2012 - %3, July

Our Financial System is Still Broken

| Mon Jul. 23, 2012 11:25 AM PDT

Riffing off a post by John Kay, Felix Salmon points out that a big part of the problem with our financial system is the way that derivatives have corrupted aspects of banking that used to have an actual, concrete purpose:

Barclays’ Libor lies, for instance, started life as a way for its derivatives traders to make money: something which could never have happened when the banks reporting into the Libor system didn’t have derivatives desks.

A large part of the problem is the way in which financial tools which had a utilitarian purpose when initially designed have become primarily vehicles for financial speculation. Libor, for instance, was a way for banks to peg loan rates to their own funding costs, and thereby minimize their own risks while at the same time minimizing the amount that borrowers had to pay. Today, banks don’t fund on the interbank market any more, and Libor has become something else entirely: a number to be speculated on in the derivatives market, and, in times of crisis, an indication of how creditworthy banks are perceived to be.

Libor is no longer actually used to peg loan rates. Equity trading no longer bears much relationship to the actual value of companies. Asset-backed securities have little to do with making actual loans to actual people. As derviatives become more and more abstracted from their underlying instruments, they've morphed into independent entities to bet on, not ways to make the financial system run more smoothly:

Kay’s conclusion is sobering spot-on: the entire financial-services industry, he says, needs to be restructured so as to create the kind of institutions which thrive on increased trust, rather than on maximized arbitrage of anything from news to interest rates to regulations. In order for that to happen, we’re going to need to see today’s financial behemoths broken up into many small pieces — because at that point each small piece is going to have to earn the trust of the other small pieces which rely on it.

Felix is no more optimistic about that happening than I am. The financial crisis produced Dodd-Frank and Basel III, and that's pretty much it. Both are better than nothing, but neither comes close to addressing the fundamental problems with Finance 3.0. And I suppose we never will. The world had plenty of problems with a money economy, and plenty of problems with a credit economy, none of which were ever really fixed. So there's not much reason to think that we'll ever fix the problems with our shiny new derivatives economy either. I sort of wish we'd at least given it a serious try, though.

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Romney's Rainmakers Dump Millions Into His Super-PAC

| Mon Jul. 23, 2012 10:26 AM PDT

June was the best month ever for super-PACs since their creation in 2010. In all, super-PACs large and small reeled in $55 million last month, according to the Sunlight Foundation. That brings their overall haul for the 2012 election cycle to $313 million.

Leading the charge in the outside money wars was Restore Our Future, the pro-Romney super-PAC run by dark-money guru Carl Forti. Restore Our Future raised $21 million in June. Seven families ponied up $15 million of that haul: casino tycoon Sheldon Adelson and his wife, Miriam; Boston financier John Childs; Dallas investor Harlan Crow; the company owned by Bill Koch, brother of the billionaires Charles and David Koch; Houston homebuilder Bob Perry; former Rick Santorum bankroller Foster Friess; and TD Ameritade executive Joe Ricketts.

And in an even more encouraging sign for the Romney super-PAC, USA Today points out that one in 10 donors to Mitt Romney's campaign have also given to Restore Our Future. Fundraisers says that kind of donor crossover is key to a presidential super-PAC's success—and that crossover has so far eluded the super-PAC supporting President Obama.

Restore Our Future wasn't the only GOP super-PAC to notch a record month. American Crossroads, the super-PAC cofounded by Karl Rove, raised $5.7 million in June, including $2 million from Texan Bob Perry. John Childs also chipped in $500,000 to Crossroads last month in addition to the million each he gave to Restore Our Future and the Club for Growth.

Priorities USA Action, the pro-Obama super-PAC, also beat its monthly fundraising record, pulling in $6.2 million. Donors included Qualcomm founder Irwin Jacobs ($2 million), actor Morgan Freeman ($1 million), and Chicago media executive Fred Eychaner ($1 million).

The Case Against Terror

| Mon Jul. 23, 2012 10:22 AM PDT

Germany's vice chancellor says that a possible Greek exit from the euro has "lost its terror." Paul Krugman isn't happy about that:

I find their lack of terror ... disturbing.

I’m not saying that Greece should be kept in the euro; ultimately, it’s hard to see how that can work. But if anyone in Europe is imagining that a Greek exit can be easily contained, they’re dreaming. Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery.

....My advice here is to be afraid, be very afraid.

Fine. I'm afraid. But here's my question. Like Krugman, I find it hard to imagine a scenario in which Greece stays in the euro. But is there any way for Greek exit to happen in some non-scary way? The problem of contagion remains real no matter how Greece leaves, and the problem of panic probably isn't solvable either. After all, Greece will leave the euro if and when other countries refuse to pony up more aid, and if that happens then Greece is doomed. What's more, this isn't the kind of thing you can plan for. Any planning for a Greek exit would inevitably become public very quickly, and that would do nothing except generate panic even sooner than the actual exit itself.

So if Greek exit really is inevitable, what's the argument against the German position? Why not go ahead and talk about it soothingly, do whatever contingency planning you can behind the scenes, and then hope for the best?

Merit Pay Works Better if You Fear a Loss Rather Than Anticipate a Gain

| Mon Jul. 23, 2012 9:30 AM PDT

Dylan Matthews describes a recent field test in paying teachers if they get higher-than-average test score improvements from their students:

The authors split teachers in the study into a control group, who were not offered any rewards, a “gain” group, which was promised rewards of up to $8,000 at the end of the school year, and a “loss” group, which was given $4,000 upfront and asked to pay back any rewards they did not earn....Additionally, the gain and loss groups were split, with a “team” group being rewarded on the basis of theirs and fellow teachers’ test scores, and the “individual” group being reward only on the basis of their own scores. The conclusion: it worked, and it worked almost twice as well when the money was given at the start and then taken away.

This is a fascinating piece of confirmation that loss aversion is very real as a motivating factor. People respond far more strongly to the threat of loss than they do to the prospect of gain. In this case, teachers in the loss group did twice as well even though their reward per point of improvement was half as big. On the other hand, there was very little difference between team motivation and individual motivation.

Beyond that, though, I'd take this study as suggestive, but not conclusive. The gain group showed very tiny overall improvements in student performance, and none of the improvements were statistically significant. The loss group did better, showing gains of about seven percentile points.

But I'm still a bit puzzled. If I'm reading the results correctly, teachers in the gain group could expect $4,000 if their students produced average results, and $80 per percentile point extra if they did better than average. In the end, they produced results two percentile points better than average. Teachers in the loss group were paid $4,000 at the beginning of the year, and had to pay back $40 per percentile point if their kids did worse than average. They ended up producing gains of about seven points. (See Table 3 in the study here.)

This means that on average, teachers in the gain group earned $160 extra ($80 x 2) while teachers in the loss group gained $280 ($40 x 7). But the teachers must have known beforehand that their rewards were likely to be very small compared to the $4,000 baseline: In theory, they could earn thousands of extra dollars, but only by being supermen. The authors don't say how well the very best teacher did, but based on their summary results the top teacher probably generated an improvement of about 15 percentile points compared to average. That's a reward of $600 above the baseline. And that's the best result. This kind of money seems like it's far too small to produce any kind of serious impact.

So something about this doesn't really add up. Maybe I'm interpreting their results wrong, but I simply don't see how expected rewards this small could generate such significant improvements. Somehow, the baseline extra pay of $4,000 must have played a role here. right?

After Bachmann Allegations, Clinton Deputy Reportedly Under Police Protection

| Mon Jul. 23, 2012 9:02 AM PDT
Huma Abedin.

In June, five Republican members of Congress, including Rep. Michele Bachmann (R-Minn.), sent letters to the nation's top law enforcement, defense, and intelligence agencies warning that the Muslim Brotherhood, an international Islamist organization, had infiltrated the United States government. Bachmann and her associates—Reps. Trent Franks (R-Ariz.), Louie Gohmert (R-Texas), Thomas Rooney (R-Fla.), and Lynn Westmoreland (R-Ga.)—demanded an investigation, and Bachmann told radio host Sandy Rios that "it appears that there are individuals who are associated with the Muslim Brotherhood who have positions, very sensitive positions, in our Department of Justice, our Department of Homeland Security, potentially even in the National Intelligence Agency."

There is not even a smidgen of credible evidence to back up the charges Bachmann and her colleagues have made. But one of the individuals Bachmann has singled for her supposed ties to the Muslim Brotherhood—Huma Abedin, a longtime aide to Secretary of State Hillary Clinton—has suffered very real consequences. Abedin, who's married ex-Rep. Anthony Weiner, with whom she has a new baby, has received threats in the wake of Bachmann's charges and is now under police protection, the New York Post reported Sunday. Sen. John McCain (R-Ariz.) took to the Senate floor last week to defend Abedin, but that hasn't been enough to stop the witchhunt.

People for the American Way, a liberal advocacy group, has called on Speaker of the House John Boehner (R-Ohio), who called Bachmann's charges "pretty dangerous," to remove her from the House Intelligence committee as a way of sending a message that this kind of conduct is unacceptable.

How Obama Put a Silencer on His Support for an Assault Weapons Ban

| Mon Jul. 23, 2012 8:43 AM PDT

In the aftermath of the horrific shooting in Aurora, Colorado, I thought the below piece I wrote over two years ago deserved reposting. By the way, I would add that after the Gabby Giffords assassination attempt, the president disappointed gun-control advocates by not using the moment to address gun violence with specific and forceful policies, such as an assault weapons ban.

Obama Puts a Silencer on Assault Weapons Ban

—By

| Fri May. 21, 2010

When Mexican President Felipe Calderon addressed the US Congress on Thursday, he called for the United States to reinstate the ban on assault weapons that expired in 2004 under the Bush administration. Calderon noted that a ban on these weapons, which are flowing south across the border to violent drug cartels, could help Mexico reduce the horrific violence that has seized parts of that country.

Calderon might be forgiven for assuming that this would be a reasonable request to make to the Obama administration. While campaigning for the presidency, candidate Barack Obama backed permanently reinstating the ban. After he assumed office, his administration quickly announced it would proceed on this front. On February 25, 2009, Attorney General Eric Holder declared,

As President Obama indicated during the campaign, there are just a few gun-related changes that we would like to make, and among them would be to reinstitute the ban on the sale of assault weapons.

Holder specifically noted that resurrecting the ban would reduce the number of guns pouring into Mexico and fueling the violence there.

Compare Holder's unequivocal statement to how the White House these days addresses the matter. Hours after Calderon's appearance on Capitol Hill, press secretary Robert Gibbs was asked about this issue. Here's the full exchange:

Q: Robert, speaking of President Calderón, this morning in his address to Congress, he asked lawmakers to reinstate the assault weapons ban, something the President has supported in the past.  Does the President still support that and does he plan to lean on Congress to make progress?

GIBBS:  I would — because the President largely got asked this question yesterday about both drugs and weapons moving across the border, I’d point you to the answer that he gave about increased inspections on cargo that’s moving from the north to the south.

You know the rest. At Obama's joint press conference with Calderon the previous day, this is what the president said,

Through increased law enforcement on our side of the border, we’re putting unprecedented pressure on those who traffic in drugs, guns, and people.  We’re working to stem the southbound flow of American guns and money, which is why, for the first time, we are now screening 100 percent of southbound rail cargo.

Nothing about an assault weapons ban. A Mexican journalist followed up and asked Obama, "Shouldn’t there be an initiative that will regulate guns as they are sold? Is there going to be a ban?" Obama again talked about interdiction efforts and didn't address the assault weapons ban.

Not only will the White House not make good on candidate Obama's promise to revive the ban or Holder's announced decision to do so, it won't even talk about the assault weapons ban. Not a word. The reason is obvious: Obama and his aides don't want to spark a backlash from the NRA and voters who cling to their guns—especially as Democrats ride toward a difficult mid-term election. On this dicey topic, Obama cares most about ducking a political bullet.

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We're Still at War: Photo of the Day for July 23, 2012

Mon Jul. 23, 2012 7:46 AM PDT

With a swift yank, Spc. Justin Israel, a cannoneer with the 4th Infantry Brigade Combat Team, 1st Infantry Division, pulls the lanyard on “Thor," an M777A2 155mm Howitzer. US Army photo by Sgt. 1st Class Bruce Williams, HHB 2-32 FA.

Persuasion vs. Suppression: Yes, There's a Difference

| Mon Jul. 23, 2012 7:34 AM PDT

Thomas Edsall says that President Obama is trying to boost turnout among liberals this November, and at the same time trying to "suppress turnout" among groups less likely to support him. Ed Kilgore slaps down this choice of words:

Even if you buy Edsall's assumption that the Obama campaign's anti-Romney ads are designed to convince non-college educated white voters who won't support the incumbent to give Romney a pass as well, it is fundamentally wrong to treat such efforts as equivalent to utilizing the power of government to bar voters from the polls altogether. Voters hypothetically convinced by the Obama ads to "stay home" in the presidential contest are perfectly free to skip that ballot line and vote their preferences for other offices, just as they are perfectly free to ignore both presidential campaigns' attack ads and make a "hard choice" between two candidates they aren't crazy about. Lumping negative ads together with voter disenfrancisement under the rubric of "vote suppression" legitimizes the latter as a campaign tactic rather than what it actually is: an assault on the exercise of fundamental democratic rights.

Hoo boy. Rarely have I agreed more with somebody. Running a campaign of persuasion, whether to vote for you or to not bother voting for the other guy, is just that: a campaign. It's what politicians do. In no way is this voter suppression or anything close to it.

Maybe this was just a poor choice of words on Edsall's part. But the Republican voter ID assault, which is pretty plainly meant not to persuade, but to prevent the usual level of turnout among traditionally liberal-leaning voters, is a whole different animal. That's voter suppression.

LCD Soundsystem's "Best Funeral Ever"

| Mon Jul. 23, 2012 3:06 AM PDT

LCD Soundsystem
Shut Up and Play the Hits
Oscilloscope Laboratories

A little over a year ago, James Murphy announced that his band, the indie dance-punk group LCD Soundsystem, would play its final show at Madison Square Garden in April. For many, the announcement came out of the blue—the band had released three critically-adored, fan-beloved records, and seemed to be at the top of its game. But that was the idea: "If it's a funeral, let's have the best funeral ever," reads the title card that opens Shut Up and Play the Hits, a documentary about that final show and the forty-eight hours before and after. It's a glorified concert film, but one that aims to be something more, to varying effect. 

For those of us who, say, watched the final performance alone in the wee hours of the morning on a patchy livestream thousands of miles away, and for whom never seeing the band live is a great life regret, Shut Up and Play the Hits is about as close as we're likely to get. The film capturing this last hurrah screened in a small number of theaters around the US on July 18, in an attempt at recreating the concert vibe. As Murphy explained, "it seemed like it would be better to see this in a theater that was pretty full, and pretty full of other people who actually wanted to be there," and while people weren't exactly getting up and dancing in their seats, there was a lot of vigorous head-nodding. The live show emphasizes the punk aspects of the band's sound without losing any of the dance, and footage of ecstatic concertgoers letting loose is a highlight. Getting people moving is the LCD Soundsystem ethos: Murphy says the band grew out of wanting "to play for people who were having fun."

Vaccines on Chicken Farms Create Supervirus

| Mon Jul. 23, 2012 3:00 AM PDT

The problem of routine antibiotic use on factory farms has generated a lot of ink lately—especially after this startling recent report on a possible link between industrial chicken farming and a spate of antibiotic-resistant urinary-tract infections among women.

But what about vaccine use? Concentrated animal feedlot operation (CAFO) operators use antibiotics to help prevent bacterial infections from raging through spaces densely packed with animals (as well as to make the animals grow faster). To address the problem of viral infections, against which antibiotics are ineffective, they turn to vaccines, which get considerably less press.