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The Crash of 2:54pm; health care and health-care repeal both unpopular; Iron Man 2!

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Ezra Klein
Friday, May 7, 2010; 7:36 AM

Remember that time the Dow dropped 1,000 points in, like, a minute? Yeah. Me too. And so does Wall Street. But now we're left with a whodunnit. Was it Greece? A computer glitch? Iron Man 2? And did you read what the CBO had to say about climate-change legislation?

Welcome to Wonkbook

Agenda

House:

Out of session today, but Rep. Ed Markey is leading a bipartisan delegation from the Energy and Commerce Committee on a fact-finding trip to the oil spill.

Senate: Debate continues on financial regulation.

White House: The president will speak on the unemployment numbers at 11am today.

And! The Labor Department releases unemployment data for April, the Federal Reserve releases data on consumer credit for March, Goldman Sachs holds its annual shareholder meeting, and Iron Man 2 comes out!

Top Stories

The crash of 2:54pm: "At its afternoon low, the Dow Jones Industrial Average had plummeted 998.50 points, its biggest intraday point drop ever. The swing from its intraday high was 1010.14 points," report Tom Lauricella and Peter McKay. Why? Explanations range from Greece contagion to a computer problem. But this isn't just a stock market problem.

Think global, or at least continental: "The fiscal crisis that began in Greece months ago is spreading across Europe like a virus, causing growing doubts about the fates of even nations with far more manageable levels of government debt," reports Neil Irwin. It is called a 'contagion effect,' an economist's metaphor for the rapid and hard-to-predict spread of financial crisis, driven by the fragility of investors' perceptions. They are a function of vicious cycles in which confidence in a country's ability to repay its debts falls, driving up the country's borrowing rates and thus making it all the harder for the nation to handle its debts."

"It leaves countries like Spain, the largest and most economically significant country in the path of the storm--at the mercy of global investors operating under the twin pressures of fear and greed. And it even can be true for countries that have managed their government debt responsibly--Spain has less debt relative to the size of its economy than the United States or Britain--if investors' views of their likely future deficits or ability to roll over debt shift."

Most-important-story-of-the-day interlude: "It isn't quite the breath of fresh air that Iron Man was, but this sequel comes close with solid performances and an action-packed plot," says Rotten Tomatoes.

Table of contents: Economy (more on the stock market whodunnit); FinReg (amendment to audit the Fed moves forward, amendment to break the big banks is voted down); Environment (CBO says climate change bills will reduce employment, but what about climate change?); Immigration (Schumer asks Arizona to hold off); Health-care reform (the bill is unpopular, but so is repeal).

Economy

A recipe for financial disaster: "Combine one part nervous traders, one part Greek crisis and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic," writes Floyd Norris." That combination produced one of the wildest days ever in financial markets, with the Dow Jones industrial average, at one point, down almost 1,000 points while the euro sank to its lowest level in more than a year. There were substantial declines in emerging markets, whose economies had seemed to be booming, and in developed markets fearful of renewed recessions."

"Even though a substantial part of the worst plunge appeared to be linked to a trader error -- one $40 stock fell for a time to one penny -- prices had fallen around the world even before such mistakes began to happen." This was no mere computer error, though. "Even after technical glitches were suspected and the trades were unwound, however, the markets and the world confronted the precarious state of the 60-year effort to create a single economy and a unified political system out of Europe's once-warring countries," writes Steve Pearlstein. "The Dow has already fallen more than 600 points in three days on fears that a European debt and banking crisis could drag the continent's economy back into recession and put the entire European project in jeopardy."

"As C. Fred Bergsten of the Peterson Institute put it this week, the fundamental problem is that even with a single currency and a unified political and bureaucratic structure, the arrangement is only a 'halfway house' on the way to genuine political and economic integration, and a rickety one at that. While capital and goods and tourists can move relatively freely across borders, workers and services cannot, and national governments continue to jealously protect their regulatory and fiscal prerogatives. Although the political and economic elites continue to swear allegiance to the European project, their top-down strategy continues to meet strong resistance from voters."

Tell me what happened, again? "What we were seeing was traders flailing around in a context of limited information and liquidity, trying to get a grip on what was or wasn't going on," explains Felix Salmon. "There was always the possibility, after all, that the sellers knew something they didn't, and that stocks were actually falling for a reason. So it took a few minutes for the market to realize that it was all just market volatility -- and therefore a great buying opportunity for any trader."

"It's been a very impressive day to learn how the stock-market sausage is made: I think we just saw the largest intraday fall, in point terms, that has ever happened. But the bigger lesson is that in the short term, any market can fail temporarily. The question is whether the jitters from this afternoon are going to mean increased volatility and risk aversion going forwards. My feeling is that, yes, they both will and should."

Can Greece remain in the Euro? "The only thing that could seriously reduce Greek pain would be an economic recovery, which would both generate higher revenues, reducing the need for spending cuts, and create jobs," writes Paul Krugman. "If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness. But Greece is on the euro."

"So how does this end? Logically, I see three ways Greece could stay on the euro. First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting -- indeed welcoming -- the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento -- that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable."

Obama seeks modified line-item veto: "A president would have 45 working days after signing a spending bill into law to submit to Congress items to rescind, the administration official said, and Congress would have 25 days to act," reports Jackie Calmes. "The House and Senate would have to vote the package up or down, without amendments."

Risotto interlude: "To make great risotto you need really good stock, and a lot of butter," writes Mark Bittman.

FinReg

'Audit the Fed' becomes 'Audit the Fed once': "The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis," report Sudeep Reddy and Michael Crittenden. "It would also require a one-time audit of those loans and a one-time review of Fed governance. A formal vote was scheduled for late Thursday."

Proposal to break up big banks fails: "The amendment, proposed by Senators Sherrod Brown, Democrat of Ohio, and Ted Kaufman, Democrat of Delaware, would have forced some of the heaviest hitters on Wall Street, including Citigroup and Goldman Sachs, to shrink in size to limit the risk that big banks pose to the broader financial system," reports David Herszenhorn. "The vote was 61 to 33, with 29 Democrats and 3 Republicans and 1 independent in favor, and 27 Democrats and 33 Republicans and 1 independent opposed."

Small banks score in amendment process: "Senate lawmakers handed community banks another victory Thursday, passing an amendment to financial regulatory overhaul legislation that will shift the burden for deposit insurance to larger banks," reports Michael Crittenden. "Lawmakers voted 98-0 in favor of an amendment that would change the way the Federal Deposit Insurance Corp. charges banks for government-backing of bank deposits. The agency would base a bank's fees on its total assets minus tangible equity, instead of the traditional practice of basing assessments on a bank's domestic deposits."

Harkin wants to limit ATM fees: "Chalk up ATM fees on the list of amendments that may make their way into the bank-overhaul bill under debate in Washington," reports Jennifer Waters. "Sen. Tom Harkin (D., Iowa) introduced an amendment Wednesday that would cap fees for withdrawals at automated teller machines at just 50 cents per transaction."

Is this financial regulation that Wall Street can love? "Democrats did spend the past year threatening to unleash hell and all its furies on the financial sector, and in response a petrified Wall Street rushed to buy protection with millions of dollars in Democratic campaign tithes," opines Kimberley Strassel. "The party in power then produced legislation that¿while bad in many, many ways¿is something the biggest players can live with. When Goldman Sachs CEO Lloyd Blankfein last week told Congress he was 'generally supportive' of the Democratic bill, he meant it."

An end to fine print: "Over the past generation, the proliferation of fine print, in everything from car loans to credit card applications to television commercials, has shaken what we value about contracts," writes Elizabeth Warren. "Fine print means that one party (think: a big corporation) can lay down the terms of the deal in a way that the other party (think: a customer) is unlikely to figure out. Long after the contract has been signed, the party that inserted all the fine print can do almost anything -- raise prices, cut service, extend the contract -- all because the fine print says so...My proposal is simple: no more fine print. If you can't explain something in simple, straightforward terms, it shouldn't be part of the agreement."

College admissions interlude: A guy tries to get off MIT's waitlist -- through the power of song.

Environment

CBO estimates effects of climate-change legislation, but not of climate change: "CBO has analyzed the research on the effects that policies to reduce green house gases would have on employment and concluded that total employment during the next few decades would be slightly lower than would be the case in the absence of such policies," writes Doug Elmendorf. "Eventually, however, most workers who lost jobs would find new ones. In the absence of policies to reduce emissions of greenhouse gases, changes to the climate also might affect employment; however, this brief does not address such changes because that effect would probably arise after the next few decades, and it has not been studied as carefully by researchers."

Looking back on the Exxon-Valdez: "Two decades after the Exxon Valdez tanker ran aground near here, the economy and environment of Alaska's Prince William Sound have recovered somewhat, but some effects of the nation's last giant spill persist," reports Jim Carlton. "The scenes of blackened devastation have been replaced by a return to postcard-perfect views. But thick oil can still be found on beaches throughout the sound only a few inches beneath the sand. More than half of the roughly 20 major animal species hurt by the 1989 spill --including killer whales and sea otters -- haven't fully recovered."

"A collapse of the region's once-rich herring fishery hammered Cordova, a town of about 2,200 still struggling to recover. Seeing fishermen on the Gulf Coast facing the same threat, Cordova fishermen offer them little cheer. 'All those people are absolutely screwed,' said 62-year-old Noel Pallas, one of many forced out of the fishing business by the spill."

Chinese energy use soars: "Even as China has set ambitious goals for itself in clean-energy production and reduction of global warming gases, the country's surging demand for power from oil and coal has led to the largest six-month increase in the tonnage of human generated greenhouse gases ever by a single country," reports Keith Bradsher. "China's leaders are so concerned about rising energy use and declining energy efficiency that the cabinet held a special meeting this week to discuss the problem, according to a statement Thursday from the ministry of industry and information technology. Coal-fired electricity and oil sales each climbed 24 percent in the first quarter from a year earlier, on the heels of similar increases in the fourth quarter."

House passes 'Cash for Caulkers': "The House approved a new economic stimulus bill Thursday that could lead to thousands of dollars in 'Cash for Caulkers' rebates for homeowners who renovate their homes with better insulation and energy-saving windows and doors," reports the Associated Press. "The Home Star bill, which passed 246 to 161, would authorize $5.7 billion over two years for a program that supporters, mostly Democrats, said would have the added benefits of invigorating the slumping construction industry and making the earth a little cleaner."

Learning from the BP oil spill: "What escalated the April 20 incident from a tragic accident to a catastrophe was not the blowout itself but the ensuing inferno that sunk the $650 million BP platform" writes Nansen Salari. "Without the fire, the oil well leak could have probably been brought under control within a week. Thus it is critical to determine what future designs could best enhance survivability of giant offshore structures even under blowout conditions. Are there lessons to be learned from the airline industry, which has engineered significant reduction in post-crash fires during the last decade?"

Use the fishermen: "Offer to buy back your oil at a price that will entice them to skim and deliver it to you," advises Jerome Dobson. "There's probably no other stretch on Earth that has as much available capacity as the Texas, Louisiana and Mississippi coasts, including barges, tankers, fishing boats, recreational boats -- and an incredibly resourceful workforce. Fishermen and watermen (including women) are accustomed to handling about as much fuel as fish, and they can do wonders with anything that floats. You will be astounded by the clever solutions they will invent for harvesting, separating and transporting oil."

The times-they-are-a-changing interlude: The modern food system is really playing havoc with our aphorisms.

Immigration

Chuck Schumer asks Arizona to hold off for a year: "When she signed the law, Brewer said she was forced to act because Washington had failed to fix the immigration system. In his letter, Schumer said he 'cannot agree more than urgent federal action is necessary this year.' He even said that he understood that as governor of Arizona, she felt 'duty-bound' to act. He then went on to call the new law 'wrong-headed,' 'likely unconstitutional' and unlikely to reduce illegal immigration into Arizona," reports Laura Meckler.

"As an alternative, he suggested that Arizona put its law on hold while Congress works on the problem. His proposal includes border security measures, an employment-verification system, a guest worker program and a path to legalization for those already in the country. Schumer asked her to urge Arizona's two senators, Republicans John McCain and Jon Kyl, to get on board."

Health Care Reform

Bill unpopular, repeal unpopular: "The Quinnipiac polls, conducted in three states across the past month, all find likely voters to have complex and contradictory views on these repeal lawsuits as well as health care reform itself," reports Sarah Kliff. "By a slight majority, likely voters tend to oppose the health care reform law. But they also tend to oppose the repeal lawsuits as a 'bad idea' that would, for a sizeable portion of voters, make them 'less likely' to support a given candidate. In short, voters simultaneously don't want to health care reform but don't want to challenge it either."

Appendix

Is Ben Roethlisberger ruining the Steelers? "Ron Vergerio, a Pittsburgh-area bus driver and commercial driver's license inspector, has devoted a significant portion of his epidermis to his beloved Steelers," writes Jack McCallum. "The artists at American Tattoo, a parlor in the Pittsburgh suburb of Verona, have spent more than 200 hours crafting Steelers-themed tats on Vergerio's back, chest and arms. One of the most striking images is that of Ben Roethlisberger standing tall, looking downfield, poised to throw¿a quarterback's quarterback. Vergerio wears that one on his left biceps. Now even this most extreme of Steelers fans wonders if he should get a red line inked through it."

Closing credits: Wonkbook is compiled with the help of Dylan Matthews and Mike Shepard.

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