Kevin Drum

Eating Their Own Dog Food

| Mon Jun. 15, 2009 1:16 PM EDT

Speaking of bank regulation, here's point #2 (out of five) previewing the administration's plans for regulatory reform from today's Washington Post op-ed by Tim Geithner and Larry Summers:

Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.

Italics mine.  As far as the mortgage market goes, it strikes me that this plan has two potential targets.  The first is the actual originator of the mortgage.  Lots and lots of crappy mortgages got written because the originators didn't really care how good they were.  They were just going to sell them off within 30 days anyway, so what did it matter if the borrowers were going to default two years from now?  Requiring these folks to keep a piece of their mortgage business on their own books might indeed be helpful, but it doesn't sound like this is the target Geithner and Summers have in mind.  (Technically, I'm also not quite sure how you'd make this work.  But leave that aside for now.)

The second target, and the one that G&S do seem to be talking about, isn't the orginator of the mortgage, but the bank that buys up all the mortgages and originates the mortgage-backed security.  They want these guys to be forced to keep a piece of the security on their own books instead of selling the entire thing to third parties.  The idea is that if they have to eat their own dog food, that should make them a little more careful about quality control.

But the devil is really in the details here, and there are at least two big problems.  First, most MBS originators did keep pieces of their own securities on their books.  It didn't do any good because they were deluded about the quality of the stuff they kept.  Second, even if banks are required to keep pieces of their own MBS that they otherwise wouldn't, what's to stop them from hedging away the risk?  You can't really forbid a bank from buying hedging instruments, and the rocket scientists (once they've dusted themselves off and come out from under their desks, which shouldn't take more than a year or two) will have no trouble creating a blizzard of derivatives that appear to take all the risk out of the snippets of MBS that banks are required to hold onto.  And once they've done that, you're just a tiny jump away from the glory days of 2005.

This, of course, is the basic problem with all regulatory reform: whether or not it works is enormously dependent on minuscule details written into 1000-pages legislative tomes.  Obama's team has apparently already decided that they need to take a pretty cautious approach to this, and once it gets through the congressional sausage factory we'll be lucky if anything serious is left at all.  This is, needless to say, a process that deserves a ton of attention from a watchful public, but how likely is that?  After all, I hear that Jon and Kate might be splitting up.

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Watching the Watchmen

| Mon Jun. 15, 2009 12:31 PM EDT

Via Felix Salmon, John Gapper complains in the Financial Times today that the Obama administration is backing down on regulatory consolidation:

All this is an interesting contrast to the consolidation of regulation by the UK government when it created the Financial Services Authority in 2000 and swept a bunch of self-regulatory organisations and the banking supervision arm of the Bank of England into a single financial regulator.

True, this did not help the UK to regulate large banks any better than the US, given the scale of the financial crisis. On the other hand, fragmentation of regulation caused its own particular difficulties in the US, with financial institutions picking and choosing among regulators.

The US administration has clearly decided that it simply cannot get any large-scale consolidation of regulation through Congress, given the vested interests involved. But that makes its response to the financial crisis seem more like a whimper than a bang.

Britain is not the United States, but there are enough similarities in our financial sectors to make comparisons instructive.  And the bottom line here, as Gapper admits, is that Britain had consolidated regulation, we had fragmented regulation, and it made no difference at all in the outcome.  If anything, in fact, Britain was harder hit than we were.

I'm not opposed to consolidation, but honestly, if you have the same rules and the same kind of people enforcing the rules, and the only thing that changes is the reporting structure — well, that just doesn't change much.  What's needed isn't consolidation per se, but a structure that's politically more likely to point out credit bubbles when they're happening and more likely to have the credibility to make people listen to them when they issue their dire warnings.  There's no special reason why a consolidated regulatory structure would be better at that than what we have now.  In fact, by hiding disagreement within the bowels of a huge bureaucracy, it might even be worse.

(That said, forum shopping among regulators eager to offer lax enforcement in return for increased business does need to be stopped.  But that can be accomplished with a much narrower set of reforms.  You don't have to consolidate everything into one super-regulator to put a halt to this.)

Gapper's concluding paragraph, however, is discouraging.  We should all wait to see the final proposals before passing judgment, but it seems pretty likely that he's right.  Even now, the financial industry pretty much owns Congress, and the likelihood that they'll allow financial reform to go too far seems slim.  Kinda makes you wonder just what they'd have to do to lose their grip on power.

Iran's Opposition

| Mon Jun. 15, 2009 11:34 AM EDT

So what's going to happen in Iran?  I myself have no idea, but Near East expert Wayne White tells David Corn that the jig might already be up:

In the face of harsh repression like this, there may only be one real option for the opposition to effect meaningful short-term change: get rough or stand down; confront a coup with a popular countercoup, or wait and hope for better days. I know it is vastly easier for me to sit back here in the States and comment that either the opposition organizes mass street action in which it is willing to inflict and take substantial casualties or it almost inevitably fails in its clearest near-term objective, but that probably is, I fear, the bottom line in this particular instance.

....I was watching the iPod bit last night in which, what, less than a dozen police on motorcycles with nothing more than batons took on a dense crowd of a thousand or more at close quarters.  Instead of largely heading for the hills, such a crowd could easily have closed in behind the police and taken them all down, not just one.  The tipping point in many of these situations is when the police become either as fearful as the demonstrators, more so, or even grow thoroughly sickened by the violence they have been ordered to carry out.  That crucial moment is far less likely to come if demonstrators stand down or shrink back in the face of the mere threat of violence.

On the other hand, upwards of half a million Mousavi supporter marched silently through Tehran on Monday.  It's not over yet.

The Healthcare Two-Step

| Mon Jun. 15, 2009 11:05 AM EDT

Ezra Klein says that Tyler Cowen has a point when he argues that we're running the risk of enacting a healthcare bill without effective cost controls:

But it is baffling to watch him blame this on the Obama administration. As he himself says, the White House is firmly behind the most promising proposals on cost....What stands in the White House's way is Congress. And, more often than not, it's the Republicans in Congress. Liberals, after all, will sacrifice almost anything to radically expand coverage. This leaves cost-conscious conservative facing a bit of a dilemma. They can attack the most vulnerable parts of the policy — the cost controls — in the hopes of bringing the whole thing down. The downside to that, of course, is that liberals simply jettison cost-controls to protect the coverage expansion. For a fiscal conservative, this should be considered the worst of all worlds.

I don't know about Tyler specifically, but this is par for the course for conservatives in general, who basically have two critiques of national healthcare plans.  First, they yell and scream that we're busting the budget if cost controls aren't firm enough.  At this rate, healthcare will be 99% of the federal budget by 2050!  But then, if you concede the point, they yell and scream that your cost controls are rationing medical care.  Do you want to stand in line for months just to get a flu shot, the way they do in all those European hellholes!?

Conservatives can bounce back and forth between these mutually hypocritical positions pretty much forever.  Why?  Because they're effective.  The first makes earnest liberals feel guilty because we basically agree as a policy matter.  The second is the greatest public argument against national healthcare ever invented, regardless of whether or not it's actually true.  The combination of the two has won the day for conservatives for decades.  Why give up a winning strategy now?

Why Steal the Election?

| Mon Jun. 15, 2009 10:20 AM EDT

Here's a quick question I haven't really seen anyone address regarding the Iranian election.  Assuming that the conventional wisdom is correct and it was stolen, why did they do it?  If Ahmadinejad stole it on his own, that's easily explainable as a pure coup/power play.  But if the clerical regime went along — which seems likely — what was it they were afraid of?  Mousavi was hardly the first reformist to run for president, after all, and he wouldn't have been the first to win.  What, precisely, was the threat that Mousavi presented to them?

Obama and Leverage

| Mon Jun. 15, 2009 12:52 AM EDT

The Wall Street Journal describes the financial industry regulatory reform that Barack Obama is expected to unveil this week:

The plan stops short of the complete consolidation of power that some lawmakers have advocated. For example, it will allow several agencies to continue supervising banks. It also won't place specific limits on the size or scope of financial institutions, but it will make it much harder for large companies to be so overleveraged that they threaten the broader economy.

....The plan calls on the Fed to oversee financial institutions, products, or practices that could pose a systemic risk to the economy. It will create a "council" of regulators to monitor this area as well. Government officials believe this arrangement will forestall companies from growing large and overleveraged without substantial federal supervision, as happened, for example, in the case of giant insurer American International Group Inc.

The Fed will likely have the power to set capital and liquidity requirements for the U.S.'s largest financial companies and scour the books of a wide range of firms. It is unclear what enforcement powers the central bank will have; that likely will be a point of contention as lawmakers debate the issue.

I'm OK without complete consolidation.  Box drawing exercises often just ignite turf battles without really accomplishing much.  I'm also OK with not trying to limit the size of financial institutions.  I'm semi-persuaded that it might be a good idea to do this, but I also suspect that it's fanciful to think that it could work.  The limits would have to be draconian, compliance would have to be almost perfect worldwide, counterparty connections would have to be monitored as rigorously as size, and companies would almost certainly be able to figure out ways to evade the regulations.  This seems like a tide that's nearly impossible to hold back.

But leverage — that's critical.  For the past two decades we've not only ignored increasing leverage in every nook and cranny of the financial world, we've made it worse.  LTCM blew up in 1998 because of astronomical leverage and afterward Alan Greenspan produced a report saying we should "encourage" financial institutions to limit their leverage.  Result: nothing.  In fact, things got worse.  Basel II followed Basel I and loosened capital adequacy requirements.  In 2004 the SEC allowed big Wall Street investment banks to increase their leverage ratios.  Off balance sheet leverage skyrocketed with no pushback from anyone.  At the consumer level, zero down mortgages became common.  The shadow banking system went almost entirely unregulated.  All this plus a tsunami of cheap money made disaster almost inevitable.

If Obama's plan truly addresses leverage — everywhere and in all its guises — and if he can persuade the rest of the world to follow suit, he will have really accomplished something.  It's not the only thing we need to do, but it's the most important.  When we get the details of his proposals to regulate leverage, that alone will tell us most of what we need to know about whether he's really serious about taking on Wall Street.

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Factlet of the Day

| Sun Jun. 14, 2009 12:14 PM EDT

From a New York Times Magazine article about gigantic data centers and the power it takes to run them:

While it once took 30 to 50 years for electricity costs to match the cost of the server itself, the electricity on a low-end server will now exceed the server cost itself in less than four years — which is why the geography of the cloud has migrated to lower-rate areas.

According to Jonathan Koomey, a scientist at Lawrence Berkeley National Laboratory, the internet consumes 1 to 2 percent of the world’s electricity.

The Vote in Iran – Revisited

| Sun Jun. 14, 2009 11:27 AM EDT

Yesterday I posted a chart showing that as Iran's Interior Ministry announced election results throughout the day, the winning percentage for Mahmoud Ahmadinejad had stayed almost eerily constant.  It seemed likely that in a genuine election there would have been a little more variation, so this looked like a piece of evidence that the vote count had been rigged.

It still seems likely that the vote was rigged, but the steady vote count apparently doesn't prove anything one way or the other.  Nate Silver plotted the 2008 U.S. election results using waves of states in alphabetical order, and he came up with an almost dead straight line, just like the Iranian results.  One of Andrew Sullivan's readers did the same with the results as announced every half hour through the night, and again the line was as straight as a laser.  So this is apparently a null piece of evidence.

But now I'm curious.  The Sullivan graph shows that by 7:30 pm Eastern time, when you have two data points, you could predict the final popular vote in the 2008 election with about 99% accuracy.  Question: would you get the same results if you plotted the last five or six elections?  If so, it means that most years we'll know with almost complete certainty who the winner is by 7:30 pm, exit polls be damned.  Can this really be true?

New York, New York

| Sat Jun. 13, 2009 10:54 PM EDT

In a couple of weeks I'll be taking a few days off and jetting to New York City for a short vacation.  Marian has never been before, and neither has half of the couple we're going with.  So far, the Circle Line tour and the Empire State building are on the agenda, as well as an afternoon at Carnegie Hall, where a friend of ours is singing.  Anybody have other suggestions?  Both obvious and nonobvious ones are OK.  We're staying at a place on 55th Street between 6th and 7th Avenues, so restaurant suggestions in the general area would be great too.

Marian constructed our San Francisco weekend a couple of months ago out of suggestions from commenters, which is why I'm going back to the commentariat for help again.  You guys were great with Bay Area recommendations.

Also, anyone know the best place online to get Broadway show tickets?

Getting Out the Vote

| Sat Jun. 13, 2009 10:11 PM EDT

Alex Moskalyuk reviews Yes! 50 Scientifically Proven Ways to Be Persuasive and offers up this summary of #15:

Labeling people into a social group tends to increase their participation ratio. A group of people was interviewed regarding their voting patterns. Half of them were told that based on their response criteria, they were very likely to vote, since they were deemed to be more politically active. Later on the election day that specific half did indeed turn up a participation rate that was 15% higher than participation of the control group.

Hmmm.  This sounds pretty handy as sort of the mirror image of a push poll.  (1) Identify people likely to vote for your guy, (2) call them up and ask them to participate in a survey because they're "politically active," (3) watch them show up to the polls at a higher rate than normal.  Result: as long as you've done (1) reasonably well, instant boost for your candidate.  Campaign managers take note.