I was on the conference call with the Treasury officials tonight, and listening to the official who opened the call (I didn't catch his name) talk about the warrants, I got the distinct sense that the Treasury isn't planning to take significant warrants from institutions that voluntarily participate in the "market mechanisms" (i.e., auctions). The text of the bill only requires the Treasury to take equity warrants from an institution voluntarily participating in the market mechanisms when the institution sells more than $100 million into the Treasury fund, and even then the amount of warrants required is left to the discretion of the Treasury. But the official seemed to suggest that companies that sell more than $100 million into the fund still wouldn't be required to issue significant warrants, because the Treasury wants to go out of its way to avoid discouraging private capital injections. He kept emphasizing that the Treasury has significant discretion in determining how much equity in the form of warrants will be required; he also emphasized more than once that the Treasury doesn't want to scare away private capital. The message seemed to be that the Treasury will take equity warrants in institutions participating in the market mechanisms, but that the amount of equity warrants will be small enough that the dilution will be de minimis. On the other hand, he suggested that the Treasury is planning to take significant warrants when it makes "direct purchases," but that such purchases would be limited to failing institutions. Bob Hoyt, Treasury's GC, later said that when the Treasury makes direct purchases from failing institutions, it will "run the same play" it ran with Bear Stearns and AIG. That is, shareholders get wiped out. That's what I took away from the call, anyway.

Friday, September 26, 2008

Adam Putnam, Please Stop Talking

Either Adam Putnam has been in a coma for the past few weeks, or he's a first-rate idiot:

One of the top party leaders in the House, Republican Conference Chairman Adam H. Putnam of Florida, charged that the administration has been following an “ad hoc strategy” that it hasn’t explained to the public or even to lawmakers. “In the last several weeks there have been ample opportunities for them to share with Congress their strategy and their thinking,” he said.
Sure, because all Paulson and Bernanke have had to do in the past few weeks is rescue Fannie and Freddie twice (including a nationalization the second time around), coordinate a frantic search for a buyer for Lehman, oversee Lehman's bankruptcy, help save Merrill Lynch by strong-arming BofA into buying Merrill at the last minute, put together a bailout package for the largest insurance company in America (AIG), stop a potentially devastating run on money market accounts, and negotiate the largest government bailout in the U.S. since the Great Depression. When, exactly, does Putnam think Paulson and Bernanke had all these opportunities to come chat with Congressmen?

Thursday, September 25, 2008

Thank God McCain Rushed Back to the Hill

Obama shows that, contrary to popular belief, it's possible for the candidates to talk to their Senate colleagues without suspending their campaign first. From the WSJ:

After a three-hour meeting, lawmakers agreed to legislative principles that would approve Treasury's request for the funds. ... During the meeting, Democratic presidential candidate Barack Obama of Illinois called the cell phone of Sen. Chris Dodd of Connecticut, according to people familiar with the matter. Sen. Obama spoke with Sen. Dodd and Republican Sen. Robert Bennett of Utah.
Maybe McCain doesn't know how to use a cell phone yet either.

Now that the broad terms of the bailout bill are more or less set, attention will shift to the design of the auction(s) the Treasury will use to buy troubled assets. An article in yesterday's NYT briefly discussed the difficulty of designing the best auction, and the WSJ ran a full article this morning on potential auction designs. It will no doubt be a difficult task, requiring a great deal of creativity from those designing the auction(s). Hmmm. If only we had two well-respected economists who recently won some sort of prize for their work in designing mechanisms like auctions......

Now that the financial crisis has become a political issue, there has been a surge of commentary on the financial markets from political commentators. Let's just say that they haven't raised the quality of the discourse. The sooner they're back to fighting about the outrage-du-jour on the campaign trail, the better, as far as I'm concerned. One argument that has predictably caught on with the far right is the that the Community Reinvestment Act (CRA) caused the housing bubble. The CRA "forced" banks to make loans to minorities who were poor credit risks, the argument goes, and these "subprime loans" are the root cause of the financial crisis. This argument is, of course, not true at all. A Bank for International Settlements working paper released this week concluded:

Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust. This Act only applies to depositories, and did not cover most of the important subprime lenders. Depositories showed a lesser tendency to write subprime loans than lenders not subject to the Act (Yellen 2008).
Arguing that the CRA caused the housing bubble reveals a lot about the person making the argument, but very little about the origins of the housing bubble.

Ben Bernanke and Hank Paulson are testifying in a hearing of the House Financial Services Committee tomorrow (2:30 pm). And you know who's on House Financial Services? Ron Paul, the longtime opponent of the Federal Reserve, and certified economic nut-job. I'm guessing that Ron Paul will bring quite a bit of Crazy to tomorrow's hearing. His questions for Bernanke have the potential to be high comedy.

Saturday, September 20, 2008

Central Bank Independence

Dean Baker, in an otherwise excellent post describing his preferred conditions for a bailout, writes:

The structure of the Fed should be changed so that all the officials with a direct say in monetary policy are appointed by the president and approved by Congress. The Fed is supposed to act in the public interest, not in the service of the financial industry. It is disturbing that the public is being represented in this debate over the restructuring of the financial industry almost entirely by top figures from the financial industry. This would be comparable to having national policy on the auto industry determined by former top officials with the United Auto Workers. It is difficult to believe that the views of Treasury Secretary Paulson and other government officials from the financial industry are not influenced by their long association with the industry. This problem should not be worsened by giving the banking industry a direct voice in the conduct of monetary policy, by allowing it to appoint Federal Reserve district bank presidents who take part in open market committee discussions. There should be a strict separation between the conduct of open market policy, which should be done exclusively by people appointed by the president and approved by Congress and the responsibilities of the district bank presidents. The banking industry deserves no special voice in the conduct of monetary policy.
I half-agree with this. Baker is right that we should change the way that monetary policy is conducted. But he's wrong about the nature of the problem, and thus his proposed solution is inadequate. Baker is wrong when he says that "[t]he Fed is supposed to act in the public interest." No, actually it's not, and that's part of the problem. I can understand why he would assume that the Fed is supposed to act in the public interest—given the importance of monetary policy, that should be a no-brainer. In selecting the Board of Governors (all 7 of whom sit on the OMC), 12 U.S.C. 241 states:
the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.
So in selecting the Board of Governors, the president isn't required to consider the "public interest," but rather the interests of a few sectors. Things don't get any better when the Fed Governors get to the Open Market Committee. 12 U.S.C. 263(c) states:
The time, character, and volume of ... open-market operations shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country.
The closest thing we get to a mandate to act in the public interest is the requirement that the OMC consider the consequences of open-market operations on "the general credit situation of the country." But that comes right after the part about how open-market operations must be conducted "with a view to accommodating commerce and business." Inspiring stuff. Baker is right that all 12 members of the OMC should be appointed by the president and approved by the Senate. (I assume by "approved by Congress" he meant "approved by the Senate," since he surely knows that including the House would needlessly politicize the process, and his main objection is that the 5 regional presidents on the OMC are basically hand-picked by the banking industry.) But the Open Market Committee's legal mandate must also be changed, so that when the "financial, agricultural, industrial, and commercial interests" diverge from the public interest, the Fed's loyalties lie unambiguously with the public.

Wall Street Journal: "Work Grows for Wall Street Lawyers"

True story. I'm in my office* right now, waiting for a colleague who went out to Greenwich to fax me some documents.

Damn you, Lehman Brothers. You owe me a total of 22 hours of sleep this week.

* And by "my office," I mean the conference room which I aggressively commandeered as soon as I got back on Monday, and which I've been just-as-aggressively defending from groups of i-bankers ever since. Hyenas.

Here's a quick roundup of the various bailout ideas/proposals that have been floated in the past few days. I'm sure there are plenty that I've missed. What's interesting to me is the surprising heterogeneity. When people have to quickly come up with their own proposal, and can't take their queue from other people's proposals, there's less time for groupthink to take hold. Paul Volcker, Nicholas Brady & Eugene Ludwig: Resurrect the Resolution Trust Corp.

"We should move decisively to create a new, temporary resolution mechanism. ... This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management."
Nouriel Roubini: New version of Home Owners' Loan Corporation.
"We need a new HOLC -- more than a new RTC or RFC -- to provide massive debt relief to the household sector. We need to create HOME (Home Owners' Mortgage Enterprise)."
Raghuram Rajan: Force shareholders to recapitalize the financial system. (This is an oddly intruiging idea, even though I think Rajan dramatically overestimates how much capital the financial system needs, and underestimates how much capital the shareholders of the best-off financials actually have. Still, if less capital was needed, this would have been a good idea.)
"I would propose a more direct solution. The need of the hour is to recapitalise the financial system. Why not ask the shareholders of financial companies to do it? ... "First, all levered financial companies (including banks and investment banks – defining who these are is an important but not impossible detail) should be asked to impose a temporary moratorium on dividend payment immediately. Second, all large well-capitalised levered financial companies should make rights offerings (if the rights are offered at a large enough discount to the market price, shareholders will be forced to subscribe) to their shareholders amounting to 2 per cent of their risk-weighted assets."
Steve Randy Waldman, Interfluidity: Unilaterally reorganize and recapitalize the most important firms.
"Broadly, my view is that if we are going to legislate, Congress should empower regulators to declare systemically important firms insolvent, write off existing common and preferred, fire incumbent management and unilaterally convert debt to equity as far up the capital structure as they need to go until the firms are unambiguously well-capitalized, with little or no public money involved. Going forward, investors should understand that firms that are too big to fail are too big to be debt-financed, and government enforcement of debt claims against such firms will be limited. ... "As far as the money is concerned, throw it at infrastructure. Increase worker bargaining power by offering Federally funded retraining sabbaticals for any worker over thirty who decides they want to retool. I'd rather see a new WPA than a new RTC."
Robert Reich: RTC in exchange for banks voluntarily opting into the equivalent of Chapter 11.
"[I]t makes sense to allow the big banks to wipe their balance sheets clean of as many bad loans as they can identify, and put them into a special agency that then sells them for as much as possible. The agency would bundle or unbundle the risky loans, slice and dice them as needed, with the goal of getting the most for them on world markets by creating a market for them. "But there's no reason taxpayers need to be involved in this. "Whether you call it a reorganization under bankruptcy or just a hellova fire sale, the process should resemble chapter 11 under bankruptcy. Any big financial institution that wants to clear its books can opt in. But the price for opting in is this: Investors in these institutions lose the value of their equity. Executives lose the value of their options, and their pay (and the pay of their directors) is sharply limited. All the money from the fire sale goes to making creditors as whole as possible."
Douglas Elmendorf: Have the government buy equity in the whole financial sector.
"An alternative to the government buying certain types of debt from financial institutions is for the government to make equity investments in a wide cross-section of such institutions. For concreteness, suppose that the government offered to make an equity investment in every firm regulated by a federal or state banking regulator equal to 10 percent of the market value of the company as of September 1st in exchange for a 10 percent equity stake in the company. (The 10 percent figure is illustrative. As with the first approach, a judgment about the appropriate total amount of government funds would need to be made.)"
Luigi Zingales: Require partial debt-to-equity swaps. (h/t Tyler Cowen)
"As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture."
Mark Thoma: Overpay for illiquid assets + Taxpayers get percentage of future profits for a period of time.
"Here's a proposal. First, in return for taking toxic assets off of a firms books at a price that is higher than the market rate, the government would get a share of any future profits the firm makes for some time period, say 10% for ten years, something like that. Administratively, it could come as an increased tax rate on profits and, if it helps politically, it could be earmarked for a particular cause. The government pays the firm a fair value for the assets plus an additional amount to help with recapitalization, and in return gets a claim on future profits for a period of time (I would also tie executive compensation directly to profits to help prevent gaming). "For additional recapitalization, I would do something similar. Give the firms a zero or very low interest term loan and, in return, taxpayers get a share of future profits for a period of time, say another 25% (or whatever rate is appropriate, the rates could be set so that, even with expected defaults, taxpayers ought to make a profit). The firm pays back the zero interest loan in full and gives up a share of future profits."

This passage from a 1999 article by Bert Ely claims (somewhat cryptically) that insurance companies approached the Fed about emergency loans in the '70s and '80s, which suggests that an emergency loan to a large insurance company like AIG might have been what Congress had in mind when it amended the "unusual and exigent circumstances" clause in 1991 (via Westlaw):

While banks pay for the entire cost of their federal safety net, ... large non-bank financial firms do not pay for their federal financial safety net, which is the ability to borrow at the Fed's discount window in "unusual and exigent circumstances." Although the Fed has not lent in such circumstances for at least fifty years, it could lend to a large insurance company or investment banking firm facing severe liquidity problems. The importance of this standby lending authority for the Fed was evidenced by a little-noticed provision in FDICIA (Sec. 473, Emergency Liquidity) which effectively broadened the types of collateral which the Fed could accept in lending to non-bank firms to include marketable securities. This amendment reportedly was sparked by the liquidity problems some securities firms faced in the aftermath of the 1987 stock market crash. The report accompanying the Senate version of FDICIA made clear that this amendment to 12 U.S.C. Section 343 was intended to make it easier for the Fed to lend to temporarily illiquid investment banking firms. Unpublished reports also indicate that there have been times, specifically in the mid-1970s and the late 1980s, when insurance companies suffering liquidity problems approached the Fed about borrowing at the discount window. According to these reports, the Fed did not lend to these insurers, but that does not mean the Fed could not have lent to them. That insurers occasionally face liquidity crises illustrates one of the great weaknesses of the state guaranty funds for insurers—the lack of an equivalent to the Fed's discount window.
The article is titled, "Revisiting an Old Debate: Do Banks Receive a Federal Safety Net Subsidy?", and was published in the November 1999 issue of Banking Policy Report. I can't find a non-gated link, but for those of you with Westlaw access, the citation is 18 No. 21 BNKPR 1.

As might be expected, I've had to come out of finance-law retirement this week to help the Securities/Structured Finance department out (in exchange for their calling my return "Jordan-esque"). It's been a crazy week for a lot of lawyers, too.

One big question following the Fed's bailout of AIG will surely be: Does the Fed have the authority to do that? The answer is probably yes.

The Fed is claiming authority for the AIG bailout under Section 13(3) of the Federal Reserve Act, which provides in pertinent part:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank ... to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange ... . Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.
There's no relevant statutory or regulatory definition of "unusual and exigent circumstances," but it should be pretty clear that the current circumstances would qualify as "unusual and exigent." Obviously, AIG is a corporation, so it satisfies the "individual, partnership, or corporation" requirement.

But was AIG "unable to secure adequate credit accommodations from other banking institutions"? We know that AIG turned down a PE offer over the weekend, but as I understand it, that offer was for some form of capital injection, and might not have counted as a "credit accommodation[]." However, I don't think AIG's turning down of the PE offer will ultimately affect the legality of the Fed's bailout, because Section 201.4(d) of Reg A appears to give the Fed wide discretion in determining whether AIG was "unable to secure adequate credit accommodations." Section 201.4(d) provides that the Fed:
may extend credit to an individual, partnership, or corporation that is not a depository institution if, in the judgment of the Federal Reserve Bank, credit is not available from other sources and failure to obtain such credit would adversely affect the economy.
There doesn't appear to be any relevant case law here, so this is as far down the legal-interpretation rabbit hole as we can go.

Thus, it's essentially up to the Fed to decide whether AIG was "unable to secure adequate credit accommodations." And by making the loan to AIG, the Fed obviously decided that the answer was no.

Of course, none of this will ever really matter, because this issue will never go to court. It's an interesting theoretical question though, and one that we'll probably hear asked a lot over the next few days.

UPDATE: Eric Posner thinks the AIG bailout is illegal because a court would hold that the transaction is a sale rather than a loan, and the Fed doesn't have the authority to purchase an insurance company:
[T]he Fed statute does not say that the Fed can purchase businesses, and it seems reasonable to interpret the statute to forbid the Fed to purchase businesses. So here’s the question, is the AIG deal a purchase or a loan? I suspect the deal is a loan in form but a purchase in substance. Unfortunately, the details are not available, but the press accounts suggest that the Fed is receiving AIG equity (more precisely, the option to obtain equity) as collateral for the loan but that it’s going to exercise the option more or less automatically.
This strikes me as wrong. Sure, if this were a normal transaction executed in the course of every-day business, a court might hold that it's a sale rather than a loan. But this is, by definition, an "emergency loan," executed in "unusual and exigent circumstances." Any individual, partnership, or corporation (IPC) that gets a loan from the Fed under Section 13(3) of the Federal Reserve Act has to have been "unable to secure adequate credit accommodations from other banking institutions." If an IPC can't get a loan from anywhere else, then it's almost by definition a poor credit risk. For any emergency loan to such an IPC to be "secured to the satisfaction of the Federal Reserve bank," the IPC would have to put up so much collateral that the transaction might start to resemble a sale.

In other words, any emergency loan under Section 13(3) of the FRA is, by definition, going to require an unusual amount of collateral as security, because for a corporation to even be elligible for an emergency Fed loan, it has to be such a poor credit risk that it can't get a normal loan from a private sector bank. The line between a loan and a sale would be shifted substantially in the case of an emergency Fed loan to an insurance company, making it much more likely that a court would consider the transaction a loan.

Monday, September 15, 2008

There Will Be Blood

This was truly one of the most incredible days in Wall Street's history (and despite what Felix Salmon says, this isn't hyperbole). Once the news started coming fast-and-furious, it was a chore just to keep up. "Barclays pulls out! Lehman to file bankruptcy! BofA is buying Merrill! The Fed is turning the PDCF into a shadow repo market! Ten biggest banks pool $70 billion for private liquidity fund! Oh my God: AIG is collapsing, and asking the Fed for help!" Tomorrow will be chaos. No one knows how bad it'll be, since we've never experienced anything like this before, but one thing's for sure: it will be a wild, wild day. No single index will capture all the craziness, but I'll be paying the most attention to CDS spreads, along with currencies. Fair or not, this week will be a referendum on the Bear Stearns bailout. If Lehman is dismantled in an orderly manner, and financial markets hold up relatively well, then it will become conventional wisdom that the Bear Stearns rescue was a mistake. If, on the other hand, financial armageddon ensues, then the government's refusal to bail out Lehman will, obviously, be viewed as a huge mistake. The two situations aren't nearly analogous enough to make a direct comparison appropriate, but time has a way of glossing over those differences. Oh yeah, and pundits have a way of glossing over these kinds of differences too. Let the games begin.

Sunday, September 14, 2008

Paging Brad DeLong

This is tailor-made for Brad DeLong. As I noted yesterday, Gregg Easterbrook made this patently false assertion in a recent Slate article:

Wind-turbine application went nowhere in the 1970s and 1980s when federally subsidized; actual use has come since the 1990s, when the government bowed out and the private sector took over.
This is an outright lie, and in fact an article in this month's Atlantic Monthly—for which Easterbrook is a contributing editor—directly contradicts his assertion. The federal government hasn't "bowed out" of wind energy in any way, shape, or form. And this morning I read this NYT Magazine piece on wind energy, which states:
[T]he explosive growth in land-based wind farms owes more than a little to state and federal subsidies for the wind industry: state renewable energy credits; accelerated depreciation credits; and, perhaps most important, federal tax credits for equity investors who help wind developers finance and construct wind farms. ... Large wind farms simply can't be financed without the [federal production tax credit], which, in effect, decreases by as much as 40 percent the financing that developers need to build a project. "That's huge," says Bruno Mejean, managing director at Nord/LB New York, a German-based bank and an active wind-energy lender. "You cannot finance these projects without this 40 percent component. That's what makes wind power viable commercially."
And yet Easterbrook claims that wind energy has gained traction because "the government bowed out and the private sector took over." There's just no way around it: Gregg Easterbrook is a dishonest hack.

Saturday, September 13, 2008

The Battle of the Journalist-Pundits

It's Gregg Easterbrook vs. Thomas Friedman, in a clash between two of the most prominent journalists-turned-"experts." Friedman is, of course, the most famous globalization cheerleader in the world, and in his new book, Hot, Flat, and Crowded: Why We Need a Green Revolution—and How It Can Renew America, he takes on energy policy, climate change, and globalization (again). Easterbrook is a prolific pundit, most often described as a science and/or climate change expert, despite the fact that he has no background in science whatsoever. Friedman's, shall we say, "un-nuanced" view of globalization is somewhat obnoxious, and I fully expect his views on energy policy to be obnoxious and over-the-top too (I haven't read his new book yet, although I've read his column semi-regularly for several years). But Easterbrook's review of Hot, Flat, and Crowded is bone-crushingly stupid. Easterbrook just doesn't know what he's talking about on any of the issues. At all. The most brazenly dishonest/uninformed part of his review is when he asserts:

Wind-turbine application went nowhere in the 1970s and 1980s when federally subsidized; actual use has come since the 1990s, when the government bowed out and the private sector took over.
It's simply not true that the government has "bowed out" of wind-turbines. In a delicious bit or irony, an article in this month's Atlantic Monthly—for which Easterbrook is a contributing editor—reports:
Twenty-eight states have set ambitious mandates for renewable energy, with wind power shouldering most of the load... . Those requirements, along with a generous federal subsidy (20 percent of wind energy’s costs), have fostered a turbine-building frenzy.
No Easterbrook article would be complete without condescendingly tut-tutting those who recognized global warming before he did, I guess for having the gall to disagree with Noted Climatologist Gregg Easterbrook and then be proven right:
Artificial climate change is real; even skeptics now call the danger scientifically proven. But Friedman, Al Gore, James Hansen of NASA, and others present climate change as some kind of super-ultra emergency. Global warming is a problem, one that must be managed via greenhouse-gas restrictions and a weaning away from fossil fuels.
First of all, note how Easterbrook links to his own op-ed, as if the turning-point in the climate change debate occurred when a journalist with no scientific expertise of any kind finally admitted that man-made climate change is real. Being a responsible policy expert, and not one of those hippie-alarmists, Easterbrook proposes "a weaning away from fossil fuels" to deal with climate change. Umm, you mean, exactly what Friedman has been proposing for years? I was under the impression that the whole point of Hot, Flat, and Crowded was to push the U.S. government to help develop clean energy sources so that we can "wean away from fossil fuels." At one point, Easterbrook thinks he has identified a basic flaw in Friedman's argument, posing this incredibly smug rhetorical question:
[I]f resource trends and climate change are driven by rising population and rising affluence, which of these, precisely, do you propose to ban?
As I said, I haven't read Friedman's new book yet, but I've read enough of his columns that I'm quite sure he's not proposing to ban any of these. He's long pushed for the U.S. government to aggressively support the development of clean alternative energy sources, which Friedman believes would allow rising population, rising affluence, and ultimately energy consumption to continue apace (even if he wishes population growth would slow down), while at the same time mitigating the harmful effects of climate change. It's your basic "technology and innovation will solve all problems by facilitating a shift to clean energy sources" argument. Perhaps most revealing is how Easterbrook takes time to attack a familiar cast of strawmen: "the cocktail-party circuit," "corporate and Hollywood elites," etc. When an author tries to make himself look good by comparing his arguments to the oh-so-imprudent arguments of fictitious opponents, it's a pretty good sign that the author is full of shit. Slate should be embarrassed that it continues to publish articles by someone as chronically wrong as Gregg Easterbrook.

Thursday, September 11, 2008


Since everyone is telling their 9/11 stories, I guess I'll share mine. Having experienced the terrorist attacks on 9/11 up close, this day always bring back terrible memories.

My wife and I were both working in the Financial District, and my wife's office was very, very close to the Twin Towers. I had walked over to my wife's office to drop something off that she had forgotten at home, and I was standing in her office waiting for her to finish a call when we heard the first plane hit the North Tower. Most people on her floor went outside to see what was going on / get a better look, because none of us had any idea what had happened. We were standing outside when the second plane hit the South Tower, although I didn't actually see the impact; it was, however, the loudest noise I've heard in my life. I thought there had been a massive explosion in the North Tower at first. Even at that point, we weren't really sure it was an attack, because we still didn't know for sure what had happened to the North Tower. People had been speculating that a plane had hit the North Tower, but no one we talked to had actually seen the plane go into the tower. All you could see was a giant hole in the side of the building with smoke pouring out.

After the second plane hit, people naturally started to panic. My wife always kept a near-lifetime-supply of bottled water in her office, so we went back inside to get them to hand out to people who were coming down the street from the WTC. Handing out bottled water seemed like a very good idea at the time; we hadn't yet realized how dangerous it was to be so close to the WTC. Partly that's because, despite what everyone says in hindsight, a lot of people still weren't sure that we were under attack even after the second plane hit, and so were just standing around staring at the towers rather than fleeing. I wasn't 100% convinced myself, because some people were still claiming that the explosion in the North Tower had been a massive pipe explosion. Anyway, after we handed out the bottled waters and made a few calls on our cell phones to check on friends who worked in the WTC, police officers started telling everyone to clear the entire area immediately. So we started moving down Liberty Street (toward the bridge).

We had only been walking away for about 60 seconds when the South Tower collapsed. I had my back turned initially, but I remember turning around when the rumbling started and seeing the massive cloud of dust and debris rushing toward us. Everyone turned and ran, and I was shocked at how quickly the cloud of dust/debris was on top of us. We barely made it half a block before the cloud effectively engulfed us. (It was very hot.) Once the dust/debris started to clear, it was just pure chaos. There's no other way to describe it. We moved as fast as we could toward the bridge, but everyone seemed to be running in different directions. (No one really knew where we were supposed to run to; "away from here" was the only real consensus.) Eventually we made it to the bridge, where, like everyone else, we remained for basically the rest of the day.

It was, obviously, the most harrowing experience of my life.

Monday, September 8, 2008

Media Bias Again

My post on media bias generated some good debate (especially in the comments to Megan McArdle's post). It also generated one utterly unhinged (and comically stupid) response by a guy named Brad at the Fire Megan McArdle blog. Before I get to Brad's response, I want to clear a couple things up. First, as I noted in my original post, I don't perceive a liberal bias in the media. In fact, if you asked me whether I perceived a particular bias in the media, I would say that I think there's a conservative bias. But I'm a partisan Democrat, and my point was that my perceptions of media bias are likely to be heavily tilted toward perceiving a conservative bias. Second, I don't think "unbiased" means a perfect 50-50 balance of pro-Democrat and pro-Republican stories. The media's reporting should of course be driven by the facts. If the Democrats are right 75% of the time, then by all means, the media's reporting should reflect that. But media bias isn't always that simple; it often takes place at a much more nuanced level, for instance how a reporter describes a policy or a political event. Third: yes, I know that Fox News isn't liberal, and that Chris Matthews slobbers all over Republicans. The fact that there are prominent conservative pundits doesn't prove that the media, in general, have a conservative bias. Now to Brad's post, which is high comedy. Brad first tries to argue that my post is worthless because I'm a lawyer, and not a neurologist. Ouch. Good one, Brad. You're absolutely right: I'm not a neurologist. But, of course, that has nothing to do with my argument, seeing as the neurological study I relied on was published in the Journal of Cognitive Neuroscience. Next, he argues that my post was dishonest:

He goes on to cite one of countless studies showing reporters tend to identify as Democrats. He does not, of course, follow up with mention of the consistent accompanying result that a majority of editors and publishers identify as Republicans, or the fact that these folk are the ones who actually control the news being published. That would be honest, and wouldn't play into the meme being pushed.
First of all, the survey I cited did, in fact, include editors in the survey sample. Here's the breakdown of the survey sample:
* 9 percent of respondents were editors, managing editors or assistant managing editors. * 38 percent were mid-level editors (including the copy desk, section editors, graphics/photo editors and editorial page editors). * 46 percent were staff (including both general assignment and specialized reporters, photographers, designers and columnists).
Second of all, there is no "consistent accompanying result" showing that editors and publishers skew Republican. In fact, surveys show that most editors and publishers also vote Democratic. Next, Brad questions the neurological study I discussed:
I'd be interested to know whether the study controlled for the actual empirical truth values of the claims being responded to, as Kerry tended to lie a lot less often than Bush, which could skew the results, but then I'm probably being emotional in my attachment to reality.
Brad was clearly too lazy to click on the link to the study that I provided. Had he done so, he would have found that yes, the study did control for "the actual empirical truth values of the claims being responded to." Or, alternatively, he could have simply read my post, as I clearly stated that the claims the subjects responded to were "undeniably inconsistent." Finally, he argues that the party affiliation of journalists (and editors) can't be used to gauge liberal or conservative bias anymore, because:
Bush's extremism and my way or the highway mentality and record of unmitigated failure have forced the country's political center back into the Democratic Party.
As I noted in my post, the survey of journalists and editors I cited was conducted in 1999—that is, before Bush shifted the political spectrum. Brad should really learn to think before he writes. According to his profile, Brad is a student. My advice to him: stay in school.

Sunday, September 7, 2008

Thoughts on the Frannie Bailout

It's too early to tell how successful the Frannie bailout will be. Its ultimate success or failure will largely hinge on how many small and regional banks become insolvent as a result of having to write down their preferred shares in Frannie. The fact that Paulson said they looked at this issue and decided to essentially wipe out preferred shareholders anyway makes me think that a significant wave of regional bank failures is quite unlikely. Treasuries will take a beating tomorrow (they're already taking a beating in Asian markets), as agency spreads tighten. Equity markets will presumably have a monster day too. The most interesting aspect of the bailout is the promise to shrink Frannie's balance sheet by 10% each year starting in 2010. Really? Who's going to take on all that risk? The government is going to expand Frannie's balance sheet through 2009, so 10% of Frannie's balance sheet in 2010 won't be chump change. It's not a foregone conclusion that the financial sector will be fully rehabilitated by then. And I can't imagine that foreign central banks or SWFs would be too wild about assuming even more credit risk associated with the US housing market. I understand the desire to credibly commit to an exit strategy, but without more details, this commitment can hardly be considered credible.

Saturday, September 6, 2008

Charles Wheelan's "Naked Economics"

With the dominant issue in the election being the economy, my nephew, who is a freshman in college, has decided that he wants to start studying economics in the spring semester. Wanting a slight head start, he asked me what books (not textbooks) he should read on his own this semester. (I of course scoffed at the idea of learning economics for the first time without a textbook, since I used textbooks in all my econ classes.) I asked an economist friend of mine if he knew of any non-textbook books that would give my nephew a decent grounding in economics, and he recommended Naked Economics: Undressing the Dismal Science, by Charles Wheelan. I had never read it, so I decided to read a chapter or two to see what it was like. Once I started reading it, I couldn't put it down. I ended up reading the whole thing in two days. It was fantastic. Wheelan has a superhuman ability to explain complicated economic concepts clearly and concisely, using entertaining hypotheticals and real-world examples. I felt like I was reading the 1990s Paul Krugman again. Remember Krugman's classic "baby-sitting co-op" column? Wheelan's book is like Krugman's baby-sitting co-op column times 100. If a publisher doesn't give Wheelan a contract to write an introductory economics textbook, then there is no justice in the world.

This seems appropriate right about now (h/t CalculatedRisk): And put the load right on me, indeed.

The WSJ is reporting that Fannie and Freddie will be put into a conservatorship, with the Federal Housing Finance Authority as conservator. So the plan is to put two gigantic and vital companies into a conservatorship that's unprecedented in both nature and size, and to appoint as conservator an agency that's been in existence for just over 5 weeks? And this is supposed to calm the markets? If we're going to nationalize the GSEs, just come out and nationalize them already.

Thursday, September 4, 2008

Is There a "Liberal Media Bias"?

Glenn Greenwald, in a predictably grating bit of rhetorical overkill, says no:

The very notion of the "Liberal Media" is one of the most inane myths in American politics -- something spat out and repeated in the lowest right-wing sewers for so long that it has become conventional wisdom. ... It's literally hard to imagine a claim that ought to be more discredited in general than the notion of the "liberal media" and its "anti-Republican bias."
The issue of media bias has been debated and studied for decades, and both sides can cite academic research that supports their argument. But the process of defining and measuring "media bias" is so inherently subjective that I don't think it's possible to conduct an objective empirical study. I tend to think there is a "liberal media bias," based on two facts. First, surveys have consistently shown that journalists are far more likely to be Democrats than Republicans. For example, a 1999 survey by the American Society of Newspaper Editors found:
At the bigger papers, 61 percent of newsroom respondents described themselves as Democrats (or leaning toward Democrat) and only 10 percent as Republicans (or leaning toward Republican). At small papers, the number of Democrats (and leaners) drops to 48 percent and Republicans (and leaners) rises to 21 percent.
Second, neurological studies have shown that people's feelings toward a political party dramatically affect the way their brains interpret political news. In his book The Political Brain, Drew Weston described a great study he and two colleagues conducted during the 2004 election. Westen and his colleagues studied the brains of 15 self-identified Democrats and 15 self-identified Republicans as they were presented with a series of slides that showed undeniably inconsistent statements by John Kerry. The partisans were asked to consider whether Kerry's two statements were inconsistent, and were then asked to rate the extent to which Kerry's statements were contradictory, from 1 (strongly disagree) to 4 (strongly agree). They then repeated the process with undeniably inconsistent statements by George W. Bush, and again with inconsistent statements by politically neutral males. Here's how Westen described the results:
They had no trouble seeing the contradictions for the opposition candidate, rating his inconsistencies close to 4 on the four-point rating scale. For their own candidate, however, ratings averaged closer to 2, indicating minimal contradiction. Democrats responded to Kerry as Republicans responded to Bush. And as predicted, Democrats and Republicans showed no differences in their response to contradictions for the politically neutral figures. ... The results showed that when partisans face threatening information, not only are they likely to "reason" to emotionally biased conclusions, but we can trace their neutral footprints as they do it. When confronted with potentially troubling political information, a network of neurons becomes active that produces distress. ... The brain registers the conflict between the data and desire and begins to search for ways to turn off the spigot of unpleasant emotion. We know that the brain largely succeeded in this effort, as partisans mostly denied that they had perceived any conflict between their candidate's words and deeds. Not only did the brain manage to shut down distress through faulty reasoning, but it did so quickly -- as best we could tell, usually before subjects even made it to the third slide [which asked them to consider whether the statements were inconsistent]. The neural circuits charged with regulation of emotional states seemed to recruit beliefs that eliminated the distress and conflict partisans had experienced when they confronted unpleasant realities. And this all seemed to happen with little involvement of the circuits normally involved in reasoning. But the political brain also did something we didn't predict. Once partisans had found a way to reason to false conclusions, not only did neural circuits involved in negative emotions turn off, but circuits involved in positive emotions turned on. The partisan brain didn't seem satisfied in just feeling better. It worked overtime to feel good, activating reward circuits that give partisans a jolt of positive reinforcement for their biased reasoning.
This is basically the root of the well-known "confirmation bias." So given that (1) journalists are overwhelmingly Democrats, and (2) party affiliation dramatically affects the way our brains interpret political news, is it really possible that there isn't a liberal media bias? No empirical study of newspaper stories or talking heads on TV is ever going to be able to objectively determine whether there's a liberal media bias, because what people think constitutes "liberal bias" depends on their party affiliation also. I don't perceive a liberal media bias, but then again, I'm a Democrat, so my brain would presumably interpret political news the same way a biased liberal media would. But if we know that the inputs are heavily biased, it's very likely that the output is biased as well.

Tuesday, September 2, 2008

First Impressions

I can't resist pointing this out. It's too perfect. Here's me, right after the press confirmed that Palin was the VP pick:

[W]ith Palin, there's [a] danger that the press quickly settles on a "too inexperienced to be president" narrative, and spends the next few days talking about what a bad choice McCain made. I think a good deal of the time the media spend talking about Palin in the next few days will, in fact, be dedicated to laughing at the Palin pick and discussing why McCain made such a poor decision.
Here's Jim Lindgren, earlier tonight:
Watching both MSNBC and CNBC today, I have been surprised how quickly the press has moved from "Who is Sarah Palin?" — or even "Is Sarah Palin a good choice?" — to "How exactly did John McCain screw up by picking Sarah Palin?"
Of course, I didn't think the narrative would necessarily be so focused on what a poor job McCain did in the vetting process. I thought the narrative would be dominated by what a bad decision McCain made in picking such a wildly inexperienced VP candidate — there's been quite a bit of that, but it has shared the spotlight with the stories about Palin's various scandals/contradictions and the McCain campaign's atrocious vetting. Still, it's nice when your initial reaction to an unexpected event turns out to be accurate.

Monday, September 1, 2008

Assorted Links/Thoughts

1. How Good Are Experienced Presidents? Examines the historical data on governmental experience vs. presidential greatness. If the Obama campaign takes the bait on Palin and focuses on her extreme inexperience, we'll be hearing even more about the importance of "experience" to being a good president. I hope the Obama campaign is smart enough not to mount an all-out attack on Palin's inexperience. Use it purely defensively—that is, whenever McCain tries to argue that Obama lacks the requisite experience to be president. The high command of the Obama campaign is top-shelf though, so I trust they won't run full-speed into an argument over experience. 2. Tom Friedman: China must become America. Friedman continues to set world records in shark-jumping. Now he thinks China must "gradually develop a cleaner, knowledge-based, service/finance economy. It has to move from 'made in China' to 'designed in China' to 'imagined in China.' In short, the economy here has to become greener and smarter." How about instead, we just give China our finance sector? 3. Experts Recommend Books to Help Explain What's Going On in the Economy. Curiously, not one of the 14 experts recommended Mohamed El-Erian's terrific new book, When Markets Collide, which specifically tries to provide a framework for understanding the ongoing transformation of the global economy. Best pick goes to Mark Cuban:

No recommendation. Cuban says: "I don't think there is such a book. In my humble opinion, people who actually believe they can understand all the issues are the ones that got us to where we are today. In reality, there are so many variables and so little data, it's all a guess. I don't think a book exists that can explain it. Is there a book out there called 'No One Has a Clue What Is Going On and the Whole World Is Guessing'?"
True story. Worst pick (or, more accurately, worst reasoning) goes to Greg Mankiw, who recommends Milton Friedman's Capitalism and Freedom, and stresses that "[i]n this difficult economic time, it is important to keep first principles firmly in mind." Maybe it's just me, but "keep[ing] first priciples firmly in mind" sounds an awful lot like "clinging to ideology."