Monthly Archive for November, 2008


Why Obama chose Hillary for State

I like both of these answers:

Tyler Cowen:

This is exactly the kind of detailed political question I don’t follow so let’s try some crude, fact-poor economism. Hillary Clinton commands the loyalties of significant segments of the Democratic Party. The implication is that Obama will need these segments for what he is trying to do. Since Obama already has 58 (?) Democratic Senators on his side, we should conclude that Obama will try to do lots in the first few months of his term; this is the “throw long and deep” scenario.

He can always encourage her to leave later, if the relationship does not work out. Latinos, on the other hand, are stronger as voters than as a lobby or as an organized segment of the Democratic Party. The implication is that they will get relatively little at the beginning of Obama’s term — when lobbies are needed — but successively more as the next election approaches.

Andrew Sullivan:

Earlier this year, it seemed a good idea to plonk her on the ticket to defang the threat. That would have followed the “team of rivals” concept that Obama wanted to purloin from Lincoln. It would also have given the Clintons an independent claim on power. By winning without them and even, in some measure, despite them, Obama can now bring the Clintons into the power structure while retaining clear dominance. The State Department appointment is prestigious enough not to be condescending, yet also keeps Clinton off the Washington circuit more than any other position. She’ll be on a plane or abroad a great deal. Extra bonus: Bill will just love that. Sending his wife to the Middle East is the ex-president’s idea of a good time.

There’s also the small question of Iraq. Think of the appointment this way: “You voted for this bloody war, Hillary; you can end it.”

Withdrawing from Iraq will not be easy and it may well be gruesome. I have no confidence that the place won’t erupt into an even nastier civil war when the United States pulls out than it did when the United States didn’t fully push in. How does a president avoid the domestic blow-back of essentially cutting his losses on a doomed adventure? He uses Clinton as a protective shield from domestic critics. It’s also a rather brilliant manoeuvre against those elements on the right – from Fox News to Washington neocons – who came out in praise of Clinton in the spring when she sounded more hawkish than Obama on the Middle East. Having hailed Clinton as the Iron Lady of the Jews, the stab-in-the-back right will find it hard to pivot immediately and accuse her of treason if and when she ends the Iraq occupation.

But why did Hillary accept the job?

The best I can imagine off the top of my head is that (a) she really believes that the Obama presidency will be a successful one; and (b) a successful stint as Secretary of State after time in the Senate would look very, very good on the resume in eight years time.


Oops …

Well, what do you know?  The US government is (almost certainly) going to buy troubled assets after all, starting with those of Citigroup.  CalculatedRisk has been on top of it [1,2,3,4].  The last of those links contains the joint statement by the Treasury, Federal Reserve and FDIC:

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.

Here is a summary of the terms of the deal, with a fraction more detail:

Size: Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).

Deductible: Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves) Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%).

USG share will be allocated as follows:
UST (via TARP) second loss up to $5 bn;
FDIC takes the third loss up to $10 bn;

Financing: Federal Reserve funds remaining pool of assets with a non-recourse loan, subject to the institution’s 10% loss sharing, at a floating rate of OIS plus 300bp. Interest payments are with recourse to the institution.

A couple of points:

  • The US government isn’t immediately buying US$306 billion of crappy assets.  It’s guaranteeing that the value of them won’t fall too much further.  If they do, then they’ll buy ’em.  It will be interesting to see how much of this guarantee is actually called into force.
  • Notice that only US$20 billion is attributable to TARP, while the rest is entirely new.  That is presumably to make sure that the US government can continue to stand by it’s recent promise to not ask for congressional approval for the last US$350 billion available under that program.  On the other hand, I suppose it’s also likely that they want to keep the TARP money for direct capital infusions; that is, for actual money spent now rather than taking on risk.
  • To put the US$20 billion of new money into perspective, Citigroup’s market capitalisation as of Friday was US$20.5 billion.
  • It’s that “on valuation agreed upon between institution and USG” that troubles me.  Part of the reasoning given for TARP in the first place was for “price discovery” (through reverse auctions).  There was plenty of criticism of that policy, but the goal of discovering the true value of all of these assets is a noble one.  This bailout of Citi will now involve private negotiation between Citigroup and the US government to determine their value for the purposes of the guarantee.  That’s a bloody awful way to do it.

More on the Effective Funds Rate versus the Target Rate

Without comment, here are some more links on the gap between the target and effective federal funds rates:


Persepolis, by Marjane Satrapi

I’m reading “(The Complete) Persepolis” by Marjane Satrapi.  It’s an autobiography – of her time growing up in Iran through the revolution and the war with Iraq – in the form of a graphic novel.  You can see a few pages of it here.  It’s wonderful.  I strongly recommend it.  Hoping that it doesn’t breach any copyright, here is the first page:


Bush does the right thing

The US$700 billion Troubled Asset Relief Program, otherwise known as the mother of all pork, did have one redeeming feature:  It came in tranches.  The first US$350 billion were directly accessible (some of it needed a signature from the president), but the last US$350 billion needs congressional approval.  With just 10 weeks to go in his Presidency and every company big enough to hire a lobbiest bashing on the doors for a piece of the action, George W. Bush has done the right thing:  He’s deciced to not ask for the last 350.  If soon-to-be-President Obama wants to tap it, it’s up to him.

The Bush administration told congressional aides it won’t ask lawmakers to release $350 billion remaining as part of the $700 billion U.S. financial- rescue package, people familiar with the matter said.

The Treasury Department has committed $290 billion, or about 83 percent of the total allocated so far in a program Congress enacted last month to inject capital into a wide spectrum of banks and American International Group Inc. The U.S. invested $125 billion in nine major banks, including Citigroup Inc. and Wells Fargo & Co. and plans to buy an additional $125 billion in preferred shares of smaller lenders.

Paulson told the Wall Street Journal today he is unlikely to use what remains of the package, estimated at $410 billion, unless a need arises.

“I’m not going to be looking to start up new things unless they’re necessary, unless they make great sense,” Paulson said. “I want to preserve the firepower, the flexibility we have now and those that come after us will have.”

Update: I don’t mean to suggest that the money shouldn’t be spent. Maybe it should. Professor Krugman, for one, might argue that it ought to be spent as part of a stimulus package. I just think that it’s correct for Bush to pass on deciding how to spend it. His moral authority as an economic leader was gone some time ago. Paulson’s flip-flopping, even if what he has moved to is the better plan, demonstrates the same for him. America will – I suspect – benefit from being forced to take a breather in their cries for help. Let the new team think about the whole mess carefully and then take up the responsibility handed to them.

Another update: The anonymous authors at Free Exchange aren’t so sure it’s a good idea:

It is, in effect, calling time-out on the rescue until Barack Obama is sworn in, and even then there will be a delay while funds are requested and authorised. Meanwhile, Congress has all but decided not to pursue a stimulus bill during the lame duck session. The legislature is taking up discussions on an automaker bail-out, but given resistance to a rescue among Republicans and conservative Democrats, it seems clear that any bill signed into law during the lame duck will be quite weak.

Now, Ben Bernanke will remain on duty right through the inauguration. There’s still an executive branch, and there are still plenty of international policy makers working to stabilise the global financial system. But in a very real sense, America is going to coast on its current economic policies for the next two (and in practice, three) months. I’m not sure this is a good idea, particularly given the critical nature of the holiday shopping season. By all accounts, consumers are locking up their piggy banks at the moment. A disastrous shopping season will probably mean a wave of post-holiday failures among retailers, which will, in turn, mean lay-offs (as well as pain for exporters to America).

Yes, it’s only three months, but three months is a long time for people and businesses struggling to pay bills. And if the economic situation deteriorates over that span, then the government may well feel pressured to pass a much larger and more expensive stimulus package in the spring.

I’m not convinced.  I do note that, as Paul Krugman points out, it’s difficult to have too large a fiscal stimulus in this environment.  I also think that we might benefit from backing off a little bit and abandoning the idea that America and the world at large can somehow escape the recession.  It needs to sink in.