Speaking of bank regulation, here's point #2 (out of five) previewing the administration's plans for regulatory reform from today's Washington Post op-ed by Tim Geithner and Larry Summers:

Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.

Italics mine.  As far as the mortgage market goes, it strikes me that this plan has two potential targets.  The first is the actual originator of the mortgage.  Lots and lots of crappy mortgages got written because the originators didn't really care how good they were.  They were just going to sell them off within 30 days anyway, so what did it matter if the borrowers were going to default two years from now?  Requiring these folks to keep a piece of their mortgage business on their own books might indeed be helpful, but it doesn't sound like this is the target Geithner and Summers have in mind.  (Technically, I'm also not quite sure how you'd make this work.  But leave that aside for now.)

The second target, and the one that G&S do seem to be talking about, isn't the orginator of the mortgage, but the bank that buys up all the mortgages and originates the mortgage-backed security.  They want these guys to be forced to keep a piece of the security on their own books instead of selling the entire thing to third parties.  The idea is that if they have to eat their own dog food, that should make them a little more careful about quality control.

But the devil is really in the details here, and there are at least two big problems.  First, most MBS originators did keep pieces of their own securities on their books.  It didn't do any good because they were deluded about the quality of the stuff they kept.  Second, even if banks are required to keep pieces of their own MBS that they otherwise wouldn't, what's to stop them from hedging away the risk?  You can't really forbid a bank from buying hedging instruments, and the rocket scientists (once they've dusted themselves off and come out from under their desks, which shouldn't take more than a year or two) will have no trouble creating a blizzard of derivatives that appear to take all the risk out of the snippets of MBS that banks are required to hold onto.  And once they've done that, you're just a tiny jump away from the glory days of 2005.

This, of course, is the basic problem with all regulatory reform: whether or not it works is enormously dependent on minuscule details written into 1000-pages legislative tomes.  Obama's team has apparently already decided that they need to take a pretty cautious approach to this, and once it gets through the congressional sausage factory we'll be lucky if anything serious is left at all.  This is, needless to say, a process that deserves a ton of attention from a watchful public, but how likely is that?  After all, I hear that Jon and Kate might be splitting up.

Watching the Watchmen

Via Felix Salmon, John Gapper complains in the Financial Times today that the Obama administration is backing down on regulatory consolidation:

All this is an interesting contrast to the consolidation of regulation by the UK government when it created the Financial Services Authority in 2000 and swept a bunch of self-regulatory organisations and the banking supervision arm of the Bank of England into a single financial regulator.

True, this did not help the UK to regulate large banks any better than the US, given the scale of the financial crisis. On the other hand, fragmentation of regulation caused its own particular difficulties in the US, with financial institutions picking and choosing among regulators.

The US administration has clearly decided that it simply cannot get any large-scale consolidation of regulation through Congress, given the vested interests involved. But that makes its response to the financial crisis seem more like a whimper than a bang.

Britain is not the United States, but there are enough similarities in our financial sectors to make comparisons instructive.  And the bottom line here, as Gapper admits, is that Britain had consolidated regulation, we had fragmented regulation, and it made no difference at all in the outcome.  If anything, in fact, Britain was harder hit than we were.

I'm not opposed to consolidation, but honestly, if you have the same rules and the same kind of people enforcing the rules, and the only thing that changes is the reporting structure — well, that just doesn't change much.  What's needed isn't consolidation per se, but a structure that's politically more likely to point out credit bubbles when they're happening and more likely to have the credibility to make people listen to them when they issue their dire warnings.  There's no special reason why a consolidated regulatory structure would be better at that than what we have now.  In fact, by hiding disagreement within the bowels of a huge bureaucracy, it might even be worse.

(That said, forum shopping among regulators eager to offer lax enforcement in return for increased business does need to be stopped.  But that can be accomplished with a much narrower set of reforms.  You don't have to consolidate everything into one super-regulator to put a halt to this.)

Gapper's concluding paragraph, however, is discouraging.  We should all wait to see the final proposals before passing judgment, but it seems pretty likely that he's right.  Even now, the financial industry pretty much owns Congress, and the likelihood that they'll allow financial reform to go too far seems slim.  Kinda makes you wonder just what they'd have to do to lose their grip on power.

Today, Public Employees for Environmental Responsiblity, the eco watchdog group, came out swinging against President Obama's pick to lead the U.S. Fish & Wildlife Service. For the past dozen years, Sam Hamilton has overseen the 10-state FWS Southeastern Region, where numerous endangered species battles are being fought between environentalists and developers in fast growing states such as Florida. PEER is unimpressed with how Hamilton handled those fights, noting that he "did not protect science from political interference or scientists from retaliation."

As a case in point, PEER notes the decision of Hamilton's team to green-light suburban sprawl in shrinking Florida panther habitat. The decision falsely inflated the size and viability of the panther population, to the point that Hamilton's region was rebuked by none other than Steve Williams, the FWS director under George W. Bush. Even so, Hamilton took no disciplinary action against any of the managers involved and "several of the scientific deficiencies persist today," PEER says.

Apparently, this was not an isolated incident. In a 2005 survey of FWS scientists working in Hamilton's region, 49 percent cited cases where "commercial interests have inappropriately induced the reversal or withdraw of scientific conclusions," 46 percent said they'd been "directed for non-scientific reasons . . .to refrain from making findings that are protective of species," and 36 percent feared retailiation for raising concerns about species and habitats. Most damming, less than a quarter of respondents felt Hamilton would "stand up for scientific staff or supervisors who take controversial stands."

In short, Hamilton seems at best a pliable bureaucrat. Maybe that makes him a convienent pick for the Obama administration, but he doesn't seem likely to reverse Bush's environmental legacy any more than he's asked to.

Iran's Opposition

So what's going to happen in Iran?  I myself have no idea, but Near East expert Wayne White tells David Corn that the jig might already be up:

In the face of harsh repression like this, there may only be one real option for the opposition to effect meaningful short-term change: get rough or stand down; confront a coup with a popular countercoup, or wait and hope for better days. I know it is vastly easier for me to sit back here in the States and comment that either the opposition organizes mass street action in which it is willing to inflict and take substantial casualties or it almost inevitably fails in its clearest near-term objective, but that probably is, I fear, the bottom line in this particular instance.

....I was watching the iPod bit last night in which, what, less than a dozen police on motorcycles with nothing more than batons took on a dense crowd of a thousand or more at close quarters.  Instead of largely heading for the hills, such a crowd could easily have closed in behind the police and taken them all down, not just one.  The tipping point in many of these situations is when the police become either as fearful as the demonstrators, more so, or even grow thoroughly sickened by the violence they have been ordered to carry out.  That crucial moment is far less likely to come if demonstrators stand down or shrink back in the face of the mere threat of violence.

On the other hand, upwards of half a million Mousavi supporter marched silently through Tehran on Monday.  It's not over yet.

I speculated a few minutes ago that the momentum might be shifting in Iran. Josh Marshall is thinking along the same lines:

On the face of it, Khamenei could call for a review and then decide that it all checks out and that's the end of it. But it's my experience that that's not how these things play out. When regimes ride these crises out successfully they almost always do so with a united phalanx. You simply do not grant the premise of the critics. Force, much as we like to think otherwise, is often quite effective. (See Tiananmen Square.) Once you do, once you legitimize the premise of the protests, which can quickly shift the momentum of the drama, it's a very slippery slope for the regime.

As Josh emphasizes in his full post, the next 24 hours are crucial. Ahmadinejad has already delayed a visit to Russia—another sign that he might be vulnerable.

The rallies in Iran are very large. Check out this photo from twitter (via the Lede):

CNN has new video from Iran:

The Healthcare Two-Step

Ezra Klein says that Tyler Cowen has a point when he argues that we're running the risk of enacting a healthcare bill without effective cost controls:

But it is baffling to watch him blame this on the Obama administration. As he himself says, the White House is firmly behind the most promising proposals on cost....What stands in the White House's way is Congress. And, more often than not, it's the Republicans in Congress. Liberals, after all, will sacrifice almost anything to radically expand coverage. This leaves cost-conscious conservative facing a bit of a dilemma. They can attack the most vulnerable parts of the policy — the cost controls — in the hopes of bringing the whole thing down. The downside to that, of course, is that liberals simply jettison cost-controls to protect the coverage expansion. For a fiscal conservative, this should be considered the worst of all worlds.

I don't know about Tyler specifically, but this is par for the course for conservatives in general, who basically have two critiques of national healthcare plans.  First, they yell and scream that we're busting the budget if cost controls aren't firm enough.  At this rate, healthcare will be 99% of the federal budget by 2050!  But then, if you concede the point, they yell and scream that your cost controls are rationing medical care.  Do you want to stand in line for months just to get a flu shot, the way they do in all those European hellholes!?

Conservatives can bounce back and forth between these mutually hypocritical positions pretty much forever.  Why?  Because they're effective.  The first makes earnest liberals feel guilty because we basically agree as a policy matter.  The second is the greatest public argument against national healthcare ever invented, regardless of whether or not it's actually true.  The combination of the two has won the day for conservatives for decades.  Why give up a winning strategy now?

Why Steal the Election?

Here's a quick question I haven't really seen anyone address regarding the Iranian election.  Assuming that the conventional wisdom is correct and it was stolen, why did they do it?  If Ahmadinejad stole it on his own, that's easily explainable as a pure coup/power play.  But if the clerical regime went along — which seems likely — what was it they were afraid of?  Mousavi was hardly the first reformist to run for president, after all, and he wouldn't have been the first to win.  What, precisely, was the threat that Mousavi presented to them?

The Latest From Iran

In the wake of continuing mass protests over Friday's elections that many reasonable people have concluded were stolen, the resolve of the Iranian powers that be seems to be faltering. Reversing his earlier proclamations calling President Mahmoud Ahmadinejad's win a "divine assessment," Ayatollah Ali Khamenei, Iran's supreme leader, has called for an investigation into the results. PressTV, the Iranian state-run television network, is now covering the protests sympathetically. You may think that the call for an investigation is just a sop to protesters. But the change in state television coverage is certainly relevant. Via Laura Rozen, we hear this:

[The National Iranian American Council's] Trita Parsi told NPR's Washington affiliate Monday he thinks the momentum is starting to shift in favor of those contesting the elections results. Among the signs: the Guardian Council said it would delay certification for ten days, and Khamenei's order for an examination of the elections results seeming to relax police crackdown on demonstrators that had been occurring. The ultimate outcome is uncertain at this point, Parsi said.

At this stage, uncertainty is good news. It's definitely better than the certainty of an Ahmadinejad re-election. David Corn worries that Iran may only have half an opposition. If that's right, we're about to see how far half an opposition can go.

Today's photo is from Afghanistan.Soldiers navigate across a creek during a dismounted patrol in the Nerkh Valley, Afghanistan, June 4, 2009. The pictured soldiers are assigned to Battery B, 4th Battalion, 25th Field Artillery Regiment on Forward Operating Base Airborne. Photo credit: Staff Sgt. Richard Roman. (Photo courtesy army.mil).