Carmen Reinhart, coauthor of 'This Time is Different,' the seminal work on financial crises, told me something on Friday that I haven't been able to get out of my head. 'Seven of the fifteen post-war crises had broadly defined double-dips,' she said, 'but often these renewed bouts of slowness were tied to external factors. They weren't always related to post-crisis intrinsic forces. But after a crisis, you're highly leveraged, you're growing slowly, and so you're vulnerable to an adverse external shock that, in normal times, you could handle well.'
Watching all this unfold, Reinhart seems, if anything, a bit too optimistic. It's not just that post-crisis economies occasionally face an unexpected punch in the gut. It's that they don't hit back with nearly the force or speed necessary to resolve the situation. In America, we're looking at a slowdown in growth, poor jobs numbers, and some of the lowest borrowing costs in our nations history. And what are we doing about it? Nothing. In Europe, they've been facing a growing debt crisis for years now, but they've never been able to muster the political will to actually solve it.
Only Japan, which got rocked by a tremendous natural disaster, gets to say that an unexpected shock derailed their recovery. American and Europe are dealing with the same problems they've been dealing with for years, but with political systems that seem increasingly less capable. I suspect that if a political scientist did a history of post-war financial crises, she would find that this was a common thread among them too, and that one reason post-crisis countries are more vulnerable to shocks is that their political systems have largely exhausted their capacity to effectively respond to bad news. Financial crises are long and brutal, and very few political systems are capable of sustaining the necessary focus and consensus for five, six or seven years.
Five in the morning
1) The European Central Bank is intervening to help Italy and Spain, reports Anthony Faiola: 'Moving to stem panic of an escalating debt crisis in Europe, the European Central Bank on Sunday signaled it would intervene in bond markets to prop up hard-hit Italy and Spain, as world leaders scrambled to calm investors before the opening of financial markets Monday. The reluctant decision by the ECB underscored the gravity of a crisis that some fear could lead to a messy breakup of the euro zone if not quickly contained, and which has gathered fresh urgency following the downgrading of U.S. debt by Standard & Poors. Worried investors have been dumping Italian and Spanish bonds, driving their borrowing costs to record levels in recent days...The bank could at least temporarily take some of the pressure off both nations by buying debt that private investors now see as too risky.'
Krugman's take: 'There is a reasonable case that what we’re seeing in Italy is a self-fulfilling crisis trying to happen, in which fear of default is precisely what leads to default. And that’s exactly the kind of case in which intervention could short-circuit the crisis. Let the ECB buy lots of Italian bonds, in effect guaranteeing a low interest rate, and the possibility of default fades – which in turn means that further intervention isn’t needed. It’s certainly worth a try.'
2) The second recession in a double-dip could be worse than the first one, reports Catherine Rampell: 'If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around. Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health -- including jobs, incomes, output and industrial production -- worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009...When the last downturn hit, the credit bubble left Americans with lots of fat to cut, but a new one would force families to cut from the bone.'
3) S&P is often wrong, but this time, they got it right, writes Ezra Klein: 'Standard Poor’s didn’t just miss the bubble. They helped cause it. They were paid by the banks to award their AAA-stamp of approval to all manner of financial products that were anything but riskless -- which, ironically, makes them an accessory to the resulting explosion of U.S. debt...But that doesn’t make Standard Poor’s wrong in this particular case. 'The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,' they explained in the statement accompanying Friday’s decision. After Republicans in Congress spent three months weighing whether or not to default on our debt and Senate Minority Leader Mitch McConnell said that paying our bills would never again be a foregone conclusion, can anyone really argue with that?'
4) The debt limit fight was a natural result of how the 2010 elections were won, report Brady Dennis, Alec MacGillis, and Lori Montgomery: 'How the shorthand of 2010 grew into the showdown of 2011 is the story of a Republican resurgence that brought immense advantage to the leadership but also created immense expectations among this new breed of lawmaker. Having built a majority on ideology, the GOP leadership found itself struggling to control a rambunctious rank and file determined to live up to the bold rhetoric that had brought it to Washington...Others in official Washington had not yet grasped quite how big a deal the debt limit could become. The White House, though, had an inkling. Obama and his advisers had picked up on the debt-limit fervor. They say they took a run at increasing the debt ceiling as part of a tax package that passed Congress in December, but got no traction. Asked recently about what happened, they reacted with some irritation.'
5) Tim Geithner is staying on as Treasury Secretary, reports Zachary Goldfarb: 'Treasury Secretary Timothy F. Geithner has told President Obama he plans to remain in his job through the fall of 2012, keeping in place Obama’s longest-serving economic adviser after the first-ever U.S. credit downgrade and renewed fears of a second recession. Geithner, who has been battling financial crises since 2007 as a top Federal Reserve official and then Treasury secretary, considered leaving the administration after Congress raised the federal debt ceiling and reached an agreement with Obama to tame the national debt. But several developments have made his departure more difficult. The debt ceiling was raised with only hours to spare. The deal to tame the debt fell short of what Geithner and Obama wanted. The economy has suddenly taken a turn for the worse.'
Folk-tinged interlude:
Bon Iver plays 'Towers' live.
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Still to come: S&P does not have a great reputation on Wall Street; health care reform might not give states enough power to cut insurance rates; the administration is giving out waivers on No Child Left Behind; the GOP will target the EPA when Congress gets back in session; and cars make way for a whole lot of ducklings.
Economy
S&P does not exactly have a sterling reputation for analytical rigor, writes Economics of Contempt: "To say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement. Naturally, before meeting with a rating agency, we would plan out our arguments — you want to make sure you’re making your strongest arguments, that everyone is on the same page about the deal’s positive attributes, etc. With S&P, it got to the point where we were constantly saying, 'that’s a good point, but is S&P smart enough to understand that argument?' I kid you not, that was a hard-constraint in our game-plan. With Moody’s and Fitch, we at least were able to assume that the analysts on our deals would have a minimum level of financial competence. I’ve seen S&P make far more basic mistakes than the one they made in miscalculating the US’s debt-to-GDP ratio. I’ve seen an S&P managing director who didn’t know the order of operations, and when we pointed it out to him, stopped taking our calls. Despite impressive-sounding titles, these guys personify 'amateur hour.' (And my opinion of S&P isn’t just based on a few deals; it’s based on countless deals, meetings, and phone calls over 20 years. It’s also the opinion of practically everyone else who deals with the rating agencies on a semi-regular basis.)"
A big deal could get the US credit rating back, writes Robert Barro: 'First, make structural reforms to the main entitlement programs, starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula. Second, lower the structure of marginal tax rates in the individual income tax. Third, in the spirit of Reagan's 1986 tax reform, pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits--not to mention eliminating ethanol subsidies. Fourth, permanently eliminate corporate and estate taxes, levies that are inefficient and raise little money. Fifth, introduce a broad-based expenditure tax, such as a value-added tax (VAT), with a rate around 10%.'
Gutting the SEC is dangerous, writes Arthur Levitt: 'The S.E.C., which was founded during the Depression to protect Main Street investors, has been charged with implementing the 2,300-page Dodd-Frank financial reform law but has not been given the resources to do the work necessary. For 2012, the S.E.C. asked for an increase of $222 million in its budget; it is slated to receive no increase at all. Those in Congress who complain that the S.E.C. is behind schedule on Dodd-Frank and wonder why need only look at the budgets they approve...Whether or not these bills pass, we are witnessing a pattern of Congress’s grabbing the steering wheel of an independent agency. Dodd-Frank imposed upon the S.E.C. new procedures that should have been left to the discretion of the agency’s leadership. Congress has criticized the S.E.C.’s investigation of Ponzi schemes but then has neglected to adequately finance its investigations.'
The US is in a liquidity trap, writes David Wessel: 'If we are in a liquidity trap, how do we get out of it? Economists have three remedies, all with such significant side effects that there's a reluctance to attempt them. One, the classic Keynesian prescription is for the government to borrow (after all, rates are low and savings idle) and spend to create demand and jobs...Two, Lars Svensson, now deputy governor of the Swedish central bank, sees one 'foolproof way of escaping from a liquidity trap'--devalue the currency. 'This,' he wrote in 2001 while in 'academia, 'will jump-start the economy and escape deflation.'...Three, the interest rate that matters in the economy is the sticker-price rate adjusted for inflation. So some economists argue that the way out of the trap is for the Fed to convince everyone it's going to create more inflation.'
Kids' books come alive interlude:
A family of dozens of ducks crosses the street, holds up traffic.
Health Care
Health care reform may not give state governments enough power to keep rates low, reports Julie Appleby: 'For many consumers, the ultimate test for the embattled health-care law is simple: Will it push down insurance premiums -- or at least slow their relentless rise? It’s a pressing question for the Obama administration, which is hoping its signature domestic policy achievement doesn’t end up as an election year albatross. Officials have been jawboning carriers to refrain from big rate jumps and, beginning in September, will require insurers to undergo additional scrutiny before raising premiums 10 percent or more. But keeping a lid on premiums is hardly a slam dunk: The law doesn’t give the federal government or the states, the traditional regulators of health care, the nuclear option: the power to reject rate increases outright.'
Medicare part D is hurting cancer patients, writes Ezekiel Emanuel: 'The Medicare Prescription Drug, Improvement and Modernization Act of 2003..required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And...it restricted the price from increasing by more than 6 percent every six months. The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.'
Domestic Policy
The administration will start issuing waivers to No Child Left Behind, reports Lyndsey Layton: 'With a growing number of states rebelling against the No Child Left Behind law and stalled efforts in Congress to reform it, the Obama administration says it will grant waivers to liberate states from a law that it considers dysfunctional. Education Secretary Arne Duncan said he is taking action because of 'universal clamoring' from officials in nearly every state, who say they cannot meet the unrealistic requirements of the nine-year-old federal education law. 'The states are desperately asking for us to respond,' Duncan said in a conference call with reporters Friday. Duncan and Melody Barnes, President Obama’s domestic policy adviser, were short on specifics but said they would release details in September, when they will begin weighing applications from any state that wants to be exempted from No Child Left Behind.'
Obama's been slow-going on judicial nominations, reports John Schwartz: 'So far, Mr. Obama has had 97 of his judicial nominees confirmed -- compared with 322 for President George W. Bush and 372 for President Bill Clinton, who each served two terms. So far in Mr. Obama’s presidency, nearly half of the confirmed nominees are women, compared with 23 percent and 29 percent in the Bush and Clinton years. Some 21 percent are black, compared with 7 percent under Mr. Bush and 16 percent under Mr. Clinton. And 11 percent are Hispanic, compared with 9 percent under Mr. Bush and 7 percent under Mr. Clinton. Of the nearly two dozen nominees awaiting a Senate confirmation vote, more than half are women, ethnic minorities or both. Race is not the only measure of diversity under consideration by the administration -- for example, J. Paul Oetken was the first openly gay man to be confirmed to the federal judiciary, in his case in the Southern District of New York.'
The federal immigration enforcement agency is tearing up contracts with state and local governments, reports Tara Bahrampour: 'A key immigration enforcement program that has drawn criticism from some state and local governments will terminate all existing agreements with jurisdictions over the program, federal authorities announced Friday. Immigration and Customs Enforcement said its director, John Morton, had sent a letter to state governors terminating the agreements 'to avoid further confusion.' Through the program, the FBI shares fingerprint data of people arrested by local and state law enforcement agencies with federal authorities, who can use the information to check for immigration law violations. The agreements were meant to educate states about the availability of the service, ICE officials say...Immigrant advocacy organizations responded angrily to the announcement.'
Turning every election into a potential realignment has poisoned our discourse, writes Ross Douthat: 'Our leaders have a responsibility that transcends their ideological differences: the responsibility to work with one another to keep the country solvent. The dream of realignment has become the enemy of such compromises. It inspires politicians to claim sweeping mandates from highly contingent victories: think of Dick Cheney insisting on another round of deficit-financed tax cuts in 2003 because 'we won the midterm elections' and 'this is our due,' or the near-identical rebukes that President Obama delivered to Eric Cantor ('Elections have consequences -- and Eric, I won') and to John McCain ('the election’s over') during the debates over the stimulus and health care. The losers, meanwhile, wax intransigent, while hoping for a realignment of their own. After all, why cut a deal today if tomorrow you might overthrow your rivals permanently?'
Parody interlude:
Tiny Fuppets, a Portuguese knock-off of the Muppets.
Energy
Republicans plan on targeting EPA rules when Congress is back in session, reports Erik Wasson: 'Democrat aides are worried that the push on the appropriations policy riders, especially in the bill funding the Environmental Protection Agency (EPA), could lead to a government shutdown crisis at the end of September. That bill is listed by Cantor’s office as a tool for regulatory reform. Policy riders will play a larger role in September’s 2012 spending fight compared to the April battle over 2011 funding. The top-line spending number for 2012 was set in the debt-ceiling deal at $1.043 trillion. Senate Democrats, however, are sure to reject most of the restrictions in the appropriations bills that have already passed the House. 'We really don’t know how it’s going to play out with those riders,' one Democrat appropriations aide warned.'
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.
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