Kevin Drum - March 2010

John Ensign Soldiers On

| Thu Mar. 11, 2010 1:43 PM EST

Democrats have suffered through their share of bad behavior lately, but honestly, none of it compares to the travails of Republican Sen. John Ensign. I mean, the guy had an affair with his top aide's wife, paid out hush money in a way plainly intended to skirt IRS reporting rules, and then worked illegally to get his ex-aide some consulting income doing congressional lobbying. “Senator Ensign has stated clearly, he has not violated any law or Senate ethics rule,” says Ensign's flack, but Ensign can say it as clearly as he wants. The evidence says otherwise.

Today, the New York Times got hold of some emails suggesting pretty clearly that Ensign, who was "a bit rattled" according to one of the messages, intervened with a guy named Bob Andrews, who was trying to get help with some energy projects in Nevada:

According to the documents, Mr. Ensign forwarded the note about the company’s business plans to Mr. Hampton with a message of his own saying: “I think you have played golf with him. This is who I met with.”

That led to a series of meetings between Mr. Hampton and Mr. Andrews about consulting work. “It was my understanding he was in the lobbying business,” Mr. Andrews said of Mr. Hampton. “Being able to lobby our Congressional and senatorial lawmakers was certainly something we were exploring.”

A typical excerpt from one of Hampton's emails to Ensign is below. How this guy manages to stay in office mystifies me. I guess he must have taken lessons from David Vitter and Mark Sanford.

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Climate Change's PR Disaster

| Thu Mar. 11, 2010 1:12 PM EST

The chart below, from Gallup, shows that public recognition of the seriousness of global warming has taken a steep hit over the past two years. This comes via Aaron Wiener, who believes the most obvious explanation for the shift is the growing politicization of climate change. "What was once a broad moral and scientific issue is now a centerpiece of the Democrats’ legislative agenda. The percentage of Americans expressing a belief in man-made climate change now correlates loosely with the level of support for the president, while the percentage expressing skepticism is in line with opposition to Democrats in Washington."

True enough, though I'd say that the recent failure of Copenhagen and the concerted disinformation campaign surrounding "Climategate" probably played a role in the latest numbers. Whatever the reason, though, the effects have been devastating. It's one thing to acknowledge climate change but to argue over its likely impact. That would lead politicians to accept cheap, small-bore measure to address warming but to reject bigger, more expensive ones.

But that's not what's happened. The Republican Party has largely decided that climate change simply doesn't exist. It's a hoax. And that leads them to oppose everything, even programs that have light footprints, don't cost a lot of money, and don't require massive regulation. After all, why should they support them if the problem they address literally doesn't exist?

This is why so many environmentalists have switched gears recently, suggesting that climate change action should be disguised as energy research, national security programs, or competition with China for market share in windmills and solar panels. And maybe that will work for a while. But just saying something doesn't exist doesn't make it so. Eventually even the GOP is going to have to acknowledge this.

Healthcare Looking Up

| Wed Mar. 10, 2010 9:23 PM EST

Guess what? Healthcare reform is getting more popular. Just a little more popular, mind you, but every little bit counts when it comes to wavering congress critters.

What's really important here, though, isn't the magnitude of the change, but just the fact that the tide is shifting. This might have something to do with the recent summit and some of Obama's more aggressive speechmaking recently, but my guess is that it mostly has to do with the fact that there's an actual bill on the table now; Democrats have something concrete to sell; Republican obstructionism has been a little too screechy for a lot of independents lately; and, most important, it looks like we're actually in the home stretch.

That, I think, concentrates the mind wonderfully. The long, dreary dog days of the legislative process are over, and now we're in the final few seconds of the game. It's exciting! And it makes some of the concrete measures in the bill just a little more.....well, concrete. It's still gonna be a close one, though.

Summing Up Paul Ryan

| Wed Mar. 10, 2010 6:06 PM EST

I'd just like to quickly sum up what we now know about conservative Rep. Paul Ryan's "Roadmap for America’s Future":

And remember, this comes from the guy who's pretty much the best the GOP has to offer. Pretty impressive, no?

The Problem With Credit Default Swaps

| Wed Mar. 10, 2010 5:42 PM EST

Felix Salmon, who has been a one-man truth squad lately when it comes to credit default swaps, lauds Tuesday's CDS speech by CFTC head Gary Gensler as "by far the best thing written on the subject to date. He's absolutely right about pretty much everything." Among other things, Gensler favors exchange trading for CDS, stronger regulation of all OTC derivatives so that CDS pathologies don't just move elsewhere, and much more restrictive rules on allowing banks to use CDS to meet regulatory capital requirements. All good stuff.

But CDS are basically insurance policies on bonds or other financial instruments, and Gensler thinks that can be a problem too:

At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company’s prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.

Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.” The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be “null and void to all intents and purposes.”

For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest.

Interesting! And it's a pretty good analogy that makes the underlying conflict understandable. However, although Gensler acknowledges the problem, he misses the aspect of this that's come to bother me the most: the effect this has on market stability.

Here's the problem: if you own a corporate bond of some kind, but don't want to run even the small risk of default that it carries, you can buy a CDS on that bond. This is basically fine. As Gensler points out, it does have the downside of making bond buyers less careful about due diligence, but that's probably manageable. (And Gensler has some ideas about how to manage it.) But what happens when lots of other people also buy a CDS on that bond? Obviously, you have the problem Gensler mentions, namely that under some circumstances these CDS owners might have a vested interest in helping the bond issuer fail — the same way you might want your house to catch on fire if it's insured for more than it's worth. But you also have another problem: if the bond issuer does default, and there are a hundred speculators who own CDS protection on one of its bond, you've gone from, say, a $10 million event to a $1 billion event. Basically, when things go bad — and eventually they always do — widespread CDS protection can cause things to spiral far more out of control than they would otherwise.

And what's the upside of allowing this? The argument I hear most often is that broad market trading of CDS provides an efficient price discovery mechanism for the underlying securities. Moody's may rate that bond AA, but the CDS market will tell you what traders really think.

I guess I have two questions about that. First, does it really work? Are CDS marks really reliable indicators of creditworthiness? That's debatable. Second, even if they are, is this a big enough benefit to make the instability risk worth it?

I'm no CDS expert, but I wish Gensler had at least addressed this problem. Maybe there's a simple solution. Or maybe the danger is a lot less than I think it is. It's not clear, for example, that CDS instability was a big problem in the 2008 crash. AIG was a big problem, but that's because they sold too much CDS without proper risk management or enough capital to back it up, not because speculators were loading up on specific issues.

So: Does widespread use of CDS make the financial system inherently less stable? Or is this just another of the endless slanders that CDS has to endure? Conversation on this topic welcome. 

Swan Song for the Filibuster?

| Wed Mar. 10, 2010 3:00 PM EST

Harry Reid on the filibuster:

The filibuster has been abused. I believe that the Senate should be different than the House and will continue to be different than the House. But we're going to take a look at the filibuster. Next Congress, we're going to take a look at it.

Sam Stein explains:

Reid's embrace of filibuster reform comes after he previously threw cold water on the likelihood of getting the rules changed. His reference to the "next Congress" stands out. To change Senate rules in the middle of the session requires 67 votes, which Democrats clearly don't have. But changing the rules at the beginning of the 112th Congress will require the chair to declare the Senate is in a new session and can legally draft new rules. That ruling would be made by Vice President Joe Biden, who has spoken out against the current abuse of the filibuster. The ruling can be appealed, but that appeal can be defeated with a simple majority vote.

Of course, setting this precedent means that Republicans can change the filibuster rules too, the next time they have both a Senate majority and a president in the White House. Are 51 Dems willing to take that chance? Does Harry Reid have the stones to find out? Is Barack Obama fed up enough that he'll give Joe Biden the go-ahead? Tune in next January!

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Defending Public Schools

| Wed Mar. 10, 2010 2:29 PM EST

Erik Kain writes that a blog post from conservative Austin Bramwell about the benefits of public schools has "pulled me back from the brink of school choice advocacy and the adoption of pro-voucher views." Sounds interesting! Let's take a look at this conservative defense of the public school system:

As every schoolchild likes to say, America is a free country. That is, parents have the right to settle in whatever school district they choose. (They also have a constitutional right to send their children to private school if they wish.) Predictably, therefore, those families willing to pay the most for a good education gravitate to the best schools, the “price” of which is reflected in the cost of real estate and local property taxes, while the families that care the least about education gravitate to the worst. Meanwhile, the extent to which parents value education itself enhances (or degrades) school quality, as schools are always more likely to thrive when they can attract the families with the highest social capital. Thus, good schools and “good” (that is, education-valuing) families cluster together. So long as Americans enjoy freedom of movement, supply and demand will always tend to produce a huge gap between successful and failing schools. The outcome is basically fair and not altogether inefficient.

Holy cats. That's it? This has pretty much the opposite effect on me: if this is the best defense of public schools we can come up with, then sign me up for vouchers. Aside from the obvious question of whether entire classes of children should be doomed to a lousy education based on where their parent choose to live, there's the equally obvious problem that lots of non-wealthy parents flatly can't afford to move to neighborhoods with good schools no matter how much they value education. Luckily a couple of commenters make note of this, and Bramwell responds:

You are troubled by the cases of people who value education highly but are still trapped in bad schools. I am troubled by these cases too, though I suspect that the number is smaller than imagined.

To reduce the number of such cases, how about this: since reforming schools is so inherently difficult, we should instead try to make housing more affordable even in the best school districts. I would consider first reforming zoning laws that restrict density and discourage/prohibit rental housing.

Sounds great! Let's just build lots of affordable housing in nice, upscale suburban neighborhoods. I don't imagine there will be any political problems associated with that. Should be a piece of cake.

Or, on a more serious note, we could fund poverty and educational interventions with proven track records, allow schools more leeway to deal with incorrigible students, encourage our best teachers to work in our most challenging schools and allow principals to fire the ones who fail, promote experimentation via charter schools, and make sure every school is adequately funded. Feel free to add your own favorite ideas to this list. It's a little messy and it's no silver bullet — it's a long, hard slog, if you will — but these are the sorts of things that will eventually make a difference. Best of all, some of it is even politically feasible.

Trade vs. Healthcare

| Wed Mar. 10, 2010 1:50 PM EST

 James Pethokoukis says that although Barack Obama may be temperamentally in favor of liberalized trade policy, he's not actually doing anything about it:

The wonks aren’t driving U.S trade policy in the Obama administration. The political team is. Its priority is passing healthcare reform. To pass healthcare reform, Obama needs his core union support. And a push for new trade agreements would alienate Big Labor.

Hey, I know how to fix that! Pass the healthcare bill! Then Obama will be free to do whatever he wants on trade.

(Though, let's face it: with unemployment at 10% there's not going to be much stomach for an aggressive push on trade no matter what happens to healthcare. So this probably isn't a very urgent issue anyway.)

Overdraft Fees: Mend 'Em, Don't End 'Em

| Wed Mar. 10, 2010 1:37 PM EST

More noodling this morning. I've mostly been sleeping since I wrote last night about Bank of America's decision to end overdraft protection on its debit cards, but I've also been thinking about it a bit more. And I remain.....skeptical.

First things first: I've been slagging banks for years about their overdraft fees, and now that BofA has boldly eliminated overdraft protection entirely I'm about to slag them for that. Am I just unappeasable?

I don't think so. Here's the thing: overdraft programs themselves have never been the problem. They're a genuine customer convenience. The problem has been the massive abuse of overdraft programs by big banks: high fees, multiple fees per day, reordering of fees, advertising campaigns that encourage customers to think of overdraft protection as a virtual line of credit, etc. So when a BofA executive says, “What our customers kept telling me is ‘just don’t let me spend money that I don’t have,’ ” I don't believe them. I don't doubt that some customers are saying that, but it's vanishingly unlikely that even a majority want overdraft protection to end completely, let alone most of them. What their customers want is fairer overdraft protection, and BofA's choices weren't limited to either having overdraft fees or eliminating them entirely. There are lots of good intermediate measures. For example:

  • The law now says that customers have to opt in to overdraft protection. BofA could have simply implemented this.
  • They could give customers the option of opting for overdraft protection only for purchases over a certain amount. This way your major purchases would always go through but you wouldn't accidentally end up paying $40 for a cup of coffee.
  • They could simply reduce overdraft fees from their current ridiculous level to, say, $5 with a limit of one fee per day. This would still be profitable, would be a genuine customer service, and wouldn't be transparently exploitive.
  • Even better: they could implement a sliding scale of overdraft fees: say, $2 for purchases up to $20, $5 up to $100, etc.
  • Even better still: they could simply treat overdrafts as high-interest loans. Charge a small administrative fee (a dollar or two) plus 30% interest until the overdraft is paid off.

But BofA didn't do any of these things.1 They just eliminated overdraft protection entirely even though many of their customers would probably benefit from it. Why?

Well, call me suspicious, but I can't help but think that they're hoping for a backlash of some kind. I honestly don't know what they might have in mind, but it just doesn't make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn't smell right here.

1The best alternative, of course, would be for consumers to be asked at the point of purchase if they want overdraft protection to kick in. Unfortunately, current technology doesn't allow that. The card swipers in most retail outlets just don't have the capability to do this.

Comparative Effectiveness

| Wed Mar. 10, 2010 1:00 PM EST

In the LA Times today, researchers Michael Hochman and Danny McCormick explain the sorry current state of comparative medical research. On a broad range of topics, we simply don't know which treatments work best:

In this week's issue of the Journal of the American Medical Assn., we report the results of a study that may help explain why we don't. In the study, we analyzed 328 medication studies recently published in six top medical journals and found that just 32% were aimed at determining which available treatment is best. The rest were either aimed at bringing a new therapy to market or simply compared a medication with a placebo. Whether the therapy was better or worse than other treatments was simply not addressed.

....Why [] did only a third of medication studies focus on helping doctors use existing therapies more effectively? The answer lies in the fact that pharmaceutical companies fund nearly half of all medication research, including the lion's share of large clinical trials. For obvious reasons, commercially funded research is primarily geared toward the development of new and marketable medications and technologies. Once these products have won approval for clinical use, companies no longer have incentives to study exactly how and when they should be used.

At the risk of joining the forces of socialism and death panelism, this is why the federal government should be funding a lot more of these studies. The free market won't do it — in fact, in many cases the free market actively resists studies like this — and our lives are shorter and poorer for it. Our lives are, quite possibly, also more expensive for it, since the most effective treatments aren't always the most expensive ones.

And you know what would help fund more of these studies? The Democratic healthcare bill! Wouldn't it be great if that passed?