Tag: politics

It’s Not a Bailout — It’s a Funeral

The following guest post was contributed by Jennifer S. Taub, a Lecturer and Coordinator of the Business Law Program within the Isenberg School of Management at the University of Massachusetts, Amherst (SSRN page here).  Previously, she was an Associate General Counsel for Fidelity Investments in Boston and Assistant Vice President for the Fidelity Fixed Income Funds.

In poetry and politics, metaphor matters. Expect some fighting figures of speech on Thursday, when the conference committee takes up the topic of the Orderly Liquidation Fund or “OLF.” Under the proposed financial reform legislation, the OLF is the facility that would hold the money needed by the FDIC to shut down a systemically important, insolvent financial institution before its failure can contaminate other firms and the broader economy. In other words, one purpose of the resolution authority and OLF is to avoid repeating the disorder and disruption of either the Lehman bankruptcy or the AIG bailout.

To be clear, many question whether regulators will have the courage to invoke this provision and pull the plug on a dying bank. Accordingly, the “prevention” measures under discussion in the legislation are critical — these included the swaps desk spinoff, hard leverage caps on financial firms, regulatory oversight over shadow banks and inclusion of off-balance sheet transactions in capital standards, among others.

One of the hottest debates concerning funding the OLF is over who should pay into the fund and when should they pay. On the question of “who,” the choices have been framed as either industry or taxpayers. And the “when” options are described as in advance of or after a failure. Many, including the House majority in its bill and FDIC Chairman Sheila Bair, support an up-front assessment on industry. Those who oppose an industry pre-fund have tried to damn the OLF as a “bailout fund” and at times the financial reform legislation as a “bailout bill.”

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Wall Street CEOs Are Nuts

By James Kwak

“Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.'”

Oh, well.

That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone (e.g., the Volcker Rule), riding a wave of populist anger to the point where the bill was sure of passing, and then quietly pruning back its most far-reaching components. If anything, that’s a testament to the political skill of the White House and, yes, Tim Geithner as well.

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Regulation vs. Structural Change

By James Kwak

Robert Reich discusses a theme that I think I’ve discussed before (and first heard expressed by Ezra Klein):

“The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.”

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Constructive Populism

By James Kwak

I don’t expect to get a holiday card from Tim Geithner this winter. Nor do I expect one from Larry Summers. Or even Michael Barr, despite everything I’ve written in favor of consumer protection. (I probably will get one from Barack Obama, since I donated money to his campaign.) But they might want to consider putting me on their lists.

“Populist” has mainly been used as a smear over the past year and a half, to connote irresponsible pandering to . . . well, to the people, actually. Simon and I have been written off by many people as populists, as if that alone were enough to settle the argument. But if and when financial reform does finally get passed by both houses of Congress, the administration will owe a major debt to the recent resurgence of anti-Wall Street sentiment, which can only be called populist.

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Sam Brownback’s Staff Are Amateurs

By James Kwak

Senator Sam Brownback has been pushing an amendment in the Senate that would exempt auto dealers from regulation by the Consumer Financial Protection Agency. The auto dealer exemption has gotten a lot of press. The House version of the exemption was the focal point of a Huffington Post story back in December on how the House Financial Services Committee was loaded with moderate Democrats who are weak on financial reform. (That amendment was introduced by John Campbell, a former auto dealer who is no longer an auto dealer but who owns real estate that he rents to auto dealers.)

The argument for the exemption is that regulating auto dealers will — you guessed it — reduce access to credit.* The arguments against are: (a) auto loans are a major source of financing for consumers, along with mortgages and credit cards, so people need to be protected; (b) auto loans provide even more opportunities for ripping off customers than most bank loans, because of the auto dealer’s privileged market position and its ability to shift money back and forth between the sale price and the loan fees;  and (c) if you open up this loophole, you will have regulatory arbitrage.

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Financial Reform for the Long Term

By James Kwak

The news these days is largely about the financial reform bill on the floor of the Senate. I think you know my opinion about that: many good things, not enough to solve the root problems, but still better than nothing.

Here’s a simplified way of thinking about things. There are two general problems with the financial sector today, which were the subject of two consecutive columns by Paul Krugman. The first problem, according to Krugman: “Much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors.” This is what we see in the SEC-Goldman suit, the Magnetar trade, and so on. The financial reform bill is largely (but not exclusively) aimed at this problem; that’s why there are a consumer protection agency, new trading and clearing requirements for derivatives, etc. These reforms, I think, have a reasonable chance of doing good.

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Dallas Fed President: Break Up Big Banks

By James Kwak

We’ve cited Thomas Hoenig, president of the Kansas City Fed, a number of times on this blog for his calls to be tougher on rescued banks and to break up banks that are too big to fail. This has been a bit unfair to Richard Fisher, president of the Dallas Fed, who has been equally outspoken on the TBTF issue (although we do cite him a couple of times in our book).

Bloomberg reports that Fisher recently called for an international agreement to break up banks that are too big to fail. Here are some quotations, taken from the Bloomberg article (the full speech is here):

“The disagreeable but sound thing to do” for firms regarded as “too big to fail” would be to “dismantle them over time into institutions that can be prudently managed and regulated across borders.”

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Krugman: No Bill Is Better Than a Weak Bill

By James Kwak

Paul Krugman begins this morning’s column this way:

“So here’s the situation. We’ve been through the second-worst financial crisis in the history of the world, and we’ve barely begun to recover: 29 million Americans either can’t find jobs or can’t find full-time work. Yet all momentum for serious banking reform has been lost. The question now seems to be whether we’ll get a watered-down bill or no bill at all. And I hate to say this, but the second option is starting to look preferable.”

Krugman says he would be satisfied with the House bill, but that the need to bring moderate Democrats and at least one Republican on board in the Senate could lead to a severely watered-down bill, in particular one without a Consumer Financial Protection Agency. Instead of accepting such a deal, he says:

“In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.”

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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.

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Greg Mankiw on the Deficit

By James Kwak

Broken record alert: Another post on the deficit ahead. Wouldn’t you rather look at funny pictures of cats? Why do I keep writing these? (Hint: The other side keeps writing them.) You have been warned.

Greg Mankiw, noted economics textbook author and former chair of Bush 43’s Council of Economic Advisers, has an op-ed on the deficit that is relatively sensible by the standards of recent debate. He points out that modest deficits can be sustainable, that taxes will probably need to go up, and that a value-added tax is a plausible option. He also points out that Obama’s projections are based on optimistic economic forecasts that very plausibly may not pan out, and that Obama’s main deficit-reduction strategy is to kick the problem over to a deficit-reduction commission, which are valid criticisms.

Unfortunately, his bottom line seems to be throwing more rocks at President Obama, under the general Republican principle that since he’s the president, everything is his fault:

“But unless the president revises his spending plans substantially, he will have no choice but to find some major source of government revenue. Ms. Pelosi’s suggestion of a VAT may be the best of a bunch of bad alternatives. Unfortunately, in this new era of responsibility, the president is not ready to face up to the long-term fiscal challenge.”

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Jeff Sachs on the Deficit

By James Kwak

Jeff Sachs:

“Policy paralysis around the US federal budget may be playing the biggest role of all in America’s incipient governance crisis. The US public is rabidly opposed to paying higher taxes, yet the trend level of taxation (at around 18% of national income) is not sufficient to pay for the core functions of government. As a result, the US government now fails to provide adequately for basic public services such as modern infrastructure (fast rail, improved waste treatment, broadband), renewable energy to fight climate change, decent schools, and health-care financing for those who cannot afford it.

“Powerful resistance to higher taxes, coupled with a growing list of urgent unmet needs, has led to chronic under-performance by the US government and an increasingly dangerous level of budget deficits and government debt.”

That’s part of a longer article, “Obama in Chains,” on the challenges presented by political polarization. Sachs seems generally sympathetic to Obama, although he criticizes him for his pledge of no new taxes on the “middle class” and ruling out a value-added tax.

Unfortunately, Sachs isn’t long on practical solutions: he prescribes an end to the Iraq and Afghanistan wars, increased taxes, and lobbying reforms. But that’s in part because the problem is hard to solve.

Some Survey Results

By James Kwak

Here are the results of the latest New York Times/CBS News poll. (Here’s the Times article.)  A few observations:

1. When asked what the most important problem facing the country is (question 4), here are the winners:

  • Jobs: 27%
  • Economy: 25%
  • Other: 16%
  • Health Care: 13%
  • Budget Deficit: 4%
  • DK/NA: 4%

This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design, so you can argue about which design is more relevant depending on what question you’re trying to answer.

2. On questions 6-10, Obama gets positive marks for foreign policy and terrorism, but negative marks for the economy, health care, and the deficit. This is what you would expect for a Republican president, not a Democratic one (with the possible exception of the deficit question, since Democrats are still seen as big spenders, the past two administrations notwithstanding). Probably the most likely explanation is that the last three are simply things that people are unhappy about in general; also, the economy and health care are issues where Obama faces disapproval both from the right and the left, for opposite reasons. Basically, we have a centrist president.

3. Only 8% of Americans think that “most members of Congress” deserve re-election. This, it seems to me, is one of those survey results that is inherently self-defeating. All of the Republican base should be happy with Republican Congressmen for successfully fighting off the Obama agenda. Many though not all Democrats no doubt blame the last year on the Republicans and should be reasonably happy with their Congressmen. And we know the vast majority of members of the House will be returned to office. So all this means is that people have an unfocused antipathy toward Congress as an institution.

4. When you ask if “homosexuals” should be allowed to serve in the military (page 24), people are in favor 59-29. When you ask about “gay men and lesbians,” you get 70-19. (If you follow up by asking about serving “openly,” the margin falls to 44-41 and 58-28, respectively.) Words matter.

Whose Fault?

To believe politicians in Washington and pundits in the media, the national debt has become the most important political issue of the day. (Whether it should be–as opposed to, say, jobs–is another question.) The Republican argument is, basically: “Big deficits! Democratic president! His fault!” The Obama administration argument, by contrast, is “No way! George W. Bush’s fault!”

I generally side with Obama on this one, mainly because of the two Bush tax cuts and the unfunded Medicare prescription drug benefit. Keith Hennessey, Bush’s last director of the National Economic Council, has a counterargument. Some of his points are good. OK, well, one point–the fourth one down. Hennessey is right that what initially transformed the Clinton surplus into the Bush deficit was the 2001 recession, which was beyond Bush’s control–just like what transformed the large Bush deficits of 2007-2008 into the enormous Obama deficits of today was the 2007-2009 recession.

The other points are good debating, but I don’t buy them. This could take a while.

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A Constitutional Amendment?

In the wake of the Supreme Court’s decision in Citizens United to expand the ability of corporations* to pay for election-related communications, prominent law professor Lawrence Lessig is calling for a constitutional amendment to protect elections from the influence of money. The text of the proposed amendment isn’t done yet, but the goal is to protect Congress from the influence of money.

Lessig’s argument is simple: Congress is fundamentally (though, thanks to the Supreme Court, legally) corrupt, and most people think it is corrupt, which makes it hard for elected majorities to effect change and also undermines people’s faith in their government. Commenting on Citizens United, he said, “The surprise, and in my view, real cause for concern, however, was how little weight the Court gave to the central purpose of any fair election law: the purpose to protect the institutional integrity of the democratic process. That value seemed invisible to this Court, as if we didn’t now live in a democracy in which the vast majority has lost faith in their government.” Since the Court’s preferred stick for blocking campaign finance reform is the First Amendment, the only thing that can stop them is a new amendment.

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