Kevin Drum

The Fat Lady Starts Warming Up On Financial Reform

| Tue Jun. 29, 2010 11:20 PM EDT

After three Republican senators threatened to vote against the financial reform bill unless its $18 billion bank fee was removed, Democrats briefly reopened conference committee proceedings today and voted to remove it:

Conference negotiators voted to eliminate the proposed tax and, in its place adopted a new plan to pay the projected five-year, $20 billion cost of the legislation. The new plan would bring an early end to the Troubled Asset Relief Program, the mammoth financial system bailout effort enacted in 2008, and redirect about $11 billion toward heightened regulation of the financial industry. The conferees also voted to increase the reserve ratio of the Federal Deposit Insurance Corporation but specified that small depository institutions — those with less than $10 billion in consolidated assets — be exempt from paying any increase.

If Maria Cantwell, who voted against the bill on its first go-around, agrees to support the final conference report, that will give Democrats 57 votes. If the removal of the bank tax buys the support of Republicans Susan Collins, Olympia Snowe, and Scott Brown, that will give them 60 votes and the bill will pass. So cross your fingers and hope this does the trick.

That is, cross your fingers if you think this bill is worth passing in the first place. And since I got into a Twitter argument with Marcy Wheeler last night about that very subject, here's a brief rundown of what we'll get out of it:

  • Companies selling mortage-backed securities will be required to retain a portion of the risk on their own books. The originate-to-distribute model, where dealers bundled up loans and immediately turned around and sold off the whole package, created a system where bundlers had no incentive to make sure the underlying loans were any good. This provision helps rein this in.
  • Commercial banks will face restrictions on the amount of proprietary trading they can do. This is the so-called Volcker Rule, and although it was watered down in conference (banks can still trade up to 3% of their capital for their own accounts) it's still a pretty good safety valve for the banking industry.
  • A Consumer Finance Protection Agency will be set up within the Federal Reserve. I was initially opposed to housing the CFPA at the Fed, but I came around to the idea based on the argument that this will allow the CFPA to offer higher salaries and attract better talent. This is a significant win, and Elizabeth Warren says she's pretty happy with it.
  • Derivatives trading will largely be forced onto public exchanges. Certain standard derivatives will still be offered over-the-counter, which is too bad, but more complex instruments like credit default swaps will be made considerably safer by this rule.
  • Dick Durbin's interchange regulation for debit cards was adopted. This doesn't affect the safety and soundness of the banking system, but it's a good step forward for transparency and consumer protection.
  • Capital requirements for large banks will be increased. Together with the Basel III requirements currently under negotiation, this is a key step toward making the entire financial system safer and less leveraged.
  • Other changes that are good, though watered down from where they ought to be, include ratings agency reform, resolution authority, systemic risk regulation, and SEC authority over hedge funds.

This doesn't go as far as it should. There should be greater constraints on leverage. The prop trading and derivatives trading regs were weakened more than they should have been. Some critics think the big banks should have been forcibly broken up.

Still, even in its weakened state, the bill is stronger than it was a few months ago and it will go a long way toward reducing the size and profitability of the banking sector — which is why the banking industry is fighting it tooth and nail. Here's the Wall Street Journal:

A weekend of number-crunching left no doubt that the changes would hurt the bottom line at thousands of banks, brokerage firms and other financial companies. "This is wrong, and we have one last chance to do something about it," the American Bankers Association wrote in an email to its members, urging them to write opposition letters to members of Congress. Financial-industry lobbyists are aiming at Republicans who voted in favor of the Senate version, hoping to change their position when the final bill comes up for a vote. "You keep playing until the whistle blows," says ABA spokesman Peter Garuccio.

Inside most banks, the mood already has shifted to assessing how much revenue and earnings are likely to evaporate if the bill becomes law — and how to make up for the forgone money. Keith Horowitz, an analyst at Citigroup Inc., estimated the legislation would reduce annual earnings per share for big U.S. banks by 6%, down from his previous estimate of 11%.

This is half a loaf, but at this point the only credible alternative is doing nothing. There's not enough time to draft a new bill this year, and after November there's no chance of passing anything at all. Given the alternatives, anyone who cares about financial reform should support this bill.

Advertise on MotherJones.com

My Obama Schizophrenia

My brain tells me that he's done pretty well. So why do I feel let down?

| Tue Jun. 29, 2010 5:56 PM EDT

This is weird. Bob Herbert writes today about his disappointment in Barack Obama:

Mr. Obama and the Democrats have wasted the once-in-a-lifetime opportunity handed to them in the 2008 election. They did not focus on jobs, jobs, jobs as their primary mission, and they did not call on Americans to join in a bold national effort (which would have required a great deal of shared sacrifice) to solve a wide range of very serious problems, from our over-reliance on fossil fuels to the sorry state of public education to the need to rebuild the nation’s rotting infrastructure.

All of that could have been pulled together under the umbrella of job creation — short-term and long-term. In the immediate aftermath of Mr. Obama’s historic victory, and with the trauma of the economic collapse still upon us, it would have been very difficult for Republicans on Capitol Hill to stand in the way of a rebuild-America campaign aimed at putting millions of men and women back to work.

This is so far beyond wrong I hardly know what to call it. All of these things could have been pulled together under the umbrella of job creation? No, they couldn't have. It would have been difficult for Republicans to stand in the way of putting millions of men and women back to work? In what alternate universe? Republicans almost unanimously filibustered Obama's stimulus package four weeks after he took office. They've filibustered the extension of unemployment benefits every time it's come up. They've filibustered jobs bills, public works bills, education bills, and just about every other bill you can name. There's nothing Obama could have done to change that.

But what's weird about this is not that Herbert wrote a column I disagree with. What's weird is that a column so utterly wrong provoked an admiring response so utterly right. Here is M.J. Rosenberg writing about his circle of friends:

They all supported Obama in the primaries and all celebrated his election. They are all left-of-center.

And they all feel let down by the administration right now. They are still Obama supporters but, unless something changes, he will soon move in to the territory both Clinton and Carter inhabited. He will have our support because he's a Democratic President up against utterly unpatriotic and selfish lunatics, bigots, and troglodytes. It will be simply be the "consider the alternative" kind of support.

We had hoped for much more. We wanted to feel what our grandparents and great-grandparents felt for FDR — that he was out there battling for working people, the unemployed, and, frankly, an America strikingly different than the one they were living in....I want FDR style politics and TR style rhetoric ("the bully pulpit"). Right now, I don't see it. Neither does columnist Herbert. And, yes, I recognize the constraints. But Presidents have to transcend them, or at least be seen as fighting like hell. I don't see that happening.

Italics mine. Like Rosenberg, I've been feeling pretty schizophrenic about Obama for quite a while. My brain tells me that, given the realities and constraints of American politics, he's done pretty well: a big stimulus package, the Lilly Ledbetter Act, healthcare reform, withdrawal from Iraq seemingly on schedule, a decent start on rationalizing Pentagon procurement, financial reform (maybe), and progress on DADT (hopefully). Even his Afghanistan policy, which I don't agree with, was deeply considered and responsive to the obvious limitations of military action.

There are, of course, things I don't like about Obama's record too. I wish he hadn't reappointed Ben Bernanke. I wish he'd nominated Diane Wood to the Supreme Court instead of Elena Kagan. His record on civil liberties issues, with a few noticeable exceptions, has been generally lousy. I wish he'd listened to Joe Biden on Afghanistan. I'm not sure that bailing out Chrysler was worth the taxpayer's money.

But this isn't why I'm schizophrenic about Obama. I never expected to like everything he did. The reason I'm schizophrenic is that it's almost impossible to get a handle on what he really wants. Did he want a bigger stimulus bill but compromised down because $800 billion was all he could get? Or did he not really want more than that in the first place? Ditto for the public option. Ditto for DADT repeal, which he had to be pushed into supporting this year. And ditto again on financial reform, which is worth passing only because of numerous amendments to the original bill. On all of these issues and more, I don't feel like I ever knew what Obama's real position was. There's a big difference between compromising because politics is what it is and you have no choice, and compromising because the more centrist position is the one you genuinely hold. But Obama never gives me a good sense of which it is with him.

Now, it's a bad idea to look at FDR through rose colored glasses. Plenty of New Deal legislation passed over his objection, and there was nobody better at playing his cards close to his vest. Still, there was seldom any question about where FDR stood on the big issues, and you either loved him or hated him for it. With Obama, I'm left unsure far too often for comfort. Thus my schizophrenia.

Boehner vs. Boehner

| Tue Jun. 29, 2010 1:57 PM EDT

Now that the Republican caucus has apparently decided to unanimously oppose any reform of our financial system, House GOP leader John Boehner explains his party's objections to the final bill reported out of conference last week:

This is killing an ant with a nuclear weapon.

And here is Boehner's spokesman "explaining" what he meant:

It's clear Boehner is not minimizing the crisis America faced — he is pointing out that Washington Democrats have produced a bill that will actually kill more jobs and make the situation worse.

So here's a question: do the standards of journalism require us to take this explanation at face value? I mean, it's obvious to a fourth grader what Boehner meant: he thinks there were only minor problems with the financial system before the crash, and we just don't need anything more than a few tweaks here and there to fix things up. He decidedly was minimizing the problems on Wall Street during the years that led up to the crisis.

But do we now have to pretend that's not what he meant simply because his press flack says that's not what he meant? Or can we act like adults and interpret his remark in the obvious way? Stay tuned for media reaction later today to find out.

Still No Deficit Hawks in the GOP

| Tue Jun. 29, 2010 12:07 PM EDT

On the scale of the federal budget, $18 billion is a rounding error. Literally. It's about one-half of one percent of the budget, which rounds down to zero. But a small group of moderate Republicans are threatening to vote no on financial reform because an $18 billion fee is included in the final bill.1 It's not there to punish banks or to create a slush fund for new spending. It's there solely to make the bill deficit neutral. Ryan Avent:

And yet the most moderate Republicans in the Senate are balking at the charge. Not because they disagree in any real sense with the economics of the fee. They simply won't vote for anything that looks like a tax.

This is why it's so difficult to imagine a solution to America's long-run budget crisis. It's a political impossibility to move to primary surplus on the back of spending cuts alone. Democrats are highly unlikely to win a Senate majority comfortably over 60 seats any time in the near future. And the most moderate Republicans won't vote for tax increases, even when the increase in question is a relatively small, one-off charge on big banks.

There's no room for compromise on the deficit there. Zero. The Journal story is trouble for the fate of the financial reform bill, but it should worry deficit hawks even more.

And I suppose it would worry them if there were any actual deficit hawks in the Republican Party. But there aren't, are there? There are plenty of tax-on-rich-people-and-corporations hawks, but no deficit hawks. Let's stop pretending otherwise, OK?

1Actually, I got this wrong: it's $18 billion over ten years, which works out to about .05% of the federal budget. In other words, it's really a rounding error.

California's Dim Idea

| Tue Jun. 29, 2010 11:50 AM EDT

On the off chance that you thought there was any intelligent life in California's capital, here's the latest from Sacramento:

Motorists who already feel bombarded by digital billboards, freeway advertisements and vinyl-wrapped buses say a new proposal to put ads on license plates is a bad sign. State lawmakers' flirtation with digital license plates moved another step forward Monday as the Assembly Transportation Committee voted 9-0 in favor of a feasibility study to determine if advertising revenue from millions of digital license placards would help close the state's $19.1-billion deficit.

This is surely one of the most moronic ideas in history. Just think: in the near future, California drivers could be distracted not just by digital billboards, digital phones, and digital nav systems, but by millions of blinking, flashing, scrolling digital license plates! And just to make the idea even better, there's no chance that this would have more than the most minuscule effect on the state budget. It's perfect! No wonder the feasibility study passed unanimously.

Quote of the Day: Ideology in Economics

| Tue Jun. 29, 2010 11:14 AM EDT

From Mike Konczal, on his first experience with PhD-level macroeconomics:

Speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was the observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal.

Ideology is everywhere, and it's often strongest in the very places that pretend the hardest that they don't cater to it. Economics, unfortunately, is still an immature discipline, much more complex than something like chemistry or physics, and that means that if you pick your assumptions carefully you can prove almost anything you want. And economists do.

Advertise on MotherJones.com

Avoiding Ireland's Fate

| Tue Jun. 29, 2010 1:26 AM EDT

Liz Alderman of the New York Times reports on Ireland's efforts to retain the confidence of international investors by cutting spending after the financial implosion of 2008:

Rather than being rewarded for its actions [] Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession. Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

....Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

In the case of Ireland, it's not clear if they had a lot of choice. They're a eurozone country, so they couldn't devalue their currency, and they're running monster deficits even with the cutbacks they've made. Bigger deficits might simply not have been possible for a country their size.

Still, the results are pretty obviously horrific, and any country that can avoid Ireland's fate surely ought to. We certainly can, for example. So why do so many people want us to follow the Irish path instead?

Russ Feingold's Bad Choice

| Mon Jun. 28, 2010 10:00 PM EDT

In the wake of a historic economic collapse caused largely by a financial industry allowed to run rampant, Sen. Russ Feingold (D–Wisc.) has decided to vote in favor of doing nothing at all to address this:

As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis. The conference committee’s proposal fails that test and for that reason I will not vote to advance it. During debate on the bill, I supported several efforts to break up ‘too big to fail’ Wall Street banks and restore the proven safeguards established after the Great Depression separating Main Street banks from big Wall Street firms, among other issues. Unfortunately, these crucial reforms were rejected. While there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.

Can I vent for a minute? I know Feingold is proud of his inconoclastic reputation. I know this bill doesn't do as much as he (or I) would like. I know the financial industry, as he says, continues to have way too much clout on Capitol Hill.

But seriously: WTF? This is the final report of a conference committee. There's no more negotiation. It's an up-or-down vote and there isn't going to be a second chance at this. You either vote for this bill, which has plenty of good provisions even if doesn't break up all the big banks, or else you vote for the status quo. That's it. That's the choice. It's not a game. It's not a time for Feingold to worry about his reputation for independence. It's a time to make a decision between actively supporting something good and actively supporting something bad. And Feingold has decided to actively support something bad.

What's more, his reasons for doing this don't even make sense. This bill won't prevent another crisis? No it won't, but voting for the status quo does even less. It doesn't break up the big banks? The status quo does even less. It suffers from too much lobbyist influence? Well, Wall Street lobbyists are far more enthusiastic about the status quo than they are about this bill. There are only two choices available here, and on virtually every level Feingold is voting in favor of the alternative that does less of what he says he wants.

But who knows? Maybe this won't make any difference. Maybe Harry Reid will be able to round up three or four Republicans to vote in favor of proceeding. But maybe not. With Robert Byrd's death, Feingold's vote could end up being the one that dooms financial reform for another decade. I sure wouldn't want that to be my legacy.

One-Click Shopping Still Owned by Amazon

| Mon Jun. 28, 2010 9:09 PM EDT

Hidden among all the big-ticket Supreme Court decisions handed down today, Nick Baumann reports on one of the less momentous ones:

On Monday, the Supreme Court affirmed a lower court ruling that struck down Bernard Bilski and Rand Warsaw's "business method" patent for hedging energy prices against the weather. Some observers had hoped that the court would issue a broad ruling rejecting many "business method" patents — such as Amazon.com's "one-click" purchasing — entirely. (Critics of business method patents argue that you shouldn't be able to get patent protection for something as supposedly "obvious" and vague as one-click ordering.) Instead, the court ruled narrowly....That leaves the door open for the Patent Office to continue granting recognition to things like Amazon's one-click.

Well, that's a drag. I think that business method patents are harder to get now than they used to be, but Amazon's ridiculous one-click patent was granted this year after they revised a few of their claims. It's idiocy. I'd be delighted to see the Supreme Court or Congress do away with the whole business method patent cesspool entirely. The triviality of most business method claims has long since gotten way out of hand, and the whole world would be better off if we just put an end to them.

Preference Ordering Among the Wingers

| Mon Jun. 28, 2010 5:36 PM EDT

A few days ago Mark Kleiman noted that although cap-and-trade was originally a conservative idea, it almost instantly became a conservative bête noir when liberals began to embrace it. Matt Yglesias followed up with the Earned Income Tax Credit and Section 8 housing vouchers as similar conservative ideas that fell out of favor when liberals adopted them. Steve Benen fills in some additional detail:

This is important. Cap-and-trade — any version of it — has been deemed wholly unacceptable by Republicans this year. But given the intense opposition to the idea, it's easy to forget that Republicans used to consider cap-and-trade a reasonable, market-based mechanism that was far preferable to command-and-control directives that the right found offensive.

And I'm not talking about the distant past — the official position of the McCain/Palin Republican presidential ticket, not even two years ago, was to support cap-and-trade. Not just in theory, either. The official campaign website in 2008 told Americans that John McCain and Sarah Palin "will establish ... a cap-and-trade system that would reduce greenhouse gas emissions." McCain/Palin's official position added, "A cap-and-trade system harnesses human ingenuity in the pursuit of alternatives to carbon-based fuels."

Actually, I think conservatives have a pretty defensible position on these things. Take pollution regs. Their preferences go something like this:

  • Worst: Command and control
  • Better: Cap-and-trade
  • Best: No regs

If they have the opportunity to support cap-and-trade when the alternative is almost certainly some kind of command-and-control mandate (as in the case of acid rain), then they'll take cap-and-trade. Half a loaf is better than none. But their strongest preference is still to do nothing. So in the case of greenhouse gas emissions, where there's still a credible chance of having no regs at all, they oppose cap-and-trade. There's really nothing especially devious about this.

But how about Sarah Palin, who specifically supported cap-and-trade for greenhouse gases just two years ago and now assails it as a job-killing monster? Well, that's harder to justify, but still possible. After all, it's hardly news that vice presidential candidates are routinely forced to officially support the policies of their running mate even if they disagree with them. In fact, it's a longtime media sport to force them to somehow justify their change of position even though everyone knows exactly what's going on. So Sarah Palin played along as a good soldier in 2008, but once the campaign was over she no longer had an obligation to her ticket and was able to revert to her true position. It's not exactly a principled conversion, but it's hardly the height of hypocrisy either.

So fine. But how about John McCain himself? He didn't owe any kind of fealty to anyone else. Cap-and-trade was his plan for reining in greenhouse gases, he fought for it, and he believed it. At least, he said he did. But then, as soon as he lost an election in which cap-and-trade seemed like an electoral winner and started up a campaign in which it seemed like an electoral loser, he dumped it. How about that?

Here, I'm afraid I can't help. There's just no excuse for this. John McCain is a slick opportunist and always has been. There's just no there there.