Kevin Drum

The Repeal of Glass-Steagall

| Wed Mar. 25, 2009 3:56 PM EDT
Jason Zengerle points us to this allegedly prescient quote from 1999 in the New York Times:

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010," said Senator Byron L. Dorgan, Democrat of North Dakota. "I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."

I understand the outcry over passage of the Commodity Futures Modernization Act, which happened a year later in 2000.  Aside from opening the infamous "Enron loophole," it also prevented the regulation of credit default swaps, something that might have come in handy over the past few years.

But despite a strong preconceived distaste for any legislation sponsored by Phil Gramm, I'm still a little mystified over the impact that repeal of Glass-Steagall is supposed to have had on our current financial meltdown.  Standalone investment banks have suffered every bit as much as the big conglomerates — maybe even more — and it's not clear that combining commercial and investment banking under one roof had any effect one way or the other on the housing and credit bubble that drove the collapse.  AIG would have gotten into the CDS business with or without Glass-Steagall, and crappy lending standards were the order of the day at Countrywide and IndyMac just as much as they were at Citigroup and Bank of America.

On a broad note, I suppose you can argue that repeal of Glass-Steagall encouraged the growth of ever more too-big-to-fail financial institutions, and there might be something to that.  On the other hand, I don't think Travelers Insurance has contributed anything to Citi's troubles, so it's not clear that crude size is really the culprit here.  There are big banks all over the world, not just here in the post-Glass-Steagall United States.

Maybe someone would like to take a crack at making the case for the malign role played by repeal of Glass-Steagall.  Even better, how about the case for reinstating it?  I'd certainly be interested in hearing it.

Advertise on MotherJones.com

Just How Bad Will It Get?

| Wed Mar. 25, 2009 1:30 PM EDT
Via Brad DeLong, Menzie Chinn compares the CBO's February and March projections of economic disaster and notes that they've become considerably more disastrous in only a month:

Notice that the no-stimulus counterfactual output gap and unemployment rates are noticeably worse now than only a month ago (see this post). For 2010, the February counterfactual was -6.3% of GDP, now around -10%; the February counterfactual for 2010 was 8.7% unemployment, now it's nearly 11% (I'm eyeballing the current counterfactuals off of Figures 2-1 and 2-2)....My guess is that that "massive" stimulus is going to look a lot less "massive" given the severity and duration of this recession.

A month ago CBO estimated that unemployment would hit 8.7% in the absence of a stimulus package.  Now they think it would have been around 10.5%.  With the stimulus, they think it will top out at a little over 9%.

Healthcare Reform, Insurance Industry Style

| Wed Mar. 25, 2009 12:52 PM EDT
Over at the Wonk Room, Igor Volsky notes that AHIP, a healthcare insurance trade group, has finally announced its position on healthcare reform:

Specifically, by enacting an effective, enforceable requirement that all Americans assume responsibility to obtain and maintain health insurance, we believe that we could guarantee issue coverage with no pre-existing condition exclusions and phase out the practice of varying premiums based on health status in the individual market. While we support transitioning to a reformed system in which health-status-based rating is no longer used, rating flexibility based on age, geography, family size, and benefit design is needed to maintain affordability.

Volsky is pretty unimpressed, but I guess I feel slightly more generous toward this proposal than he does.  If AHIP is serious, this represents a philosophical concession that's worth having.  Unfortunately, the devil is in the details.

AHIP says that in return for making insurance mandatory, the industry is willing to guarantee coverage to everyone, regardless of health status.  But check out that last sentence, which is a loophole big enough to drive an EMT ambulance through.

I'll grant them family size as a reasonable criteria for premium flexibility.  Obviously a big family should be charged more than a single person.  But age?  Health issues rise rapidly with advancing years, so it would be fairly easy to avoid the worst risks by simply making premiums rise dramatically after age 50.  Geography?  Everyone knows that poor people tend to have the worst health, and obviously they cluster in low-income areas.  Benefit design?  Every health insurance company understands where the costs are in the system.  If plans with decent coverage of expensive chronic conditions like diabetes are priced out of reach, then nobody will buy them even if, technically, the premium isn't based on health status.

Now, some of this is simply fodder for regulation.  Maybe you can set minimum standards for plan benefits, or limits on how fast premiums can increase with age. But as Volsky points out, AHIP's position today isn't really very different from its position in 1992, which it abandoned at the first sign of political opportunity.  Liberals, including me, have a fond hope that the political scene is different today than it was in 1992, which might keep AHIP from bolting, but recent events suggest that Republicans are pretty likely to adopt the same "Just Say No" strategy this year that they did during the Clinton administration.  It's possible that the political scene hasn't changed as much as we think.

Bottom line: AHIP's statement is better than no statement.  It's progress of a sort, especially if they're serious about it and willing to accept reasonable regulations on how it gets implemented.  We'll see.

Suckitude Update

| Wed Mar. 25, 2009 11:50 AM EDT
Man, does it suck working on a 1024x768 screen with a 1360x768 monitor.  It's like staring at a Dali painting all day long.  I've got a new Acer on its way, though, and I even paid a boatload extra for 2-day delivery.  Now I'm wishing I'd paid a yachtload more for overnight.  Sigh.

Quote of the Day - 3.25.09

| Wed Mar. 25, 2009 11:36 AM EDT
From Bank of America CEO Ken Lewis, on the $45 billion in taxpayer capital that they accepted last year:

"As soon as we think the markets normalize, we would very seriously like to pay it all back."

Granted, Lewis left himself the escape hatch of waiting until "markets normalize" to pay back this capital, but even so this statement means one of three things: (1) he's lying, (2) he's crazy, or (3) BofA really is in fairly decent shape.  I report, you decide.

Regulation

| Wed Mar. 25, 2009 11:18 AM EDT
Bloomberg reports that new financial regulations are on their way:

The Obama administration is preparing an overhaul of U.S. banking rules that would force financial companies to keep more cash on hand in case their trading bets go wrong.

Treasury Secretary Timothy Geithner told lawmakers yesterday that changes will include “strong oversight, including appropriate constraints on risk-taking.” Federal Reserve Chairman Ben S. Bernanke said the case of American International Group Inc. showed the “intense problem” of trading with insufficient capital to guard against losses.

This is probably good stuff, but one thing that I find persistently missing from these discussions is any sense of guiding principles. There are a million rules you might want to put in place to regulate the financial industry, and every one of them might individually sound sensible.  But what's the big picture?  What are you trying to accomplish?

If you asked me, for example, I'd toss out three big principles.  #1 is firmer regulation over leverage, wherever and however it occurs.  This would produce regulations like the one above that increases capital adequacy ratios, but it would also lead to similar oversight of hedge funds; an overhaul of how capital and assets are calculated; regulation of effective leverage embedded in complex derivatives; rules about off-balance-sheet vehicles; and so forth.

#2 would be a stronger commitment to act countercyclically.  That would produce things like rules designed to force the Fed to keep an eye on asset inflation as well as goods inflation; a dedication to limiting credit expansion as well as credit destruction; capital adequacy rules that weren't merely stronger, but that tightened during expansions and loosened during contractions; and stronger down payment requirements for mortgage loans.

#3, for lack of a better name, is a recognition that the global financial system could stand to have a little more sand in its gears.  Something to slow it down just a little bit.  This might include things like a small transaction tax; exchange trading for credit derivatives; and stronger transparency rules.

Now, I might be wrong about these principles, and I might be wrong about the specific regulations needed to support them.  Fine.  Suggest your own.  But rather than a huge hodgepodge of rules that might be good ideas on their own but might not really work together to accomplish what you want, I'd like to see a moderate, well-targeted set of rules aimed at fixing two or three big things.  The principles should guide what we do, not the other way around.

Advertise on MotherJones.com

Come See Rachel! (If You're in the Bay Area, That Is)

| Wed Mar. 25, 2009 12:11 AM EDT
Would you like to meet Rachel Maddow?  Do you live near San Francisco?  Our fundraiser this Saturday with Maddow has been sold out for weeks, but we thought it might be nice to give away a pair of tickets to one of our blog readers.  (I'll be there too, in case you need even more incentive to come.)  If you're interested, just leave a comment and we'll choose a random winner on Thursday evening.  Make sure you're registered so we have an email address to contact you.  Good luck!

The Three C's

| Tue Mar. 24, 2009 11:49 PM EDT
Fred Kaplan writes that the Obama administration will soon have to choose its Afghanistan strategy: either CT (counterterrorism) or COIN (counterinsurgency).  Steve Hynd doesn't like either option: he suggests plain old C (containment) instead.  Read and decide.

Cruel and Unusual

| Tue Mar. 24, 2009 10:41 PM EDT
Atul Gawande has a piece in the New Yorker arguing that lengthy periods of solitary confinement are so debilitating that it basically amounts to torture.  You can read the whole thing and decide for yourself, but I actually found this short passage to be the most convincing argument:

The wide-scale use of isolation is, almost exclusively, a phenomenon of the past twenty years. In 1890, the United States Supreme Court came close to declaring the punishment to be unconstitutional. Writing for the majority in the case of a Colorado murderer who had been held in isolation for a month, Justice Samuel Miller noted that experience had revealed “serious objections” to solitary confinement:

“A considerable number of the prisoners fell, after even a short confinement, into a semi-fatuous condition, from which it was next to impossible to arouse them, and others became violently insane; others, still, committed suicide; while those who stood the ordeal better were not generally reformed, and in most cases did not recover suffcient mental activity to be of any subsequent service to the community.”

If you go down the whole list of accepted norms in treating people — child labor, civil rights, treatment of the mentally ill, minimum housing standards, workplace safety, etc. — virtually everything that was even a close call in 1890 is universally reviled today.  Nobody's in favor of kids working in mills, Jim Crow laws, packed lunatic asylums, rat-infested slums, or miners dying of black lung.  Our penal system is apparently the exception.  But if we knew, even in 1890, that long-term solitary confinement is essentially barbaric, can there really be any question about it in 2009?

Press Conference Notes

| Tue Mar. 24, 2009 7:35 PM EDT
Obama better pick up the pace.  I'm about to fall asleep.  If he doesn't start bringing a little more pizazz to these things the networks are just going to pull their cameras and go home.

UPDATE: OK, this was good.  Ed Henry asked Obama why it took him a few days to respond to the AIG bonus scandal.  Answer: "It took me a couple of days because I like to know what I'm talking about before I say something."  Ba-da-bum!