Kevin Drum - July 2010

Can California Legalize Marijuana?

| Sun Jul. 18, 2010 2:45 PM PDT

Mark Kleiman, clearly competing for killjoy of the year honors, explains why a California initiative to legalize marijuana won't work:

The federal Controlled Substances Act makes it a felony to grow or sell cannabis. California can repeal its own marijuana laws, leaving enforcement to the feds. But it can't legalize a federal felony. Therefore, any grower or seller paying California taxes on marijuana sales or filing pot-related California regulatory paperwork would be confessing, in writing, to multiple federal crimes. And that won't happen.

True, Atty. Gen. Eric H. Holder Jr. has announced that the Justice Department will not prosecute people who are selling medical marijuana in compliance with California's law. But that's an entirely different matter....The feds can afford to take a laid-back attitude toward California's medical marijuana trade because it's unlikely to cause much of a trafficking problem in the rest of the country. Because dispensaries' prices are just as high as those for black-market marijuana, there's not much temptation to buy the "medical" sort in California and resell it out of state.

By contrast, the non-medical cannabis industry that would be allowed if Proposition 19 passed would quickly fuel a national illicit market....As a result, pot dealers nationwide — and from Canada, for that matter — would flock to California to stock up. There's no way on earth the federal government is going to tolerate that. Instead, we'd see massive federal busts of California growers and retail dealers, no matter how legal their activity was under state law.

On his blog, Mark says, "I may vote for the proposition anyway, just as a protest against the current laws." Me too. Besides, there's really no telling what the feds will do until someone forces the issue. So why not force it? At the very least it has a chance to move the public opinion needle a bit. Besides, I think it would be entertaining to watch the tea partiers twist in the wind trying to figure out which is more important: (a) making sure the hippies don't get their dope or (b) fighting the jackbooted tyranny of federal officers interfering with the sovereign Tenth Amendment right of states to police their own borders. Or something.

In any case, my guess is that Prop 19 will fail. It probably would regardless (it's already behind 44%-48%), but Mark is right: opponents can make a pretty scary case that it would lead to California becoming the pot capital of the United States and fueling gang/mafia/DEA wars of all stripes. The ads sort of write themselves. Unfortunately, we're probably still a few years away from having any chance of seriously discussing a sane marijuana policy. Even in California.

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SCADA-phobia

| Sun Jul. 18, 2010 2:19 PM PDT

I honestly don't know if this is something to take seriously or just the latest in cyberwar hype, but....

Anti-virus specialists report that a new trojan is spreading via USB flash drives, apparently exploiting a previously unknown hole in Windows.

....An investigation by malware analyst Frank Boldewin has shown that this is not just any old trojan designed to harvest passwords from unsuspecting users....During his investigation, Boldewin came across some database queries the trojan made that point towards the WinCC SCADA system by Siemens. As Boldewin explained in an email to The H's associates at heise Security, a "normal" malware programmer wouldn't have managed to do that. Boldewin continued "As this Siemens SCADA system is used by many industrial enterprises worldwide, we must assume that the attackers' intention was industrial espionage or even espionage in the government area".

Stewart Baker explains what he thinks this means:

This particular exploit is remarkably sophisticated and singleminded....Most troubling is what the malware goes looking for once it starts up. The entire attack seems designed to exploit holes in the Siemens SCADA software that runs electric grids around the world.

As far as I can tell, there’s no reason to compromise a SCADA system other than to take it down. The SCADA system doesn’t contain credit card numbers or other financial data, and I doubt that compromising it is a cost-effective way to steal power for free....There are no obvious secrets to steal from a SCADA system — other than the secret of how to bring the system down. So the logical goal of the malware is not so much espionage as sabotage.

Let me repeat that for emphasis. This elaborate, previously unseen piece of malware, which surely could have been a big moneymaker if used to create a botnet or to send spam, has instead been put to use for a purpose that has no obvious economic payoff — compromising the power grid.

The comment thread on Baker's post is lively and, needless to say, not everyone agrees with him that this is as big a deal as he thinks. And since I don't have the chops to have an independent opinion, don't take this post as an endorsement of what Baker says. But it seemed interesting and potentially ugly. Just thought I'd pass it along.

And while I'm on the subject, if you didn't read Mark Bowden's Atlantic piece about the Conficker worm, "The Enemy Within," when it came out a few weeks ago, it's well worth your time. It's pretty riveting stuff if you have even a little touch of nerd in you.

Quote of the Day: Still Ruled by the Rich

| Fri Jul. 16, 2010 4:51 PM PDT

From Rep. David Obey (D–Wisc.), soon to retire after 40 years in Congress, on his biggest regret:

I think our biggest failure collectively has been our failure to stop the ripoff of the middle class by the economic elite of this country, and this is not just something that happened because of the forces of the market.

And despite the legislative achievements of the Obama administration so far, this hasn't changed even modestly over the past few years. In the long term, this is by far the biggest threat to our economy.

Friday Catblogging - 16 July 2010

| Fri Jul. 16, 2010 12:03 PM PDT

Inkblot and Domino are on vacation this week. (Not that you can really tell the difference, mind you.) So today we have a guest cat. This is Ditto, one of my mother's four critters, lounging in the bay window above her computer. I took the picture while I was over there doing an inventory of her IT needs prior to replacing her old PC with a shiny new one. Conclusion: moving all her stuff to a new machine shouldn't be too hard.

Yes, yes, famous last words. We'll see. In the meantime, wouldn't you like to take an online survey? Sure you would! We're running a reader survey here, and although it's got a bunch of annoying demographic questions, they're easy to answer and the whole thing doesn't take more then ten minutes. For your trouble, we'll send you a free reusable Chico grocery bag and enter you in a drawing for a $100 gift certificate to Patagonia. Thanks!

Who Will Obama Choose to Protect Consumers?

| Fri Jul. 16, 2010 10:39 AM PDT

With the new Consumer Finance Protection Bureau mere days from being created when Obama signs financial reform into law, the question of the day is: who's going to head it up? The obvious choice is Elizabeth Warren, who's been its biggest champion from the very start. Annie Lowrey:

The idea for the CFPB is hers. She is, bar none, considered the foremost mind on the topic. As the head of the CFPB, many in Washington hoped, she would act not just as a strong leader, but as a draw for smart minds — a kind of J. Edgar Hoover, sexing up the bureau rather than letting it become just another wan regulatory agency. This might sound a bit strong. But I am serious in saying that most everyone I speak with about this issue — on the Hill, in consumer groups, in think tanks — considers Elizabeth Warren just that good.

But HuffPo's Shahien Nasiripour says Warren has a problem: Treasury Secretary Tim Geithner doesn't like her.

Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views.

....It's no secret the watchdog and the Treasury Secretary have had a tenuous relationship. Geithner's critics have enjoyed watching Warren question him during his four appearances before her panel. Her tough, probing questions on the Wall Street bailout and his role in it — often delivered with a smile — are featured on YouTube. One video is headlined "Elizabeth Warren Makes Timmy Geithner Squirm."

Well, maybe this source is right, maybe it isn't. But I certainly find the whole thing plausible, and I also find it plausible that Barack Obama would be none too thrilled with a muckraking CFPB director who has little managerial or government experience. That's not really his no-drama style. What's more, there's no telling what kind of deal (if any) the White House made with Sen. Ben Nelson over who they'd appoint.

But I will say this: right now the White House has a big problem with its base. Fair or not, the left wing of the party doesn't believe that Obama either respects them or listens to them much — and this is bad news for Democratic chances in the November midterms. Now, nominating Elizabeth Warren to head up the CFPB wouldn't suddenly make everyone sing Kumbaya, but it would sure go a long way toward patching things up. It would demonstrate, at least for a moment, that he's paying attention to what his base wants, that he's willing to take a chance, and that he's serious about the CFPB having a director who genuinely wants to protect consumers. And just to piss off the entire crew of Fox News, he could even send someone to announce her nomination at Netroots Nation next week. The alternative, as Max Sawicky predicts, is to appoint "some banker d-bag." Take your pick, Mr. President.

Send the Suits to Jail

| Fri Jul. 16, 2010 9:36 AM PDT

Mike Konczal on corporate fraud:

I don’t get people who downplay the sheer volume of consumer fraud that went on in the subprime mortgage market, and the fact that the market decided to reward this fraud. Take Household Finance in the early 2000s. Their aggressive lending practices where people would learn after the fact that they were mislead to how much their total monthly payments were (as well as many other problems) lead to successful settlements in Colorado, Georgia as well as a $484 million in fines joint settlement with a group of attorney generals, the largest consumer fraud settlement in U.S. history.

....So Household Finance has to pay the largest consumer fraud fines in history. I bet you think that the investment community and elite financial institutions wouldn’t look twice at it. Well, you’d be wrong. One month later Household was acquired by HSBC, the London financial giant, for $16.4 billion. The New York Times columnist Floyd Norris called this “the deal that fueled subprime.”

This, of course, is the difference between people and corporations. (Well, one of them, anyway.) For people, crimes are considered moral lapses. Even after you pay your penalty or serve your time, a person convicted of a crime is treated as less trustworthy, less employable, and less honorable than before.

But a corporation? Civil penalties are simply considered a cost of doing business. There's no real moral valence to it at all. If the fine is small enough that the corporation is still profitable, then it's all good. So HSBC might have lowered their price for Household Finance a smidge, but certainly nothing more than that.

This is an unusually stark example of the principal-agent problem at work: a civil fine mostly just hurts shareholders, who had nothing to do with the fraud in the first place and have very little real-world ability to stop it. Criminal charges hit the executives who do — and it's one of the reasons that we probably ought to be a little more willing to pursue criminal charges against executives of companies that either knowingly commit fraud or negligently allow it. Perhaps HSBC would have been a wee bit more hesitant to buy Household Finance if they'd known that the culture of the place didn't merely cut into earnings a bit, but might end up sending a few of the suits on mahogany row to prison for a couple of years? The conservatives I talk to seem to have a considerable confidence in the deterrent power of such things.

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Feeding the Beast

| Fri Jul. 16, 2010 9:03 AM PDT

Hey! I kinda sorta agree with Charles Krauthammer today. How about that? Here he is talking about Obama's big accomplishments so far (the stimulus, healthcare reform, and financial reform) and what they mean for long-term deficit control:

As everyone from Obama on down admits, the real money is in entitlements, most specifically Medicare and Medicaid. But Obamacare freezes these out as a source of debt reduction. Obamacare's $500 billion in Medicare cuts and $600 billion in tax increases are siphoned away for a new entitlement — and no longer available for deficit reduction.

The result? There just isn't enough to cut elsewhere to prevent national insolvency. That will require massive tax increases — most likely a European-style value-added tax. Just as President Ronald Reagan cut taxes to starve the federal government and prevent massive growth in spending, Obama's wild spending — and quarantining health-care costs from providing possible relief — will necessitate huge tax increases.

The net effect of 18 months of Obamaism will be to undo much of Reaganism. Both presidencies were highly ideological, grandly ambitious and often underappreciated by their own side. In his early years, Reagan was bitterly attacked from his right. (Typical Washington Post headline: "For Reagan and the New Right, the Honeymoon Is Over" — and that was six months into his presidency!) Obama is attacked from his left for insufficient zeal on gay rights, immigration reform, closing Guantanamo — the list is long. The critics don't understand the big picture. Obama's transformational agenda is a play in two acts.

As it happens, the healthcare reform bill makes only small changes to both funding and spending on Medicare. Its long-term needs haven't actually changed all that much. But it is true that Obamacare plucked some of the lowest hanging fruit, which means that further cuts will be tougher and tougher. My take is that major cuts in Medicare were never likely, but it's true that the passage of healthcare reform makes them less likely still.

As for a VAT — well, maybe. There are other alternatives, like a serious carbon tax, which would kill two birds with one stone (raise money, cut carbon emissions). But Krauthammer is right that, one way or another, the die is even more firmly cast now than it was a few years ago. Americans really don't want big cuts in entitlement programs, and eventually that's going to mean tax increases of some kind. My guess is that it will happen under a Republican president after the 2016 election.

GOP Fairy Tales

| Fri Jul. 16, 2010 3:00 AM PDT

Back in the day, one of the key Republican arguments against the estate tax was that it forced hardworking, salt-of-the-earth children of small farmers to sell the family plot in order to pay their taxes after dad died. It was a sad story, but with one problem: no one could find even a single small farmer who had been forced to liquidate in order to satisfy Uncle Sam's voracious maw. Even the American Farm Bureau Federation was eventually forced to admit that it couldn't come up with a single example, and a few years later the Congressional Budget Office estimated that under the now-current exemption level, only a tiny handful of small farms were likely to owe any estate tax to begin with — and of those, only about a dozen lacked the assets to pay their taxes. And even those dozen had 14 years to pay the bill as long as the kids kept running the farm. In other words, the story was a fraud from beginning to end.

Good times. Today, though, we're getting a rerun. The subject at hand is the Bush tax cuts, and the question is who exactly will get hurt if we go ahead and keep the cuts intact for middle income earners but let them expire for the rich. The obvious answer is, "the rich," but it turns out that, just as there are small farmers begging for our sympathy, there are small rich too: namely an alleged army of hardworking, salt-of-the-earth small business owners who would also end up paying higher tax rates. "To those who are pushing the higher marginal rates," thundered Sen. Chuck Grassley (R–Iowa) earlier this week, "I say the burden is on you to show that you are not harming our primary job creators, small business."

OK then. Let's show it. Step 1: The Brookings Tax Policy Center estimates that only 1.9% of small businesses are in the two top brackets that would be affected. That's a little better than the dozen small farms affected by the estate tax, but not by much.

Step 2: About half of that 1.9% aren't really small business owners at all. They're high-income investors who get part of their income from investments in small businesses. So we're down to about 1% of small businesses that would be affected.

Step 3: The top brackets are just that: brackets. When the top rate goes up, it doesn't affect your entire income, just the portion in the top bracket. So if the top rate goes back up from 35% to 39.6%, it only affects the portion of income above approximately $400,000. A small business owner making $500,000 would see an increase of about $5,000. This is a fairly modest amount for someone making a half million dollars, and anything higher than that is hardly a "small" business to begin with. And the marginal effect is even smaller for the second highest bracket.

Step 4: The Office of Management and Budget estimates that the 10-year cost of these upper-income tax cuts is $678 billion, the vast majority of which hits wealthy individuals, not small businesses no matter how you define them. That's a fair chunk of change for anyone concerned about the deficit.

So that's the case. Letting Bush's tax cuts for the rich expire affects only a tiny number of small businesses; it doesn't affect them very much; and it generates revenues of $678 billion. If the only thing you care about is keeping taxes low for rich people, you won't be convinced. For the rest of us, it's a no-brainer.

Bybee Says CIA Broke Torture Rules

| Thu Jul. 15, 2010 10:01 PM PDT

Jay Bybee, the co-author along with John Yoo of the infamous Justice Department memos approving torture on terrorist suspects, now says that the CIA went far beyond the guidelines the two of them set out:

For example, Bybee said, his memo, co-written with lawyer John C. Yoo, authorized waterboarding only if there were no "substantial repetitions."

....Among the other techniques reportedly used on CIA detainees that were not approved by the Justice Department, Bybee testified, were diapering a detainee, forcing a detainee to defecate on himself, forcing a detainee to wear blackout goggles, extended solitary confinement or isolation, hanging a detainee from ceiling hooks, daily beatings, spraying cold water on a detainee, and subjecting a detainee to high-volume music or noise.

"So if these things occurred, dousing with cold water, subjecting to loud music to keep people from falling asleep, if that occurred, that means they were done without specific [Justice Department] authorization?" Bybee was asked by the committee.

"That's right," Bybee replied.

This is from the just released transcript of a House Judiciary Committee hearing held on May 26. The full transcript is here. Marcy Wheeler has a few followups at her place.

The Gnomes of Basel

| Thu Jul. 15, 2010 9:24 PM PDT

And now for a post on the world's most boring topic: Basel III. This, you might recall, refers to the ongoing talks to update the Basel II Accord, which in turn was an update of the Basel I Accord — all three of which govern the amount and quality of capital that banks are required to hold. Roughly speaking, the more capital they're required to have, the lower their leverage and the higher their safety. To a considerable extent, this is the real ground zero for bank safety, not the financial reform bill that passed the Senate today.

So, how's it going? First some good news from Felix Salmon, who chatted with assistant treasury secretary Mike Barr today:

Barr said that the reforms passed today “were absolutely essential to the process,” and added something I didn’t know before — which is that they include Congressional authority for regulators to adopt all the Basel III standards. In other words, there’s no risk of Basel III getting caught up in Congressional opposition, as Basel II did. Once it’s agreed in Switzerland, US regulators are free to implement it immediately. “We got all the authority that we needed in this legislation that just passed,” Barr said. “The regulatory community will be ready to implement it in the US.”

That doesn't mean the regulatory community will implement it quickly, of course, but it's still good news. Now here's some bad news: the rules are almost certain to be watered down thanks to all the usual tribal squabbling. The Wall Street Journal reports:

The French are demanding changes that would allow their three largest banks — Societe Generale SA, Credit Agricole SA and BNP Paribas SA —  to continue owning insurance subsidiaries without facing steep penalties. The Germans and French want banks' minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital.

On the testy issue of the leverage ratio — limiting how much banks can borrow — negotiators from several countries are looking for wiggle room. Germany, for instance, is worried about the impact on Deutsche Bank AG. They want regulators to be given discretion over how rigidly to enforce the new ratio, rather than having binding global rules. Other officials counter that that would undermine the intent of the rule. In a temporary fix, officials have said they would begin with an "observation period" for the leverage ratio, and there is now a major disagreement over what to do after that.

You may also recall that I posted a couple of days ago about the dangers of a run on the shadow banking system, something that was one of the major causes of the 2008 panic. Bank runs are pretty much a thing of the past in commercial banking because they're funded by retail deposits, and since these deposits are insured by the FDIC it means that retail customers like you and me aren't likely to panic and pull all our money out during a financial crisis. It's a different story for shadow banks, which typically rely heavily on short-term wholesale funding and therefore run the risk of their funders suddenly pulling out their money at the same time if they fear a bank is about to go under.

What to do about this? Answer: require banks to rely more on stable, long-term funding. This is called the "net stable funding ratio," and the banks are fighting it:

Some analysts say that the requirement alone could cost banks trillions of dollars in new funds, and officials could postpone or shelve the idea, people familiar with the matter said....Those studies in general show that the version of the rules outlined in December could require banks world-wide to raise nearly $1 trillion in new capital, according to people briefed on the process. That's considerably less than the multi-trillion-dollar estimates published by some industry groups.

One big concern is whether forcing banks to hold more capital and otherwise be more risk-averse will hurt lending, and thus strangle global economic growth, a theme that banks have been sounding loudly.

Italics mine. As Felix says in a different post, it would be nice to know just who's saying this. Like him, I imagine these are mostly banking industry lobbyists whose statements should be very seriously discounted:

The standard WSJ “people familiar with the matter” formulation simply isn't good enough here, especially when it's used ambiguously: are the “people familiar with the matter” saying just that the liquidity requirements could be shelved, or are they also the source for the multi-trillion-dollar scare estimates?....Banks seeking to influence the outcome are naturally going to try to set the tone of the debate by talking strategically to members of the press. Anybody reporting this story should assume that they're being used, somehow. And be very careful in what they say and how they say it.

Anyway, that's the latest. The news overall, I'd say is middling. There's a tremendous amount of lobbying going on, and the eventual rules will almost certainly be weaker than they should be. However, negotiations do seem to be proceeding fairly quickly (the Basel II process took five years) and there does seem to be a decent consensus about tightening up the rules on how to account for various kinds of capital. The net stable funding rule, if it survives in credible form, will also be welcome. Stay tuned.