Privatizing Gains and Socializing Losses

Posted on September 30, 2008 | 1 comment

Someone asked me yesterday if I was going to do a post on the big bank bailout, and I reviewed my notes from a post I was going to write just two months ago, after the Fannie and Freddie bailouts. At the time, it seemed egregious that those were going to cost $50 billion, or around $170 per person in the US. How naïve and innocent we all were in those days.

Rather than writing about the current bailout per se, other than to say that it’s prima facie an utter Mongolian cluster f**k, I’d like to put it in the broader context of privatizing gains and socializing losses, which has been a special hobby for the current administration but seems to be a general approach in Washington DC.

As regulations were peeled away, leaving hedge funds free to trade opaque securities and mortgage bankers free to write unsustainable loans, members of the financial community made fortunes. These fortunes range from Wall Street titans buying Hamptons estates to Phoenix mortgage brokers buying a new Hummer, but they were all built on a house of cards. And now that the card house has fallen like a Jenga tower at the end of a drunken evening, the fortunes are still there while the taxpayers are picking up the tab.

Just to choose someone at random, let’s look at Michael Perry, the longtime CEO of IndyMac bank, until it was taken over by federal regulators. His total compensation in 2006 was over $4 million. In 2007 it went down to $1 million, but that didn’t include payments to his father ($86,925: independent inspector), his brother ($346,621: loan originator) and his sister-in-law and cousin, both employees making over $200k per year. But most of Mr. Perry’s fortune was made in equity. In May 2005 he netted $6 million from exercising options and in August 2005 he netted another $4 million. He filed SEC forms for many other option exercises, but I got tired of looking them up. You get the point: this guy made tens of millions of dollars while running his bank into the ground. And courtesy of the Bush tax cuts for the wealthy, he got to keep more of his ill gotten gains than he ever would have before.

The FDIC is currently estimating the takeover of IndyMac will cost nearly $9 billion. None of this money is coming from Mr. Perry. He gets to keep his tens of millions of dollars, while we all (anyone who uses a bank, since the FDIC is funded by banks, not taxpayers) pay the cost of his terrible management. This pattern – operator is unburdened by regulation, takes excessive risks, makes fortune, is bailed out by society while keeping fortune – has become almost paradigmatic for the Bush administration. Officials preached deregulation and markets while fortunes were being made, but now that things have soured, suddenly society is expected to bear the costs.

This is clearly a bad idea. Even an old Republican hand like George Schultz recently said “People and institutions behave more responsibly when they have some of their own equity at stake.” George and I are not the only ones who think it’s a bad idea; here are links to some other folks who agree:

  • NY Times writer David Carr, who recently described a mortgage broker right out of college: “We ordered three, four bottles of Cristal at $1,000 per bottle.” The taxpayers aren’t getting those bottles of Cristal back.
  • Foreign Policy magazine: “What is reprehensible here is that losses have now been socialized to taxpayers.”
  • The Financial Times: “Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses?”
  • Nobel Prize winning economist Joseph Stiglitz: “Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us.”
  • Nobel Prize winning economist Robert Solow: “And once the banking system is involved in a big way–owning, and holding as collateral, assets whose likely value is hard to understand and impossible to calculate–then we are all at risk.”

Five data points do not make reality, but let’s just say, for fun, that most people would agree to my proposition: it is bad to keep gains private while taxpayers cover the losses. So why does it keep happening? Here are some ideas:

  • Bankers are wealthy while taxpayers aren’t, and Republican policies generally benefit the wealthy
  • Banks and financial firms hire lobbyists and make campaign contributions, while taxpayers don’t
  • Republicans think that markets are self correcting, but they aren’t (there will be an entire post on that philosophical faux pas soon)

But another reason it keeps happening is because the voters let it happen. When Phil Gramm was jamming though poorly designed deregulation laws, none of his constituents voted him out.  Maybe Texas voters bought his “big government is bad” argument. Or maybe they didn’t realize the possible implications of unregulated trading in financial derivatives. Or maybe they simply weren’t paying attention. Whatever the reason, if voters don’t punish politicians for acting stupidly, then voters (ie. taxpayers) are going to end up paying the costs, all the way up to (and beyond) $700 billion.

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Republicans and Small Government

Posted on September 26, 2008 | Leave a comment

The Republicans bill themselves as the party of small government. It’s stated right in their 2008 platform: “constrain the federal government.” This is partly a historical-constitutional position, resting on the 10th Amendment. It also reflects the Republican belief that large government is inefficient and unresponsive to the people. Small government also meshes with Republican tax policy (to be discussed soon), since a smaller government requires less tax revenue to support it.

This all sounds reasonable. Large organizations of any kind tend to bloat, reducing efficiency and responsiveness. But some tasks simply require the government, because they are so big, or so complex, or demand a consistent approach throughout the country. Take the military for example, or the FDA’s drug approval process, or regulation of pollution that crosses state lines. Or look at the financial markets, and what has happened over the last year as a consequence of a shrinking governmental role in regulation.

To stick with the FDA example, if the federal government doesn’t regulate drugs, who will? I can’t imagine anyone thinks that we should just let drug companies decide what they can and cannot sell. Should the market decide? By the time the market has figured out a drug is dangerous, people will be dead. Try drinking Chinese milk if you don’t believe this. Perhaps the Republican platform would prefer that states handle this. Republicans support “devolving” power from the federal to the local level. But should states regulate drugs? Counties? Cities? How local can you go?

There are two main problems with devolution. As discussed above, some tasks are simply too big for even state governments to handle. Second, with devolution comes replication. Instead of one large federal bureaucracy, you have 50 state bureaucracies, each doing essentially the same thing. Which is less efficient?

As an example, in California there is a state board of education along with 1,000 school districts and county boards of education. Each of these entities is evaluating textbooks and curriculum. The local districts have an association that represents them in the state capital, and that association alone employs 100 people. It’s hard to believe that this system is efficient or responsive to its constituents.

So while Republicans attack big government (recall Reagan’s famous quote: “government is not the solution to our problem; government is the problem”) they don’t present a reasonable alternative. I am sure that some truly believe in a federalist system, and intellectually want to push decision-making as close to the people as possible. But many Republicans, I’m afraid, are simply against big government because they don’t really want government to help anyone but themselves.

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Republican Energy Policy

Posted on September 25, 2008 | Leave a comment

When writing about any energy policy, there are certain facts which need to be put on the table:

  • the amount of oil in the world is finite
  • most of the currently known reserves are in places unfriendly to the US: the Middle East, Russia and Venezuela
  • demand for oil from emerging markets (India and China) will continue to grow

With those facts as a backdrop, the Republicans have decided on an energy policy that is summarized in their convention chant: “drill, baby, drill.” They have embraced drilling off both the west and east coasts of the US as their solution. But that’s not an energy policy: it’s a band-aid trying to cover a gaping wound.

Not that drilling is bad. But drilling isn’t enough. It’s nowhere near enough. The Department of Energy’s own study states that drilling in the areas the Republicans want to open would generate 200,000 barrels of oil per day (1% of US daily consumption), but not until 2017. Other than in the Gulf of Mexico, where we already drill, there just isn’t that much oil off the US coastline.

Which means that the Republicans can place drilling platforms all over the California coast – it will have virtually zero impact on gas prices. Nor will it reduce our dependence on enemy states for our oil. “This is a troubling trend” understates Bruce Bullock, director of SMU’s energy institute.

After drilling – way after drilling – the Republican policy looks at nuclear and coal power. Nuclear power produces zero greenhouse gases, and the newer reactors are supposed to be much safer, although there is that pesky toxic waste. Coal is a dirty fuel, both in the mining and the burning, and the new clean burning technology is far from ready. But the main problem with nuclear and coal is that you can’t put them in your car.

Right now gas is still at around $4.00 per gallon and that price is at the mercy of oil sheiks, Hugo Chavez and Vladimir Putin. Do we really want to let those guys control our driving habits? I don’t. But nothing in the Republican plan helps free us from our oil dependence. Automobile fuel efficiency, alternative fuels, conservation – none of this is mentioned. Nothing but drilling, which won’t really help. So whose interests does the Republican plan represent?

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Politics and Culture, Part 2

Posted on September 19, 2008 | 3 comments

Tuesday’s post was about Lee Siegel’s theory that Republicans win by focusing on heartland culture while Democrats waste their time talking about policy. Today’s post addresses what Democrats can do about this problem.

Some of the easiest, fastest responses are tactical. For example, Democrats should divide and conquer: they can discuss policy with standard liberal audiences and talk culture to the heartland. In addition, they should be advancing their own cultural narratives, particularly those that tap into Siegel’s call for “vicariousness.” Show Obama and Biden being regular people: shopping, going to church, driving their kids to soccer practice. Distribute the message via the cultural milieu itself rather than through the media. Have the candidates talk about their personality and their dreams. And Obama, please, lighten up a little. The Democrats should take Spiegel’s trope of “ordeal and humiliation” and use it, playing up their own descent and rebirth narratives. Obama has the single mom/neglectful dad angle, and Biden has his car crash (yes, it’s utterly debased to use it, but his son already opened that door during the convention).

But these tactical moves don’t really turn Siegel’s thesis to our advantage. A larger solution is to emphasize the Democratic culture. Fortunately, that culture actually synchronizes with policy, unlike the Republican culture, which fundamentally conflicts with Republican policy. But what is this Democratic culture, and is it lived like the Republican one?

I posit that the Democratic culture is the culture of the founding fathers, which is so ingrained in the American psyche, so elemental to our identity, that we live it every minute of every day. The Democratic culture is one of equality and opportunity, where people who work hard deserve a better life for themselves, regardless of class, color, creed or gender. This is a culture that takes seriously the words “all men are created equal, that they are endowed by their Creator with certain unalienable Rights.” The Declaration of Independence is one of America’s totemic documents, and I think just as powerful as the Jungian archetype of descent.

For the Democrats, this culture is not a political strategy but the very essence of the party, the manifestation of their values, and thus is inseparable from policy. This is a culture, backed by policy, which favors hard work over family connections. It sides with student loans, not yacht owners; with sick children, not insurance companies; with producers, not paper pushers; with main street, not Wall Street. During a week when financial debacles are destroying value at unprecedented rates, it is worth remembering whose culture, and whose policies, support a market that is free but regulated. Democratic culture lives in churches that help the needy, in safety nets that help the disadvantaged, in methods of supporting families’ choices, and yes, in the ability of a mixed-race man with a single mother to become president.

If indeed people respond more powerfully, more viscerally, to culture than to policies, then let’s talk culture. In both red states and blue states people believe in the culture of forming “a more perfect union,” but only one party includes everyone in that union.  The Democratic culture is built on supporting the average American, on making real a “government of the people, by the people, for the people,” so don’t hide that culture – embrace it, spread it, and follow it to victory. Because what’s great here is that Democratic culture can speak to the heartland just as forcefully as the Republican culture can, and the Democrats can back their culture up with policies that reflect and actualize their culture of equality and opportunity.

Many thanks to Septa for her thoughts and edits.

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Politics and Culture, Part 1

Posted on September 16, 2008 | 1 comment

Cultural critic Lee Siegel wrote a great article in Saturday’s Wall Street Journal describing how Republicans created the culture wars and continue to win them because Democrats don’t even understand the game they are playing. I’ll quickly summarize his argument, but strongly encourage you to read the article.

Siegel claims that Republicans view culture as something lived: your religion, your family or your sexual preferences. Liberals look at culture as something separate from daily life, something to be dipped into (e.g. opera), which means that they discuss policies as something distinct from culture. Republicans don’t even need to discuss policies…they just discuss culture, which, because it is personal and emotional, captures people’s hearts in a way that policy cannot. Culture trumps policy. As long as Democrats are talking about economic policies while Republicans are talking about a lived culture, Siegel states, Democrats will lose.

In general, I find Siegel’s argument fairly compelling. It explains why hugely qualified Democrats (Al Gore) lose to clearly unqualified Republicans (George W. Bush).  It helps explain how Bill Clinton (an exceptional Democrat in that he came across as cultural more than policy-driven) beat George H.W. Bush (who was more wonk than culture warrior). It explains the dynamic that Thomas Frank described in What’s the Matter with Kansas. And as a committed liberal, I find Siegel’s piece profoundly disturbing, because the process he describes seems to be getting more and more severe.

However, I am hoping that by unpacking some of Spiegel’s ideas, we might be able to find some ways that Democrats can integrate policy with culture and turn this dynamic to our advantage.

In the article Siegel discusses “contemporary democracy’s leveling maw.” This leveling is a key piece that Siegel touches on repeatedly but rarely addresses explicitly. He talks about how McCain “is not above us,” contrasting that with the three elite intellectuals (Gore, Kerry and Obama) the Democrats have nominated in the last three elections.

He touches on this again by discussing the growth in “vicariousness….We love people who make it possible for us to imagine inhabiting their lives.” He ties this to the growth in memoirs of regular people (e.g. James Frey); we want our lives glamorized just as the authors’ are.

Siegel combines the leveling and the vicariousness to explain Sarah Palin’s appeal. “Gov. Palin’s blatant struggles with inadequacy serve as proof of her potential to lead. She wins the vicariousness sweepstakes hands down.” But is this really where we want America to head? Where a person’s inadequate resume and messy personal life are actually their selling points? This is a problem. I don’t think society wants a race to the bottom, or even the middle, in its leaders. The person running the country should excel, rather than be average.

Finally, Siegel notes that “heartland conservatism” has a trope of “ordeal and humiliation,” in which an authority figure must be humbled before he can lead again. McCain’s torture in a POW camp leaves him pre-humiliated and thus perfectly positioned. This trope fits the classic hero pattern of descent and rebirth, which, as James Frazer and Carl Jung pointed out, is among the most common in human society. Republicans are thus able to take advantage of a very powerful mythology.

Tomorrow: what Democrats can do

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Lipstick on a Pig

Posted on September 11, 2008 | 1 comment

The Republicans are now calling Barack Obama sexist for using the phrase “lipstick on a pig,” claiming that he is subtly referencing Sarah Palin’s “pitbull with lipstick” laugh line during the Republican convention. This isn’t going to work. This CAN’T work. It’s dishonest and hypocritical and the American public is not that stupid.

Just because the McCain spin machine makes their claim repeatedly does not make it true. People will see through this ridiculous sham.

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Republicans Who Address Income Inequality

Posted on September 10, 2008 | Leave a comment

It deserves notice that there are a few Republicans who are taking income inequality seriously and see it as something which needs to be addressed.

David Frum wrote an article in Sunday’s NY Times about how regions with high income inequality tend to vote democratic. He pointed out that if Republicans don’t address growing inequality, they will keep losing districts. Politically expedient, yes, but Frum has written an entire book on the need for a more compassionate conservatism.

Atlantic editors Ross Douthat and Reihan Salam also have a book out: Grand New Party: How Republicans Can Win the Working Class and Save the American Dream. And Minnesota governor Tim Pawlenty, who was reputedly on the shortest of short lists to be McCain’s VP, is credited with coining the term “Sam’s Club Republicans.”

Are these guys purely recognizing that working class whites are a bulwark of the Republican base, and therefore must be helped? Or do they actually recognize a moral or fairness problem with growing income inequality? I don’t know, and I haven’t read their books yet to find out. But either way, they are rare, and should be saluted at the very least for thinking differently.

Plus, I am about to start a series of posts that will attack Republican thinking and policies, so I feel like I should say something positive first.

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Why Voters Hate Campaign Spinners

Posted on September 4, 2008 | 2 comments

Why? Because they lie and/or refuse to answer questions.

Example one: McCain’s senior advisor Steve Schmidt was quoted in today Wall Street Journal about whether Sarah Palin had been fully vetted:

This vetting controversy is a faux media scandal designed to destroy the first female Republican nominee for vice president of the United States.

That is nonsense, a blatant lie. Wondering how a presidential candidate made a giant decision (his choice of a VP) is a totally legitimate line of questioning. Even if you support McCain and Palin, you might wonder “did he really know everything? Did he rush into that pick?” To claim that it’s a “faux media scandal” is ridiculous. That is what journalists are supposed to do: ask tough questions.

 

Example two: this clip from CNN, which has gotten a fair amount of buzz. In it, CNN’s Campbell Brown asks McCain spokesman Tucker Bounds some simple and legitimate questions about Sarah Palin. He ducks and weaves, refusing to answer the questions, and then attacks the journalist for “belittling” Palin. Avoiding questions and sliming people makes the average voter completely tune out these spinmeisters.

 

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More On Income Inequality

Posted on September 3, 2008 | Leave a comment

Princeton economist Alan Blinder wrote an op-ed in the NY Times recently describing a new study that showed income inquality increasing during Republican administrations and decreasing during Democratic adminstrations. This pattern goes back for the last 60 years. The study also notes that the economy has grown faster under Democrats during the same 60 year period.

Although Blinder has worked in Democratic administrations, he is a big deal economist. His textbook Economics: Principles and Policy, written with William Baumol, is a classic, which I used as an economics major in college.

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Thoughts on Sarah Palin

Posted on September 2, 2008 | 4 comments

Everyone else has commented on Sarah Palin, the surprise VP pick of John McCain, so I might as well throw down my thoughts.

In several ways, she is a very clever tactical pick for him:

  • The Republican base loves her
  • Picking a woman reestablishes McCain’s maverick reputation
  • And makes a blatant play for the disaffected Hillary Clinton supporters
  • She is a fresh new face, a Washington outsider, so McCain can play the change card

On the other hand, her selection completely eviscerates the McCain argument against Obama that seemed to be working best: that he is too inexperienced to be president. Palin’s dearth of experience makes Obama seem like a wizened old man. Mayor of Wasilla, Alaska, population 8,471, leading to a couple of years as governor of a state with population: grizzly bears. Seriously, Alaska has a population of 670,000, which is smaller than San Francisco, where I live, and nobody is suggesting that our mayor Gavin Newsom is qualified to be president (and that’s not just because he is a marginally competent pretty-boy tool).

Republican supporters are talking up Palin’s “executive experience,” but that is as moronic as Fox News’ claim that she has international experience because Alaska is near Russia. Does anybody really think that being an “executive” is that much different than running a Senate office? That’s like saying your marketing VP isn’t qualified to be CEO because she hasn’t run a whole company even though VPs of marketing make great CEOs all the time.

Most Hillary Clinton supporters I have seen interviewed have been insulted by the concept that they will get behind Palin just because she is a woman. However, the hard core PUMAs, who I have queried before, seem mixed. Which is moderately crazy, given that Palin supports none of the causes that Hillary does, and is especially conservative on the traditionally feminist causes.

Finally, I reckon I should comment on the new controversy, about whether Palin will have time to be VP and to be a good mother, and whether it’s sexist to even bring it up. She is the one who positioned herself as a “family values” candidate, so I feel like her family values are fair game. I should also note that having five kids, one an infant with Down’s syndrome, is a lot of work, for both the mother and the father. As I told my friend Catalina, when feminists say “nobody questions whether Obama can manage being president and being a father,” I have to reply that Obama has only two children, both healthy. That being said, there is no question that our society has higher expectations of mothers than of fathers, and it’s entirely likely that if Todd Palin were the VP candidate, nobody would be questioning his ability to manage.

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