I think we all understand the dynamic by which the earmark for your district is a wasteful boondoggle, whereas the earmark for my district is addressing serious problems in a concrete way. But the way this game is supposed to work is that we both vote for the bill since we’re both more interested in claiming credit for our own project than we are in complaining about each other’s projects.

It’s win-win, basically, though it does result in a structural misallocation of funds toward regions that happen to have politically powerful elected officials.

With the stimulus bill, though, the opposition (mostly Republicans, but but Democrats too) perfected a new approach to this. First the denounced the whole thing as unnecessary wasteful spending. Then they all voted against it. Then many members turned around, went home, and started bragging about all the good stuff they’d brought home to their district. Now it seems that Reps. Pete Hoekstra and Mario Diaz-Balert are up to the same tricks with the omnibus appropriations bill.

It’s not surprising, I guess; having gotten away with this once in the future probably everyone will be doing it.

Notwithstanding what seem to me to be shortcomings in the administration’s public/private partnership plan, their agenda for new financial regulations seems quite a bit better. This, in particular, is encouraging:

A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds. [...] The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company — a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward.

I’ve heard repeatedly that one problem with nationalization proposals is that there’s no set procedure in place. That seems like a legitimate concern, but it’s been hard to know how much that talk was really “concern” and how much was just excuse-making. Stepping forward to try to actually resolve that problem so as to make a receivership option more valuable in the future seems to me to be an important step for the medium-term.

One point that I don’t think is controversial but that I haven’t seen clearly stated in the MSM very much is that the whole question of evaluating toxic assets as it pertains to economic recovery has a somewhat circular quality to it. If nobody is willing to give banks anything for their mortgage-backed securities, then the banks will be in bad shape, then it will be impossible for people with sound businesses to expand, then the unemployment rate will keep going up and wages will keep going down, and then everyone will default on their mortgages and the securities will really be worthless. The whole discussion about “responsible” borrowers and “exotic” loans becomes irrelevant if people don’t have jobs. What looked responsible when you were earning income and what looks responsible when you’re not are totally different things.

By contrast, if enough people buy up mortgage-backed securities to get the banks back in business, then sound elements of the real economy can expand and the economy can recover. This creates a scenario in which even though we’re bound to lose a lot of paper wealth in housing, people should still generally have jobs and incomes and thus be able to make mortgage payments. Not everyone, of course, but most people. In which case, the default rates will go down and the securities will turn out to be somewhat valuable.

If you want something a bit under the radar to worry about, consider Greg Miller’s LA Times article on the increasing use of airstrikes in Pakistan against alleged al-Qaeda targets.

I can’t imagine that an American president ever would or should completely disavow the right to launch this sort of attack. But still, I think people should be concerned about our government’s growing enthusiasm for this tactic and the possibility that the Obama administration will start to rely on it even more heavily. Simply put, there’s little evidence to suggest that this kind of thing can achieve a strategic victory over al-Qaeda, though it may or may not reduce short-term vulnerabilities. In his analysis for CAP of the airstrikes, Colin Cookman observed:

While these strikes may bear some meaningful short- and medium-term successes, as a long-term strategy their value is less clear. Research from the RAND Corporation into the case histories of 648 terrorist organizations that carried out attacks between 1968 and 2006 found that only 7 percent were successfully eliminated through direct military force. This is in contrast to 43 percent who dropped their violent activities after some form of political accommodation and 40 percent who were broken up successfully through some combination of local policing, infiltration, and prosecution.

The impact of these strikes on public opinion in the Muslim world writ large, and specifically on political dynamics inside Pakistan, can easily outweigh the gains from killing even a bona fide bad guy. The fact that Miller’s intelligence sources deem the program an unqualified success based on what look to be pure body count considerations is disturbing. There’s no use in killing a terrorist if in the course of doing so you accidentally kill a civilian whose two sons grow up dreaming of avenging their father’s murder, or if it makes it impossible to stay politically viable in Pakistan while publicly cooperating with the United States. This is a delicate balance in which all the considerations need to be taken seriously.

Via Atrios, an example of some of the problems with keeping existing managers and institutions in charge of our economy:

Bank of America vaulted into the top 10 banks for insider lending last year with an increase of more than $358 million, much of it coming as credit markets froze and mounting financial calamity threatened the industry’s survival.

For at least seven years, the bank’s quarterly insider lending never exceeded $300 million and was often less than half that. But by the end of 2008, it had jumped to $624 million.

This is Simon Johnson’s “tunnelling” “borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.”

It also reflects a kind of conceptual confusion that inflicts a lot of discussion of the economy. But businessmen are not Heroes of Capitalism determined to make as much money as possible through honest, mutually beneficial exchanges. Rather, they’re just greedy people who want to make money. Capitalism is about the idea that given a proper institutional structure, the impulse toward greed can be channeled into honest, mutually beneficial exchanges. But given an institutional set-up that creates the possibility of earning money by ripping off taxpayers, this is what a businessman is going to do. Not everyone is primarily motivated by greed (I know people who do things like volunteer for the Marines or try to earn a living painting)—but I think it’s fair to say that the kind of person who wants to become a bank executive is not driven by strong patriotic or artistic impulses, he’s trying to make money. And he’s probably pretty good at it!

A highly-performing civil servant at the FDIC is, by definition, someone who’s not particularly inclined to take advantage of opportunities to rip the taxpayers off. A highly-performing private sector executive or hedge fund manager, by contrast, is. So one cost that certainly arises as we try to rescue the financial sector primarily by funneling funds through private actors is that those actors aren’t going to be waking up in the morning to say “what can I do to make the economic recovery program a success.” They’re going to be waking up in the morning and saying “how can I put as much of this money as possible in my pocket.”

I don’t think this idea is nearly the panacea that Gary Shilling and Richard LeFrak seem to think it is, but nevertheless a program to offer permanent resident status to foreigners who buy American houses does seem to me like a good idea. It should, at a minimum, help decrease the amount of time it takes for the capacity overhang in U.S. housing to get soaked up. Meanwhile, there would be some stimulative effect to getting more people to move here. They’d presumably buy furniture, etc. I’m just a bit skeptical that there’s be all that many people taking advantage of such an offer—traditionally people immigrate to the United States to find work, but this is not a good time to be job hunting.

Barry Ritholtz also likes the other.