Kevin Drum

Where's the Right Wing Reform?

| Sat Apr. 24, 2010 1:02 PM EDT

Via Twitter, National Review editor Rich Lowry suggests that conservatives are a lot more interested in financial reform than I (or Jonathan Chait) give them credit for. To demonstrate, he points to a post that has links to nine pieces recently run on the NR website or in the magazine.

I'll get to those in a minute. First, though, I should clarify: I wasn't targeting any particular magazine when I suggested that conservatives haven't shown a lot of serious interest in financial reform. My observation was much broader than that. When I think of the blogs that have become go-to sites on the financial crisis — Mike Konczal, Felix Salmon, Barry Ritholtz, Simon Johnson & James Kwak, Yves Smith, Steve Randy Waldman, and others — they're mostly run by folks with a leftish tilt of one kind or another. Ditto for books. Ditto for magazine pieces. There are a few conservatives who blog and write about financial regulation too, but just not very many, and almost none that do it with the depth and passion — or the kind of concrete proposals — of the lefties. That's why lefty sites mostly end up arguing with other lefties.

But what about National Review in particular? Well, aside from nonsense about the CRA there's one thing for sure that we know conservatives are exercised about: the supposed "bailout fund" contained in Chris Dodd's reform bill. So I'll give 'em that. And sure enough, of the nine piece linked in this post, five of them (1, 2, 3, 4, and 8) are primarily about that. Of the others, #6 and #7 are just reporting and nonspecific commentary, and #9 is some kind of weird analogy with oily rags and fire insurance that I couldn't even make sense of. Bottom line: NR has some commentary on reform, but there's not much, and what there is is almost entirely dedicated to griping about resolution authority and the "bailout fund." It's essentially pretty trivial stuff. On a broader note, The Corner probably puts up a couple hundred posts a week on every topic under the sun, but most weeks you can count the number dedicated to serious commentary on financial reform on the fingers of one hand.

But maybe you noticed that I skipped a step up there. What about item #5? It's by Duncan Currie, and after a bit of throat clearing about the bailout fund and the dreaded CFPA, he offers three reform suggestions Republicans should take up. Here's the condensed version:

(1) A one-page mortgage form....The form would clearly and concisely show prospective borrowers how their mortgage payments relate to their income, and would be accompanied by a two-page glossary defining various technical terms. It has received praise from none other than Elizabeth Warren, chair of the TARP Congressional Oversight Panel.

(2) Revamping Fannie Mae and Freddie Mac....Dodd’s legislation does not address their future status. Republicans should continue highlighting this omission and challenge Democrats to support robust GSE-reform language.

(3) Implementing new capital requirements....In the latest issue of National Affairs, economists Oliver Hart of Harvard and Luigi Zingales of the University of Chicago describe an innovative approach. Briefly, Hart and Zingales would force big financial firms to safeguard their systemically important obligations by carrying two layers of capital, the second of which “would allow for a market-based trigger to signal that a firm’s equity cushion is thinning, that its long-term debt is potentially in danger, and therefore that the financial institution is taking on too much risk.”

This is the kind of thing I'm talking about. It's obviously not what I'd propose, and it doesn't really address the deepest regulatory issues that probably cause the most heartburn for conservative ideology. Still, it shows a serious interest in the subject and tosses out some real proposals. Mortgage loans should be simpler. Fannie and Freddie do need to be dealt with. And capital requirements are a key part of any reform effort. It's a good piece.

But it's just one piece. Beyond that, I guess my question is, Where are the Mike Konczals and Simon Johnsons of the right? That is, conservatives who acknowledge the serious market failures that brought on the crash (instead of obsessing solely over CRA or Fannie Mae) and who go beyond just sniping at Democratic proposals. Conservatives who write regularly for a lay audience and really take seriously an obligation to explain what they think happened and what we ought to do to fix it. Maybe they're out there and I'm just not reading them. But if someone gives me half a dozen names, I'll take a look.

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Goldman's Big Short

| Sat Apr. 24, 2010 11:10 AM EDT

The New York Times reports that Goldman Sachs is a big fat liar:

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

Hmmm. Really? What statements were those?

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

You know, I'm as willing as the next guy to rubbish Goldman Sachs. But 2007 is not 2009, and Goldman's mortgage-related results might very well have been different during those two years. What's more, making lots of money shorting the housing market is entirely consistent with Goldman's statement that it "did not generate enormous net revenues by betting against residential related products." The obvious conclusion from this is that they lost a truckoad of money on mortgage products and made a truckload of money shorting mortgage products. Apparently the second truckload was bigger than the first during certain periods, but that's all.

As far as I can tell, this has been Goldman's story all along. They were long housing up through 2006, got nervous, and then started to short the market. As a result, they came out of the financial meltdown in decent shape. Not great shape, as their conversion to a bank holding company and $1.3 billion "missing month" in late 2008 demonstrate, but not bad.

There are plenty of things to hate about Goldman Sachs, but this one is a real stretch. Maybe I'm missing something, but I don't really see any kind of serious deception here.

Friday Cat Blogging - 23 April 2010

| Fri Apr. 23, 2010 2:21 PM EDT

Happy Shakespeare's birthday! Maybe. April 23rd is as good a guess as any, and if you're not convinced just pretend you're celebrating St. George's Day instead. Inkblot and Domino are celebrating by hunting critters in the deep, dark jungle in our backyard. I don't really know what Inkblot is looking at, I just know that something caught his eye and he took off like a shot for the bushes to track it down. As usual, he failed. Domino then followed him out and caught sight of some birds. She even made that funny cat hunting sound, which I've never heard her attempt before.

And there's good news to go with all this: Wednesday was vet day, and everyone is healthy. Hooray! What's more, according to the official weigh-in, Inkblot has lost about five pounds since his peak and Domino has lost two-and-a-half. Not exactly supermodel svelte, but that's good enough for now. Have a nice weekend, everyone.

Republicans and Wall Street

| Fri Apr. 23, 2010 2:02 PM EDT

Rich Lowry takes a whack at the cozy relationship between Wall Street and the Democratic Party:

When President Barack Obama’s vast new regulatory state is completed, Wall Street firms ought to have a competition over the naming rights. Will it be the CitiDeal? Or the Goldman Society? Or the UBS/J.P. Morgan Joint Initiative for the Establishment of a Social Democracy?

....Back in 2006, Democrats began a hard sell on Wall Street led by New York senator Chuck Schumer and then-representative Rahm Emanuel, now White House chief of staff. The basic pitch was that Democrats were taking Congress, and the financial world should get on board — surely delivered with all the bare-knuckled subtlety for which those two are justly renowned.

Lowry's tone aside, I'd say he's got a point. (My collection of shots at both parties is here.) The fact is that we'd have a lot easier time reining in Wall Street if it weren't for the fact that Democrats long ago gave up their populist roots and decided to follow Willy Sutton's advice. The only difference is that they don't have to rob banks, they just have to ask them nicely for their money over coffee and scones.

But look: this particular critique would be a lot more meaningful if it were accompanied by some actual ideas about what went wrong with our financial system and what we ought to do to fix it. But Lowry doesn't even try. He makes a couple of tired references to "unfettered capitalism" and "the unforgiving discipline of the market" toward the end of the column, and that's about it. But there's no there there. At some point we need some good ideas too. Unfortunately, conservatives just can't seem to work up any interest in this subject. Funny that.

Obama and His Discontents

| Fri Apr. 23, 2010 12:50 PM EDT

David Brooks writes today that all the old left-right wars are back in full swing even though we were all promised differently back in 2008:

The country had just elected a man who vowed to move past the old polarities, who valued discussion and who clearly had some sympathy with both the Burkean and Hamiltonian impulses. He staffed his administration with brilliant pragmatists whose views overlapped with mine, who differed only in that they have more faith in technocratic planning.

Yet things have not worked out for those of us in the broad middle. Politics is more polarized than ever. The two parties have drifted further to the extremes. The center is drained and depressed. What happened?

History happened. The administration came into power at a time of economic crisis. This led it, in the first bloom of self-confidence, to attempt many big projects all at once. Each of these projects may have been defensible in isolation, but in combination they created the impression of a federal onslaught.

Given Brooks' temperament and policy preferences, I'm not surprised that he's discouraged. Still, I really don't understand his basic complaint here. It's true that Barack Obama has a cautious, pragmatic character, but he was also pretty clear during the campaign about what he wanted to do. Let's roll the tape: Healthcare reform. Climate change. A drawdown in Iraq. A stimulus bill. A surge in Afghanistan. More drone attacks in the AfPak region. Ending DADT.

And what has he devoted most of his time to? Healthcare reform. Climate change. A drawdown in Iraq. A stimulus bill. A surge in Afghanistan. More drone attacks in the AfPak region. Ending DADT.

He's also added financial reform to that list, which didn't get a lot attention in 2008 for the obvious reason that we were right in the middle of a financial meltdown and it was too early to figure out what needed to be done on that score. But under the circumstances, surely Brooks doesn't begrudge a focus on this? And surely he doesn't think that it could have been put off much longer than it already has?

Not really. His real complaint, apparently, is this: "Each of these projects may have been defensible in isolation, but in combination they created the impression of a federal onslaught." But I don't think that's true. Remember: Rick Santelli's famous tea party rant from the floor of the Chicago Mercantile Exchange was broadcast 30 days after Obama's inauguration and the movement was in full swing a couple of months later. There was no "federal onslaught" at that point, there were just a bunch of smallish things working their way through Congress plus two big ticket items that Obama was pushing hard for: the stimulus bill and healthcare reform.1 The first — compromised in size and including plenty of tax cuts — was, surely, something that no responsible president could have avoided and that any responsible opposition should have accepted. The second was the cornerstone of Obama's campaign, and it was — by a good margin — the most moderate healthcare overhaul that any Democratic president had ever proposed.

So yes: the impression of a federal onslaught was "created." But beware the passive voice. It was created very deliberately by Fox News, Rush Limbaugh, and the Republican opposition. Which is fine. That's their role. But they created it not over an "onslaught," but practically before Obama had even done anything. The only way for Obama to have avoided this fight, then, would have been to almost literally give up his entire domestic agenda. And even that probably wouldn't have done it.

The nature of the opposition to a liberal domestic agenda was always clear, and there was never much Obama could do about it. If you don't like that agenda, that's fine. But it's wrong to pretend that the hysterical opposition it's produced is somehow uniquely Obama's fault. It was inevitable from the day he was elected, and its source has always been perfectly clear.

1The Waxman-Markey climate bill passed the House in June, but then stalled and went nowhere for the next year. It never got the kind of attention that healthcare or the stimulus did.

The Non-Nuclear Nuke

| Fri Apr. 23, 2010 11:12 AM EDT

For years the Pentagon has been wrestling with a problem: when you get intel telling you that a high-value terrorist has been located somewhere, how do you take him out? They aren't likely to stick around at the target location for long, so you need something that can (a) get there quickly and (b) cause a lot of damage once it does. Bombers and cruise missiles take hours. Local forces, even if they're in place, aren't always lethal enough. What to do?

One answer is to use ICBMs. Not nuclear-tipped ICBMs, but missiles with a big conventional payload. The Obama administration is apparently planning to revive this idea, and Noah Shachtman explains why it's crazy:

Over and over again, the Bush administration tried to push the idea of these conventional ICBMs. Over and over again, Congress refused to provide the funds for it. The reason was pretty simple: those anti-terror missiles look and fly exactly like the nuclear missiles we’d launch at Russia or China, in the event of Armageddon. “For many minutes during their flight patterns, these missiles might appear to be headed towards targets in these nations,” a congressional study notes. That could have world-changing consequences. “The launch of such a missile,” then-Russian president Vladimir Putin said in a state of the nation address after the announcement of the Bush-era plan, “could provoke a full-scale counterattack using strategic nuclear forces.”

I guess I can imagine possible ways to fix this. I just can't imagine any good ways. Even if the Russians and Chinese and Indians and Pakistanis are provided with some reliable way of identifying non-nuclear ICBM launches, they could never be sure that the United States hadn't figured out some way to fool them. So they'd always be on a short fuse. And do we really want to make that particular fuse even shorter than it already is?

Sometimes bad ideas are just bad ideas. This really seems like one of them.

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Climate Bill Gets a Boost

| Fri Apr. 23, 2010 10:50 AM EDT

The KGL team — that's senators Kerry, Graham, and Lieberman for those of you not up to speed with current Beltway lingo — anounced yesterday that they've gotten key business support for their climate bill:

The Edison Electric Institute — whose members generate the bulk of the nation's electricity — and two of its influential CEOs, Exelon's John Rowe and Duke Energy's Jim Rogers, will declare their support Monday, sources said. While Kerry did not name the three oil companies, a source familiar with the negotiations said Shell, BP and ConocoPhillips would back the climate measure.

And why did these folks decide to support the bill? Here's the big payoff:

The bill will preempt both the states' and EPA's ability to regulate greenhouse gases under the Clean Air Act, as long as emitters comply with the standards outlined in the measure. The EPA will monitor and enforce compliance with the law.

That's pretty much been the plan all along: use the threat of EPA action to gain support from Republicans and the business community. It seems to be working on the business community, so the only question left is whether it will work on Republicans. Normally I'd say no, but the threat of EPA action is quite real and might prompt the GOP's business wing to put some serious pressure on them to get this bill passed. That will mean standing up to the "carbon taxes are tyranny" crowd in the tea party movement, but in the past the business wing of the party has usually won these kinds of showdowns. It's still not clear if there's enough time on the congressional calendar to pass a climate bill this year, but at least the odds are now a little better. Kate Sheppard has more details here.

Greece Hits the Panic Button

| Fri Apr. 23, 2010 10:10 AM EDT

The soap opera in Greece is nearing its final stage:

Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday, an unprecedented step that will test the bonds of the European Union.

....“The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together,” he said, referring to an emergency aid package arranged two weeks ago. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund.

....The announcement means that money from the I.M.F. can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to E.U. officials. “We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, the I.M.F. managing director, said in a statement issued in Washington.

The IMF money is just a stopgap. The real question is how quickly the EU will approve its part of the rescue and whether it will fix Greece's problems anyway. "The markets are betting on the country going bankrupt," one Greek official told the Wall Street Journal, and once the markets do that they generally don't stop, bailout or not. My guess is that speculators are going to start a regime of betting-with-extreme-prejudice pretty quickly, and it's not at all clear that even €40 billion will be enough for Greece to defend itself from that. And then Portugal will be up to bat. Stay tuned.

Conservatives and Financial Reform

| Thu Apr. 22, 2010 7:16 PM EDT

Jonathan Chait remarks on the "intellectual disarray" in right wing circles concerning financial reform:

Conservatives do not know what to say or think about this. A few of them are calling for breaking up the big banks. A few more are following the Frank Luntz line that regulation is a big favor to Wall Street. But mostly they're saying... nothing. It's almost a non-issue at the National Review and Weekly Standard blogs.

This is something that's been nagging at me lately too. Most of the blogs that spend a lot of time on regulatory reform are liberal or leftish blogs. Most of the books on the subject that aren't pure journalistic efforts generally come at it from a lefty point of view too. Conservative bloggers, columnists, and talking heads just don't seem to have an awful lot to say on the issue.

Why? They had plenty to say about healthcare reform, a similarly policy-heavy debate. And regulatory issues have long been a staple of the right. So why don't conservatives have more to say about it? Jon proposes an answer:

You can see why the issue would pose problems for the right. First, it threatens the self-image they've developed over the last year as opponents of the government-business nexus. Second, it's difficult to work out a free market response. If you let Wall Street invest however it likes, it will eventually precipitate a financial crisis, with massive government intervention being the only option to save the economy. Or else you can break up the big banks, or limit their ability to take on systemic risk. Either way, government has to get involved at some step in the process. It almost seems like conservatives can't choose which form of government intervention to accept, so many of them just aren't choosing.

Maybe. I don't have a better answer, anyway. But it's not really very compelling. In the past conservatives have always been able to marry their middle class NASCAR wing and their big business wing without much difficulty, and they've always been able to construct a free market response of some kind no matter what the issue is. It's hard to believe that banking reform is really all that big a challenge for them.

One possibility, I suppose, is that this took them by surprise. On most subjects — healthcare, climate change, taxes, etc. — the right has a well honed arsenal of proposals. They may or may not make sense, but they've got 'em. Financial reform, conversely, is something they've never even thought about. For the past 30 years their only mantra has been to tear down regulation, and that's pretty obviously a nonstarter right now. So they've got nothing.

Who's Afraid of Finance Industry Profits?

| Thu Apr. 22, 2010 4:38 PM EDT

Matt Yglesias wants to know why so many progressives are obsessed by the insane profitability of the financial sector:

Consider two problems:

— Financial institution failures that cost taxpayers billions.
— Run-amok income inequality.

The policy response to the first is “regulation modernizing the powers of regulators.” And the policy response to the second is higher taxes to finance more and better public services. Is there really some third problem that trying to make Wall Street less profitable addresses? At the end of the day, insofar as people want to entrust their money to greedy risk-taking bankers, I would rather have those bankers be located in New York and paying taxes to the IRS that finance great schools and shiny new mass transit systems than have the bankers be located in Zurich and financing their schools and transit systems.

Speaking only for myself, I'd say this misconstrues the issue. Finance sector profitability isn't a problem per se, it's the symptom of a problem. Put another way, you might say that industry profits are a useful metric for assessing how bad the financialization of the U.S. economy has become. Historically, the financialization of a country's economy is a huge blinking red light, and we'd do well to avoid it.

More prosaically, industry profits are also a good way of measuring whether our regulations are working. A safe, efficient banking system just shouldn't be enormously profitable. So if our regulations are working, you'll see profits decline. Conversely, if they stay high, there's something wrong. Finance sector profitability may not be the only (or even the best) way to measure if Wall Street is working well, but it makes a pretty decent canary in the coal mine.

Remember: at its core, finance is supposed to be a way of allocating capital to the real economy. The way it does this might be simple or it might be complex, but its fundamental purpose is to provide a service to the business community. When, as Martin Wolf put it yesterday, it instead becomes a "machine to transfer income and wealth from outsiders to insiders," the real economy suffers as capital is increasingly misallocated. That's the problem we need to address, and the best way to address it is to make pure finance less profitable. It's better to refocus Wall Street into caring primarily about the moderately profitable business of providing efficient funding to the rest of the world than it is to let them do whatever they want and then try to tax the excess away.

(FWIW, I've never been sold on the idea of taxation as the best policy response to income inequality anyway. But that's a subject for another post.)

UPDATE: There's also a political economy problem with outsized finance industry profits, which Ezra Klein gets at here. Taxation can mitigate this, though even here I don't think it's an ideal solution.

Another thing to keep in mind: taxing the industry doesn't really motivate Wall Street to engage in less risky, more socially useful activities. To do that, you have to tax riskier activities differently from less risky activities. To say the least, that's pretty tricky.