Unemployment Still Sucks

Not to put too fine a point on it, but this sucks:

In August, the number of unemployed persons increased by 466,000 to 14.9 million, and the unemployment rate rose by 0.3 percentage point to 9.7 percent. The rate had been little changed in June and July, after increasing 0.4 or 0.5 percentage point in each month from December 2008 through May. Since the recession began in December 2007, the number of unemployed persons has risen by 7.4 million, and the unemployment rate has grown by 4.8 percentage points. (See table A-1.)

You wanna know what table A-1 looks like?  Here you go:

Oh, sorry, that’s a graph. Anyway. U-6, the number that really tracks who’s unemployed, is still discouraging, but hasn’t changed since last month: 16.8 percent. Andrew Leonard, as always, has a better breakdown.

Wasn’t the stimulus supposed to help by now? Well, yes and no. Von at Obsidian Wings makes a long and credible argument that the stimulus as passed was too back-loaded, providing to much money for job creation next year and not enough for the current year. I can see that logic, and as someone still without a job, I, too, wish there’d been a bigger investment early on.

But to say that the stimulus isn’t working fast enough isn’t quite true. The Treasury and Energy Departments announced just this week that they’re investing about $500 million in 12 wind and solar farm projects in the U.S., an announcement that comes a month earlier than the deadline for making the awards. I’m particularly happy about this announcement, as Oregon — the state with the second-highest unemployment in the country and, yes, my home — will benefit most from the investments, with over $130,000,000 coming to three big projects. (More on that next week).

I agree that the stimulus plan, as written, has problems, but it is in large part being deployed more quickly and often more efficiently than I had expected. Which doesn’t make these numbers any easier to take, but does, at least, remind me that things are still scheduled — sigh — to get better soon.

Cash for Clunkers Could Use an Upgrade

Just before dashing off for their August break, Congress today tripled the total investment in the Cash for Clunkers program, adding $2 billion to the existing $1 billion that’s already been allocated and spent.  Cash for Clunkers is the program under which car owners can trade in a qualifying vehicle — one that gets 18 miles per gallon or less — for another, more efficient vehicle.  Improve the mileage by at least 4 mpg and you get $3,500 toward your new vehicle; raise it by 10, you get $4,500.

^{Credit: Flickr/mazdamiata/ / CC BY-NC-ND 2.0}

The program has apparently been a boon to car dealers, who’ve otherwise had a rough year.  Since buying used cars with better gas mileage also counts under the program, it’s a bit more inclusive than efforts to otherwise prop up the car sales industry, as the profits aren’t exclusively being seen by company dealerships.  The benefits seem obvious.  What could be the downside?

The downside so far is that the program isn’t well-organized, and so we may be pouring good money into creating nationwide headaches for dealerships.  There’s another way to look at this, though: what if we think about Cash for Clunkers as a pilot program, instead of a discrete single-time slush fund? 

Cash for Clunkers has been wildly popular so far, and it seems like a program that could benefit quite a wide swath of the population if it continues.  People can get more fuel efficient cars, which is better for the environment and better for the country, as we start needing less fuel from overseas.  The car dealerships make some sales, which means the people at the dealerships get to keep their jobs — and get to spend their paychecks in the community.  The auto industry gets the picture, that Americans are (slowly, yes, and perhaps not permanently) getting tired of driving gas hogs, and they continue (and perhaps accelerate) their race toward greener technology.

I’m a little afraid that, in the great governmental tradition, Cash for Clunkers will become either a a permanent program, unchanged except, probably, by increasing bureaucracy and internal inefficiency, or, worse, that it will become a one-off, one-time feel-good solution to a series of much larger problems.  Congress gives Cash for Clunkers more funding and congratulates itself for helping business and the environment; consumers buy a (sometimes only slightly) better car, and feel better about their own investment; and everybody quickly forgets that this is a start, not an end.

Why not consider Cash for Clunkers a pilot program in a larger package of government involvement in improving America’s motorpool?  For instance, what of the cars — as shown and noted extensively at No Cash for Clunkers — that are, by condition if not by model, no longer as efficient as they could be?  What if instead of $3,500 a person to buy a new vehicle, the government offered 30 or 40 percent vouchers toward repairs that make a vehicle more fuel efficient (pending government inspection)?  What if they offered a flat $3,500 for turning in a car and replacing it with a bicycle?  What if they handed out bus passes for free in the city, contingent upon the tickets being used for a certain number of trips every week? 

Cash for Clunkers got quick Congressional support because it’s being billed as an auto industry rescue plan as much as (and sometimes more than) an environmental program.  Every program above, however, could be billed the same way.  In this economy, job creation and retention are the magic bullets of legislation.  Democrats and Republicans voted for C4C today.  Maybe the same coalition could be swayed to make more major steps toward environmental protection in this, well, environment, if only the White House would work on framing the issue as one of long term economic protection instead of short-term economic intervention.

Speed Bump: Supreme Court Puts Hold on Chrysler/Fiat Merger

It seems the marriage of Fiat and Chrysler has hit a speed bump (NYT):

Justice Ruth Bader Ginsburg, who handles emergency matters arising from the United States Appeals Court for the Second Circuit, issued a stay of the sale, preventing Chrysler and Fiat from completing the transaction immediately.

There’s a slim possibility this could become a serious roadblock to the merger, which was set to conclude at 4 p.m. today after the Second Circuit denied the stay and allowed the expedited path to merger to proceed.  Now, instead, there could be a delay of weeks, as Ginsburg and possibly the full Court decide what to do.

The arguments being made by the pension funds — the Indiana State Teachers’ Retirement Fund, the Indiana State Pension Trust, and the Indiana Major Moves Construction Fund — are pretty interesting and could have wide-ranging consequences, should Ginsburg choose to pass the issue up to the full Court.  The mostly likely argument to get them anywhere, as the Wall Street Journal’s law blog summarizes, is that they’ve had their constitutional rights violated by this deal, because junior creditors were privileged over senior lenders in Treasury’s deal.  The funds might have standing to argue that, but will need to prove existing, specific harm.

The trickier charge, and the one that makes me more uneasy, is this:

The United States Department of the Treasury (“Treasury”), purporting to  utilize powers conferred upon it by the Troubled Asset Relief Program (“TARP”) established under the Emergency Economic Stabilization Act of 2008, 12 U.S.C. 5201 (“EESA”), will have been permitted to structure and finance the reorganization of Chrysler without any judicial review of its authority to do so (the Bankruptcy Court incorrectly disposed of the issues by deciding that Appellants lacked standing);

Full text of the Pensioners’ Application is here, in PDF.  I’m not uneasy because I think that’s a bad charge — rather, it certainly seems like it’s true.  TARP hasn’t undergone any significant judicial review, and it seems like, if challenged, the authority of Treasury and the Fed to intervene in rescuing companies like G.M. and Chrysler, particularly when their decisions have involved the kind of leverage that comes close to outright threats, could crumble.  Beyond that, my faith in the lawyers at Treasury in particular is pretty thin, so I’m not sure I believe that they drew this up in an unassailable way.

I don’t think the Constitution prohibits the government from intervening in business in the U.S.  But I can certainly see how the current methods, which have at times felt slap-dash, might be unraveled by the Court.  Is that for the better?  I don’t know.  I don’t completely buy anymore the argument that Chrysler needs to be turned around in 30 days to survive, though I do believe that its workers will suffer more and harder for each day that the merger is delayed.

I’m actually hoping Eric Holder will have to issue a statement about this.  In fact, I find myself suddenly wishing that Holder was part of that Auto Task Force surrounding the president last week.

Friends Don’t Let Friends Drive Toxic Assets

The Legacy Loans program, a sizable chunk of the Geithner Plan, is dead, reports the New York Times.  The FDIC has “called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets.”

I’ve used my car before to explain this program, so maybe I can use it to explain the death.  In this scenario, the role of the Bad Bank is played by me; the Toxic Asset is my car; and Tim Geithner and Sheila Bair, Treasury Secretary and FDIC chair respectively, play themselves. 

^{By CatKaoe}

Remember, if you will, that in our last scenario, my accountant, Tim, had offered to partner with his friend Sheila to offer potential buyers of my car a pretty sweet deal: Sheila would loan 80 percent of the money to any potential buyer, and Tim would invest up to half of the remaining cost of the purchase, which meant someone could buy my car for about 10 percent of its auction price.  That would give me extra money to spend in the economy (hooray!).  It would also allow the dealer that bought my lemon the chance to fix it up and hold onto it until the market for bad cars goes back up.  Win-win, with the possibility of Tim and Sheila taking a big hit (taxpayer lose).

But what’s happened since this initial offer is that I, holder of the toxic car, have fallen back in love with it.  That burning oil smell — it’s the scent of nostalgia, of summers spent on hot tar highways.  The scratches and dents merely make the car more hip, like a worn pair of jeans.  I’m starting to think I could convert it to bio-diesel.  In short, I’m no longer willing to sell for anything less than the original $1,000 I thought it was worth.  I am not willing to put it up for auction, as Tim said I had to do.

Now, maybe I’m being honest about that.  Maybe I really do think the car’s gonna make it.  But maybe I don’t want to put the car up for auction because last month, I applied for a new apartment, and as part of my credit check I listed the car as an asset when I did that — an asset worth $1,000.  Now, I don’t want to put the car up for auction, because it will become clear pretty quickly that the car is only worth $700, and I could lose my apartment. 

Or maybe I don’t want to sell the car because I no longer need to sell it.  The market’s getting a little better, I’m feeling more flush, and I think I can afford to pay to maintain it until the time comes when it will be worth what I’m willing to sell it for.  It will be vintage soon, you know?

Now, Tim and Sheila — Tim in particular — have an interest in making sure I’m telling the truth about my motivation.  Because if I’m not selling because selling will make me look insolvent, well — that means I’m already insolvent.  If I’m not selling because I’m ready to spend, spend, spend anyway, then that means the market is improving, and the healing has begun (and quick, Tim says, let’s get some posters printed about that one, and make sure we send one to Paul Krugman).

Ezra Klein outlined both of these reasons as why the banks might not be willing to jump into the Geithner plan.  Kevin Drum at Mother Jones says it’s probably the insolvency problem, and that’s really, really bad, because it means that not only did the Geithner plan not solve the banks’ problems, but the banks are being allowed — and maybe, post-stress test, encouraged — to live on in denial that will eventually come back to bite us all.

To extend the metaphor: there exists a danger to the community if I continue to drive around a broken car while swearing that really, it’s fine.  Not only am I not spending as much as I could be, since I’m constantly worried about my toxic asset, but I might be actively making the whole community less safe by showing them that it’s cool to keep broken cars.

I think there’s also a third option, here.  Banks might be deluding themselves; they might be healthy enough to afford hanging onto their loans; and they might actually be afraid to deal with the government.  Several banks, post-stress test, raised a bunch of capital in advance of leaving TARP.  If they get re-entangled with the Geithner Plan now, they’ll also get pulled back into the shady land of government regulation over compensation.

In short: am I unwilling to sell the car because I still love it, because I still need it, or because you’re not the boss of me, Tim Geithner?

It could be all three (and none of these are particularly good reasons, really).  But whatever it is, I hope there’s a plan B.  I hope Tim and Sheila and Ben Bernanke have a better idea of what to do next than just what Sheila Bair said they’re going to do, which is wait and see if the PPIP might be needed later.  That’s only an OK plan if the assets don’t get worse — and I am not at all encouraged by our jobless rates, the rise in foreclosure and bankruptcy claims, and the continued need of companies with terrible mortgages on their books (yesterday GMAC got another $7.5 billion).

At some point, Friends Don’t Let Friends Drive Toxic Assets.  Apparently the banks still want to keep the keys — but at some point, Tim, Sheila, or Ben might have to step up and say, no way, man.  The PPIP was the gentlest possible way of doing that, so I’m sorry to see it die.

^{By wireheadinc / CC license}

The New G.M.: A Green G.M.?

So, G.M. is going into bankruptcy, and the government’s going to own a big slice. Yep.  Please raise your hand if you’re surprised.  OK, seeing no hands up, let’s move on to what’s really interesting here: who exactly is going to be running G.M.

I think the answer lies in the video above.  No, not just in the president’s remarks, where he says that he won’t be making the decisions — in the people who are in attendance at the remarks.  Namely, in his auto task force.

So who are all these people standing with him?  Well, from left to right, I spot:

Christina Romer, Chair of the Council of Economic Advisers
Stephen Chu, Secretary of Energy
Hilda Solis, Secretary of Labor
Barack Obama — what’s that guy do?
Gary Locke, Secretary of Commerce
Ray LaHood, Secretary of Transportation and Natty Handkerchiefs
Peter Orszag, OMB Director

Next row:
Austan Goolsbee, member of the Council of Economic Advisers
Larry Summers, director of the National Economic Council
Carol Browner, assistant to the president for Energy and Climate Change
The Mayor from Spin City Jared Bernstein, Economic Adviser to VP Joe Biden

Back row:
Ron Bloom, senior adviser at Treasury
Gene Sperling, counselor to Geithner and member of the CEA
Ed Montgomery, Director of Recovery for Auto Communities and Workers
Steven Rattner, who I believe to be the Car Czar and possibly also the Worst Tie Picker in history

Not pictured: Tim Geithner, who’s in China, and about six other second-tier members of the auto task force, including the 31 year old that the New York Times seems to think is running this show, Brian Deese.  I guess there’s only so many people you can fit in the Grand Foyer.

Image means a lot in Washington.  Obama may be saying, today, that the government is going to keep its nose out of the new G.M., but we’re still a few months away from that new entity, and everyone standing behind him will have a say in what it looks like.

So what I’m most interested in here is that two people — Chu and Browner — are present from the energy/environment side.  The way the administration has tied the success of the automotive industry to the cause of the environment is kind of fascinating.  Chrysler is being pushed toward smaller, more eco-friendly models, and now it seems inevitable that G.M. will be pushed that way, too.  These people — this task force — is built to do exactly that.

In case you’re wondering, as I did, who President Bush brought out with him when he announced the auto bailout, here’s the answer:

Bush stood alone and couched his discussion of the loans in almost completely business terms.  He made no mention of the companies changing to fuel efficient models or of any goal to achieve energy independence, as Obama did in his speech.

I kind of like the new crowd.

Could a Blog have Saved Edmund Andrews from Foreclosure?

About two weeks ago, the New York Times ran an excerpt from Edmund Andrews’s forthcoming book, Busted: Life Inside the Great Mortgage Meltdown.  I wasn’t alone in saying it would be the weekend’s must-read; Andrews’s tale of how he, a successful business writer for the Times, and his new wife were facing foreclosure makes for a fascinating read.  It’s a very personal story:

^{Image by: Respres (Flickr)}

The panic attack hit me around 2 a.m. on Patty’s birthday. It was Oct. 17, 2007, and I was lying in bed obsessing over bills that couldn’t be postponed and the money we didn’t have to pay them. Like many of my predawn fear cascades, this one had its start with a specific unpaid bill: $240 in traffic tickets — $140 for speeding, $50 each for expired tags and inspection. The fines would double if we didn’t pay them in less than a week. The tickets had uncorked the bottle on all the other “must pays”: the $400 electric bill with the cutoff date printed in red; the $220 cable/telephone/Internet bill for the past two months; the MasterCard and American Express bills — at least one of which had to be brought current or I wouldn’t even be able to travel for work. And of course, there was the $3,271 mortgage payment.

After its publication, Megan McArdle at The Atlantic found that Andrews neglected to mention in his piece or his book that his new wife filed for bankruptcy just after they first married — and had also filed once before, during her first marriage, making her not exactly the kind of good-credit help-mate that one might think she is from Andrews’s descriptions.  McArdle:

Andrews’ desire to shield his wife is understandable–hell, laudable.  No decent person wants to parade their spouse’s financial trouble in front of the world.  But this is material information that changes the tenor of his story.  Serial bankruptcy is not a creation of the current credit crisis, and it doesn’t just happen to anyone, particularly anyone with a six figure salary.

While I agree with her conclusions, I also agree with Andrews’s response that it’s not terribly material to the story he was trying to tell, about the ease with which he — clearly unqualified — got massive loans and credit he couldn’t afford.

But what I find even more interesting was a piece McArdle wrote that same morning, about Credit Reports and whether black marks “have staying power.”  She writes:

On the other hand, I can attest from personal experience that those smudges have staying power.  Through a series of bizarre events including a misfiled state tax return, multi-state residence, and an apparently incorrect address, the state of New York slapped me with a tax lien a few years back.  The State of New York has since admitted they were entirely in error, and indeed, that they owed me about $500 in refund.

(Not that they paid.   Funnily enough, the statute of limitations for getting a refund from the state is much shorter than their statute of limitations for coming after arrears.)

Megan McArdle is the Business and Economics Editor for The Atlantic, as well as one of its leading business bloggers.  Just in replying to the day’s news, above, she brought in her own personal experience — instant connect between what’s happened to her and what’s happening in the world.

Edmund Andrews, as an economics reporter for the NYT, says, “I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years.”  Yet Andrews was able to disconnect himself so completely from what he was writing about that he fell into a terrible trap despite being so well informed.

If in 2004, Edmund Andrews had been blogging for DealBook at the Times in addition to supplying objective reports on the “spike in go-go mortgages,” maybe he would have been forced to realize what was coming for him.  Maybe one day he would have posted, “My wife and I are thinking about buying a $500,000 house –” and would have had to stop right there, hit in print by the impossibility of that ever working out.  And, I guarantee, if just writing it wasn’t enough to shake him into reality, the fiery comments that would have followed would have offered at least 75 persuasive descriptions of what he could do with that idea.

This thing we do, blogging — it’s in first person for a reason.  To do it well requires an amount of honesty that often leads to self-awareness, whether through realization or through readers forcing it upon you.

I’m continually bothered by the way that we cheer for distance between reporters and what they report on.  I understand the desire for objectivity, but not the belief that it’s possible.

Car Efficiency Standards: Who Are We Trying to Help?

President Obama proposed nationwide emissions and fuel standards for cars today, a move that’s been long anticipated and has been greeted pretty warmly around the blogosphere.  Warmly enough that I assume the facts of the case are known — so let’s move on to the weird bits.  What’s interesting is the way the story is being framed.  Take Politico’s opening paragraph:

President Barack Obama will announce plans on Tuesday for a national fuel-economy and greenhouse-gas standard for automobiles in an effort to give more certainty to car companies as they struggle for survival.

So… this is something we’re doing to help out the auto industry?  Yes, they’ve responded so well to rules in the past.

The New York Times has a different take:

WASHINGTON — Why, after decades of battling, complaining and maneuvering over fuel economy standards, did carmakers fall in line behind the tough new nationwide mileage standard President Obama announced on Tuesday?

Because they had no choice. The auto industry is flat on its back, with Chrysler in bankruptcy, General Motors close to it, and both companies taking billions of dollars in federal money. Foreign automakers are getting help from their own governments. Climate change legislation is barreling down the track, and Congress showed last fall that it had no appetite to side with Detroit any more.

So it’s not an effort to help — it’s an instance of “we did it because we could.”  But why?

Ask The Washington Post, which had an A-1 story starting thus:

The Obama administration today plans to propose tough standards for tailpipe emissions from new automobiles, establishing the first nationwide regulation for greenhouse gases.

Oh, so it’s about the environment!  Now I understand.

Everything with the auto industry is like this at the moment.  When we talk about G.M. facing bankruptcy, we’re not just talking about a business going under, but about a possible bank failure.  When we talk about how to reduce carbon emissions, we’re talking about a future disaster for the auto industry.  And when the government is at the same time proposing stricter standards that will increase the price of an automobile by an average of $600 while simultaneously offering people $4,500 bonuses to buy current models — we run into a problem.

I expect government to contradict itself; it contains too many multitudes not to.  But the ground we’re currently treading with car-makers is getting increasingly tricky, and will only get worse if the government gets its majority stake in G.M. (and GMAC).  So it’s important to see how the White House itself is framing the issue, because we need to know, at the end of the day, who, exactly, we’re trying to help.  So, here’s the way the White House blog shapes the story:

This week the makings of a change in the culture of Washington will be on display, and as the President’s words above indicate there could be no better example than today’s announcement of a breakthrough on fuel economy and greenhouse gas emissions standards. Whereas these issues seemed destined to be the subject of eternal political clashing just last year, today the President was joined on stage by the Presidents, CEOs, or other top executives from Ford, Toyota, General Motors, Honda, Chrysler, BMW AG, Nissan, Mercedez-Benz, Mazda, Volkswagon, and the United Auto Workers to announce a new consensus. 

In the course of his remarks, the President made clear that ending America’s dependence on fossil fuels will be one of the greatest challenges the country has faced, and that this is only one of steps already being taken to address it. However, he also made clear that this was a historic day.

Indeed.

G.M., Chrysler Announce Thousands of Dealership Cuts

It hasn’t been a good year for car dealerships.  Gas prices skyrocketed, meaning more people were eyeing the bus and the bike; the economy downshifted, meaning more people were eyeing the electrical tape than the new-car circulars; and now two of the Big Three U.S. automakers have announced plans to cut a combined 3,158 dealerships in the next year or so.

G.M. made its announcement today.  The company plans to cut its network of dealerships by 2,369 (40 percent) by 2010.  These cuts will come from cutting off 1,100 dealerships that underperform, closing 500 dealerships that only sell the Pontiac, Saab, Hummer, and Saturn lines that G.M. is looking to get rid of, and by combining other franchises.  Right now, G.M. says this will happen in late 2010, when contracts expire, but if it files for bankruptcy, the closures might move up significantly — say, to this fall.  They haven’t yet announced which dealerships will close, but have said they’re focusing on underperformers, a logical way to make cuts.

Chrysler made its announcement yesterday, complete with a list of who’s going to close, where.  They’ve asked the court to cut off these contracts on June 9.  You can download the full bankruptcy filing [huge .pdf] and search for your home state, if you’re curious (I was). 

What you might find is that some dealerships aren’t closing outright — they’re just losing the Chrysler side of their business, as the Jeep-Volvo-Volkswagon dealer near me will be.  That’s still a big hit in product supply, of course, but the reports that say unambiguously that 3,000 dealerships are going out of business seem to miss the nuance: 3,000 dealerships will lose supply of brand-new G.M. and Chrysler vehicles, but the industry is so cross-pollinated now that it doesn’t automatically mean 3,000 dealerships will fold.  It will be a huge loss for these businesses, which will also (presumably) lose financing arrangements through GMAC, but it’s not the end of the road for every one.

Yet G.M. in particular seems to be ready to cut off its smallest dealerships, those that sell only a few dozen cars a year and are probably likely to be heavily tied to one brand.  While that makes perfect business sense, I wonder if won’t also contribute to the declining economy in the middle of the country, where, like the slogan says at one my old hometown car-dealerships, “a handshake is still a deal.”  Small dealerships are everywhere in the Midwest, and while they do a fair trade in used cars, there’s still a culture of The Car Dealer, the small town salesman who can talk you into a new Cadillac when you came in for a tire rotation, that seems sure to die.

Should Treasury Bail Out Califonia?

This may come as quite the shocker, but California has bigger problems right now than its wayward Miss USA contestant.  The treasurer of the State of California has asked U.S. Treasury Secretary Tim Geithner to use TARP to guarantee the state’s debts.

California faces a budget shortfall of $13 billion next year.  There’s a state constitutional amendment that says California must always balance its budget, and the state got into a DEFCON-1 fight this year because no one will raise taxes.  Bill Lockyer, the California Treasurer, predicted that the state will be out of money by July, and will have to “delay” paying what’s owed to “school districts, counties, social service providers, vendors,” and other State-dependent agencies.  Lockyer predicts this will force some school districts into bankruptcy.  So, like any financially struggling institution that is too big to fail, they have turned to the federal government.

Lockyer’s request is particularly clever, almost Citibank-like.  He proposes the following: California needs to borrow in order to make up for the shortfall.  It wants to borrow by issuing Tax and Revenue Anticipation Notes (TRANS), which are what they sound like: they sell $X billion in these notes, saying, hey, look, we’re anticipting tax revenue down the road, and we’ll pay you back when this hits.  So investors (banks) buy the notes, expecting that they’ll get paid back what they put in plus interest.  But, as with any investment, there’s a risk involved.  If California defaults, then the banks that they issue the bonds through are left holding the $X billion bag.  They would still be required to pay the bonds off — California isn’t going to file for bankruptcy protection, after all — but no bank wants to take the chance that it will be left holding a multi-billion dollar outstanding debt.  California’s credit rating is the lowest of all 50 states.

So Lockyer has asked Treasury to guarantee California’s borrowing.  If California defaults, he wants Treasury to say, we will step in and buy their debt from you, the banks.  This way, the banks feel confident that they’re going to get paid no matter what, and California will be able to borrow more easily because Treasury has just made them a sure-fire investment.

If this sounds familiar, it’s because it is very, very close to what the intention of the TARP is: Treasury guarantees bad assets, so that banks are more willing to loan money.  Lockyer — and California — are right to say that this is the point of TARP.

Lockyer also argues — again, correctly — that the overall goal of TARP and all its acronymish brethren is to improve financial security and stability in the market overall.  A default by California, or even a major stall in its payments to state agencies, wouldn’t exactly help the nation’s economy.  Please imagine the unequaled BAD of schools staying closed, fire stations shutting down during fire season, mental health centers shuttering, and everyone who works in those places sitting at home, not spending any money.

Now, I’d expect yelling from the right about this.  The governors who have declined (or tried to decline) stimulus spending have all done so standing on the soap box of States’ Rights, which would seem to imply that they believe each state should have to stand on its own.  If California should default, here, then residents of faraway states would end up paying for their debt, at least immediately.  California would still eventually have to pay the government back, but the big outlay necessary to pay off its bank debts would be more money coming out of Treasury and less money that could go toward… well, toward the original goal of the TARP, shoring up banks.

Yet this seems to me a better way to spend that money, or at least a more urgent need.  If California, which is something like the world’s sixth largest economy, has to undertake IMF-levels of austerity in its budget, the impact on the national economy would be dramatic.  This wouldn’t be wilting green shoots: this would be like setting the green shoots on fire and then putting them out by pouring concrete on top.  Hate on Cali all you want, but as it goes, so goes 13 percent of national GDP.

I suddenly feel a need to buy an avocado.  Short of a similar massive national sentiment, the TARP bailout sounds reasonable.  I hope Geithner writes a positive reply to the letter — and soon.

Whirling Derivative Dervishes: Treasury Takes on the CDS Market

Also in the news yesterday (underneath the photo-release reversal madness, which I think Glenn Greenwald has pretty much covered) was the Obama administration’s proposal to press for regulation of Credit Derivatives [emphasis added]:

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them. 

I know, not nearly as sexy as the legal intricacies of a fight against FOIA, but still important.  (Believe me, I tried for at least five minutes to think of a way to attach Paris Hilton’s picture to this, too, but I’ve got nothing).  This is a dry topic, and if I didn’t know Americans so well, I’d say the boring tedium of it all was one of the reasons no one took this up a couple of years ago when it might have actually made a difference.  Oh, wait, it turns out I do know Americans that well.  Anyway, now that the financial world is falling apart, suddenly everyone’s concerned about the “shadow banking industry,” so we might see some real change, since voluntary national alcoholism doesn’t seem like a passable strategy to get through the days.  Like Andrew Leonard says, it is a bit like “closing the barn door after the derivatives escaped,” but there are still plenty of derivatives in the barn that could use some supervision.

It turns out, though, there was somebody pushing for this exact strategy five years ago.  Wait, did you say five years ago?  I did, self, I did.  Who was this forward-thinker?

Waaait a second.  Where’s his Darth Vader mask?

In 2004, Tim Geithner gave a speech¹ on “Hedge Funds and Their Implications for the Financial System,” in which he discussed, briefly, the need for credit derivatives to be traded more openly, and with some system of regulation.  Later that year, he convened the heads of the banks and got them to volunteer to update their tracking systems and get things onto a standardized computer system, instead of everyone running their own haphazard (think: sticky notes) show.  But the actual regulation of derivatives never went any further than that, whether because Geithner lacked the power, the resources, the guts, the inclination, the kickback, the conspiracy, or the political savvy or support (please remember who was running Treasury back then) to see that it did.

So, unlike PPIP and TARP and TALF and WTF (yes I made that last one up), this is a plan that someone’s thought about for more than a week or two.  Consider this Revenge of the Government Servants.  The plan for regulating derivatives is… well, I won’t risk putting you to sleep, but it’s been in the works for a while — we heard shades of it mentioned during Geithner’s earlier Congressional testimony — and it would consist, essentially, in rolling back big slices of the Commodities Modernization Act of 2000, which was adopted under the Clinton administration and, oh yeah, as both Andrew Leonard and the New York Times point out, with the full approval of one Larry Summers.

^{“Stop trying to help, Larry! Seriously!”}

It would push for most “derivative instruments” to be traded openly, so that investors and regulators could actually get a look at the ways companies hedge themselves against risk.  And it would also require certain capital reserves to be on hand before banks could trade these things — so an insolvent, constantly-borrowing-to-survive guy like Bear Stearns would have some trouble here. 

Openness?  What?  Accountability?  On Wall Street?  Surely you jest.

Well, a little bit, I do, because one of the agencies likely to be charged with overisght responsibilities is the Securities and Exchange Commission.  If you haven’t read TPM’s overview of the scathing GAO report on the SEC, well, that’s ten minutes of appalled laughter and stomach-sinking dread that you really owe yourself.  The SEC is pretty much a dead agency.  Giving it new things to do will only help if the President and Congress have plans to staff it up — and they’d better not be sending Summers over there.  SEC restructuring or, honestly, replacement is the biggest missing piece in this plan.

But overall, this is good news.  Yes, it comes too late, and yes, it’s probably not a perfect plan, but it’s complex with some pleasantly optimistic overtones and just a hint of bitter, bitter regulatory nuttyness.  Vintage government-label work, here.  I’ll drink to it.

^{1 Should you ever have trouble sleeping, I really, truly recommend perusal of the New York Fed’s speech archive, btw.  Skip the lively speeches by the other guys — Dudley’s “May You Live in Interesting Times” is just no match for the somnia-inducing Geithner tome, “The Economic Dynamics of Global Integ...”  Wha?  What?  Oh, sorry, nodded off.}