Kevin Drum - April 2010

The Non-Nuclear Nuke

| Fri Apr. 23, 2010 11:12 AM EDT

For years the Pentagon has been wrestling with a problem: when you get intel telling you that a high-value terrorist has been located somewhere, how do you take him out? They aren't likely to stick around at the target location for long, so you need something that can (a) get there quickly and (b) cause a lot of damage once it does. Bombers and cruise missiles take hours. Local forces, even if they're in place, aren't always lethal enough. What to do?

One answer is to use ICBMs. Not nuclear-tipped ICBMs, but missiles with a big conventional payload. The Obama administration is apparently planning to revive this idea, and Noah Shachtman explains why it's crazy:

Over and over again, the Bush administration tried to push the idea of these conventional ICBMs. Over and over again, Congress refused to provide the funds for it. The reason was pretty simple: those anti-terror missiles look and fly exactly like the nuclear missiles we’d launch at Russia or China, in the event of Armageddon. “For many minutes during their flight patterns, these missiles might appear to be headed towards targets in these nations,” a congressional study notes. That could have world-changing consequences. “The launch of such a missile,” then-Russian president Vladimir Putin said in a state of the nation address after the announcement of the Bush-era plan, “could provoke a full-scale counterattack using strategic nuclear forces.”

I guess I can imagine possible ways to fix this. I just can't imagine any good ways. Even if the Russians and Chinese and Indians and Pakistanis are provided with some reliable way of identifying non-nuclear ICBM launches, they could never be sure that the United States hadn't figured out some way to fool them. So they'd always be on a short fuse. And do we really want to make that particular fuse even shorter than it already is?

Sometimes bad ideas are just bad ideas. This really seems like one of them.

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Climate Bill Gets a Boost

| Fri Apr. 23, 2010 10:50 AM EDT

The KGL team — that's senators Kerry, Graham, and Lieberman for those of you not up to speed with current Beltway lingo — anounced yesterday that they've gotten key business support for their climate bill:

The Edison Electric Institute — whose members generate the bulk of the nation's electricity — and two of its influential CEOs, Exelon's John Rowe and Duke Energy's Jim Rogers, will declare their support Monday, sources said. While Kerry did not name the three oil companies, a source familiar with the negotiations said Shell, BP and ConocoPhillips would back the climate measure.

And why did these folks decide to support the bill? Here's the big payoff:

The bill will preempt both the states' and EPA's ability to regulate greenhouse gases under the Clean Air Act, as long as emitters comply with the standards outlined in the measure. The EPA will monitor and enforce compliance with the law.

That's pretty much been the plan all along: use the threat of EPA action to gain support from Republicans and the business community. It seems to be working on the business community, so the only question left is whether it will work on Republicans. Normally I'd say no, but the threat of EPA action is quite real and might prompt the GOP's business wing to put some serious pressure on them to get this bill passed. That will mean standing up to the "carbon taxes are tyranny" crowd in the tea party movement, but in the past the business wing of the party has usually won these kinds of showdowns. It's still not clear if there's enough time on the congressional calendar to pass a climate bill this year, but at least the odds are now a little better. Kate Sheppard has more details here.

Greece Hits the Panic Button

| Fri Apr. 23, 2010 10:10 AM EDT

The soap opera in Greece is nearing its final stage:

Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday, an unprecedented step that will test the bonds of the European Union.

....“The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together,” he said, referring to an emergency aid package arranged two weeks ago. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund.

....The announcement means that money from the I.M.F. can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to E.U. officials. “We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, the I.M.F. managing director, said in a statement issued in Washington.

The IMF money is just a stopgap. The real question is how quickly the EU will approve its part of the rescue and whether it will fix Greece's problems anyway. "The markets are betting on the country going bankrupt," one Greek official told the Wall Street Journal, and once the markets do that they generally don't stop, bailout or not. My guess is that speculators are going to start a regime of betting-with-extreme-prejudice pretty quickly, and it's not at all clear that even €40 billion will be enough for Greece to defend itself from that. And then Portugal will be up to bat. Stay tuned.

Conservatives and Financial Reform

| Thu Apr. 22, 2010 7:16 PM EDT

Jonathan Chait remarks on the "intellectual disarray" in right wing circles concerning financial reform:

Conservatives do not know what to say or think about this. A few of them are calling for breaking up the big banks. A few more are following the Frank Luntz line that regulation is a big favor to Wall Street. But mostly they're saying... nothing. It's almost a non-issue at the National Review and Weekly Standard blogs.

This is something that's been nagging at me lately too. Most of the blogs that spend a lot of time on regulatory reform are liberal or leftish blogs. Most of the books on the subject that aren't pure journalistic efforts generally come at it from a lefty point of view too. Conservative bloggers, columnists, and talking heads just don't seem to have an awful lot to say on the issue.

Why? They had plenty to say about healthcare reform, a similarly policy-heavy debate. And regulatory issues have long been a staple of the right. So why don't conservatives have more to say about it? Jon proposes an answer:

You can see why the issue would pose problems for the right. First, it threatens the self-image they've developed over the last year as opponents of the government-business nexus. Second, it's difficult to work out a free market response. If you let Wall Street invest however it likes, it will eventually precipitate a financial crisis, with massive government intervention being the only option to save the economy. Or else you can break up the big banks, or limit their ability to take on systemic risk. Either way, government has to get involved at some step in the process. It almost seems like conservatives can't choose which form of government intervention to accept, so many of them just aren't choosing.

Maybe. I don't have a better answer, anyway. But it's not really very compelling. In the past conservatives have always been able to marry their middle class NASCAR wing and their big business wing without much difficulty, and they've always been able to construct a free market response of some kind no matter what the issue is. It's hard to believe that banking reform is really all that big a challenge for them.

One possibility, I suppose, is that this took them by surprise. On most subjects — healthcare, climate change, taxes, etc. — the right has a well honed arsenal of proposals. They may or may not make sense, but they've got 'em. Financial reform, conversely, is something they've never even thought about. For the past 30 years their only mantra has been to tear down regulation, and that's pretty obviously a nonstarter right now. So they've got nothing.

Who's Afraid of Finance Industry Profits?

| Thu Apr. 22, 2010 4:38 PM EDT

Matt Yglesias wants to know why so many progressives are obsessed by the insane profitability of the financial sector:

Consider two problems:

— Financial institution failures that cost taxpayers billions.
— Run-amok income inequality.

The policy response to the first is “regulation modernizing the powers of regulators.” And the policy response to the second is higher taxes to finance more and better public services. Is there really some third problem that trying to make Wall Street less profitable addresses? At the end of the day, insofar as people want to entrust their money to greedy risk-taking bankers, I would rather have those bankers be located in New York and paying taxes to the IRS that finance great schools and shiny new mass transit systems than have the bankers be located in Zurich and financing their schools and transit systems.

Speaking only for myself, I'd say this misconstrues the issue. Finance sector profitability isn't a problem per se, it's the symptom of a problem. Put another way, you might say that industry profits are a useful metric for assessing how bad the financialization of the U.S. economy has become. Historically, the financialization of a country's economy is a huge blinking red light, and we'd do well to avoid it.

More prosaically, industry profits are also a good way of measuring whether our regulations are working. A safe, efficient banking system just shouldn't be enormously profitable. So if our regulations are working, you'll see profits decline. Conversely, if they stay high, there's something wrong. Finance sector profitability may not be the only (or even the best) way to measure if Wall Street is working well, but it makes a pretty decent canary in the coal mine.

Remember: at its core, finance is supposed to be a way of allocating capital to the real economy. The way it does this might be simple or it might be complex, but its fundamental purpose is to provide a service to the business community. When, as Martin Wolf put it yesterday, it instead becomes a "machine to transfer income and wealth from outsiders to insiders," the real economy suffers as capital is increasingly misallocated. That's the problem we need to address, and the best way to address it is to make pure finance less profitable. It's better to refocus Wall Street into caring primarily about the moderately profitable business of providing efficient funding to the rest of the world than it is to let them do whatever they want and then try to tax the excess away.

(FWIW, I've never been sold on the idea of taxation as the best policy response to income inequality anyway. But that's a subject for another post.)

UPDATE: There's also a political economy problem with outsized finance industry profits, which Ezra Klein gets at here. Taxation can mitigate this, though even here I don't think it's an ideal solution.

Another thing to keep in mind: taxing the industry doesn't really motivate Wall Street to engage in less risky, more socially useful activities. To do that, you have to tax riskier activities differently from less risky activities. To say the least, that's pretty tricky.

Cutting Costs the WellPoint Way

| Thu Apr. 22, 2010 2:03 PM EDT

Cancer survivor Murray Waas files a dispatch for Reuters about WellPoint's treatment of women who contracted breast cancer:

The women all paid their premiums on time. Before they fell ill, none had any problems with their insurance. Initially, they believed their policies had been canceled by mistake.

They had no idea that WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators.

Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information.

The whole story is here.

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Popping the Tea Party Bubble

| Thu Apr. 22, 2010 1:17 PM EDT

In Politico today, Jonathan Martin and Ben Smith write that the mainstream media, after being caught off guard by the rise of the tea parties, now seems determined to make up for that by manically overcovering them:

Part of the reason is the timeless truth in media that nothing succeeds like excess. But part of the reason is a convergence of incentives for journalists and activists on left and right alike to exaggerate both the influence and exotic traits of the tea-party movement. In fact, there is a word for what poll after poll depicts as a group of largely white, middle-class, middle-aged voters who are aggrieved: Republicans.

But just read the succession of New York Times stories, profiling newly energized activists who are “bracing for tyranny.” Or follow the dispatches of the CNN crews who went along with two national Tea Party Express bus tours. Or delve into the crosstabs of polls conducted in the past few weeks by the Times, CNN, and POLITICO about the opinions and demographic characteristics of tea partiers. Or check out the blogger the Washington Post hired to chronicle their movement....Indifference has given way to curiosity, and — in recent weeks especially — to a nearly manic obsession that sometimes seems to place the tea partiers somewhere near the suffragettes and the America-Firsters in the historical ranking of mass political movements.

....The tea parties’ main expression has been public gatherings. But last week’s Tax Day crowds were not representative of a force that is purportedly shaping the country’s politics. About a thousand people showed up in state capitals like Des Moines, Montgomery and Baton Rouge — and even fewer in large cities like Philadelphia, Boston and Milwaukee. In some cases, turnout was less than the original protests spurred by the stimulus, bailouts, financial crisis and new Democratic president last April 15th.

....What’s more, the eruption of protest after a president of a new party takes the country in a new direction is a standard feature of modern American politics. Ronald Reagan’s election produced record-breaking rallies for the now-forgotten Nuclear Freeze movement. The right, with rhetoric and occasional excesses that are almost identical to those of today, rose up angrily against Bill Clinton in the mid-1990s.

Look: this is right. It just is. The tea parties ought to be covered, and liberals should fight back against them. But treating them as some kind of massive new movement misses the point. These people have been around forever, and they're always upset when liberals take over. In fact, if there's anything new about the tea partiers it's that the movement is smaller, less organized, and less influential than either the Birchers of the 60s or the anti-Clinton wingnuts of the 90s. That is, the power of populist conservatism has actually declined over time. The real driver behind all the press attention was pointed out by the friend who emailed the Politico piece to me:

The subtext here, though, is the power of conservative media over other MSM outlets. Unaddressed is how the Tea Party elements came to prominence in such a way that other media outlets were compelled to play catch up. The answer of course is Fox.

Politico itself, of course, has been second only to Fox in its obsession with the tea parties, something that Martin and Smith briefly allude to but then drop. As my friend cynically notes, "Perhaps their page views are slowing down on those stories, enabling them to try a 'let's move on' approach. More likely, this is just another Tea Party story to continue the page view diet they seem addicted to."

Well, maybe. I guess I'm a little more charitable. I don't want the media to stop covering the tea partiers, but they really need to dial it down a notch and give it only the attention it deserves. Which is to say: not that much, really. Remove Fox and FreedomWorks from the equation and there probably wouldn't be much left of the whole movement. So whether they're doing it for pageviews or not, bravo to Politico for pointing this out.

Healthcare Reform After a Month

| Thu Apr. 22, 2010 12:20 PM EDT

So how is public opinion on healthcare reform coming along? Here's the top line from a Kaiser Family Foundation poll taken last week:

Democrats outnumber Republicans, so overall 46% of the country favors the bill vs. 40% who don't. Still, independents remain skeptical: 46% are unfavorable vs. 36% who are favorable.

That's going to take some work to overcome. On that score, there's some good news and some bad news. The good news is that Kaiser also polled some of the specific provisions of the healthcare bill that take effect quickly, and virtually all of them were extremely popular. Every single one polled over 50% and virtually all of them were favored by more than two-thirds of the respondents. Even Republicans approved of most of them.

So that's something to work with. And the bad news? People are pretty savvy about who the bill will help: the poor, the uninsured, and those with preexisting conditions. However, only 31% think it will help them, and broadly speaking, they're probably right about that in the short term. For most voters, then, we're going to have to appeal to the better angels of their nature, and that's always a crap shoot.

This all comes via Austin Frakt, who points to another part of the poll that says 26% of the country got at least some of their information about healthcare reform via blogs and non-media websites. Not bad! Only 6% said it was their most important source, but that doesn't strike me as surprising. After all, even for me I'd have to say that it's a close call whether blogs or traditional news media were my most important source of information about healthcare reform. Being a healthy part of the mix is probably about as much as we can hope for.

Obama on Financial Reform

| Thu Apr. 22, 2010 11:54 AM EDT

President Obama's big speech on financial reform is here. After hearing it, I don't feel so bad about being unable to make the subject fascinating. If even Obama can't make it sound interesting, what chance do I have? Here's the Reader's Digest version:

First, the bill being considered in the Senate would create what we did not have before: a way to protect the financial system, the broader economy, and American taxpayers in the event that a large financial firm begins to fail....Second, reform would bring new transparency to many financial markets....Third, this plan would enact the strongest consumer financial protections ever.

So: resolution authority, derivatives clearing, and the CFPA. All good stuff. Important stuff. Better than nothing. But in the great battle between those who want to bust up the big banks and those (like me) who want to implement serious, wide ranging limits on leverage — well, guess what? We're both losers. Structurally, Wall Street just isn't going to change much after all this stuff is passed.

Basel I, II, III

| Thu Apr. 22, 2010 11:15 AM EDT

After my lunch with Felix Salmon a few weeks ago I demanded better coverage of international negotiations over capital standards in the banking industry. Why? Because "international negotiations over capital standards in the banking industry" is possibly the most boring sounding topic of all time; the talks all happen behind closed doors; and it's supremely important.

A higher capital standard is sort of like requiring a higher down payment on a house: not only does it mean you're borrowing less, but it also means you have a bigger equity cushion in case the value of the house drops. It makes it harder to overextend yourself on a house you can't afford and it means you won't be wiped out by a small drop in the house's value. In a nutshell, this is what we want to do to banks: force them to buy less house and maintain better reserves against the possibility of disaster. It will make them less profitable, but it will also make them safer.

Now, we've been through all this before. The original Basel standards for capital adequacy were OK but not great. But the Basel II standards were a disaster. Partly this was because every country has different financial customs and different sectors where it's stronger or weaker, and every country wanted to protect both its own customs and its own strongest sectors. The result was lots of flexibility. Too much flexibility.

But that was then. After a global financial meltdown we're all going to suck it up and get serious, right? Guess again:

Countries involved in the negotiations agree banks should maintain larger capital reserves, but disagree on key details, including definitions of core terms. Officials are instead moving to protect the interests of their own banking industries while penalizing others elsewhere.

....In the talks, some U.S. government officials are fighting what they view as an anti-American proposal that would prevent banks from counting as part of their capital cushion a specific type of security favored by U.S. banks known as a trust-preferred security.

Several other governments are pushing to change the way tax credits are counted as capital, amid arguments that the rules help banks in certain countries but hurt others. French officials are lobbying against rules that could force some of their banks to divest themselves of insurance subsidiaries or face major blows to their capital. The Japanese are also opposed to elements of the new rules.

Meanwhile, U.K. and U.S. officials have clashed over British attempts to require foreign banks to stash more cash in their U.K. subsidiaries. A top official with the U.K.'s Financial Services Authority, Britain's top regulator, says the policy is a response to the U.K. getting burned by the collapse of Lehman Brothers, which taught the agency "to be cautious about relying on other regulators."

Yuck. This is a big part of what made Basel II so toothless. But it's important stuff, because it's one of the keys to a safer banking sector. The United States can, if we want, implement tough rules on our own — and I think we should — but banks are too globally interconnected to make this the best solution. A safe American banking sector doesn't do anyone much good if the riskiest practices just move to Frankfurt or Tokyo. So boring or not, keep your eyes on this.