Kevin Drum - April 2010

Friday Cat Blogging - 30 April 2010

| Fri Apr. 30, 2010 1:53 PM EDT

Today is "favorite things" day. (Actually, that's most days around here.) On the left, Domino is stretched out in the 10 am sunny patch and looking at me suspiciously because she wants to get on with her nap. On the right, Inkblot is eating breakfast. This is, I admit, not the most flattering picture I've ever taken of him, but I thought everyone would enjoy the hint of tongue action. Happy weekend, humans!

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Quote of the Day: Laura Bush

| Fri Apr. 30, 2010 1:29 PM EDT

From Laura Bush, in an interview with Ladies Home Journal:

George loves to tell the story of how all his Midland friends would come to the Oval Office and say, "I can't believe I'm here." And then they looked at him. Couldn't believe he was there either.

I think I understand how they felt.

Prop Trading and the Volcker Rule

| Fri Apr. 30, 2010 1:11 PM EDT

Mike Konczal interviews Jane D’Arista, a research associate at PERI, about the Volcker Rule and its proposed ban on proprietary trading by banks, the part of their business in which they borrow money to trade on their own accounts:

Prop trading only works if [banks] can borrow enough to substantially leverage their own capital. They have to set up a situation in which the cost of borrowing is lower than the return on the assets or derivatives in which they are investing. One example is what they are doing right now — borrowing very cheaply from the Federal Reserve and earning 200 basis points, let’s say, on buying Treasury securities.

....The only way prop trading is profitable is if the scale is enormous, especially in periods of low interest rates when margins are thin. Also because there is — has to be — a maturity mismatch to generate that margin. Except in rare periods when yield curves are inverted, low interest rates are available if borrowing is short-term lending and the desired higher rates on investment are available on longer-term assets. There is a liquidity risk if something happens in the market and the cost of rolling over the short-term borrowing rises....Every time there’s been a shock — Franklin National in 1975, Continental Illinois in 1984, Long Term Capital Management in 1998 — one or more big institution was not able to cover its position because its short-term funding disappeared and central bank liquidity had to be rushed to the rescue.

....Now people might say if we remove the prop trading desk from the firm its no less risky because it will be outside the firm, its like were not going to make it less risky, it will just move it around. What should people think in terms of taking the prop desk out of firms that have access to the fed window?

....What’s important about the ban on banks is that you end the channel through which the backup to the Fed creates the moral hazard that supports excessive risk. If the amount of funding banks can supply to one another and to other financial institutions is curtailed, prop trading will have to shrink because the repo market will shrink.

That’s what section 610 of the Dodd bill would do, shrink the repo market. It would restrict loans by banks to other financial institutions, requiring that the same limit on loans to a non-financial borrower in relation to capital that has been in effect for over a hundred years also apply to financial borrowers. In the case of financial institutions, the limit would apply to credit exposures involving repos, securities purchases and sales and a very broad list of derivatives.

....The growth of the offshore banking market and the invention of the domestic repo market [in the 90s] dramatically raised the amount of intra-sectoral borrowing and brought the issue into focus....About the same time, the Gramm-Leach-Bliley act gave permission to banks to borrow more for both necessary and other reasons — that is, to increase the share of non-deposit liabilities on their balance sheets. So they set up this whole interconnection game in which they borrow from one another and, in the process, are creating liquidity by monetizing debt. Of course, its all on paper — its all a pyramid — and in the end it can collapse and did.

The solution is to limit the funding that goes into prop trading as well as banning the trading itself for those institutions that have access to the Fed. And if that were done — if section 610 became law — even the investment banks wouldn’t be able to engage in excessive proprietary trading because they couldn’t get the funding to do so.

The whole thing is a little long and wonky, but worth a read. And while you're at it, if "off balance sheet" is a mystery to you, you might want to check out Mike's interview with UMass lecturer Jennifer Taub as well. It's good tutorial stuff.

Do Republicans Want to Win?

| Fri Apr. 30, 2010 12:39 PM EDT

Ramesh Ponnuru comments on the upcoming midterm elections:

Do House Republicans actually want to take the majority? I have asked that of nearly every House Republican I have met since January 2007. Life in the minority is just as satisfying if you're in it for the perks; more satisfying, actually, since you don't have to make appropriations bills go out on time, run committee hearings, etc. Only once, a few weeks ago, have I heard anyone say that more than half of the conference wants the majority. That congressman said that his colleagues do want to be in the majority but are not yet ready to do what it would take. But he thinks they're getting there.

Wow. I mean, technically, sure, I guess that being in the minority is less stressful. But everything I've ever heard on this subject suggests that, overall, being in the minority just absolutely sucks. You get nothing. You have no ability to do anything. You're shut out of decisionmaking completely. Your staff is minuscule. Etc. etc. The only way in which it's better than being in the majority is if you just like having the doorman call you "congressman" and literally don't care about the process of lawmaking at all.

But apparently virtually no one in the GOP House caucus thinks that even a majority of their fellows wants to take control in November. I could understand a few slackers not wanting the aggravation, but a majority? Holy cow.

Rush: "I'm Just Noting the Timing Here"

| Fri Apr. 30, 2010 11:23 AM EDT

Me, in email with a friend last night about the Louisiana oil spill:

I can't wait until Rush figures out how this is all actually Obama's fault. 

Honest to God, I didn't know he'd said this a few hours earlier:

I want to get back to the timing of the blowing up, the explosion out there in the Gulf of Mexico of this oil rig....Now, lest we forget, ladies and gentlemen, the carbon tax bill, cap and trade that was scheduled to be announced on Earth Day. I remember that. And then it was postponed for a couple of days later after Earth Day, and then of course immigration has now moved in front of it. But this bill, the cap-and-trade bill, was strongly criticized by hardcore environmentalist wackos because it supposedly allowed more offshore drilling and nuclear plants, nuclear plant investment. So, since they're sending SWAT teams down there, folks, since they're sending SWAT teams to inspect the other rigs, what better way to head off more oil drilling, nuclear plants, than by blowing up a rig? I'm just noting the timing here.

Plus there's this, from the friend I was emailing with: "Maybe not Obama, but the WSJ snuck it in their story yesterday: you know, if the environmentalists didn't make us drill so deep, so far out from shore, this wouldn't have happened." I haven't seen that story, but I wouldn't be surprised if this meme picks up steam in the days to come.

Reinflating the Bubble

| Fri Apr. 30, 2010 10:58 AM EDT

The LA Times reports on the homebuyer's tax credit:

Buyers can get a tax break of up to $8,000 for first-time purchasers and $6,500 for some current homeowners if they reach agreements by April 30 and seal their deals by June 30.

California lawmakers sweetened the package last month by passing a $10,000 credit that kicks in Saturday. Now, some buyers in the state can qualify for as much as $18,000 in federal and state tax relief if they time their purchases just right.

Seriously? California, which is in only slightly better fiscal shape than Greece, is handing out money to homebuyers? Jeebus. So how's that working out?

The dual incentives have created a mind-set reminiscent of the bubble years, particularly among first-timers, who stand to gain the most money. "I am looking at properties almost constantly, and it is just kind of a feeding frenzy right now, which frustrates me," said Zeenath Shareef, 30, a Venice Beach renter and finance director for a Santa Monica consulting firm who took half days off to look for a home.

"In my mind, properties are going more quickly, and in some cases for more than what they would normally sell for, because people are in such a rush to buy ahead of this deadline," she said. "I hear people saying, friends of mine saying, ‘I have to buy, I have to buy, I have to buy.' "

We are a nation of idiots.

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ID, Please

| Fri Apr. 30, 2010 10:39 AM EDT

Ezra Klein reports that the new Democratic immigration proposal includes a shiny new way to enforce employment laws:

I don't think the Democrats are going to like me calling this a biometric national ID card, as they go to great lengths to say that it is not a national ID card, and make it "unlawful for any person, corporation; organization local, state, or federal law enforcement officer; local or state government; or any other entity to require or even ask an individual cardholder to produce their social security card for any purpose other than electronic verification of employment eligibility and verification of identity for Social Security Administration purposes."

But it's still a biometric national ID card. It's handed out by the Social Security Administration and employers are required to check it when hiring new employees. Essentially, if you want to participate in the American economy, you need this card.

I've written about this before, and it's fine with me if they call it a national ID card. I'm in favor. It's not as if these things are security panaceas or anything, but they'd be pretty useful for things like reducing employment fraud or voter fraud. And what are the drawbacks? Every time this comes up I hear lots of vague but alarming talk about police states and the end of liberty, but nothing concrete about how this would really change things much from the status quo ante, in which most of us have to produce IDs multiple times a day merely to get through our lives. As for making it easier for the federal government to track us, please. They already have all the tools they need to track us. It's called a Social Security number. A non-fakable Social Security number would be an improvement, not a further infringement on our liberty.

The main difference a national ID would make is that if the federal government provided these cards free of charge, then poor people would have a reliable form of ID too, not just rich and middle class folks. Could they be abused? Sure, but no more than our current hodgepodge of SSNs and corporate ID cards. Other countries seem to have them without descending into totalitarianism.

Unfortunately, as Ezra says, this whole thing is a nonstarter: "The oddity of this strategy, of course, is that anti-immigration sentiments run highest among the same communities that are most opposed to national ID cards." There's not much chance of this proposal getting anywhere.

Finance Reform Update

| Fri Apr. 30, 2010 12:23 AM EDT

Andy Kroll runs down the remaining problems that Republicans still have with the Senate financial reform bill:

Right now, there look to be three main sticking points between the parties. One is the proposed consumer protection agency....What to do with systemically risky, or "too-big-to-fail," banks is another prickly issue....The third issue where major differences remain is regulating derivatives.

In case you haven't been keeping score at home, those three things are pretty much the heart of the entire bill. Everything else is window dressing. And just to drive the point home, here's Andy describing Sen. Richard Shelby's take on the bill:

Today on the Senate floor, Shelby pretty much eviscerated the measure, while a red-faced and anxious-looking Chris Dodd sat across the aisle from the Alabama senator. "This bill threatens our economy," Shelby said. He added that the bill would leave taxpayers on the hook for future bailouts; the derivatives provisions would impair the economy; a new consumer bureau would stifle consumer lending; and a proposed Office of Financial Research, which would gather financial data used to predict future financial crises, would pry into Americans' lives and violate their civil liberties.

But other than that, Mrs. Lincoln, how did you like the play?

Hopefully this is just showboating, because if it's not it means that Republicans still aren't in a mood to get serious about financial reform. They just want to gut the entire measure. Either way, it's pretty reckless behavior.

(And just to address Shelby's concerns for the record: (a) actually, it would protect taxpayers, (b) no they wouldn't, (c) it might stifle predatory lending, but that's all, and (d) WTF is he talking about?)

Roller Coaster Economics

| Thu Apr. 29, 2010 7:20 PM EDT

Ryan Avent's baby is going to be old enough for a visit to a theme park one of these days, and he's not looking forward to it:

Specifically, I'm dreading the queues. Endless, winding queues, lasting hours, all to ride a roller coaster for two minutes.

There should be an easy solution to this: ride pricing. A long line indicates an underpriced experience. At any given moment, many more people want to ride than the ride can accommodate. By charging for individual rides, demand can be rationed until the queue is winnowed down to something reasonable, like five to ten minutes. The pricing could even vary. Operators could reduce prices for underused rides until more users are attracted, the better to keep activity evenly distributed around the park.

The problem with this is that people would hate it. But you could improve upon the system to make it less unpleasant! Specifically, you could give everyone who comes into the park a bunch of tokens, and then rides could be priced in tokens. You could then sell additional bundles of tokens for the real ride enthusiasts. I seem to recall that the old state fairs I used to visit operated on this system and didn't have long queues.

Ryan's idea sounds suspiciously familiar to this Southern California native. Throughout my childhood we visited Disneyland every year on my sister's birthday, and since Walt Disney was no communist he made sure that if you wanted to get on the more popular rides you had to pay for the privilege. This wasn't done via tokens, however, it was done via ticket books. You could pay for admission by itself, or you could pay a few dollars more for admission plus a book with a limited number of A, B, C, D, and E tickets. A and B tickets were for the junky rides. We always came home with a bunch of unused one. E tickets were for the Matterhorn or the other good rides. If you ran out you could buy more inside the park.

Disneyland ditched the ticket books in the early 80s and went to a simple admission charge that included unlimited access to all rides. The reasons were obvious: they made more money since everyone now paid the higher admission price, and they saved money since they didn't have to print ticket books, hire people for ticket booths, or collect tickets at the rides.

Which is all well and good, but the bigger question is: Did the ticket books cut down on queuing? Answer: Not as far as I can tell. The line for the Matterhorn or Space Mountain was miles long back in the 60s and 70s, just like it is today. In theory, ride pricing should work. In practice, I think theme parks might represent a market failure.

Next Time Will Be Different

| Thu Apr. 29, 2010 5:40 PM EDT

Via Jonathan Chait — who owes me big time for making me read this — here is Jonah Goldberg arguing that better financial regulation is a fairly non-urgent issue because bankers have all learned their lessons:

Think of it this way. We are just as vulnerable as ever to the threat of Coca-Cola releasing another New Coke. No laws have been passed to prevent it. No new oversight authority has been created to warn of its looming threat. And yet, the odds of Coca-Cola rolling out another debacle like New Coke are severely limited. Why? Because, to paraphrase Roy Scheider in Jaws II, as God is their witness the executives at Coca-Cola don’t want to go through that Hell again.

....This is not to say that the financial crisis doesn’t justify any reforms. But let’s not forget that inherent to capitalism is the capacity for self-correction. Surely the disappearance of Lehman Brothers and the dismantling of AIG is an example that many can learn from. The real danger seems to me that people like Dodd haven’t learned the lesson that government is not the only—or best—corrective to the excesses of capitalism.

Does Jonah really think that American industry's capacity to launch stupid new products was diminished by the New Coke fiasco? Does he remember Pets.com? Or Webvan? Or, restricting ourselves just to the soft drink market, Crystal Pepsi? Or any of the other fine beverages on this list?

As for bankers learning their lesson, I'm at a loss for words. If there's a profession on the entire planet that has aggressively declined to learn any lessons from its periodic collapse over the past several millennia, it's high finance. In This Time It's Different, it takes the authors three columns of text spread over four pages just to list the banking crises since 1800. They tally up 51 of them since 1980 alone.

God knows I'm sympathetic to arguments about regulatory capture and government collusion in blowing up financial bubbles, but even Alan Greenspan has admitted that financial markets can't be trusted to self-regulate. Alan Effin Greenspan. Regulatory capture is a reason to try to build a more robust financial control infrastructure, one that at least tries to address the changes in modern finance, not a reason to shrug our shoulders and pretend, yet again, that next time will be different.