Tuesday: Reboot

(Early morning meeting.  This will be quick)

Nicholas Lemann, who I know nothing about, has written Mad and Madder in The New Yorker that hints at why Obama may be reluctant to nationalize the banks.  Well, *another* reason that is independent from the fact that his banker backers have him by the junk:

Bank nationalization would drive the stock market down and increase the agita of people with 401(k) plans. Moderate Democrats in Congress would further soften in their support for the Administration’s legislation. The price of bank nationalization might be Obama’s super-ambitious plans in other realms, which, if history is a guide, are likely to pass only in this first year of his Presidency. If they do pass, he will have generated tax revenues from affluent people for social purposes far beyond those of the House’s tax on A.I.G. bonuses, and he will have significantly eased the distress of people who can’t get good health care or education. That is a lot to put at risk.

Ok, the first part of that sentence makes sense; the second part is utter bull$#@&.  It’s the plunging 401K values Obama’s worried about.  Well, not exactly worried about.  Obama doesn’t really worry about people who makes less than 7 figures a year.  But revolutions happen when the middle class gets fed up with being treated badly.  As Thomas Jefferson wrote once upon a time: “all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.”  Yep, we can hold out a long time as long as its the usual suspects that get the shaft.  You know, the perpetually poor, the undereducated, the ne’erdowells.  But when the value of middle class property starts to fall, “when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”

So, maybe Obama’s strategy, and we have to assume their is a point to all of this even though there is no policy that we can detect, is to make sure that the middle class doesn’t lose its temper.  Plunging 401k’s would definitely make some people peevish, including moi.  However, if we descend into the semi-darkness of a Japan style “lost decade” where the already devalued 401k’s do not regain any of their value, just so that the bankers don’t have to eat their losses, that would piss me off more.  Maybe Obama figures that his chances of being a president when that happens are very slim.  Fine.  But don’t expect your picture on any stamps or money.  Your name will be “Bush”.

No, what we need is a reboot if there’s any chance to salvage the 401K system.  Of course, I would willingly forgo it if someone would just give me a fricking pension I could live off.  The rally of the stock market recently, I suspect, was partially the result of 401K contributions from bonuses that got disbursed in March.  It’s not going to last.  The market is going to start sinking again and stay there.  And then, people who were about to retire are going to get angry anyway.

Then it won’t be long before the anger spreads upwards to the smelly bourgeoisie.

Hmmm, NYC or Philly? NYC or Philly?

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Wednesday: Gambling on Resurrection

Japan eventually forced bankers to fall on their swords

“Banks think with their capital.  When they have enough capital, they act smart because then they have something at stake.  When banks lose capital and don’t have anything personally at stake, for the managers and the shareholders, they act dumb.  They gamble.”

That was a quote from Adam Posen from an interview he gave last week on NPR’s Planet Money about Japan’s Lost Decade.  You see, although the bankers are wailing hysterically that this kind of financial meltdown has never been seen before. the truth is that Japan went through something almost exactly like it back in the 90’s when their own real estate bubble burst.  The crash for them took place in ’90-91 and didn’t really affect the Japanese until 1992.  Then it was bad.  The government left the economy to sort itself out.  Actually, it made the situation worse by planning to adopt austerity measures and they announced these measures, like tax increases, 18 months in advance.   Eventually, there were some changes in government and some kind of Keynesian economics wizard who started to hold banks accountable for what is called adverse selection.  As I understand it, adverse selection occurs when bankers hold onto their bad assets, like bad mortgage tranches, for example, in the hopes that they will be worth something someday, while they sell off all of their good assets for cash they need in order to do regular backing business like lending and borrowing.  When Japanese banks were finally forced to eat their bad stuff, the economy turned around. (This is from a non-econ major POV so I urge you to listen to the podcast and send your questions to Dakinikat for clarification.)

The creation of a “bad bank” where the bankers can push their bad loans is probably NOT what Posen was refering to when he said that banks were eventually held accountable.  The “bad bank” transfer that is planned for the US simply gives banks cash for toxic assets and they never feel the consequences of their actions.  They may feel tempted to “gamble on resurrection”.  After all, the capital they are receiving from us is paying their salaries and bonuses.  It’s not real money to them.  No, I’m afraid that sacrifices will be necessary for this to turn around even if it means nationalization.

Obama has announced that he will hold banker compensation down in the upcoming stimulus package.  Executive compensation would be limited to a measly $500,000, which some compensation experts say:

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”

Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.

“It would be really tough to get people to staff” companies that are forced to impose these limits, he said.

OK by me.

It’s a great idea but we will have to see the details to make sure it is enforced.  After all, last fall’s TARP bill was supposed to give us preferred stock in the banks we rescued.  But as it turned out, preferred stock really meant “silent partner”.  We have no control over how the money is spent or are their any requirements that the banks report to us and keep us in the loop.  So, for all we know, they could be back to their old gambling addiction and living it up on our dime.

As Krugman wrote yesterday in Bipartisan Bromides, there is no middle ground here that can be reached by a treacly anti-Randian bi-partisan compromise.

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

There are certain procedures and steps that need to be followed in order to prevent a severe recession and decade of stagflation like the one that Japan faced during the 90’s.  Acquiescing to Republicans for the sake of bipartisanship just dilutes the policy.  The question is, does Obama understand the policy that he needs to create?  Or is he so beholden to the big Wall Street firms that got him here that he can’t make them sacrifice for fear of angering them?

Hey, he wanted this job.  He was willing to break all of the rules to get the nomination and there were plenty of people with almost a billion dollars in campaign funds who were willing to help him break those rules.  But it is his responsibility now to fulfill the obligations of his oath, even if it makes him unpopular with the rich boys and even if the bankers and Broderites attack him mercilessly. No one expected him to govern as a tree-hugging lefty but they *did* expect him to govern as a Democrat.   It is his own fault that his scorched earth campaigning split the party and many of us don’t have his back but hundreds of stimulus package house parties are not going to make an inadequate stimulus bill into a thing of beauty that everyone wants to support.  He has to do the right thing or take the blame for f%*^ing things up.

Now is when the shmoozing stops and the real work begins.