Kevin Drum - March 2010

Payday Loans Are Thriving

| Tue Mar. 2, 2010 1:13 PM EST

The LA Times reports that at least one sector of the economy is thriving during the recession:

The payday loan industry has found a new and lucrative source of business: the unemployed.

....No job? No problem. A typical unemployed Californian receiving $300 a week in benefits can walk into one of hundreds of storefront operations statewide and walk out with $255 well before that government check arrives — for a $45 fee. Annualized, that's an interest rate of 459%....APRs in other states are even higher: nearly 782% in Wyoming and 870% in Maine.

But hey — couldn't that proposed Consumer Finance Protection Agency tighten up regulation of these guys? Yes indeed. Which is why lobbying activities have reached a fever pitch over the past year. Here is Keith Epstein in the Huffington Post:

Last year, as the U.S. House drew up a financial reform bill, some lawmakers who were courted by the companies and received campaign contributions from them helped crush amendments seeking to restrict payday practices, a review by the Huffington Post Investigative Fund has found.

The failed amendments would have capped payday interest rates — which reach triple digits on an annualized basis — and would have limited the number of loans a lender could make to a customer. Working largely behind the scenes, the industry ended up dividing the Democratic majority on the 71-member House Financial Services Committee...."The payday lenders have done a lot of work," House Financial Services Chairman Barney Frank (D-Mass.) said in an interview. "They've been very good at cultivating Democrats and minorities."

....Steven Schlein, a spokesman for an industry trade group, the Community Financial Services Association, said the industry's victory in the House against the proposed amendments was hardly final. "We were worried," said Schlein. "But we worked it hard. We have lobbyists, and they made their point. The banks worked it hard, too. But we're still in the middle of what could be a big fight."

....The activity in Congress led the industry to spend $6.1 million lobbying Washington last year, more than twice what it spent a year earlier....Meanwhile, an analysis of federal elections records shows payday-linked political contributions are streaming into the campaigns of members of Congress. At the current rate — $1.3 million since the start of last year — the amount of money spent before the 2010 midterm elections could easily surpass the industry's spending during the 2007-2008 presidential campaign season.

You can make up your own mind whether you approve of payday lending or not. The libertarian argument says that poor people deserve to have control over their lives just as much as rich people. Who are we to tell them they can't voluntarily take out a high-interest loan if they're in dire straits?

There's a rough sort of merit to this, but for my taste it's a little too redolant of Anatole France's famously acerbic observation that "The law, in its majesty, prohibits the rich as well as the poor from sleeping under bridges." In fact, common sense not only allows us to make distinctions, it demands it. And common sense suggests that abusive practices that target the most desperate and vulnerable ought to be regulated in ways that similar practices might not be in other circumstances. I don't know that I'd outlaw payday lending entirely, but would I cap interest rates and limit both the number of loans a single customer could take out as well as the total cumulative payout from a single loan? You betcha. Too bad I don't have $1.3 million to contribute to congressional reelection campaigns.

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Jim Bunning and the End of Outrage

| Tue Mar. 2, 2010 12:21 PM EST

What is there to say about the Jim Bunning situation? It just leaves me speechless. We have here a situation in which the Senate is being hijacked, literally, by the ravings of a single cranky old man against a bill that the entire Republican leadership had already agreed to. It's pure pique, and the Republican Party is unwilling to do anything about it.

A lot of liberals have taken lately to calling the GOP nihilistic, and I've never bought it. Opportunistic? Sure. Brutally partisan? Sure. Vacuously unwilling to address the country's most serious problems? Sure. Ideologically frozen in the past? Sure. But nihilistic? On the contrary, they seemed driven by a brute cunning that I might even approve of if it were my own side doing it.

But then along comes Bunning, ranting against a temporary extenstion to unemployment benefits just for the sake of.....well, no one quite knows. For the sake of whatever demons are running around in his head, I guess. It's the kind of situation where a non-nihilistic party would finally step up and agree to rein the guy in. But that hasn't happened. The Republican leadership has, by all accounts, done nothing, and the rest of the caucus — or enough of it, anyway — has actually rallied around Bunning. Rallied around him! They know perfectly well he's a crackpot; they know perfectly well this is a bipartisan bill designed to provide working-class relief in the middle of a massive recession. But for guys like Bob Corker and Jeff Sessions and John Kyl it's more important to demonstrate solidarity with a crackpot than it is to help a few people out. "I admire the courage of the junior senator from Kentucky," said John Cornyn, apparently speaking for many.

Nihilism is probably still the wrong word for this. But I guess it's close enough for government work. Whatever it is, it's a very deep rot in the soul of the Republican Party.

And why won't they pay a price for this? Well, partly because Democrats aren't willing to force them to. But it's also partly because of how this gets played to most of the public. One of the consequences of Bunning's objections is that Medicare payments for doctors went down 21% effective yesterday. And whose fault is this? According to the AMA, it's the fault of the "U.S. Senate." Here's their press release:

“The Senate had over a year to repeal the flawed formula that causes the annual payment cut and instead they abandoned America’s seniors, making them collateral damage to their procedural games,” said AMA President J. James Rohack, M.D.  “Physicians are outraged because the cut, combined with the continued instability in the system, will force them to make difficult practice changes including limiting the number of Medicare patients they can treat.”

Not "Jim Bunning." Not "the Republican Party." It's the fault of "the Senate." This sort of thing gets played out in headlines around the country, and the result is disgust with government and disgust with Congress. But it doesn't affect Republicans any more than Democrats until the headlines change.

Quote of the Day: Fox News

| Tue Mar. 2, 2010 11:25 AM EST

From Ezra Klein, on Fox News:

I continue to be amazed that lying brazenly to your audience is such a good business strategy.

Why, it's the oldest moneymaking strategy in the world. Fox News has just polished it up a bit for the 21st century. Details at the link.

The Slow Death of Climate Change Legislation

| Mon Mar. 1, 2010 4:42 PM EST

The climate change bill is yet another piece of legislation being watered down almost to nothingness in a vain attempt to gain two or three Republican votes. This weekend's new proposal from the Kerry-Graham-Lieberman team, for example, ditches economy-wide carbon pricing and instead would implement lobbyist-friendly caps on individual sectors. (It's lobbyist friendly because this makes it much easier for lobbyists for specific industries to pick off their little piece of the pie. Before long, the whole thing is gone.) And anyway, Sen. Dick Lugar says it's still no good: he could support carbon pricing "potentially at some point, but not at the moment." Aaron Wiener translates:

Which is Congress-speak for: Sure, I’d consider voting for climate legislation, but not until after the midterm elections, when the Democratic majority will be sufficiently reduced to make passing a comprehensive climate bill impossible. At which point I’ll oppose it because "it simply doesn’t have the votes."

Quote of the Day: The GOP on Healthcare Reform

| Mon Mar. 1, 2010 4:04 PM EST

Steve Benen highlights this excerpt from a Good Morning America segment about healthcare reform today:

Republicans want the bill to pass because of its unpopularity but, at the same time, they can't be complacent on health care overhaul, said Matthew Dowd, ABC News contributor and former adviser to President George W. Bush. [...]

"Republicans would like this bill to pass because they know how unpopular it is," Dowd said on "GMA."

Steve is skeptical. Me too. After all, if Republicans really want the bill to pass, they know what to do: just withdraw their filibuster and allow a vote. Democrats will do the rest.

But don't hold your breath.

How the Repo Market Ate Wall Street

| Mon Mar. 1, 2010 3:05 PM EST

Several years ago I remember reading about the repo market for the first time. I had never heard of it before not because it didn't exist, but because I'm not a financial guy and I had simply never paid much attention to how Wall Street banks fund themselves. To make a long story short, the repo market is basically a market for short-term loans. Really short term: it's an overnight market, and if you have, say, $100 billion in repo funding, you have to roll over that funding every single day. If you can't, you're in big trouble.

To a layman, that sounds crazy. Investment banks weren't just using the repo market to gain a bit of additional flexibility, they were using it as a significant part of their funding base. They were literally dependent for their continued existence on a line of funding that had to be renewed daily.

I'm reminded of this by a paper from Yale's Gary Gorton that I just got around to reading today. It explains the role of the repo market in our recent economic collapse. Gorton estimates that the total size of the repo market had grown to about $12 trillion by 2007, and as the housing bubble started to burst investors began large-scale bank runs. Except that instead of the run being caused by individuals queuing up at local banks to cash out their savings accounts, it came from repo lenders calling in their loans:

For concreteness, let’s use some names. Suppose the institutional investor is Fidelity, and Fidelity has $500 million in cash that will be used to buy securities, but not right now. Right now Fidelity wants a safe place to earn interest, but such that the money is available in case the opportunity for buying securities arises. Fidelity goes to Bear Stearns and “deposits” the $500 million overnight for interest. What makes this deposit safe? The safety comes from the collateral that Bear Stearns provides. Bear Stearns holds some asset‐backed securities [with] a market value of $500 millions. These bonds are provided to Fidelity as collateral. Fidelity takes physical possession of these bonds. Since the transaction is overnight, Fidelity can get its money back the next morning, or it can agree to “roll” the trade. Fidelity earns, say, 3 percent.

....There’s another aspect to repo that is important: haircuts. In the repo example I gave above, Fidelity deposited $500 million of cash with Bear Stearns and received as collateral $500 million of bonds, valued at market value. Fidelity does not care if Bear Stearns becomes insolvent because Fidelity in that event can unilaterally terminate the transaction and sell the bonds to get the $500 million. That is, repo is not subject to Chapter 11 bankruptcy; it is excluded from this.

Imagine that Fidelity said to Bear: “I will deposit only $400 million and I want $500 million (market value) of bonds as collateral.” This would be a 20 percent haircut. In this case Fidelity is protected against a $100 million decline in the value of the bonds, should Bear become insolvent and Fidelity want to sell the bonds.

....For now, keep in mind that an increase in the haircuts is a withdrawal from the bank. Massive withdrawals are a banking panic. That’s what happened. Like during the pre‐Federal Reserve panics, there was a shock that by itself was not large, house prices fell. But, the distribution of the risks (where the subprime bonds were, in which firms, and how much) was not known. Here is where subprime plays its role. Elsewhere, I have likened subprime to e‐coli (see Gorton (2009a, 2010)). Millions of pounds of beef might be recalled because the location of a small amount of e‐coli is not known for sure. If the government did not know which ground beef possibly contained the e‐coli, there would be a panic: people would stop eating ground beef. If we all stop eating hamburgers for a month, or a year, it would be a big problem for McDonald’s, Burger King, Wendy’s and so on. They would go bankrupt. That’s what happened.

The evidence is in the figure [on the right], which shows the increase in haircuts for securitized bonds (and other structured bonds) starting in August 2007. The figure is a picture of the banking panic. We don’t know how much was withdrawn because we don’t know the actual size of the repo market. But, to get a sense of the magnitudes, suppose the repo market was $12 trillion and that repo haircuts rose from zero to an average of 20 percent. Then the banking system would need to come up with $2 trillion, an impossible task.

There's more in the paper, which is worth reading if you want to learn more about this stuff. In my own mind, I have a tendency to waffle back and forth between blaming the economic meltdown solely on a single fundamental (housing prices crashed, everyone panicked) and blaming it on a variety of other factors as well (mortgage fraud, the growth of credit derivatives, ratings agency conflicts, massive abuse of leverage, wild underestimation of risk, etc.). Overall, I tend toward believing that although the housing crash was clearly both the proximate and primary cause of the collapse, all the other stuff really did matter too, magnifying an asset bust far beyond what it could have done on its own. Without massive leverage, for example, even a huge housing bubble couldn't have caused the scale of the damage we saw.

Gorton has a slightly different take: the housing bubble was primary, but it was the fundamental structure of modern banking that turned it into a catastrophe: "The problem is structural," he says. "This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default....The economy needs banks and banking. But bank liabilities have a vulnerability."

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Reconciliation 101

| Mon Mar. 1, 2010 1:33 PM EST

Are American journalists idiots? No, don't answer that. Just go read Jon Chait's description of Sen. Kent Conrad trying to explain the budget reconciliation process to Bob Schieffer and then having the exchange picked up by Politico. Is it any wonder that the public doesn't understand this either?

So here it is in simple terms: the Democratic plan is not to pass healthcare reform via reconciliation. It never has been. The plan is to pass it via regular order (i.e., have the House approve the bill already passed by the Senate) and then amend it with a few modest modifications that are passed via reconciliation and therefore can't be filibustered in the Senate. Only the amendments would be passed via reconciliation, and the only open questions are what exactly the amendments would look like and whether they'll be passed at the same time as the main bill or as part of a later budget resolution. Capiche? Here's Chait:

Look, it would be okay for reporters and pundits to be obsessed with what legislative method is employed to pass health care reform if they boned up on the issue. Alternatively, it would be okay for them not to understand it at all if they deemed it an irrelevant issue. (Which, in my opinion, it is.) But obsessed and ignorant makes for a bad combination.

Good luck with that.

Chart of the Day: Long-Term Unemployment

| Mon Mar. 1, 2010 1:06 PM EST

Lots of people have been talking about this for months now, and I don't have anything new and unusual to add to the conversation. But it's worth keeping this chart front and center at all times: it's the number of people who are not just unemployed, but who have been unemployed for at least half a year. The red line is the key one, and it shows that the proportion of long-term unemployed during the current recession is nearly twice as high as it was during 1982, the previous record holder since the Great Depression.

What's worse is that we can't expect this to go away quickly. Paul Volcker deliberately created the recession of the early 80s by jacking up interest rates to unprecedented levels, and he dispensed with it just as easily by lowering rates in 1982. That's not going to happen this time because interest rates are already as low as they can go. At best, we're going to hit a plateau and then linger there before a slow, fitful recovery that takes years. At worst — well, things will get even worse.

Mass, long-term unemployment is one of the most corrosive things any country can go through. The fact that we're basically doing nothing about it is not just disgraceful, it's genuinely dangerous.

It's Not Just Congress That's Broken

| Mon Mar. 1, 2010 12:23 PM EST

David Frum argues today that the congressional revolution of the 70s — when the filibuster was made easier to use, the power of committee chairmen declined, Congress became more egalitarian, and campaign finance reform broke the power of the parties — has caused the legislative process to break down:

Take this quiz. Name the most important legislation enacted in the 30 years between 1950 and 1980.

Overwhelming isn’t it? Civil rights. Voting rights. Interstate highways. Medicare. Medicaid. The deregulation of the airlines, natural gas, trucking, rail and oil. The immigration act of 1965. Clean Air, Clean Water, and the Endangered Species Acts. Supplemental Security Income in 1974. I could fill the whole screen.

Now ... the next 30 years. There’s the Reagan tax cuts of course. Deregulation of the savings & loans in 1982. The Americans with Disabilities Act in 1990. Welfare reform in 1995. Medicare Part D. What else?

Leave aside whether you are liberal or conservative, whether you approve the measures mentioned above or disapprove. It’s hard to dispute: Congress just got a lot more done in the 1950s, 1960s and 1970s than in the 1980s, 1990s and 2000s.

Matt Yglesias points out that you can hardly talk about polarization and gridlock without mentioning the racial realignment of the parties that's affected politics so strongly in the post-Reagan, and I think that's right. But I'd add something else. The era between 1950 and 1980 was an essentially liberal one. That applies to the 60s and 70s pretty obviously, but even the 50s, underneath McCarthyism and the man in the gray flannel suit, was defined mainly by consolidation of the New Deal. Eisenhower wasn't called a New Republican for nothing.

The succeeding 30 years, famously, were primarily conservative. And that makes a fundamental difference. Liberals, by nature, want to change things. They want to pass big stuff. Conservatives, by nature, want to conserve. They want to prevent change. Occasionally this takes the form of rolling back liberal programs (tax cuts, welfare reform), but rolling back progress is hard and rare. For the most part, conservatism takes the form of not undertaking big legislative changes. So it's hardly any surprise that a conservative era is marked by lack of seminal congressional actions.

What's really noteworthy isn't that 1980-2010 was a marked by a conservative approach to legislation, but that we should be at the start of a new liberal era right about now. Maybe not a repeat of the 60s, but still something. Times change, cultures change, and problems change — and conservatives can keep the lid on this bottle just so long before it's ready to blow. By now, America ought to be ready for fundamental financial reform, healthcare reform, energy reform, and social reform.

But it's not, really. All of these things poll well in vague terms, but don't really garner a lot of deep support. It's this, even more than legislative maneuvering, that's allowed Republicans to stop Democratic plans in their tracks. We liberals just haven't made the case for change compellingly enough.

Reforming the Filibuster

| Mon Mar. 1, 2010 11:20 AM EST

OK, here's my idea: mend it, don't end it. How about if both parties agree to a limited number of cloture votes per congressional session? Let's say, 20 per session per party. Ditto for holds. Maybe one per senator per session. The minority would still have a broad ability to force a supermajority on major legislation like healthcare reform, or to hold a nominee who they considered truly noxious, but they wouldn't have the ability to simply bring the Senate to a grinding halt out of pique or pure partisan rancor.

I know, I know, it's not going to happen. But it would be interesting if it did! Maybe even better than pure majority rule, since it would introduce some genuinely intriguing strategy and maneuvering to Senate procedures. Sort of like coaches deciding when to burn timeouts or challenge rulings on the field during a football game. It would also give party leaders some much-needed additional power, since they'd necessarily be the clearinghouse for filibusters. Who's with me?