Kevin Drum

Blunt Rules

| Mon Mar. 29, 2010 9:15 AM EDT

Everyone agrees that excessive leverage was one of the core causes of the 2008 financial crash. So how do we fix this? Stronger capital requirements for banks is the usual answer, but that supposes that regulators can be trusted to impose tough standards on an industry that will fight tooth and nail to resist them. David Leonhardt:

In a way, this issue is more about human nature than about politics....“When things are going well,” Paul A. Volcker, the former Fed chairman, says, “it’s very hard to conduct a disciplined regulation, because everyone’s against you.

....One way to deal with regulator fallibility is to implement clear, sweeping rules that limit people’s ability to persuade themselves that the next bubble is different — upfront capital requirements, for example, that banks cannot alter....“We don’t know where the next crisis is going to come from,” Geithner told me. “We won’t be able to foresee it.We’re not going to pre-empt all future bubbles. So we want to build a much bigger cushion into the system against those basic human limitations. I don’t want a system that depends on clairvoyance or bravery.” He added, “The top three things to get done are capital, capital and capital.”

Sounds good! So what are Geithner & Co. planning to do about it?

Their solution is to depend on capital requirements to prevent another financial crash. They refer to these requirements as cushioning or foam on the runway. So long as a firm has enough hard assets — and can get access to their cash value — it can survive a lot of bad investments and a lot of ineffective oversight.

....But there is reason to wonder whether the capital cushions, at least in their current form, will be enough to overcome human limitations. The administration and Congress have been deliberately vague about what the capital ratios will be. They have not given out numbers or explained a myriad of details: how the ratios will vary by firm size, for instance, or how they will deal with so-called off-balance-sheet assets. Their approach has the advantage of keeping technicalities free of Capitol Hill horse-trading, much as setting interest rates is a process left to the Fed, not Congress. Vagueness also allows American regulators more freedom to coordinate with regulators in other countries. On the other hand, by remaining out of the public eye, capital requirements become yet another issue that will ultimately depend on discretion. Wall Street firms will have a chance to persuade the Fed that maybe they do not need as much capital as people first thought. No doubt, the firms will offer some highly sophisticated mathematical models to make their case.

....What is the alternative? Canada offers another telling lesson. It relies more on blunt rules than the United States does. Canada requires any mortgage with a less than 20 percent down payment to be insured, and those mortgages are much less common there. It also sets a standard leverage ratio of no more than 20. As Julie Dickson, the chief financial regulator in Canada, told me, “We become nasty when banks get close to it.”

Blunt rules inevitably have their problems. But they also send signals that can outlast a given administration or a given moment in the business cycle. In Canada, the well-publicized conservative capital rule not only restrained Canadian banks, but it also served as an immutable reminder to regulators and kept them from falling under the sway of bubble thinking.

At the risk of being branded one of those liberal haters of American exceptionalism, sign me up for the blunt rules approach.

It's not that blunt rules are any kind of panacea. Wall Street bankers dedicate their lives to figuring out clever ways to circumvent regulations, and they'll keep doing that no matter how blunt the regulations are. What's more, Leonhardt is right: the last thing we want is Congress micromanaging the regulation of risk in the financial system.

But that's the whole point of blunt rules: they may not be perfect, but they don't require Congress to do anything more than set them in the first place. You still have to trust regulators to act reasonably, but even if they don't you at least have the backstop of statutory limits that are hard to get around. Not impossible to get around, but blunt rules at least require a little bit of noise and public attention to overcome.

The big question, of course, is that even if you support this approach, just what should those blunt rules look like? They have to apply to all sources of leverage in all kinds of big financial firms, but how do you define that? What limits should regulators labor under? What's the simplest way of making sure that leverage can't just be hidden in someplace that no one anticipated when the orginal rules were written? Etc.

I'm not sure. But there are reasonable answers to these questions, even if they aren't perfect. The first step, though, is agreeing that we need blunt rules in the first place.

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From the Annals of Chutzpah

| Sun Mar. 28, 2010 11:43 PM EDT

Shorter Wall Street Journal editorial page: Congress should never close corporate tax loopholes because this will result in corporations booking accounting charges for higher taxes.


Loophole in question is explained here.

The Education of a President

| Sun Mar. 28, 2010 11:32 AM EDT

We have two related foreign policy stories today. First up is Peter Baker on Obama's negotiation with Russian President Dmitri Medvedev over a new arms control treaty. After reaching agreement, Medvedev insisted on bringing missile defense back into the treaty:

“Dmitri, we agreed,” Mr. Obama told Mr. Medvedev with a tone of exasperation, according to advisers. “We can’t do this. If it means we’re going to walk away from this treaty and not get it done, so be it. But we’re not going to go down this path.”

....If Mr. Obama overestimated his powers of persuasion in reaching quick agreement with the Russians, they misjudged how far they could get him to bend. In the end, they compromised on nonbinding language. And so, after all the fits and starts, all the miscalculations, the vodka toasts that proved premature and the stare-downs that nearly sank the whole enterprise, Mr. Obama hung up the phone again with Mr. Medvedev on Friday, this time having finally translated aspiration into agreement.

And here's Michael Hirsh on why Obama was so upset at Israeli prime minister Benjamin Netanyahu after his government embarrassed Joe Biden by announcing a new housing development in Jerusalem the day Biden arrived for an official visist:

The main reason for Obama's ire, according to a senior administration official, who asked not to be named, was that Biden had gone to Israel specifically to deliver a message to Netanyahu: the main issue is now Iran and its nuclear program, and we can't allow ourselves to be distracted by other issues or to jeopardize the emerging alliance against Tehran in support of tough sanctions — an alliance which includes most of the leading Arab states. In particular, Netanyahu — who campaigned for office himself on the primacy of the Iranian nuclear issue — can't afford to allow Israel's leading defender on this issue, the president of the United States, to look as if he's weak or lacking influence....And that of course is precisely what happened. Netanyahu's government made Obama look bad, undermining the effort against Iran.

Italics mine in both excerpts. It goes without saying that both of these stories are based on sources who have an agenda. And we don't know what that agenda is. So take this all with a few grains of salt.

But the connecting tissue here is Obama's backbone. Domestically, he played hardball to get healthcare reform done this month and he threw down the gauntlet on recess appointments this weekend. Internationally, he played hardball with Medvedev — or convinced him he was playing hardball, anyway — over arms control, and was upset with Netanyahu less over the Jerusalem housing project per se than over the fact that it was a bungle that handicapped his ability to play hardball with Iran.

Conservatives are unhappy over Obama's domestic hardball and liberals are probably uneasy over the international hardball — espcially if Hirsh's report about Iran is true. But they're opposite sides of the same coin. A good president knows when to compromise, and also knows how to beat up his opponents enough to make compromise possible. It's still early days, but Obama seems to be developing a pretty good sense for this stuff.

Staffing Up

| Sun Mar. 28, 2010 10:51 AM EDT

James Fallows outlines the stellar qualifications of Alan Bersin, nominated to head Customs and Border Protection, an agency of DHS, and then notes that Republicans refused to allow a vote on his nomination anyway. Matt Yglesias comments:

(A) This is a sign of an opposition political party gone mad. But (B) this is a poor way to organize a government. The number of political appointees in the executive branch should be reduced, the proportion of political appointees requiring congressional confirmation should be lowered, and some kind of express track to an up-or-down vote for nominees should be established. Confirming judges — lifetime members of a coequal branch of government — is one thing, but a president needs to be able to staff his administration.

Actually, I'd extend this argument to district court judges too. Just in general, it's absurd for the Senate to spend time vetting such a vast number of appointees. They should stick to cabinet level positions, heads of a few of the major agencies (Fed, SEC, EPA, etc.), ambassadors, and circuit court judges.

For what it's worth, it might also be a good idea to have set terms for judges. Say, ten years or so. Long enough to keep them independent, but not so long that every appointment has to be a pitched battle. I'm not quite sure whether this would take a constitutional amendment, though.

Opera After a Month

| Sun Mar. 28, 2010 10:12 AM EDT

As long as I'm making lots of lists this weekend, here's another one: What I like and dislike about the Opera browser. (The PC version, that is, since I don't know anything about how well the Mac version performs.) I'm pretty hooked on it. First, here's the small list of things I don't like:

  1. No autocomplete in form fields. This is my only big complaint. I understand why some people might not want this, but it's a pretty standard feature on every other browser in the galaxy. I'm not sure why it isn't an option on Opera.
  2. Occasionally a page won't load 100% properly. Not often. Just keep another browser on tap for when it happens.
  3. Ad blocking requires a little more effort than just plugging in AdBlock on Firefox. But it works fine once it's configured.
  4. You can't right click on sites in the Personal Bar. This is a very minor annoyance.

And now for the things I like:

  1. History search! This is awesome. Opera keeps a full text index of every page you browse, so you can search them instantly. I'm always forgetting where I saw something, and this is a feature I've wanted forever.
  2. It's faster (and seemingly more reliable) than Firefox.
  3. The address bar search feature is very handy. Just type "w obama" to bring up the Wikipedia page for Barack Obama. "t crazy" brings up thesaurus entries for crazy. Etc. You can define whatever search shortcuts you want.
  4. There's a "closed tabs" icon on the far right of the tab bar. It's basically a trash can for all the tabs you've closed recently. Very handy when you want to get back to a page that you just know you had opened a couple of hours ago but can't quite remember.
  5. You can shift tabs around on the tab bar. This is sort of an anal retentive thing, but I have a specific order I like my tabs to be in, and this lets me keep them that way if they get jumbled.
  6. The Notes feature allows me to keep short little text notes within easy reach. I use this for, among other things, keeping some commonly used HTML code handy.
  7. Opera Link uploads my settings so that all my PCs can stay synchronized. When I loaded Opera on my new PC it worked about 90%. Obviously 100% would have been better, but it still saved me tons of time re-importing my bookmarks and other settings.
  8. "Open in background" is a surprisingly handy option. When I'm proofreading a post, I use it to load all the links in the background while I'm reading. After they've all loaded I check to make sure they're correct.
  9. Opera Mail is great. It's nice having mail in a browser tab, and it has a super fast search feature. I have over 100,000 messages in my archive, and Opera can search the whole thing in about a second. (On the downside, Opera Mail is also a little idiosyncratic and takes some getting used to. If you don't care about searching, it might not be worth the trouble.)

This is a fairly miscellaneous list. Opera is the kind of program that has lots of hidden nooks and crannies, and I keep discovering new things about it all the time. Someone else would probably discover different things. In any case, it's pretty cool. I'm a big fan.

Obama Plays Hardball

| Sat Mar. 27, 2010 7:39 PM EDT

Today's big news is that the White House announced a bunch of new recess appointments:

Fed up with waiting, President Barack Obama announced Saturday he would bypass a vacationing Senate and name 15 people to key administration jobs....The 15 appointees to boards and agencies include the contentious choice of union lawyer Craig Becker to the National Labor Relations Board. Republicans had blocked his nomination on grounds he would bring a radical pro-union agenda to the job, and they called on Obama not to appoint Becker over the recess.

Obama went ahead anyway, while also choosing a second member for the labor board so that four of its five slots will be filled. The board, which referees labor-management disputes, has had a majority of its seats vacant for more than two years, slowing its work and raising questions about the legality of its rulings.

This is pretty fascinating. Years ago, after Republicans filibustered a Carter nominee to the NLRB, the two parties made a deal: the board would have three appointees from the president's party and two from the other party. So after he took office Obama nominated two Democrats and one Republican to fill the NLRB's three vacant seats and got support from a couple of Republicans on the HELP committee for the entire slate. But when it got to the Senate floor John McCain put a hold on Becker, and his nomination — along with the others — died.

Fast forward to today and Obama finally decides to fill the board using recess appointments. But what does he do? He only appoints the two Democrats. This is not what you do if you're trying to make nice. It's what you do if you're playing hardball and you want to send a pointed message to the GOP caucus. You won't act on my nominees? Fine. I'll appoint my guys and then leave it up to you to round up 50 votes in the Senate for yours. Have fun.

Does this mean the postpartisan Obama is finally dying away, overtaken by a newly muscular president willing to duke it out with a Republican Party that he finally realizes has been utterly consumed by its hardcore obstructionist wing? Maybe! Stay tuned.

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My Big List O' Books

| Sat Mar. 27, 2010 1:33 PM EDT

For the past week or so bloggers have been compiling lists of ten books that have influenced them throughout their lives. I haven't compiled mine yet, but you didn't think I could hold out against doing this forever, did you? So here it is.

I should note: this is not a list of books that I'm recommending. If you want that, see here — though the list is outdated. The key idea in the following list is that these books influenced me for some reason — and not always because of the book's content. Also: they aren't all books. And there are more than ten. And my definition of "influenced" is a little more pedestrian than most people's, I think. There are no big philosophy tomes or anything like that. That said, here they are in the order in which they influenced me:

1962-66: The Oz books, by L. Frank Baum and Ruth Plumly Thompson. We had a complete set of Oz books and my mother read them aloud to us when we were kids. They tended to get more outré and almost science fictiony toward the end of the series, and those were the ones I liked best. (My mother decidedly didn't.) I credit this, more or less, with leading me in the direction of Tom Swift and then science fiction in general.

1967: My Only Great Passion, by Jean and Dale Drum. Although officially my father was a speech professor, he also specialized in film history and criticism, and in the 50s he struck up a correspondence with Carl Th. Dreyer, the great Danish film director (The Passion of Joan of Arc, Ordet). In 1967 he took a one-semester sabbatical and we all trooped over on SAS to live in the town of Køge for seven months while he and my mother did primary research for a biography of Dreyer. This was, by a wide margin, the most exciting thing that ever happened to me as a child.

(As it happens, the book failed to find a publisher after it was written. However, in the late 90s, after my father had died, my mother resurrected it at the urging of the head of the Danish Film Museum, headed to Denmark to do some additional research, and then updated the manuscript and got it published in 2000. If you're looking for a full-length English-language biography of Dreyer, this is pretty much it.)

1969: Adventure Comics #378. The Legion of Superheroes! A Curt Swan/Neal Adams cover! My love affair with comic books was born.

1975: APL: An Interactive Approach, by Leonard Gilman and Allen J. Rose. I still have my dog-eared copy of this book. Aside from a few months in my senior year of high school I never actually used APL for anything, but it was the language that showed me how much fun computer programming could be. That changed my life, and this was the book that taught me.

1979: The Power Broker, by Robert Caro. I probably don't have to say much about this. You know, Pulitzer Prize and all that. But this book not only opened my eyes to the use of political power, but also, I think, inspired my continuing love of really long books. I've never been entirely sure if Caro was fair to Robert Moses, but then, I've never been entirely sure he wasn't either.

1980: The Making of the President 1960, by Theodore White, and Fear and Loathing: On the Campaign Trail '72, by Hunter S. Thompson. I think these are the two books that really got me interested in politics. I don't know that I'd recommend the former other than for its historical interest, but the latter is great reading regardless of whether or not you care about the 1972 presidential campaign. Hell, it's worth reading just for the scene where Thompson talks football with Richard Nixon.

1982: The Origin of Consciousness in the Breakdown of the Bicameral Mind, by Julian Jaynes. I warned you that I wasn't necessarily recommending these books, right? In this one, Jaynes assembles evidence to suggest that up until a few thousand years ago humans were essentially all schizophrenic, routinely commanded by voices in our heads. (Thus the origin of all those endless pantheons of gods and goddesses.) However, as the two halves of our brains began to fuse, the voices ended — for most of us — and we became conscious and self-aware in the sense that we are today.

As it happens, virtually no one believes this. On the other hand, no less than Richard Dawkins says, "It is one of those books that is either complete rubbish or a work of consummate genius, nothing in between! Probably the former, but I'm hedging my bets." Me too. And even if it is wrong, it's a fascinating example of being wrong — complete with some really compelling explanatory power for the history of our species. It remains fascinating to me to this day. When I briefly took up fiction writing in the early 80s, my first story was based on Jaynes's concept.

1985: Plagues and Peoples, by William McNeill. I think Matt Yglesias had this on his list, and I have it for the same reason: it was my first real introduction to a version of history in which everything you think you know turns out instead to be caused by some vast underlying movement you had never even considered before. In this case, it's the effect of disease pools on the rise and fall of various civilizations. (The Spanish conquest of Mexico is the most famous example.) I think you have to be careful with adopting this kind of attitude toward history wholesale, but in the Great Man vs. Great Movement debate, I'm pretty clearly in the Great Movement camp, and this book is one reason why. It also prompted me to read McNeill's The Rise of the West, which is a very good book.

1998: American Aurora, by Richard Rosenfeld. This is a long book made up almost entirely out of excerpts from political newspapers published around the time of the Alien and Sedition Acts. That makes it sound boring. It's not. (Though it's frustrating at times unless you already have a pretty detailed knowledge of that era.) We've all heard about how politics in the past was actually far more polarizing and belligerent than it is today, and this book really makes that come to life. After you've read it, you won't think of modern politics the same way again.

1999: The Promise of Sleep, by William Dement. I've always slept poorly and I hoped this book, by a famous sleep researcher from Stanford University, would help me figure out why. It didn't. However, it did help me conquer jet lag, and you have no idea what a difference that's made. So listen up. This is one of those cheap and easy pieces of advice that you're often promised but almost never get in life.

A lot of people believe that if you, say, travel to Europe, all you have to do is force yourself to stay up all day on your first day and you'll be OK. You won't be. Here's why: twice a day your body releases stimulants that wake you up. This is (awkwardly) called "clock dependent alerting," and it happens once around 6 am and again around 7 pm or so — though this varies from person to person. So when I travel from California to Paris, even if I stay up all day and get to sleep just fine at midnight, around 4 am I'll wake up. And for the next three hours, no matter how hard I try, I can't get back to sleep. Around 6 or 7 am I can, but by then it's time to wake up. Result: I'm completely wiped out for the rest of the day.

So here's the answer: sleeping pills. Get a good quality prescription sleeping pill and take it when you go to bed even if you don't need it to fall asleep. You don't. You need it to stay asleep. I now take a sleeping pill every night for about a week (plus one on the plane over) when I travel to Europe, and it's like a damn miracle. I literally have no jet lag at all.

(Obviously this depends a lot on where you're traveling to and from. Going from LA to New York, for example, I take a pill because my evening stimulant rush hits around 10 pm and won't let me get to sleep before 1 or 2 am. So in this case, the pill does help me get to sleep rather than keeping me asleep. If you're traveling from the East Coast to Europe, ditto. If you're traveling west, it'll be something else. But the arithmetic is fairly easy to figure out. However, you really can hardly go wrong by just taking a pill an hour before bedtime and not fussing over it.)

(And if you're one of those people who don't care about this because you don't suffer from jet lag? Well, I hate you. Any other questions?)

2002: kausfiles. Whatever else you can say about Mickey, in 2002 I started reading Slate in my free time and it was kausfiles that introduced me to blogging. Three days later I started my own blog, and boy did that change my life.

2002: The Threatening Storm, by Kenneth Pollack. This one is sort of an honorable mention. For a few months in 2002-03 I supported the Iraq war, and that was a really fucking stupid thing to do. This book was one of the big reasons why I did it. So on the theory that learning from your mistakes is important, this book deserves a place on my personal list.

2005: Before the Storm, by Rick Perlstein. This is the best piece of political history I've ever read. I think that's recommendation enough. More here.

My Lunch With Felix

| Fri Mar. 26, 2010 8:48 PM EDT

Here's a random assortment of topics from my lunch with Felix Salmon today at Eat Chow in Costa Mesa. He had the shrimp tostada and I had the swordfish, with olives and truffle parmesan fries on the side. Enjoy.

  1. The Spice Station on Sunset Blvd. is awesome. Even if you're not really in the market to buy any spices, you should check it out.
  2. We should all be more worried about the potential of a mass casualty event — an epidemic, a gigantic earthquake, a massive hurricane, etc. — to annihilate the insurance industry and take out the rest of the financial system as a side effect. The AIDS epidemic nearly did it, Felix says, and missed only because most of its victims weren't insured. A really big hurricane hitting Long Island could do it, though.
  3. Lunch with Tyler Cowen is always great. He unerringly picks out the best thing on the menu. (But I wonder: how does Felix know this unless he tries everything else on the menu too?)
  4. The corporate bond market didn't really exist before 1980. This one is actually kind of embarrassing. A little while earlier I had been telling Felix that no matter how much I read about the finance biz, I never really felt like I could acquire even a layman's grasp of it. It's just too damn deep and complex for a nonpractitioner. Then, later, in response to something he said, I sort of shook my head and muttered "fucking fixed income market." He laughed, and I explained that I was still gobsmacked about how the sleepiest, most boring corner of the financial industry had become such a world-devouring monster.

    No, he said, it was a mistake to think of it that way. In fact, the corporate bond market barely even existed before the 70s. It wasn't that the bond market morphed from boring to rocket science, it was that the bond market essentially started up and then just got ever more complex as time went on. Now, that's a pretty basic historical fact, but I really didn't know it. Though, in retrospect, I think I sort of did. But I had forgotten. In any case, the disintermediation of banks and the practice of corporations selling bonds on a large scale directly to institutional investors — as opposed to retail coupon clippers — has really only been around for a few decades. And that led, step by inevitable step, to the towering, tottering creations of the fixed income quants in 2005.

    I probably have some of this wrong. Maybe Felix will see it and point us all to a good brief history of the corporate bond market, the Eurobond market, and the changing tax status over time of debt vs. equity.
  5. You will never get good fish and chips in a restaurant where it's just one item on the menu. You have to go someplace where they serve it in vast quantities and people are queued up outside the door. This has something to do with the cycle time/freshness of the batter.
  6. I should be reading David Merkel and Bond Girl.
  7. Getting Congress and the Fed to impose higher and more rigid capital requirements on big financial institutions is important, but what's even more important is getting an international agreement in place to make sure everyone else does it too. However, there's really no one who does a good job of reporting on this. Largely this is because the discussions are all held behind closed doors, so we only hear about the status of negotiations when someone like Larry Summers or Mervyn King drops hints in a speech. It's like reporting on the intelligence community, except worse.

That's all. Consider this an open thread.

Friday Cat Blogging - 26 March 2010

| Fri Mar. 26, 2010 1:58 PM EDT

It's been a long week, hasn't it? And with all the gunshots and death threats and growing panic over our imminent slide into tyranny, it's time to chill. So here they are, the world experts on chilling.

And with that, I'm off to meet Felix Salmon for lunch. Have a good weekend, everyone.

Quote of the Day: the Individual Mandate

| Fri Mar. 26, 2010 1:53 PM EDT

From Sen. Orrin Hatch (R–Utah) on why he supported an individual mandate in 1993 but doesn't support it now:

Well, in 1993, we were trying to kill Hillarycare, and I didn't pay any attention to that, because that was part of a bill that I just hadn't centered on.

Well OK then! I guess we can put this right up there with Mitt Romney's increasingly strained explanations for why the individual mandate was a good idea when he implemented it in Massachusetts but not so good when Barack Obama implemented it for everyone.