Kevin Drum - May 2012

Scott Walker's Recall Probably Not a Sign of Impending Doom

| Fri May 11, 2012 12:13 PM EDT

In the LA Times today, "lifelong Democrat" Jonathan Zimmerman explains why he's uncomfortable with the recall campaign against Wisconsin's Republican governor, Scott Walker:

The recall epitomizes the petty, loser-take-all vindictiveness of contemporary American politics. And if you don't agree, I've got two names for you: former California Gov. Gray Davis and U.S. Sen. Dianne Feinstein. Remember Davis? In 2003, he became just the second governor to be recalled in U.S. history. A year earlier, voters had elected Davis to a second term. As budget and energy woes engulfed California, however, Republicans saw an opportunity to get rid of him.

....As a liberal, I'm troubled by the prospect of voters unseating an elected official over taxes. Or abortion. Or gun control. If you can recall leaders for any political reason, sooner or later your own ox will be gored. I'm also worried that the Wisconsin recall, which has drawn nationwide attention and money, will trigger a vicious cycle of partisan retribution. Your guy didn't win in November? No problem. Start a recall drive now.

I have some sympathy for this point of view. In fact, back in 2003 this was pretty much how I felt. So after Arnold won that year's recall election in California, I waited for the other shoe to drop. And waited. And waited. And kept waiting.

This year it finally dropped, but it took nearly a decade. So what we have is two high-profile recall attempts in nine years. This doesn't really seem like the tit-for-tat avalanche that I feared back in 2003.

In fact, Zimmerman admits as much. As he relates California's history, we recalled a mayor in 1909, another one in 1938, and then saw a spike of recall attempts in the 70s, culminating in the 1983 recall attempt of Dianne Feinstein when she was mayor of San Francisco. And then....nothing. The wave receded until Gray Davis was recalled in 2003.

I think Zimmerman has an obviously relevant point here, and it becomes ever more relevant as our national politics becomes ever more polarized. And yet....we just haven't seen a mighty wave of serious recall attempts since 2003. I thought we might, but I was wrong. It's something to keep an eye on, but it's also worth keeping in mind that Walker pretty plainly chose to govern in a far more hard-nosed, extreme, and deliberately hostile fashion than he campaigned on. Not only is it no surprise that he produced a massive backlash, but that backlash almost seemed to be part of his plan from the start. I'll stay alert to Zimmerman's misgivings, but for the moment I don't think Walker's fate is a canary in the coal mine. Unlike Gray Davis, who mostly just got screwed by Enron and never deserved to be recalled, Walker overreached, he did it deliberately and calculatedly, and now he's facing the consequences. That's politics.

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What Romney the Teenager Says About Romney the Man

| Fri May 11, 2012 10:49 AM EDT

Yesterday I wrote that although Mitt Romney's teenage "pranks" are, by current standards, fair game for journalists, "pretending that this makes him an anti-gay bully today isn't. He's got decades of adult experiences that tell us what kind of man he's become."

I still believe that, but the more I think about exactly that point — focusing on Romney's actions right now, not his actions 50 years ago — the more disturbing the whole Lauber affair becomes. Lots of teenage boys bully classmates, and in the mid-60s it was equally common to bully kids for seeming effeminate. That doesn't tell us much about Romney the man.

But Romney the man has denied, and repeatedly denied yesterday, even remembering this incident. Sure, it was half a century ago, but he led a posse of his friends, tackled John Lauber in a hallway, dragged him into a bathroom, and then chopped off his hair while he struggled in terror. Even if you grant that this kind of extreme behavior was more common in a 1960s prep school than it is today, it's really not the kind of thing you'd forget.

At least, you shouldn't. So either Romney has done this kind of thing so often that the Lauber incident just blends into all the others, which suggests a far more vicious childhood than he's owned up to, or else he remembers it just fine and is simply lying about it.

My guess is the latter. And that's depressing, as much for what it says about modern politics as for what it says about Romney. Because, really, what would be the harm of just talking about this? Fess up, acknowledge that you remember the incident, explain that you feel terrible about it, maybe even draw some gauzy lessons about tolerance for the View set, etc.? But for some reason Romney is too politically insecure to do that. He's obviously afraid that he'd pay some terrible price. Afraid that it would make him seem weak. That speaks badly for him, and badly for American politics.

Quote of the Day: Other Bankers are Even Dumber Than Jamie Dimon

| Fri May 11, 2012 10:07 AM EDT

From JPMorgan CEO Jamie Dimon, on whether his bank's $2 billion trading loss suggests that bank trading ought to be more closely regulated:

Just because we’re stupid doesn’t mean everybody else was.

Dimon is digging himself an even deeper hole here. Here's the thing: JPMorgan really does have a sterling reputation. So does Dimon. By consensus, he's probably the best big bank CEO around. But even so he managed to lose $2 billion in a few weeks.

Luckily, no big harm was done. JPMorgan has a solid balance sheet, the banking system is on solid ground these days, and the loss means little more than a hit to earnings. But think about this: If even JPMorgan can lose a colossal amount of money on stupid trades. If even JPMorgan has lousy controls in place. If even Jamie Dimon allowed himself to be lulled to sleep by a star trader. If all that happened, what are the odds it's not going to happen to a less well managed bank in the future, and happen at a time when it turns into another Lehman Brothers and shorts out the entire financial system? The odds are way too short for comfort, I'd say.

Would even Jamie Dimon take that bet?

California Committing Educational Suicide

| Fri May 11, 2012 2:01 AM EDT

Education supporters in Los Angeles protest ongoing cuts to education in May 2011.

The Public Policy Institute of California (PPIC) released a grim report on Thursday with a pretty simple message: We're eating our seed corn. Over the past two decades, the number of California high school students completing the state's most rigorous curriculum—known as the "a-g requirements"—has risen by a third, and the number of high school grads admitted to the state's CSU and flagship UC systems has risen by a similar amount. That should be good news in a world that increasingly depends on educated workers. But there's a problem: It hasn't translated into more students going to college.

According to the PPIC report, state support for higher education over the past two decades has plummeted by a third and tuition charges have skyrocketed to make up the difference. When I attended CSU-Long Beach in the late '70s, it cost me a little over $100 per semester in tuition and fees. Adjusted for inflation that's about $300 in today's dollars. But that's not what today's students pay. They pay about $3,000 per semester. UC students pay about $6,000 per semester. The cost of a state university education has skyrocketed 10 times in California.

Students can still get loans and grants, of course, but increasingly the out-of-pocket cost is driving students away. And that trend is made worse by CSU and UC policies that have responded to budget cuts by restricting enrollments. PPIC reports that among all high school grads, enrollment in state universities has declined by nearly a fifth since 2007, from 21.5 percent to 17.8 percent. And here's even worse news: The enrollment rate among the highest qualified students, those who have completed the a-g requirements, has also declined by nearly a fifth, from from 67.5 percent to 54.9 percent. Both CSU and UC have seen enrollment declines.

So what's happening to these students? Are they going elsewhere? A few are. PPIC reports no increase in enrollments at private California universities and only a small increase in enrollments at community colleges (which have their own budget problems) and out-of-state universities. Their conclusion: "It appears that sizable numbers of high school graduates in California are increasingly less likely to enroll in any four-year college and that a small but notable share of those who were eligible and even accepted into UC and CSU do not attend college anywhere."

Declining state support for higher education, of course, is not a phenomenon limited to California. And if the same thing is happening elsewhere, it means that a sizable number of students who have graduated during the Great Recession are simply choosing not to go to college even though they would have done so in better times. The combination of a tough economy and rising costs has shut them out of a college degree.

It's hard to think of a more self-defeating social policy than this. Temporary economic downturns aside, we know that we desperately need more college graduates in the future. But instead we're doing everything we can to turn out fewer of them, and in the face of this congressional Republicans are playing dumb games with legislation to keep student loan interest rates affordable—surely the absolute minimum response we could expect from our elected leaders.

Twenty years from now we'll all be arguing about why the Chinese or the Koreans or the Indians are eating our lunch on the global stage. But why wait 20 years? The answer is right here in front of our faces today.

Wall Street's Casino Culture Still Alive and Well

| Thu May 10, 2012 6:26 PM EDT

JPMorgan announced a gigantic $2 billion dollar loss today thanks to a huge position in basis trades that blew up. Felix Salmon explains what a basis trade is:

The basis trade is an arbitrage, basically. There are two different ways the market measures credit risk: by looking at credit spreads — the yield on a certain issuer’s bonds, relative to the risk-free rate — or by looking at CDS spreads, which are basically the same thing but set in the derivatives market rather than the cash bond market. Most of the time, CDS spreads and cash spreads are tightly coupled. But sometimes they’re not.

Long story short, a JPMorgan trader placed some humongous bets that credit spreads would go up relative to CDS spreads, and instead the opposite happened. Eventually, everything went kablooey.

Felix says one lesson from this debacle is that you need to keep your bets secret at all times. "Whenever a trader has a large and known position, the market is almost certain to move violently against that trader — and that seems to be exactly what happened here....Once your positions become public knowledge, the market will smell blood."

Jamie Dimon, JPMorgan's CEO, agrees, but has a different problem: "It plays right into the hands of a bunch of pundits out there," he said exasperatedly today. You see, Dimon has been scathingly critical about the Volcker Rule, which prevents banks from making proprietary trades, and now he's just announced a huge loss from making proprietary trades. He insists, however, that the basis bets were a legitimate hedge, not just a bunch of casino-like bets.

And then there's me. The lesson I'd take from this is that the Volcker Rule ought to be beefed up. Because here's the question: what possible social good is there in allowing gigantic multinational banks to make gigantic bets on how one particular financial index will move compared to a different financial index? I can't think of one. The Dimon argument is that real-world companies have legitimate hedging concerns, and the only way they can execute their hedges is if someone else takes the other side of the hedge. If that someone is JPMorgan, then they're performing a valuable service.

At some point, though, you just have to ask: Really? We're supposed to believe that Bruno Iksil, the trader in question, was merely performing a financial service for some of JPMorgan's clients? Do you believe that? I don't. I think he was making gigantic bets and then furiously looking for suckers he could sell the other side of the bet to. Except this time he turned out to be the sucker.

I dunno. At this point I'm beginning to wonder if we should even be worrying about real-world companies and their hedging requirements. On net, maybe we'd be better off with no one executing hedges instead of everyone executing hedges, since in practice there seems to be no middle ground. Once you concede that nonfinancial companies can hedge, it's a short hop, skip, and jump before it's impossible to distinguish between hedges and bets. No one seems to have a good idea of how to make the distinction in a reliable, consistent way.

Maybe it's time for us all to simply accept that the world is risky — in fact, time to have our noses rubbed into it, something that might force us to pay closer attention to what we're all actually buying and selling. Maybe it's time to accept that using the financial system in a vain attempt to pretend that risk can be hedged away does more harm than good.

That's most likely impossible at this point, and probably owes more to a tetchy mood than a deeply considered position. But honestly, it's hard not to think that until the casino culture of Wall Street is well and truly reined in, we're just in for endless trouble. When times are good — or, in any case, not too terrible — losing a couple billion dollars is just an annoyance for JPMorgan's stockholders. When times are bad, though, all bets are off. Literally.

Chart of the Day: Being Rich in America is a Pretty Good Gig

| Thu May 10, 2012 12:40 PM EDT

This will come as no surprise to any of you at this point — I hope — but it never hurts to see it again. The combination of the 1997 capital gains tax cut, the 2001 Bush tax cut, and the 2003 Bush tax cut has been fantastically beneficial to the richest of the rich in America. Most of us ordinary schlubs have seen our tax rates go down about three percentage points over the past decade or so. The rich have seen them go down about seven percentage points. And the super-duper rich? Their taxes have gone down nearly ten percentage points.

It's pretty nice having a bought-and-paid-for Congress, isn't it?

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Why Romney's High School Bullying Is Fair Game

| Thu May 10, 2012 12:22 PM EDT

Jason Horowitz reports in the Washington Post today that Mitt Romney bullied a gay high school classmate named John Lauber in 1965:

[Lauber] was walking around the all-boys school with bleached-blond hair that draped over one eye, and Romney wasn’t having it. "He can't look like that. That's wrong. Just look at him!" an incensed Romney told Matthew Friedemann…A few days later, Friedemann entered Stevens Hall off the school's collegiate quad to find Romney marching out of his own room ahead of a prep school posse shouting about their plan to cut Lauber's hair. Friedemann followed them to a nearby room where they came upon Lauber, tackled him and pinned him to the ground. As Lauber, his eyes filling with tears, screamed for help, Romney repeatedly clipped his hair with a pair of scissors.

Does this matter? It was 50 years ago and a different era. And generally speaking, I've always felt like there ought to be a political statute of limitations on this kind of thing: Anything that happened before, say, age 25 and more than 20 years ago is off limits.

Needless to say, though, that's decidedly not the way the world actually works, and in the case of presidents their pasts have always been fair game back to the day they entered kindergarten. Like it or not, Romney isn't being treated any differently here than any other presidential candidate of the past half century.

So: Does it matter? Paul Waldman says no. What matter are his abhorrent current day policy positions:

Whether he wants to do those things because deep down in his soul he's a cruel person and always has been, or because he's perfectly kind to the people he meets but believes in an ideology that is fundamentally cruel, doesn't matter a bit. He's not asking us to elect him hall prefect, he's asking us to elect him president. This story is certainly colorful and interesting, but it shouldn't change what we think about Mitt Romney as a candidate.

Jon Chait isn't so sure. Some people grow out of their youthful doltishness and some don't:

The story does give the sense of a man who lacks a natural sense of compassion for the weak. His prankery seems to have invariably singled out the vulnerable—the gay classmate, the nearly blind teacher, the nervous day student racing back to campus. It's entirely possible to grow out of that youthful mentality—to learn to step out of your own perspective, to develop an appreciation for the difficulties faced by those not born with Romney's many blessings. I'm just not sure he ever has.

MoJo editor Monika Bauerlein thinks we should drop the subject: "Okay, as an ex bully-ee I loathe it with a passion, but seriously, we are going there??" MoJo staffer Tim Murphy, zeroing in on Romney's weaselly expression of regret over "dumb things" he did in high school, disagrees: "It's not an apology if you never really say you're sorry."

And me? I think mining the past for clues to people's character is basically okay as long as you don't engage in endless pretzel bending to draw absurd conclusions. Barack Obama's youthful drug use and his community activism say something about him, so they're fair game. Pretending he's a whitey-hating anti-colonialist because of imagined influences from his Kenyan father isn't. In Romney's case, describing how he treated both friends and nonfriends while he was growing up is fair game. It's partly a window into Romney, and partly a window into the era and culture that he grew up in. But pretending that this makes him an anti-gay bully today isn't. He's got decades of adult experiences that tell us what kind of man he's become. That should be enough.

Did the Supreme Court Get Snookered During Obamacare Oral Arguments?

| Thu May 10, 2012 11:37 AM EDT

Andrew Sprung has been on a crusade over the past month over a single issue brought up during the Supreme Court's oral arguments over Obamacare. The issue is catastrophic coverage, and today he summarizes everything he's written about it:

In his oral argument against the constitutionality of the ACA's individual mandate on March 27, plaintiff's counsel Michael Carvin asserted, "Congress prohibits anyone over 30 from buying any kind of catastrophic health insurance" (p. 105).

That is not true — the ACA provides the catastrophic coverage option for others exempt from the mandate, e.g. on grounds of financial hardship. And that factual error signals a greater distortion, one that was not countered and apparently made a major impression on Justices Alito, Roberts and Scalia: that the mandate forces Americans to buy coverage greatly in excess of what's required to offset the cost of catastrophic care for those lacking health insurance. No one pointed out that a) the ACA provides a catastrophic coverage option for those under 30; b) that it extends that option to others exempt from the mandate on financial or other grounds; or c) that the bronze plans offered in the exchanges, as the Kaiser Family Foundation recently detailed, might also reasonably be labeled "catastrophic" coverage.

Andrew suggests that the Obama administration should try to file a supplemental brief with the court: "One way or another, it seems to me worthwhile to try to reach Justice Kennedy and/or one of his colleagues with a two-track argument: 1) the mandate is properly 'minimized'; Congress exercised what you might call a self-limiting principle; and 2) if you don't think it is sufficiently minimized, limit it further without killing it."

There's more at the link, and even more links at the link. It's worth a read.

Obama: Biden Pushed Me on Same Sex Marriage

| Thu May 10, 2012 10:03 AM EDT

This doesn't really matter much in the big scheme of things, but it's still sort of interesting. Apparently Joe Biden's remarks this weekend about gay marriage had a bigger impact than we all thought:

“He probably got out a little bit over his skis, but out of generosity and spirit,” Mr. Obama said when asked whether Mr. Biden had “jumped the gun” by going first a few days earlier.

“Would I have preferred to have done this in my own way, in my own terms, without I think there being a lot of notice to everybody? Sure. But all’s well that ends well,” he said in the interview as it was broadcast on “Good Morning America” on Thursday.

Well, good for Joe. I'm a little surprised that his rather measured remarks actually had such a big effect on Obama, but apparently they did. It just goes to show the value of a bit of pressure in exactly the right place at exactly the right time.

Obama Endorses Same Sex Marriage

| Wed May 9, 2012 4:02 PM EDT

President Obama finally ended years of skepticism over his alleged "evolution" on the subject of gay marriage today. "I’ve just concluded that, for me personally, it is important for me to go ahead and affirm that I think same-sex couples should be able to get married," he told ABC News today.

Unfortunately, Obama did this while I was out to lunch, and by the time I got back approximately everyone on the planet had already reported this. So there's really not much left to add except this: I'm very happy he finally cut out the gobbledygook and stood up for what's right. Will it make a substantive difference? Maybe not. Will it make things worse, by polarizing opinion on the subject even more? I doubt it, but it's possible. Was this a purely political calculation on Obama's part? Possibly.

But I don't care either way. Sometimes you just need to say where you stand and let the chips fall. This is one of those times. For more, check out David Corn's take here.