James K. Galbraith on the Disaster

A Bailout We Don't Need

By James K. Galbraith
Washington Post Thursday, September 25, 2008

Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises.

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won't be enough.

In Texas, recovery from the 1980s oil bust took seven years and the pull of strong national economic growth. The present slump is national, and it can't be cured that way. But it could be resolved in three years, rather than 10, by a new Home Owners Loan Corp., which would rewrite mortgages, manage rental conversions and decide when vacant, degraded properties should be demolished. Set it up like a draft board in each community, under federal guidelines, and get to work.

The second great crisis is in state and local government. Just Tuesday, New York Mayor Michael Bloomberg announced $1.5 billion in public spending cuts. The scenario is playing out everywhere: Schools, fire departments, police stations, parks, libraries and water projects are getting the ax, while essential maintenance gets deferred and important capital projects don't get built. This is pernicious when unemployment is rising and when we have all the real resources we need to preserve services and expand public investment. It's also unnecessary.

What to do? Reenact Richard Nixon's great idea: federal revenue sharing. States and localities should get the funds to plug their revenue gaps and maintain real public spending, per capita, for the next three to five years. Also, enact the National Infrastructure Bank, making bond revenue available in a revolving fund for capital improvements. There is work to do. There are people to do it. Bring them together. What could be easier or more sensible?

Here's another problem: the wealth loss to near-retirees and the elderly from a declining stock market as things shake out. How about taking care of this, with rough justice, through a supplement to Social Security? If you need a revenue source, impose a turnover tax on stocks.

Next, let's think about what the next upswing should try to achieve and how it should be powered. If the 1960s were about raising baby boomers and the '90s about technology, what should the '10s and '20s be about? It's obvious: energy and climate change. That's where the present great unmet needs are.

So, let's use the next few years to plan, mapping out a program of energy conservation, reconstruction and renewable power. Let's get the public sector and the universities working on it. And let's prepare the private sector so that when the credit crunch finally ends, we'll have the firms, the labs, the standards and the talent in place, ready to go.

Some will ask if we can afford it. To see the answer, don't look at budget projections. Just look at interest rates. Last week, in the panic, the federal government could fund itself, short term, for free. It could have raised money for 30 years and paid less than 4 percent. That's far less than it cost back in 2000.

No country in this situation is broke, or insolvent, or even in much trouble. For once, Wall Street's own markets speak the truth. The financially challenged customer isn't Uncle Sam. He's up on Wall Street, where deregulation, greed and fraud ran wild.

James K. Galbraith is the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too."

Paul Krugman on The Disaster

Cash for Trash

By PAUL KRUGMAN
New York Times September 21, 2008

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

My political joke

Q: Why did John McCain choose Sarah Palin for his running mate?

A: Jesse Ventura wouldn't return his calls.

The Tribe

Dream of August 11
As I approach the door of the house with Art (the Gude Ave. house), I see that the lock has been removed. We enter the house and the TV and stereo are missing. In the bedroom there’s also a TV missing. I am anxious because I think the burglar may still be here or come back, and I say that I don’t want to stay in the house tonight. Suddenly a short young guy appears right in front of me, trying to run for the door. He’s small and slight; it’s easy to catch him. He begs me not to call the police, but his reasons are ridiculous, and I’m going to. But then anther guy dashes across the room and I’m distracted and the first guy gets away. The second guy runs downstairs. At the head of the stairs I can see that the basement is dark and I’m nervous, but as I descend I see that there are young people who are like squatters down there; they seem like anarchist hippie types that I actually would think are pretty cool. Some are gathered around a fire and I see that they are “tribal”—that is, they think of themselves as a tribe—and they’re not at all concerned that I’m there, as if they were my hosts and not squatters. I look at the back door, at the laundry room and bathroom, and at a grid in the ceiling that leads outdoors, and each time I look back there are more of these people, and it occurs to me that it’s like the gathering of the crows in The Birds. Then I find that they are discussing Hitchcock and how great his movies are.

Tina Fey as Sarah Palin on SNL

You know, the worst thing about having multiple personalities is trying to convince the waiter you need separate checks when you're eating alone.

C'mon Y'all, Shake That Thing

Which of these is the more horrifying video? Specifically, which is the more horrifying resurrection of long-rightfully-dead cultural cliches that were horrifying the first time around?

John Cornyn Ad

Bearforce1 - Shake that thing

How bad is The Happening?
If a tenth-grader had submitted the script in a writing class, you'd be looking for a gentle way to say, "This is some really immature work for a person your age."
The Happening would make Al Gore say, "Enough with this global-warming bullshit already."
The Happening makes Don't Mess with the Zohan look like Citizen Kane.
The Happening is beneath the dignity and the talents of Zooey Deschanel.
Watching The Happening is a lot like watching Mark Wahlberg play that scene in The Simpsons where Sideshow Bob keeps stepping on a rake and hitting himself in the face, over and over--except not funny.
As entertainment, The Happening stands as some kind of curious hybrid of watching a demented child pull the wings off flies and watching paint dry--emphasizing the worst aspects of each.

Polanski Dream

Watched the Roman Polanski doc on HBO last night. This morning I dreamed that I was visiting Polanski in Paris--actually, I was with a kind of seminar group and Polanski pulled me aside to show me some stuff--he was thinking of putting together an exhibition of art that had been created as death-threats against him. There was a series of watercolors (these were very clearly stylistically like the drawings from the courtroom that were used a lot in the documentary) in which people were pulling guns on him, and there was a black and white film (like Knife in the Water) in which he was attacked by a shark. It was a very sun-filled room, everything had been archived neatly on beautiful racks, and he was asking me in a very friendly way, completely at his ease, if I thought the exhibition was a good idea.

Bush Vs. Zombies

Brokeback Mountain

Dennis just sent this picture of me and John Bernd--dancer, lovely guy--in, I'd guess, 1980

The greatest cinematic moment in all of cinematic history

The Persistence Of Memory: 'Hiroshima Mon Amour'

Bernard has some big ideas

"THE WORLD'S BECOME completely unpredictable on a large scale," says writer Bernard Welt.
He says that pollutants and man-made alterations have rendered our rock-steady notions of Earth as stable algorithm totally obsolete, and while he would love for this to be manifested as "a rain of frogs," we'll just have to settle for ice caps melting, winters becoming intemperately warm and other subtle indications of irreconcilable climate change.
He says all of these things when summarizing the message of a seminal piece of environmental literature: Bill McKibben's 1989 book "The End of Nature," which helped plant the idea of global warming into the lives of everyday Americans.
Welt, along with fellow writers Judith McCombs and Nan Fry, will be tackling McKibben's ideas in a poetry reading on April 19 at the Warehouse Gallery, in conjunction with the art exhibition "The End of Nature."
Why poetry?
"[Poetry] brings a kind of focused attention to the world that I think we don't have time for" in our modern world, Fry says.
That includes looking at the natural world that we live in every day, be it going out and drinking in the Appalachians or noticing the scrappy tree in McPherson Square that we usually overlook en route to the Metro.
Our idea of nature has completely changed in the last50 years, McCombs says, and "instead of Nature — the monster that you find in so much Anglo-Canadian literature — you have 'Nature,' the terribly, terribly endangered."
Each poet will be reading his or her poems about nature, or man's place in it. Fry will be reading her poems about particular aspects of nature that she enjoys, such as individual plants or animals. McCombs will be reading from her recent book of nature poetry, "The Habit of Fire." Welt plans to read a longer piece analyzing our stance toward the natural world.
But expecting to inspire social change through poetry offers it own challenges.
"When you think climate change or Free Tibet, you don't always think, 'Hey, I know what we can do — let's have a poetry reading!'" says Welt. It's hard for poetry to stay relevant, he says, in an age of "tabloidism and e-mail" — but he also thinks that our attitude toward spontaneous e-mail writing and reading could actually translate into a healthy appetite for poetry.
"If [poetry] ends up an academic hobby — the last thing you want as a poet is to be like the guy at the Renaissance Fair who goes around playing the lute," he says. "That's no fun, for a poet. So you do want to do something that has a real impact on real people, bringing up real issues."
"I want people to take nature seriously, and to think about it," adds McCombs.
» Warehouse, 1021 7th St. NW; through May 4, free; 202-783-3933. (Mt. Vernon Square)

Written by Express' Chris Combs

Bearapalooza Roadtrip 2008

It's horrifying, and yet you can't look away.

Artificial People

April 12-15 at Frankenfolk, blog for my Humanities section on "Children of Frankenstein": Images and video of automata; computing pioneers; artficial beings in literature; contemporary robotics; uncanny valley -- supplement to reading of Stanley Perkowitz, Digital People.
Video of automata, Elektro at 1939 World's Fair, The Tin Man, audio-animatronic Lincoln, Cog, ASIMO, dancing robots, a lecture on the Uncanny Valley, "Mickey's Mechanical Man."
Also see Dave Bryant on The Uncanny Valley.
April 4: Video and Images from Metropolis.

Klaatu Barada Nikto, Gort