Kevin Drum - June 2010

Reining in the Debt Machine

| Tue Jun. 8, 2010 10:15 AM PDT

The conference committee on financial reform gets down to business this week, and one of the subjects on the table is Susan Collins's provision to increase capital requirements for banks. Wall Street is dead set against this, of course, but Pat Garofalo dismisses their objections:

Throughout the financial reform debate, the banks have claimed that every proposed regulation would hinder credit and decrease the availability of loans. The same threat, used over and over, begins to ring a bit hollow.

I sort of wonder about the advisability of this approach. Because let's face it: the banks are right. Other things equal, anything that raises capital requirements or reduces leverage does limit the size of a bank's asset base. That's the whole point. And since the vast bulk of most bank assets consists of loans in one form or another, higher capital requirements will indeed lead to them reducing the availability of loans.

Now, it's possible that the effect will be less than Wall Street says. Maybe banks will shift their portfolios in ways that keeps credit to the real economy flowing. Maybe other parts of the financial industry will take up some of the slack. Maybe. But the housing bubble of the aughts was really a credit bubble, and one of the whole points of financial reform is to put rules in place that rein in the kind of unsustainable increases in debt we saw over the past decade. It might or might not work (the financial industry is pretty good at figuring out ways around prudential regulation, and global capital flow imbalances are going to continue driving debt upward unless we get them under control), but putting a modest damper on loan availability is a feature of financial reform, not a bug.

Whether it's wise to say this very loudly I'm not sure of. But I'm not sure it's wise to deny it too loudly either.

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Was Obama Ever a Raging Lefty?

| Tue Jun. 8, 2010 9:48 AM PDT

James Bennet, in the Atlantic's annual "Ideas" issue, writes an entry called "Obama Is No Liberal." It starts like this:

It was a beautiful moment when Barack Obama, with his election, drew the left and right together in one powerful conviction: that he was a raging lefty.

I've heard variations on this many times, but where does it come from? The right certainly invested itself in a narrative of all-but-Marxism to galvanize the troops in opposition to Obama, but the left? Maybe I'm just hanging out in the wrong precincts, but it seems to me that the left pretty much always saw Obama as a pragmatic, mainstream liberal. Seriously: who on the left ever claimed Obama as a fellow "raging lefty"? (I'd ask Bennet to "name one," but hell, there probably is one. There always is. So how about naming half a dozen? That shouldn't be hard if left and right really were drawn together in this powerful conviction.)

It's fair to say that a lot of liberals hoped to accomplish more than we have. But it's really not fair to say that most liberals ever viewed Obama as a raging lefty. Better ideas, please.

Taxes and the Rich

| Tue Jun. 8, 2010 8:55 AM PDT

Felix Salmon notes Jeff Sachs's suggestion that tax rates on the rich should rise substantially, and demurs:

I don't think this is possible, politically, in either the US or the UK. In the US, the middle classes are implacably opposed to tax hikes on people making more money than they themselves will ever make. I'm not entirely clear on the reasons for this, but I suspect it has something to do with the American Dream of becoming incredibly successful: no one wants to reach that gilded land only to find it full of taxes.

Someone — a journalist or an academic, I'm not sure which — should consider this an assignment desk piece: Why are Americans so unsympathetic to higher taxes on zillionaires? Does it really have something to do with an unfounded optimism about themselves someday becoming rich? I've heard this explanation a thousand times, but there's really never any evidence for it except for one thing: an old poll (which I can't locate just at the moment) showing that 19% of Americans think that someday they'll be millionaires. The problem is that (a) it's just one poll and (b) it's still only 19%. If that were really the reason Americans were opposed to taxing the rich, we'd still have about 80% of the country in favor.

So what is the reason? The "American Dream" answer is one possibility. Generic anti-tax fervor is a possibility. A principled sense of justice (i.e., no one should have to pay more than half their income in taxes, or some such) is a possibility. Widespread delusion about how much the rich currently pay in taxes is a possibility. There are lots of possibilities. But which of these are actually the prime motivators? Someone should try to find out.

California Propositions

| Tue Jun. 8, 2010 7:00 AM PDT

It's voting day! For all my California readers, here's a recap of my recommendations for the five initiatives on today's ballot:

  1. Seismic retrofits: YES.  This is small and harmless.

  2. Open Primaries: NO. I'm not a fan of letting members of one party select the other party's candidates.

  3. Fair Elections Act: YES. This is a limited experiment with public financing for a single office. It's worth a try.

  4. Municipal Power: NO. This is an effort by PG&E to use the ballot box to eliminate its competition. If it passes, you can expect a lot more sleazy initiatives like this.

  5. Auto Insurance: NO. This initiative is funded entirely by Mercury Insurance, which wants to base auto insurance rates on a factor not related to the risk of filing a claim. I think we're better off maintaining a very bright line that prohibits this.

For more details, see here.

California Hatin'

| Mon Jun. 7, 2010 9:18 PM PDT

Ladies and gentlemen, courtesy of Public Policy Polling, I give you the state of California:

We'd never done a public poll in California before last week and the thing I found most remarkable was how much voters in the state hate all of their politicians.

Arnold Schwarzenegger of course is the least popular Governor in the country with a 20/64 approval rating. The battle to replace him looks like it will be between someone marginally unpopular (Jerry Brown and his 37/39 favorability ratio) and someone very unpopular (Meg Whitman and her 24/44 favorability ratio.)

In the Senate race right now an unpopular incumbent (Barbara Boxer, 37/46 approval) is still favored for reelection because her likely opponent is just as unpopular (Carly Fiorina, 22/30 favorability and that's before the Democrats start really spending money on attacking the heck out of her.)

....Dianne Feinstein's breaking even at 41/41 seems like a monumental level of popularity in comparison to everyone else.

It's true: we hate everyone. Of course, one thing to keep in mind is that the current political season has been almost 100% brutally negative. I've never seen such a tidal wave of negative advertising in my life as I have in the past couple of months. Add in a recession that's hit California worse than most of the country, a budget crisis that's become nearly unfathomably disastrous, and a dysfunctional political system that's almost literally incapable of doing anything, and it's a miracle that these folks don't poll even worse.

In any case, I'd just like to say that Arnold Schwarzenegger fully deserves his unpopularity. I'm not sure who the 20% are who still approve of him, but they must be seriously deranged.

Distorting the Energy Market

| Mon Jun. 7, 2010 4:26 PM PDT

The Financial Times got a look at a draft study from the International Energy Agency today and reports that "The world economy spends more than $550bn in energy subsidies a year, about 75 per cent more than previously thought." Matt Yglesias comments on the notion that removing these subsidies would move us closer to a free market in energy:

The last point really is telling and important here. I can’t think of a single significant “free market” institution in America that spends nearly as much time and energy on this set of market distortions than they do bashing enviornmentalist proposals. Operationally, conservatism in the United States just isn’t about small government or free markets.

That's true enough. However, the FT piece also includes this line:

Iran, Russia, Saudi Arabia, India and China top the ranking, according to the report.

It turns out the IEA study is about developing economies. There aren't any details about what's in the report, but it looks like they're mostly tallying consumer subsidies for things like heating oil and gasoline, not corporate welfare for Exxon Mobil. It doesn't really have much to do with the United States, and it's not really surprising that American think tanks spend more time on American legislation (which they can influence) than on petrol subsidies in Iran (which they can't).

That said, there are plenty of examples of corporate welfare for energy production in the United States, one of which has been in the news quite a bit lately: the statutory $75 million limit on liability for oil spills. This creates a significant distortion in the free market for energy, but it hasn't exactly lit the conservative world on fire. Over at the Heritage Foundation, for example, the best Nicolas Loris could say a couple of weeks ago was that raising or eliminating the cap "is a matter needing careful thought." Indeed.

This is especially noteworthy in light of today's news that climate legislation is likely to be watered down into mere energy legislation. The whole idea behind a comprehensive climate bill is that it provides some scope for political dealmaking: enviros get their cap-and-trade plan while a few conservatives hold their noses and vote for it because they get some goodies in return (nuclear power, offshore drilling, etc.). Market-distorting subsidies are, generally speaking, the price for conservative support on any bill, and now it's starting to look like they're going to get more of them without really paying any price at all. Hooray for free market capitalism!

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Killing the FCIC With Kindness

| Mon Jun. 7, 2010 3:13 PM PDT

Via Felix Salmon, CNBC reports that Phil Angelides is pretty peeved at Goldman Sachs:

Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, said that while the overwhelming number of financial firms from which the FCIC has sought documents or information have complied, Goldman has not. Instead, Goldman has been “dumping” an overwhelming volume of documents on the FCIC, which has a staff of just over 50 people.

"We did not ask them to pull up a dump truck to our offices to dump a bunch of rubbish," Angelides said during a conference call following the announcement that the FCIC had sent Goldman a subpoena Friday.

....Thomas said Goldman was deliberately delaying because it knows the FCIC must wrap up its investigation and deliver a report on the crisis at the end of the year. Angelides agreed, describing Goldman as making a “very deliberate effort to run out the clock.”

This is such a classic maneuver. Thanks to technology, however, it's not as common in big class action lawsuits as it used to be. These days, if you dump a million pages of documents on the plaintiff in a big suit, they just hire a bureau with a bank of high-volume scanners to scan every page, OCR it, and then do full text indexing on the whole mess. Sometime during the mid-90s I went to a lecture given by one of the lead lawyers in the Exxon Valdez case where he described how they had done this, and it was pretty eye opening. Today, though, it's routine.

But it's only routine if you have (a) the budget to do it and (b) the time to do it. The FCIC has neither, so in a case like this it remains a pretty effective tactic. But the Washington DC area has loads of imaging bureaus. Maybe one of them should offer up their time pro bono to help out with this. It's only a million pages, after all.

BP vs. Katrina

| Mon Jun. 7, 2010 11:35 AM PDT

Here's the latest on public reaction to the BP oil spill:

A month and a half after the spill began, 69 percent in a new ABC News/Washington Post poll rate the federal response negatively. That compares with a 62 negative rating for the response to Katrina two weeks after the August 2005 hurricane.

There are a couple of obvious reasons for this. The first is that the BP disaster has gone on for a long time. People have short memories, and within just a few days of finally getting assistance into New Orleans the outrage over Katrina had started to ease. The same thing will happen when the BP blowout is capped, but in the meantime public reaction is just going to get worse and worse.

The other reason, I suspect, is purely political: during Katrina, Republicans largely rallied around the federal response because they wanted to defend George Bush from lefty criticism. In the case of the BP spill, Democrats have been much less willing to do the same for Barack Obama. And sure enough, the poll results suggest this is exactly what's happened. The reverse-partisan split in negative reactions is about the same between the two events: 81% of Republicans are critical of federal response to the BP spill while 79% of Democrats were critical of federal response to Katrina.

But take a look at the same-party response. In 2005, only 41% of Republicans were critical of their own administration's response to Katrina. In 2010, 56% of Democrats are willing to criticize their administration's reponse to BP. That alone accounts for most of the difference in public reaction between the two events.

Climate's Canary in the Coal Mine

| Mon Jun. 7, 2010 9:55 AM PDT

Will Congress pass a climate bill this year? The odds look long, but one thing working in favor of passage is the background threat that if Congress doesn't act, the EPA will. The EPA has considerable authority to enact greenhouse gas regulation on its own, but pretty much everyone agrees that trying to shoehorn climate change regs into the Clean Air Act would be costly and ineffective compared to a program that's custom built to do the job. So even if you don't like the idea of cap-and-trade or a carbon tax, you might vote for one anyway if the alternative is letting the EPA handle things.

Sen. Lisa Murkowski (R–Alaska) wants to put a stop to this threat, so she's sponsoring legislation that would strip the EPA of its authority to regulate greenhouse gases. Dave Roberts puts Murkowski's resolution #1 on his list of bellwethers that will provide us with clues about the possibility of passing serious climate legislation this year:

If passed, the resolution would wreak havoc on the vehicle fuel efficiency standards worked out between the EPA, California, and auto companies (and the standards under discussion for 2017 forward). It would also disrupt the very legislative efforts Murkowski claims to support. The cap-and-trade system in the climate bill is run by the EPA, as a title under the Clean Air Act; how can that be legally kosher if the EPA is forbidden from judging greenhouse gases a danger?

But of course it won't pass; nobody, Murkowski included, thinks it has a chance. If it got through the Senate, it wouldn't get through the House; if it got through the House, Obama would veto it. It's an act of pure grandstanding on Murkowski's part.

But pundits have decided that the vote is an indicator of support for the climate change bill. The resolution needs 51 votes, to pass. If it breaks 45 votes, it's trouble. If it breaks 50, it's doom.

The vote is scheduled for Thursday and Murkowski already has 41 cosponsors. She's not likely to get 50 votes, but she's probably going to come mighty close to 45. Stay tuned.

The Helen Thomas Affair

| Mon Jun. 7, 2010 9:26 AM PDT

Helen Thomas is retiring. Thank God. On a substantive level, this is a good thing. Her remarks about Israel were obviously odious and she's doing everyone a favor by stepping down. Equally important, though, maybe this means we don't have to spend the next week listening to every windbag in the country rant on about Thomas's remarks, using them as an excuse to grind every axe ever invented and suck media attention away from actually important stories. Of which, you might have noticed, we have quite a few these days.

Probably a vain hope, though. The windbags aren't going to shut up regardless, are they?