Regulating Risk

I'm not really sure if the federal government needs a "systemic risk regulator."  I just don't have a strong opinion about whether this is the right way to think about managing credit bubbles.  But a couple of days ago I said that if we do have such a thing, it shouldn't be the Fed.  Instead, "you want to give the authority to an agency that's institutionally dedicated to reducing risk and considers it a primary task.  That ain't the Fed.  It's just going to get buried in the bureaucracy and forgotten there."  Tyler Cowen responds:

Assuming we are going to do it, I think it has to be the Fed, whether we like it or not.  It's the Fed who is the fireman with the awesome power to print money, move markets, lend to the banking system on a large scale, and now even conduct fiscal policy, all without Congressional approval.  Our textbooks speak of the Fed as a lender of last resort but very often it is the lender of first resort too.

Now, this might be right.  It's possible that we just don't have any choice.  But at the risk of a bit of incoherence, let me offer an alternative.

It's true that the Fed is the agency with the brute force to make things happen in an emergency.  But I'm not sure that's the relevant thing to think about.  What we want is some kind of body that works to prevent emergencies.  That requires credibility and influence, but it doesn't necessarily require a trillion dollar balance sheet.

I guess the model I have in mind here is the Congressional Budget Office.  The CBO is unknown to most people, but despite its small size and low public profile it has a remarkable amount of power.  This power comes from two sources.  First, it has institutional credibility.  I honestly don't know how it's managed to keep this credibility in the face of what must be enormous partisan pressure, but it has.  It's widely considered an honest broker and its budget estimates are taken seriously by everyone.

Second, although the CBO itself doesn't have a huge staff or control of a huge budget, Congress has agreed to abide by its cost estimates for legislative programs.  This means that CBO analysts have considerable indirect control over a lot of money.  And in Washington, money equals power.

So my question is: could we create an agency like the CBO, but charged with monitoring systemic risk in the financial system?  It would have to be nonpartisan and independent.  It would need to have risk management baked into its DNA as its primary mission, rather than being #7 on a list of ten goals — with everyone knowing that only the top three get any real attention anyway.  Its director would need the kind of credibility that makes people listen when he warns that other agencies are allowing too much giddiness on Wall Street.  And, finally, it would need the right mix of authority, either direct or indirect, that's enough to force people to take it seriously when its mere credibility isn't quite enough.

But here's the incoherent part: I'm not quite sure how you'd construct such an agency or what authority might be sufficient for it to do its job without getting it hopelessly at odds with other regulatory agencies.  One way or another, though, I feel that giving this mission to the Fed is simply a waste of time.  Right now, virtually every impulse — both at the Fed and in the private sector — works in the direction of either ignoring credit bubbles or actively cheering them on.  If we're going to put a brake on this, we need to think about institutional priorities and balances of power, and figure out what it would take to get systemic risk established as a bureaucratic turf with a built-in constituency dedicated to protecting it over the long term.

Smart people, help me out.  What should this look like?  Or is it foolish to think this is even possible?

It's been a rough week for healthcare reform, but Ezra Klein points to a recent Wall Street Journal poll that has a smidgen of good news:

Luckily, there are some elements of health reform that meet with overwhelming public approval. Among them is the public plan. According to the poll, 76 percent of Americans believe it's either "extremely important" or "quite important" to "give people a choice of both a public plan administered by the federal government and a private plan for their health insurance."

Hmmm.  A crisp new twenty dollar bill says this poll result is meaningless.  My guess is that (a) the vast majority of these respondents have no real idea what this even means and (b) would change their mind in an eyeblink if they saw even a single 30-second attack ad on the subject.

On the other hand, maybe I'm just cranky this morning.  In fact, I am cranky this morning.  But twenty bucks still says I'm right about this.

Khamenei's Sermon

Iran's supreme leader, Ayatollah Ali Khamenei, gave his long awaited sermon today, and it wasn't pretty:

Addressing huge crowds at Tehran University, the ayatollah voiced support for President Mahmoud Ahmadinejad, saying the president's views on foreign affairs and social issues were close to his.

....Responding to allegations of electoral fraud, the ayatollah insisted the Islamic Republic would not cheat. "There is 11 million votes difference," the ayatollah said. "How can one rig 11 million votes?"

....He said the election was a "political earthquake" for Iran's enemies — singling out Britain as "the most evil of them" — whom he accused of trying to foment unrest in the country.

"Some of our enemies in different parts of the world intended to depict this absolute victory, this definitive victory, as a doubtful victory," the Supreme Leader said.

Until now, there was some thought that Khamenei might back down and look for a compromise solution of some kind.  Doesn't look that way now.  On the bright side, though, Obama's careful reaction seems to have shifted the mantle of Great Satan to a different country for at least a few days.

Steve Aquino has more here.

Jim Pinkerton and I were together again for another Bloggingheads.tv diavlog. We mainly agreed on Iran, with Jim sort of concurring with my assessment that John McCain is "bonkers" for pushing Barack Obama to embrace the Iranian opposition. Nothing would hurt the opposition movement's credibility within Iran--where it counts most--than a big wet-kiss from Washington. We then moved on to health care, with Jim suggesting both Ds and Rs are wrong to preach austerity to the American public when it comes to health care dollars. Perhaps, but I challenged his solution: freeing the health care industry from government regs so it can produce the sort of products and services that can be exported abroad a la McDonald's. Finally, our big topic: whether the remaking of the cheesy 1984 anti-commie movie Red Dawn--high school kids in Colorado beat back Russian and Chinese invaders--is of any cultural significance. Jim: yes and hooray! Me: no and yawn.

Following on my previous post about Grand Ayatollah Hossein Ali Montazeri's letter to the Iranian people in support of the protesters now crowding the streets of Tehran, Bloomberg has an interesting piece on the tensions between the "supreme leader" of Iran's clerical establishment, Ayatollah Ali Khameini, and Iran's former president, Akbar Hashemi Rafsanjani. Though neither man stood for election, the resulting furor over the results has increasingly pitted them against one another as the battle has been joined for the future of Iran. And it is tensions like these, between leaders of the ruling class that fomented the 1979 Revolution, that are now undermining the government's ability to control events. "The divisions within the ruling elite in Iran are making it very hard for the authorities to crack down decisively," Iran expert Mohammed-Reza Djalili told Bloomberg. "The divisions are getting deeper and deeper." 

Meanwhile, at his special Friday sermon in Tehran (see Mother Jones' Kevin Drum and Steve Aquino for more), Khameini declared an "absolute victory" for Ahmadinejad, telling worshippers that Iran's president won by 11 million votes. A decision on a recount is due to be reached on Sunday, reports The National. It's unclear what impact Khameini's statement might have on the opposition, but massive protests are again being planned for this weekend.

More on Khameini's sermon from NPR:

"If the difference was 100,000 or 500,000 or 1 million, well, one may say fraud could have happened. But how can one rig 11 million votes?" he said during Friday prayers at Tehran University, adding that the "legal structures and electoral regulations of this country do not allow vote rigging."

"Some of our enemies in different parts of the world intended to depict this absolute victory, this definitive victory, as a doubtful victory," he said, repeating a claim that foreign media and governments – specifically in the U.S. and Great Britain – were to blame for the week of unrest following the vote.

"It is your victory. They cannot manipulate it," he said.

Khamenei also issued a thinly-veiled threat, saying that leaders "must be determined at the ballot box ... not in the streets."

"If there is any bloodshed, leaders of the protests will be held directly responsible," he said.

Lots of Blue Marble-ish news afoot on this Friday. Here's a sampling:

Side deals! Side deals! Who wants a side deal?: Word has it that Waxman and Markey are desperately chasing after midwestern Dem support for their climate bill. But it doesn't have to be that way, says Kevin Drum.

Photo of the Day: We're still at war.

Most CO2 ever: Well, practically. Earth has reached its highest concentration in 2.1 million years. So that means people will probably pay attention to Times Square's new 70-foot greenhouse gas ticker, right? Not so much.

Excuse me, waiter, there's a cow in my KFC: Since when is beef a spice?

In his first public sermon since last Friday's presidential election, Iran's supreme leader, Ayatollah Ali Khamenei, issued a stark warning to the opposition leaders who are disputing Mahmoud Ahmadinejad's re-election: halt the protests or be "responsible for bloodshed and chaos."

Khamenei charged that the public dissent that has swept Tehran this week "questions the principles of election and democracy." Opposition leaders and their supporters reportedly did not attend, and have yet to respond.

In the last few days, supporters of Mir-Hossein Mousavi and other reformers had hoped that the outpouring of discontent across Iran might cause the Guardian Council and other authorities to take a more conciliatory stance. Instead, the ayatollah threatened a violent crackdown, leaving the opposition very little room to maneuver.  Following the sermon, Wayne White, a former State Department intelligence analyst with expertise on Iran, sent out an email to colleagues concluding that the sermon does not bode well for the reformers:

Those who have talked of the regime's need for compromise, Khamenei's fears and hesitation, etc. urgently need to reconsider seriously the overall situation.

Khamenei's sermon today appeared to have closed the book on substantial concessions to the opposition and its ardent supporters on the streets. Although the Guardian Council's review might still be underway technically, Khamenei reiterated flatly that Ahmadinejad was and remains the winner and warned protesters to get off the streets or face and be responsible for the consequences. In fact, Khamenei rendered an accurate evaluation of the relatively insignificant investigation and partial recount supposedly underway: the margin of victory the regime has accorded Ahmadinejad (albeit falsely and shamelessly) was so wide that the collection of individual complaints involved in the recount probably could not erase Ahmadinejad's victory (even if most all of the complaints were ruled valid by a biased Guardian Council led by a notorious hardline cleric who probably was party to the election theft scheme in the first place).

The conservative, anti-reform establishment's patience would appear to have worn out at this point, and now we can expect a ramped-up crackdown on demonstrations and other signs of dissent with most of the media previously able to record such ugly, brutish behavior now largely swept conveniently away and much of the country's prominent reform-oriented leadership behind bars. Many accurate reports on the unfortunate events to come doubtless will get out to the world, but probably only the proverbial tip of the iceberg regarding the totality of the violence that may well be pending. As has been the case already (especially away from the main demonstrations and in other cities beyond Tehran less generally accessable to the media), the crackdown will likely become gradually more severe and more costly in terms of casualties, with the regime hoping that such a paced escalation can drive the protests to ground without one huge confrontation.

A report this morning by email or some such routing from Iran read out on, I believe, CNN came from a hospital (specific location unknown to me) speaking of numerous civilian casualties flowing in—both dead and badly wounded—with authorities arriving to prevent any personal data from being recorded and taking away the arrivals. Such is being carried out by the same ruthless, fanatical elements that dragged an ailing Ebrahim Yazdi out of a hospital intensive care unit on Wednesday. I very much fear that this is the future.

I would like nothing more than to post analysis that would convey more hope and less in the way of dire warnings, but, with considerable sadness, the above is what I truly believe to be yet another emerging bottom line that will increasingly define the remainder of this crisis. Over the long-term, especially with the steady mounting of demographics largely against this now more bare-knuckled, abusive authoritarian order, the days of the regime are numbered, but the robust, admirable challenge mounted in the course of this crisis may well be unable to overcome such violent countermeasures this time around. [Emphasis added.]

In his sermon, the ayatollah made a point of calling Ahmadinejad's re-election an "epic moment that became a historic moment." If White is correct, the aftermath of the election will indeed be "epic" and "historic"—but not for the reasons that the ayatollah believes.

Read Kevin Drum's take here.

Happy Friday to the cats and the frog. Three quick MoJo must reads before you glue yourself to today's Iran coverage:

1) Sotomayor With A Starr

Conservative legal stalwart Kenneth Starr has endorsed Obama's Supreme Court pick. David Corn broke the news, writing: "He noted that he has not written any official endorsement letter for Sotomayor but that no one had asked him to do so—suggesting he would if requested." How will Rush, Newt, and other 4-letter-word Republicans take it? Read more.

2) John Ensign's Interns Pack It In

Now that anti-gay marriage Sen. John Ensign has admitted his own opposite-marriage problem with The Ladies, will we get an Ensign resign? Note to Ensign interns: MoJo's hiring! Join our scandal-free DC bureau and investigate your ex-boss and his ilk for a living. Read more.

3) Did Lead-Laced Sludge Taint Michelle Obama's Garden?

It's not easy being green. After the National Park Service disclosed that the White House plot was a wee bit toxic, lead-based paint was fingered as the culprit. But what if the real plot problem is the Clinton-era "very clean poo" once used to fertilize the White House South Lawn? Read more.

Plus, keep an ear out later today for David and Kevin's week-in-review podcast.

Last fall, John McCain hailed Sarah Palin as "experienced" and "talented." He declared, "she knows how to lead," and he predicted that "she's really going to have a remarkable impact on the American people." Nowadays, McCain doesn't follow her on Twitter.

Palin, as of Friday morning, had 34,558 followers of her feed on Twitter. The Arizona senator is not among them.

Happy Friday to Kevin's cats and the MoJo frog. Three quick MoJo must reads before you glue yourself to today's Iran coverage:

1) Sotomayor With A Starr

Conservative legal stalwart Kenneth Starr has endorsed Obama's Supreme Court pick. David Corn broke the news, writing: "He noted that he has not written any official endorsement letter for Sotomayor but that no one had asked him to do so—suggesting he would if requested." How will Rush, Newt, and other 4-letter-word Republicans take it? Read more.

2) John Ensign's Interns Pack It In

Now that anti-gay marriage Sen. John Ensign has admitted to his own opposite-marriage problem with The Ladies, will we get an Ensign resign? Note to Ensign interns: MoJo's hiring! Join our scandal-free DC bureau and investigate your ex-boss and his ilk for a living. Read more.

3) Did Lead-Laced Sludge Taint Michelle Obama's Garden?

It's not easy being green. After the National Park Service disclosed that the White House plot was a wee bit toxic, lead-based paint was fingered as the culprit. But what if the real plot problem is the Clinton-era "very clean poo" once used to fertilize the White House South Lawn? Read more.

Plus, keep an ear out later today for David and Kevin's week-in-review podcast.