By James Kwak
The June issue of The American Prospect includes a section on financial reform that is already available online. Our contribution is on the way the financial sector has used its time-honored techniques to block and water down meaningful reform over the past year. There are also articles by many of the usual suspects, including Elizabeth Warren, Michael Greenberger, Rob Johnson, and Nomi Prins.
By James Kwak
One battle in Washington — the one that has been in the news this week — is over resolution authority and the supposed “bailout fund” attacked by Mitch McConnell. Another battle will be over the Consumer Financial Protection Agency, which Republicans are likely to try to cripple behind the scenes. While most of the reviewers of 13 Bankers have seized on the call to break up big banks, few have discussed the first part of that chapter, which argues for strong consumer protection. Simon and I wrote an op-ed in The Hill to reiterate the point and warn against some of the tactics opponents may use.
The article below first appeared in our Washington Post column yesterday. I’m reproducing it in full here because there is an important correction, thanks to a response by Andrew Biggs. I’ve fixed the mistake and added notes in brackets to show what was fixed. Also, I want to append some additional notes about the data and some issues that didn’t fit into the column.
Recent volatility in the stock market (the S&P 500 Index losing almost 50% of its value between September and March) has led some to question the wisdom of relying on 401(k) and other defined-contribution plans, invested largely in the stock market, for our nation’s retirement security. For example, Time recently ran a cover story by Stephen Gandel entitled “Why It’s Time to Retire the 401(k).”
However, the shortcomings of our current retirement “system” predate the recent fall in the markets, will not be solved by another stock market boom. The problems are more basic: we don’t save enough, and we don’t invest very well.
Our Washington Post online column today is another cry in the wilderness against the homebuyer tax credit.
There are many arguments against the tax credit. One argument we make is that the tax credit is a benefit for sellers of houses more than for buyers of houses. This is simplest to see if you imagine a permanent credit available for all buyers: “Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.)”
It turns out Nemo had made a similar argument already.
Everyone is writing a Lehman anniversary post these days, and ours is up as our weekly Washington Post column. Our topic is the many forms of moral hazard involved in the banking business these days – for employees, shareholders, and creditors – and whether or not the proposed regulatory reforms will be up to the task of dealing with the problem.
By James Kwak
This week in the WaPo column we are switching from health care back to financial regulatory reform. Our column summarizes and comments on Tim Geithner’s recent white paper on capital requirements. The paper makes a lot of points that are good – more capital is better, higher quality capital is better, risk weighting of assets should reflect risks accurately, and so on. But in this form the principles, while we agree with them, are too uncontroversial to have much in the way of teeth. Ultimately what will matter are the numbers – how much more capital will Tier 1 systemically important financial institutions have to hold – and how hard the administration will fight for real reform. One rule of thumb: if the banking lobby isn’t bitterly against it, it’s probably not enough.
By James Kwak
This week’s Washington Post health care column is on the question of whether we can afford health care reform – meaning whether we can afford to subsidize poor and middle-class people who cannot otherwise pay for health insurance. This has a different meaning depending on you interpret “we” as the U.S. economy in general or the federal government, but in either case we think the answer is “yes.” Or at least, as far as the federal government is concerned, the answer is that we can’t afford not doing some form of health care reform, although it’s not certain that the reforms currently on the table will be sufficient to solve our government’s long-term fiscal problems.
In summary:
“If you are for fiscal discipline, you should be for health-care reform. If our government cannot produce some kind of reform, that will only reinforce the perception that our political system is incapable of resolving our largest, most difficult problem — and that is what will make investors think twice about investing in America.”
By James Kwak
Simon and I have a new article, “Finance: Before the Next Meltdown,” in the Fall issue of Democracy: A Journal of Ideas on one of our favorite topics, financial innovation. (It’s part of a larger Democracy symposium on innovation in general, available online and on sale on September 15.) Instead of just sniping at specific innovations gone awry, we try to lay out a systemic explanation of why financial innovation is different from other forms of innovation, and how it should be evaluated. In particular, we argue that even though some financial innovation is good, more is not necessarily better.
Financial innovation has also been on the minds of the Planet Money crew recently. Their first episode was a little over the top, basically ascribing all of the benefits of capitalism to financial innovation (I guess this is technically true, since money is a financial innovation, but they make it sound like the joint-stock corporation was a necessary ingredient for all economic progress). But last week they had a panel with prominent bloggers Felix Salmon, Tyler Cowen, and our friend Mike Konczal. Obviously I agree most with Salmon, but I thought Cowen’s position as the “defender” of financial innovation was interesting. Basically he agreed that financial innovation can cause problems, but he first argued that the innovation in question (synthetic CDOs) was a response to bad regulation, and then argued that regulation was likely to cause more problems than it solved, and therefore our best bet is to let the free market sort it out and hope for the best.
By James Kwak
Simon and I have our latest weekly column up at the Washington Post. The topic is contradictions: opponents of the public option who bill themselves as defenders of Medicare, opponents of cost savings who support private health insurers, and so on. It’s also about a world without a public option:
Imagine health-care reform without a public option: Insurers have to charge the same price regardless of customers’ medical history; everyone has to buy insurance; and poor people get subsidies to help them afford it. From the insurers’ perspective, they get more than 40 million new customers, they subsidize the old and sick by overcharging the young and healthy (who have to overpay because of the mandate), and the government even pays people to buy their product. There are no new competitors (additional choices for customers), and there is no pressure to reduce costs. What could be better?
As we’ve said before, I think this is still far better than the current situation. Ezra Klein recently made the point much more forcefully. But still, reform without the public option could be a recipe for private insurers to charge whatever they feel like charging. Alex Tabarrok, not the first person you would expect to write a post called “In Defense of the Public Option,” writes:
Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices. Moreover, in oligopolistic markets, a more homogeneous product can increase the ability of firms to collude.
I believe that health insurance reform will increase the market power of insurance firms and drive up prices. In this scenario, the public option at least has a raison d’etre, although whether it actually fulfills it’s purpose is an open question.
By James Kwak
Simon and I have a kind of synthesis of our recent thoughts on health care reform, along with some more data and thoughts about the employer-based system, up at The Hearing. It seems to have 167 comments – people really like to talk about health care, don’t they?
On a related note, we will be modifying the format of our Washington Post gig. We’re moving in the direction of a weekly, substantive opinion and analysis piece, rather than trying to keep up with Congressional hearings from day to day. We’ll get you a new link when that is fully up and running.
By James Kwak
The Washington Post is widely read on Capitol Hill and the reception among key people to The Hearing blog (run by us and the Post) has been generally very positive. Members of Congress and their staff want to get you more involved in their discussions around economic policy, and we’re experimenting with ways that will help your opinions – whatever they are – get across at a time and in a manner that increases their impact.
To that end, we’re developing on-line polls in which you can register your views on questions that are currently being debated – either in general terms or as specific legislation – on the Hill (of course, longer comments are also welcome; it’s a blog, after all). Today’s question is about whether the United States should provide an additional $100bn to the IMF, as was agreed at and immediately after the recent G20 summit; this is for a hearing held by a subcommittee of House Financial Services, which starts at 10am. Continue reading
From 1945 until around 1980, the financial sector was one industry among many in the United States. Then something happened.
People in finance started making more money,* jobs in finance became more desirable, financial institutions became more influential, and the linkages between the financial sector and the political establishment became stronger. At the same time that our financial sector became more leveraged and more risky, it also became more powerful. The result was a confluence of interests between Wall Street and Washington – one more normally found behind the scenes of emerging market crises, the kind the IMF is called on to resolve.
Simon and I tell this story – and the story of what happened next – in “The Quiet Coup,” an article in the May issue of The Atlantic. (Many thanks to The Atlantic for putting the online copy up as early as they did.) The working title of the article was, “What the IMF Would Tell the United States, If It Could.” Enjoy.
* The data in that chart are from Table 6.6 of the National Income and Product Accounts tables available from the Bureau of Economic Analysis.
Update: Henry Seggerman recently sent us an article he wrote in 2007, comparing the Korean crisis of 2007 to the then-current situation in the United States. He discusses not only the economic similarities, but also some of the political ones.
Update 2: A reader sent us an article about Mark Patterson, formerly Goldman’s chief lobbyist and now Tim Geithner’s chief of staff. Unfortunately, the article was published too late for us to use any of it in our Atlantic article.
By James Kwak
Leaving aside the question of subsidies, which has gotten piles of attention on the Internet, Simon and I are skeptical that the Geithner Plan will achieve its basic objective: getting enough toxic assets off of bank balance sheets to restore the financial system to normal functioning. We discuss this in today’s Los Angeles Times op-ed, although our regular readers could probably fill in the blanks by themselves.
Update: At 2:30 PM Eastern today, I’ll be on a live chat at Seeking Alpha with Felix Salmon and possibly Brad DeLong and Mark Thoma discussing the Geithner plan. Salmon is strongly against, Delong is moderately (strongly?) for, Thoma is moderately for.
Update 2: At The New Republic, Simon discusses one plausible scenario under which the Geithner Plan is the first step in a comprehensive bank rescue strategy. But he’s skeptical that we will see the other necessary steps.
Update 3: Chat is done; replay is here.
By James Kwak
We have been arguing, here and elsewhere, for a banking approach centered around scaling up FDIC-interventions. Part of the pushback is (1) Congress won’t provide any more money, (2) there is no point in even going to ask, and (3) if you did go ask, that could be destabilizing.
In that context, I’m encouraged by the moves in and around the Senate at the end of last week to increase the resources available to the FDIC (for details, see my assessment on The New Republic’s site this morning). The Administration seems to be taking the lead and key senators are coming on board.
There are still a lot of pieces that can go wrong: the vaunted “stress test” looks weak, the signals on banks from the Fed and Treasury are mixed at best, and the banking lobby is digging in for a long struggle. And the world economy is going to put severe pressure on any approach.
But eventually we will turn a corner and, at that point, the FDIC will likely play a central role.
The G20 Lets Us Down
I’m continually amazed by how easy it is for government officials to hoodwink most of the news media. All it takes is for a couple of leading finance ministers to get on roughly the same page, and we’re reading/hearing about “substantial progress” or “major steps forward.” If someone provides an articulate background briefing to a leading newspaper on the supposed debate within a group of countries, this becomes the dominant news story.
Saturday’s G20 meeting of finance ministers and central bank governors is a leading example. It was a disaster - we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed precisely nothing that will make any difference. If the G20 heads of government summit on April 2nd is a similar failure, we will be staring at the real possibility of a global catastrophe. Yet the spinning storytellers of the G7 have still managed to get much of the press peering in entirely the wrong direction.
For more on what would the right direction, take a look at my piece in Britain’s Sunday Telegraph.
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Posted in Commentary, Op-ed
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