Kevin Drum

Summing Up Paul Ryan

| Wed Mar. 10, 2010 6:06 PM EST

I'd just like to quickly sum up what we now know about conservative Rep. Paul Ryan's "Roadmap for America’s Future":

And remember, this comes from the guy who's pretty much the best the GOP has to offer. Pretty impressive, no?

Advertise on MotherJones.com

The Problem With Credit Default Swaps

| Wed Mar. 10, 2010 5:42 PM EST

Felix Salmon, who has been a one-man truth squad lately when it comes to credit default swaps, lauds Tuesday's CDS speech by CFTC head Gary Gensler as "by far the best thing written on the subject to date. He's absolutely right about pretty much everything." Among other things, Gensler favors exchange trading for CDS, stronger regulation of all OTC derivatives so that CDS pathologies don't just move elsewhere, and much more restrictive rules on allowing banks to use CDS to meet regulatory capital requirements. All good stuff.

But CDS are basically insurance policies on bonds or other financial instruments, and Gensler thinks that can be a problem too:

At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company’s prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.

Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.” The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be “null and void to all intents and purposes.”

For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest.

Interesting! And it's a pretty good analogy that makes the underlying conflict understandable. However, although Gensler acknowledges the problem, he misses the aspect of this that's come to bother me the most: the effect this has on market stability.

Here's the problem: if you own a corporate bond of some kind, but don't want to run even the small risk of default that it carries, you can buy a CDS on that bond. This is basically fine. As Gensler points out, it does have the downside of making bond buyers less careful about due diligence, but that's probably manageable. (And Gensler has some ideas about how to manage it.) But what happens when lots of other people also buy a CDS on that bond? Obviously, you have the problem Gensler mentions, namely that under some circumstances these CDS owners might have a vested interest in helping the bond issuer fail — the same way you might want your house to catch on fire if it's insured for more than it's worth. But you also have another problem: if the bond issuer does default, and there are a hundred speculators who own CDS protection on one of its bond, you've gone from, say, a $10 million event to a $1 billion event. Basically, when things go bad — and eventually they always do — widespread CDS protection can cause things to spiral far more out of control than they would otherwise.

And what's the upside of allowing this? The argument I hear most often is that broad market trading of CDS provides an efficient price discovery mechanism for the underlying securities. Moody's may rate that bond AA, but the CDS market will tell you what traders really think.

I guess I have two questions about that. First, does it really work? Are CDS marks really reliable indicators of creditworthiness? That's debatable. Second, even if they are, is this a big enough benefit to make the instability risk worth it?

I'm no CDS expert, but I wish Gensler had at least addressed this problem. Maybe there's a simple solution. Or maybe the danger is a lot less than I think it is. It's not clear, for example, that CDS instability was a big problem in the 2008 crash. AIG was a big problem, but that's because they sold too much CDS without proper risk management or enough capital to back it up, not because speculators were loading up on specific issues.

So: Does widespread use of CDS make the financial system inherently less stable? Or is this just another of the endless slanders that CDS has to endure? Conversation on this topic welcome. 

Swan Song for the Filibuster?

| Wed Mar. 10, 2010 3:00 PM EST

Harry Reid on the filibuster:

The filibuster has been abused. I believe that the Senate should be different than the House and will continue to be different than the House. But we're going to take a look at the filibuster. Next Congress, we're going to take a look at it.

Sam Stein explains:

Reid's embrace of filibuster reform comes after he previously threw cold water on the likelihood of getting the rules changed. His reference to the "next Congress" stands out. To change Senate rules in the middle of the session requires 67 votes, which Democrats clearly don't have. But changing the rules at the beginning of the 112th Congress will require the chair to declare the Senate is in a new session and can legally draft new rules. That ruling would be made by Vice President Joe Biden, who has spoken out against the current abuse of the filibuster. The ruling can be appealed, but that appeal can be defeated with a simple majority vote.

Of course, setting this precedent means that Republicans can change the filibuster rules too, the next time they have both a Senate majority and a president in the White House. Are 51 Dems willing to take that chance? Does Harry Reid have the stones to find out? Is Barack Obama fed up enough that he'll give Joe Biden the go-ahead? Tune in next January!

Defending Public Schools

| Wed Mar. 10, 2010 2:29 PM EST

Erik Kain writes that a blog post from conservative Austin Bramwell about the benefits of public schools has "pulled me back from the brink of school choice advocacy and the adoption of pro-voucher views." Sounds interesting! Let's take a look at this conservative defense of the public school system:

As every schoolchild likes to say, America is a free country. That is, parents have the right to settle in whatever school district they choose. (They also have a constitutional right to send their children to private school if they wish.) Predictably, therefore, those families willing to pay the most for a good education gravitate to the best schools, the “price” of which is reflected in the cost of real estate and local property taxes, while the families that care the least about education gravitate to the worst. Meanwhile, the extent to which parents value education itself enhances (or degrades) school quality, as schools are always more likely to thrive when they can attract the families with the highest social capital. Thus, good schools and “good” (that is, education-valuing) families cluster together. So long as Americans enjoy freedom of movement, supply and demand will always tend to produce a huge gap between successful and failing schools. The outcome is basically fair and not altogether inefficient.

Holy cats. That's it? This has pretty much the opposite effect on me: if this is the best defense of public schools we can come up with, then sign me up for vouchers. Aside from the obvious question of whether entire classes of children should be doomed to a lousy education based on where their parent choose to live, there's the equally obvious problem that lots of non-wealthy parents flatly can't afford to move to neighborhoods with good schools no matter how much they value education. Luckily a couple of commenters make note of this, and Bramwell responds:

You are troubled by the cases of people who value education highly but are still trapped in bad schools. I am troubled by these cases too, though I suspect that the number is smaller than imagined.

To reduce the number of such cases, how about this: since reforming schools is so inherently difficult, we should instead try to make housing more affordable even in the best school districts. I would consider first reforming zoning laws that restrict density and discourage/prohibit rental housing.

Sounds great! Let's just build lots of affordable housing in nice, upscale suburban neighborhoods. I don't imagine there will be any political problems associated with that. Should be a piece of cake.

Or, on a more serious note, we could fund poverty and educational interventions with proven track records, allow schools more leeway to deal with incorrigible students, encourage our best teachers to work in our most challenging schools and allow principals to fire the ones who fail, promote experimentation via charter schools, and make sure every school is adequately funded. Feel free to add your own favorite ideas to this list. It's a little messy and it's no silver bullet — it's a long, hard slog, if you will — but these are the sorts of things that will eventually make a difference. Best of all, some of it is even politically feasible.

Trade vs. Healthcare

| Wed Mar. 10, 2010 1:50 PM EST

 James Pethokoukis says that although Barack Obama may be temperamentally in favor of liberalized trade policy, he's not actually doing anything about it:

The wonks aren’t driving U.S trade policy in the Obama administration. The political team is. Its priority is passing healthcare reform. To pass healthcare reform, Obama needs his core union support. And a push for new trade agreements would alienate Big Labor.

Hey, I know how to fix that! Pass the healthcare bill! Then Obama will be free to do whatever he wants on trade.

(Though, let's face it: with unemployment at 10% there's not going to be much stomach for an aggressive push on trade no matter what happens to healthcare. So this probably isn't a very urgent issue anyway.)

Overdraft Fees: Mend 'Em, Don't End 'Em

| Wed Mar. 10, 2010 1:37 PM EST

More noodling this morning. I've mostly been sleeping since I wrote last night about Bank of America's decision to end overdraft protection on its debit cards, but I've also been thinking about it a bit more. And I remain.....skeptical.

First things first: I've been slagging banks for years about their overdraft fees, and now that BofA has boldly eliminated overdraft protection entirely I'm about to slag them for that. Am I just unappeasable?

I don't think so. Here's the thing: overdraft programs themselves have never been the problem. They're a genuine customer convenience. The problem has been the massive abuse of overdraft programs by big banks: high fees, multiple fees per day, reordering of fees, advertising campaigns that encourage customers to think of overdraft protection as a virtual line of credit, etc. So when a BofA executive says, “What our customers kept telling me is ‘just don’t let me spend money that I don’t have,’ ” I don't believe them. I don't doubt that some customers are saying that, but it's vanishingly unlikely that even a majority want overdraft protection to end completely, let alone most of them. What their customers want is fairer overdraft protection, and BofA's choices weren't limited to either having overdraft fees or eliminating them entirely. There are lots of good intermediate measures. For example:

  • The law now says that customers have to opt in to overdraft protection. BofA could have simply implemented this.
  • They could give customers the option of opting for overdraft protection only for purchases over a certain amount. This way your major purchases would always go through but you wouldn't accidentally end up paying $40 for a cup of coffee.
  • They could simply reduce overdraft fees from their current ridiculous level to, say, $5 with a limit of one fee per day. This would still be profitable, would be a genuine customer service, and wouldn't be transparently exploitive.
  • Even better: they could implement a sliding scale of overdraft fees: say, $2 for purchases up to $20, $5 up to $100, etc.
  • Even better still: they could simply treat overdrafts as high-interest loans. Charge a small administrative fee (a dollar or two) plus 30% interest until the overdraft is paid off.

But BofA didn't do any of these things.1 They just eliminated overdraft protection entirely even though many of their customers would probably benefit from it. Why?

Well, call me suspicious, but I can't help but think that they're hoping for a backlash of some kind. I honestly don't know what they might have in mind, but it just doesn't make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn't smell right here.

1The best alternative, of course, would be for consumers to be asked at the point of purchase if they want overdraft protection to kick in. Unfortunately, current technology doesn't allow that. The card swipers in most retail outlets just don't have the capability to do this.

Advertise on MotherJones.com

Comparative Effectiveness

| Wed Mar. 10, 2010 1:00 PM EST

In the LA Times today, researchers Michael Hochman and Danny McCormick explain the sorry current state of comparative medical research. On a broad range of topics, we simply don't know which treatments work best:

In this week's issue of the Journal of the American Medical Assn., we report the results of a study that may help explain why we don't. In the study, we analyzed 328 medication studies recently published in six top medical journals and found that just 32% were aimed at determining which available treatment is best. The rest were either aimed at bringing a new therapy to market or simply compared a medication with a placebo. Whether the therapy was better or worse than other treatments was simply not addressed.

....Why [] did only a third of medication studies focus on helping doctors use existing therapies more effectively? The answer lies in the fact that pharmaceutical companies fund nearly half of all medication research, including the lion's share of large clinical trials. For obvious reasons, commercially funded research is primarily geared toward the development of new and marketable medications and technologies. Once these products have won approval for clinical use, companies no longer have incentives to study exactly how and when they should be used.

At the risk of joining the forces of socialism and death panelism, this is why the federal government should be funding a lot more of these studies. The free market won't do it — in fact, in many cases the free market actively resists studies like this — and our lives are shorter and poorer for it. Our lives are, quite possibly, also more expensive for it, since the most effective treatments aren't always the most expensive ones.

And you know what would help fund more of these studies? The Democratic healthcare bill! Wouldn't it be great if that passed?

The Anonymous SAO, Final Post

| Wed Mar. 10, 2010 12:20 PM EST

I'm not sure if anyone still cares, but after noodling over this a bit I think I'm basically convinced by the Atrios/Salmon/Yglesias argument that there's some real benefit to government briefing sessions that don't allow direct quotes. Spin will be a big part of these sessions regardless, and if this rule allows government officials to talk like real people instead of worrying that the slightest misstep will produce some headline-worthy gaffe, then it's probably a useful thing. Felix makes the case pretty well here.

On the other hand, the argument for not being able to attribute your paraphrases to specific officials still seems pretty dodgy. On balance, then, I say: paraphrase rule yes, ID rule no.

The End of Overdraft Fees?

| Wed Mar. 10, 2010 2:57 AM EST

Here's the latest on the overdraft front:

In a move that could bring an end to the $40 cup of coffee, Bank of America said on Tuesday that it was doing away with overdraft fees on purchases made with debit cards, a decision that could cost the bank tens of millions a year in revenue1 and put pressure on other banks to do the same.

....“What our customers kept telling me is ‘just don’t let me spend money that I don’t have,’ ” said Susan Faulkner, the bank’s deposit and card product executive, who said the overdraft changes were part of a broader push to build trust among its customers. “We wanted to help them avoid those unexpected overdraft fees.”

Well, that was a quick U-turn. As recently as last year it was "our customers are telling us not only that they want overdrafts covered, but they don't even want to be asked first and they're just fine with us fiddling with the order of payment even if it maximizes the number of overdraft fees they pay." Hell, Bank of America was famous for its unwillingness to ever allow anyone to opt out of overdraft protection no matter how compelling the argument. Now, suddenly, it's "our customers don't want overdraft protection at all."

I'm a little short on time right now, so I'm not sure what to think of this. On the surface, it's good news. If it's a choice between unlimited overdraft fees and no overdraft fees, then no overdraft fees is a clear winner. But then there's this:

“Consumers have shown a willingness to incur overdrafts if it’s covering mortgage payments or car payments, but not to cover a hot dog and a soda,” said Greg McBride, senior financial analyst at Bankrate.com and one of a handful of analysts and consumer advocates briefed by Bank of America on its new policy. “They don’t want to incur overdrafts on everyday purchases.”

So how hard would it be for BofA to give customers this choice: "please cover payments over, say, $200 but not anything below that amount"? Why no middle ground? I need some time to think this over, but something tells me there's more going on here than it seems.

But hey — maybe I'm just overly suspicious of the banking industry these days. Maybe.

1Tens of millions? For a bank the size of BofA, wouldn't the real number be somewhere in the billions?

Paul Ryan's Plan to Tax You More

| Tue Mar. 9, 2010 9:54 PM EST

Rep. Paul Ryan's tax and spending "roadmap" is a fascinating critter: conservatives all praise it to the skies but none of them want to actually commit to supporting it. The reason for their hesitation is obvious: Ryan's plan would cut spending dramatically, and supporting it would mean having to explain what, exactly, they'd cut. That would be electoral suicide and they know it. They much prefer their usual game of loudly denouncing "spending" without ever having to say what spending they're actually opposed to.

However, their reason for supporting Ryan's plan is also obvious: it would cut taxes on the rich dramatically, and there's nothing conservatives like better than cutting the tax bills of America's wealthy. But how much would it cut taxes on the rich? Citizens for Tax Justice has run the numbers and the answer is: a lot. The very richest of the rich would see their tax bills go down by an average of over $200,000, a whopping 15% of their income. Ka-ching! To make up for that, everyone with an income under $100,000 would have their taxes increased by about $2,000 per year.

It's a sweet deal for the rich. But even with all the tax increases on the middle class, Ryan's plan still raises less revenue than today's tax code. "It’s difficult to design a tax plan that will lose $2 trillion over a decade even while requiring 90 percent of taxpayers to pay more," says CTJ acerbically. "But Congressman Ryan has met that daunting challenge." Details are in the table below, where you can find out how much more you'd have to pay under Ryan's plan. Enjoy.