MOMocrats™

Too Little Too Late (about Too Much Too Soon)

While the entire eastern seaboard was obsessed with Irene, Gretchen Morgenson wrote in the New York Times this weekend about the Federal Reserve efforts to save the financial sector during the Great Recession, at enormous cost to the taxpayers and little benefit to Main Street.  Talk about burying the lede!

Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.

The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again. (emphasis added)

This is NOT the TARP money bailout that was publicly debated and ultimately Congressionally approved, but additional amounts of money that were lent by the Federal Reserve to large banks (including foreign banks) largely in secret and at minimal interest rates in order to make sure that these banks could meet their minimum liquidity requirements so as to avoid bankruptcy. 

2008 Redux?

Following Standard & Poor’s cutting its rating on US long-term debt late Friday from AAA to AA+, the US stock market fell significantly today: the Dow Jones industrial average had a one-day decline of more than 600 points (over 5 percent) and the Nasdaq dropped close to 200 points (nearly 7 percent).

Let's take a deep breath.  Some refreshers:

• S&P is only one of the three big credit ratings agencies.  The other two, Moody's and Fitch, did not downgrade US debt (though they did change their outlooks to "negative").  However, remember that the ratings agencies played a significant role in their overly optimistic ratings of structured debt securities which were instrumental in the 2008 crash.  It's arguable that having been caught with their pants down, S&P is reacting rashly in the opposite direction, seeing danger where there is none.  But ratings are as much a dart game as they are a science and have been called, among other things, "substandard and porous."
• However, because of the interconnectedness of the US financial sector, the downgrade of US debt will have (and has had) direct follow-on effects: specifically, the downgrade today of the debt of Fannie and Freddie Mac, and of DTCC, the central depository for United States securities, all of which rely significantly on the US government. 
• Downgrades are significant because many "safe" investment vehicles (such as money market funds and low risk pension funds) have mandated investment rules, which may include, for example, a rule that such funds invest only in AAA rated securities.  The downgrade of US debt (and subsequent downgrade of other US backed securities as well as the as-yet-unseen ancillary effects of the downgrade) may lead to massive sell-offs by these funds, fueled by nothing but their mandates.
• Despite all of the above, IF investors are genuinely worried about default by the US government (which is what a downgrade signals), then the interest rate on 10-year Treasury bonds should be soaring (because the likelihood that the US government will continue to honor its debt in 10 years should have just deteriorated significantly).  Instead, that interest rate has actually edged down today. 
• What happened today is generally being seen as a flight from securities to "safe havens" (which includes US Treasuries and gold, which broke all-time highs again today).
• The fear is most likely driven by a renewed sense that the global economic outlook is bleak.  Most are speculating that the continued deterioration of Eurozone sovereign debt is the main driver of this fear, but the botched debt deal (see below) and the S&P downgrade are likely contributing to an overall sense that a double dip is imminent.
• There is definitely an element of psychological fear in today's market gyrations.  Volatility, measured via the VIX (or fear index) was off the chart today.
• But in the end, it may be helpful to remember that the stock market is not the economy.

Even if the main driver for the market gyrations these past few days lies squarely in Europe, the US government is far from blameless.  There are real, grown-up ways to deal with the continued economic instability, and real steps that could have been taken to fortify our domestic economic situation while we brace for the inevitable from Europe.  And yet, Congress has consistently shied away from taking such steps over the past 3+ years.  One view, from the Economist:

[The US government's] prescription for a weak economy [through the debt deal] is a large slug of austerity. Thanks to the expiry of a payroll-tax credit and extended jobless benefits in December, the United States is on course for a fiscal contraction of some 2% of GDP next year, the biggest of any large economy—and enough to drag a weak economy into recession.

The debt deal, which implies only modest new spending cuts in the short term, is not directly responsible for this. But Congress could, and should, have stopped this potentially ruinous trajectory. There was a deal to be had: keep up spending in the short term, with a stress on much-needed infrastructure investment, as well as extending the temporary tax cuts, in exchange for a big medium-term reduction in the deficit, centred on entitlements and tax reform. Congress did precisely the opposite, failing to support the economy now and failing to find enough cuts over the next decade to stabilise America’s debt.

Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty. Now that the tea-partiers have used default successfully as a political weapon, it will surely be used again. The refusal to compromise, rapidly becoming a point of honour for both parties, is wreaking damage ... At best, the politicians will have slowed a sputtering expansion; at worst they will have killed off the recovery and inflicted lasting harm on the world’s most impressive prosperity machine. (emphasis added)

Kady is back from a self-imposed sabbatical and may be persuaded to occasionally pop back on her other blog.

Vanilla Iced

I love plain vanilla ice cream.  Love it.  My favorite is the soft serve vanilla at Carvel's.  The rest of my family doesn't understand my vanilla compulsion.  My husband is a ice-cream omnivore.  My oldest daughter favors the fruity sherbets, and my youngest has already demonstrated a strong disposition towards anything that includes chocolate.

I am simple, uncomplicated.  And to me, it is the simple, and uncomplicated repetition of vanilla that draws me to it again, and again, and again.  I know what I'm paying for, and I know what I'll get.

So needless to say, that I took it as a personal affront this week when my favorite comedian-politician, Barney Frank, announced that the House has revised the administration’s proposal for a new consumer financial protection agency by removing the requirement that banks and other financial services companies offer "plain vanilla products", like 30-year fixed mortgages and low-interest, low-fee credit cards.  My favorite comedian-secretary, Timothy Geithner, came around quickly, announcing the administration's acquiescence in the deletion.

On what planet does it make sense that I could walk into any ice cream store tomorrow and find out that vanilla is no longer available?

A '10 Senate Race to Watch: Democrats Gillibrand and Maloney Vie in NY

                   

Left, Sen. Kirsten Gillibrand, D-NY                 Right, Congresswoman Carolyn Maloney, D-NY

For liberal New Yorkers mulling the fall 2010 special election race to fill the U.S. Senate seat currently occupied by  Senator Kirsten Gillibrand (D-NY), the declaration of Congresswoman Carolyn Maloney's (D-NY) campaign for it represents an interesting wrinkle. Under state rules governing a vacated Senate position, Governor Paterson chose Gillibrand to fill what had been former Senator Hillary Clinton's seat for a portion of the time remaining in her term when Clinton joined Obama's cabinet. In 2010, the U.S. Senate seat goes wide open to both major political parties, and there's tremendous interest among Democrats in retaining the seat with, naturally, the strongest possible challenger to whoever the Republicans put up.* In this case, it's generally accepted that the Democratic aspirant will likely be a woman. What's unusual is that in addition to the question of who's more "electable" (and why), there's the additional question, who has the better feminist record?

Bonfire of the A.I.G.

The Congressional hearing over the AIG bonuses today may have been the most circus-like experienced by the normally staid House Financial Services Committee.  But theatrics aside, what we find is a deeply nuanced situation, full of half-details suggesting shady subterfuge, and not a person to trust as far as the eye can see.

First, the $165 million in bonuses/retention fees paid to employees (and apparently, a handful of ex-employees) of AIG.  There is an enormous amount of public outrag at this incomprehensible rewarding of the very people who have contributed (and not in a small way) to the financial crisis (certainly, on a per head basis, are far more culpable that the irresponsible mortgage holder that those of other side of the political spectrum love to hate). 

But peel aside the outrage and this is the situation we are left with: if we assume that AIG has a contractual obligation to fulfill the terms of what can only be characterized as criminally generous compensation contracts (and you can read this op-ed, as well as this recent post by Pundit Mom, for some critical discussion about the legal grounds which AIG may have to not perform on their obligations), then (1) breaking that contract may in fact cost AIG more than simply paying out on the obligation and (2) the government has already tied its hands with respect to the degree of its involvement allowed.

Econ 101: Crisis of Credit

For those readers out there who are still unsure about how housing, investment banks, your 401(k) and the economy are all tied together, this is a wonderful tutorial I found today at NPR's Planet Money. 

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Kady also blogs at Wonkess.

Missing Kyoto

Found this very interesting study via Clusterstock.  In a report released by the Centre for Industrial Economics at the Ecole des Mines in Paris, a strong correlation was found between ratification of the Kyoto Protocol (yeah, the one that Bush didn't) and green technology innovation.

The researchers first looked at the effect of Kyoto on the speed of development of climate-related technologies compared to all technologies (based on number of patent filings), and this is what they found across all countries:

Great, so the Kyoto Protocol spurred innovation in climate change technologies.

TARP-ageddon Part the Deux

We are soooo screwed.

The Washington Post reported some leaked details of the new administration’s plan to rescue the U.S. banking system on Wednesday. According to the WaPo, the plan, which Treasury Secretary Geithner is set to announce Monday:

Instead of taking a single approach, the Obama administration plans to divide assets and other loans into three categories, each with its own solution, according to sources familiar with the discussions, speaking on condition of anonymity because the details are not finalized.

The government would buy and hold on to those assets whose falling prices are putting banks under the most pressure. Officials want to limit these purchases because of the vast expense.

The centerpiece of the plan would be a guarantee to limit losses on a second group of troubled assets that can be kept by the banks because they have more stable prices.

And it would allow banks to retain and profit from their healthiest assets. Beyond these initiatives, the government also is likely to inject more capital into troubled institutions.

You know what, three crappy plans do not beget a good plan.  There is no multiplier effect on crap. 

This is not a plan to get our economy out of the toilet, but a disgusting convolution of the facts in order to throw money at the banks (and, in doing so, keep a bunch of wealthy bankers wealthy).

Econ 101: Stimulus

Momocrat Julie wrote a post earlier today, indignant over a member of the "Stimulati's" unfortunate characterization of the goals of the stimulus as spurring government spending instead of putting more dollars into the individual's hands "because...wait for it...we wouldn't spend it. Instead? We'd live on it."

We find ourselves in a precarious economic situation, and unfortunately, due to the bumbling idiocy that is Washington D.C., and the apparent impossibility of doing things in any way except the same old way, we are about to see our government take on a massive amount of debt in an attempt to "stimulate" ourselves out of this recession.

Now don't get me wrong.  Like Robert Reich, I'm dead-set against the Republican suggestion of all tax cuts all the time.  Tax cuts have their place, but it's hard to understand how anyone can justify tax cuts when we've had eight years of exuberant tax cutting which have gotten us to this very place.

On the other hand, we're clearly not in an era of post-partisanship when the ruling party (yes, Dems, I'm talking about you) takes a policy disagreement and turns it into a taunt, running as far in the other direction as possible, thumbing their noses all the while.

Prop 8, with Jazz Hands

Being a fan of musical theatre (and having participated in many a cheesy production myself), this just warms the cockles of my heart.

See more Jack Black videos at Funny or Die

Kady is on a holiday induced sabbatical over at Wonkess.