Kevin Drum - December 2012

Corruption and Fraud in the Financial Industry Get Worse and Worse

| Wed Dec. 19, 2012 9:00 AM PST

Felix Salmon explains that we have only begun to plumb the depths of financial industry corruption:

You want to know why pretty much the entire financial sector is still trading at less than book value? This is why: the number of investors who trust the banks is now zero, and banking seems to have become a game of picking up fraudulent nickels in front of a relentless justice-department steamroller.

This is a reaction to the latest shoe to drop in the LIBOR scandal. UBS, it turns out, wasn't just shaving its own submissions in order to manipulate the LIBOR rate (as Barclays did), it was actively bribing everyone in sight to do the same thing. "If Barclays was dreadful and UBS was much worse than Barclays," says Felix, "it’s hard to imagine that anybody has clean hands here." True. More to the point, if corruption around LIBOR was so widespread and extended so far into the executive suite, it's a pretty good guess that similar corruption extended to practically every other operation on Wall Street too.

The mammoth profits of the financial industry are bad for the economy because they suck money away from other activities with actual value. They're doubly bad because they were built on, and encouraged, vast amounts of fraud and corruption. That's what happens when there are enormous pools of money sitting around for the taking. None of us will be safe until profits in the financial sector are permanently cut by about three-quarters from the go-go days of the aughts.

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Know Your Gun Terminology!

| Tue Dec. 18, 2012 3:48 PM PST

One of the more annoying features of the gun control debate is the frequent mockery from gun rights folks toward anyone who doesn't have a deep technical understanding of how firearms operate. After all, how much do you need to know to figure out whether you think dangerous weapons ought to be regulated more than they are now? And yet, occasionally I have to admit that I sympathize with the gun folks a little bit. Here's a fragment from Hardball yesterday:

CHRIS CILLIZZA: ....You mention in the ammunition used in this shooting was one of these high-round ammunitions.....Chuck is right, the president, I think....he has to do something. The question is, does he do something around these high-round ammunition holders?....Eventually — OK, let's say assault weapons or let's say these high-caliber — these high-pack rounds — if they do that, what will they do next....

Seriously? "High-round ammunitions"? Followed by "high-round ammunition holders"? And then by "high-caliber/high-pack rounds"? I don't even care about this stuff much, and even so I was rolling my eyes listening to this. No one expects every talking head to be a deep expert on the taxonomy of firearms, but this is a common topic of political discussion and has been for decades. Anyone who talks about it should have at least a nodding familiarity with the basics of guns. I assume that Cillizza was trying to talk about high-capacity magazines—though his later mention of "high-caliber" makes me wonder—and knowing that this is what they're called is about the equivalent of knowing that it takes 60 votes to break a filibuster. You really mark yourself as a dolt if you don't even know that much.

So maybe some lefty magazine should do all us peacenik lefties a favor and write a really short, punchy guide to the basics of guns. There are probably no more than about a dozen terms you'd need to know to get yourself through a cocktail party without too much embarrassment. Let's make a list:

  • Automatic
  • Semi-automatic
  • Machine gun
  • Shotgun
  • Clip/magazine
  • Caliber
  • Assault weapon
  • Bolt action
  • Chamber
  • Bullet/round/cartridge
  • __________ (placeholder for other terms that could use a brief explanation)

Hey! Wait a second! I work for a lefty magazine. Maybe we should do it! How about it, Adam?

The Latest From the Fever Swamp: Concussiongate

| Tue Dec. 18, 2012 2:58 PM PST

Hillary Clinton is widely viewed as the frontrunner for the 2016 Democratic nomination if she decides to run, and that's prompted a lot of people to wonder how the right wing would react to a Hillary campaign. Have they learned to respect her over the past four years, or would it be Whitewater/Vince Foster/Travelgate all over again?

Anyone with a room-temperature IQ has already put money on Option B, and today brings fascinating new evidence that anyone taking the other side of that bet has already lost a bundle. You see, it turns out that the fever swamp thinks Hillary is faking the concussion she suffered over the weekend. Seriously. The Atlantic's Alexander Abad-Santos rounds up the quotes:

Jim Treacher: "If she has a concussion, let's see the medical report. Let's see some proof that she’s not just stonewalling."

John Bolton: "When you don't want to go to a meeting or conference, or an event, you have a 'diplomatic illness,' ... And this is a diplomatic illness to beat the band."

Lucianne Goldberg: "Hillary has given us a great new excuse. Don't call in with a cold or a bad tooth. Just say you have a concussion. It can last for days."

There you have it: a little mini-preview of 2016 if Hillary decides to run.

Michigan Governor Latest to Shoot Himself in the Foot

| Tue Dec. 18, 2012 11:37 AM PST

In 2010, Republicans swept the table, electing a whole slew of new governors and state legislators. Since then, however, they've seemed bound and determined to use their newfound power to make themselves as unpopular as possible. This month's case study is Michigan governor Rick Snyder, who was behind last week's sneak attack that turned Michigan into a right-to-work state. PPP finds that Snyder's approval ratings have plummeted:

We now find Snyder as one of the most unpopular Governors in the country. Only 38% of voters approve of him to 56% who disapprove. There are only 2 other sitting Governors we've polled on who have a worse net approval rating than Snyder's -18.

....There's not much doubt that it's the right to work law and his embrace of other actions by the Republican legislature that are driving this precipitous drop in Snyder's popularity. Only 41% of voters in the state support the right to work legislation, while 51% are opposed to it. If voters got to decide the issue directly only 40% of them say they would vote to keep the law enacted, while 49% would vote to overturn it. This comes on the heels of voters overturning Snyder's signature emergency managers law last month. The simple reality is that Michigan voters like unions- 52% have a favorable opinion of them to only 33% with a negative one.

Dave Weigel gets the analysis right: "This is the problem with something perceived as a 'power grab.' Voters, who don't typically obsess over process, get angry about it. Democrats learned that in 2010, when a number of their endangered, to their confusion, faced voters angry about the constitutionality of a health care mandate and the state funding included in early versions of the deal."

The fact that Snyder's policies are broadly unpopular is bad enough. The fact that he and his fellow Republicans seem to be flouting the rules of fair play in order to pass them makes it even worse.

Can a State Require You to Insure Your Guns?

| Tue Dec. 18, 2012 9:37 AM PST

Paul Waldman:

If you say, "I want a gun," the rest of us can say, OK, you have that right. But guns pose a potentially lethal danger, so that means we need a special set of rules to deal with them. After all, we do this already. If you want a car, you can't just get one. First, you have to prove to your state that you are competent to drive it. Then you have to register it with the government, and you have to get insurance for it. We agree to this more restrictive set of rules for cars than for televisions or refrigerators because what you do with a car affects other people. Cars are dangerous. Used improperly, they can kill people.

There's a thought. What if you could own all the guns you wanted, but you were required to insure them against any damage they might cause? Would that be constitutional?

I'm not suggesting this is even remotely possible. I'm just curious. Could a state do this if it wanted? Could Congress?

Yacht Owners Go Galt in Newport Beach

| Tue Dec. 18, 2012 9:24 AM PST

Would you like to hear a story about rich people in America today? It's a small one, but it says a lot in a nutshell. It takes place just down the road from me in Newport Harbor, which, it turns out, needs renovation:

The city's five-year plan for the harbor calls for $29 million in long-overdue maintenance. Its silt-filled channels haven't been fully dredged since the Great Depression. Ancient, leaky sea walls protecting neighborhoods need to be repaired or replaced. "We have the makings of a perfect storm like they did on the East Coast" during Superstorm Sandy, said Chris Miller, the city's harbor resources manager. "The sea walls are nearing the end of their useful life."

So the city of Newport Beach, home of the rich and famous, needs $29 million to maintain the harbor. Where to get it? Let's now skip up to the top of this story to see what caught the LA Times' interest in the first place:

An increase in city rental fees for residential docks that protrude over public tidelands created a furor when it was approved last week by the City Council. It also prompted a call to boycott the boat parade and festival of lights by a group calling itself "Stop the Dock Tax."

"It costs us thousands of dollars to voluntarily decorate our homes and boats to bring holiday smiles to nearly 1 million people," organization Chairman Bob McCaffrey wrote to the city. "This year, we are turning off our lights and withdrawing our boats in protest of the massive new dock tax we expect the City Council to levy."

....Newport's dock fee, which has stood at $100 a year for the last two decades, will now be based on a dock's size. The city says rents will increase to about $250 for a small slip to $3,200 annually for a large dock shared by two homeowners. "People have been paying $8 a month all these years to access what is public waters," said Newport Beach City Manager Dave Kiff. "That's a pretty good deal. The City Council didn't think the increase it approved was too extreme."

Got that? These docks would probably be worth tens of thousands of dollars if they were auctioned off, free-market style. But the boycotters, who I'd guess are free market fans one and all, are outraged that they won't be allowed to use these docks for $100 per year forever. The free market might be a great idea when it comes to setting the wages and salaries of working folks, but using it to set the fees for dock rental in one of the richest communities in America? That's outrageous.

In fairness, the complainers are a small fraction of the Newport Harbor community. Still, they're a loud fraction, and it's this sense of entitlement from the very loud, very rich that drives so much public policy in America. No matter how well they do—and the rich have done very, very well over the past few decades—their blood boils at the thought of contributing so much as an extra dime to public coffers, even if the money is specifically earmarked to improve their own communities.

Welcome to America. Ho ho ho.

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What a Fiscal Cliff Deal Will Probably Look Like

| Tue Dec. 18, 2012 8:32 AM PST

Paul Krugman is agonizing over the fiscal cliff deal that's apparently on the table right now:

The tax hike on earned income only falls on those making $400,000 or more. As I understand it [...] taxes on unearned income are going back to pre-Bush levels: capital gains at 20 instead of 15 percent, dividends taxed as ordinary income. If I’m wrong about that, this is easy: no deal. And there’s extra revenue too, notably from changing the treatment of itemized deductions: instead of being a deduction from taxable income, they offer a tax credit, not to exceed 28 percent — which means a further substantial tax rise for people in the top bracket. Overall, there’s more revenue in this deal than you get from letting the high-end tax cuts expire after the cliff.

So the revenue side isn’t that bad....Also on the plus side, extended unemployment benefits and more infrastructure spending....But then there’s the Social Security cut.

Switching from the regular CPI to the chained CPI doesn’t affect benefits immediately after retirement, which are based on your past earnings.What it does mean is that after retirement your payments grow more slowly....This is not good; there’s no good policy reason to be doing this, because the savings won’t have any significant impact on the underlying budget issues. And for many older people it would hurt.

I suppose it was never likely that Obama was going to get a deal that liberals would be wholly enthusiastic about, and I'm not excited about the Social Security cut either. However, one thing to watch out for is whether there's more to it. It's possible that Obama will agree to chained CPI but insist on compensating changes for the lowest earners, so that the most vulnerable seniors are held harmless. We'll have to wait and see.

In addition to the fact that the Social Security cuts would hurt retirees, I continue to think it sets a bad precedent to link Social Security to a broad deficit deal that's otherwise focused on general fund spending and revenue. Social Security is a separate program, and if a deal is going to be made, compromises should be made within the program. It's one thing to hammer out an agreement to raise revenues and cut benefits that affect only Social Security, but it's quite another to cut Social Security benefits in return for general fund tax increases. I don't like that, and I don't like the idea that Obama is setting a precedent to do that kind of thing again in the future.

Overall, this doesn't sound like it's the worst deal in the world. So far, though, I'm with Krugman: it doesn't sound all that great either, and it's not clear if it's better than what Obama could get if he simply waited a bit and went over the cliff. But I guess that was never in the cards. He seemed intent from the beginning on avoiding that.

Adopting Chained CPI Is a Terrible Idea on Its Own

| Mon Dec. 17, 2012 5:52 PM PST

Somebody just asked me what I think about the idea of adopting a new measure of inflation ("chained CPI") as a way of slowing the future growth of Social Security benefits. I am, as I've said before, generally in favor of some kind of balanced deal that would cut benefits a bit and raise taxes a bit in order to improve Social Security's finances. Chained CPI is worth considering as a component in such a deal.

However, no such deal is on offer. The only proposal being offered right now is to adopt chained CPI, full stop. As far as I'm concerned, that's unacceptable, and no Democrat should even think about endorsing it. We can argue all day about whether Social Security needs rescuing in the first place, and if we decide it does, we can then argue about exactly which combination of measures would be fairest and best. But some things should be completely off the table, and passing a package that's 100% benefit cuts is one of them. It's ridiculous. This is really a no-brainer.

Yet More Republican Attempts to Game the System

| Mon Dec. 17, 2012 12:32 PM PST

There are different ways for parties to win elections. The most obvious way is to support more popular policies than your opponents. Unfortunately for Republicans, their fever swamp wing, from Newt Gingrich through the tea party, has made that increasingly difficult.

But there's a second option: make sure that, one way or another, votes for the other party don't count as much as votes for your party. Gerrymandering is the most obvious method, and Republicans have played this game more and more aggressively over the past decade. There are also policies that make it less likely that Democratic constituencies will be allowed to cast votes. That's the idea behind photo ID laws, which reduce participation by the poor, the young, and ethnic minorities. But if that's still not enough, what's next? Well, how about gerrymandering the electoral college? National Journal reports:

Republicans alarmed at the apparent challenges they face in winning the White House are preparing an all-out assault on the Electoral College system in critical states, an initiative that would significantly ease the party's path to the Oval Office.

Senior Republicans say they will try to leverage their party's majorities in Democratic-leaning states in an effort to end the winner-take-all system of awarding electoral votes. Instead, bills that will be introduced in several Democratic states would award electoral votes on a proportional basis.

If, say, Michigan switched to a proportional system, then Mitt Romney wouldn't have won zero of its 16 electoral votes this year. He would have won eight or nine. Voila! More votes for Mitt.

Do this in other states that are either solidly Democratic or trending Democratic, and you could snag 40 or 50 extra electoral votes for the Republican nominee. Needless to say, there are no plans to do something similar in states that tend to vote for the Republican candidate. Texas and Georgia have no intention of going proportional and allowing the Democratic nominee to get a share of their electoral votes.

There's a brazenness here that almost makes me optimistic. These are rearguard efforts to rig the system, and in a way, they're an admission that Republicans understand just how doomed they are if they remain the party of corporations, the rich, and hating gays. In the end, though, they're unlikely to work. The GOP will continue losing votes, and as they do, even their attempts to game the system will get repealed, making their situation even more desperate.

In the meantime, though, they'll keep trying. They'll try anything aside from actually facing up to what their party has become. The only question is, for how long?

Inflation Expectations and the Fed

| Mon Dec. 17, 2012 11:31 AM PST

The Cleveland Fed has released its latest estimates of expected inflation, and Matt Yglesias thinks it's good news for the Fed:

I'd say it looks like mission accomplished for the FOMC. Relative to last month, short-term expectations are meaningfully higher indicating a coordination of expectations along a higher demand equilibrium. But long-term expectations remain "anchored" exactly where they were.

As you can see in the modified version of the chart on the right, 1-year inflation expectations have gone up from 1.6 percent to 2.1 percent, while 10-year inflation expectations have remained anchored at 1.5 percent.

But I'm not sure what this tells us. The data is for the first day of the month, so the jump in the chart is from November 1 to December 1. That's obviously not the result of Wednesday's Fed announcement. Likewise, September's Fed announcement should show up as a change in expectations between September 1 and October 1, but inflation expectations declined between those two dates. I'd like to hear more about this from the folks who follow this closely, but to me it looks more like random month-to-month noise than anything else.