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The subprime mortgage meltdown and the ancillary predictions about whether it will drag the economy directly into a recession are headline news.  But I'm losing sleep over a very different concern:  What if there's no recession because the rating agencies don't tell the truth? 

The emblem of the subprime mortgage meltdown has been Liar's Loans--high-interest mortgage loans for which the borrowers could fill in any numbers, and the mortgage companies wouldn't check.  In other words, bad information.  Now, from Gretchen Morgenson at the New York Times, comes a paragraph that makes me wonder if Liar's Ratings are coming next:

Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling  stampede that would follow. Many mortgage buyers cannot hold securities that are rated below investment grade — insurance companies are an example. So if the securities were downgraded, forced selling would ensue, further pressuring an already beleaguered market.

I get the part about the stampede, but I'm enough of a market purist to believe that when quality fails, the rating agencies MUST downgrade.  If they do not, then ratings are not giving a genuine mark of the quality of securities.  At that point, all confidence in the American markets will dissolve.

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Susan Estrich was the first woman President of Harvard Law Review and went on to be a law professor, Presidential campaign manager (Dukakis), and author ("The Case For Hillary" among many books and articles).

In this piece she examines the differences between Obama and HRC on Israel. Most fascinating part. Estrich says that the pro-Israel Right was offended when Obama said that cynicism about the chances of achieving peace is dangerous.

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Subprime lenders have recently faced a reversal of fortune. Why? One lender is suggesting that, when Congress made it harder not to pay your debts in '05, lenders with risky mortgages ended up taking the hit.

The data from Credit Suisse is clear. Fewer borrowers in foreclosure are filing bankruptcy since the '05 amendments.

This is good, right?

Wrong.

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I gather that conservatives are upset about the Time magazine cover showing Reagan weeping. But the real outrage is Karen Tumulty's accompanying story, which asserts: "Conservatives are in many ways victims of their successes, and there have indeed been big ones. At 35%, the top tax rate is about half what it was when Reagan took office; the Soviet Union broke up; inflation is barely a nuisance; crime is down; and welfare is reformed."

Another way to look at things is that none of those particular successes were the outgrowth of conservative ideology -- they were bipartisan, pragmatic accomplishments. But the right's big ideas have all failed in concrete ways: benevolent hegemony, the unitary executive, politicizing the government, tax cuts for the rich, dismantling public health and environmental protections, school vouchers, Social Security privatization, and so on.

No, Karen, the conservatives are victims of their failures, and there have indeed been big ones.

Mark Schmitt’s thoughtful and provocative article has spurred a very welcome conversation among those of us who think that fixing the democracy has to be one of the progressive movement’s big goals. The goal can’t be to end the role of money in politics. It must be to create incentives to give average citizens the most powerful voice in their democracy.

The article is bursting with ideas, and I can’t respond to all of them in one post. Let me start with a few of Mark’s big points.

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I'm trying to boil down to a headline what I think progressives should take from Mark Schmidt's Fresh Start for Campaign Reform. Essentially, the thirty year project to limit "bad" campaign contributions should be dropped, kaput. It's close to hopeless, given the First Amendment and the endless loopholes big money finds.

Instead, focus on putting MORE MONEY into the system, "good" money representing those with less financial resources. Instead of trying to limit the speech of the wealthy, amplify the voices of poor and working families through public financing.

But let me add a few observations and points beyond Mark's:

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Adam Bonin has blogged in response to Mark Schmitt’s recent post regarding the campaign finance reform community’s purported hostility to the role of the Internet in building small-donor democracy.  Mr. Bonin explains that “By helping small donors aggregate and magnify their impact, the Internet levels the playing field in ways that law alone cannot,” and claims that “The reformers, so far as I can tell, still haven’t figured this out . . . .”  Mr. Bonin lists the Campaign Legal Center as one of these reform groups.  However, the Campaign Legal Center wholeheartedly supports the use of the Internet and other emerging technology in manners consistent with the principle of small-donor democracy—so  I feel compelled to set the record straight.

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As I've read the ever-growing torrent of articles on the meltdown in the subprime mortgage market, my gut reaction is, how did this happen?

Cognitively, I know how it happened. Every player in the mortgage business has incentives to lend, lend, lend! The appraisers, mortgage brokers and lenders all stand to profit from more mortgages and have little downside if the mortgages aren't repaid. The lender bundles the mortgages together and sells them to large investment banks (who resell them to investors). This sale of mortgages allows the banks to lend again immediately - no need to wait for 30 years to be repaid.

This sale also represents an enormous moral hazard. The lender, who should be in the best position to know whether the borrower can repay the loan, doesn't care because they don't bear the risk of default. If increased regulation of the mortgage market is where we're headed - this looks like a great place to start.

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Valerie Plame is on TV, I'm reading the US Attorney Purge Timeline, and I'm on my second cup of coffee. You?

When you think about predatory financial practices, what do you think about? Payday loans? Subprime mortgage lenders? I've come to think that the big banks - the ones with the familiar brand names and shiny reputations - as the worst of the bunch. It's just that we are so used to the way things work, we don't see the manipulation anymore. Take overdraft fees. Banks manipulate transactions in just about every way possible to maximize the chances of an overdraft "protection" loan that has everything to do with generating fees, and nothing to do with service or protection for consumers.

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Those who have read the strident handwringing of rightwingers in a snit over Valerie Plame's testimony on Friday before Henry Waxman's Committee on Oversight and Government Reform are probably asking themselves: are these clowns high on drugs or just profoundly stupid? I refer of course to articles in the Investor's Business Daily and The American Thinker, which offer up rightwiner wish lists of questions members of Congress should ask Valerie Plame tomorrow. If the list of questions proferred by Investor's Business Daily is indicative of their investment advice prospective investors relying on their guidance are probably already bankrupt or facing near financial ruin. And what can we say about The American Thinker? Is this an intentionally ironic oxymoron? One wonders because the piece reflects nothing that approaches genuine thought. But I digress.

In the spirit of public service, I will take a stab at helping answer their questions. While I don't know for sure what Valerie will say nor am I acting on her behalf, I do know what the right answers are. Here's my guess at what we could hear from Mrs. Wilson.

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Continuing in a series of posts on an issue we’ve been following the past few days, Alan Greenspan – the former Chairman of the Federal Reserve – said today that the recent woes among sub-prime lending companies was “not a small issue.” He also pointed out that this might not even be the biggest story:

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Consumer credit has become a monster.  It is a monster that eats away at family security.  It produces monster profits for certain lenders.  And the monster has grown big enough to bully Congress and state legislatures.  What will it take to tame this beast? 

I'd like to announce the arrival of a knight wielding a spear, but change is more likely to start with small steps.  I see four from the past few weeks:

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Mark Schmitt’s article recently published on DemocracyJournal.org, Mismatching Funds: How small-donor democracy can save campaign finance reform, claims to offer groundbreaking “principles that might breathe some new life into the campaign finance reform movement,” in order to “revive campaign finance reform” from a decade of so-called failures. Despite Mr. Schmitt’s claim, he does little more than misconstrue the reform movement’s positions and then offer a purportedly “new” approach that is essentially what the reform community has been striving to achieve for decades.

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I've enjoyed working with Mark Schmitt ever since we met in the late 1990s; he was at the Open Society Institute and deeply involved in its work with the campaign finance reform movement, I was at Public Campaign as one of its senior analysts, working on the public financing side of the movement Mark writes about. I'm glad Mark is taking the time to survey the landscape of reform efforts in the last decade and to try to chart a way forward; it's vital that political movements take stock and periodically assess their assumption and efforts.

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One of the most important lessons of the welfare reform experience is that when a government program is clearly failing, it’s much more effective to propose something new that’s more likely to work than to defend the status quo or mere tweaking at the margins. Since Mark Schmitt’s Democracy Journal article includes the accurate observation that “the obsolete system of partial public financing for presidential campaigns has slowly collapsed,” the question arises: what now then? (By the way, coming from someone who invested so much of his professional energy in campaign finance reform, Mark’s article was about as jarring as Michael Barone’s recent blog entry attacking the Bush administration for corruption. The difference is that Mark, being a good liberal, is adjusting his views based on developments in the real world. It turned out that Barone, being a right-wing ideologue who doesn’t care about reality, was simply victimized by a technological snafu.)

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Laura Sessions Stepp’s book Unhooked—a warning to young women about “hook up” culture—has come under fire for promoting gender stereotypes (young women don’t really like sex) and being regressive. But predictably, as is the case for most books or studies that “warn” young women against being sexual, many of the reviews have been glowing.

Now, I can handle the tired complaining about young women being ruined by promiscuity—arguing that women’s moral compass is located in between their legs isn’t exactly a new or compelling theory. But another concept that comes up in Stepp’s book left me more than slightly disturbed: “gray rape.”

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In two recent posts, Derek discussed the impending (if not already occurring) subprime mortgage lending crisis. Two editorials today – one in USA Today and one in the New York Times – do the same and make a strong case for federal intervention.

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As we keep tracking the situation with more and more Americans being unable to pay their mortgage I want to follow up on my post yesterday and draw your attention to some interesting news in just how seriously the market takes the sub-prime mortgage failure issue.

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MEMORANDUM FOR: Speaker of the House | Senate Majority Leader

SUBJECT: Denouement on Iraq: First Stop the Bleeding

In the coming weeks a Congress that is willing to assert its prerogative as a co-equal branch of government has a unique opportunity to stop the needless deaths and maiming of U.S. troops in Iraq and bring them home in an orderly way this year. To do that, it must use its constitutionally mandated authority—the power of the purse. Although the president, vice president, and their most ardent supporters blindly insist that victory is a troop surge away, the current U.S. military commander on the ground, General David Petraeus, concedes that no military victory is possible. Victory will only be secured through a political solution. The question is not whether U.S. troops will remain permanently in Iraq. The vast majority of Americans agree that the U.S. presence in Iraq is temporary. The real question is how many more Americans will be killed and wounded in a civil war that pits Sunnis against Shias.

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Today I discovered that Yahoo!'s featured story highlighted credit card abuses.  Through the main page link, David Bach writes about universal default clauses and other tricks that credit card companies don't want you to know about.  The main page also linked to a Motley Fool article discussing problematic "grace periods" and a bankrate.com article about problems with check cards.   This is clearly a discussion that is gaining momentum; let's keep it going.

I am grateful to Mark for opening up this conversation, because he focuses on an issue which frustrated me immensely during the 2005-06 debate as to how (and whether) the Federal Election Commission should regulate online activity: the stubborness of the "reform community" towards this technology.

I do want to take issue with one claim, however: "The new progressive activists of the 'netroots' are mostly either indifferent to reform or, as with Daily Kos founder Markos Moulitsas Zuniga, openly oppose it."

I don't think that's the case. It's not that we don't trust reform; it's that we don't trust the reformers. With good reason.

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Why should United States Attorneys not have ten year terms? There are many reasons not to appoint them for life but I can't think of any reason not to give them ten year terms. They can quit sooner if they want but if they choose to serve through two terms of any President they should be able to do so.

If there are other good ways to depoliticize what is now a politicized position, let's hear them.

And then let's put the good ideas into a reform law.

I'm looking forward the chance to start a discussion here for a change, instead of just responding, though responding is always easier! And I'll confess that I'm worried about this discussion because I wrote “Mismatching Funds” to challenge a movement – the campaign finance reform movement – that I've been a part of and that I largely admire but that I want to see reexamine its basic operating assumptions. There's a pretty serious critique in the article of the assumptions of the movement, but also some things that I wish I’d stated a little better.

To start at the middle of the article, with something I should have said more clearly: I very much believe that the most fundamental problem to be addressed in American politics is the extent to which radical economic inequality reinforces and in turn is reinforced by inequality in the political system.

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Quick news: we'll be starting a conversation today on Mark Schmitt's new article in Democracy Journal, "Mismatching Funds." Mark looks at the 1990's effort from the perspective of a reform advocate to ask what went wrong and what's next. Writers and activists from around the campaign finance reform community have been invited to chime in (and others are certainly welcome). Mark's first post on the topic will go up soon.

For the thread, since TPM World HQ is still in full Purgegate mode, I'll pose the obvious question: how high will the resignations go? How high should they?

Like M.J., I'm watching the AIPAC convention this week, albeit in the news, not in person--for signs of where the politicians think the Jewish vote is. That is, were the Jewish vote monolithic, which contrary to all the recent hoopla about "the Jewish vote", it isn't. but,...then again, trends do show and polls do show, that Jewish voters remain mostly liberal--and that isn't just on economic issues. it's also on international issues, even in the Middle East, perhaps especially there. Contrary to public perception, for instance, the majority of American Jews support a state for the Palestinians alongside Israel, an end to the project of Jewish settlement on the West Bank, and, increasingly, an end to the war in Iraq. That's what VP Cheney discovered when he went to speak to AIPAC today in DC.

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More and more Americans are unable to make their mortgage payments. According to recent reports, almost 5% of Americans were past due in the last three months. While this is the highest level for the overall mortgage market since the beginning of 2003, it's not the end of the story. The "sub-prime" market three-month past due rate is up to %13.33.

While this is a cause for concern in many ways, three specific concerns jump out:

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If you are a renter, home buyer or potential seller, or merely an investor—be sure to read this Sunday’s New York Times front page story about the unraveling of the mortgage bubble. The New York Times points out that despite soothing reassurances from those who formed the bubble, the major shake-up in the housing market is yet to come. In the past, in such situations, the free market advocates -- rushed to the government to bail them out. This is what happened during the Savings and Loan debacle, to framers who are still heavily subsidized, and to Chrysler among others. Most recently various airlines tried to stick the public with their under-funded pension plans. If the banks and builders succeed, taxpayers will cover the losses caused by wild speculation in the real estate market.

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What would you do if presented with this choice? Unless you have a magic money machine that provides returns of 280% annually, the rational choice is to defer your gratification and take the $3800 next month. Yet, according to research by MIT’s Shane Frederick, many people choose the lesser amount, just to get their hands on it faster.

For those of us interested in consumer protection in the financial industry, the story gets even more interesting. …

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Even if you aren’t prone to finding politics in popular culture, the recently released big screen adaptation of 300, the Frank Miller graphic novel about the battle between a small group of Spartan soldiers led by King Leonidas and the massive Persian army of Xerxes, begs for some comment. I mean, even normally well-heeled mainstream film reviewers are really, really disgusted with the brazen orientalism, homophobia, sexism, racism, and testosterone-heavy jingoism (check out scathing reviews by A.O. Scott of the NY Times and Slate’s Dana Stevens).

But I beg to differ. I think the movie has got some flaws, but it isn’t necessarily because it is poorly written or because it is a negative portrayal of everyone except barrel-chested British actors. I actually think the film has something going for it to the extent it portrays the delusional dream for quasi-imperial domination of foreign lands by a massive and technologically superior army.

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We really should do more of these. We're having a very busy morning here in TPM World HQ, how's yours going? Share some wisdom.

When the Montana State Senate voted overwhelmingly two weeks ago to oppose approval of reauthorization of "Fast Track" Trade Promotion authority for new trade deals, it sent a powerful message that the American people and state governments are tiring of misguided trade deals. Other states look to join Montana in sending that message.

As Jeff Faux, myself and others noted in the trade discussion over the last few weeks, instead of delivering promised economic growth, those trade rules have led to enormous trade deficits, lost jobs and an undermining of state democratic powers to regulate large corporations in the public interest. This post is looking more closely at that assault on state democratic powers.

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Take it from John Fund:

Despite his antipathy toward liberals, Mr. DeLay joked that he's happy to work with them. He told me he is about to sign on with CNN as a commentator. "I may be their only conservative on air, but someone has to do it."

The network-that-isn't-Fox-but-hires-Glenn-Beck-to-prove-that-America-is-nuts thinks that what America, and a White House on the ropes, need in the year 2007 is more right-wing nuttery.

Wasn't Ms. Coulter available?

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The bright idea from the rightwing is to give individuals incentives to save money on health care, thereby driving down costs and freeing up money for lower costs and/or greater coverage.  Sounds like a nice idea and would make sense if average users of health care had much effect on health care costs.  But they don't.  See this table:

Share of health care spenders   * Cumulative share of US medical spending
Top 1%  *  30%
Top 5%  *  58%
Top 10% *  72%
Top 30% * 90%

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Another question not for the faint-hearted: What's happening to wages, from which those not in the top income quintile obtain the money to pay mortgages?

Take a look at the following from Wikipedia:

The formula for GDP measured using the income approach, called GDP(I), is:

GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports
Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

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http://www.nytimes.com/2007
/03/11/business/11mortgage.html

Help me, readers, find that quote where Dr. Greenspan recommended that everyone take more risks in the mortgages they assumed. At least as to the information technology bubble, he could point to the "exuberance" warning, although he neglected to repeat the caution when it was warranted three years later, and instead supported the New Economy thesis.

Many things are new about the current economy, especially the phenomenon of increasing returns to technology firms that enjoy network effects (most recently, Google). But owing more money then you can pay is as old as money itself.

Some financial firms, their relatively well-paid investors and their well-heeled investors are losers as the "free money" mortgage bubble collapses. Congress will think about applying more regulation to the sector, although principally the Fed and the Administration are to blame for depending so strongly on consumption instead of investment and savings to drive growth from 2001 to the present. Meanwhile, the Fed and Treasury should worry about whether the bubble's pop triggers the much-discussed "hard landing" for the precariously imbalanced American economy.

The other class of losers are those forclosed upon, those whose lives are utterly disrupted by the failure of money to match obligations. Many moralists will blame the people who undertook the mortgages. But a closer look at individual situations will reveal the hard balances to be struck in the problem set of finding affordable housing, paying for transportation, avoiding hours of commuting, trying to build up equity in a house when there's a paucity of attractive savings plans offered to the middle class. It will be a challenge for Congress to rise to the occasion of this severe and unprecedented financial problem.