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Oil spill worsens; Greece gets bailed out; Sheila Bair vs. Blanche Lincoln

Ezra Klein
Monday, May 3, 2010; 7:44 AM

Morning, wonks. And welcome to the first edition of Wonkbook! Let's get started.

The Agenda.

House: Not much going on. The body will meet, but isn't planning on getting anything done. They will, however, be announcing a Tuesday forum bringing together House leadership and outside economic experts to talk jobs, financial regulation, long-term growth, and all that good stuff.

Senate: Convenes at 2 p.m. to continue working on financial regulation.

White House: President is watching the Gulf Coast, the developments with the attempted car bomb in New York, and the progress of financial regulation. He'll also be hosting a dinner for the Business Council, which bills itself as "an association of the Chief Executive Officers of the world's most important business enterprises." A quick glance at the executive committee turns up the CEOs of Caterpillar, Aetna, JP Morgan Chase, and Wellpoint, so it should be a spirited exchange.

Top Stories.

Gulf oil spill continues to get worse: "Obama administration officials on Sunday offered a somber outlook on the fight to seal off a leaking oil well 5,000 feet below the surface of the Gulf of Mexico," report Joel Achenbach and David Fahrenthold. "With robotic submarines so far unable to seal off the leaks, the federal government and oil giant BP may need weeks or even months to get control of an uncapped well that has created an environmental crisis that could affect much of the gulf coast."

Quoth Interior Secretary Ken Salazar: "The best-case scenario: It gets stopped today. Worse-case scenario: This thing could keep going on for 90 days," he said on ABC's 'This Week.'

Greece gets $146 billion bailout: "Euro-region ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the worst crisis in the currency's 11-year history from spreading through the rest of the bloc," report Gabi Thesing and Flavia Krause-Jackson. "The first payment will be made before Greece's next bond redemption on May 19."

Krugman's take: "More serious than I expected," he writes. "The Greek fiscal problem has been turning into a death spiral, in which fear of default is driving up borrowing costs, making default even more likely. The EU has now, in effect, given up on trying to restore market confidence; instead, it's going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding...It does rise to the scale of the problem, and it might work."

Charts and graph interlude: Ever wondered where legislators get those giant charts they hold up during hearings?

FinReg.

Sheila Bair comes out against Blanche Lincoln's proposal to separate derivative desks from banks: "Federal Deposit Insurance Corp. Chairman Sheila Bair has urged lawmakers to scrap a controversial Senate plan that would force banks to spin off their derivatives businesses, saying it could destabilize banks and drive risk into unregulated parts of the financial sector," reports Damian Paletta. "Coming from the head of the agency in charge of protecting deposits in the U.S. banking system, Ms. Bair's comments could command attention, particularly because she has often been critical of big banks, and has called for curbs on their activities. In this case, however, she's suggesting proposed curbs might go too far."

Confusion over the scope of the Consumer Finance Protection Agency: "Much of the bewilderment -- and therefore the argument -- stems from the imprecise nature of some of the proposed rules," report Edward Wyatt and Sewell Chan. "The new agency would regulate financing provided by most car dealers, for example, but not by rent-to-own furniture vendors, according to the bill's advocates. Department stores with private-label credit cards would be covered; stores that let their customers pay in installments, without interest, would not, they say. A review of the consumer protection provisions, which account for 335 pages of the 1,565-page bill, shows that the intent of the legislation is not to cover Main Street businesses. But the ambiguity of some terms -- like the word 'significantly' -- leaves the regulations open to a broad interpretation."

NYT editorial page says Dodd bill weak on rating agency reform. "The financial reform bills before Congress have only vague proposals to fix the agencies," writes the New York Times editorial board. "They would have to register with the Securities and Exchange Commission, and the Senate bill would allow the S.E.C. to pull their registration if they were consistently wrong. Raters would have to disclose conflicts of interest, and investors would be able to sue for blatant recklessness." Matt Yglesias has some further thoughts.

Dodd pulls out of Wall Street fundraiser; Gllibrand does not: "Senator Christopher J. Dodd of Connecticut, a leader of Congressional efforts to crack down on Wall Street abuses, announced abruptly on Friday that he was canceling a planned appearance at a fund-raiser attended by financial industry executives in Manhattan next week," reports Raymond Hernandez. "Senator Kirsten E. Gillibrand, however, said she would attend the fund-raiser."

What did Brooksley Born want and when did she want it? We're going to be hearing a lot about derivatives regulation this week, which means we'll probably be hearing a lot about Brooksley Born's effort to regulate derivative swaps back in the 90s. Prepare yourself by reading this post by the anonymous finance lawyer who writes the blog 'Economic of Contempt.'

Kenneth Rogoff thinks the IMF's proposed bank tax has problems. "The IMF is on much weaker ground, however, in thinking that its one-size-fits-all global tax system will somehow level the playing field internationally," writes Rogoff. "It won't. Countries that now have solid financial regulatory systems in place are already effectively 'taxing' their financial firms more than, say, the US and the UK, where financial regulation is more minimal...if the US and the UK do implement even modest reforms, a lot of capital will flow elsewhere, potentially overwhelming regulatory systems that seemed to work well until now."

"And what about the second tax proposed by the IMF, on banks' profits and bonuses? Such a tax is politically appealing, but ultimately it makes little sense -- except, perhaps, in a crisis year when bank subsidies are glaringly transparent. It would be better to improve financial-market regulation directly and let national tax systems handle banks' income like that of any other industry."

Bankruptcy for banks? "During the past year since the administration proposed its financial reforms, bankruptcy experts have been working on a reform to the bankruptcy law designed especially for nonbank financial institutions," writes John Taylor. "Sometimes called Chapter 11F, the goal is to let a failing financial firm go into bankruptcy in a predictable, rules-based way without causing spillovers to the economy and permitting, if possible, people to continue to use its financial services┬┐just as people flew on United Airlines planes, bought Kmart sundries and tried on Hartmax suits when those firms were in bankruptcy."

"What would a Chapter 11F amendment look like? It would create a special financial bankruptcy court, or at least a group of 'special masters' consisting of judges knowledgeable about financial markets and institutions, which would be responsible for handling the case of a financial firm."

You-should-go-to-the-gym-more-often interlude: This dude is a seriously impressive jumper.

Gulf Oil spill.

Did you know we have an 'Oil Spill Liability Trust Fund' for cases like this? "Up to $1 billion of the $1.6 billion reserve could be used to compensate for losses from the accident, as much as half of it for what is sometimes a major category of costs: damage to natural resources like fisheries and other wildlife habitats," reports Matthew Wald. "Under the law that established the reserve, called the Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government, although they are responsible for the cost of containing and cleaning up the spill."

"The fund was set up by Congress in 1986 but not financed until after the Exxon Valdez ran aground in Alaska in 1989. In exchange for the limits on liability, the Oil Pollution Act of 1990 imposed a tax on oil companies, currently 8 cents for every barrel they produce in this country or import."

Seafood industry scared: "Shippers, shrimpers and tourism officials braced Sunday as a huge oil slick continued to spread in the Gulf of Mexico, bringing some fishing operations to a halt, but many said it was too early to tell how severe the economic impact would be," report Corey Dade, Jeffrey Ball and Aoun Sahi. "The spill came as the harvesting season for the $21 billion commercial seafood industry is scheduled to begin May 15. States on the Gulf coast account for about one-fifth of seafood production and nearly 75% of shrimp caught in the U.S., according to industry officials. Louisiana is responsible for up to 40% of the seafood caught in the continental U.S."

Owners of the failed oil rig had serious safety issue. "The board of Transocean Ltd., owner of the drilling rig where 11 workers died last month, eliminated executive bonuses last year over concerns about the company's safety practices," report Rebecca Smith and Ben Casselman. "The board's decision followed the deaths of four Transocean workers in 2009, according to documents filed with securities regulators just weeks before the drilling rig disaster in the Gulf of Mexico. The Swiss-based company's board took the unusual step to 'underscore the company's commitment to safety' and to give executives an incentive to prevent future accidents, according to the company's April 1 proxy."

David Fahrenthold and Steve Mufson get atmospheric: "The slick from the Deepwater Horizon oil spill was still too far offshore to see or even smell. At least, it didn't smell worse than the harbor's usual mix of boat fuel and bait," they report. "But there were rumors: It would come Sunday, first the sheen and then the thick stuff behind it. People here had heard that just to the west, fishermen were already pulling up shrimp that smelled like diesel fuel."

"On the Royster, a rust-edged fishing boat, Richard Bosarge said that he feared the oil could coat the valuable oyster grounds, which the fishermen here know so intimately they have given them names like 'Square Handkerchief' and 'Pass Mary Anne.' And the oil could poison the huge stocks of shrimp offshore. 'They're out of reach until he's probably my age,' Bosarge, 42, said, pointing to his son Roy, who is 15. 'Just take a picture and put it in a museum.'"

The consequences of a moratorium on offshore oil drilling: "All oil comes from someone's backyard, and when we don't reduce the amount of oil we consume, and refuse to drill at home, we end up getting people to drill for us in Kazakhstan, Angola and Nigeria -- places without America's strong environmental safeguards or the resources to enforce them," writes Lisa Margonelli. "Kazakhstan, for one, had no comprehensive environmental laws until 2007, and Nigeria has suffered spills equivalent to that of the Exxon Valdez every year since 1969. (As of last year, Nigeria had 2,000 active spills.)"

Greece.

Can the deal survive deflation? "Greece, effectively bankrupt and with a European gun to its head, committed itself to years of austerity on Sunday when it signed a financial bailout deal with the European Union and the International Monetary Fund," writes Steve Erlanger. "But there are serious questions about whether the deep cuts in salaries and benefits the agreement calls for are politically sustainable over time, even as deflation will make it impossible for Greece to grow its way out of debt." I recommend reading the whole thing.

It's all in Europe's head: "The Greek-linked difficulty [is] largely [attributable] to the claim by the [European Central Bank] and government officials in Eurozone member countries that the Eurozone is founded on fiscal discipline and the Stability and Growth Pact," writes Jacques Melitz. "This claim can only mean that Greek default is a big problem for the euro."

"Unfortunately, financial markets give credence to the official view that any government default in the Eurozone would weaken the monetary union, and what these markets believe makes a lot of difference ... Financial markets can act quickly enough to make their fears come true. To guarantee a long-run future for the Eurozone, a change of doctrine is therefore key. The new doctrine should be that nothing as manageable as a Greek government default can upset Eurozone. This contribution offers reasons why the alternative doctrine is plausible, and in addition it proposes a reform to reinforce the doctrine." I don't know if Californians will be comforted or terrified by the extended analogy Melitz draws to the Golden State.

Gen-Y nostalgia interlude: A where-are-they-now for the stalwarts of Nickelodeon's killer 90s-lineup. Poor Pete and Pete.

Immigration.

Dem proposal shows conservative drift: A new proposal by Senate Democrats shows how far the debate has shifted to the right since Congress took up the issue in 2007, advocates on both sides said," writes Spencer Hsu. "The Democrats' legislative 'framework' includes a slew of new immigration enforcement measures aimed at U.S. borders and workplaces. It would further expand the 20,000-member Border Patrol; triple fines against U.S. employers that hire illegal immigrants; and, most controversially, require all American workers -- citizens and non-citizens alike -- to get new Social Security cards linked to their fingerprints to ease work eligibility checks."

"Ideas that were hotly contested in ill-fated Senate debates in 2006 and 2007 seem now to be taken for granted, said Edward Alden, a senior fellow at the Council on Foreign Relations. 'You've seen a lot of movement, and in partisan terms mostly movement on the Democratic side toward Republican positions,' he said."

The Arizona law has breathed new life into the immigration-reform movement. "At rally after rally across the nation, protesters chanted 'shame, shame, Arizona,' and carried signs saying, 'Todos Somos Arizona,' or 'We are All Arizona,'" reports Julia Preston. "The bigger demonstrations were far larger than planners had anticipated in March, when the events were first announced. The protests were originally called by immigrant advocates who had set May 1 as the deadline for Congress to introduce overhaul legislation that would include measures to give legal status to millions of illegal immigrants. But organizers said the Arizona legislation, which was signed into law April 23, had been a watershed event for disparate advocate organizations, transforming them into something akin to a civil rights movement with a national profile."

Her earnest statements of opposition to the Arizona law don't lie: Sanjay Gupta interviews Shakira on the Arizona law, and it's one of the most substantive interviews I've seen on the subject.

Five myths about immigration: Myth #1 is that they're taking American jobs. "Although immigrants account for 12.5 percent of the U.S. population, they make up about 15 percent of the workforce," writes Doris Meissner. "They are overrepresented among workers largely because the rest of our population is aging: Immigrants and their children have accounted for 58 percent of U.S. population growth since 1980. This probably won't change anytime soon...Moreover, immigrants tend to be concentrated in high- and low-skilled occupations that complement -- rather than compete with -- jobs held by native workers."

Dana Milbank unloads on the mixed signals and cowardice on immigration reform. "Obama's retreat -- after encouraging senators only weeks ago to take up immigration reform -- clotheslined Senate Democrats," writes Milbank. "Since their proposal had already been leaked, they had no choice but to go ahead with the rollout of the plan Obama had just doomed. 'I don't know in what context the statement was made last night,' Senate Majority Leader Harry Reid told reporters at Thursday night's rollout.

Well, Mr. Leader, the context is fear. As the Arizona abomination makes clear, there is a desperate need for federal immigration action to stop the country from turning into a nation of vigilantes suspicious of anybody with dark skin. But leaders on both sides have instead run for the hills, called there by the yodels from their respective extremes. The most tragic case is that of John McCain, who once nobly led the fight for immigration reform but now, cowering in the face of a conservative primary threat, endorses Arizona's racial profiling plan. On the Democratic side, Reid has been in headless-chicken mode. In need of Latino votes in his Senate reelection bid, he promised he would move immediately to pass immigration reform, then reversed himself, then floated the 'framework' with no promise of action."

Take a look at the New Employment Verification Act: "NEVA has two tiers," write Bruce Morrison and Paul Donnelly. "[First,] a mandatory, wholly electronic system that deprives employers of any discretion -- a simple red light/green light that a new hire has cleared or not. NEVA's second tier is voluntary, with authentication linked to a biometric identification (such as a fingerprint) to empower individual Americans to protect their identities from theft. Solid conservatives such as Rep. Sam Johnson (R-Tex.) and some of E-Verify's long-standing critics, including Rep. Paul D. Ryan (R-Wis.), support NEVA because it is a private-sector approach in which free enterprise will compete to protect privacy and security."

Economy.

Monster.com reported a 17% increase in bookings during the first quarter: "[Monster's CEO] Mr. Iannuzzi, during an interview, said Monster believes that demand for its online job-search services is on solid footing again, a statement that he said he wouldn't have made a few quarters ago as the economic turnaround began," reports David Benoit. "'It's across the board, it's in virtually every segment, every professional or occupational sector, we are seeing increases in demand,' Mr. Iannuzzi said. 'The mood, the discussion, for our customers is much more positive than it has been. It looks like it's sustainable.'"

Larry Summers optimistic on job growth, but not that optimistic: Job growth will rise faster than economic models suggest as the economy emerges from recession, but unemployment will remain a lasting problem, Lawrence Summers, director of the White House National Economic Council said Friday," reports Sara Murray. "Mr. Summers noted that 40 years ago, one in 20 men between the ages of 25 and 54 in the U.S. was unemployed at any given point in time. That is now one in five men. Even in five years if the economy has reached a point of recovery, one in six men in that age range will not be working."

Business investment growing, but not fast enough: "Business investment overall, including money spent on warehouses and office buildings, grew at an inflation-adjusted annualized rate of 4.1%, dragged down by the persistent slump in commercial real estate," reports Mark Whitehouse. "So far, though, it is falling well short of the pace needed to drive the kind of sharp, 'V-shaped' recovery that has followed deep recessions in the past."

Congress likely to cut off unemployment benefits at 99 weeks: "Democrats who have pushed through the past extensions agree there's insufficient backing to go beyond 99 weeks, largely because of mounting concern over the federal deficit, projected to reach $1.5 trillion this year," reports Brian Faler. "'You can't go on forever,' said Senate Finance Committee Chairman Max Baucus, of Montana, whose panel oversees the benefits program. 'I think 99 weeks is sufficient,' he said."

New transcripts show Ben Bernanke, Tim Geithner part of Alan Greenspan's low-interest rate consensus: "In May 2004, the Fed was about to begin raising interest rates from 1% and was torn about whether to signal to the market that rates would rise at a 'measured pace,' a not-so-subtle signal that they were likely to go up in quarter-point increments," reports Jon Hilsenrath. "Several officials fought hard against sending the signal, arguing it could handcuff the central bank if it needed to raise rates more aggressively."

"Their arguments were overruled by former Fed Chairman Alan Greenspan, with the support of Mr. Bernanke. 'The new wording will serve the very useful function of reducing the chance of an overreaction in the bond market that would damage both the markets and the economy,' Mr. Bernanke argued. Also on board was Timothy Geithner, the Treasury secretary who was then president of the Federal Reserve Bank of New York."

Roger Lowenstein explains what that consensus wrought: "Had the Fed raised interest rates more aggressively in the early part of the decade, it is possible that banks would not have made so many questionable loans," writes Lowenstein. "We can't know for sure, of course. But we do know what did happen: From 2001 to 2003, the Fed lowered short-term interest rates 13 times, reaching a rock-bottom level of 1 percent. They stayed there another year, and thereafter rose at a painstaking pace. With credit so cheap, people and institutions borrowed as if there were no tomorrow. And when the bust came, it spawned the worst recession in 75 years."

Looking forward to the Fed's new nominees: Sewell Chan profiles Janet Yellen, the Obama administration's nominee for vice chair of the Federal Reserve, and Peter Diamond and Sarah Bloom Raskin, the administration's nominees to fill the open seats on the Board of Governors.

Fed looking for ways to suck money out of the economy: "The U.S. Federal Reserve took steps on Friday toward creating tools that could help it eventually withdraw the billions of dollars it pumped into the economy to support economic recovery," reports Kristina Cooke. "The Fed's Board of Governors said it authorized a term deposit facility, similar to certificates of deposits banks offer their customers, that could be used by the Fed to lock up excess cash. The New York Federal Reserve moved closer to testing reverse repurchase agreements with money market funds by posting a master agreement on its website."

Campaign finance reform.

Democrats take aim at Citizens United: "To counter the decision, House and Senate Democrats introduced a measure last week called the Disclose Act, short for Democracy Is Strengthened by Casting Light on Spending in Elections," reports Sheryl Gay Stolberg. "The bill would require corporations, unions, trade associations and advocacy groups to identify themselves on advertisements they pay for. Chief executives would have to offer an 'I approved this message' endorsement similar to those of candidates running campaign commercials."

Al Hunt sees a tough road ahead for the bill: "The U.S. Chamber of Commerce, which plans to spend more than $50 million on this year's congressional elections, has blasted the Schumer-Van Hollen effort," reports Hunt. "Thomas Donohue, the trade group's president, says the bill 'is nothing more than a thinly veiled attempt to hijack the political playing field' to aid Democrats in November. Mr. Donohue declined an interview request to elaborate. It will be interesting to hear why he believes fuller disclosure -- for unions and corporations as well as nonprofits -- helps one side."

DC-is-getting-cooler interlude: 60 Minutes spent a whole show profiling DC-superchef Jose Andres.

Taxes.

Taking aim at "tax expenditures": Such tax breaks were worth more than $1 trillion to recipients last year," report Edmund Andrews and Lori Montgomery. "That's more than the government spent on Social Security, and nearly enough to balance the federal budget. And their cost is growing. Even if Congress doesn't add any tax credits, analysts predict that the rising cost of existing tax breaks could add about $3 trillion dollars to the federal debt by 2020."

Greg Mankiw on a VAT. Short version: A VAT tax will fund government efficiently, if regressively. More here.

Closing credits: "In science, in business and in the more reasonable sectors of government, numbers have won fair and square," writes Gary Wolf. "For a long time, only one area of human activity appeared to be immune. In the cozy confines of personal life, we rarely used the power of numbers. The techniques of analysis that had proved so effective were left behind at the office at the end of the day and picked up again the next morning. The imposition, on oneself or one's family, of a regime of objective record keeping seemed ridiculous. A journal was respectable. A spreadsheet was creepy. And yet, almost imperceptibly, numbers are infiltrating the last redoubts of the personal."

"When we quantify ourselves, there isn't the imperative to see through our daily existence into a truth buried at a deeper level. Instead, the self of our most trivial thoughts and actions, the self that, without technical help, we might barely notice or recall, is understood as the self we ought to get to know. Behind the allure of the quantified self is a guess that many of our problems come from simply lacking the instruments to understand who we are. Our memories are poor; we are subject to a range of biases; we can focus our attention on only one or two things at a time. We don't have a pedometer in our feet, or a breathalyzer in our lungs, or a glucose monitor installed into our veins. We lack both the physical and the mental apparatus to take stock of ourselves. We need help from machines."

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