Why Didn’t The Major Bank CEOs Show Up On Monday?

Speaking on Wall Street at noon Monday, President Obama laid blame for the crisis and recession of 2008-09 squarely at the feet of the financial sector.  The diagnosis was sound but the rest of his speech was disappointing – the administration’s draft regulatory reforms look lame, banks are fully mobilized against the only proposal with any teeth (a consumer protection agency for financial products), and the President’s call to “please don’t do it again” surely fell on deaf ears.

In fact, were any of the most relevant ears even listening?  The real news from Monday was not the substance of the speech or the stony silence of the financial elite in the audience, but rather that not a single chief executive officer (CEO) of a major bank was in attendance. Continue reading “Why Didn’t The Major Bank CEOs Show Up On Monday?” →

Voodoo Cost Savings

If you really want to know about Max Baucus’s bill, head on over to Ezra Klein’s blog, which is all Baucus, all day. If you want to complain about fake cost-saving measures, stay here.

A major selling point of the Baucus bill (can’t really call it the Group of Six bill with zero Republican support; can’t call it the Democratic bill with questionable Democratic support), at least in the media, is its lower cost – $860 billion according to Baucus, $770 billion according to the CBO. This compares to the $1 trillion cost of the House bill. But this is a meaningless number, for two reasons.

Continue reading “Voodoo Cost Savings” →

The CFPA and Small Banks

To be clear, I favor the Consumer Financial Protection Agency. I favor it because I think it will be good for consumers. I also like to think that it will be good for small banks relative to big banks. My main argument for this is that should not harm the main competitive advantages of smaller banks, which should be customer service and local underwriting. But I’m still in favor of the CFPA even if it doesn’t help small banks.

John Pottow (hat tip Mike Konczal) agrees on the small bank point. His main argument is that the CFPA should lower fixed regulatory costs by making it easier to get approval for basic products. He also adds this point:

“The current credit market, with its indecipherable multi-page contracts, is not competitive. Actually, that’s not true: It’s perniciously competitive — the competition focuses on better hiding fees in small print. Burying terms in legal documents is an activity where larger banks again hold the advantage. By contrast, a true plain vanilla market would remove the obfuscation and refocus the competition on price. Once more, smaller lenders would benefit from this increased transparency and leveled playing field.”

Continue reading “The CFPA and Small Banks” →

No, Wait! This Is What I Really Want!

I try not to comment on purely political issues, but sometimes they are just too infuriating.

Over the last few days, Max Baucus has been leaking “his” health care proposal, which should be made public. Regular readers will know I’m no fan of Max Baucus, whose main goals seem to be killing the public option (I know, it’s not as big deal as it’s made out to be, but it isn’t irrelevant) and cutting subsidies to poor people. But supposedly, the whole point of the Baucus/Group of Six approach was that it would result in a bipartisan bill that could clear the Senate. The tradeoff was very simple; a plan that isn’t as good as it could be, but one that could pass.

Yesterday, The New York Times reported two of the three Republicans in the Group of Six, Charles Grassley and Michael Enzi, are against the Baucus proposal, and even Olympia Snowe wants changes.

Continue reading “No, Wait! This Is What I Really Want!” →

Obama And Brandeis

President Obama’s speech yesterday was disappointing.  As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far.  He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that.  This is hard to believe.  And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better.

The audience was comprised of our financial elite, but the Wall Street Journal reports “not one CEO from a top U.S. bank was in attendance” (p.A4).  How’s that for demonstrating respect, gratitude, and a willingness to behave better? Continue reading “Obama And Brandeis” →

Kindle Comments?

As a few of you have figured out, you can read our blog on the Kindle. I know a few of you know this because I have received a very small amount of money from Amazon – a good deal less than the annual expenses of maintaining this blog, and those expenses are probably only in two figures anyway.

Simon pointed out that not being able to read comments on the Kindle is a problem. The reason for this is that WordPress.com separates posts and comments into two separate feeds. So I was just over at the Kindle Publishing site, about to publish the comments feed as a separate Kindle blog, when I realized I had no idea what the copyright status of comments is. In particular, if I do publish the comments feed on Kindle, I will make (a paltry amount of) money from other people’s work.

Now, I am guessing I am probably on firm legal ground doing that, since there are lots of blogs that make money (though few that make a lot of money), and they are all to some degree making money off of their comments. I think I’m on firm ethical ground as well, since the amount of money is so small that there is just no way to distribute it to the commenters that would not cost more to implement than the revenue I would receive. But I wanted to know: (a) if anyone knows of a good discussion of this topic (I can’t be the first person to think of it) and (b) if any of our regular commenters cares one way or the other.

Thanks.

By James Kwak

Obama, the Light Touch?

Edmund L. Andrews and David E. Sanger have an article in The New York Times today that is sure to infuriate some people, including me. Here’s one excerpt:

“Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.

“A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as ‘crazies.’

“Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.

“But in the end, according to one senior official, ‘no one called him and told him to shut up,’ and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.

“A similar hands-off decision was made about the auto companies. Shortly after General Motors and Chrysler emerged from bankruptcy, some members of the administration’s auto task force argued that the group should not go out of business until it was confident that a new management team in Detroit had a handle on what needed to be done.

“But Mr. Summers strongly rejected that approach, and the Treasury secretary, Timothy F. Geithner, agreed.

“‘The argument was that if the president said he wasn’t elected to run G.M., then we couldn’t hire a new board and then try to run any aspect of it,’ one participant in the discussions said. The auto task force took off for summer vacation in July, and it never returned.”

The political argument for this position makes sense. Basically, Obama and his administration are afraid of being charged with “socialism” or “big government,” so they are doing what they can to defuse this charge. (Not that that will help given the way political rhetoric is thrown around these days.)

Continue reading “Obama, the Light Touch?” →

The Importance of Outcomes

Last week, Bill Moyers interviewed Jim Yong Kim, a distinguished medical professor and leader of nonprofit organizations and the new president of Dartmouth College. A lot of Kim’s work is dedicated to improving health in the developing world, so you might think he is some sort of soft-hearted lefty. But one of his main points about our health care problems was that our health care delivery system is not sufficiently tough-minded and calculating, and that health care providers can learn a lot from the business world. For example:

“JIM YONG KIM: So a patient comes into the hospital. There’s a judgment made the minute that patient walks into the emergency room about how sick that person is. And then there are relays of information from the triage nurse to the physician, from the physician to the other physician, who comes on the shift.

“From them to the ward team, that takes over that patient. There’s so many just transfers of information. You know, we haven’t looked at that transfer of information the way that, for example, Southwest Airlines has. Apparently they do it better than any other company in the world.

“BILL MOYERS: Computers?

“DR. JIM YONG KIM: No, they have taken seriously the human science of how you transfer simple information from one person to the next. And in medical school, and in the hospitals that I’ve worked in, we’ve done it ad hoc. Sometimes we do it well. Sometimes we don’t do it well. But what we know is that transfer of information is critical. Now to me, again, that’s the rocket science. That’s the human rocket science of how you make health care systems work well.”

Continue reading “The Importance of Outcomes” →

Where Are We Again? (Pre-G20 Pittsburgh summit)

This revision to our Baseline Scenario is required reading for my Global Entrepreneurship Lab (GLAB) class at MIT this week.  For those classes, please also look at these updated slides.

Financial markets have stabilized – people believe that the US and West European governments will not allow big financial institutions to fail.  We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside.  How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation (my version; Joe Nocera’s view).  Small and medium-sized banks, however, will continue to fail as problems in commercial real estate continue to mount.

The economic recovery, in the short-term, may be surprisingly strong in terms of headline numbers; this is a standard feature of emerging markets after a crisis (e.g., Russia from 1998 or Argentina after 2002).  Official short-term forecasts are probably now too low, as the IMF and other organizations make the case for continued fiscal stimulus and very loose monetary policy. Continue reading “Where Are We Again? (Pre-G20 Pittsburgh summit)” →

Economic Donkeys

Early in the First World War, British generals decided to attack German trenches with an initial light bombardment, followed by infantry walking in close order across No Man’s Land.  The result was tens of thousands killed in a series of military disasters, but the generals reacted with only small adjustments to their approach and essentially persisted in repeating the same mistakes for years.  “The English soldiers fight like lions,” one German general remarked. “True.  But don’t we know that they are lions led by donkeys?” was the reply.

Today, a year after global financial collapse and the ensuing tragedy for millions, our economic leaders are lining us up to suffer again (and again) through the same horrible experiences. Continue reading “Economic Donkeys” →

Another Year, Another Decline in Employer-Based Coverage

Ezra Klein shows the new Census figures on the uninsured. The long-term trend is absolutely clear: employer-based coverage is declining and public coverage is increasing, but not enough to make up the gap. Looking at the underlying data, we can see that 2008 was the eighth consecutive year in which the proportion of people covered by employer-based health insurance declined.

This is a point I’ve also tried to make before. Not only is employer-based coverage deteriorating, but the reasons for that deterioration imply that it is likely to only accelerate. As health care costs continue to increase, even if the rate of increase stays the same, the rate of deterioration will increase, because each year health care costs become a larger proportion of total costs and therefore harder to absorb. (Put another way, if health care cost inflation remains around 7% per year, each year it will be 7% of a larger proportion of employers’ costs.) Deterioration will take three forms – some employers will drop health coverage altogether, some will increase the share paid by employees, and some will shift toward less-generous plans.

Klein’s point is that it may be dangerous to premise health care reform on the idea that the employer-based system will remain what it is, because it won’t. My point was that because the employer-based system is slowly dying, people with employer-based coverage should not be thinking, “I don’t need health care reform, I’ve got my employer-based plan;” they should be thinking, “I’m afraid of what will happen when my employer drops its plan, so I need health care reform.” Unfortunately, I think both of us are right.

By James Kwak

Can Openers for Beginners

We haven’t had a Beginners post in a long time, but David Kestenbaum’s Planet Money post about traffic court got that part of my brain going again.

Kestenbaum’s story is that he went to traffic court and the judge was a friendly populist, but not an economist:

“The judge went on to say that this was the “people’s court” and explained that if she gave probation on a ticket, no points would appear and the insurance companies wouldn’t find out. ‘This court is not in the business of enriching the insurance companies,’ she said.”

Aha! Kestenbaum, who after a year on Planet Money is an economist, even if his Ph.D. is in physics, points out that whether or not people get points on their licenses doesn’t affect insurance company profits. They need to charge bad drivers more because their loss payments for those drivers will be higher; if they can’t find out who the bad drivers are, they will just raise premiums on everyone.

Continue reading “Can Openers for Beginners” →

Recovery – or Not – in Words and Pictures

First, the pictures. Paul Swartz of the Council on Foreign Relations has a new version of his charts on the current recession in historical perspective, which I first linked to in June. The overall impression? We are still considerably worse off today than in other postwar recessions at this point (21 months in), although some indicators appear to be bottoming out.

Now the words. Edward Harrison of Credit Writedowns has a guest post at naked capitalism presenting the arguments for a robust recovery and for no recovery at all. He cites Joseph Stiglitz for the proposition that statistical GDP growth isn’t everything, and extends the point to argue that  you can have “low-quality” GDP growth if that growth is financed by debt without corresponding investment. When you happen to control the world’s reserve currency you can do this for quite some time, and there’s no saying we can’t do it for a while longer. So one possibility Harrison foresees is a reasonable growth fueled by cheap money, yet no change to some of our underlying economic problems, including a financial sector with a put option from the federal government.

By James Kwak

Lessons Learned and Soon Forgotten

One year after the collapse of Lehman, the controversial “rescue” of AIG, and the ensuing collapse of world financial markets there are two questions: what have we learned, and what good will it do us?

The second question is essential, because we have learned so much about the functioning of our financial system – and the three main lessons are all rather scary.

First, our financial system has become dangerous on a massive scale.  We knew that the banks were playing games, e.g., with their so-called off-balance sheet activities, but we previously had no idea that these huge corporations were so badly run or so close to potential collapse.

Continue reading “Lessons Learned and Soon Forgotten” →