Kevin Drum - July 2010

A Run in the Shadows

| Tue Jul. 13, 2010 1:15 PM EDT

The Economist points us today to a new paper from the New York Fed that explains the role of the shadow banking system in the great crash of 2008:

The subprime crisis may have started the fall, but the financial crisis was precipitated by a run on shadow banks. As this paper shows, there is an inherent weakness in the shadow banking system that makes it vulnerable to future bank runs.

In traditional banks, deposit insurance acts as an official put, limiting any losses suffered by retail investors. For shadow banks, the bulk of the deposits are provided by money market funds. These funds expect their deposits to be available on demand and at par....Any entity that relies on them for funding and lacks alternative sources of liquidity is inherently fragile. During times of crisis, if confidence in the credit puts guaranteed by the institutions erodes, depositors move to redeem their funds. Absent a backstop, in the form of government guarantees, a run on the system ensues.

As the chart shows, starting in 2008 the shadow banking system collapsed, with wholesale funders panicking en masse and removing 20% of their money within the space of a couple of years. That's a huge drop. The same thing didn't happen in the traditional banking system because their funding comes mostly from retail depositors like you and me, and we had no reason to suddenly panic since we knew the FDIC had us covered in the event our bank failed. So perhaps we should provide a similar backstop for the shadow sector?

But any permanent guarantee would come at the cost of added regulation. The authors propose regulating financial institutions based on function rather than form. This makes sense. Banks and shadow banks essentially perform the same function — financial intermediation. Regulation by function would remove the need for shadow banks that thrive on regulatory arbitrage, and focus on institutions that add economic value.

That's a novel idea, no? And I think the current financial reform bill makes a few small feints in this direction, though nothing that seriously affects the structure of the shadow sector. We'll probably need them to destroy the world a second time before we consider taking any further action.

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Make My Day, GOP

| Tue Jul. 13, 2010 12:24 PM EDT

Jonah Goldberg diagnoses the Democratic Party's woes following their early legislative successes:

Democrats steamrolled the most ambitiously liberal agenda in at least a generation. Yet liberals are miserable. Their lamentations over what they see as President Obama's lack of audacity punctuate the din, like ululating matrons at an Arab politician's funeral. This misplaced griping stems not from Obama's failure to "think big" but from a misreading of the political climate: Liberals thought they'd be popular.

Fair enough. A little florid for my taste, but then, I'm not a conservative. But it turns out that Goldberg has issues with his side too:

For a year or so, Republicans have been the so-called party of no. Contrary to the expectations of its critics, that tactic has been good for the GOP. It seems that the "tea parties," America's natural antibodies to Obamaism, have provided some vital stem cell therapy, helping to regrow the Republican spine.

But that spine is only valuable if you use it for something....Now is the time for the GOP to call Obama's bluff and offer a real choice. My personal preference would be for the leadership to embrace Wisconsin Rep. Paul Ryan's "road map," a sweeping, bold and humane assault on the welfare state and our debt crisis. Doing so might come at the cost of trimming the GOP's victory margins in November, but it would provide Republicans with a real mandate to be something more than "not-Obama."

I swear, I would pay cash money if the Republican leadership would promise to actually do this. Goldberg thinks that liberals aren't popular? That's peanuts. If Republicans made a serious run at passing Ryan's road map the party would end up just slightly more popular than the Taliban. I think there would literally not be a single demographic or interest group in the entire country still supporting them. Even the tea partiers would start pretending to be Democrats. Hell, they'd probably take up the cause of repealing the 22nd amendment and allowing Obama to be elected president for life.

Of course, it's fine for columnists and pundits to say this kind of stuff. Just trying to move the needle, after all. But I sure wish party leaders would take them up on it once in a while. Democrats, for all their faults, generally do approximately what they say they're going to do and then either pay the price or reap the benefits. Republicans don't. They parachute into Tea Party gatherings and spout stemwinders about taking an axe to government spending, but when they get back to Washington they do just the opposite — all while figuring out ever newer and more inventive ways of providing tax breaks to favored industries. If they ever actually got serious about slashing all that government spending they claim they're so dedicated to slashing, the party of Lincoln would end up on the ash heap of history.

So I dare them. I double dog dare them. Let's hear about how you're going to cut federal spending by a trillion dollars over the next five years and by a third over the next 50. Details, people. Let's hear 'em. Make my day.

Healthcare Reform and Contraceptives

| Tue Jul. 13, 2010 11:36 AM EDT

Dana Goldstein reports that conservative groups are gearing up for a fight to make sure that healthcare reform regs, which will be drafted over the next couple of years, don't include a requirement that insurance companies cover contraceptive use:

The conservative groups are particularly worried that a birth control coverage mandate could include teenage girls and young women covered under their parents' health insurance plans. "People who are insured don't want to pay for services they don't need or to which they have moral objections," said Chuck Donovan, senior researcher at the Heritage Foundation. "Parents want to have a say over what's covered and what's not for their children."

Yeah, it's all about the kids, isn't it? But then, what choice do guys like Donovan have? Abortion may be a hotly contested issue, but contraceptives aren't. Practically everyone approves of them, so you have to figure out some way to demonize them that doesn't reduce your fundraising appeal among the masses. Matt Yglesias comments:

Politically speaking, I think this is the fight progressives have been wanting to have for some time now — something that would highlight the deeply reactionary and anti-woman ideology that drives the main institutional players in the anti-abortion movement. But will it be possible to get people to pay attention? These non-abortion reproductive health aspects of the Affordable Care Act got very little attention from either side.

But I wonder how much help we'll get from President Obama? His desire to avoid hot button culture war issues is almost obsessive, and it's unlikely that he'll choose this as a hill to fight for. So it'll mostly be up to HHS secretary Kathleen Sebelius, and my guess is that she'll try to keep the whole thing very low key.

Update: Hospitals Still Killing Their Patients

| Mon Jul. 12, 2010 11:58 PM EDT

If you read Atul Gawande's New Yorker article about central line infections three years ago, you already know that CRBSIs — catheter-related bloodstream infections — maim and kill tens of thousands of hospital patients a year. And you also know that these infections can be reduced nearly to zero through the use of a simple checklist that boils down to "keep everything really clean." So it's infuriating all over again to read today that a new survey of doctors and nurses suggests that pretty much nothing has changed:

Why aren't hospitals leaping to adopt these best practices?.... More than half of the 2,075 respondents, most of whom were infection control nurses employed by hospitals, reported that they use a cumbersome paper-based system for tracking patients' conditions that makes it harder to spot infections in real time. Seven in 10 said they are not given enough time to train other hospital workers on proper procedures. Nearly a third said enforcing best practice guidelines was their greatest challenge, and one in five said administrators were not willing to spend the necessary money to prevent CRBSIs.

[Peter] Pronovost said part of the problem was that many hospital chief executives aren't even aware of their institution's bloodstream infection rates, let alone how easily they could bring them down. When hospital leaders decide to create a culture in which preventing infections is a priority, he added, nurses feel empowered to remind physicians to follow the checklist when inserting catheters, physicians are provided antiseptic soaps as part of their catheter kits and infection control personnel have the best tools to monitor patients.

Italics mine. How is it possible that hospital CEOs don't even know about this? We're talking about something that saves lives, costs almost nothing, and would probably reduce healthcare costs by over a billion dollars nationally if it were adopted aggressively. And equally, why is our medical system still so screwed up that doctors routinely treat nurses like serfs who are too cowed to insist on sterile procedures? I mean, talk about the cost of lingering patriarchy. In this case, it might someday kill you.

The Republican Philosophy

| Mon Jul. 12, 2010 5:55 PM EDT

Over the weekend, Sen. Jon Kyl (R–Ariz.) went on Fox News to tell the world that although spending increases should always be offset (gotta keep the budget balanced, natch), tax cuts shouldn't. "You should never have to offset the cost of a deliberate decision to reduce tax rates on Americans," Kyl said categorically. Liberals chortled at Kyl's hypocrisy, but NRO's Dan Foster objects:

First of all, I'm not sure where the "gotcha" moment is. The most natural — nay, the most blindingly obvious — way to interpret Kyl's statement is that a tax cut paid for by a tax increase is no tax cut at all. It's a tax redistribution. Second of all, I'm sure if you asked Senator Kyl, he'd tell you that tax cuts should be offset — by spending cuts. That also seems a fairly natural inference to draw here.

On Foster's first point, sure. Revenue neutral tax fiddling is — well, revenue neutral. But on his second point, can I point out that, natural inference or not, Kyl did not, in fact, say that tax cuts should be offset by spending cuts. In his interview with Kyl, Chris Wallace repeatedly pointed out that the portion of the Bush tax cuts that apply to the upper brackets would cost $678 billion if they were extended. But even with all the opportunity in the world, Kyl failed to explain that he thinks there's $678 billion in spending cuts that Congress should push through in order to make up for that.

So here's the question: does anyone seriously believe that Kyl thinks this? Or that anyone in the Republican leadership thinks this? Or that $678 billion in specific spending cuts will get even a hundredth of the attention that they give to their PR campaign to extend the Bush tax cuts for the wealthy?

Foster is right that this is a philosophical point. But he's got the philosophy wrong. Republicans are dedicated to tax cuts for the rich, not to leaner, meaner, smaller government. Real-world evidence to the contrary is welcome.

Theory vs. Reality

| Mon Jul. 12, 2010 2:44 PM EDT

Jon Cohn thinks President Obama was right to make a recess appointment of Donald Berwick as head of the Centers for Medicare and Medicaid Services. But today he says that conservative Tevi Troy has a pretty good counterargument:

Being a confirmed appointee really makes a difference at the agencies, and it is worth taking some political hits to give your nominees that important blessing. Given the Democrats' strong 58 seat majority in the Senate, Dr. Berwick could have gotten there if the White House had just let the process play out.

When I told Jonathan that I disagreed with him on this issue, he said that if the Republicans were willing to promise that they would not filibuster Dr. Berwick, then he would be willing to say that the White House was wrong to go this route. I disagree. Nobody, Republican or Democrat, could or should make that promise, as we can't know what information the confirmation process will reveal. Furthermore, the Republicans had not filibustered or obstructed this nomination before the recess took place, largely because they wanted to have a chance to question Dr. Berwick on his controversial views.

I agree with this argument in theory.1 The problem I have with it is that it implicitly requires us all to pretend to be idiots who don't pay attention to the actual way that actual politics works these days. Republicans haven't filibustered Berwick yet? Of course not, but does anyone care to place cash money on them not doing it? Anyone? And Republican questioning of Berwick's "controversial views"? We all know what this means: Berwick is a commie who has said nice things about Britain's National Health Service. This is not exactly going to be the Lincoln-Douglas debates here.

Look: I still think Troy has a good argument. In theory. If a position is supposed to be confirmed by the Senate, then the Senate should be allowed to hold hearings. And maybe Obama should have sucked it up and let these hearings proceed. But the Republican Party has made it pretty clear that they're only willing to hold real hearings and allow real votes on high profile nominees that the press and the public actually pay attention to: cabinet positions and Supreme Court nominees. They don't want ordinary voters to realize what they're up to, after all. Other nominees all fly under the media's radar and have become the victims of routine obstructionism. I'm not quite sure why we're all supposed to pretend we don't know this.

1Except for the fact that I don't think the head of CMS should be a Senate-confirmed position in the first place, of course. But let's set that aside for the moment.

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Financial Reform Update

| Mon Jul. 12, 2010 12:51 PM EDT

And speaking of financial reform.....

Apparently Scott Brown has agreed to support the financial reform bill in the Senate. Susan Collins got on board a few days ago. So that gives us 57 Democrats and two Republicans. One more to go and we have 60. So it's all going to come down to Olympia Snowe and Chuck Grassley. Kinda makes you tingle all over, doesn't it? 

The Safest Street in America

| Mon Jul. 12, 2010 12:34 PM EDT

As the economy (hopefully) begins to pick up, one of the things that will make recovery difficult is the problem of sectoral shifts. That is, the industries that lost jobs in the recession aren't necessarily the same ones that will gain jobs in the recovery. So if you're a guy who's installed drywall for the past 20 years, you're in dire straits even if the economy starts going gangbusters. There are millions of construction workers who are going to have to find a brand new line of work over the next few years, and that change won't be an easy one.

But guess what? There's one industry where, although a massive sectoral shift would be a blessing, it's not happening: high finance. Here's the New York Times today:

While much of the country remains fixated on the bleak employment picture, hiring is beginning to pick up in the place that led the economy into recession — Wall Street.

Isn't that sweet? But Annie Lowrey says it's even worse than that:

Granted, Rae Rosen believes that Wall Street is hiring in anticipation of better times. But the article, and the data, show that times are already pretty darn good. The Wall Street firms that made it out of the credit crunch and the financial collapse alive are doing just fine, in fact. They have less competition from companies like Lehman Brothers and Bear Sterns. That means more profits.

They also are benefiting handsomely from low interest rates. It is Banking 101: Wall Street firms borrow billions from the government for close to nothing, lend it out and make money on the margin. That means more profits.

Companies like Goldman Sachs are more profitable now than they were in the boom years. That, really, is why they are hiring — not because they are betting on a strong economic recovery. They are making money hand-over-fist despite the fact that the rest of the economy is ailing terribly, and only starting to turn around.

The financialization of the American economy has been a disaster. Forget all that stuff about the hollowing out of our manufacturing base or increased global competition or waves of immigrants taking away our jobs. Those are all legitimate issues of one stripe or another, but the far bigger issue is that a gigantic chunk of our productive capacity — Wall Street — is deployed almost solely to make money for one sector of our economy: Wall Street. Until that changes, until the financial industry is focused primarily on providing capital and services to other people, we're always going to suffer from either (a) underperformance in the real economy or (b) an endless boom and bust cycle. Take your pick.

There's one key metric that will tell us whether financial reform is working: the size and profitability of the FIRE sector. (That's Finance, Insurance, and Real Estate.) If it shrinks considerably, it means financial reform, despite all the watering down, has basically done its job. But if the FIRE sector remains enormous, it hasn't. We'll know in a few years.

Lead of the Week

| Mon Jul. 12, 2010 11:57 AM EDT

I would like to nominate this for least surprising lead of week:

The sweeping legislation that grew out of Toyota Motor Corp.'s sudden-acceleration crisis — heralded as the most important auto safety bill in a decade — has been scaled back significantly in the face of auto industry opposition.

You can substitute any rich interest group you like for "auto industry" in this story and you've pretty much written the recent history of American politics. Pretty uplifting, no?

The Real Truth About Elections

| Mon Jul. 12, 2010 11:45 AM EDT

A little while back I was talking (well, emailing) with MoJo's editors about possible election-related stories for our next issue. One idea I pitched was, basically, about how nothing matters in national elections except the economy and a couple of other smaller issues — primarily candidate quality, the current party balance, and who holds the White House. But mostly the economy.

In the end I decided to write about something else because, let's be honest: this subject is kind of a downer. Who really wants to read a few thousand words about how nothing we do really matters because the election will be almost entirely decided based on the state of the economy a few months before November? Probably not too many people. But that didn't stop Ezra Klein, who's perfectly willing to spill the bad news:

We think of campaigns in terms of people, but they're often decided by circumstances. "The media and the popular mind really think that candidates and the campaigns make a huge difference," says Michael Lewis-Beck, author of "Forecasting Elections." "But it's not as big a difference as the fundamentals operating behind the scenes every day." In some ways, that's comforting: Politicians are judged more on the condition of the country than on the elegance of their campaign.

But for the Obama administration, it's likely chilling: The economy is still weak, and there aren't 60 votes in the Senate for further stimulus spending. And even if there were, it is too late for them to make a major difference in the economy before November. Democrats needed to pass a bigger stimulus back in 2009, not in late 2010. What they do from here might help the economy, but it's not likely to affect their reelection.

Does the truth really set you free? Or just bum you out? I guess it depends. In any case, Ezra's crack team at the Post has also put the truth into chart form: on the left is presidential results based on the state of the deficit, and it's a messy plot that tells you nothing. Nobody, it turns out, cares about the deficit even if they say they do. On the right is presidential results based on the state of income growth, and guess what? Everyone cares about their incomes. That's a nice, clean regression line.

By the way, this chart also shows the power of incumbency. The main overperformers (i.e., candidates who did better than the state of the economy predicts) were in 1996, 1956, 1984, 1972, and 1964. All of these were one-term incumbents seeking reelection. Conversely, the main underperformers were 1952, 1968, and 2000. All of these involved an incumbent party that had already been in office for two terms or more. Basically, a combination of economic growth and boredom determines presidential elections almost completely.

And midterm elections? Pretty much the same deal. But despite what I said at the top, don't let this fool you into thinking that working hard for your candidate or your party doesn't matter. These models work because they assume that both sides are fighting hard and basically cancel each other out. If you give up and leave your fate in the hands of the gods, you'll soon discover that the gods are not amused.