Kevin Drum

Our Powerless Fed

| Mon Sep. 13, 2010 10:27 AM EDT

I move sort of slowly when it comes to rearranging my reading habits, and it was only about a month ago that I finally added Economics of Contempt to my RSS feed list. And then I forgot about it. Why? Because EOC, it turns out, only puts up a new post once every few weeks or so, and nothing had popped up since I moved it from bookmark land to RSS land.

But today something finally popped up, and it was....intriguing. Thanks to Barack Obama's delays nominating new members to the Fed and to Richard Shelby's mindless obstructionism of the ones he has nominated, the Fed Board of Governors currently only has four members:

The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama's three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).

So if an emergency crops up and the Fed needs to take action, it won't be able to. The odds of this happening are low — that's why they call them emergencies, after all — but then again, if it does, we'll really, really need to do something quickly — another reason we call them emergencies. So Shelby is playing with fire here, all because he's still nursing a grudge over Democrats passing a financial reform bill that he didn't like. Nice work, Dick.

Advertise on

The Foxification of the Republican Party

| Sun Sep. 12, 2010 8:13 PM EDT

Pew has one of their regular surveys of media consumption out today, and it has lots of interesting tidbits. Newspaper and radio news continue to decline, online news continues to prosper (in terms of audience, if not profitability), Bill O'Reilly and Sean Hannity appeal mostly to old people, and the New York Times and Wall Street Journal are the most popular destinations for in-depth reporting.

But the most interesting chart in the report is one showing how cable news viewing habits have changed since 2000:

  • Democrats: -3% (Fox), +1% (CNN), +3% (MSNBC)
  • Independents: +3% (Fox), -2% (CNN), 0 (MSNBC)
  • Republicans:
    +22% (Fox),
    -9% (CNN),
    -6% (MSNBC)

In other words, Democrats and Independents have changed their viewing habits only slightly while Republicans have flocked to Fox and dropped both CNN and MSNBC in droves. Back in 2000, it turns out, the viewing habits of all three groups were pretty similar. Since then, as Fox has steadily amped up its conservative branding, conservatives have decided that's all they want to hear. The echo chamber must be getting pretty deafening over there.

Basel III is Here

| Sun Sep. 12, 2010 7:12 PM EDT

After listening to me natter on endlessly about the new Basel III capital requirements, I suppose you've all been waiting on the edge of your seats to see what the final agreement would be. Well, it arrived today. Here's the nickel summary:

  • The most important part of the agreement covers "core" Tier 1 equity. For all practical purposes, you can think of this as real capital that can't be monkeyed around with too much by clever accountants — in other words, it mostly means cash and government bonds that are firmly held by the bank. The old standard was 2%. The new standard is 7% (4.5% plus a 2.5% "conservation buffer"). In addition, during times of credit expansion, it goes up to 9.5%, and "systemically important" banks (i.e., really big banks) are expected to have even more. So figure that big banks will be required to carry core capital of about 11% or so when the economy is strong. That's a 5x increase over the old requirement.
  • Likewise, ordinary Tier 1 capital requirements will also increase. When you add everything up, the requirement for big banks during economic booms goes up from 4% to about 12%.
  • The whole thing will be phased in between 2013 and 2018.

I think you could make a good argument for even higher requirements than this, but this isn't bad. The new emphasis on core equity is welcome, as is the requirement for higher capital cushions in good times. This latter is something that can probably be gamed a bit depending on how lenient national regulators are, but it's a good idea anyway. The whole idea of minimum capital requirements is that it's something you should build up in good times in recognition of the fact that you're going to burn through some of it in bad times. As long as regulators don't define "bad times" too softly, it's a good idea.

The BIS press release also announced that a new liquidity coverage ratio and a revised net stable funding ratio will move toward minimum standards in 2018, but it didn't provide any details about exactly what the new standards would be.

Tim Geithner has said all along that he thought stronger capital requirements were the most important part of financial reform, and hopefully that means he'll be aggressive about pushing U.S. regulators to adopt the new standards. The United States never did adopt the Basel II standards, though it did independently adopt some of Basel II's worst aspects, including the ones that allowed banks to count some forms of contingent capital as Tier 1 capital. That turned out not to be quite as safe as everyone thought, which is why the Basel III emphasis on core equity is so important. Now it's implementation time.

Forbes Jumps the Shark

| Sun Sep. 12, 2010 1:02 PM EDT

I am flabbergasted. I was about to write a quickie "Quote of the Day" post starring Newt Gingrich, who apparently now thinks Barack Obama "is so outside our comprehension" that he can only be fathomed "if you understand Kenyan, anti-colonial behavior." But as I followed the quote backward, I learned that it was based on something that Dinesh D'Souza wrote. So I followed back again, and it turns out that the source isn't just something D'Souza wrote in some obscure lunatic outlet, it's the cover story of Forbes this week.

The. Cover. Of. Forbes.

Now sure. Steve Forbes is an ultraconservative true believer. But this is still a mainstream business magazine,1 not a John Birch Society newsletter. And D'Souza is the guy who wrote an entire book blaming 9/11 on the "cultural left," a book that expressed such obvious sympathy for the revulsion of conservative Muslims toward the American left's "deluge of gross depravity and immorality" that even most of the folks at National Review couldn't stomach it.

So now he has a new book out, and this week he's abstracting it on the cover of Forbes. D'Souza is ostensibly so bewildered by Obama's mainstream liberalism (climate change! national healthcare! non-nationalization of banks! progressive taxation!) that he insists Obama is completely incomprensible except when viewed through the lens of gibberish like this:

So who was Barack Obama Sr.? He was a Luo tribesman who grew up in Kenya and studied at Harvard. He was a polygamist who had, over the course of his lifetime, four wives and eight children. One of his sons, Mark Obama, has accused him of abuse and wife-beating. He was also a regular drunk driver who got into numerous accidents, killing a man in one and causing his own legs to be amputated due to injury in another. In 1982 he got drunk at a bar in Nairobi and drove into a tree, killing himself.

An odd choice, certainly, as an inspirational hero. But to his son, the elder Obama represented a great and noble cause, the cause of anticolonialism. Obama Sr. grew up during Africa's struggle to be free of European rule, and he was one of the early generation of Africans chosen to study in America and then to shape his country's future.

....It may seem incredible to suggest that the anticolonial ideology of Barack Obama Sr. is espoused by his son, the President of the United States. That is what I am saying. From a very young age and through his formative years, Obama learned to see America as a force for global domination and destruction. He came to view America's military as an instrument of neocolonial occupation. He adopted his father's position that capitalism and free markets are code words for economic plunder.

....His proposal for carbon taxes has little to do with whether the planet is getting warmer or colder; it is simply a way to penalize, and therefore reduce, America's carbon consumption.....Rejecting the socialist formula, Obama has shown no intention to nationalize the investment banks or the health sector. Rather, he seeks to decolonize these institutions, and this means bringing them under the government's leash....If Obama shares his father's anticolonial crusade, that would explain why he wants people who are already paying close to 50% of their income in overall taxes to pay even more....Obama supports the Ground Zero mosque because to him 9/11 is the event that unleashed the American bogey and pushed us into Iraq and Afghanistan. He views some of the Muslims who are fighting against America abroad as resisters of U.S. imperialism....Finally, NASA. No explanation other than anticolonialism makes sense of Obama's curious mandate to convert a space agency into a Muslim and international outreach.

This is the cover story of Forbes this week. And I am flabbergasted.

1Right? Or am I out of touch? Does Forbes run this kind of drivel routinely these days? Or is this peculiar even for them?

UPDATE: I see that Daniel Larison got here a few days ago. His takedown is worth a read.

Boehner Land

| Sun Sep. 12, 2010 1:05 AM EDT

I imagine that Eric Lipton's piece in the New York Times today about John Boehner's almost comic dependence on business lobbyists was assigned a few weeks ago. But it's certainly convenient that it appeared at the same time that Democrats are trying to introduce Boehner to the American public as the face of the Republican Party:

He maintains especially tight ties with a circle of lobbyists and former aides representing some of the nation’s biggest businesses, including Goldman Sachs, Google, Citigroup, R. J. Reynolds, MillerCoors and UPS. They have contributed hundreds of thousands of dollars to his campaigns, provided him with rides on their corporate jets, socialized with him at luxury golf resorts and waterfront bashes and are now leading fund-raising efforts for his Boehner for Speaker campaign, which is soliciting checks of up to $37,800 each, the maximum allowed.

....Michael Steel, a spokesman for Mr. Boehner, said the industry ties only help make Mr. Boehner a better Republican leader. “Like the American people, Boehner — a former small-business man — is most concerned right now about the issue of jobs,” he said. “So he often speaks with employers, rather than, for example, labor unions or environmentalists who support job-killing policies.”

....His clique of friends and current and former staff members even has a nickname on Capitol Hill, Boehner Land. The members of this inner circle said their association with Mr. Boehner translates into open access to him and his staff....One lobbyist in the club — after lauding each staff member in Mr. Boehner’s office that he routinely calls to ask for help — ticked off the list of recent issues for which he had sought the lawmaker’s backing: combating fee increases for the oil industry, fighting a proposed cap on debit card fees, protecting tax breaks for hedge fund executives and opposing a cap on greenhouse gas emissions.

Two quick notes. First, it's telling that Boehner's friends and flacks hardly even bother trying to spin this. Boehner does whatever the business community wants and they don't figure they really need to deny it. Second, as I said, the timing of the story is convenient for Democrats. But it would be even more convenient if more Democrats could say with a straight face that they don't act pretty much the same way. Just sayin'.

Friday Cat Blogging - 10 September 2010

| Fri Sep. 10, 2010 1:45 PM EDT

This picture of Domino is one of my favorites ever. I couldn't really tell you why. It just seems so perfectly feline. (However, she wasn't staring in the window because she wanted me to open the door and let her in. That's usually the reason, but this time it turned out she was engaged with some sort of insect on the front porch and wasn't trying to get my attention at all. She just wanted to catch her bug.) Over on the right, Inkblot has burrowed himself under a quilt, something that's suddenly attracted his interest just this week. I guess the weather must be turning colder. He didn't really do the job right, though, so as soon as I finished taking pictures of him I lowered the quilt so he could have a more cave-like hidey hole. He seemed pleased.

Advertise on

Yet More on Basel III!

| Fri Sep. 10, 2010 12:23 PM EDT

Felix Salmon passes along the news that the new Basel III capital requirements will be announced this weekend. Can you feel the excitement?

He also links to a new BIS report that asks: What's the effect of higher capital standards, anyway? Banks argue that it will increase the cost of borrowing and therefore slow economic growth, and they're probably right about that. However, it will also reduce the frequency and severity of banking crises. So what's the net effect?

First things first: How big is the effect of banking crises? Do they merely have a temporary negative effect on economic growth, which gets washed away during the subsequent recovery? Or is the output level permanently lowered? Here's a series of charts from the report:

I've added the green lines to roughly show the pre-crisis trend level. In some cases (notably Mexico) this obviously overstates things, since the pre-crisis growth rate was probably unsustainable. But in most cases it looks as if the effect is a permanent reversion to a lower output baseline that never gets made up by higher growth — at least not in the medium term of 20 years or so. The BIS report offers up several explanations for why this is so, but the bottom line is simple: banking crises appear to have a large and permanent effect on the output level. It's worth paying a small price to avoid them.

And the price of higher capital requirements is indeed small. The report estimates that a 1% rise in capital standards has a 0.04% effect on economic growth. So what's the net effect? Well, if the effect of banking crises is moderate but permanent, it's shown in the red line in the chart below:

This chart estimates the long-term effects of higher capital ratios and liquidity requirements after the transition period to the higher requirements is over, and the results are pretty stunning. If capital requirements increase from 7% to 12%, the net effect on the annual level of output is nearly two percentage points upward. The BIS report analogizes this to a burglar alarm in an art museum: it costs you a little bit every year, but it's well worth it if it prevents the theft of a priceless masterpiece.

All of this is arguable, of course, and depends on your estimates of the cost of banking crises vs. the cost of higher capital standards. But if the BIS is even in right ballpark here, higher capital standards are a slam dunk. We'd be idiots not to adopt them.

UPDATE: I've reworded this is in a few places to make it clear that we're talking about permanently lower output levels here, not permanently lower growth rates. Japan and Mexico do show lower growth rates, but the main point of the BIS report is that banking crises cause an output shock that can only be made up by several years of above-average growth, and that doesn't seem to be the norm.

Breaking: Tax Cuts for the Rich Remain Unpopular

| Fri Sep. 10, 2010 11:17 AM EDT

A new Gallup poll is out and it shows the same thing as every other poll recently taken on this subject: most people would prefer to keep in place tax cuts for the middle class but not extend tax cuts for the rich. So why isn't everyone rushing to embrace this stand? At a minimum, there are three reasons:

  • It's a pretty thin plurality. 44%-37% isn't exactly a tsunami of public opinion.
  • As with most polls, this one doesn't measure depth of feeling. But here's a guess: the 44% who want to end tax cuts for the rich don't actually care all that much about it. Sure, it would be nice, but hey — did you see the Vikings last night? Favre looked terrible, didn't he?
  • As noted before, politicians don't really care much what you think unless you're rich. And it's a pretty fair guess that nearly all the rich people in the country are in the 37% that wants to extend all the tax cuts. And they care about this a lot.

In addition, of course, you have district-level dynamics that don't show up in a national poll. If you're campaigning in a district where 55% of the registered voters want to extend the tax cuts for everyone, then that's probably the stand you're going to take. The rest of the country really doesn't matter to you.

Oh — and did I forget venality and cowardice? Stir that into the mix too. Never forget venality and cowardice.

Why the Fed is Hawkish

| Fri Sep. 10, 2010 10:42 AM EDT

Fed presidents are chosen by regional Fed boards, and regional Fed boards are chosen via a complex arrangement that, in practice, ensures that all the seats go to local bankers and business leaders. So why do these board members tend to be so hawkish? Wouldn't they be better off with an expansionary monetary policy that keeps the economy growing? Matt Steinglass uses the Minneapolis Fed as a case study:

You could argue that the fact that local banks pick the Class B directors, while the Fed's governors pick the Class C directors, ensures that ultimately they're representing the interests of banks, and not so much those of business — let alone those of consumers, labour, civic associations, or every other way to group citizens in order to express their many interests. That's actually a violation of the spirit of the Fed's charter. Class B and Class C directors are supposed to "encompass the broad economic interests of the District, including industry, agriculture, services, labor, consumers, and the nonprofit sector." The fact that every single member of the Minneapolis Fed is either a banker or a business executive makes a travesty of that principle. The interests of consumers and workers ought to be represented in choosing regional Fed presidents.

But I still think you need to have a theory as to why a group of prominent local businesspeople would be more likely to pick a regional Fed president who wants tight monetary policy than one who wants loose monetary policy. And at that point I think you start getting into the fuzzy terrain of people's economic ideologies, which aren't always entirely coherent.

OK, I'll offer up a simpleminded theory in two parts. First, local bankers and business folks, when you get right down to it, don't believe in modern economics. I don't mean that they believe in, say, Milton Friedman's economics compared to Paul Krugman's economics, I mean that in their hearts they basically don't get it at all. They may have been socialized not to admit it, but I'll bet that deep in their hearts most of them don't quite understand why we're not still on a gold standard.

Second, in the same way that Germans are supposedly still scarred by the great hyperinflation of the 20s, I think American business leaders are still scarred by the stagflation of the 70s. And what they think they know about stagflation is that it was caused by overeducated Keynesian technocrats fiddling with the money supply and then brought to heel by the common-sense hard money policies of Paul Volcker and Ronald Reagan. And by God, they don't want to go back to that. So they're hawkish.

Obviously I'm just engaging in armchair sociology here. But I suspect that the rarified arguments of the MIT economics department vs. the Chicago economics department simply wash over most of these guys. As far as they're concerned, the only thing the government can do successfully is control inflation, so that's what they're going to do. They are not, repeat not, going to be the villains who let the inflation genie out of the bottle again, and that's that.

Here's What's the Matter With Kansas

| Fri Sep. 10, 2010 4:00 AM EDT

Why has income inequality grown so explosively over the past 30 years? Why do so many working and middle class voters cast their ballots for a party that's so obviously a captive of corporations and the rich? Why is there no longer any real sustained effort to improve the lot of the middle class?

There's no shortage of answers. There's the "What's the Matter With Kansas" theory. There's the demise of labor unions. There's the well-worn story of the rise of conservative think tanks. There's the impact of globalization on unskilled and semi-skilled labor. There's the growing returns to education in a world that grows more complex every year.

But these are all limited and therefore unsatisfactory explanations, and no one has yet put them all together into a single organic whole that feels genuinely complete and compelling. Until now. The book that finally does it is called Winner-Take-All Politics, by Jacob Hacker and Paul Pierson, and it puts together all of these pieces with a clarity of explanation that's breathtaking. I hesitate to summarize their argument for fear of ruining it, but here's the nickel version:

  1. In the 60s, at the same time that labor unions begin to decline, liberal money and energy starts to flow strongly toward "postmaterialist" issues: civil rights, feminism, environmentalism, gay rights, etc. These are the famous "interest groups" that take over the Democratic Party during the subsequent decades.
  2. At about the same time, business interests take stock of the country's anti-corporate mood and begin to pool their resources to push for generic pro-business policies in a way they never had before. Conservative think tanks start to press a business-friendly agenda and organizations like the Chamber of Commerce start to fundraise on an unprecedented scale. This level of persistent, organizational energy is something new.
  3. Unions, already in decline, are the particular focus of business animus. As they decline, they leave a vacuum. There's no other nationwide organization dedicated to persistently fighting for middle class economic issues and no other nationwide organization that's able to routinely mobilize working class voters to support or oppose specific federal policies. (In both items #2 and #3, note the focus on persistent organizational pressure. This is key.)
  4. With unions in decline and political campaigns becoming ever more expensive, Democrats eventually decide they need to become more business friendly as well. This is a vicious circle: the more unions decline, the more that Democrats turn to corporate funding to survive. There is, in the end, simply no one left who's fighting for middle class economic issues in a sustained and organized way. Conversely, there are lots of extremely well-funded and determined organizations fighting for the interests of corporations and the rich.

The result is exactly what you'd expect. With liberal money and energy focused mostly on non-economic concerns, the country moves steadily leftward on social issues. With conservative money and energy focused mostly on the interests of corporations and the rich—and with no one really fighting back—the country moves steadily rightward on econonomic issues. Thomas Frank's famous working-class Kansans who vote against their own economic interests are easily explained. It's not just that conservatives appeal to them on social grounds, it's that there's no one left to really make the economic case to them in the first place. And even if anyone did, they have little reason to believe that Democrats would actually follow through in concrete ways. So why not vote on abortion and gay rights instead?

I'm not doing Pierson and Hacker justice here. In fact, I'm not really even trying to. What I am doing is telling you to buy a copy of their book and read it. Seriously. Just get a copy and read at least Parts I and II. No book is perfect, and I feel a little silly gushing too much, but this is the most complete and sustained explanation I've ever read of why, over the past 30 years, America has gone the direction it has even while most other countries haven't. And although Hacker and Pierson's sympathies are obvious, this isn't a polemic. It's an explanation. For me, it was a 300-page "Aha!" moment.

More later. In the meantime, though, buy the book. I can almost guarantee you won't be disappointed.