Czars, Kings, and Presidents

By James Kwak

Over the years, Tim Geithner has come in for a lot of well-deserved criticism: for putting banks before homeowners, for lobbying for Citigroup when it wanted to buy Wachovia, for denying even the possibility of taking over failed banks, and so on. The release of his book, whatever it’s called, has revived these various debates. Geithner is certainly not the man I would want making crucial decisions for our country. But it’s also important to remember that he was only an upper manager. The man who called the shots was his boss: Barack Obama.

That’s the theme of Jesse Eisinger’s column this week. I’m on Eisinger’s email list, and he described the tendency to focus on Tim Geithner—while ignoring the role of the president—as “If only the Tsar knew what the Cossacks are doing!” I wasn’t familiar with the Russian version, but I’ve always been fond of the seventeenth-century French version. In September 2009, for example, Simon and I wrote this about the financial reform debate: 

“During the reign of Louis XIV, when the common people complained of some oppressive government policy, they would say, ‘If only the king knew . . . .’ Occasionally people will make similar statements about Barack Obama, blaming the policies they don’t like on his lieutenants.

“But Barack Obama, like Louis XIV before him, knows exactly what is going on.”

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Why Regulation Goes Astray

By James Kwak

The Harvard Law Review recently published a multi-book review by Adam Levitin, the go-to guy for congressional testimony on toxic mortgages, illegal foreclosures, and homeowner relief (or, rather, the failure of the administration to provide any). It’s a tough genre: Levitin had to write something coherent about six very different books by Bernanke, Bair, Barofsky, Blinder, Connaughton, and Admati and Hellwig, whose sole point of commonality is that they all had something to do with the financial crisis. I don’t agree with all the aspects of his discussions of each individual book, but I think Levitin did a good job using the books as a starting point for a discussion of the incentives problem in financial regulation: the problem that regulators have stronger incentives to favor the industry than to defend the public interest.

HLR asked me to write an online “response,” which in some ways is an even less appetizing prospect—writing something interesting about something someone else (whom I generally agree with) wrote about six other things by different people. On the other hand, they only wanted 2,000 words, so I said yes.

My response focuses on a separate reason that regulation can be captured by industry: ideology. This is something that Levitin does discuss in the body of his article, but I think is not directly addressed by his proposed solutions. If you want to read more, you can download it from SSRN or read it at the HLR site.

Is Credit Suisse Really in Jail?

By James Kwak

Credit Suisse’s guilty plea to a charge of tax fraud seems to be a major step forward for a Justice Department that was satisfied both before and after the financial crisis with toothless deferred prosecution agreements and large-sounding fines that were easily absorbed as a cost of doing business. A criminal conviction certainly sounds good, and I agree that it’s better than not a criminal conviction. But what does it mean at the end of the day?

Most obviously, no one will go to jail because of the conviction (although several Credit Suisse individuals are separately being investigated or prosecuted). And for Credit Suisse, business will go on as usual, minus some tax fraud—that’s what the CEO said. A criminal conviction can be devastating to an individual. But when public officials go out of their way to ensure that a conviction has as little impact as possible on a corporation, it’s not clear how this is better than a deferred prosecution agreement.

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Connecticut Public Retirement Plan Passes, More or Less

By James Kwak

A couple of weeks go I wrote an op-ed about a proposal in Connecticut to create a new tax-preferred retirement plan that would, by default, include almost all workers who don’t currently have access to an employment-based plan (like a 401(k)). That proposal took some major steps forward when it was included in an end-of-session bill that was passed by the Connecticut legislature. As it stands, the bill authorizes a feasibility study and implementation plan for the new retirement option, which must contain a number of features (default enrollment, portability, default annuitization at retirement, a guaranteed return to be specified at the beginning of each year, etc.).

As I said in the op-ed, this is a decent step forward that will increase the amount of retirement saving by low- and middle-income workers, put those savings in a relatively low-cost, low-risk investment option, and spread some of the benefits of the retirement tax break to those workers (although you do have to pay income tax to benefit from the deduction). One of the claims made by the plan’s opponents is that it cannot be managed for less than the 1 percent of assets mandated by the bill, but that seems laughable to me: the State of Connecticut’s current retirement plans for its employees have administrative costs of 10 basis points, plus investment expense ratios as low as 2 basis points (for index funds from Vanguard). This is a slightly different animal, since the idea is to invest in low-risk securities and buy downside insurance, but still it doesn’t follow that you have to pay more than 1 percent for asset management is.

Connecticut is one of several states, most famously California, that are in the process of implementing these public retirement plans to cover people who are left out by the current “system,” which favors people who work for large companies.   They can solve several of the common problems with 401(k) plans: nonexistence (at many employers), low participation rates, investment risk, pre-retirement withdrawals, lump-sum distributions at retirement, to name a few.

But they can’t solve the underlying problem, which is that many people just don’t make enough for saving 3 percent of their salary each year to make much of a difference. A big constraint is that the Connecticut plan was designed to not cost taxpayers any money: administrative fees will come out of plan balances, and the insurance is there to limit the chance that the state will have to bail out the plan in the future. If we really want to protect people against retirement risk, we need to actually spread risk by making either the funding mechanism or the benefit formula progressive, which means we can’t regard the idea of the untouchable individual account as sacrosanct. (See my recent paper for more on this topic.) That’s what Social Security does, and it’s vastly popular. But in today’s political environment of me me me me me, and so we’re stuck with treating symptoms.

What Is Social Insurance? Take Two

By James Kwak

More than a year ago I wrote a post titled “What Is Social Insurance?” about a passage in President Obama’s second inaugural address defending “the commitments we make to each other – through Medicare, and Medicaid, and Social Security.” In that post, I more or less took the mainstream progressive view: programs like Social Security are risk-spreading programs that provide insurance against common risks like disability, living too long, poor health in old age, and so on.

Since then, I undertook to write a chapter on social insurance for a forthcoming Research Handbook in the Law and Economics of Insurance, edited by Dan Schwarcz and Peter Siegelman. In writing the chapter, I decided that things were somewhat more complicated.

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Finance and Democracy

By James Kwak

Roger Myerson, he of the 2007 Nobel Prize, wrote a glowing review of The Banker’s New Clothes, by Admati and Hellwig, for the Journal of Economic Perspectives a while back. Considering the reviewer, the journal, and the content of the review (which describes the book as “worthy of such global attention as Keynes’s General Theory received in 1936″), it’s about the highest endorsement you can imagine.

Myerson succinctly summarizes Admati and Hellwig’s key arguments, so if you haven’t read the book it’s a decent place to start. To recap, the central argument is that under Modigliani-Miller, the debt-to-equity ratio doesn’t affect the cost of capital and therefore doesn’t affect banks’ willingness to extend credit; the real-world factors that make Modigliani-Miller untrue (deposit insurance, taxes, etc.) rely on a transfer of value from another party that makes society no better off.

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Tax Policy Revisionism

By James Kwak

In an otherwise unobjectionable article about The Piketty, the generally excellent David Leonhardt wrote this sentence: “In the 1950s, the top rate exceeded 90 percent. Today, it is 39.6 percent, and only because President Obama finally won a yearslong battle with Republicans in early 2013 to increase it from 35 percent.”

Is “yearslong” really a word?

But that’s not what I mean to quibble with. It’s that “yearslong battle with Republicans.”

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