The Economist Backs Cantwell-Collins

Which, attentive readers know, is the climate change bill that auctions almost all emission allocations starting on day one, and refunds most of the proceeds to households. Here’s the Economist story. (Technically, it’s just the columnist “Lexington,” but the Economist has a consistency voice and position unlike any other news publication.) Here’s an excerpt:

“Of all the bills that would put a price on carbon, cap-and-dividend seems the most promising. . . . The most attractive thing about the bill is that it is honest. To discourage the use of dirty energy, it says, it has to be more expensive. To make up for that, here’s a thousand bucks.

“This challenges the conventional wisdom in Washington, DC, that the only way to pass a global-warming bill is to disguise what’s in it. Leading Democrats try to sell cap-and-trade as a way to create jobs and wean America from its addiction to foreign oil.”

Continue reading “The Economist Backs Cantwell-Collins” →

Goldman Sachs And The Republicans

I testified yesterday to the Senate Banking Committee hearing on the “Volcker Rules” (full pdf version; summary).  My view is that while the principles behind these proposed rules are exactly on target – limiting the size of our largest banks and preventing any financial institution backed by the government, implicitly or explicitly, from taking big risks – the specific rule changes would need to be much tougher if they are to have any effect.

Wall Street is strongly opposed to the Volcker Rules (link to the written testimony; webcast) and the discussion elicited some classic Goldman Sachs moments.  Gerry Corrigan, a senior executive at Goldman and former head of the New York Fed, suggested that Goldman Sachs has an impeccable approach to risk management and seemed to imply that the firm was not in trouble in fall 2008.  When pressed on why Goldman requested and was granted a banking license – and access to the Fed’s discount window – in September 2008, he fell back slightly, “There is no question whatsoever that when you look at totality of the steps that were taken by central banks and government, particularly in 2008, that Goldman Sachs was a beneficiary of this.”

The public record is clear – Goldman Sachs would have failed in September 2008, were it not for the support provided by the government. The fact that some of this support did not involve direct use of taxpayer money speaks to the ingenuity of the people involved, but it should not distract us from the substance.  Goldman Sachs was failing and it was saved.

Why is this so hard for Goldman to admit?

Continue reading “Goldman Sachs And The Republicans” →

Remember Those Stress Tests?

I’m curious to know how banks’ 2009 final results compare to the projections in the stress tests. My suspicion is that JPMorgan and Goldman did better than projected, but Citi may have done worse. Ideally you would compare both the new loan losses recognized over the year and the profits from current operations. But there are a couple of problems with doing this. One is that the stress test results were for 2009-2010 combined, without the separate years split out. The other problem is that it’s not immediately obvious how to map the line items from the stress test results to the line items on a bank’s income statement (or to changes on its balance sheet). I might be able to figure it out with a lot of study, but I might not.

Does anyone know of someone who has already done an analysis along these lines? Or does anyone know how to do the mapping correctly?

By James Kwak

Kevin Warsh: “No Firm Should Be Too Big To Fail”

The debate over Ben Bernanke’s reappointment, and his approach to the financial system, may after all have had some impact.  In a speech yesterday, Kevin Warsh – the Federal Reserve Board Governor who liaises between Ben Bernanke and financial markets – signaled a major change in Fed thinking regarding “too big to fail”.

Warsh was much blunter than we have heard from the Fed in a long while: “Moral hazard in the financial system is higher than any of us should countenance”; “eradicating the too-big-to-fail problem should be the predominant policy goal”; and “in the new regime, no firm should be too big to fail.”

At some level, Warsh and his colleagues are finally learning the main lesson of 2008-09.

“We need a system in which insolvent firms fail. Market discipline only works if governments can demonstrably and credibly commit to allow firms to fail. This system isn’t just about giving government officials better options on Sunday nights. It is about making sure that market discipline is operative in the prior months and years to avoid altogether the proverbial Sunday night judgments.”

But there is still a major problem in the Fed’s thinking. Continue reading “Kevin Warsh: “No Firm Should Be Too Big To Fail”” →

The Republican Plan, III: Comic Relief

(This is a multi-post series on the Republicans’ Roadmap for America’s Future. Part I was on how it slashes Medicare spending. Part II was on how it shifts risk from the government to individuals.)

The Roadmap brings up the issue that there is little price transparency in the health care market. This is the solution:

“The environment resembles what existed in the securities markets before the stock market crash of 1929. Abuse, fraud, and misinformation about the nature of stocks and the rules governing their purchase were rampant. In response, the Securities and Exchange Commission [SEC] was formed with the main purpose of bringing transparency to the market and restoring consumer confidence.

“With the increasingly rapid transformation of the financial markets and the growing complexity of financial transactions, the private sector began to take a more prominent role in developing accounting guidelines; and eventually the SEC began relying on the private sector to establish the basic standards by which it would be regulated. Since 1973, the SEC has recognized the nongovernment Financial Accounting Standards Board [FASB] as the authoritative standard-setting organization for financial accounting and reporting information. While the SEC has statutory authority to establish such financial standards, it has historically adopted FASB rules. The SEC allows the private sector to establish its own disclosure standards, so long as it demonstrates the ability to fulfill the responsibility in the public interest. The authority to enforce the standards, however, falls solely to the SEC.

“Applying this model to the health care industry will allow all stakeholders to come together, without heavy-handed government intervention, to establish uniform and reliable measures by which to report quality and price information.”

Enron? WorldCom? Self-regulation? FASB, the SEC, and the securities industry are their example?

By James Kwak

The Republican Plan, II: You’re On Your Own

In my previous post on the Roadmap for America’s Future, I discussed how the Republican plan is based on converting Medicare into a voucher program and then slashing the vouchers drastically relative to current Medicare spending projections, leaving seniors without the ability to buy anything close to what they get from Medicare today. In that post, I compared projected Medicare vouchers under the Roadmap to projected Medicare spending under current law. If you assume that, in the Roadmap world, the cost of Medicare-equivalent health insurance will be the same as currently projected Medicare spending, then people will die.

But, Paul Ryan would argue, the Roadmap is going to bring down the cost of health care, so the fact that we’re providing less support won’t matter. Put another way, he might say, Obama’s plan also counts on bringing down the cost of health care, so why can’t I make the same assumption? There are two problems with this argument.

Continue reading “The Republican Plan, II: You’re On Your Own” →

The Republican Plan, I: People Will Die

So the Republicans have a deficit reduction and a health care plan, all wrapped into one, the “Roadmap for America’s Future.” It’s being pushed by Paul Ryan, in part because he’s the ranking member of the House Budget Committee, in part because he’s good-looking and articulate, in part to provide the party plausible deniability if it flops (like Bobby Jindal a year ago). The CBO says that it will balance the budget and even eliminate the national debt by 2080. Ezra Klein and Matt Yglesias have commented on it. Klein says, “I wouldn’t balance the budget in anything like the way Ryan proposes. His solution works by making care less affordable for seniors. . . . But his proposal is among the few I’ve seen that’s willing to propose solutions in proportion to the problem.” Yglesias says “it’s totally unworkable.” But they’re both being much too kind.

Ryan realizes that “the deficit problem is a health-care problem,” which he agreed to in an interview with Klein. That’s good. He realizes that to solve the deficit you have to do something about Medicare. That’s good. He also puts forward a logically coherent conservative position. That’s good in itself and especially refreshing after the Bush era (and the unfunded Medicare prescription drug benefit) and all the recent posturing of the Republicans as defenders of Medicare (Mitch McConnell: “Cutting Medicare is not what Americans want.“) Ryan’s plan is basically to cut Medicare like never imagined before.

But everything else about the plan is such an unmitigated disaster I’m going to devote a whole paragraph at some point to thinking about how to label this plan. It will be a long time before we get there, though, broken into a couple of blog posts, because there are so many problems to go over.

Continue reading “The Republican Plan, I: People Will Die” →

Tom Hoenig For Treasury

The White House is floating, ever so gently, the notion that they are open to nominations for the position of “Tim Geithner’s Successor.”

It’s not clear if they mean this job is likely to be advertised formally sometime in 2012 or 20 minutes after the November midterms.  Nor is it obvious if this is a real request for proposals – it could be just an effort to make critics “put up or shut up.”

Fortunately, there is an entirely plausible successor already in waiting, ready now or whenever the president finally realizes the need to fundamentally change banking policy. Continue reading “Tom Hoenig For Treasury” →

Budget Sense and Nonsense

With the submission of the Obama administration’s budget today, fiscal silly season is opening. President Obama already launched an opening salvo last week with his proposed freeze on non-security-related military spending,which amounts to a rounding error on the ten-year budget projections, which are themselves a rounding error on the long-term budget projections– at a time when unemployment is running at 10.0%. Fortunately, there is a partial saving grace, which is that the freeze does not set until until fiscal year 2011 (which begins in October 2010), and in the meantime Obama has proposed $100 billion in tax cuts and government spending to create jobs. (Whether his proposals are the right way to spend $100 billion is a debate for another time.)

The midterm elections are looming already (note: do we have to be satisfied with a political system in which the legislature is preoccupied with upcoming elections half the time?), and the two big themes seem to be jobs and the deficit. With unemployment at levels not seen since the 1980s, it’s obvious why jobs are on the political agenda. With the federal budget deficit at record (nominal) levels, it also seems obvious that the deficit should be on the agenda, but this is really an unfortunate artifact of our political system. A government deficit is the result of insufficient government saving, and a period of high unemployment is absolutely the worst time to increase government saving. The sensible solution would be to use the urgency we currently feel to put in place long-term fiscal solutions, but the political system can’t handle that (see health care reform as Exhibit A). As a result, when deficits go up, we get lots of short-term politicking about the deficit–in Paul Krugman’s words, the “march of the deficit peacocks.”

Continue reading “Budget Sense and Nonsense” →

Move Your Politician’s Money

I talked Sunday about Move Your Money with Guy Raz of NPR’s Weekend All Things Considered (summary; audio from about 3:45).  We covered a lot of ground, from what’s in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely).

Unfortunately, there wasn’t enough time to discuss what comes next – i.e., what happens when the location of political candidates’ own money starts to matter.  As early as this fall’s primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?

These questions strike to the heart of democratic responses against overly concentrated financial power throughout US history – a topic we take up in Chapter 1 of 13 Bankers. Continue reading “Move Your Politician’s Money” →

Final Thoughts on Volckerfest 2010

The coming months will tell if the Volcker Rule and the prohibition on banks getting even larger will turn out to be substance or mere spin. I’m finally getting around to reading the transcript of the pre-announcement media briefing and I found a few things that were worth a smile.

1. On the cap on a single institution’s share of liabilities: “The 10 percent cap on insured deposits exists in current law. It was put in place in 1994. And what we’re saying is that deposit cap has served or country well.” Um, then why did you waive it for JPMorgan Chase, Bank of America, and Wells Fargo?

Continue reading “Final Thoughts on Volckerfest 2010” →

“Populism”

Amidst otherwise strong coverage of the growing debate around the nature of finance and the power of big banks, a surprisingly high number of journalists continue to misuse the word “populism”.

For example, in an article on criticism of bankers at Davos, the Wall Street on Saturday morning reported that President Sarkozy of France delivered a “populist broadside” when he said,

“That those who create jobs and wealth may earn a lot of money is not shocking.  But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.”

The implication, of course, is that some politicians are pandering to “the people” vs. “the elites” – part of a long-standing theme in some interpretations of democratic political conflict.  While elites invest and engage in productive activities, the argument goes, plebians from time to time demand excessive income redistribution or punitive taxation or other measures that would undermine productivity and prosperity.

Or, as President Obama said in March 2009, “My administration is the only thing between you and the pitchforks.”

Such language reveals a complete misunderstanding of our current situation.  (Matt Taibbi has this right, but doesn’t go far enough.) Continue reading ““Populism”” →

The Wasted Opportunity

I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.* For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.

Continue reading “The Wasted Opportunity” →