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Tilting at Windmills

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July 11, 2008
By: Kevin Drum

THE REAL WORLD....Steven Pearlstein today:

What started out as a credit crisis and then morphed into a broader financial crisis has finally worked its way into the real economy. That economic downturn — a recession, inevitably — is beginning to wash back on the already weakened financial sector, creating the kind of self-reinforcing vicious cycle that is difficult to control.

....As part of that "de-leveraging" process, households and some businesses are being forced to reduce their indebtedness, either by paying it down or admitting that they can't. But it is in the financial sector, where debt was piled on debt in ever-more complex arrangements, that things have begun to get real dicey. Prices for many credit instruments have collapsed, forcing banks and investment houses to take billions of dollars of real or paper losses. Meanwhile, creating new credit has been dramatically curtailed.

Honest, Jonah, there's nothing "mental" about this. It's as real as taxes. Phil Gramm wasn't being honest, he was being clueless.

Kevin Drum 2:42 PM Permalink | Trackbacks | Comments (55)

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Irony alert: Jonah Goldberg talking about ANYTHING being "mental," given his family tree.

Jonah, go amuse yourself by trying to activate a screwed-up iPhone.

Posted by: SocraticGadfly on July 11, 2008 at 2:52 PM | PERMALINK

The other day the local school superintendent (a good sized middle class suburban district) told our Kiwanis Club that the school system pays $4.65 per gallon for bus fuel (they buy in bulk), electricity is up, food costs are way up and supplies are more expensive, and that, thanks to the decline in real estate values, for the first time ever the district's total assessed valuation has declined. Translation higher costs, less money. Similar stories are repeating themselves across every school district, town, and county in the country. I have heard of police departments that are parking police cruisers to save gas.

I have seen 3 clients this week who could no longer afford to operate their vehicles, but since our community lacks any reasonable public transportation they are trapped. Maybe if Phil and Jonah lived in the real world they would begin to understand that the economic problems out there are not imaginary.

Posted by: Ron Byers on July 11, 2008 at 2:54 PM | PERMALINK

Anyway, I think Jonah's comments were politically dumb and substantially incorrect. Of course, I might feel differently if I were insulated from the real economy with wingnut welfare.

Posted by: Chief Angry Cloud on July 11, 2008 at 2:55 PM | PERMALINK

Most of the time Pearlstein is right on, but today's assertion that banks shouldn't be forced to mark to market because it might cause the banksters to lose their ass is way off target. They took the risk, let 'em pay the price. Let them go under.

Posted by: Vicente Fox on July 11, 2008 at 3:02 PM | PERMALINK

Gramm wasn't being honest or clueless, he was being the same corrupt shill for the securities and investment industry that he's always been. He played a not insignificant role in the creation of this financial mess that we are in now.

Shorter Gramm: Now is a great time to invest!

Posted by: Art Eclectic on July 11, 2008 at 3:05 PM | PERMALINK

Phil Gramm's lobbying is partly the reason why we're in the shitstorm we are in, so his comments are clearly self-serving.

Posted by: ack ack ack on July 11, 2008 at 3:06 PM | PERMALINK

Solution? A payroll surtax on everybody in the financial industry above a certain income level.

Posted by: SocraticGadfly on July 11, 2008 at 3:07 PM | PERMALINK

Most of the time Pearlstein is right on, but today's assertion that banks shouldn't be forced to mark to market because it might cause the banksters to lose their ass is way off target. They took the risk, let 'em pay the price. Let them go under.

If the banks to under, they're taking your money market accounts, IRAs, 401Ks, pension funds, bank deposits, home mortgages and basically, all the rest of your comfy way of life with them, so be careful what you wish for. If someone's handcuffed themselves to you, it's not a good idea to push them off a pier.....

Posted by: Stefan on July 11, 2008 at 3:15 PM | PERMALINK

Rich people should quit whining that without more tax cuts they won't be as rich.

Posted by: AJB on July 11, 2008 at 3:25 PM | PERMALINK

Stefan, you are right, but at the same time somebody, a lot of somebodies, need to pay for their dishonest, arrogant greed.

Posted by: Ron Byers on July 11, 2008 at 3:25 PM | PERMALINK

Revolution is never easy or comfortable.This opportunity rarely presents itself so clearly.Let the bastards go under and it will be painful for most of us.Starting from scratch is the best option for our grandchildren.

Posted by: paul revere on July 11, 2008 at 3:29 PM | PERMALINK

Ron Byers-
I would explain to you why there is an actual legitimate reason for keeping the book value of some assets at face value, rather than marking them to current trading value, but since you're more interested in venting some righteous anger than thinking through an issue I'll save my breath.

Posted by: epar on July 11, 2008 at 3:41 PM | PERMALINK

Go ahead and explain. I think I understand but a lot of honest, hardworking people are going to go hungry over the next few years. Why shouldn't rich people take a hit?

Posted by: Ron Byers on July 11, 2008 at 3:47 PM | PERMALINK

I"f the banks to under, they're taking your money market accounts, IRAs, 401Ks, pension funds, bank deposits, home mortgages and basically, all the rest of your comfy way of life with them, so be careful what you wish for."

Not quite. I do not know if money market accounts are FDIC insured but deposits certainly are. As far as the IRA's, 401Ks, and pension funds, only if you area shareholder in the failed institution. There are risks out there and the higher returns fuel bigger risks. If you happen to be one of the ones who gambled and lost my advice is be more careful next time. Many won't lose a dime.

"If someone's handcuffed themselves to you, it's not a good idea to push them off a pier....."

When someone allows themselves to be handcuffed to a bunch of crooks this is the price to pay.

They aren't taking a cent from my comfy life.

Posted by: jharp on July 11, 2008 at 3:58 PM | PERMALINK

I know how Jonah Goldberg keeps his job but it's gotta be embarrassing to his enablers.

How someone can be so astoundingly wrong on everything and still get published is mind boggling.

Posted by: jharp on July 11, 2008 at 4:03 PM | PERMALINK

Not quite. I do not know if money market accounts are FDIC insured but deposits certainly are.

Only up to $100,000. After that, the risk is yours.

As far as the IRA's, 401Ks, and pension funds, only if you area shareholder in the failed institution.

Generally, if you hold equities, you're likely to have some stake in these institutions. Certainly true if you have money in a pension fund, or if you're a public employee. You'd be suprised at how interconnected the financial system really is.

There are risks out there and the higher returns fuel bigger risks. If you happen to be one of the ones who gambled and lost my advice is be more careful next time. Many won't lose a dime.

No, that's not true. Many already have lost a lot, and there's precious few who won't lose money out of this situation.

When someone allows themselves to be handcuffed to a bunch of crooks this is the price to pay.

People weren't knowingly handcuffing themselves to crooks. They were handcuffing themselves, in most cases perfectly innocently and understandably, to their local banks, home mortgages, pension funds, state and local bond issues, etc. The trouble is that all of these financial instruments and more were collateralized and sold on.

They aren't taking a cent from my comfy life.

So you say, but it's not true. But even if it misses you, it's going to catch your friends, family and neighbors, and again, if they suffer you'll eventually suffer to. When, for example, your town can no longer pay for police patrols, or has to cut back on schools or other public services, or the garbage is only picked up once a week rather than twice a week, or four houses on your block to into default and get boarded up and property values sink, dou think your life will still be so comfy?

Posted by: Stefan on July 11, 2008 at 4:10 PM | PERMALINK

I don't usually defend Jonah and what Gramm said was idiotic but Jonah did have a good point about the state of public debate.

The way things currently work, both the left and right lie in wait for someone associated with a campaign to say something that is in any way controversial or can be misconstrued to mean something that was obviously not the speaker's intent. Then the professional outrage industry kicks into gear, everyone on one side or the other pretends to be offended and incensed, the speaker goes public with a restatement that says he didn't mean it that way, and the candidate has to distance himself from the person.

Then the outrage industry says how terrible it is that the candidate is "throwing X under the bus".

It is all very stupid - our own version of a kibuke dance.

Meanwhile our country continues to become a hollow shell of an empire - see Soviet Union, circa 1983.

Posted by: Just a Dude on July 11, 2008 at 4:19 PM | PERMALINK

Yes, it's particularly galling to hear this from the same Republican crowd that has been whining about taxes for decades. In the early days of the GWB administration, was there any great public demand for upper income tax cuts and for elimination of the estate tax? Of course not. It was Republican whiners who made this the issue of the day.

How often have I heard some jowly Republican living in a six-bedroom house and driving a Mercedes whine about how high his taxes are? Far too often.

Posted by: Virginia on July 11, 2008 at 4:27 PM | PERMALINK

Meanwhile our country continues to become a hollow shell of an empire - see Soviet Union, circa 1983.
Posted by: Just a Dude on July 11, 2008 at 4:19 PM | PERMALINK

Agreed but you have to be honest with the history of this. The stupidification of the debate was a deliberate conservative strategy to stop discussion of popular liberal ideas in the media. The obstructionism in congress is a deliberate strategy by the republican party to stop passage of popular liberal bills.

There is a truth to what has happened.

One of the reasons that the public are voting against the republican party is because they know the truth, even if they have trouble explaining it.

Posted by: Northern Observer on July 11, 2008 at 4:31 PM | PERMALINK

Whining led to the Revolutionary War.

Posted by: Brojo on July 11, 2008 at 4:31 PM | PERMALINK

Hate to defend Phil Gramm--his ideas about taxes are atrocious--but he has a point. There is a psychological component to any financial downturn, especially when there's panic and "a run on the banks." Not that one should completely ignore the actual suffering of real people.

What he's really describing is a kind of malaise of the American people, hmmm, where have I heard that before? Just because Phil said it doesn't mean it isn't valid. However, saying that to the American people is a sure way to lose an election, right JC?

Posted by: Jeff from WI on July 11, 2008 at 4:34 PM | PERMALINK

Stefan...excellent post. Our financial and economic worlds are so complex and interrelated, that the simplistic, vindicative response to the mess the big boys created, one we all feel, will just screw us even more. Too bad, 'cause I'd like to do a Jesse Jackson on 'em.

Posted by: jrw on July 11, 2008 at 4:35 PM | PERMALINK

Not quite. I do not know if money market accounts are FDIC insured but deposits certainly are.

Only up to $100,000. After that, the risk is yours.

So only deposit $100,000 per bank. Anyone smart enough to earn enough to have more than 100K I would think would be smart enough to know there are many banks.

As far as the IRA's, 401Ks, and pension funds, only if you area shareholder in the failed institution.

Generally, if you hold equities, you're likely to have some stake in these institutions. Certainly true if you have money in a pension fund, or if you're a public employee.

I stick by my words. Many don't hold equities that have a stake in these institutions.

There are risks out there and the higher returns fuel bigger risks. If you happen to be one of the ones who gambled and lost my advice is be more careful next time. Many won't lose a dime.

No, that's not true.

Yes it is true.

Many already have lost a lot, and there's precious few who won't lose money out of this situation.

Yes, many gamblers have lost. You say a precious few won't, I say I know many who won't. The ones who play it safe.

When someone allows themselves to be handcuffed to a bunch of crooks this is the price to pay.

People weren't knowingly handcuffing themselves to crooks.

I agree but nevertheless, they did.

They were handcuffing themselves, in most cases perfectly innocently and understandably, to their local banks, home mortgages, pension funds, state and local bond issues, etc.

A tough lesson, no doubt.

They aren't taking a cent from my comfy life.

So you say, but it's not true. But even if it misses you, it's going to catch your friends, family and neighbors, and again, if they suffer you'll eventually suffer to.

Wrong. My circle has been on to the crooks for too long.

Posted by: jharp on July 11, 2008 at 4:38 PM | PERMALINK

Stefan - moral hazard. Why should we as a nation allow the greed-driven parasites in the financial sector who contribute exactly NOTHING to society other than shifting paper around to walk away with their wealth intact? So they can just keep creating speculative bubble after speculative bubble to surf while playing with other people's life savings? These people have to be allowed to fail and when they fail they need to take down all the corrupt politicians who enabled them and allowed them to write laws and policy wholesale -- like Gramm for one.

Actions have consequences. These people sold their souls for pieces of silver and now the devil has come to collect his due. They should not get a free ride just because they will take down others, the others will survive just fine. There are already 6 empty houses on my block and we already only get our trash picked up once a week. My city can certainly trim some fat of the 10% of its workforce that makes over 100k a year.

Are you really saying with a straight face that we should all hold tightly onto our "comfy" lifestyles and turn a blind eye to the festering corruption in the financial sector?

Posted by: Art Eclectic on July 11, 2008 at 4:45 PM | PERMALINK

Art Eclectic,

Well put. Thank you and I could not agree more.

Posted by: jharp on July 11, 2008 at 4:53 PM | PERMALINK

401Ks and pension funds will be decimated regardless, and bank deposits are FDIC insured, so to hell with the pig bankers.

Posted by: Juanita de Talmas on July 11, 2008 at 4:55 PM | PERMALINK

The argument that if we do not subsidize the fraudulent financial institutions the poor will become... poorer, is not a solution to the underlying institutional problems that have led to the current situation. The debt/financial crisis is going to make everyone suffer, but the longer the reckoning is delayed the greater the suffering will be for the... poorest.

Posted by: Brojo on July 11, 2008 at 4:59 PM | PERMALINK

The ultimate expression of capitalism is piracy. Unregulated capitalism inevitably ends up eating itself. This is what you are witnessing today. Funny how all these right-wingers are now advocating increased regulation and government bailouts. Sounds like socialism to me.

Simple-minded disciples of Ayn Rand like Goldberg and Gramm think "laissez faire" capitalism will save us. They are dead wrong. Socialism produces a much more stable, sustainable society and less people get hurt. That's why Sweden has a higher standard of living than we do.

Posted by: The Conservative Deflator on July 11, 2008 at 5:05 PM | PERMALINK

Art Elective - "speculative bubble after speculative bubble".

Art I agree with some of the things you say, and disagree with others. But the fact that we seem to be lurching from one bubble to the next tells me only that "regular" people can be real suckers when it comes to their finances. People seem to have forgotten that old adage - If it looks too good to be true, it is.

Posted by: optical weenie on July 11, 2008 at 5:07 PM | PERMALINK

If it looks too good to be true, it is.

That is good adivce, but as long as fraudsters are allowed to offer people opportunities that are too good to be true, people will keep buying their lies. If something looks to good to be true, then regulators should investigate, shut it down, if it is fraudulent, prosecute the individuals perpetrating the fraud and seize their ill gotten wealth.

Bubbles are prevented from happening by well regulated and trasparent markets free of moral hazards. Ronald Reagan made a famous speech where he declared America was the last place people could become rich. That led to the S & L meltdown, which was paid for by all tax payers. W. Clinton repealed Glass-Steagall and that led to the stock market and real estate bubbles. Now we are in a commodities bubble, which some have called a super bubble. Bubbles are not business cycles, they are the deliberate manipulations of markets that the lack of transparency and oversight allow.

Posted by: Brojo on July 11, 2008 at 5:32 PM | PERMALINK

Lets not forget how Phil Gramm slid a provision in a spending bill in 2000 that paved the way for total deregulation of the commodity market.

Can you say Enron?


Posted by: Jet on July 11, 2008 at 5:35 PM | PERMALINK

I speculate the next bubble, after this oil commodity bubble bursts, will be an infrastructure bubble.

Posted by: Jet on July 11, 2008 at 5:38 PM | PERMALINK

You make me chuckle Jet! But the next bubble will be in renewable energy technology. I can just hear the powerpoints being generated now. I'll bet you $5 that there will be more than 1 person who will claim to be able to violate the laws of thermodynamics.

Posted by: optical weenie on July 11, 2008 at 5:46 PM | PERMALINK

You make me chuckle Jet! But the next bubble will be in renewable energy technology. -OW

People say Im a cheap date, so now I take my dates to the gas station.

Ennyhoo, maybe your right, but given what Ron Byers said I dont think I'm to far off

Posted by: Jet on July 11, 2008 at 5:54 PM | PERMALINK

Ah, Kevin, you neglected to mention that John McCain was a POW and was tortured.

Posted by: Hedley Lamarr on July 11, 2008 at 5:57 PM | PERMALINK

I'll bet you $5 that there will be more than 1 person who will claim to be able to violate the laws of thermodynamics.

I think McCain has already accomplished that what with all the hot air that cant possibly be explained. Heh.

Posted by: Jet on July 11, 2008 at 5:59 PM | PERMALINK

Not only do the anti-"whining" Pollyannas cheat by looking at averages (which don't show how badly the lower half is doing as such), but the "average person" isn't even as well off as advertised. Pollyannas often use the CPI of "core inflation" which has "volatile" food and energy prices (i.e., they might rise more than the government wants to accommodate in higher SS payments etc.) stripped out. Then there's also Boskin's attempt, fraudulent as Hell AFAICT, to make inflation seem less. But energy and housing got really bad, and housing is rough even after the recent drop. Bottom line: Most of us can still buy "junk" at good rates, but core necessities, education, etc., take up more and more of our incomes. Is it attitude and trickery, or stupidity, on the part of people like Gramm and by extension, McCain?

Posted by: Neil B. on July 11, 2008 at 6:14 PM | PERMALINK

Lets not forget how Phil Gramm slid a provision in a spending bill in 2000 that paved the way for total deregulation of the commodity market.

Can you say Enron?

And while we're remember that, let's also not forget that at the time his wife was moving from being head of the federal commission that regulates commodity trading to being a member of the Enron board of directors.

Posted by: rea on July 11, 2008 at 6:17 PM | PERMALINK

Why should we as a nation allow the greed-driven parasites in the financial sector who contribute exactly NOTHING to society other than shifting paper around to walk away with their wealth intact?

Just a quick point, but it's a common fallacy that shifting paper around contributes exactly nothing. In fact it contributes quite a lot, as that paper shifting enables our whole system of credit financing, which is how businesses are able to take out loans and invest and create jobs, and ordinary people are also able to borrow money, get car loans, obtain mortgages so they can buy a house, etc. Without paper shifting we're back to a barter economy.

Posted by: Stefan on July 11, 2008 at 6:22 PM | PERMALINK

No one is more clueless than Jonah Goldberg. No one. What kind of lunatic would want Gramm as president? And also, why would anyone say it out loud?

Geezus, what a dunce.

Posted by: Miss Otis on July 11, 2008 at 6:27 PM | PERMALINK

The costs of having pResident Bush are high, but the blood-letting has mostly been overseas. Now it's coming home to us.

Democrats in Congress are trying to solve these problems, so fewer people will be hurt. But, it takes time for them to find legislation which can be passed into law.

The upcoming oil markets regulation bill and the energy bill are likely to drive Republicans nuts and it is definitely going to be rough going with lots of pressure from Bush/Cheney to stop everything.

Who will get hurt the most? That's not entirely clear, but it's safe to say we have all paid a price already and there's more to come. We're far from out of the woods and even if Obama is elected and in office there are lingering effects such as the Supreme Court justices and court case decisions and crazy laws Bush passed with the Republican Congress which will have awful effects for some time.

It's gonna take time to get through this.

Posted by: MarkH on July 11, 2008 at 6:37 PM | PERMALINK

Don't underestimate Phil and Wendy Gramm. Phil was one of the principal authors of financial deregulation that resulted in our current mess.
Wendy was on ENRON's board of directors (audit committee) and both are walking around free. Their main talent is their ability to stay two steps ahead of the sheriff.

Posted by: nonheroicvet on July 11, 2008 at 6:42 PM | PERMALINK

Don't underestimate Phil and Wendy Gramm. Phil was one of the principal authors of financial deregulation that resulted in our current mess.
Wendy was on ENRON's board of directors (audit committee) and both are walking around free. Their main talent is their ability to stay two steps ahead of the sheriff.

Posted by: nonheroicvet on July 11, 2008 at 6:42 PM | PERMALINK

How someone can be so astoundingly wrong on everything and still get published is mind boggling.
Posted by: jharp

You know, I'm getting the feeling that the reason we're headed towards the economic shithouse is that a lot of anstoundingly wrong people still have their jobs. Many of whom are politicians, pundits, bankers and economists.

Posted by: AnotherBruce on July 11, 2008 at 7:09 PM | PERMALINK

But Stefan, you are only half right. There is ordinary lending for business and buying housing, and then another regime of derivatives, packaging of credit instruments, etc. The boundary isn't always clear, but we certainly can differentiate and that should be part of tax and "rescue" policy.

Posted by: Neil B. on July 11, 2008 at 7:29 PM | PERMALINK

Thanks everybody for a generally interesting and intelligent discussion.

Posted by: emjay on July 11, 2008 at 9:31 PM | PERMALINK

But you got to admit, Johah is right.

Phil Gramm will never be President.

Posted by: Me_again on July 11, 2008 at 9:53 PM | PERMALINK

Meanwhile in after-market-close action, the Feds seize IndyMac Bank... reportedly 2nd largest bank failure in US history.

In other news, a possible Freddie Mac and Fannie Mae default may total 5 Trillion... yes, that's TRILLION.

Not many people grasp just where this is headed... yet.

Once I had a railroad
I made it run
I made it run against time
Once I had a railroad, but now it's gone
Buddy, can you spare a hundred dollar bill?

Posted by: Buford on July 11, 2008 at 9:54 PM | PERMALINK

I will admit that Clinton pals Raines and Gorelick ran the two mortgage bundlers into the ground but there is a definition of recession. Obama says words matter so I'd hold off abusing Gramm when he's right and you are wrong. But you won't.

Posted by: Mike K on July 11, 2008 at 10:11 PM | PERMALINK

Of course, you might be able to create a recession; sort of like Chuck Schumer did with IndyMac Bank.

Posted by: Mike K on July 11, 2008 at 10:15 PM | PERMALINK

Mike K, John Reich is a Republican appointee who failed to properly regulate IndyMac. If he had been doing his job IndyMac wouldn't have gotten into trouble and Schumer's letter wouldn't have been written.

Like a lot of Republicans, Phil Gramm included, Reich is clearly trying to shift blame away from himself. But you knew that, didn't you?

Posted by: Ron Byers on July 11, 2008 at 10:23 PM | PERMALINK

shorter mike k: bu..bu..bu..bu..bu..bu..bu...bu..bu..bu...bu..CLINTON !

Posted by: mr. irony on July 12, 2008 at 8:46 AM | PERMALINK

mike k: Of course, you might be able to create a recession

mike k's version of the free market = only the insiders can have information....

Posted by: mr. irony on July 12, 2008 at 8:48 AM | PERMALINK

"Finance is the art of passing money from hand to hand until it finally disappears' -
Robert W. Sarnoff

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