Kevin Drum - April 2010

Healthcare and Hillary

| Fri Apr. 2, 2010 11:21 AM EDT

Bruce Bartlett makes a long argument today that conservatives should have (quietly, one presumes) supported Hillary Clinton during the Democratic primary because she would have governed more agreeably than Obama has. I'm not sure about that, but I'm especially not sure about this specific prediction:

I think the evidence suggests that Hillary Clinton could have won the Democratic nomination with just a little bit more support, and probably would be governing significantly more conservatively than Obama. For one thing, given her disastrous experience with health care reform in 1993-1994, it's reasonable to assume that she would have stayed away from that issue at all costs.

Well, we'll never know, will we? But my guess is just the opposite. I think Hillary was, if anything, more dedicated to healthcare reform than Obama, and I think she would have taken it on more vigorously than he did. What's more, my guess is that her better feel for the Senate and past failure with healthcare reform would have made her more effective at getting a package passed. It probably would have looked about the same as what we got (her position during the campaign was similar to Obama's and most of the work was done by Congress anyway), but I suspect that she would have been a little more aggressive about pushing it through more quickly. Contra Bruce, we might have gotten healthcare reform last fall instead of last month.

But! Who knows? Maybe the economy would have spooked her. Maybe Bill would have convinced her to wait until 2011. Maybe the townhall madness of summer would have stopped her short. But I think the conservative myth of the allegedly principle-less, endlessly calculating Hillary has led Bruce astray here.

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Lambasting the Banks

| Fri Apr. 2, 2010 10:45 AM EDT

The first thing I do when I come down to the computer each morning is read the email that's piled up overnight. More precisely, I sort of mindlessly click through and delete the 90% of it that's either spam, PR drops, announcements from politicians, or other related dreck. I was doing that this morning when my eyes lit on the phrase "lambasted the tilted playing field that benefits Wall Street banks over Main Street banks." My fingers stopped. Tell me more, internet!

In a 45-minute interview this week, Federal Reserve Bank of Kansas City President Thomas M. Hoenig, who's emerged as one of the few influential voices calling for a fundamental redesign of a broken U.S. financial system:

  • Lambasted the tilted playing field that benefits Wall Street banks over Main Street banks;
  • Called the idea that the U.S. needs megabanks to compete globally a "fantasy";
  • Said Congress should mandate simple, easily understood and enforceable rules — rather than guidelines — so regulators can restrain financial firms and rein in the financial system;
  • Prodded the Senate to get tougher on permanently ending Too Big To Fail by enacting laws that would take away much of the discretion currently held by policymakers (who bailed out financial firms when confronted with these decisions in late 2008);
  • And criticized the Federal Reserve's ongoing policy to keep the main interest rate near zero because it "guarantee[s] a spread to Wall Street", enabling unearned profits and "encourag[ing] speculation."

....Hoenig isn't just any reformer — he's the longest-serving Fed policy maker; a voting member of the Fed's main policy-making body, the Federal Open Market Committee; and his credentials as a deficit- and inflation hawk are unparalleled.

I'm not so sure Hoenig is right about raising the interest rate — his inflation hawkery is too strong for my taste — but I definitely like his attitude toward leverage and how to rein it in:

"The simplest is: What is your total assets and what is your equity capital, and what's that ratio, and what's the maximum we should allow it to be? Should it be 12 or 14 or in some instances 15? We can have that debate either through the legislative process or though the regulatory process with comments and then come to a rule that is binding and cannot be exempted under any circumstance.

...."The max should be — and this is based on my experience, I haven't done the studies, so I have to put that caveat in there — if a bank has a 12-to-1 leverage ratio, total assets to equity, that's a fairly good operating level if you look across the country. So I would be inclined to put 15-to-1 as the max, so that in a growth environment you could get to 15, but not beyond that. That becomes a constraint, and I think it would work over time. You would get some blame during the boom that you're inhibiting growth, but that means you'd have to bring capital to the table and that would be strong.

"So I would start with 15. Let the debate go on — if that's not the right number — but that's where I would start."

Obviously Hoenig isn't exactly bowling over the world with his views yet, but it's nice to see that there are at least a few people in real policymaking positions who seem to get this stuff. Hoenig's approach to leverage, I think, is exactly right: keep it simple and keep it blunt. The only thing he doesn't mention here is the need to apply these kinds of blunt limits to the shadow banking system as well as the conventional banking system, but I'd be surprised if he doesn't believe that too. Is there any way we can appoint him dictator for a day?

Why Did Obama Decide to Drill, Baby?

| Fri Apr. 2, 2010 10:02 AM EDT

I should have posted this yesterday, but I forgot. On Tuesday night, responding to President Obama's decision to unilaterally open up new offshore drilling tracts, I asked, "Wouldn't he be better off holding this stuff in reserve and negotiating it away in return for actual support, not just hoped-for support?" Well, it turns out that something of a consensus answer has formed about this.

Basically, it goes like this. Sure, Obama could have held out on offshore drilling and used it as a bargaining chip to get some Republican support for an overall climate plan. But no Republican would have made the deal anyway, so it wouldn't have done any good. However, by doing it preemptively, Obama has (a) deprived them of an issue to sputter about this summer, (b) split their ranks, and (c) made himself look like a pretty reasonable guy to the general public. Long story short, this is mostly a long-term play for public opinion, not part of a short-term partisan negotiation.

I'm not sure if I buy this or not. But I just thought I should mention it since I asked the question in the first place.

Everyone Hates NCLB

| Thu Apr. 1, 2010 5:32 PM EDT

Roger McShane summarizes the results of an Economist poll about the effect of No Child Left Behind. Here it is:

That's pretty remarkable. Not only is NCLB massively unpopular a decade after it was passed, but it's about equally unpopular with both Democrats and Republicans. Everyone hates it. If Barack Obama really wants to bring the nation together, it sounds like deep sixing NCLB completely might be a pretty good way to do it.

Chart of the Day: Voting Your Pocketbook

| Thu Apr. 1, 2010 3:30 PM EDT

We've seen this before, but why not see it again? Jeff Frankel shows graphically today the disconnect between how much net money the various states get from the federal government vs. how those states' residents feel about government spending. Long story short, the ones who say they hate government the most are also the ones who are sucking the hardest at the federal teat.

Now, there are enough problems with calculating state shares of federal spending that you have to take this with a grain of salt. Still, it's a solid point. If you want to kvetch about federal spending, that's fine. But if you're going to do it, how about first giving back some of your federal largesse to the states that provided it to you in the first place?

Don't Mess With Texas (Mortgages, That Is)

| Thu Apr. 1, 2010 12:37 PM EDT

I think I've blogged about this before, but Alyssa Katz has a good piece today about how Texas generally avoided the housing bubble that afflicted the rest of the country and nearly destroyed Wall Street. The key, she says, is that Texas had uniquely stringent regulation of home equity loans:

As home prices skyrocketed in many markets, cash-out refinancings became standard, even in the relatively sober world of Fannie Mae and Freddie Mac. By 2006, Freddie Mac reported that 88 percent of refinance mortgages that it purchased were for amounts at least 5 percent higher than borrowers’ previous loan balances. Subprime, in insane pursuit of risk, piled on with cash-out refinances for high-risk borrowers, often approaching the entire appraised value of the home.

But not in Texas. A borrower there can secure a home-equity line of credit from a bank. And she can refinance her mortgage or take out a home-equity loan. But the total amount of debt on a home cannot exceed 80 percent of its appraised value, and any proceeds cannot be used to pay off other debts.

This is, you'll note, essentially a limit on leverage. In this case, though, it's not a limit on bank leverage, but on individual homeowner leverage. It's a good example of how leverage is shot through our entire financial system, and how reining it in at one level can have a big impact on every other level as well.

But there's more to Texas than just their regulation of HELOCs. State law also prohibits mortgage loans with prepayment penalties. And it prohibits negative amortization loans, where the principal you owe goes up over time because you're not required to make full interest payments. There are also limits on balloon payments and requirements that mortgage lenders take into account the borrower's ability to repay a loan. (Shocking, I know.)

My guess is that these latter restrictions, especially the ban on prepayment penalties and negative amortization loans, were actually more important than the HELOC restrictions. Prepayment penalties were a key part of the mortgage madness of the past decade, since the most egregious subprime and Alt-A loans only worked if you were penalized for paying off your loan early. You can hardly afford to offer loss-leader teaser rates, after all, if the borrower can just enjoy the low payments for a couple of years and then refinance into a standard mortgage with no penalty, leaving the lender with the losses on the first two years of the loan.

Bottom line: there are several common-sense changes to home mortgage regulations that would go a long way toward stabilizing the housing market in the future. The 80% HELOC rule is a good one. Banning prepayment penalties is another. Requiring a minimum 10% down payment for all home loans would be useful too — as well as making sure that brokers don't use "silent seconds" to get around this rule. All of these regs would not only be good for consumers, they'd help keep a lid on housing prices as well. And remember: it was skyrocketing housing prices that underlay everything else that happened during the past decade. It's too bad that no one at the federal level seems much interested in doing any of this stuff, isn't it?

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New CAFE Standards Finally Signed

| Thu Apr. 1, 2010 11:28 AM EDT

This has been in the works for a long time, but it's still nice to see it finally made official:

The Obama administration finalized the first national rules curbing greenhouse gas emissions Thursday, mandating that the U.S. car and light-truck fleet reach an average fuel efficiency of 35.5 miles per gallon by 2016.

The new fuel efficiency standards, issued by the Transportation Department and the Environmental Protection Agency as the result of a May 2009 deal with the auto industry, represent a peaceful end to a contentious legal battle over how to regulate tailpipe emissions....As a result of the new rules, the U.S. vehicle fleet is projected to cut its greenhouse gas emissions 21 percent by 2030.

For all the crap CAFE gets from conservatives and car buffs, it's been an astonishingly successful program. It probably cut oil use following the embargoes of the 70s more effectively than any program before or since — and unlike gas prices, which fell precipitously in the early 80s, it had a permanent effect. What's more, for most of us it did it with virtually no noticeable impact on the cars we drive.

Technology has advanced a lot since the original CAFE standards were adopted, and I expect the new ones to have approximately the same invisible effect on the kinds of cars we drive. At the margins, it will make the most egregious gas guzzlers a little more expensive. It might even spell the end of a few of them. And on average, your next new car might accelerate from zero to sixty half a second slower. But that's about it. And in return we'll extend our oil supplies, import a bit less from Saudi Arabia, and cut down on greenhouse gas emissions. It's no panacea, but it sure is a cheap way to make a difference.

 

April Fools Fail

| Thu Apr. 1, 2010 10:47 AM EDT

Atrios tweets:

hate when cannot tell is something is april fools joke. i hate april fools. bah humbug.

Does anyone else think this has gotten harder over the past decade or so? Or is my memory just failing me? It's not so much that April Fools gags have gotten more sophisticated, it's that the world has gotten so bizarre that even Onion-like gags seem disturbingly plausible. In a world that has people like Michele Bachmann and Steve King serving in the U.S. Congress, how do you top real life?

Financial Phrases to Beware Of, Part LXXII

| Thu Apr. 1, 2010 10:34 AM EDT

Here is Mike Konczal reading my mind today:

Like "providing liquidity," whenever I hear "competitive disadvantage" as the main reason to not do a sensible financial regulatory related thing I think that there's some real shenanigans going on.

Obviously he's right about the "competitive disadvantage" shibboleth, but it's the other one I really have in mind. It's everyone's go-to excuse for why some arcane bit of financial rocket science is really a good thing: because it "provides liquidity" to the market. Whenever I hear that I reach for my wallet.

Example: if you ask Goldman Sachs about the value of high-frequency trading, in which they co-locate their servers near a stock exchange's servers so they can complete trades in 3 milliseconds instead of the pokier 10 milliseconds required by the dinosaur brokers that you and I have to use, they'll tell you that HFT provides needed liquidity. There are, at a minimum, two problems with that. First: does anyone really think that U.S. stock markets have historically suffered from a lack of liquidity? Stop laughing back there. But you're right: the answer isn't just no, it's hell no. In fact, U.S. equity markets are generally used as textbook examples of the most open, liquid markets ever created on planet Earth.

Second: financial rocket science does often provide additional liquidity. Unfortunately, it doesn't always provide additional liquidity. Typically, it provides liquidity when you don't need it and then scurries away and hides in a corner precisely when you do. Unless there's some underlying reason — or, better yet, some regulation — that gives you a reason to believe that a financial innovation will provide liquidity all the time, even when the market panics, it's useless.

End of rant. You may now go back about your business.

Quote of the Day: The iPad

| Thu Apr. 1, 2010 10:12 AM EDT

From Jack Dorsey, creator and co-founder of Twitter, on Apple's new iPad:

I'm most excited about the potential of being able to get closer to data — to be able to touch data. Being able to use your fingers for every aspect of the experience is something that's really going to change computing.

Seriously? I'm agnostic on the whole tablet computing thing, but surely being able to "touch" an iPad is the least of its attractions. Is there really a widespread feeling out there that our keyboards are getting between us and our data?

UPDATE: RickNAnn tweets: "If you used an iPhone regularly you'd understand, I think." Maybe so! At the moment, though, I barely even use my old dinosaur cell phone for calling people, let alone anything else, so I'm still a couple of steps away from that. I guess I'm waiting for direct brainstem connections to be invented first. Get cracking, scientists.