Kevin Drum

The Dismal Outlook for Financial Reform

| Wed Mar. 24, 2010 1:23 PM EDT

I'm going to keep collecting reactions to Chris Dodd's financial reform bill until I feel like I've made some sense out of it. First off, here's Ryan Avent on Dodd's approach to dealing with banks that are too big to fail:

To address TBTF concerns, the bill is relying very heavily on resolution authority, as opposed to measures limiting firm size or leverage or interconnectedness through direct means or the use of strong incentives. So you ensure that some firms will be really big and systemically risky, and then you give regulators discretion to use or not use resolution authority. Discretion, under these circumstances, is exactly what you don't want. It creates doubt in markets that regulators will actually pull the trigger, which will lead to greater risktaking by firms, which will make it more difficult for regulators to pull the trigger in times of crisis.

In fact, it's probably even worse than that. The problem with resolution authority is that it's like a nuclear bomb: it causes a lot of damage and you don't want to haul it out except as a last resort. So the default position for regulators is always going to be the same as it is for the banks themselves: do everything they can to avoid using it. Troubled banks will propose plan after plan to unwind their risky positions and earn their way back to solvency, and regulators, who are terrified of pulling the trigger on a big bank that might still have a chance of survival, will allow things to continue spiraling. And when the shit finally and irrevocably hits the fan, the problem will be massively greater than anyone ever thought it could be.

Much better, then, to try to keep banks from getting into crisis in the first place. That means reasonable leverage and capital regulations. Mike Konczal compares the House approach on this to Dodd's approach:

In both bills, regulators have discretion in how to set limits, as determined by internal risk managers. In the House Bill though, there’s a strict limit: no systemically risky firm can have leverage greater than 15-to-1. In the Senate, the FSOC will make recommendations to the Federal Reserve. The Federal Reserve will do like, whatever it wants — it could follow the recommendations. Or it could not.

This solution in the House Bill is a satisficing solution — there are almost certainly firms that could handle being leveraged 16-to-1. However we don’t trust the regulators to be able to detect that firm and also not bend the rules for firms that couldn’t handle that leverage. So we write down a clear rule.

And these clear rules are exactly what the lobbyists are going to go after.

The House bill is the bare minimum that's likely to work. And even at that it depends heavily on defining exactly how leverage is calculated; keeping a gimlet eye on bank shenanigans at all times; defining "bank" broadly to mean virtually any big financial institutions; getting buy-in from other countries; making sure the relevant regulators consider bank safety to be their primary mission; and then applying leverage constraints in other areas, such as residential and commercial loans. In other words: even the House version isn't all that likely to work. But it's way better than the Dodd version. Congress shouldn't micromanage, and regulators should always have the ability to tighten standards on individual banks, but Congress should put in place an absolute ceiling that can't be easily wisked away by the SEC or the Fed when times are good and everyone thinks they're going to last forever.

So that's where we are. We have a House bill that at least has the right idea, even if it probably isn't either broad or deep enough. We have a Senate bill that, even before it goes through the legislative meatgrinder, is woefully inadequate. And we still have months and months of negotiations to get through, all of it done in the shadow of a massive lobbying campaign from every financial institution in the country to water things down even more. And that's despite the fact that, as near as I can tell, that nobody really disagrees about the general shape of the problem here. There's pretty much universal agreement that reining in leverage is the single most important thing we can do to moderate future financial crises.

Color me pessimistic that this is likely to turn out well.

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How Affordable Is Your Neighborhood?

| Wed Mar. 24, 2010 11:53 AM EDT

Via Atrios, the Center for Neighborhood Technology has released an updated survey of affordable housing that takes into account transportation costs as well as rent and mortgage costs. Their conclusion: there's a lot less affordable housing out there than we think:

Under the conventional definition, 30% or less of household income, 69% of U.S. communities have average housing costs that are considered “affordable” to the typical household. But in almost all metro regions of the country, when the definition of affordability includes both housing and transportation costs (at 45% of income), the number of communities considered affordable for typical households plummets, often dramatically. Across the country, only 40% of U.S. communities are affordable to the typical household when transportation costs are included.

They include a map that calculates affordability for 330 metro areas in the U.S., which means that 80% of you can check out the affordability of your neighborhood. Mine is on the right. Not very affordable! Which isn't too surprising since it boasts both expensive housing and high transportation costs. In fact, I'm surprised it's as affordable as it is.

This kind of calculation seems like a good idea, but I guess I'm left with one question: where did the 45% benchmark for affordability come from? I know these things are always a bit arbitrary, but if instead you went from 30% (without transportation costs) to, say, 50% (with transportation costs), overall affordability might end up looking about the same as it is now. So who came up with 15% as the magic number for how much transportation ought to cost?

In any case, if you're thinking of moving, the map might be kind of useful. Obviously your personal costs will depend on exactly what kind of place you live in and what kind of commuting you do (my personal affordability index is pretty awesome, for example, since all I do is walk down the stairs to go to work), but it's not a bad idea to see the numbers in black and white anyway. A lot of people with average commuting and recreational patterns don't calculate how much this actually costs, and the map forces you to take this stuff seriously. It's worth a look.

Healthcare Reform's Immediate Impact

| Wed Mar. 24, 2010 11:21 AM EDT

This comes straight from the White House, but I'm reprinting it here because the question comes up a lot: what does healthcare reform accomplish right now? Slightly rephrased, this means, "What can Democrats campaign on this year?" Here's a lightly edited list from Nancy-Ann DeParle:

  • This year, children with pre-existing conditions can no longer be denied health insurance coverage. Once the new health insurance exchanges begin in the coming years, pre-existing condition discrimination will become a thing of the past for everyone.
  • This year, health care plans will allow young people to remain on their parents' insurance policy up until their 26th birthday.
  • This year, insurance companies will be banned from dropping people from coverage when they get sick, and they will be banned from implementing lifetime caps on coverage. This year, restrictive annual limits on coverage will be banned for certain plans. Under health insurance reform, Americans will be ensured access to the care they need.
  • This year, adults who are uninsured because of pre-existing conditions will have access to affordable insurance through a temporary subsidized high-risk pool.
  • In the next fiscal year, the bill increases funding for community health centers, so they can treat nearly double the number of patients over the next five years.
  • This year, this bill creates a new, independent appeals process that ensures consumers in new private plans have access to an effective process to appeal decisions made by their insurer.
  • This year, discrimination based on salary will be outlawed. New group health plans will be prohibited from establishing any eligibility rules for health care coverage that discriminate in favor of higher-wage employees.
  • Starting January 1, 2011, insurers in the individual and small group market will be required to spend 80 percent of their premium dollars on medical services. Insurers in the large group market will be required to spend 85 percent of their premium dollars on medical services. Any insurers who don't meet those thresholds will be required to provide rebates to their policyholders.
  • Starting in 2011, this bill helps states require insurance companies to submit justification for requested premium increases. Any company with excessive or unjustified premium increases may not be able to participate in the new health insurance exchanges.
  • This year, small businesses that choose to offer coverage will begin to receive tax credits of up to 35 percent of premiums to help make employee coverage more affordable.
  • This year, new private plans will be required to provide free preventive care: no co-payments and no deductibles for preventive services. And beginning January 1, 2011, Medicare will do the same.
  • This year, this bill will provide help for early retirees by creating a temporary re-insurance program to help offset the costs of expensive premiums for employers and retirees age 55-64.
  • This year, this bill starts to close the Medicare Part D 'donut hole' by providing a $250 rebate to Medicare beneficiaries who hit the gap in prescription drug coverage. And beginning in 2011, the bill institutes a 50% discount on prescription drugs in the 'donut hole.'

 So that's your answer. Pass it along.

End Game in Afghanistan

| Wed Mar. 24, 2010 11:10 AM EDT

Carlotta Gall of the New York Times reports that one of Aghanistan's major insurgent groups has come forward with a peace proposal:

The delegation represents fighters loyal to Gulbuddin Hekmatyar, 60, one of the most brutal of Afghanistan’s former resistance fighters who leads a part of the insurgency against American, NATO and Afghan forces in the north and northeast of the country.

....Though the insurgent group, Hezb-i-Islami, or Islamic Party, operates under a separate command from the Taliban, it has links to the Taliban leadership and Al Qaeda and has fought on a common front against foreign forces in Afghanistan. A spokesman for the delegation, Mohammad Daoud Abedi, said the Taliban, which makes up the bulk of the insurgency, would be willing to go along with the plan if a date was set for the withdrawal of foreign forces from the country.

Robert Dreyfuss calls this "the most important peace initiative since the start of the war in Afghanistan in 2001" and points to other reporting suggesting that Pakistan is getting ready to deal too:

The big question hovering over all of this is: Does the Obama administration have the savvy to undertake a vast, regional approach that sees Afghanistan, Pakistan, India, Iran, Saudi Arabia, and China components and participants in a deal? Can it make all of those moving parts fit together? Can it do that, while doing the same in Iraq, where it was to work closely with Iran, Saudi Arabia, Turkey, Syria, and Jordan? And can it do all of that while hammering away at the Israel-Palestine conundrum, which is approaching a major turning point, too? Stay tuned.

Quite.

Healthcare and Income Inequality

| Wed Mar. 24, 2010 12:50 AM EDT

David Leonhardt says that healthcare reform is the most significant effort to attack growing income inequality since the beginning of the Reagan administration:

A big chunk of the money to pay for the bill comes from lifting payroll taxes on households making more than $250,000. On average, the annual tax bill for households making more than $1 million a year will rise by $46,000 in 2013, according to the Tax Policy Center, a Washington research group. Another major piece of financing would cut Medicare subsidies for private insurers, ultimately affecting their executives and shareholders.

The benefits, meanwhile, flow mostly to households making less than four times the poverty level — $88,200 for a family of four people. Those without insurance in this group will become eligible to receive subsidies or to join Medicaid. (Many of the poor are already covered by Medicaid.) Insurance costs are also likely to drop for higher-income workers at small companies.

Bill Clinton's tax changes in 1993 — increasing the top marginal rate on the rich, uncapping Medicare taxes, and increasing EITC for the poor — deserves a place on this list too, but Leonhardt is right to call healthcare reform an even bigger assault on income inequality. Rejiggering tax rates is one thing, but it's neither as permanent nor as potent as creating a program whose benefits flow primarily to the middle class and below. What's more, now that healthcare reform has been started, it's almost certain to become more expansive and more generous to the middle class over time. Legislation like this is the second best way we have of producing a genuine impact on growing income inequality.

(The first best way, of course, is creating rules of the road that boost middle class income and rein in top level incomes in the first place. Universal programs like healthcare are #2. Tax changes are #3.)

Plumbing Ever Further Depths

| Tue Mar. 23, 2010 10:42 PM EDT

Just when I thought Republicans had plumbed the final depths of playground-level obstruction, they somehow manage to take things to yet another level. There is, it turns out, a rule stating that Senate hearings can't go past 2 pm unless there's unanimous consent to continue them. This consent was routine until this week. Amanda Terkel reports:

Today, during a Senate Homeland Security Subcommittee hearing on transparency, Sen. Tom Carper (D-DE) announced that he had to stop the proceedings because of Republican blocks....The AP also reported today that Sen. Mark Udall (D-CO) had a hearing on the bark beetle canceled today “after Republicans angry over the passage of health insurance reform legislation blocked it by using an obscure Senate rule requiring a unanimous consent to hold hearings scheduled after 2 p.m.”

What's next? Complaints on Fox that Democrats are using all the good hangars in the cloakroom? A refusal to come to order until Spongebob is over? To call this behavior childish would be an insult to children everywhere. Are we really expected to take a party like this seriously?

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To Repeal or Not to Repeal

| Tue Mar. 23, 2010 4:47 PM EDT

A bunch of Republicans have already hopped on the bandwagon to cosponsor a bill to repeal healthcare reform, but if you look beyond the headlines the tide may be turning a bit on that front:

Mitch McConnell: Republicans are moving quickly from “repeal” the health care legislation to “repeal and replace” the measure President Obama signed into law Tuesday. Meeting with reporters after a private party strategy meeting, Senator Mitch McConnell of Kentucky, the Republican leader, took pains to say that Republicans will push not only to overturn the law, but that they intend to replace it with something else.

Scott Brown: Brown is keeping his options open in the wake of a Republican defeat...."I think that's a little premature," he said, when asked whether he would try to repeal the legislation. "I want to see what's going to be in play."

John Cornyn: "There is non-controversial stuff here like the preexisting conditions exclusion and those sorts of things," the Texas Republican said. "Now we are not interested in repealing that. And that is frankly a distraction."

Methinks Republicans are going to get tied up in knots pretty quickly over this. Democrats are obviously going to try to tar everyone opposed to the bill as opposed to every provision of the bill, and aside from the Jim DeMints of the world that's not something most Republicans will welcome. So they'll have to take a more defensive, nuanced stand, and that's a dangerous place to be. (Just ask any Democrat.) Which provisions do you want to keep? Which ones to you want to jettison? You need to keep the goodies if you don't want to piss off various interest groups and you need to keep the cost cutting measures if you don't want to be accused of fiscal profligacy. That might not leave a whole lot: maybe the individual mandate and some taxes. (If you remember that Kaiser poll from last January, even among Republicans there aren't very many other provisions that poll especially badly.) And neither of those is all that attractive either. Going after the individual mandate sends you down an endless rabbit hole of minutiae, and going after the taxes without also going after the popular stuff makes it hard to demagogue the deficit.

Now, I'm sure they'll figure this stuff out. A good tub thumping speech can mask a multitude of sins. But it's going to be harder than they think, while defending the bill is going to be easier than they hope. The shoes are on opposite feet all of a sudden.

Chart of the Day: Healthcare

| Tue Mar. 23, 2010 2:39 PM EDT

What a difference a victory makes. Now that healthcare reform has actually passed, public reaction has improved considerably. In a Gallup poll taken on Monday, 50% of the public is happy about its passage compared to 42% who aren't. In a direct question about whether passage of the bill was "a good thing or a bad thing," the response was 49%-40% calling it a good thing.

This shouldn't surprise anyone: support for the bill was always higher than most polls showed because the "opposition" included a lot of lefties whose objection was that the bill didn't go far enough. And of course, support for the bill also generally improved once people found out what was actually in it, something that happened a lot on Monday. My guess is that these numbers aren't going to change a lot over the next few months, but if Democrats play their cards right they could still improve a bit, especially among independents. And that might make November a lot less messy than it could have been.

Christiane Amanpour and "This Week"

| Tue Mar. 23, 2010 2:13 PM EDT

This really is a bizarre rant by Tom Shales today against the choice of Christiane Amanpour to take over hosting duties on ABC's This Week. If Shales doesn't like Amanpour, that's fine. It's a free country. But a harsh attack ("it was a bad choice...considering how many others deserve it more than she does") requires a strong argument, and Shales' boils down to this:

  • Amanpour is a foreign affairs specialist, not someone who does "domestic politics and inside-the-Beltway palaver."
  • Some supporters of Israel think she isn't deferential enough toward Israel.
  • Conservatives think she's liberally biased.
  • ABC News insiders are unhappy that an outsider got the This Week job.

There's not much meat here. Insiders are always unhappy when an outsider gets a plum job. There are ideologues with an axe to grind against everyone. And perhaps This Week could do with a little more substance and a little less "inside-the-Beltway palaver"?

(And not to put this too finely, but it's not really as hard as Shales might think to bone up on domestic politics. It's not that complicated.)

Anyway, strange stuff. I don't know if I would have picked Amanpour either, but if I were arguing against it I'd at least try to come up with some colorable criticisms. This is just junior high school stuff.

Leverage and Financial Reform

| Tue Mar. 23, 2010 1:39 PM EDT

I haven't written too much yet about Chris Dodd's financial reform bill. There are two reasons for this. First, healthcare has been front and center for the past week and I just didn't want to spare the time to really dig into it. Second, based on what I read, I was pretty depressed about the whole thing.

But healthcare is (pretty much) a done deal now, so what about financial reform? Is Dodd's bill as bad as I thought? My tentative answer is yes even though it has some good things in it: a Consumer Financial Protection Bureau that has a reasonable amount of power and independence; regulation of derivatives; resolution authority for large banks; and streamlined bank supervision. None of these are as strong as they should be, but they're better than nothing.

But frankly, the whole thing is hardly worth doing unless it also contains some broad, deep, and mandatory limits on leverage. And as near as I can tell, that's almost entirely missing from the bill. Here's the summary description of the part of the bill that comes closest:

The Financial Stability Oversight Council

Expert Members: A 9 member council of federal financial regulators and an independent member will be Chaired by the Treasury Secretary and made up of regulators including: Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, the new Consumer Financial Protection Bureau. The council will have the sole job to identify and respond to emerging risks throughout the financial system.

Tough to Get Too Big: Makes recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.

Regulates Nonbank Financial Companies: Authorized to require, with a 2/3 vote, nonbank financial companies that would pose a risk to the financial stability of the US if they failed be regulated by the Federal Reserve. With this provision the next AIG would be regulated by the Federal Reserve.

Unless I'm badly mistaken — which is always a possibility — this is nearly meaningless. We get a new board that will "identify and respond" to systemic risk. They will "make recommendations" for higher capital requirements for big banks. And nonbank companies are left completely out of the picture unless two-thirds (!) of the board votes to put them under Fed regulation — which wouldn't necessarily lead to more stringent capital and leverage requirements anyway.

This is, I guess, not completely worthless. But it sure sounds pretty close. So here's a bleg for all the dedicated financial bloggers out there: am I wrong? Do these provisions have more teeth than I think? Or is leverage, for all intents and purposes, pretty much brushed under the carpet in Dodd's bill?