By James Kwak
From Stacy Mitchell of the New Rules Project, also on the Huffington Post:
Author: James Kwak
Happy CARD Act Day
By James Kwak
Most provisions of last year’s CARD Act restricting certain types of behavior by credit card issuers go into effect today. Card issuers, of course, are adapting by seeking out new ways to make money. One, pointed out by Felix Salmon, is expanding their usage of rewards cards, since (according to the Times) they get a higher interchange fee on rewards cards than on other cards. (This baffles me, but whatever.) Rewards programs, as it turns out, are subsidized by everyone in the form of higher prices for all goods bought at retail.
Put another way, this is the credit card industry (partially) shifting its sights from consumers, who benefit from (modest) legislative and regulatory protections, to the retailers, who don’t. It’s also what you would expect when you have extremely high concentration among card issuers (and transaction networks) and low concentration among retailers. Perhaps consumers aren’t the only constituency that needs a little protection.
Introduction to Legal Reasoning
By James Kwak
As many of you know, I am a law student. The law is a fascinating subject . . . if you are fascinated by the art of making fine distinctions that most people think are silly. So I thought that the subject of John Yoo and the torture memos might be good material for a good primer on how lawyers think.
The procedural facts are that the Justice Department’s Office of Professional Responsibility wrote a report severely criticizing John Yoo and Jay Bybee for various ethical lapses. Associate Deputy Attorney General David Margolis, however, decided not to take further action against Yoo and Bybee.
“Please Keep This Valuable Service”
By James Kwak
Here’s a letter submitted by a reader, originally from Chase, encouraging her to keep overdraft protection on her checking account.
Chart of the Day
By James Kwak
From Peter Goodman’s story about long-term unemployment in The New York Times.
For those wondering, U.S. population in 1982 was about 232 million; today it’s about 307 million, or about 33% more.
Mark Thoma Lets Loose
By James Kwak
Yes, Mark Thoma is generally Democratic-leaning when it comes to policy. But his blog is justly popular because it presents a wide range of views through extensive quotations and relatively little editorial commentary. So I think it’s revealing that he provides the following postscript to an article by Jamie Galbraith:
“Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can’t wait another day. It should have been done months and months ago.
“Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn’t be tolerated. But Congress doesn’t seem to be in much of a hurry to do anything about it, or give any sign that it much cares.”
Fear Mongering, Wall Street Style
By James Kwak
Jason Paez points out this Reuters story on the claim that new banking regulations will require an additional $221 billion of capital in the industry as a whole. I would take this a little more seriously if the source for the estimate were someone other than JPMorgan Chase, or even if there were a non-JPMorgan source to back it up.
As it is, I think this counts as another “nice little economy you’ve got there” attempt at hostage-taking or, as Paez says, “a threat levied against the entire non-banking economy if we allow the ‘extreme’ case (using the article’s words) of regulation to pass.” For one thing, I don’t see how any analyst could have come up with any number, given that the regulatory proposals I have seen have no numbers in them. That is, they say things like “capital requirements for large firms should be higher” but don’t say how much higher. (It’s possible I missed something recent here.) So what could $221 billion possibly be based on?
Bank of Italy Defends Draghi
By James Kwak
The Corriere della Sera, probably Italy’s most respected newspaper, relays a statement by the Banca d’Italia (Italy’s central bank) that its head, Mario Draghi, had “no role” in the Greece-Goldman Sachs interest rate swaps that have been reported by Der Spiegel and The New York Times. Here are some translated excerpts from the story:
“The transaction with Greece ‘was executed prior to the arrival of Draghi at Goldman Sachs,’ added sources from the [Banca d’Italia*], recalling that the governor [Draghi], who has headed the Banca d’Italia since the beginning of 2006, was vice president and managing director of Goldman Sachs in London from 2002 to 2005.
“On Tuesday, the former chief economist of the IMF, Simon Johnson, in his blog but picked up by other media, drew attention to Draghi, also calling into question the transaction by Italy, while [Draghi] was serving as director general of the [Italian] Treasury. . . . But it was in light of these possible connections, to avoid misunderstandings and rumors on the past role of Draghi, that the Banca d’Italia also chose to specify, on the subject of the Italian transactions in the 1990s, that ‘they had the goal of reducing the cost of the public debt and not to hide the true state of the public’s accounts.'”
The article is referring to this post by Simon asking whether Draghi had any connection to the Goldman-Greece or similar transactions with other governments.
* The actual text says “Istituto di via Nazionale.” The Banca d’Italia is located on the via Nazionale in Rome. This is similar to referring to the U.K. prime minister’s office as “Downing Street.”
The Systemic Risk Solution
By James Kwak
From The New York Times: A council of regulators chaired by the treasury secretary, with the Fed chair or his designate as the vice chair. At present, that would be Tim Geithner and Ben Bernanke.
I wouldn’t ordinarily write a whole post about this (if I just want to link to something, I try to use Twitter), but I had to point out this line by Calculated Risk:
“I can just imagine a council in 2004 and 2005 led by ex-Treasury Secretary John Snow with Alan Greenspan as Vice Chair. Yeah, that would have worked well …”
Did the Stimulus Help?
By James Kwak
This could be a midsize political battle in the run0up to the midterm elections, as discussed by The New York Times. The positions on both sides are too obvious to warrant repeating. If I recall correctly, the Obama administration hurt itself by underestimating the course of future unemployment a year ago when it passed the stimulus (most people were making the same mistake at the time), so now if you compare actual unemployment against original projections it looks like the stimulus had no impact. But that was a forecasting error and has nothing in itself to do with the stimulus itself.
Menzie Chinn has an overview post on the debate in which he argues that, at least from the standpoint of economists, it’s hardly a debate: the stimulus worked.
What’s a Populist?
By James Kwak
As Simon has previously discussed, “populist” has become a smear, epitomized by David Brooks’s frankly offensive attempt to classify populism as an “organization of hatreds” akin to racism and sectarianism. Brooks asserts, without support, that populism amounts to “simply bashing the rich and the powerful,” “class war,” “random attacks on enterprise and capital,” and a “zero-sum mentality” — proving that ideologies are easy to bash when you assume their properties.
“Populism” has been rolled out repeatedly over the last year to marginalize people who criticize Wall Street and the financial oligarchy as angry, know-nothing, Luddite, Trotskyist, ungrateful, envy-filled people who don’t understand the modern world and would return us to a barter economy. A search for “Krugman populist” returns 1.7 million hits. (“‘Simon Johnson’ populist” returns 180,000. ) So I was pleased to read Louis Uchitelle’s New York Times article that begins with this clever introduction:
“Put aside for a moment the populist pressure to regulate banking and trading. Ask the elder statesmen of these industries — giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle — where they stand on regulation, and they will bowl you over with their populism.”
More on Mankiw
By James Kwak
I recently criticized Greg Mankiw’s New York Times op-ed. I like the post on his blog better (hat tip Tyler Cowen). Basically he says that if conservatives on the deficit commission want to make the commission work (a big if — see my previous post), they “will have to agree to higher taxes as part of the bargain.” In exchange, they should ask for the following:
- Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare. Do it gradually but substantially. Then index it to life expectancy, as it should have been from the beginning.
- Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
- Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives. Conservatives hate the VAT, more for political than economic reasons. They should be willing to swallow a VAT as long as they get enough other things from the deal.
- Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.
- Permanent elimination of the estate tax. It is gone right now, but most people I know are not quite ready to die. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.
Gaming the PPIP?
By James Kwak
A couple of weeks ago, Yves Smith picked up on the story that the TARP Special Inspector General is investigating suspicious trades in connection with the Public-Private Investment Program. When PPIP was announced almost a year ago, there was widespread speculation about how banks and other private investors could take advantage of the program to unload toxic securities onto taxpayers (technically speaking, onto investment funds containing some private money, some public money, and a lot of non-recourse financing from the government). That story more or less faded away because PPIP never really amounted to much; banks apparently decided they were better off sitting on their toxic assets, counting on favorable accounting rules and regulatory forbearance, instead of selling them.
Here’s the relevant section from the SIG-TARP report (p. 141):
“The PPIF management company in question operates both a PPIF and one or more non-PPIF funds that invest in similar securities (i.e., mortgage-backed securities (‘MBS’)). In the case of this fund management company, the same person is the portfolio manager for both the PPIF and the non-PPIF fund. In late October, the portfolio manager directed that a particular MBS from the non-PPIF fund be sold after the security — in this case a residential MBS — had been downgraded by a rating agency. According to the company, multiple bids were received, and a quantity of the security was sold to a dealer. Within minutes of the sale, however, the same portfolio manager purchased, for the PPIF, the same amount of the same security from the dealer at a slightly higher price. Later in the day, the portfolio manager bought more of the security for the PPIF from the dealer at the original price.
Banker for the CFPA
American Banker is running an article by Bill Wade (subscription required, but free trial available), a former banker . . . explaining why the banking industry should be in favor of a Consumer Financial Protection Agency. Wade repeats many of the arguments made by consumer advocates such as Elizabeth Warren:
“A Consumer Financial Protection Agency can be the vehicle that restores consumer confidence in our products, our services and our institutions. The customers we serve will always need credit and other banking products . . . What they want is simple, clearly explained products and the comfort that someone is looking out for their best interests when financial products are developed and marketed. . . .
Why Is Wal-Mart Paying Retail Prices?
By James Kwak
Ted K. points out (and comments on)Â Stephanie Fitch’s article in Forbes on Wal-Mart’s 401(k) plan. The crux of the matter is that Wal-Mart seems to have done a lousy job creating a good 401(k) plan for its employees. Until recently, it had ten funds, only two of which were index funds; the other, actively managed funds all had high expense ratios (the ones Fitch quotes are above 1 percent).* More shockingly, the expense ratios paid by plan participants were the same as the expense ratios paid by individual investors in those mutual funds. It didn’t even pool its employees’ money together to get institutional investor rates. The irony, of course, is that Wal-Mart is the world’s best, most powerful negotiator when it comes to getting low prices for the stuff it sells, yet it exercised no negotiating power in getting low prices for its employees — even though it had $10 billion in assets to swing like a club.
The Baseline Scenario 