Kevin Drum

Hitting Bankers Where It Hurts

| Thu Apr. 8, 2010 12:31 PM EDT

Scott Payne is unhappy with my approach to regulating the financial sector:

Kevin Drum [] has chimed in on the idea that breaking up America's largest banks is unfathomable and that suggesting it as a course of action is the equivalent of arguing for the status quo. Like Kevin, I’m out of my league getting into the specifics of financial reform, but it is striking to me how much the arguments that are being proffered by mainstream liberals on this topic are beginning to mirror their approach to health care reform. It seems like you can’t swing a credit default swap without hitting some piece of writing where a respected liberal voice is saying,

Yes, of course we would all like A, but A is just not in the stars so we’ll aim for B. And while B is vastly inferior to A, if you demonstrate the audacity to criticize us for doing B instead of A because B won’t really work, then you are clearly not interested in any real reform in the first place.”

Meanwhile, there is polling available that demonstrates that the public is interested in A (be it breaking up the banks or instituting a public option) and that an honest effort at achieving A would actually bolster support for Democrats’ efforts overall. This is even more the case for financial reform than it was for health care reform.

I've heard this same criticism from a couple of different places, so it's worth explaining why I think this is 180 degrees wrong. It's roughly based on the idea that since people like Kevin Drum were willing to compromise on healthcare, their position on financial reform must be a sellout too. But it ain't so.

It's true that I think trying to break up big banks is politically unfeasible, but that's not the main reason I'm lukewarm on the idea. The main reason is that I think it's a second-best idea. By far the most fundamental issue in the 2008 meltdown was excessive leverage and inadequate capital. It wasn't the only problem, but it was absolutely the core one. And I want to focus my energy on facing up to the biggest, most fundamental problem, not a side issue.

I've talked about leverage enough that I don't think I have to repeat my arguments about it here. But what about bank size? Why do I think it's a side issue? There are two reasons, based on the two big arguments for limiting bank size.

First is the argument that big banks are dangerous and the federal government will always be on the hook to rescue them if they go bad. Which is true. But look at the U.S. institutions that caused the most trouble during the financial meltdown. Bear Stearns and Lehman Brothers were relatively small. They wouldn't have been affected by an asset cap. Mortgage specialists like Countrywide and IndyMac weren't very big either. Fannie Mae and Freddie Mac were GSEs. Reserve Primary was a money market fund. The monolines were relatively small, and AIG FP was a small branch of an otherwise garden variety insurance company.

Now, there were two big banks, Citi and Bank of America, that got in trouble and needed rescuing. But overall, size simply wasn't a leading indicator of systemic trouble. Leverage and interconnectedness were. That's what we should be focusing on.

The second argument is one of political economy: big banks have too much lobbying power. We'll never get the financial sector under control as long as gigantic financial firms are around. But this really doesn't hold water. The most common asset cap I've seen proposed is something on the order of $500 billion. How many banks would be affected by this? Basically, four: Citi, BofA, JPMorgan Chase, and Well Fargo. Depending on how the rule was written, maybe Goldman Sachs and Morgan Stanley would have to trim down a bit too. But that's it.

Now think about this: do you really think the power of Wall Street literally depends on these four firms? It doesn't. It depends on the size and profitability of the entire sector. If, instead of those four gigantic banks, we had a dozen big banks, would the sector have any less political clout? Would it have fewer lobbyists? Would it earn less money? Would its campaign contributions be any less? No, no, no, and no.

I don't want to take this argument too far. Breaking up big banks might be a useful thing to do. Even if it's not where the main risk of systemic damage resides, it's where some of it resides. And even if the political power of Wall Street is mainly based on the size of the financial sector as a whole, having a few gigantic players might magnify that power. On balance, limiting bank size might be a good idea.

But if you want to reduce systemic risk, limiting leverage is far more crucial. And if you want to reduce Wall Street's political power, limiting its astronomical earnings is key — and you do that by limiting leverage broadly and deeply. It's not the only thing you do, but it's the big one.

This is an important argument. I think that people who focus on bank size are mistakenly picking something that seems like a quick and easy solution instead of focusing on the one thing that the financial sector really fears: serious limits on their ability to make money via massive leverage. It's more complicated than "Break up the banks!" and it's harder to rally the troops around, but it's the big battleground. Breaking up Citigroup would be a consolation prize by comparison.

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Criminalize Marijuana!

| Thu Apr. 8, 2010 11:40 AM EDT

California will vote on an initiative this November to legalize marijuana. It might even pass. But it turns out that the pot growers of Humboldt County are having second thoughts about the whole thing:

Recently, "Keep Pot Illegal" bumper stickers have been seen on cars around the county. In chat rooms and on blogs, anonymous writers predict that tobacco companies will crush small farmers and take marijuana production to the Central Valley. With legalization, if residents don't act, "we're going to be ruined," said Anna Hamilton, a radio host on KMUD-FM (91.1) in southern Humboldt County.

....Legalization could take many forms. But the conventional wisdom here is that fully legal weed might fetch no more than a few hundred dollars a pound, as more people grow it and police no longer pull up millions of plants a year. Illegal marijuana "is the government's best agricultural price-support program ever," said Gerald Myers, a retired engineer and former volunteer fire chief who moved to the county in 1970. "If they ever want to help the wheat farmers, make wheat illegal."

I guess pot cultivation will be a little less fun when it becomes just another business. On the other hand, surely there's a benefit to being able to go to sleep each night not worried about DEA agents busting down your door and hauling you off to prison?

The End of an Era

| Thu Apr. 8, 2010 11:03 AM EDT

"I’m no expert on American politics," says Tom Friedman, "but I do know something about holes." A Freudian slip? Who knows. But he's pretty much right about this:

If you step back far enough, you could argue that George W. Bush brought the Reagan Revolution — with its emphasis on tax cuts, deregulation and government-as-the-problem-not-the-solution — to its logical conclusion and then some. But with a soaring deficit and a banking crisis caused by an excess of deregulation, Reaganism has met its limit. Meanwhile, President Obama’s passage of health care reform has brought the New Deal-Franklin Roosevelt Revolution to its logical conclusion. There will be no more major entitlements for Americans. The bond market will make sure of that.

In other words, both major parties have now completed their primary 20th-century missions, first laid down by their iconic standard-bearers. The real question is which party is going to build America’s bridge to the 21st century — one that will strengthen our ability to compete in the global economy, while practicing much more fiscal discipline.

Actually, healthcare reform isn't done yet, but point taken. Instead of being a big battleground, it's now likely to evolve steadily into an Americanized version of European national healthcare, and that's basically the final big brick in the New Deal/Great Society wall. Likewise, communism has been defeated and tax cutting has been taken about as far as it can be, and conservatives have been flailing for years to come up with something new to add to that. Right now, they're still flailing.

The rest of Friedman's column is sort of an uninteresting mishmash, but at least it gets at an interesting topic. Conservatives ran out of relevant ideas several years ago and their response to that hasn't been pretty. Liberals aren't there yet, but they could be in a few years. It's worth some thought now and again about what the next chapter is going to look like.

Chart of the Day: Cutting the Deficit

| Wed Apr. 7, 2010 8:58 PM EDT

Ah, the American public. God love 'em. The Economist asked if they'd rather tackle the federal deficit by cutting spending or raising taxes, and the runaway winner was cutting spending, by a margin of 62% to 5%. So what are we willing to cut? Answer: pretty much nothing.

As you can see, there wasn't one single area that even a third of the country wanted to cut back on. Except — hold on there! Down in the middle of the table. There is one area that everyone's willing to trim: foreign aid. Good 'ol foreign aid. A category that, as Roger McShane dryly points out, "makes up less than 1% of America's total spending."

Beyond that, there were only four areas that even a quarter of the population was willing to cut: mass transit, agriculture, housing, and the environment. At a rough guess, these areas account for about 3% of the federal budget. You could slash their budgets by a third and still barely make a dent in federal spending.

I suppose one of these days everyone's going to have to figure this out. Apparently no time soon, though.

More on Net Neutrality

| Wed Apr. 7, 2010 7:26 PM EDT

Does yesterday's court ruling in Comcast v. FCC mean that net neutrality is dead unless Congress steps in with new legislation? After reviewing the details of the court's ruling, David Post weighs in:

So what does this portend for net neutrality rules? Can the Commission proceed with its rulemaking efforts along those lines, or does it need some additional statutory authorization from Congress before it can do so? That’s the million dollar question, and I’m not sure that anyone can say for sure at this point what the answer is. There are (at least) two good arguments the agency might rely on to support that rulemaking.

 First, it can change its mind about the classification of Internet services. If Internet service were classified as a “telecomm service,” there would be no doubts about the FCC’s regulatory authority. The Supreme Court has just recently endorsed the view that the agency can change its mind in matters such as this (FCC v. Fox), as long as it does so in a reasonable manner and explains why it has done so.

The other possibilities are discussed in part IV(B) of the Court’s opinion. There are a number of statutory provisions that might well have supported the FCC’s actions here: sec. 706 (which provides that the Commission “shall encourage the depoloyment on a reasonable and timely basis of advanced telecommunications capability to all Americans . . .”), sec. 201(b) (which allows the commission to regulate common carrier charges, which plausibly could have been affected by Comcast’s actions insofar as they might have shifted traffic to other carriers). But in both cases, the Court found that the FCC had waived those arguments by not presenting them in the Comcast Order itself. That, of course, may provide an opening, in any future proceeding, for the Commission to be a little more careful about finding, citing, and explaining its authority before acting, and might provide the agency a way out of this apparent jurisdictional conundrum.

This sounds like (relatively) good news. The first best option is for Congress to write net neutrality regulations into the law, but that's been shot down enough times over the past few years that it seems unlikely to happen anytime soon. The second best option, then, is for the FCC to figure out a different legal justification for imposing the rules itself. Post's read of the opinion seems to suggest that this is quite feasible.

Staying Fit with Your iPad

| Wed Apr. 7, 2010 4:23 PM EDT

People have making a lot of strong claims for the wonderfulness of the iPad over the past week, but nobody has yet claimed that it will help you live longer. That's kind of surprising, when you stop to think about it, but today Dave Munger finally fills this promotional void. Note, though, that there's more than just an iPad itself involved. There's also a couple of old two-by-fours and a bit of sawing and drilling. You can see Dave's life-extending iPad innovation here.

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Crossing the Street

| Wed Apr. 7, 2010 2:17 PM EDT

I thought this short CNN video was pretty interesting. I confess that I'm a little mystified that this cost $7.6 million, but apparently it was money well spent. It just goes to show that sometimes small (but expensive!) things can have a very big impact.

Assassinating Americans

| Wed Apr. 7, 2010 1:01 PM EDT

As we've suspected for a while, the United States government is now officially in the business of assassinating United States citizens it suspects of terrorist activities:

After concluding that he has taken on an operational role in attempted terrorist attacks, the Obama administration has authorized the capture or killing of a U.S.-born Muslim cleric who is believed to be in Yemen, U.S. officials said. Anwar Awlaki, 38, who was born in New Mexico, recently was added to the CIA target list after a special government review of his activities, prompted by his status as a U.S. citizen, one of the officials said.

Andy McCarthy says this is "obviously the right call," so I'll leave it to fellow conservative Kevin Williamson to talk a little sense:

I hate to play the squish, but am I the only one who is just a little bit queasy over the fact that the president of the United States is authorizing the assassination of American citizens?....Surely there has to be some operational constraint on the executive when it comes to the killing of U.S. citizens. It is not impossible to imagine a president who, for instance, sincerely believes that Andy McCarthy is undermining the Justice Department's ability to prosecute the war on terror on the legal front. A government that can kill its citizens can shut them up, no? I ask this not as a legal question, but as a moral and political question: How is it that a government that can assassinate Citizen Awlaki is unable to censor Citizen McCarthy, or drop him in an oubliette? Practically every journalist of any consequence in Washington has illegally handled a piece of classified information. Can the president have them assassinated in the name of national security? Under the Awlaki standard, why not?

As it happens, this might be the right call. CAP's Ken Gude thinks it is, for example. On the other hand, Glenn Greenwald thinks it isn't. But yes: even if you think this is the right decision, it ought to make you feel a little bit queasy.

Civil Asset Forfeiture

| Wed Apr. 7, 2010 12:37 PM EDT

Today I hold out the olive branch of comity to my libertarian friends. The Institute for Justice has just released a lengthy report on "civil asset forfeiture," the ability of state and federal agencies to seize property used in the commission of a crime even if no one has actually been convicted of a crime, and I recommend reading it. The practice is appalling all by itself, but it's even worse than it sounds:

In most states and under federal law, law enforcement can keep some or all of the proceeds from civil forfeitures. This incentive has led to concern that civil forfeiture encourages policing for profit, as agencies pursue forfeitures to boost their budgets at the expense of other policing priorities.

These concerns are exacerbated by legal procedures that make civil forfeiture relatively easy for the government and hard for property owners to fight. For example, once law enforcement seizes property, the government must prove it was involved in criminal activity to forfeit or permanently keep it. But in nearly all states and at the federal level, the legal standard of proof the government must meet for civil forfeiture is lower than the strict standard of “beyond a reasonable doubt” required for criminal convictions.

Likewise, many jurisdictions provide an “innocent-owner” defense that allows owners to get their property back if they had no idea it was involved in a crime. However, in most places, owners bear the burden of establishing their innocence. In other words, with civil forfeiture, property owners are effectively guilty until proven innocent.

Guilty until proven innocent! It's the American way.

Of course, there are a few states — not many, but a few — that have decent laws on the books that limit civil asset forfeiture. But it turns out that really doesn't provide much protection: law enforcement in states with inconvenient rules simply turn over seized assets to the feds and then take advantage of "equitable sharing." This is a win for everyone: not only are looser federal rules in effect, but the money shared back to the states can only be used to fund law enforcement activities. What local police agency wouldn't be thrilled? And as the chart on the right shows, the amount of money shared back to state law enforcement has skyrocketed over the past decade. The incentive for abuse is pretty obvious. The full report is here.

Quote of the Day: Caving in to Terrorists

| Wed Apr. 7, 2010 11:56 AM EDT

From Max Boot, on terrorist claims that suicide bombings will bring the West to its knees:

Some Western analysts have added to the hype by arguing, in essence, that suicide attacks are a "poor man's smart bomb" and a tactic against which democratic states have only one recourse: giving in to the bombers' demands.

Why do conservative writers insist on tossing in little stinkbombs like this when they write op-eds? Obviously, "in essence" is Boot's way of wriggling out of this if anyone calls him on it, but why bother in the first place? Sure, there's bound to be someone, somewhere, who vaguely counts as an "analyst" and has said "in essence" that we should cave in to suicide bombers, but you'd have to dig pretty hard to find him. Not giving in to terrorist demands is the closest thing the world has to a consensus view on how to deal with them.

What makes it even weirder is that the rest of the op-ed is pretty reasonable. Boot argues that, in fact, suicide bombing has a lousy record of accomplishing anything, and that's a good point. "The futility of suicide attacks should not be surprising given that they are the last resort of the weak and desperate," he says, and he's right. Why not just stick to that?