Press Conference of the Peas - on Storify

Obama's press conference on the debt ceiling - marked by great metaphors about Band-Aids and eating peas. Will it do the trick?
As we wait to find out, read the Twitter comments of those watching the conference live - on Storify.

Click here to go to the Storify narrative.

Arab Authoritarianism Given a Blow by Tunisian People Power

Anyone watching the events in Tunisia today has to be thrilled by the magnitude of what has apparently happened. An autocrat firmly entrenched in power for 23 years in a country widely thought to be among the most prosperous and stable was chased from power by massive street demonstrations. Rulers in neighboring Arab countries who refuse to relinquish power in their own countries, despite high unemployment and rising discontent, almost certainly are watching Tunisia with great concern for what could eventually come to their own shores.
Despite the euphoria, the political scientist in me is asking many questions: why did this happen now, and not six months ago or two years ago? And what’s next? Will the protesters’ calls for greater democracy, transparency, and economic equality be heeded by the new leaders?
It’s not at all clear that the interim leader, Mohammed Ghannouchi, will steer a new course entirely different from his predecessor, Zine el Abidine Ben Ali. He is described as a “yes man” (or more correctly, “Mr. Oui Oui”) by Blake Hounshell on Foreign Policy’s blog for always saying “yes” to Ben Ali. The Tunisian people will have to change the familiar course of history to influence the new regime in the direction it wants to go. This is not an easy proposition, given that Tunisia’s opposition is generally characterized as weak and fragmented from years of Ben Ali’s cooptation and repression.
This brings me to a second point, which is “why now"?” Tunisia seems an unlikely candidate for a people power revolution, particularly given the weakness of its opposition movements. In fact, Tunisia is held up as an example of successful opposition exclusion and repression – and therefore thwarted rebellion – in one of my favorite books explaining revolutions and revolts, Why Muslims Rebel by Mohammed Hafez. Now, I think, Dr. Hafez has some splainin’ to do.
But Hafez’s book and others in the same political process tradition are very good at asking and answering the question of “why now?” about rebellions. By looking at the nature of political institutions, regime practices and opposition organizations, we can get a better understanding of the conditions that allow successful (variously defined) rebellions to form and flourish.
Most of the news reports have pointed to youth discontent over unemployment, corruption, and lack of freedom in Tunisia as the cause for the rebellions. I remain unconvinced that this is the strongest explanation for what is happening. While discontent is never irrelevant, it is unlikely to explain why this is happening now rather than a year ago. Was discontent substantially lower a year ago? Two months ago? I doubt it.
So I am planning to look a little deeper than the standard explanations to the nature of opposition organizations and (more likely) to the opportunities for opposition mobilization presented by the regime as it slowly weakened and lost its grip on power. I’ll keep ya posted.

US Debt A 'Phantom Menace,' Krugman Argues

In the debate over stimulus vs. deficit, both Paul Krugman and the Times are right. The major short-term threat to our economy is contraction caused by unemployment, shrinking credit, and reduced spending and production. This is what stimulus is supposed to fix, and in the short run, deficit spending is necessary. Undermining this effort by budget-balancing moves will only make it harder for the economy to recover. The deficit hawks are right, however, to keep an eye on the growing red ink, especially in light of our government's tendency towards deficit spending even in good economic times. If deficit hawks get too concerned too early, their loud voices could undermine confidence in the economy. What is needed is adequate spending now, but with an "exit strategy" meant to get us back in the black when the economy is back on track, but not before. That way investors and others will understand that the huge deficits are not a long-term trend, which would likely be unsustainable. This would allow short-term and long-term confidence to be maintained. Given that this would involve some austerity, a bipartisan commission might be the way to go, with its recommendations given the "fast track" in Congress - simple thumbs up or down, no amendments. (Kudos to the Economist magazine for suggesting much of this - it's a great idea!)
Read the Article at HuffingtonPost

"Too Big To Fail" Bill Unveiled By Treasury Department, House Dems

It seems that something may finally be done about the systemic risk posed by huge financial institutions. If a corporation is too big to fail, it either shouldn't exist or should pay the price for its failure. Incentives should be in line with the desired outcomes! I'm skeptical that this particular legislation will be successful in fully fixing the problem, however. It is better than doing nothing, but our political system is so highly penetrated by financial and business interests that even moderate legislation will keep from getting watered down later when the spotlight is off. There is no doubt in my mind that in a few years, when attention is diverted elsewhere, quiet lobbying efforts will result in eventual watering down of any remaining teeth in the measure that it will be worthless. After all, this is how we got into this mess in the first place. Look at the history of financial deregulation and other relatively unnoticed moves in Congress starting in the mid-1990s. (Yes, both parties can take the blame here.) Around $5 billion spent on lobbying by financial firms paid off handsomely, with the ability to engage in predatory lending free from enforcement, massive consolidation, lowered capital reserve requirements, and near unfettered freedom to create and sell complicated new financial products that no one understood - just to name a few. (see report at www.wallstreetwatch.org/soldoutreport.htm)

My pessimistic warning: unless we watch Washington like hawks, it will happen again!
Read the Article at HuffingtonPost

Where is our Leader?

Just like I thought... small rumbles of discontent among Obama supporters and progressives in general about what appears to be a glaring lack of leadership. (See for example Paul Krugman's recent article and Clive Crook's Financial Times Op-Ed.) Didn't we have high hopes for this guy, a new sort of politician, wildly popular? Wasn't he going to save the country from economic ruin at our time of peril? Although I was not among the euphoric throngs last November, I did hold up hopes that Obama would be able to really change something for the better, after eight years of disastrous policies. The economic and housing crisis showed us that reform was desperately needed, particularly once huge financial institutions began going bankrupt and disappearing from the scene, taking our 401Ks with them. Although things were (and still are) in a huge mess, I wondered if Obama could take this opportunity presented to him to not only bring us out of the crisis but also making much-needed reforms to the system, to strengthen it against future crises.

At the same time, I was only too aware that he is a savvy politician, like all the others, and a newbie to boot. That's why I didn't rush out and immediately proclaim Obama our Savior. He may be The One, at least to many, but it isn't too hard for a jaded, grizzled, political scientist like me to see the signs of carefully constructed image-making in progress.

The history of the Obama Administration has been admittedly short, but so far, it has been a history of wasted opportunities. Obama seems to have a very ambitious agenda - stimulus, financial regulatory reform, health care reform, climate change - all of which are important, but important to do well. But what we are getting are truly half-assed attempts to do a lot, and not getting any of it right. What good is a stimulus plan that doesn't spend enough to put a dent in unemployment, but spends enough to pile on to the national debt and create international worries about the strength of the dollar and the worth of US treasury bonds? Does it help us to pass a bill "reforming" health care that leaves unsolved most of the problems that currently plague our health care system? (see yesterday's NY Times for an excellent article about widespread bankruptcies among the insured!)

Of course, compromises are necessary in politics, and no policy emerges from the policy process perfect. But it seems that a leader as talented and popular as Obama, coming at a time when people look to him for answers, could use the enormous political capital he inherited to stand up for a select few crucial reform packages. He has the bully pulpit, and he has phenomenal communication skills at his disposal. He should use them to explain to the American public, and to Congress, what needs to be done, and why. He can stand up for a few principles, not just the idea of getting a bill passed. Sub-contracting the bill-writing process to Congress may be a great way to get Congress on board, but it's a terrible way to construct a coherent policy. A bad bill doesn't solve problems.

In fact, some of the solutions may not be cheap - or at least they could require an eventual tax increase, depending on the particular path chosen. Obama may need to defend some unpopular solutions - a good idea if they will work - so that he can bang enough heads together to get a bill passed that will actually solve some tough problems we are facing. We need to stop medically-induced bankruptcies, the shrinking of our retirement funds, and the unsustainable and unbalanced consumption of resources leading to dangerous climate change.

So, I am asking Obama to do a tough job, but so far it looks like he is not up to the task.

(image: Financial Times)

Why I am Angry at AIG

Yes, I usually write about international politics, but with the AIG bonus scandal dominating the headlines, I can't help but sound off. Congress hauled AIG chairman Edward Liddy in for a ritual flaying, though they were probably barking up the wrong tree. He was the poor soul hired to fix the mess at AIG and is working for a dollar a year. Nevertheless, public outrage was boiling over, and Congress had to vent. And vent it did:

"There's a tidal wave of rage throughout America," announced Gary Ackerman (D-N.Y.). Judy Biggert (R-Ill.) called it a "travesty," Carolyn Maloney (D-N.Y.) found AIG "morally reprehensible," Shelley Moore Capito (R-W.Va.) perceived "an insult," and Paul Hodes (D-N.H.) contributed the words "ridiculous" and "unconscionable."

And it got worse from there. Stephen Lynch (D-Mass.) charged AIG officials with "malfeasance," "violation of fiduciary duty," "arrogance" and "probably illegal" behavior.

"Do you have anything to say for yourself?" Lynch asked.

"I take offense, sir, at the use of --"

The congressman cut him off. "Well," Lynch said, "offense was intended, so you take it rightfully."(from Thursday's Washington Post)

Fallout from the bonus scandal has revolved around who knew what and when about the paying out of these bonuses. Congress is heading towards taxing the bonuses at something like 90 percent, spooking much of the financial sector in the process. But nobody is talking about the real scandal, the creation of the huge bubble in the financial sector by letting loose risky financial instruments in the market - completely unregulated. This is what led to the downfall of AIG in the first place. And now Congress claims innocence and outrage! But there are Congressional fingerprints all over this crisis.

The origins of the crisis can be found in the deregulation movement of the last 30 years. In particular, the Greenspan era was a time of pressing for deregulation of financial markets. After financial interests spent at least $5 billion lobbying Congress, a number of bills were passed overturning past regulations and prohibiting regulations on securities and derivatives. The fact that Congress felt the need to exempt these instruments from existing gambling and "bucket shop" laws suggests that there was an understanding that these financial instruments, which in fact resemble bets and led to the 1907 panic and stock market crash because of widespread speculation, are risky and illegal.

At the heart of the matter are mortgage securities and credit default swaps, a form of derivative (a financial instrument whose value is based on something else. It's basically a side bet) in which one "bets" on the success or failure of an enterprise, and pays out if it fails. (For great discussion of credit default swaps, see this article, and this two part series.) It acts as a form of insurance, but it isn't called insurance, or it would have to be regulated. Insurance providers are required to set aside a certain amount of money to cover potential losses, but in the case of swaps, there is no such requirement. As a result, when the market for mortgage securities began to perform poorly as the housing market fell, the credit default swaps backing these securities had to pay out. But the investment houses selling the swaps didn't have the money to pay off the obligations. They couldn't cover their "bets." AIG, Bear Stearns, Lehman Brothers, J.P. Morgan all fell victim to this problem.

Complicating matters is the fact that credit default swaps are not tracked - no one knows how large the market is, who owns them, what they cover, or if the money exists to pay them off. This uncertainty is part of the problem contributing to the banking crisis and putting a price on "toxic assets." Without transparency, people and institutions are reluctant to make transactions when there is a possibility that the "bets" won't be covered. As long as everyone paid their obligations, the system worked. Now no one wants to do business with one another for fear that the money to pay obligations won't be there later. Banks won't lend to one another, or to us, the average person. The bubble has contracted, but no one knows exactly how far.

So I don't share Congressional outrage - I am outraged at them for letting this happen to us. To me. And for hypocritically venting public rage on an issue so trivial as $218 million in bonuses, when the economy has lost billions of dollars and governments are spending hundreds of billions of dollars to jump-start our economy. And for diverting our attention from the real issue, fixing our economic and financial system so that our economy can grow again, safely.