he does understand -- advantage, Obama
  • Bracelet exchange -- advantage, Obama

What are the memorable moments that will be shown on the news shows that show McCain to advantage? I did not note any...

Ezra Klein:

Ezra Klein: 10:37: Final statements. McCain says Obama is unready. Obama says his father came from Kenya and loved America and its values. That basically encapsulates the debate.

10:34: More Bill Schneider: "McCain almost certainly misspoke when he said he wouldn't speak with Spain…I am not sure that's a fair thing for Obama to call him on." Here's McCain's foreign policy adviser, Randy Scheunemann: "The questioner asked several times about Senator McCain's willingness to meet Zapatero (and id'd him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview." I agree that McCain misspoke. But then his adviser turned his verbal slip into official policy. That's actually worse...

10:00: Bracelet wars. McCain tells a story about his bracelet, from the mother of a soldier who said "don't let my son's death be in vain." Obama tells of his bracelet, from a mother of a soldier who said "don't let other mothers go through what I'm going through." Maybe jewelry is not the right way to understand geopolitics?...

9:58: Long exchange on Pakistan, where McCain accuses Obama of recklessly threatening attack. Obama responds: "Coming from you John, who threatened North Korea with extinction and sings songs about bombing Iran..." Nicely done...

9:44: After a back-and-forth on whether the question with Iraq is whether we should have gone in or whether we should have surged, Obama hits it on the head: "John likes to pretend the war began in 2007." Interestingly, Obama is MUCH more compelling on national security and foreign policy...

9:37: Obama gets in a clean shot here. McCain voted for most all Bush's budgets. How can he say he's spent his career fighting to cut spending? McCain returns with a monologue about how the American people know him, and he's not understood to be "Mr. Congeniality" in the Senate. All fair enough. But how does the combination of his colleagues thinking him a jerk and his press person being good at booking him on tv change those budget votes?...

8:55: Chris Matthews suggests that it would be hard for Obama to capture "the racist vote." Yep...

Excess Volatility

Why oh why can't we have a better press corps? Clive Crook makes judgments:

Clive Crook: September 05, 2008: [Sarah Palin] gave an amazing speech and, to the consternation of the Democrats and a large part of the US media, triumphantly vindicated McCain's decision to select her...

And takes them back three weeks later:

Clive Crook: September 24, 2008: Palin's truly dismal performance in part two of her television interview with Katie Couric. Was this the same Palin who gave the convention speech--or even the less-than-stunning Palin of the Charles Gibson interview? She was simply awful. In response to straightforward questions, she was scared, rambling, incoherent, and at times completely unintelligible. She looked stupid. She gave her critics everything they could have wished...

Health Policy Proposals Side-by-Side

The side-by-side comparison below focuses on important health care issues not necessarily addressed in the candidates' health care reform proposals. It was prepared by the Kaiser Family Foundation with the assistance of Health Policy Alternatives, Inc. The comparisons are based on information compiled from the candidates' Web sites, speeches and campaign debates.

Kathryn Lopez Cannot Believe that John McCain Would Be So Stupid... to choose a totally unvetted and unqualified running mate. And she hopes to preserve her disbelief by refusing to take in any more information:

Kathryn Jean Lopez on National Review Online: I absolutely refuse to watch another Sarah Palin interview....

I cringe a little.... I don’t know Sarah Palin... a lot of what I like about her could be projection. I’m not where my friend Kathleen Parker is — wanting her to step aside to spend more time with her family and Alaska — but that’s not a crazy suggestion....

My guess... on nothing but hope... is that Sarah Palin just needs some freedom.... She looks like a woman who’s been cramming talking points and great Matt Scully lines and Mark Salter-McCain war stories and Steve Schmidt marching orders into her head since that first plane ride from Alaska. She looks like a woman who has ceased being the confident, successful executive who got herself elected governor of Alaska without the full force of her party behind her.... People love Sarah Palin when they see her.... If Sarah Palin is John McCain’s secret weapon, let her go, whoever is holding her back.... [I]f it turns out that the “authentic” Palin of rallies and the Republican convention is just good speech delivery in a woman with some good spirit, I want to know that sooner rather than later...

Doesn't the fact that the McCain campaign is so careful to keep her under wraps tell you what the answer is?

John McCain is simply not qualified to be president.

Time Not for a Bailout, But for Nationalization...

John McCain and the House Republicans have blown up the Paulson-Dodd-Frank compromise--for that's what House Republican Whip Roy Blunt says that John McCain did:

Roy Blunt: Everybody else seemed to be rushing for a deal and John McCain came back and said, ‘Wait a minute, I think the House Republicans have the taxpayers in mind and I’m with them’...

Now it's time to go back to three principles. There are three options:

  • Do nothing.
  • Bailout (a la Paulson)
  • Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

It might work like this. Congress:

  • grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
  • requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
  • the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
  • grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
  • requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

In addition, Congress:

  • grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.

Paulson had his shot. It's time for the Democrats to pass a nationalization in the taxpayers' interest bill and dare Bush to veto it. If he does, then announce that the congress will pass it again the day after the election. And if he vetoes it again, announce that congress will pass it yet again on January 21, 2009.

Glenn Greenwald on New Republic Syndrome

Why oh why can't we have a better press corps?

Outsourced to Glenn Greenwald:

The New Republic syndrome - Glenn Greenwald - TNR's Jonathan Chait... March 10, 2003... appeared on Hardball, said the imminent attack was a "just war," and proclaimed: "I don't think you can argue that a regime change in Iraq won't demonstrably and almost immediately improve the living conditions of the Iraqi people." Peter Beinart was the media's designated Democrat to rail against weak, subversive liberals.... In 2004, TNR expressed regret because "the central assumption underlying this magazine's strategic rationale for war now appears to have been wrong," but they still insisted that "if our strategic rationale for war has collapsed, our moral one has not." But by December 2006 -- hundreds of thousands of dead bodies later -- that very partial acknowledgment of wrongdoing turned into this: "The New Republic deeply regrets its early support for this war."

Also in 2004, The New Republic endorsed Joe Lieberman for the Democratic nomination for President, using its endorsement to attack Howard Dean and his liberal supporters as suffering from "an old Democratic affliction: an excessive faith in multilateralism and an insufficient faith in the moral potential of U.S. power" and said that Dean supporters were "dangerously out of touch with a country that feels threatened by terrorism, not Donald Rumsfeld." According to TNR, only Lieberman was Serious and Responsible enough to save the Democratic Party from the weak, pacifist liberals who were too shrill and extreme in their opposition to the Bush administration:... "[O]ne day, Joe Lieberman's warnings in this campaign will look prophetic. And the principles he has espoused will once again guide the Democratic Party. It will be the work of this magazine, to whatever small degree possible, to hasten that day....

In 2006, TNR's Chait denounced those who were trying to defeat Lieberman in the Democratic primary as "a pack of crazed, ignorant ideological cannibals" -- "exactly the sorts of fanatics who tore the party apart in the late 1960s and early 1970s." But just a few weeks ago, Chait himself expressed shock that "there's hardly any sense in which Lieberman is an independent figure" and is now nothing more than "a cog in the Republican message machine" -- exactly the basis for the primary challenged mounted by the people whom Chait was villifying as left-wing screeching radicals....

By any metric, that is a humiliating track record....

Despite those forced mea culpas and reversals, TNR never actually learns. Today [June 23, 2008] -- in a post bearing the very sensible and Serious title: "Keeping FISA in Perspective" -- TNR is here, via Josh Patashnik, to tell you that there's nothing truly disturbing about the FISA bill that is about to pass. What's more, those who think there is, and those who want to oppose Democrats who support the bill, are -- just like war opponents of 2003 and Lieberman opponents of 2006 -- nothing more than shrill, hysterical radicals who are irresponsible and even insane...

**Sigh:** House Republicans and the Press

Hoisted from Comments: anonymiss:

Grasping Reality with Both Hands: You gotta comment on the current House Republican insurance plan. Time Magazine seems to think it's a real plan, not a Potemkin plan. I have no idea, but I think the people at Time are morons, so you MUST let us know if this is real or more nonsense from the guys who brought you "get rid of the capital gains tax! That'll fix everything!"

Anonymiss is citing Karen Tumulty:

Politically at least, the [Republican Deputy Whip Eric] Cantor plan has a lot of appeal. By insuring these junky mortgage-backed securities, rather than buying them, the government presumably wouldn't be spending nearly as much money. In fact, it would be getting money from Wall Street, in the form of premiums for this insurance. This scheme would function sort of like GNMA. The very process of insuring these assets would help solve one of the biggest problems: Nobody knows what they are worth.

The problem, at least in the eyes of Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, is that, while it would help the situation, it wouldn't work to stabilize the markets as well as their plan would.

Here's how it has been explained to me: Last winter and spring, when Treasury and the Fed analyzed a lot of options out there for what to do, they considered this insurance option. They decided that because the insurance option would leave the bad stuff on the bank balance sheets, it wouldn't give the banks the additional liquidity they need. They also believe it wouldn't create a market price that can stimulate trading, the way a purchase program would.

I'm not any kind of an expert on this stuff, so I don't know who is right here...

Let us see. On the one hand, the Treasury Secretary, the Federal Reserve Chair, and their staffs. On the other hand, an unstaffed Republican Chief Deputy Whip Eric Cantor who has not a plan but a plan to have a plan to ask the Treasury to design a different plan than the plan the Treasury thinks is best.

Cantor calls for "the Treasury to design a system to charge premiums to [mortgage-backed security] holders to finance [government-provided] insurance" against defaults.

The Fed and the Treasury have been looking at these issues since at least last winter. I suspect that the Treasury and Federal Reserve staff have decided that such federal government-provided insurance is indeed something we want to try to work toward as part of our financial system after the crisis is over--the "commitment fee" due in 2010 in the Fannie/Freddie nationalization makes no sense otherwise, for it is such a fee for the insurance on mortgages and mortgage-backed securities that Fannie/Freddie have gotten for free in the past but that Treasury wants to charge them for and also offer to others staring in 2010. But my belief is that Treasury and Federal Reserve staff have also judged that it won't work well enough to be a useful tool in handling the current crisis for speed-of-implementation reasons: we need to move to asset purchases--that banks need liquidity now, and we need functioning markets where securities are priced now, and you can buy assets a lot faster than you can set up insurance schemes.

Confronted with these two sets of opinions--a single unstaffed guy who is an expert in rounding up and feeding Republican House members on the one hand, and the Treasury Secretary, Federal Reserve Chair, and their staffs on the other, Karen Tumulty says "I don't know who is right here" because "I'm not any kind of an expert on this stuff."

So why doesn't she give her space at Time to somebody who is an expert, and does know who is right here? This is he said-she said journalism as self-parody.

Why oh why can't we have a better press corps?

Very Large Financial Operations

The Paulson plan as a carry trade play. John Berry: Opinion: There might be a gem in the Treasury's plan to buy $700 billion of dubious mortgage-related assets. Call it the biggest carry trade in history. It might just put as much as $60 billion a year in the government's coffers.... The government will get the $700 billion by selling a range of Treasury securities to the public with yields of 3 percent to 4 percent. With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields. Contrast that with likely yields on the troubled assets for which there currently is no market. No one can be sure how big a haircut there will be on the assets Treasury buys, though if it's 50 percent or more, their yields should be 10 percent or higher.

That is, the government will be borrowing at 3 percent to 4 percent to buy assets yielding 10 percent or even 12 percent. Conservatively, that spread on an investment of $700 billion should generate income of $40 billion to $60 billion annually. Obviously, there's no way to be sure of the income from this carry trade.... We can be certain that the spread is going to be very wide.... The income from the carry trade will make a big difference on the impact of the bailout on the federal budget....

Do the arithmetic. Suppose the government buys $700 billion worth of assets after a 50 percent haircut, holds them for four years and then sells them for 40 percent of par. That would be a capital loss of $140 billion. Meanwhile, the carry trade has earned perhaps $50 billion a year, or $200 billion over the four years -- an overall profit of $60 billion -- and lower budget deficits. Remember, there are no taxes affecting this deal.... [T]he risk to taxpayers is much less than you might think based on the congressional debate over the plan offered by Treasury Secretary Henry Paulson...

John McCain: Dishonest and Dishonorable

Hoisted from Comments: The best comment on John McCain's campaign suspension that I have seen:

Neal: It's a tough job being a windsock in a tornado.

Secretary Paulson, the leaders of both houses, the chairs and ranking members of the relevant committess--all were on the same page and working toward a financial deal that Paulson and Bernanke, solid Republicans, say is needed now.

John McCain announces he is suspending his campaign, cancels on David Letterman, gets made-up for and does an interview with Katie Couric, goes and talks to the Clinton Global Initiatiive the following day, persuades Bush to call a meeting at the White House, gets to Washington DC in the afternoon, goes and talks to the House Republicans, goes to the meeting, sits in the back of the meeting and is evasive, and when the meeting breaks up, three things are clear:

  • John McCain won't say what financial rescue packages he supports or opposes.
  • George W. Bush won't say that support for Paulson is a test of Republican loyalty.
  • The House Republican caucus doesn't support their leaders.
  • The House Republican caucus doesn't have an alternative plan.

That's quite an accomplishment. It is hard to read it any other way than as John McCain rallying the House Republicans to blow up the bipartisan agreement that was being negotiated. The House Republicans don't want to do anything to hold CEOs accountable, to protect taxpayers, protect homeowners, or provide oversight. The Treasury rejected the not-quite-ideas they put forward at the White House meeting last week.

John McCain and the House Republicans blew up the deal because he doesn't want to debate Barack Obama tonight, and thinks that this is a way he can get out of having to do so.

We'll see if it can be put back together.

House Republicans: "Let the Markets Crash"

In my inbox:

I just wanted to make sure people saw this little gem from Politico:

According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout.

For the sake of the altar of the free market system, do you accept a Great Depression?” the member asked.


As I say, the sooner the Republican Party is shut down and replaced, the better.

How to Think About Paulson

To get get a $500B macroeconomic gain in production and employment, Paulson wants to take on a position with an expected value of -$100B. But the true value of that position could be anywhere between +$200B and -$400B. Looks like a good bet to me.

John Scalzi on John McCain, Candidate for President of WTFistan

Scalzi is bemused:

Whatever » John McCain, Candidate for President of WTFistan: Honestly, I no longer know what to make of John McCain anymore. A man who has readily admitted he doesn’t know much about the economy makes a big show of bringing his presidential campaign to a grinding halt to rush to Washington to fix it, which seems a bit like a NASA auto pool mechanic declaring to all and sundry that he’s going to stop making oil changes to rush to Florida to consult on the Shuttle.... I don’t mind that McCain is suddenly very actively concerned about the fundamentals of our economy; it’s a nice change from the previous week. But I wish that this sudden, overwhelming concern wasn’t such a transparent attempt to continue to McCain presidential strategy of attempting to win the White House without being required to articulate coherently to the public or the press why he’s presidential material.... He isn’t rushing to Washington to help, he’s running away from everything else. He is the Sir Robin of 2008 presidential election. Soon they will have to eat the flacks. And there will be much rejoicing...

Justin Fox on the House Republican Alternative to Paulson-Dodd-Frank

He writes:

Curious Capitalist: [The plan] of the House Republican Study Committee seems to be a joke. It calls for a two-year suspension of the capital gains tax to "encourag[e] corporations to sell unwanted assets." But the toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn't be able use the losses to offset capital gains elsewhere. Seriously, where do these people come up with this stuff?...

Put Me In, Coach! Put Me In!!

There is a certain second-string high school basketball game flavor to all of this.

In my inbox:

Professor DeLong –

On Thursday, October 16th our Commonwealth Club office in Silicon Valley is hosting a public forum to discuss the economic plans of Senator Obama and Senator McCain. We have confirmed Dr. John Taylor from the Hoover Institute and Dr. Laura Tyson from UC Berkeley but unfortunately Dr. Tyson’s office informed us last week that due to a change in her schedule she is unable to participate and recommended that we contact you regarding your availability.

This would be for an hour long program and Q & A (7:00-8:00 p.m.) here in San Jose at the Le Petit Trianon (72 N. Fifth Street) that would be recorded for radio broadcast. Our programs run regularly on Friday evenings on KQED FM.

I look forward to hearing from you regarding your availability...

No More WaMu Spam!

No more Washington Mutual:

WaMu Fails, Is Sold Off to J.P. Morgan: Biggest Banking Collapse in U.S. History; Government Arranges a Deal to Safeguard Huge Thrift's Deposits, Branches: Robin Sidel, David Enrich, and Dan Fitzpatrick:

In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.

The closing represents the demise of what once was the largest U.S. thrift but came to symbolize many of the worst excesses of the mortgage boom. Federal regulators said WaMu has suffered an exodus of $16.7 billion in deposits since Sept. 15, leaving the Seattle thrift "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the Office of Thrift Supervision.

While the exact structure of the transaction wasn't immediately known, J.P. Morgan is expected to acquire Washington Mutual's deposits and branches, as well as other operations. The deal isn't expected to result in any hit to the Federal Deposit Insurance Corp.'s bank-insurance fund, according to a person familiar with the arrangement. Some analysts have worried that a WaMu failure could cost more than $20 billion.... J.P. Morgan, which has long coveted WaMu as a way to secure a footprint on the West Coast, will assume most of the thrift's deposits and branches, as well as some other operations. Unlike many of the 12 bank failures that the FDIC has overseen this year, the J.P. Morgan-WaMu transaction isn't expected to impact the agency's national deposit-insurance fund. It wasn't immediately clear how the transaction would be structured to avoid the insurance fund taking a hit.

With mortgage losses mounting, and its stock price plunging, WaMu has been scrambling over the past month to find a solution; last week it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo & Co. and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal, but that was viewed as a last-ditch effort. Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday. J.P. Morgan's takeover of WaMu's deposits represents a huge blow for private-equity firm TPG, which led a $7 billion investment into the thrift this spring. The transaction is expected to wipe out WaMu stockholders and holders of the company's senior debt, one person said. A key unknown: the fate of WaMu's bad assets, which include mortgage loans that have soured as housing markets tanked.

Arranging the deal in a way that doesn't cost the FDIC's deposit insurance fund any money would be an achievement for Chairman Sheila Bair, who has had a hawkish view about the state of many financial institutions. Federal regulators faced criticism from many after the July failure of IndyMac Bank, which the FDIC estimated might have cost the deposit insurance fund close to $9 billion. This is the second time the government has gone to J.P. Morgan as a buyer of last resort. In March, the government agreed to backstop J.P. Morgan's takeover of Bear Stearns...

John McCain Undermines Henry Paulson

George Stephanopoulos:

Political Radar: Treasury Secretary Henry Paulson fears the Wall Street bailout deal is falling apart after a chaotic White House meeting, sources say. Paulson walked into the room where Democrats were caucusing after today's meeting at the White House and pleaded with them, "Please don't blow this up."

Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee was livid saying, "Don't say that to us after all we've been through!"

Speaker Nancy Pelosi said, "We're not the ones trying to blow this up; it's the House Republicans."

"I know, I know," Paulson replied...

David Rogers:

Wild White House meeting sets back deal: The whole sequence of events confirmed Treasury’s fears about the decision by Bush, at the urging of McCain, to allow presidential politics into what were already difficult negotiations.... Paulson was left feeling bruised on two fronts.... “McCain and the House Republicans are undercutting the Paulson plan, talking about a wholly different approach.”... “Nancy is not going to pass a bill with Republicans having an excuse to vote against it,” Barney Frank said.... Democratic leaders have warned that they will want at least a healthy Republican showing of 80 to 100 votes if they are going to ask their members to vote with the president....

“We think we have fundamental agreement on a set of principles,” said Senate Banking Committee Chairman Chris Dodd (D-Conn.). “We’re very confident we can act expeditiously, and we’ve done a good job arriving at that kind of consensus.” Those principles will include improved oversight of the program, as well as a plan to phase in the $700 billion investment in stages, while still assuring the administration a virtual free hand for at least the first $350 billion. There is a greater emphasis on efforts not just to relieve Wall Street firms of their bad debts but also to help homeowners... limit pay and severance packages for their executives.... Prior to the White House meeting, Sen. Bob Bennett (R-Utah) predicted legislation could be finalized in time for Congress to act this weekend...

When this is over, I want an endorsement of Obama by Paulson--and all the other Republican ex-Treasury Secretaries: Snow, O'Neill, Brady, Baker, Shultz--Simon, Connally, Kennedy, and Anderson will be hard to get on the phone, but I want them too.

DeLong Smackdown Watch (Special Self-Smackdown Edition): Greenspanism and Its Discontents

For a decade now, I have been a follower of Greenspanism[1]--the doctrine that I name after former Fed Chair Alan Greenspan that the constraint on expansionary monetary policy is inflation and inflation alone. The idea is that the first priority of the central bank is to maintain low consumer price inflation, and that the second priority is--given low current and forecast consumer price inflation--to maintain maximum employment and purchasing power--and the third priority of the central bank is that there is no other third priority.

Opposing Greenspanism is what I call Mussaism[2]. Mussaism--the doctrine I name after former IMF Chief Economist Michael Mussa--holds that there are two constraints on central bank activity. The central bank must insure:

  1. No large asset bubbles.
  2. Consumer price stability.

Only after it has successfully achieved these two higher priorities can it then even begin to worry about:

(3) Maximum employment and purchasing power.

The Greenspanist retort to the Mussaites--a retort I would have said I believed 100% a year and a half ago, 90% a year ago, and 60% last March--is that creating unemployment and idle factories because you are scared of what might happen when irrational exuberance dies away and asset prices collapse is a crime; that modern central banks are powerful; that they can successfully manage whatever crisis is provoked when it happens; and that it is easier to sweep after the elephants have gone through than to try to stop them--especially when stopping them requires the destruction of millions of jobs.

I don't see how I can maintain my belief in Greenspanism today[3].

Therefore I abjure, I recant, and I do penance. I transfer my allegiance and fealty to Michael Mussa, who is my new guru.

[1] Greenspan

Alan Greenspan: Perhaps the greatest irony of the past decade is that... success against inflation... contributed to the stock price bubble .... Fed policymakers were confronted with forces that none of us had previously encountered. Aside from the then-recent experience of Japan, only remote historical episodes gave us clues to the appropriate stance for policy under such conditions. The sharp rise in stock prices and their subsequent fall were, thus, an especial challenge to the Federal Reserve. It is far from obvious that bubbles, even if identified early, can be preempted at lower cost than a substantial economic contraction and possible financial destabilization--the very outcomes we would be seeking to avoid.... The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble while preserving economic stability is almost surely an illusion.

Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose, as we noted in our mid-1999 congressional testimony, to focus on policies "to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion."

During 2001, in the aftermath of the bursting of the bubble and the acts of terrorism in September 2001, the federal funds rate was lowered 4-3/4 percentage points. Subsequently, another 75 basis points were pared, bringing the rate by June 2003 to its current 1 percent, the lowest level in 45 years. We were able to be unusually aggressive in the initial stages of the recession of 2001 because both inflation and inflation expectations were low and stable. We thought we needed to be, and could be, forceful in 2002 and 2003 as well because, with demand weak, inflation risks had become two-sided for the first time in forty years.

There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences rather than the bubble itself has been successful. Despite the stock market plunge, terrorist attacks, corporate scandals, and wars in Afghanistan and Iraq, we experienced an exceptionally mild recession--even milder than that of a decade earlier. As I discuss later, much of the ability of the U.S. economy to absorb these sequences of shocks resulted from notably improved structural flexibility. But highly aggressive monetary ease was doubtless also a significant contributor to stability...

[2] Consider this passage from Mussa (2004), "Global Economic Prospects: Bright for 2004 but with Questions Thereafter" (Washington: Institute for International Economics: April 1), in which Michael Mussa writes about the then-global financial imbalances:

Michael Mussa: ... Policy interest rates are exceptionally low in most industrial countries: zero in Japan and Switzerland, 1 percent in the United States, 2 percent in the euro area, and at or near historic lows in the United Kingdom and Canada.... The very low level of policy interest rates is an imbalance (relative to normal conditions) that reflects exceptionally easy monetary policies to combat economic weakness. This policy imbalance poses an important challenge for the future conduct of monetary policy.... [T]hese situations tend to be associated with high valuations of equities, real estate, and long-term bonds, which can become fertile ground for large, unsustainable increases in asset prices.... [I]f monetary policy remains too easy for too long (perhaps because subdued general price inflation gives no clear signal of the need for monetary tightening), then large asset price anomalies may develop before corrective action is taken. The monetary authority would then confront the grim choice of trying to keep an unsustainable asset price bubble alive or trying to combat the collapse of such a bubble without a great deal of room for monetary easing...

[3] The only shred of pride in my intellect and foresight I can take in all this is my Brookings paper that warns how collapsing bubbles can produce really serious problems--how central banks need to fear asset price deflation as much as any other kind of deflation. But back then when I wrote this I was confident that they could manage it. Now I am not:

Read this document on Scribd: DeLong: Should We Fear Deflation?

Intellectual Garbage Collection (Yet Another Kevin Hassett Edition: "Dishonest and Purposefully Misleading")

Ah. I see that Kevin Hassett continues to be full of s--- that is politically convenient for the Republican Party.

Larry Tate deals with the manure pile so the rest of us don't have to:

I Hate What You Just Said: Kevin Hassett... entitled “How the Democrats Created the Financial Crisis.”... The title tells you all you need to know.... When something goes wrong, don’t think — just point your finger at the appropriate evildoer, be he terrorist or Democrat... in Kevin’s own words:

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing. But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years. Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.... There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Yes, pretty clear to the manichean brain.

I. Step One: Consider the source.... AEI... Dow 36,000.... Hassett works on the McCain campaign with people like Aquiles Suarez... director... lobbyist for Fannie Mae? Or Charlie Black... lobbyist for Freddy Mac between 1999 and 2004?... McCain’s campaign manager, Rick Davis, a “former” Freddie Mac lobbyist who was yesterday revealed to still be on the payroll for Freddie Mac to the tune of $15,000 a month?... 19 people who are former lobbyists for Fannie or Freddie now working for the McCain campaign.... Either he’s a scruple-free mercenary or he’s trying to manipulate us. Or maybe both...

II. Step two: Examine the evidence.... I found the data table that Hassett used for his argument.

I Hate What You Just Said » Blog Archive » Democrats to Blame for Economic Crisis

And, as you might guess, Hassett does not seem to be a fair dealer....

A PAC... is a group specifically organized by a corporation or private group.... The Individual category denotes political donations made by private individuals who just happen to have jobs... employees of Fannie and Freddie... the PAC only gave Obama $6,000, Clinton $8,000, and Dodd $48,500 over a nineteen year period spanning the years 1989-2008. Not very impressive figures [compared to the amounts for Republicans: $79K for Blunt, $71K for Bennett, $70K for Bachus, $64K for Bond, $61K for Boehner, and here we get our first Democrat--$61K for Reid]....

While Hassett doesn’t say anything that is an outright lie, he is dishonest and purposefully misleading....

Hassett also claims that in 2005, John McCain co-sponsored a bill... intends us to understand that the campaign donation monies from Fannie and Freddie were used to influence these key Democrats to “kill the fix” (i.e. McCain’s bill)....

[T]he McCain-sponsored bill mentioned in the article didn’t make it out of the Banking, Housing, and Urban Affairs committee.... Hassett’s claim about Democrats “killing” the bill by a vote is false.... Obama and Clinton aren’t even on that committee.... [I]n 2005, the Republicans... did whatever they wanted within the committees.... Why didn’t the Republicans just force it through? They could have given this issue the Terry Schiavo treatment.... Hassett’s basis for claiming that the Democrats are at fault because they blocked this bill is utterly false...

A Deal on the Mortgage-Asset Meltdown Package?

Phil Izzo:

Congressional Republicans and Democrats came to an agreement on principles for the Treasury’s Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections taxpayer protections, oversight and transparency, homeownership preservation and funding authority:

Agreement on Principles

  1. Taxpayer Protection

    1. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies
    2. To minimize risk to the American taxpayer, requires that any transaction include equity sharing
    3. Requires most profits to be used to reduce the national debt
  2. Oversight and Transparency

    1. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law
    2. Establishes strong oversight board with cease and desist authority
    3. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority
  3. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority

    1. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse
  4. Homeownership Preservation

    1. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure
    2. Requires loan modifications for mortgages owned or controlled by the Federal Government
    3. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs
  5. Funding Authority

    1. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
    2. Final $350 billion is subject to a Congressional joint resolution of disapproval

Republican Talking Point Smackdown

Ken Houghton directs us to Greg Farrell reporting on the views of former House Republican Financial Services Chair Mike Oxley. Oxley says that the failure of the 2005 GSE reform bill to emerge from the Senate committee was not--as Republican hacks and shills maintain--the fault of Barack Obama, Hillary Clinton, and Chris Dodd, but of George W. Bush and Alan Greenspan:

Oxley hits back at ideologues: In the aftermath of the US Treasury’s decision to seize control of Fannie Mae and Freddie Mac, critics have hit at lax oversight of the mortgage companies. The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system. Mike Oxley will have none of it. Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq. He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.” The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration. Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all.

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says.

A Bad Move from the New York Times...

It adds a senior fellow from the NCPA to its list of economics bloggers:

Welcoming Another Economist to Economix: CATHERINE RAMPELL: You’ll see a post here from Bob McTeer, who is on our panel of daily economists. Mr. McTeer is currently a distinguished fellow at the National Center for Policy Analysis...

NCPA is the Hack Tank that fired Bruce Bartlett for writing what he thought about George W. Bush.

Bob McTeer should get a different institutional home--he deserves a better.

And the New York Times should be aware that its only long-run value is as a trusted intermediary, and that association with Hack Tanks destroys its only possible long-term source of value.

Why oh why can't we have a better press corps?

Richard Green Smacks Down the John McCain-George Bush Claim That Big Government--Fannie and Freddie Got Us into This Mess

He writes, and deploys a graph:

Richard's Real Estate and Urban Economics Blog: Charles Calomiris and Peter Wallison blame Fannie Mae for the Subprime Mess: Hmmmm. The loan performance on Fannie's book of business is substantially better than the overall mortgage market. And starting in 2002, Fannie Freddie (pink line) lost market share to ABS (light blue line).

MDO_By_Holder(1)(1).jpg (image)

The data underlying the graph is from the Federal Reserve, Table 1173. Mortgage Debt Outstanding by Type of Property and Holder.

I agree. Fannie and Freddie did bad things and followed the market down in lending standards--calling a mortgage "conforming" if it had a 5% downpayment and a 15% mortgage-insurance policy purchased from a fly-by-night or AIG--but they did not lead the market down--it was Wall Street securitizers and their partners who did that.

The Real Side of the Economy Is Not Doing So Well

Worst Day's News in Quite a While:

Initial jobless claims soar: David Goldman, staff writer: Initial filings for state jobless benefits increased by a seasonally adjusted 32,000 to 493,000 in the third week of September... the highest number of weekly claims since Sept. 29, 2001, when unemployment soared in the wake of the Sept. 11 terrorist attacks. The consensus estimate of economists surveyed by [had been] 450,000.

"The labor market is very weak," said Mark Vitner, an economist for Wachovia. "Layoffs have ticked up for the last two months, and there has been a slowdown in hiring, so we haven't been able to absorb new entrants into the workforce." The Labor Department said about 50,000 of the new claims were due to the effects of Hurricanes Gustav and Ike...


Orders for durable goods fell 4.5 percent, to $208.5 billion, the Commerce Department said on Thursday, a $9.9 billion decline... orders for civilian capital goods outside of aircraft, fell 2 percent.... The biggest declines came among factory goods like metals and heavy machinery. Equipment used for transportation, down two of the last three months, declined 8.9 percent, and motor vehicle orders dipped 8.1 percent. Civilian aircraft orders lost 38.1 percent....

Sales of newly built homes fell 11.5 percent in August, far more than economists had expected, to an annual pace of 460,000. That marked the lowest level since the middle of the last housing recession, in January 1991.

How Did We Get Here?

On Wed, Sep 24, 2008 at 8:34 PM, XXX wrote:

I would love it if you would post a big post mortem on exactly how we got here...

I'm working on one.

Meanwhile, here is a morsel:

Well, because the investors and creditors did not do their due diligence and check that the banks that were the ultimate holders of derivative securities had done their due diligence and checked that the financiers who had created the derivatives had done their due diligence and checked that the purchasers of the securities had done their due diligence and checked that securitizers had done their due diligence and checked that the lenders had done their due diligence and checked that the home buyers had done their due diligence and checked that they could afford their mortgages if house prices stopped going up.

Catastrophic failures of risk management at seven different points along the chain--any one of which would have kept us out of this current mess.

Politico Death Spiral Watch

Ezra Klein asks: "Why oh Why Can't We Have a Better Press Corps?":

Ezra Klein: Why do John Harris and Jim Vandehei keep doing this?

Media madness. Reporters complain about the lack of spontaneity in politics. Then we punish spontaneity by ensuring that any impolitic comment gets played and replayed, often simplified and distorted in each replaying—usually accompanied with disapproving analysis about a candidate’s lack of discipline and inability to stay on message. The lack of press access to both candidates this fall is frustrating. But the truth is McCain would be foolish to indulge in the kind of free-flowing, free-associating conversations that won such notice in 2000. Obama’s natural instincts are to tightly control his image and words, which works nicely in this media environment.

An unscripted campaign would be more interesting and more useful to voters, but it would require two unlikely ingredients: Candidates self-confident enough to throw out the script, and a news media that would devote as much attention to ideas as to gaffes.

Every couple of months, they come out with a new op-ed that lambastes the media's role in cheapening our democracy and creating a substanceless, horserace-obsessed politics. Then, in the interim, they run a major political publication whose latest innovation is crowning a daily winner of the day's news cycle. Either they should become that "news media that would devote as much attention to ideas as to gaffes" or they should admit that it's impossible and quit their jobs in a very public protest. But to keep writing op-eds pointing out the harm their industry, and their publication, does to American politics is extremely weird...

The Anonymous Liberal Is Smart

Anonymous Liberal writes:

The Anonymous Liberal: Was McCain's Stunt an Attempt at Palin Damage Control?: The more I look at what happened today, the more I think it was all an elaborate attempt to stem the fallout from the truly disastrous interview Sarah Palin taped this morning with Katie Couric.... Palin did two things that hurt the McCain campaign... she all but stated that if no bailout legislation is passed, we'll be headed into the next Great Depression.... [That] all but foreclosed any possibility of McCain voting against the bailout. Then she was asked a crucially important question about McCain's record on banking regulation, something she should have been prepped for:

For those of you who can't view videos, here's the exchange:

COURIC: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.

PALIN: He's also known as the maverick, though. Taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about — the need to reform government.

COURIC: I'm just going to ask you one more time, not to belabor the point. Specific examples in his 26 years of pushing for more regulation?

PALIN: I'll try to find you some, and I'll bring them to you.

That is not a good soundbite. Not only does it confirm that Palin is in way over her head, but every time the clip is played, viewers get to hear Couric point out that McCain has a 26 year record of not favoring regulations....

I'm pretty confident that if McCain hadn't engaged in his late afternoon theatrics, those two Palin clips would have been in heavy circulation tonight and tomorrow, especially in light of the mini-press corps revolt that everyone was talking about yesterday. I think the McCain campaign knew the Couric interview would be a disaster as soon as it was done taping and spent much of the day frantically trying to think of a way to push it out of the headlines. The clincher for me is the fact that McCain cancelled his Letterman appearance at the last second and instead sat down for an impromptu interview with, of all people, Katie Couric. The hope was to bump the Palin interview even on the CBS Evening News, which otherwise would have hyped and teased the Palin interview all afternoon and used it to lead the broadcast. Instead, CBS devoted most of its coverage to McCain and played segments of the Palin interview almost as an afterthought. Mission accomplished.

Now the McCain campaign is trying to reschedule the Vice Presidential debate.... [I]t wouldn't shock me if they tried to cancel it all together or at least move it to a date where it can only dominate one or two new cycles....

Palin's favorability ratings have been sinking rapidly over the last two weeks and she is increasingly becoming a liability to McCain among independent voters. I think the campaign was worried that her performance today--if the media chose to dwell on it--could have done real lasting harm to McCain. And so they came up with this stunt, this idea of McCain "suspending" his candidacy, as a distraction...

UPDATE: Okay, here's the full segment. It's cringe-inducing throughout. As you're watching it, try to picture McCain's aides standing in the background panicking.

John McCain Is Dishonest, Dishonorable, and Incompetent

The "Paulson Plan" is two pages long. It was issued on Saturday. As of late Tuesday, McCain had neither read it nor been briefed on what was in those two pages.

In my email this morning:

John McCain on Tuesday, Sept. 23rd in Cleveland Ohio says he hasn't read the Paulson plan NBC Cleveland OH, 09/23/08:

ANCHOR: As for the massive Wall Street bailout McCain insists it have...

JSM: Oversight that is effective and transparent. We need people like Warren Buffet and Mike Bloomberg and Mitt Romney to have an oversight of this. We can't put that responsibility in the hands of one person.

ANCHOR: The crunch question. Would you vote for it as it's presently constructed?

JSM: I have not had a chance to see it in writing so I have to examine that...

UPDATE: Michael Tomasky smacks me down, says it is perfectly understandable:

I mean, it was three pages after all. He is just waiting for the large-print version.

Assumptions and Approximations

From Matt Springer:

Built on Facts : Physics from All Around: Via Swans on Tea, we have Assume a Spherical Physicist from the excellent blog The First Excited State. There's an exploration of several approximations, including how N + 1 = N is for all purposes true in percentage terms for very large N. But how about this one, mentioned in my undergrad thermodynamics textbook (Schroeder, if you're curious)?

(10^23)N = N

You don't believe me, but it's in some respects true for very large N.... Yeah, the approximation is inaccurate by a factor of Avogadro's number. But in lots of thermodynamics calculations that's a trivial error...

Financial Deregulation and Republicans

Outsourced to Robert Waldmann:

Robert's Stochastic thoughts: Kid Bitzer commenting over at Edge of the West reminds me that it is time to republish this photo:

Robert's Stochastic thoughts

To which the one and only Paul Krugman linked

Actually, there was plenty of coordination — a coordinated effort to destroy effective regulation:

Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

The lack of oversight, in short, was no oversight: it was part of the plan.

and that was to the black and white version.

Senator Durbin on John McCain

Durbin is amazed:

Last week, Senator John McCain declared the fundamentals of our economy 'strong.' Today he says the situation is so dire he needs to suspend his campaign and delay a scheduled Presidential debate so he can devote his full attention to the problem.

With polls showing his campaign is at its weakest, Senator McCain's decision may have less to do with the drop in the Dow Jones average and more to do with a decline in the Gallup poll.

It's not economic leadership that Senator McCain would bring to these negotiations; it's presidential politics – which is the last thing we need if we really want to solve the serious problems our nation faces.

John McCain: A Soap Opera *and* a Clown Show

Isn't this carrying scared-to-debate a little too far?

Reuters: Breaking News: McCain says will suspend campaign to return to Washington Thursday to help with bailout negotiations, asks that Friday debate with Obama be postponed so bailout negotiations can continue 2:51pm EDT

UPDATE: No I'm Not in the Stanford SIEPR Associates Obama vs. McCain Debate Tonight...

CLARIFICATION: I'm not debating Kevin at 5, but Peter Henry is...

As I understand it, originally Douglas Holtz-Eakin was supposed to debate Austan Goolsbee. Then Doug dropped out (I am not sure whether the statement that he had to go brief Sarah Palin was a joke or not). Kevin Hassett replaced him. Then Austan dropped out. And I replaced Austan.

Then Kevin said that he wouldn't come out of his hotel room if I were in the building.

I think this is a substantial mistake on Kevin's part.

(A) The topic is not his 1999 book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market. The topic is Obama vs. McCain in the presidential election.

(B) Even if the topic were his 1999 book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market, every time he hides from critics he does himself damage. If he still thinks that his late-1999 forecast that the Dow was about to triple in the next three-to-five years, he should defend it as the best forecast that could have been made at the time--and tell us why it did not come true. If he thinks that his late-1999 forecast that the Dow was about to triple in the next three-to-five years was not a good forecast then, he should recant. But hiding is never good.

And now that the issue is on the table again...

To be brief, the problems with Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market were:

  • Hassett got the math of the Gordon equation for valuing the stock market simply wrong. It's not the earnings yield that shows up in the numerator, it's the dividend yield. The book should have been called Dow 22000.

  • Hassett got the math of the equity premium wrong. The weighted average of the returns on bonds and stocks is the return on capital. The equity premium is a wedge between the rate of return on stocks and the rate of return on bonds. If the equity premium falls, the rate of return on stocks falls and the rate of return on bonds rises. Hassett calculated the effect of a fall in the equity premium by fixing the rate of return on bonds. The book should have been called Dow 15000.

  • The argument that the equity premium ought to go away is one you can make. The argument that the equity premium will go away in the next three to five years drastically understates uncertainty.

  • To argue toward the end stages of a bubble--when all standard indicators of fundamentals are blinking red and forecasting five-year equity returns of zero or less--that your readers should double up on their stock portfolios to "take advantage of the coming rise in the stock market" does not strike me as what my nursury school teacher used to call "playing well with others." It's kind of like treating your readers the way John-John Crummell treated the guests at my fifth birthday party when he lit the tablecloth on fire.

This does have a bearing on the presidential election. John McCain is holding himself out as the scourge of Wall Street. He is doing so while standing beside Ms. Carly "Golden Parachute" Fiorina and while sending out Mr. Kevin "Bubbles" Hassett as an advisor-surrogate. Something is wrong with this picture.

And with this picture


And now let's turn the mike over to Kevin Hassett, from his Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market:

The Dow should [i.e., ought logically to] rise to 36000 immediately [that is, in October, 1999]...

[We] believe the rise will take some time, perhaps three to five years...

[S]eize the opportunity now [i.e., in late 1999] to profit from the rise in the Dow to 36000...

[W]e aren't laughing. The case is compelling.... 36000 is a fair value for the Dow today... stocks should rise to such heights very quickly. As you read on, you will... learn to invest in ways that take advantage of a remarkable time in financial history..."

Obama vs. McCain: Opening Statement: UCLA Anderson Forecast Conference/Stanford SIEPR Conference

September 24, 2008; as prepared for delivery

UCLA Anderson Forecast Conference (10:30 AM)/Stanford SIEPR Conference (5:00 PM)

Back in the 1980s, I hoped that I would be here today--in places like this, giving my views of the relative merits of presidential candidates--and I was certain I would be a member of the sensible bipartisan center. I would dislike the Republicans for their addiction to tilting the distribution of income in favor of the already well-off and for their lack of concern about true equality of opportunity. I would dislike the Democrats because of their false confidence in the power of administrative solutions to rule processes for which gardening would be a much better metaphor and for what appeared to be excessive fear of competition from foreign workers. I would be willing to cross the aisle if one party managed to successfully damp down its worst instincts while the other did not. But I thought that most of the time I would be pretty balanced as far as economic policy was concerned--part of the sensible, bipartisan center. And I thought that most of the time my vote would be decided by three other considerations, all of which weighed against the Republicans:

  1. Republican foreign policy was horrible: a lack of confidence in our own soft power, a lack of understanding that we are strongest when we are and are seen to be the good guys, and an addiction to the rhetoric of "rollback" intended for domestic consumption only--as the Hungarians found out in 1956, and the Georgians are finding out right now.

  2. Richard Nixon: A party that can choose Richard Nixon to be its leader for a generation must be punished at the polls. By voting against a party that chooses Richard Nixon as its leader I am the agent of a Just God.

  3. Lyndon Johnson: Lyndon Johnson's decision to try to honor the check that America wrote its African-American citizens in the Declaration of Independence was a brave and noble act. By neutralizing the vote of one of the people who votes against the Democrats because Lyndon Johnson tried to honor that check, I am the agent of a Just God.

I believe all three of these reasons apply with at least as great force now as they have in the past--one and three apply, I think, with greater force.

I started out, as I said, a member of the sensible bipartisan center, my presidential vote gettable by either party if it adopted sensible economic policies. Yet each time since the mid-1980s I have filled in the oval by the Democrat's name, and now I find it almost inconceivable that I would vote for a Republican.

I remember back in 1988, listening to George H.W. Bush address the Republican National Convention while seated next to a Republican subcabinet-rank class official, and hearing him utter a "barnyard epithet" when George H.W. Bush recited Peggy Noonan's line "read my lips, no new taxes." George H.W. Bush promised no new taxes and promised a balanced budget through cutting waste, fraud, and abuse. He delivered neither.

I remember back in 1992, watching George H.W. Bush denounce his own economic policy team--Richard Darman and Michael Boskin--and promise to fire them if he won reelection, and I thought: "this can't be real." It was. I voted against George H.W. Bush. And things got a lot better, policywise.

Back in 1996 was the first time I was on a stage like this, debating Jim Miller, former OMB head and a true believer in the suppliest of supply-side doctrines. He promised the audience that the Clinton tax increases of 1993 were crushing the economy like an egg, and that if Clinton was reelected 1997-2000 would see slow growth, recession, and higher unemployment. He was wrong.

Back in 2000 I debated Mike Boskin at Stanford's SIEPR. I remember saying that George W. Bush's team was telling people about their tax cuts assuming that the AMT would be amended in order not to snarf them back and that George W. Bush's team was costing out its tax cuts assuming that the AMT stayed fixed in nominal terms. I said that either (a) 3/4 of the tax cuts promised would not be delivered, or (b) the Bush tax cuts would be vastly more expensive than the Bushies were saying and might well destabilize our fiscal situation once again, casually and criminally undoing the hard work of sensible centrists who loved their country during the Clinton administration. Mike Boskin said I was wrong. I was right.

Back in 2004 I was all set to debate Dick Schmalensee at UCSD, when he stood up at the start and said that he couldn't stomach what the Bushies had done on economic policy and would vote for Kerry. We had a fine time.

There is definitely a history here.

Now it's 2008. I don't expect my interlocutor to have the cojones, the wisdom, and the courage of Dick Schmalensee and announce that in his view you should vote for Barack Obama. I think he should tell you that. I think he should tell you to vote against the Republican. What reason could there be not to vote against a candidate who says he doesn't know very much about economics? Not to vote against a candidate whose two chief economic advisors are Phil "What Problems with Deregulation, You Whiners?" Gramm and Carly "H-P Paid Me $21 Million to Go Away" Fiorina. All signs are that McCain economic policy is set to be much worse than even George W. Bush policy--unless Douglas Holtz-Eakin could win the fight inside the White House snakepit. But I don't think he could: McCain regards Gramm and Fiorina--not Doug--as peers to be deferred to. I would be happy to be proven wrong if we take the gamble, but it's not a gamble I want us to take.

Just one more thing to takeaway about John McCain. John McCain once to (a) provide another big round of tax cuts, and (b) balance the budget, by (c) cutting earmarks. Here are the earmarks he wants to cut.


Enough said.

It is not just that economic policy under John McCain is likely to be ver bad, it is that economic policy under Barack Obama is likely to be quite good. Barack Obama shows every sign of continuing the moderate Democrat tradition of economic policy--working to reduce income disparities, enhance opportunity, restore fiscal balance, speed up productivity growth, try to fix our health care system, invest in America's future, and engage with the global economy. He is a very smart man with, I think, a very good team of advisors.

I have been trying to run the numbers. And what I get is that Barack Obama's health care plan, when phased in, is likely to:

  • Boost minimum-wage and near minimum-wage employment by $100,000 or so by reducing the health costs of those employers that do offer employment-sponsored insurance.
  • Shift 1 million workers who used to believe that they had to work 9-to-5 for a large bureaucratic entity in order to get health coverage for their families into jobs that they like more.
  • Shift 1,500,000 workers into higher-wage high-benefit jobs in the expanding capital-intensive industrial sector.
  • Boost wages by $1,500 a year for the average worker in the coverage-providing sector.

What I get is that Barack Obama's fiscal policy is likely to, by 2017:

  • Boost annual incomes by between $290 and $440 billion real 2009-value dollars.
  • That's some $1,800 to $2,700 per worker.
  • Boost sustainable employment by between 1,750,000 to 2,500,000 jobs.

On the financial panic, Barack Obama backs the Democratic approach of Chris Dodd and Barney Frank--the very smart and very competent chairs of he congressional committees--in stating that aid to support the financial sector has to be coupled with a piece of the upside action to protect the taxpayer, an analogous program to offer support to homeowners who are equally or more deserving of support, and steps to make sure that those responsible for the catastrophic failures of risk management we have seen do not profit.

What I like most about the Democratic approach is how the monies paid out by the Treasury to financial businesses for the troubled assets it is taking off their hands change classification depending on what happens in the future. If in the future the Treasury is able to sell the assets for a good price, the monies paid by the Treasury were a purchase. If in the future the Treasury is not able to sell the troubled assets ever and must eat a large loss, the monies paid by the Treasury are deemed to have been an investment in the firm--and the government and the taxpayers own a pro-rata share of the firm, and get a pro-rata share of the dividends and the capital gains the firm earns in the future.

On the one had, we have a candidate unengaged with the economy as opposed to a candidate who is. A candidate who gets on the phone with Phil Gramm and Carly Fiorina--and who doesn't appear to know that Ms. Fiorina received one of those golden parachutes he is denouncing--as opposed to a candidate who listens to Austan Goolsbee, Bob Rubin, Larry Summers, Gene Sperling, and Laura Tyson. The choice seems obvious to me. I'm interested in why it doesn't seem obvious to Wolf/Hassett.

And I have talked long enough.

My Life Gets Crazy Crazier

Departing Oakland for Los Angeles. Debating Charles Wolf on Obsma bs. McCain tomorrow morning. Then flying back to San Jose tomorrow and debating Kevin Hassett on Obama vs. McCain tomorrow night at Stanford... I'll be exhausted.