The real cost of paying back the TARP

Reports have indicated that at least some financial institutions would like to repay the TARP money that they have received and unwind their financial relationship with the U.S. Government so that they can run their businesses free of government intervention. Specifically, these institutions want to buy back the warrants that give the government the right to buy shares of the company, which is a way to exercise at least some form of control over it.

The government has signaled that they will only allow the buy backs by institutions that it deems healthy enough to be free of government control. Some WI bloggers (and no doubt others around the county) have been alarmed by this prospect of a government refusal to sever their relationship with the financial institutions. They see this as a means of government control over private enterprise-something that it is, and that should give one pause. Perhaps though, there is another less nefarious and more economically sensible reason for the government's reluctance.

It is likely that the price at which the warrants get bought back will not represent the true value of those warrants given the current climate of taxpayer funded intervention to prevent the collapse of financial institutions.

That is to say, the government's recent actions have made it clear that they will not let major financial institutions go under. This is the case even at a potential cost to taxpayers in the trillions. These firms may not be backed by the full faith of the government, but they are certainly backed by its full credit. There is a value to this.

Shares of a firm that has access to a line of credit secured by the government, will be worth more than shares of a firm without such access, other things being equal. So a government guarantee funded by taxpayers will drive up share price. This is the case if the guarantee is either implicit or explicit and these days they are almost all explicit. It's the same old public risk/private gain that we have seen played out many times in the recent past.

The warrants that were part of the TARP deal give the government the option to buy shares of stock in a company at a predetermined price. The government could use these warrants to capture some of this taxpayer funded value in share price by waiting until the shares are worth more than the predetermined price in the warrants, it could then buy shares at the predetermined price, and then sell those shares at the current, higher price.

I am willing to bet that there are economists out there that could at least come close to determining the effect of government guarantees on the share price of financial firms. If so, this value could be used to more closely determine the real value of the government held warrants.

If such a scheme were attempted though, I predict that many pundits and politicians especially those enthralled by Wall St. (yes, they are still out there), would call this highway robbery. I would call it giving the taxpayer his due.
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Economics side note: If the government pursued this strategy would it be the opposite of regulatory capture? Would that be free market capture? Corporate capture? Is there a name for this?

Ron Paul takes on the Fed (again).

Rather than just tilt at the windmill that is the Fed, Representative Ron Paul has decided he might try a different tactic this year and attempt to see just what it is that goes on inside it. To that end, he has proposed The Federal Reserve Transparency Act of 2009 (H.R. 1207).

According to the OpenCongress Blog:

Far from ending the Fed, the bill calls for a full Government Accountability Office (GAO) audit of the central bank to be completed before the end of 2010 and submitted to Congress for review.

After his annual frontal assault attempting to destroy the Fed fails year after year, it appears Paul is now attempting his own form of institutional asymmetric warfare.

I have added the widget on the right where you can access the latest information on the bill as it makes its way through Congress.

The OpenCongress blog sums up nicely why this is so important:

In the past year or so, the Federal Reserve has given banks more than $2 trillion in loan guarantees in an attempt to forestall the economic crisis. But information on where all this money has gone and what kind of securities the Fed has accepted in exchange is unavailable. Since the Fed is a quasi-public institution, they aren’t obliged to tell us, even though they are pushing around public money. “The contrast is pretty clear,” says Sen. Bernard Sanders [I, VT], who is sponsoring the Senate version (S.604), “if you want to know who received the money under TARP, go to the website, it’s there. If you want to know who received the money from the Fed, it ain’t there.”

In the Politico, Ron Paul writes, “if this audit reveals what I suspect and Congress has finally had enough, it can also pass my legislation to abolish the Federal Reserve.” Whether you support ending the Fed, like Ron Paul, or fixing the Fed in order to restore the health of our financial system, finding out what the Fed is up to – and where they have been failing – is essential to moving forward. It may sound trite, but transparency is crucial for solving our economic crisis.

It was White House Chief of Staff Rahm Emanuel that advised not to let the current crisis go to waste. Who knew that Ron Paul would take this advice to heart.

TARP Panel to hold hearing in Milwaukee.

The Congressional Oversight Panel (that's the TARP watchdog headed by Elizabeth Warren) will be in Milwaukee tomorrow.

I hope there will be some WI bloggers there for a first hand report.

From the COP website:

COP Field Hearing on Small Business Lending in Milwaukee

April 28, 2009

COP is holding a hearing on Wednesday, April 29 at 10:00 am at the University of Wisconsin-Milwaukee Student Union. The hearing, “The Credit Crisis and Small Business Lending” examine credit markets for local small businesses, with a focus on the impact of the Troubled Asset Relief Program (TARP), on lending in Wisconsin. The Congressional Oversight Panel will hear testimony from Wisconsin business owners and representatives of regional banks.

The Panel chose Milwaukee as the site of the hearing because the region is particularly vulnerable to tighter credit restrictions on small businesses, and thus is an ideal location to determine what, if any, impact TARP has had to this point on the availability of credit. As a Midwestern manufacturing center, Milwaukee’s economy has struggled during the recent economic downturn. 112,000 jobs have been lost in Wisconsin during the last year, more than any year-to-year comparison since 1939. Unemployment reached 9.4 percent in Wisconsin in March, surpassing the national rate, and bankruptcies are up 35 percent.

What is the right age to marry?

A recent Washington Post op-ed argues against the current trend for Americans to marry later in life.

The argument for earlier marriage has generated no small amount of reaction. For some of these, visit The Other McCain, The American Scene, or TAS again. (For the record, I realize these links are all to posts by men. The Other McCain has some links to the feminist reaction if you really want to check that out as well.)

The op-ed aligns with my own pro-marriage views, so I think you should go read the whole thing for yourself. One point in the piece though, is worth emphasizing. It is one the author included, but didn't necessarily focus on:

Now we advise our children to complete their education before even contemplating marriage, to launch their careers and become financially independent. We caution that depending on another person is weak and fragile. We don't want them to rush into a relationship. We won't help you with college tuition anymore, we threaten. Don't repeat our mistakes, we warn.

Sara, a 19-year-old college student from Dallas, equated thinking about marrying her boyfriend with staging a rebellion. Her parents "want my full attention on grades and school because they want me to get a good job," she told me.

For the vast majority of middle class and upper middle class Americans, this represents the most damning case against early marriage, and yet for me it is the absolutely least convincing.

It boils down to, don't get married and have kids at 20 or 22 because they will be teenagers when you are only 33 or 35. You won't have hit your peak earning years yet and teenagers need braces, and name brand jeans, and a cell phone with unlimited everything - you don't want them to be socially handicapped do you? Oh and don't forget the trip to Mexico or Florida for those long mid-western winters, and a car, and you shouldn't make them work - their grades will suffer, then they won't get into a good school, then they won't earn a lot of money, then what will their kids do?

I can think of reasons to not get married at twenty, but not being able to buy the latest sneakers for your kids ain't one of them.

The Other McCain really unpacked the marriage issue in a recent post over at Hot Air in which he calls this aspiring middle class ethos idolatrous. (Warning: Radical ideas at the Hot Air link. Those invested in American cultural norms which elevate comfort and material prosperity above all else, pregnant women, and those with heart conditions should think twice before clicking.)

This is not to say that everyone should get married early. I mean, if 20 year old Suzi and Bobby get into a knock-down drag-out in the Burger King parking lot stemming from the fact that they wanted to split an order, because they thought it would be cute, but then couldn't decide between the chicken fries or the jalapeno poppers; the result of which is the police being summoned, reality TV crew in tow, and disorderly conduct citations being issued, then maybe these are not the type of 20-year-olds that are ready for marriage.

Matching court dates are not the basis for a long and happy marriage. But neither are his and hers SUV's with vanity plates that read "W8D2MRY."

Google changes logo for Samuel Morse birthday

Some of you may have noticed the revised google logo marking the birthday of Samuel Morse on April 27th. Morse is the inventor of the telegraph, for which he is well known. Lesser known are his anti-Catholic conspiracy theories.

He promulgated these in a book, published in 1835, in which he expounded his notion that the Austrian Empire was using Jesuit missionaries to subdue America and subject it to Austrian and Vatican rule.

Richard Hofstadter, in his book The Paranoid Style in American Politics (Vintage),quotes Morse.

"A conspiracy exists,...its plans are already in operation...we are attacked in a vulnerable quarter which cannot be defended by our ships, our forts or our armies....Austria is now acting in this county....She has her Jesuit missionaries travelling through the land;...The serpent has already commenced his coil about our limbs, and the lethargy of his poison is creeping over us....Is not the enemy already organized in the land? Can we not perceive all around us the evidence of his presence?...We must awake, or we are lost."

I came across this in my reading recently, so I thought of it immediately when I saw the google logo.

Hofstadter doesn't tell us what this quote looks like in dots and dashes, though I'm willing to be it is a lot less menacing, especially the coiled serpent and the lethargy of his poison.

McArdle distracted by Warren's efforts

Megan McArdle, a blogger at The Atlantic, substitutes her normally smart and insightful commentary with a very dumb attack on Elizabeth Warren of the Congressional Oversight Panel.

While I don't think Professor Warren needs me to stick up for her, I feel the need to do it anyway in this case.

McArdle's criticism takes two main tracks. The first is that Warren is not qualified to serve on the COP. The second is that Warren has greatly expanded her role to include items outside of the original scope of her duties.

Here's McArdle on Warren's qualifications:

Elizabeth Warren knows a lot about bankruptcy--but just because it has the word "bank" in it, doesn't make her an expert in banking. Her specialty isn't even in corporate liquidations; she mostly writes about consumer bankruptcy.

Wow, Elizabeth Warren is the new Sarah Palin! So what if she could, "see bankruptcy court from her Harvard office," she is not qualified to monitor where the TARP funds are spent and to assess their effectiveness. Look, Warren is an accomplished Harvard professor empowered by Congress to keep and eye on taxpayer money. If, after conducting research and holding hearings, even she can't understand how and where the TARP money has been spent, then I would bet that no one can.

McArdle continues:

The highly specialized world of bank resolution is not one where she has, as far as I can tell, very much expertise.

In other words, send in the technocrats! Funny, I never figured McArdle for your typical expert-worshipping freedom destroyer. Is that what we can expect from a University of Chicago MBA?

Here's the other half of the critique, the incredible expanding mandate:

Warren has massively extended her mandate, using the office as a sort of forum for broad-ranging commentary on the financial crisis. Rather than tracking the expenditure of the funds, she's increasingly using the oversight board to push her own ideas about what should be done with the banks.

First of all, I am glad someone inside the government is pushing their ideas about what should be done with the banks. It is exceedingly clear that no politician is going to do it, Republican or Democrat, White House or People's House. Even political appointees only one step removed from the elected won't do it (see: Geithner, Timothy). Therefore, we need other people to do just that.

But wait, you say. Don't we have journalists, bloggers, think-tankers, and other policy gad-flies for that purpose? Of course we do. On the other hand, it's not like Warren is the only politically insulated (at least in theory) appointee that likes to expand their mandate.

For another, and far more dangerous, example of this type of behavior, one need look no further than the Fed. That's right. Uncle Ben Bernanke's Fed where several thousand lifetimes worth of debt can be ready in just five minutes!

Here is Bernanke himself, describing the new and improved Fed balance sheet:

[W]e no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate. Instead, by using their balance sheets, the Federal Reserve and other central banks are developing new tools to ease financial conditions and support economic growth. [snip]

Though we have been creative in deploying our balance sheet, using a multiplicity of new programs (and coining a multiplicity of new acronyms, I might add), we have done so prudently

Prudent or not, let's face it, this is not your father's Fed balance sheet. Where Treasury securities once reigned supreme all sorts of financial asset interlopers now lurk. It's sort of like a version of The Beverly Hillbillies where the upscale Treasuries are horrified at the decidedly down-home new class of instruments residing in their midst. The question remains as to whether or not these new securities have the accompanying folk-wisdom that always seemed to save the day for Uncle Jed and his kin.

I'm not saying Bernanke is just taking anything as collateral like the Fed is some pawn shop with really nice Greek columns out front. But I hear that he had to call in the guys from antiques road show when Bank of America CEO Ken Lewis tried to deposit a set of antique platform shoes that he claimed had been worn by Napoleon at Waterloo. It turns out Lewis's great uncle Wilbur had an active imagination--Napoleon really wasn't short by the standards of his day.

I just think McArdle would serve her readers better by concentrating on an expanding mandate that could have real and lasting consequences for American taxpayers. Even if McArdle is right and Warren has overstepped her bounds, what is the worst that could happen? Tim Geithner has to spend a few extra hours testifying? A room in the Dirksen Senate Office Building gets an extra use or two? Other reports have given the impression that members from both sides of the aisle aren't rushing out to act on any of the COP's recommendations.

In her final line, McArdle bemoans losing the oversight panel to Warren's personal quest. In this particular post though, I would say we lost a good blogger who got distracted by what amounts to a sideshow in the bailout circus.

You to Citi to Cerberus to NewPage

Dad29 has this item worthy of special attention for all in NE Wisconsin (my emphasis):

This is kind of interesting:

Chrysler owes ... lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

IOW, Obama's boyzzz want the Banks to give Cerberus about $6Bn.

Those would be the banks which are the recipients of taxpayer money, folks....so in effect, YOU are giving Cerberus about $6Bn.

The owner of Chrysler is Cerberus Capital. Cerberus is also the owner of NewPage Corp. a paper producer that owns a mill in Kimberly. The mill was shut down last year, killing about 600 jobs. The shut down was even more bitter due to the fact that New Page refused to sell the mill even though there appeared to be other interested buyers.

The Cerberus connection was one of the reasons why Rep. Steve Kagen D-Appleton voted against the auto bailout last fall. I wonder how he feels about a taxpayer funded loan to Cerberus funneled through bailed out banking giants?

I did a quick search, but couldn't find a recent update on the state of the mill. If anyone knows, please leave a comment or email me. I assume worsening credit & economic conditions since last year have made sale of the mill impossible now, but I don't know this for sure.

Fall in to the (budget) gap.

See the gap between the two dashed lines? Don't bother to look at the giant sucking wound that is 2009. Go out to 2014. The gap at 2014, that's the Obama deficit.

I mean, shouldn't the foundation of long term budgeting be an effort to bring those two lines together, or at least make them close?

That way, if something bad happens like a drastic reduction in global demand coupled with a near total collapse of the international credit system (I know, it's along shot, but, hey, it could happen, right?) then you could use short term deficit spending to ease the pain.

If you are standing in a hole when someone starts pouring dirt on you, digging the hole deeper, faster, will not get you out of the hole. It will just bury you deeper.
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Chart by CBO, but I got it from Mankiw.

Warren takes on Geithner

Treasury Secretary Geithner will appear before the Congressional Oversight Panel today. (You can watch them live by clicking here.)

For those of you scoring at home the COP is the panel set up by Congress to review and report on the TARP and the other efforts to stabilize the financial system. The panel is headed by Elizabeth Warren.

Ahead of this hearing, Politico has an article indicating that Professor Warren may be wearing out her welcome on Capitol Hill:

While the bubbly and brilliant 59-year-old professor is a darling of Democrats, Warren has become the scourge of conservative Republicans, who question her panel’s exploration of more-liberal approaches such as nationalization and bank liquidation.

Most of the article goes on to describe dissatisfaction with Warren from lobbyists:

Financial services lobbyists, who’ve long disliked Warren for highlighting predatory lending and abusive credit card fees, argue that she’s using her post to push her own, anti-industry agenda.

“A number of people wonder if this is the new Warren commission or the congressional oversight panel,” said Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association. “It’s looking more like the former than the latter.”

Let's see, who should we go with here? The Harvard professor with a no-nonsense reputation and a proven track record of advocating for the middle class; Or, "the smartest guys in the room," who just happened to take the world's biggest economy and reduce it to an absolute shambles, causing tremendous pain for millions of Americans along the way.

Every minute that public officials spend listening to the fools from Wall Street that created so much of this mess (or their paid advocates) rather than considering thoughtful proposals about how to navigate out of this mess from folks like Warren is an absolute affront to average Americans.

My only hope is that this Politico article is just a bit overblown and the only people really against the efforts of the COP are lobbyists. There is no guarantee of this, especially given this item from the article:

In private conversations, even some Democrats complain that Warren’s role as a constant Cassandra could undermine already tenuous public support for the bank, auto industry and other financial rescue programs.

The panel specializes in calculating the kinds of scary numbers that the Obama administration would rather not broadcast too loudly.

If there is anyone on Capitol Hill (from either party) or at Treasury or on Pennsylvania Avenue for that matter, who thinks we can just get through this rough patch and then everything will go back to the way it was, then we are in worse shape than I previously thought.

It's not that things absolutely can't go back to the way they were. We can all pretend that stock prices or home prices or any other asset price that we just pick at random can go up forever and that these inflated prices represent real wealth. I mean, it's not as if the human capacity for self-delusion has been diminished in any meaningful way.

The real fact of the matter is that things shouldn't go back to the way they were. Our behaviors were obviously unsustainable. Unless we want to get into the habit of waking up with an economic bubble hangover with frightening regularity, some things are going to have to change.

It may be the case that the change we really need starts with the work of the COP and Warren.

Carnivals

No, not the ones where all food comes fried and served on a stick while some guy who managed to get past the background check snaps a metal bar over the laps of teenagers as they snap their gum and giggle nervously knowing they are about to be hurled around on a creaking hunk of rusty metal which may or may not have been inspected for safety at any point since the Reagan administration.

Not that kind.

The blog kind.

RWC blog was featured on the Carnival of the Capitalists - 4-20-2009 edition linked here. CotC is hosted on Bizosphere. You can find the home page here.

Go check it out. Be sure and take a look at the entry called: Average person’s tax dollars graphically -it's where your tax money goes on a roll--of toilet paper.

Food storage.

Over at Fairly Conservative, Cindy Kilkenny has a post about food storage (and about her love of apocalyptic television programs). Food storage & general preparedness are two things that our family works on. I think these are a good idea even if you have no plans to be involved in a government standoff, though I have to admit that it is my wife that has the real skills in this area.

Regardless, Cindy asks about the pantry habits of her readers, so I thought I would post a picture of some of our storage in the basement.

This is a portion of what we keep in the basement. We also have some water stored in 7 gallon containers and some other food storage that is not pictured here. We also have a small pantry in the kitchen for the day in and day out items.

For the record, I didn't actually take this picture just for this post. My wife had previously taken this picture as part of some storage and organizing tips she had exchanged with friends.

Here are some links to sites that discuss food storage and preparedness:

Safely gathered in
Fun with Food Storage

Ready.gov
2012 Forum (all sorts of links on how to prepare for various apocalypse scenarios)

Now. If you clicked over here from Fairly Conservative, go back!

Left blogs to tea party - one lump or two?

Many liberal bloggers both nationally and right here in Wisconsin have had no small amount of fun taking shots at last week's tea party protests.

One method of attack seeks to label the entire group as racist, tin-foil-hat-wearing, conspiracy nuts. This is primarily based on some of the more outrageous signs wielded by a few of the protesters. Any mass movement is apt to attract a few (or even more than a few) characters that see this as a forum to shout about their own particular viewpoint, no matter how questionable. I seem to recall certain WTO protests at which it wasn't entirely clear if the crowd was against free trade or unbroken storefront windows (perhaps they didn't like the look of their own reflections).

The next attack revolves around the involvement of professional groups to promote and organize the tea party rallies. In the minds of those on the left, this results in the tea parties being artificial and not a real grass roots movement. This may be fun to repeat, but is entirely beside the point.

If the people that attended the rallies last week were the same ones that voted against President Obama last fall, and these events result in nothing more than preaching to the choir, then the left really has nothing to fear from them. If, on the other hand, some voters previously disposed to give Obama the benefit of the doubt start to wonder about the impact of his policies based on coverage of the tea parties, then these events do represent a political threat to the enactment of the so-called progressive agenda. If someone's mind is changed based on what they saw or heard at one of the tea parties, will it really make one bit of difference that Dick Armey parked their car?

The final, and in my mind the most disingenuous, critique states that ordinary working and middle class people shouldn't participate in the tea party protests because: 1. Obama's massive spending spree is being done for their benefit and 2. Taxes will be cut for 95% of the country and raised on only the top 5% of earners in order to pay for the spending.

First, here's Emily Mills at The Lost Albatross:

Apparently it took a New Deal style stimulus plan to do it for the teabaggers. This would be the stimulus plan aimed at pulling the country out of the abominable mess left by the last administration's hard-on for deregulation and tax cuts for the wealthiest among us.

Next here's Corey Liebmann at Eye on Wisconsin:

Another crazy point was that we were all being taxed to death. While that may have been an official talking point, it is clearly not based in reality. President Obama's stimulus plan actually gives significant tax cuts to working people and he only raises taxes on the very wealthy – and even then only to Clinton era levels.

If you increase government spending and decrease revenues you have to start borrowing. At some point, that debt will have to be paid back. Does anyone really think we can just get the top 5% of earners in the country to all pass the hat and pay off the massive debts we incur? This problem is magnified by the demographic conditions we are up against in the very near future.

That the bill will come due is true regardless of how the money is spent today. Spending it wisely and in ways that encourage future growth may help ease the debt burden, but this will not eliminate it.

So when people, ordinary working and middle class people, stand up at rallies around the country to denounce spending they are not defending the wealthy, they are sticking up for their future selves and for their children's future.

Washington Post writer Steve Pearlstein identifies the heart of the matter here:

The old Republican fantasy was that tax cuts were the magic elixir that would solve every problem. Now that the public has finally rejected it, it's disappointing to see Democrats offering up the equally fantastic notion that Americans can have all the government they want while getting someone else to pay for it.

Or if he's not good enough for you, how about a true believer, liberal blogger Matthew Yglesias has tried to point out that a higher tax bill is in our future (emphasis added):

Barack Obama has, quite rightly, an ambitious progressive agenda. But in budgetary terms you can’t really implement an ambitious progressive agenda and pair it with revenues that are only “slightly above” the average at which they rested during an era of conservative governance. This is not an issue in the short-term, since we’re dealing with a recession, but what you see at the right hand side of these charts is not sustainable. And I think the administration is correct to think that they should not compromise on their main policy pillars. The issue, though nobody wants to say it, is that taxes need to be higher.

If more people on the left had the courage to make this argument in public, many questions about the motivation and funding of the recent protests would give way to a simple, "how do you take your tea?"

Extremist threat double standard?

In response to my earlier post on the DHS memo warning of right wing extremists at the tea party protests, commenter johnny writes:

When the report came out earlier this month warning law enforcement agencies of the dangers of left wing terrorists no one said as much as boo

I think that is exactly the point. No one used the fact that some left wing extremist group exists to try and silence those opinion peddlers that happen to be on the left end of the mainstream.

Let's say the report contained a dire warning about a plan by the group Monkeys First! to release a biological agent at a certain Florida theme park in order to advance their ultimate goal of turning the southeastern United States into a giant monkey habitat.

Now I don't believe for one second that the exposure of this dastardly plot would cause a single person to call for Keith Olbermann to stop his nightly harangue against a Republican occupant of the White House, or to say that Barney Frank is insane, or advocate for the Huffington Post to be shut down.

But, just because some guy goes to a gun show and spends his weekends burying piles of MRE's in strategic locations throughout the desert surrounding his American southwest city home, the calls come fast and furious that Glenn Beck ought be removed from the air, Fox news should be shut down and Michelle Bachmann needs to be muzzled.

I say let Beck, Bachmann, Frank, and Olbermann be judged insane on their own merits, slight as they may be. Using the existence of right wing extremists as a way to tear down those that are right of center is no way engage in a productive debate.

What's ahead for the TARP?

Some news of late has given rise to what I would call nascent optimism about the end of the really bad part of the financial crisis. Some firms have even started to talk about returning TARP money.

Matt, over at TARP Results Blog is a bit optimistic about how close the end of the TARP program is. At the end of his post, though, he asks an important question:

Now that the top banks have been selected as "too big to fail", does this provide them with even more incentive for risky behavior?

The answer to this question is, in my opinion, absolutely critical in crafting the way forward. The most ingenious regulatory scheme will be absolutely worthless if, at the end of the day, it doesn't matter how bad it gets, these firms will always get bailed out. If that is the case, you may as well not even bother developing any rules. Just let these guys run amok and give them Geithner and Bernanke's home phone numbers. That way when all of their bets have gone bad and all the counterparties have deserted them, they can call these guys at home like a teenager calling his dad at 2am to tell him he wrecked the car.

No, we can't do that you say. We can't just give them a blank check. Don't make it blank then. Give them some limit that we are willing to pay. $500billion? $1 trillion? $2 trillion? Just tell them we will bail them out up to that number. After that, they are on their own. That's your regulatory scheme.

Not that I think we should go the, "whatever doesn't kill you only makes you stronger" route, but there is no way our business or, perhaps more importantly, our political leaders have been sufficiently chastened by these events to insure that this type of thing never happens again. No doubt this recession will not have a soft landing, but if we even get a U-shaped one it will look great compared to the dire predictions of not that long ago.

If a recovery of even modest proportions does take place soon, I don't believe for a second that we will get at, or anywhere near, the root of the recent crisis.

But don't take my word for it. Here is Martin Wolf of the Financial Times:

Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution. Without that change, the resolution of this crisis can only be the harbinger of the next.

So if the TARP avoids collapse of firms now, but prevents meaningful and necessary reforms from taking place and we end up in another crisis similar or worse to the current one, will the TARP be judged a success? Undoubtedly, no.

Prolific breeders a rare breed indeed!

My wife came across this article about a family with nine children which included this interesting item:

According to the [Census] bureau, about 21 percent of children have no siblings, about 39 percent have one sibling, about 25 percent have two siblings, about 10 percent have three siblings and 5 percent have four or more siblings.

In other words, fewer than one American family out of 20 has five or more children.

I guess that means with our six, we are in a pretty exclusive club.

My wife had a special appreciation for these descriptions of life with a family of nine children:

"It was more difficult when we had five children under the age of 7 and I had to take all five of them with me whenever I went anywhere." [snip]

the biggest challenge is not the number of children, but the run of five boys in a row.

We also have the added fun of the fact that five of our six children are very near in age and are all boys. At one time we had five children aged five and under, but this is easier to do when you have a set of twins.

I do not think that I can adequately describe here the types of reactions we get when we all go out together. I mean it.

There are times when we walk into a public place and jaws drop. Mouths agape, the gawkers then usually nudge their nearest companion and give an incredulous nod in our direction. Then you've got at least two people going all fish-mouthed at us.

It's not just the mouths though, it's the furrowed brow combined with the nose and top lip raised upward, exposing the top teeth. And there, like some nearsighted beaver, they stare at us as we walk across their field of vision. Once their lips start to cramp up, faces are usually restored to their normal appearance and then the head shaking usually begins.

It's usually a side to side motion, as in a general expression of disbelief. Though there is a variation on this with head nodding up and down as they count the children. The other day we went to a McDonald's and as we walked in I could see a man in a car counting four of the kids as they walked with my wife. I had unbuckled the baby and was trailing behind. When I came out from behind the car I could read his lips as he gasped to the other person in the car, "there's another one." I am pretty sure this guy has been less surprised by the number of clowns exiting a VW beetle during a circus performance at some point in his life.

The children are largely unaware of all this. I, on the other hand, am slightly bemused and I take pity on the poor saps that can't hide what should be a very mild case of interest. It's no wonder our nation's casinos can make money. These people probably couldn't disguise a pair of deuces at the first table of a penny ante poker tournament.

This general reaction occurs in a large majority of the people we encounter. There is a subset of this group that will ask us a question or two. The most common is, "are they all yours." I am a smart-aleck by nature, but I resist the temptation to give one of a hundred sarcastic responses and reply with a simple yes or yeah.

Just tonight, as we were on a walk around the neighborhood, a woman sitting on her porch called to us from across the street with this very question. When we replied in the affirmative, she actually slapped her forehead, rocked back in her chair, and exclaimed loud enough so that we could hear her, "oh my god." I don't think she could have been more surprised had we then proceeded to tell her Ed McMahon had the night off and we were there to present her with a giant novelty check from the Publisher's Clearinghouse.

My seven year old son asked if we knew those people and I told him no. I didn't add that the woman on the porch thinks we're crazy simply because you and your brothers are alive, I could have though.

Pirates hijack national media

Unfortunately, the only disproportionate response we will likely ever see to the recent rash of piracy took place on the Sunday political talk shows.

I'm glad the captain and crew are safe. The Navy Seals are incredible. All of the Navy personnel that responded to the incident deserve recognition.

But Meet The Press, Fox News, and This Week, all featured lengthy discussions about the actual hijacking and the ramifications for US foreign policy. Why?

In fairness to This Week, Rick Warren was supposed to be on, but canceled at the last minute due to the fact that he seems to be going all John Kerry on California's Prop. 8 (he was for it before he was against it, apparently).

I won't bore you with the litany of crises that might, maybe, be a little more important to focus on, but I am sure you can think of one or two on your own.

You know, like what is going on with the Obama dog.

Is it paranoia if they really are watching?

Blogger Matthew Yglesias has done yeoman work of late trying to dispel, once and for all, Richard Hofstadter's notion that paranoia is primarily a right wing phenomenon.

First, there was the post that I previously took note of highlighting the existence of a militia-right that hung out at gun shows. (Shocking!)

Here, he takes note of the fact that the Department of Homeland Security will start gathering information on "rightwing extremist activity." In describing this, Yglesias first applauds the fact, then backs off a bit and issues a challenge (emphasis added):

I’ll say two things about this. One is that this seems like an eminently reasonable thing to be doing. If you don’t believe that, you need to see Dave Weigel’s reporting from the machine gun show this militia stuff and Dave Neiwert’s stuff.

At the same time, I think it’d be great if some non-insane conservatives were to be a bit bothered by this. Legitimate concerns about security really can serve as a cover for abuses or misconduct. This was the problem with the surveillance organized by the Bush administration, and it’s a very real problem even with Barack Obama in the White House

Without further ado. One of my favorite non-insane conservatives from WI (or anywhere), Dad29 discusses the DHS alert:

Paralleling the current national climate, rightwing extremists during the 1990s exploited a variety of social issues and political themes to increase group visibility and recruit new members. Prominent among these themes were the militia movement’s opposition to gun control efforts, criticism of free trade agreements (particularly those with Mexico), and highlighting perceived government infringement on civil liberties as well as white supremacists’ longstanding exploitation of social issues such as abortion, inter-racial crimes, and same-sex marriage. During the 1990s, these issues contributed to the growth in the number of domestic rightwing terrorist and extremist groups and an increase in violent acts targeting government facilities, law enforcement officers, banks, and infrastructure sectors

"White supremacists' .....exploitation of .......abortion"??????

Are we to understand that Wisconsin Right-to-Life or Pro-Life Wisconsin has a "white supremacist" sub-agenda? Barbara Lyons as an Aryan Nation commando?

Puhleeeeeezzzz.

Umnnnnhhhhhhhhh...

Given that Planned Parenthood was founded by a racist/eugenecist (whose admirers included A. Hitler), and that the vast majority of their locations are proximate to minority populations, what actual, real-live "white supremacist" would object to abortion?

Dad29 has a follow-up here.

Dad29 hat-tips The Other McCain, and I would have quoted him, but I am not sure if he would pass the Yglesias "non-insane" standard.

Update - For those of you that couldn't tell. I think The Other McCain would be glad to have Yglesias think him crazy. Just as I am sure RSM thinks Yglesias is off his rocker much (if not all) of the time. The difference is that Yglesias thinks the government ought to stand behind him with a nice new taxpayer provided rocker to catch him as he falls.

Making money work.

No this is not a pitch for a Suze Orman therapy session, you have to watch Oprah for that. But a recent comment got me thinking back to an idea that I had read some time ago--an idea about getting money moving again in a way that is much simpler and potentially less costly than anything we have undertaken thus far.

During economic downturns, the Federal Reserve typically uses monetary policy (generally, lowering interest rates) in order to help spur economic growth. The problem is that we are in a period of extremely low (or even practically zero) interest rates. Given that, it might seem that the Federal Reserve is sort of like a baseball team with no bullpen. Once the starters are out of gas, what do they do, just give up? Not exactly some economists would argue. Particularly economist Scott Sumner on his blog TheMoneyIllusion.

Banks, being regulated institutions, are required to hold a certain amount of their deposits as reserves. The Fed then pays interest on those reserves. High interest rates on reserves give a bank an incentive to keep reserves high, even above the amount required by regulation. Low interest rates on reserves discourage holding reserves beyond the required amount.

Therefore, since many people seem to agree that it should be the policy of the government at this time to encourage banks to lend and to discourage them from simply holding on to cash, what should be the policy of the government towards reserves? Here is economist Sumner:

One easy step would be to stop paying interest on reserves. These interest payments increase the demand for reserves, and are thus deflationary...then why not go one step further and charge an interest penalty on excess reserves?

No complicated scheme for purchasing assets that nobody knows how to value. I mean, most of the TARP money is spent and I have yet to see the green glow of a toxic asset emanating from Tim Geithner's desk. No capital injection along with a personalized note from Rep. Barney Frank asking if the nation's major financial institutions could start lending money again, pretty please.

It's a straight forward proposal. No pleading, no appealing to the better angels. No carrots. All stick. The Fed simply tells banks we don't care whether or not you sit on your money, but we are not going to pay you to do so. In fact, we are going to start charging you for making us watch this big pile of money just sit there. You don't want to lend it, fine. But why should we store it for free, at least under current conditions.

Sumner concedes this amounts to 'unconventional' monetary policy, but hey, these are unconventional times. He also notes, with (barely) disguised glee, that others may be coming around to this suggestion.

TARP: In for a penny, in for a pound

The April report from the TARP Congressional Oversight Panel is out. While I haven't read the whole report yet, this is from the introduction found on the COP website (emphasis mine):

Treasury has spent or committed $590.4 billion of the TARP funds. Treasury has also relied heavily on the use of the Federal Reserve’s balance sheet which has expanded by more than $1.5 trillion....This has allowed Treasury to leverage TARP funds well beyond the funds appropriated by Congress.

The total value of all direct spending, loans and guarantees provided to date in conjunction with the financial stability efforts (including those of the FDIC as well as the Treasury and the Federal Reserve) now exceeds $4 trillion.

What? I thought we were in for $750 billion. Did Geithner go all-in while I wasn't looking?

Set aside the question of whether or not we should even bail out the banks for a moment.

Should spending authorized by congressional action be allowed to act as a back door to put at risk an amount of taxpayer money that exceeds the originally authorized amount by several trillion dollars? Keep in mind that the Federal Reserve is an institution with a large degree of independence and insulation from political accountability, which is the type of accountability we use to run our country.

I previously considered whether or not this leveraging of the money explicitly authorized for a financial bailout into this gargantuan sum is even legal. I still don't know the answer.

The American Conservative magazine predicts the future

Here is author Phillip Jenkins in the March 23rd issue of The American Conservative (emphasis mine):

When a strongly liberal administration takes office, it brings with it a new rhetoric of terrorism, and new ways of understanding the phenomenon.

Based on the record of past Democratic administrations, in the near future terrorism will almost certainly be coming home. This does not necessarily mean more attacks on American soil. Rather, public perceptions of terrorism will shift away from external enemies like al-Qaeda and Hezbollah and focus on domestic movements on the Right. We will hear a great deal about threats from racist groups and right-wing paramilitaries, and such a perceived wave of terrorism will have real and pernicious effects on mainstream politics. If history is any guide, the more loudly an administration denounces enemies on the far Right, the easier it is to stigmatize its respectable and nonviolent critics.

And here is liberal blogger Matthew Yglesias on April 7th in a post titled The Militia Right:

I don’t want to suggest that the attitudes reflected by the sort of people who are handing out pamphlets on “How to Start and Train a Militia Unit” over at your local gun show are typical of the modern American right.

But it is true that totally mainstream figures like Rep Michele Bachmann have been flirting with this kind of rhetoric, saying they want the public “armed and dangerous” in the face of Obama administration environmental policy, while prominent media conservatives such as Glenn Beck and Jonah Goldberg are saying that Barack Obama’s policies are tantamount to fascism.

Admittedly, Yglesias isn't a member of "the administration" but he certainly is a prominent voice in what I would characterize as the left edge of the mainstream. This so perfectly fits Jenkins' description of how things would unfold, I almost couldn't believe what I was reading.

Before anyone comments that Bachmann and Beck are both lunatics, don't bother. Jenkins tells you how this will proceed; "the more loudly an administration denounces enemies on the far Right, the easier it is to stigmatize its respectable and nonviolent critics."

It's no surprise that it starts with Bachmann and Beck, let's just hope it stops there. But I am not optimistic.

The high cost of doing something

If you don't believe me about the unprecedented spending spree that the President and congressional Democrats are working to bring about, how about Stanford economist Michael Boskin (emphasis added):

The claim to reduce the deficit by half compares this year's immense (mostly inherited) deficit to the projected fiscal year 2013 deficit, the last of his current term. While it is technically correct that the deficit would be less than half this year's engorged level, a do-nothing budget would reduce it by 84%. Compared to do-nothing, Mr. Obama's deficit is more than two and a half times larger in fiscal year 2013. Just his addition to the budget deficit, $459 billion, is bigger than any deficit in the nation's history. And the 2013 deficit is supposed to be after several years of economic recovery, funds are being returned from the financial bailouts, and we are out of Iraq.

Stolen from Mankiw's blog

Some budget advice for Representative Ryan.

In spite of the fact that I've never been elected to anything, I have no reservations about providing the Republican Party, and Representative Paul Ryan in particular, some advice:

Don't build straw men for the opposition to knock down. Successful politics should always be a build-your-own straw man affair, otherwise you are just setting the table for your opponents.

It seems that the Republican alternative budget proposal released on April 1st violates this rule of political tactics. It has, of course, become the object of ridicule in the liberal blogosphere both nationally, and here in Wisconsin. For those that support the Obama budget and its spending increases, why not. Attacking a proposal that has no chance of becoming, or even influencing, the actual budget has no downside. It only sweetens the deal if there are any details, no matter how small, contained in the proposal that can be pulled out and held up as objects of ridicule. This method, after all, is the way much of our political discourse (and our blogging) works.

So no matter how good their intentions, Ryan and the Republicans should not have offered up a budget proposal whose only possible utility was as a punching bag for the Democratic party.

The existence of this alternative proposal draws attention away from the real problem: the massive long term deficit spending contemplated under the Obama budget.

The question remains, how does one respond when the White House Press Secretary claims that Republicans have gone from the part of no, to the party of no ideas?

In this case the answer is easy. Budgets are about spending, therefore one should avoid the straw men altogether and talk about the spending.

The Congressional Budget Office estimates are stark:

• As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period.
• The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline.
• Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).

So in response to Gibbs: The Obama budget adds $9.3 trillion to the deficit, doing nothing adds $4.4 trillion. Is there anyone, anywhere, that believes being on the hook for $9 trillion is better than being on the hook for $4. I mean $4 trillion is nothing to sneeze at, but compared to the Obama budget, having 'no ideas' seems like a real bargain.

In addition, Republicans should have emphasized the remarks of Obama's budget Director, Peter Orszag, in his March 20th conference call:

Q: But what about the question itself, which is are deficits of 4 (percent) or 5 percents of GDP sustainable?

MR. ORSZAG: Deficits in the let's say 5 percent of GDP range would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable.

So instead of talking about mountains of debt, which, in the words of the budget director, are "unsustainable," Republicans spent time developing, and now defending, their own proposal. A proposal which, given their minority status, has no chance of affecting the budget process.

So to Republicans I would say, if you think the proposed level of spending is too high and will negatively impact the country, good. Go tear apart the Obama budget and fight the spending. Just leave the straw men behind next time. Democrats can build their own.

Rep. Obey goes to Superior

Representative Obey was in Superior recently to get an update on how government money was being spent in Douglas County.

Wisconsin Public Radio reported on his visit with some local high school students during the trip. The visit included some questions from the students. Including one brave soul that asked a question about the level of spending recently embarked upon by the President and his allies in Congress.

The question ran along the lines of where did the money come from for the current spending binge. Obey, in his characteristic blunt style, responded that the money was borrowed. The student then tried to point out that it was the young people in the audience that would bear the burden of repaying the debts incurred by current members of Congress.

Obey easily deflected this criticism by telling the student that the cost of doing nothing was much higher. He implied that without the current spending by the federal government, the students would have a difficult time paying for a college education and finding employment afterwards.

This, of course, is beside the point.

If Democrats believe the best way out of the current economic mess is through the use of fiscal policy(that is to say, spending) fine. They won the election, they get to chart the course. The short term deficits in 2009 and 2010 are not what the high school students of Douglas County should be worried about.

The real threat, the one that the student was trying to get at and that Obey was refusing to address, are the chronic deficits that run for years beyond the current crisis. Persistent deficits, combined with the fact that they are at levels above historical averages, do represent a real threat to the future of American prosperity.

Geithner's performance reflects on him and us too.

Journalism outfit ProPublica and The Washington Post have an article out dealing with Tim Geithner's time as head of the New York Fed. The authors reach this conclusion:

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued [1]. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.

While I don't know enough about Geithner's time at the Fed to provide a judgement as to his overall performance, there is nothing in this particular conclusion that would make me think anything less of the Secretary. But what about the notion that Geithner was too close to the big financial firms he was supposed to be watching? I believe this notion, and the conclusion of the ProPublica/Washington Post report, makes the mistake of confusing cause and symptom.

The root cause of Geithner's ineffectiveness as regulator, and the general ineffectiveness of the entire US regulatory regime, was the lack of political will to develop, maintain, and enforce effective regulation.

When I say political will, I am not talking about the 500 some odd people that make up the Congress and hold the office of the President. The real source of political will in a representative democracy is, of course, the voters.

An uninformed and uninterested electorate will always result in bad governance, regardless of the talents (or lack thereof) of specific officeholders.

What about the pernicious influence of special interests and money in politics? Both of these are corrosive to a healthy democracy, but both require a hothouse of voter apathy and ignorance in order to thrive.

What about the fact that the Fed is such an undemocratic institution? Again, this is a result, not a cause, of voter indifference. The Fed is a creation of our government and we are not powerless against it like some natural disaster. The Fed may be notionally insulated from political influence, but ultimate power still resides with the voters.

The fact of the matter is that neither Barack Obama nor Rush Limbaugh, Barney Frank nor Paul Ryan, Harry Reid nor Jim Demint, is going to come up with the one great idea that saves us from a repeat of the current crisis. Instituting an effective regulatory system that still allows for the kind of innovation and growth that powers the American economy is a necessary and difficult task that falls to the citizenry, not just those who happen to be in power at the time.

This is not meant to relieve Tim Geithner, or any other appointee or officeholder, from personal responsibility.

This is meant to note that the personal responsibility for good governance extends far beyond a few particular individuals to all those that hold the title of citizen. This is a responsibility that we neglect at our own peril.

Monetary policy & where the rubber meets the road

At this link you can check out a primer on Quantitative Easing. Quanti-what, you might ask. This is one of the more unusual tools that a central bank like the Fed can use when interest rates are already very low. Don't wory, the primer is a video with talking and graphics, no reading required. Just sit back and enjoy.

I wouldn't say that using QE means were in 'duck and cover' mode, but we certainly have crossed over into 'spare tire' territory.

Let's just hope it is a full size spare and not one of those bizarre miniature spare tires that seem to be the norm. It's bad enough when you are on the side of the road changing a flat that cars pass by at such incredible rates of speed you feel like you are part of a nascar pit crew, only you are wearing a tie and shoes that hurt your feet; but then when you get back in your car and on the road again, everyone can still tell you just had a flat because of the dinky spare that is causing your car to pull dangerously to one side. I mean, sure, you can white-knuckle it for a few miles, but at some point you consider lashing your hands to the wheel like some 19th century sailor at the helm of a ship headed straight into the gaping jaws of a storm at sea.

Anyway, those little spare tires are the automotive equivalent of a scarlett letter.

As an added bonus the QE video narrator has an English accent. I personally believe everything sounds better with an English accent. That is why I feel strongly that all announcements about the future national debt should be made by the actor Michael Caine, or if he is not available, the Geico lizard.
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h/t on the QE primer to Mankiw. All the rambling about spare tires and English accents is mine.

Leverage & the hair of the dog

The aspect of leverage in the Geithner plan that I previously found puzzling enough to call the paradox of leverage, may be just what we need. So argues Robert Samuelson Over at Real Clear Politics:

But succeed or fail, Geithner's plan illuminates a fascinating irony. "Leverage" -- borrowing -- helped create this mess. Now it's expected to get us out.

He goes on to argue that what we are seeing is a contraction in leverage resulting in prices of assets being unrealistically low, the inverse of a bubble. The Geithner plan, which Samuelson calls Uncle Sam's hedge fund, is an attempt to increase leverage. This will then entice buyers to purchase assets that they wouldn't otherwise.

Samuelson thinks that the biggest obstacle to Geithner's plan succeeding is whether or not buyers and sellers will be able to agree on prices. I am not sure this is an insurmountable problem. After all, buyers would put up only a fraction of the purchase price and then borrow much of the rest on favorable terms. But the really sweet part of the deal is that if the assets turn out to be worth less than the purchase price, they don't have to pay the loan back. US taxpayers will take care of that.

Coming to agreement on a price may not be a cakewalk, but buyers are faced with a quantifiable risk, their initial cash investment, and the potential for a huge payoff if the assets do turn out to have value.

Samuelson's discussion seems to hinge on the assumption that what we have is a liquidity* problem, not a capitalization problem. He is in the majority of opinion-holders in this respect, but that doesn't necessarily mean he is right. But then he goes on to note this:

Presumably, the government-supplied leverage would enable investors to pay higher prices.

That is to say, the government guaranteed low interest loan is in fact a subsidy for these purchases, which will drive prices up. No one doubts that this will push prices above what buyers are offering today, that is the whole point of the plan. However, this contradicts the fact that in describing the plan, Secretary Geithner has made a point of saying it uses the market to correctly price these assets, something the government can't do well in his estimation.

So excessive leverage helped create this mess by fueling an unrealistic run-up of asset prices. Now Geithner wants to try a controlled bubble to move assets off of bank balance sheets in order to get lending going. Please insert your own comparison to catching lightning in a bottle, a tiger by the tail, etc.etc. here. In any case, it sounds risky, but the alternatives may be worse.
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For a discussion of the liquidity vs. capitalization question, click here.