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Grasping Reality With The Opinions Of Others

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary.  Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution.  The incident was recently discussed by Brad DeLong.  (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.)  Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy.  On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15.  Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog.  Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle?  Seriously?  I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism?  Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant.  Her old man was an inspector of contracting in New York City.  He got surprisingly rich.  From that he went to starting his own contracting business.  He got surprisingly rich.  Then he went back to New York City in an even higher level supervisory job.  He got surprisingly rich.  So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated.  Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers.  The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold:  this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities.  And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems.  Timothy Geithner was even doing victory laps last month in Europe.  To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs.  But these losses exist already.  The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal.  Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team.  Volcker, Summers, Orszag, and Romer are all gone.  So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

  • The financial system was on the verge of collapse.  We all know that now – about US banks and European ones too.  Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King.  The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  • When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent.  It is still unclear whether this was a political or an economic decision.
  • The most difficult political aspect of the banking crisis response was socialising bank lossesAll banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent.  That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  • Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror.  Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds.  That is the Geithner view.
  • Once the system is healthy again, it should expand.  The reason you need to bail the banks out is that they have expansion opportunities abroad.  As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit.  American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets.  His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done.  The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery.  With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services.  I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development.  But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?


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Obama The Centrist

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January 12, 2009

It was almost one year ago when the conservative National Journal rated Barack Obama as “the most liberal senator in 2007”.  Of course, that was back during the primary season of the 2008 Presidential campaign, when many people believed that the “liberal” moniker should have been enough to sink Obama’s Presidential aspirations.  Now, with the Inaugural just a week away, we are hearing the term “centrist” being used to describe Obama, often with a tone of disappointment.

On Sunday, January 11, David Ignatius wrote an op-ed piece for The Washington Post, entitled:  “Mr. Cool’s Centrist Gamble”.  Mr. Ignatius spelled out how Obama moved toward the political center after his election, beginning with the appointment of Rahm Emanuel as chief of staff, to appointing a Cabinet “which is so centrist it almost resembles a government of national unity”:

Since Election Day, he has taken a series of steps to co-opt his opponents and fashion a new governing majority.  It’s an admirable strategy but also a high-risk one, since the “center,” however attractive it may be in principle, is often a nebulous political never-never land.

Obama’s bet is that at a time of national economic crisis, the country truly wants unity.

The President-elect’s appearance on ABC’s January 11 broadcast of This Week with George Stephanopoulos motivated Glenn Greenwald to write on Salon.com that the interview:

. . .  provides the most compelling — and most alarming — evidence yet that all of the “centrist” and “post-partisan” chatter from Obama’s supporters will mean what it typically means:  devotion, first and foremost, to perpetuating rather than challenging how the Washington establishment functions.

Mr. Greenwald (an attorney with a background in constitutional law and civil rights litigation) began his article by taking issue with the characterization by David Ignatius that Obama’s centrist approach is something “new”.  Greenwald pointed out that for a Democratic President to make a post-election move to the center is nothing new and that Bill Clinton had done the same thing:

The notion that Democrats must spurn their left-wing base and move to the “non-ideological” center is the most conventional of conventional Beltway wisdom (which is why Ignatius, the most conventional of Beltway pundits, is preaching it).  That’s how Democrats earn their Seriousness credentials, and it’s been that way for decades.

Greenwald then focused on a point made by Mr. Obama in response to a question posed by George Stephanopoulos concerning whether the detention facility at Guantanamo will be closed within the first 100 days of the new Presidency.  The President-elect responded that:

It is more difficult than I think a lot of people realize and we are going to get it done but part of the challenge that you have is that you have a bunch of folks that have been detained, many of whom who may be very dangerous who have not been put on trial or have not gone through some adjudication.  And some of the evidence against them may be tainted even though it’s true.  And so how to balance creating a process that adheres to rule of law, habeas corpus, basic principles of Anglo American legal system, by doing it in a way that doesn’t result in releasing people who are intent on blowing us up.

The magic words in Obama’s response that caught Glenn Greenwald’s attention were:  “creating a process”.  Why should due process require creation of a new process outside of our court system?  Mr. Greenwald suspects that this “new process” will be one that allows for the admission of evidence (confessions, etc.) obtained by torture.  If what Mr. Obama has in mind is a process that will protect the secrecy of legitimately-classified information, that is one thing.  Nevertheless, I share Mr. Greenwald’s skepticism about the need for an innovative adjudication system for those detained at Guantanamo.

George Stephanopoulos made a point of directing Mr. Obama’s attention to “the most popular question” on the Change.gov website.  It came from Bob Fertik of New York City, who asked:

Will you appoint a special prosecutor ideally Patrick Fitzgerald to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping?

The response given by the President-elect involved a little footwork:

We have not made final decisions, but my instinct is for us to focus on how do we make sure that moving forward we are doing the right thing.

Glenn Greenwald’s analysis of Mr. Obama’s performance on This Week, did not overlook that part of the interview:

Obama didn’t categorically rule out prosecutions — he paid passing lip service to the pretty idea that “nobody is above the law,” implied Eric Holder would have some role in making these decisions, and said “we’re going to be looking at past practices” — but he clearly intended to convey his emphatic view that he opposes “past-looking” investigations.  In the U.S., high political officials aren’t investigated, let alone held accountable, for lawbreaking, and that is rather clearly something Obama has no intention of changing.

Obama’s expressed position on whether to prosecute the crimes of the Bush administration is fairly consistent with what he has been saying all along.  Frank Rich covered this subject in his January 10 New York Times editorial:

The biggest question hovering over all this history, however, concerns the future more than the past.  If we get bogged down in adjudicating every Bush White House wrong, how will we have the energy, time or focus to deal with the all-hands-on-deck crises that this administration’s malfeasance and ineptitude have bequeathed us?  The president-elect himself struck this note last spring.  “If crimes have been committed, they should be investigated,” Barack Obama said.  “I would not want my first term consumed by what was perceived on the part of Republicans as a partisan witch hunt, because I think we’ve got too many problems we’ve got to solve.”

Henry Waxman, the California congressman who has been our most tireless inquisitor into Bush scandals, essentially agreed when I spoke to him last week.  Though he remains outraged about both the chicanery used to sell the Iraq war and the administration’s overall abuse of power, he adds:  “I don’t see Congress pursuing it. We’ve got to move on to other issues.”  He would rather see any prosecutions augmented by an independent investigation that fills in the historical record.  “We need to depoliticize it,” he says.  “If a Democratic Congress or administration pursues it, it will be seen as partisan.”

Welcome to Barack Obama’s post-partisan world.  The people at the National Journal are probably not the only ones disappointed by Obama’s apparent move to the political center.  It appears as though we will be hearing criticism about the new administration from all directions.  When he disappoints centrists, you can read about it here.