Kevin Drum

Obama's Bank Plan

| Thu Jan. 21, 2010 12:52 PM EST

Paul Volcker has been championing stricter bank regulation for months now — and seemingly getting nowhere against the combined forces of Larry Summers and Tim Geithner. But I guess a 6' 7" former Fed chairman can still wield some clout after all.  Today, with Volcker at his side, Barack Obama announced his new proposal to limit bank size and risk:

"My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout," President Obama said Thursday. "It is exactly this kind of irresponsibility that makes clear reform is necessary."

Admistration officials said the new rules would force major institutions from J.P. Morgan Chase to Bank of America to decide the direction of their business. Banks shielded from risk through federal-deposit insurance, or aided in financial crises by low-interest loans from the Federal Reserve Board, would no longer be allowed to engage in trading unrelated to their customers' interests, one senior administration official said.

Just how tough will these new rules be? We don't know yet, since Obama offered no detail at his press conference. However, Tyler Cowen offers a list of things to watch for:

  1. Do its restrictions apply to subsidaries, affiliates, and holding companies in a meaningful way?  Can they apply?
  2. How do the restrictions apply to off-balance sheet activities, if at all?  Keep in mind the various lessons about the construction of synthetic asset positions.
  3. How will Congressional oversight committees apply and interpret the plan?  This is a big one.
  4. Can a financial institution avoid or sidestep the restrictions by changing its status as a commercial bank, legally speaking?
  5. If you cap bank size, are the new and smaller banks still "too big to fail" by prevailing standards?
  6. How does the proposal treat bank leverage, including implicit forms of leverage through off-balance sheet activities?  Does leverage get redistributed elsewhere?
  7. How does it affect the political economy of bank lobbying?

"I don't pretend to know the answers to these questions," Tyler says, "nor do I expect such answers to be announced on day one." Me neither. But as we get them we'll begin to know whether this is a serious proposal or just a PR move.

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Process vs. Commitment

| Thu Jan. 21, 2010 12:29 PM EST

Jon Chait says the House should pass the Senate bill. The alternative is nothing. Andrew Sullivan argues with him:

So let this process play out. Let Obama use SOTU to argue that nothing is not an option and if the Republicans prove they really do want nothing, then the argument for passing the Senate bill gets stronger. But doing this now, greeting public anxiety with contempt, would be dreadful politics.

It would destroy Obama's commitment to open dialogue and respect for the process, which has already been battered by some of the necessary sausage making to get a final deal. It would make Obama look like a brutally partisan president. That would break Obama's presidency.

This is magical thinking. Obama is already a brutally partisan president. He just doesn't seem to know it. But it only takes one side to make politics into a partisan slugfest, and at this point the only credible response is to slug back. If Obama really believes in healthcare reform, he needs to use every lever he's got to press the House to pass the Senate bill — and then use the SOTU to explain why it happened that way and what the bill does for everyone. If he can't sell it, then he can't sell it. But several more months of "process" sure aren't going to make it any easier. Real resolve and real commitment are all that matter now.

This is it. We either pass it now or else wait another 15 years. It's time for Obama to buck up and show us what he's made of.

No Coasting

| Thu Jan. 21, 2010 11:53 AM EST

This story is from California, but I imagine it's being repeated in pretty much every state in the union:

Until recently, many Democratic strategists believed that incumbent Sen. Barbara Boxer was a prohibitive favorite for reelection in November and that their party's presumed candidate for governor, Atty. Gen. Jerry Brown, would coast to victory. Now, confidence has faded on both.

....Boxer sought to reassure supporters that she knew she had a battle ahead. "Every state is now in play, absolutely," she told reporters in Washington. The lesson from Massachusetts, she said, is "never, ever, ever take an election for granted."

I don't want to pretend that there's a silver lining for Democrats in Martha Coakley's defeat on Tuesday. There isn't. But if there were, this would be it. At least nobody's going to be coasting from this point forward.

Corporations Get Yet More Powerful

| Thu Jan. 21, 2010 11:28 AM EST

I guess this is a week for big changes in American politics:

Sweeping aside a century-old understanding and overruling two important precedents, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.

....The 5-to-4 decision was a doctrinal earthquake but also a political and practical one. Specialists in campaign finance law said they expected the decision, which also applies to labor unions and other organizations, to reshape the way elections are conducted.

“If the First Amendment has any force,” Justice Anthony M. Kennedy wrote for the majority, which included the four members of its conservative wing, “it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”

I confess that I've become more sensitive to First Amendment concerns about the McCain-Feingold campaign finance law over the years. But treating corporations as mere "associations of citizens"? Color me skeptical. That's just not what they are, and this is a decision that we're probably going to live to regret. After all, it's not as if lack of ability for corporations to influence the political process has historically been a major problem in the United States.

Pass the Damn Bill

| Thu Jan. 21, 2010 1:29 AM EST

Jon Chait says the combination of an angry left, an inflamed right, and a despondent middle remind him of the mood during the 2000 recount:

It's different, of course, in that the Florida recount involved a massive procedural injustice, and the current situation does not. But all the other pieces are in place. You have the destructive left, then enthused by Nader, now enthused by the prospect of killing reform (see this emblematic campaign by Firedoglake to stop the one plausible path to comprehensive reform.) You have a wild, energized right willing to push its cause to the absolute limit. And among mainstream Democrats, you see the same torpor.

....[House Democrats are] angry, they're tired, they've lost interest in weighing the merits of a decent compromise option versus a catastrophic failure, and most of all they want somebody else to deal with it. If they fail to pull themselves together, future generations will look back at them, note that Congress had passed comprehensive reform in both chambers, had the backing of an eager Democratic president, and could finish the deal by getting 218 of their 256 Democratic members to sign on, and somehow refused. I still find the idea that they'll allow this to happen unfathomable. If they do succumb, it will be because some deep and recurrent character flaw rose to the surface at the worst time, once again.

I agree. Sure, the Senate bill isn't perfect. Nothing ever is. But the political situation has changed and it's now the only game in town. It's beyond belief that we could get this close to a century-old goal of liberalism — we are, literally, just a hair's breadth from the finish line — and then allow the most significant social legislation of the past 40 years to slip from our grasp just because we're tired and pissed. All we need is one roll call vote in the House. That's how close we are to passing this genuinely historic bill. One vote. Then the next day we can start in on the next 20 years work of improving and finishing what we've begun.

We can't allow this to fail now. We can't let the Fox/Drudge/Rush axis win. So call your congressman. Go organize a rally. Write a letter to the editor. Lobby your union president. Do something. Do it now. Tell them: Pass the damn bill. Pass it now.

Obama Takes on the Banks

| Thu Jan. 21, 2010 12:24 AM EST

The New York Times reports today that President Obama plans to propose a limit on bank size — which could be very good idea if it's implemented properly — and then go straight for Wall Street's jugular:

He also would prohibit proprietary trading of financial securities by commercial banks, including mortgage-backed securities....The president will speak at an appearance on Thursday at the White House [...] after a meeting with Paul Volcker, the former Federal Reserve Board chairman, who has been campaigning for months for legislation that would separate commercial banking from proprietary trading. A similar discussion is percolating in Europe, led by Mervin King, head of the Bank of England.

....Now, in perhaps his most daring move, he is calling for a modern-day version of the Glass-Steagall Act, which in 1933 separated commercial and investment banking. The new separation would prohibit standard commercial banks from engaging in proprietary trading using funds from their commercial division.

Only a handful of large banks would be the targets of this legislation, among them Citigroup, Bank of America, J.P. Morgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to [give] up that status.

This is potentially very good news if Congress is willing to act on it. For background, here's my lament in "Capital City," my piece in the current issue of the magazine about the power of the finance lobby to prevent serious regulatory change:

The simplest, most striking proposals for reining in bank behavior aren't even getting a serious hearing. Former Fed chairman Paul Volcker, for example, suggests that commercial banks should simply be banned from securities trading altogether. They should go back to making loans and underwriting bonds, but leave the risky, leverage-heavy trading to hedge funds, where it's fire-walled away from the plumbing of the overall banking system. Another former Fed chairman, Alan Greenspan, thinks we should break up big banks the same way we broke up Standard Oil 100 years ago. "If they're too big to fail, they're too big," he said in October. Other economists have proposed a small tax on all financial transactions (perhaps a quarter of a percent or so), something that could reduce short-term speculation and help reduce the long-term deficit all at once.

But those reforms were never even considered....

Well, two out of three isn't bad. And since Obama's bank tax is sort of a second cousin to the transaction tax, call it two and a half.

But here's an interesting question: in order to save their skins, Morgan Stanley and Goldman Sachs applied to become commercial banks back in 2008. This gave them access to the Fed discount window as well as the ability to participate in a bunch of other Fed programs. So if Obama's proposal is passed, can they just decide to stop being commercial banks because they don't like the new regulation? Do we really want to set a precedent that you can convert your charter when you're in trouble, get bailed out, and then convert back whenever you feel like it? Or should we tell Goldman and Morgan Stanley that they should stop doing proprietary trading too? After all, investment banks caused at least as much trouble as commercial banks in the runup to the crisis.

This is probably just idle speculation, since I don't think Volcker or anyone else intends for investment banks to be barred from proprietary trading. But if they aren't, I'd sure like to see them become subject to some fairly strict leverage rules instead. Ditto for big hedge funds and private equity funds. A guy can dream, can't he?

POSTSCRIPT: Simon Johnson is cautiously optimistic: "The major question now is — will the White House have the courage of its convictions and really fight the big banks on this issue?  If the White House goes into this fight half-hearted or without really understanding (or explaining) the underlying problem of unfettered banks that are too big to fail, they will not win."

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Facing Reality

| Wed Jan. 20, 2010 7:03 PM EST

Over at the Economist, some random unidentified blogger says that Democrats should modify their healthcare bill in order to attract some Republican votes:

Suppose you had just woken up from a year-long hibernation and somebody gave you the logistical picture described above. You would come to one of two conclusions: 1) the bill in question was deeply flawed, because otherwise surely at least one member of the opposition would support legislation that seeks to improve what is almost universally accepted to be an expensive and slipshod health-care system. Or 2) The country has been paralysed by party politics, such that not even one rogue or idiosyncratic or centrist or mischievous Republican would cross party lines to support the Democrats' bill. Option two strikes me as more unlikely, but we're all operating as if it were the case.

I see an opportunity, however miniscule, for the Democrats to take this time to re-work the bill in a way that would have broader appeal — not a way that has more giveaways to business, as they seem to have that under control all on their own — or, at the very least, to make a stronger case for the bill they do have. Optimistic, or dangerously naive?

Of all the fantastical notions that have been floating around today, this is the one that strikes me as the least grounded in reality. (Which, in fairness, the Economist's blogger seems to dimly grasp.) So as long as we're waking up from a year-long hibernation, let's recall a little bit of history.

For starters: Republicans have never had any interest in serious healthcare reform. George Bush was president for eight years and never proposed anything. Congressional Republicans never proposed anything either — and when Democrats took power, they opposed even incremental changes like SCHIP expansion. The Republican candidate for president in 2008, John McCain, was plainly uninterested in healthcare reform, and when he finally felt like he had to propose a plan of his own, it was so transparently weak and unworkable that no one took it seriously.

Now fast forward to 2009. Congressional Democrats start work on healthcare and Republicans have two choices: (a) work with Dems to try to produce a bill that's a little more to their liking or (b) try to kill it completely and run the risk that Dems pass a more liberal bill on a party line vote. Option B was a big gamble since healthcare reform seemed likely to pass, but they chose it anyway because killing reform completely was their preferred outcome.

The idea that there are even a handful of Republicans who are interested in improving "what is almost universally accepted to be an expensive and slipshod health-care system" just isn't supported by the evidence. That's because this is nowhere near universally accepted. Republicans think we have the best healthcare system in the world. Their unanimous preference is to leave it alone, and Democrats really don't have any bargaining chips big enough to get them to change their mind. As Jon Chait put it in response to a Mark Penn column that also suggested a bipartisan approach: "I'm trying to think of what it would take for them to accept a public plan. The total abolition of all taxes on income over $200,000? Even that probably wouldn't be enough."

This fantasy that there are Republican votes for a more moderate bill really needs to end. There are no Republican votes for healthcare reform, no matter how moderate or conservative it is. They're opposed to healthcare reform. They've always been opposed to healthcare reform. They're Republicans! There's nothing wrong with them being opposed to healthcare reform. And they are. Full stop.

Going down this path would be dangerously delusional. It would waste time, piss off voters even more, and accomplish nothing. It's time for House liberals, labor unions, lefty activists, Blue Dogs, Democratic pro-lifers, and fence-sitting centrists to all face reality: the only way to pass healthcare reform of any kind is for the House to pass the Senate bill as is and then work to improve it later during the budget reconciliation process. It's not perfect, but it will work. Nothing else will.

Email Dump

| Wed Jan. 20, 2010 5:52 PM EST

Email from my old college roommate:

What is wrong with Democrats? I'm not talking about losing in MA. Sure, it's an unforced error, but it happens. I'm talking about the self-destructive spasms that follow.

And this from a friend:

I can't decide which is worse — watching what happened yesterday, or watching them react to what happened yesterday today. I can barely turn on my computer. It's so pathetic.

And another:

There is nothing in the Democratic conference that inspires confidence.  They are simply not trustworthy.  At all. Make no mistake: This failed for lack of leadership.  And I guess the leaders have to reap the whirlwind or whatever.

And another:

Frankly, I don't know which is worse — the finger pointing, or the calls for slowing down, restarting, or scrapping HCR.  You can find more professionalism in your local student council race.  To call this amateur hour actually dignifies the whole thing.

And finally this from a Senate staffer over at Josh Marshall's site:

The worst is that I can't help but feel like the main emotion people in the caucus are feeling is relief at this turn of events. Now they have a ready excuse for not getting anything done. While I always thought we had the better ideas but the weaker messaging, it feels like somewhere along the line Members internalized a belief that we actually have weaker ideas. They're afraid to actually implement them and face the judgement of the voters. That's the scariest dynamic and what makes me think this will all come crashing down around us in November.

And remember: I and my readers are mostly the sober, pragmatic sorts. Willing to compromise. Sensitive to political realities. Etc. And even we're disgusted. I can't remember ever being as embarrassed to be a Democrat as I am today.

The Choice

| Wed Jan. 20, 2010 1:57 PM EST

After reading stuff like this and this, it's looking increasingly clear that jittery Dems aren't willing to do the obvious thing now that they've lost their 60-vote supermajority: Pass the Senate healthcare bill intact along with promises to make changes later this year via reconciliation (which requires only 51 votes in the Senate). Partly this is because the Senate bill delays implementation of its major structural changes for years, which means that anyone running for reelection this November will take plenty of potshots from Republicans but have nothing substantive to brag about in return.

That's the theory, anyway, but Jon Cohn provides a laundry list of immediate tangible changes that would make good campaign fodder:

Seniors will see the Medicare “donut hole” start to shrink.

Families will get to keep kids on their policies past high school, until the kids are 26.

Preventative services will have "first-dollar" coverage, meaning you'll pay nothing out-of-pocket — that's right, nada, zilch — when you get a regular checkup.

People who are uninsurable because of high medical risks will get access to catastrophic policies, as a stopgap until full coverage becomes available in a few years.

The government will set up a website with information about different insurance plans, letting people compare benefits in standardized, plain English terms.

It will also make investments in the health care workforce — spending money to train or hire new primary care doctors, nurses, and direct care workers.

Insurers will have to fess up about how much money they divert from patient care to overhead and profits — and to set up systems for appealing coverage denials.

People will have the right to go to the emergency room — and women the right to see an obstetrician/gynecologist — without prior approval.

The list goes on.

I'll add one other thing: the idea of going back to the drawing board and trying to pass a few little piecemeal reforms is suicidal. It's one of the worst ideas I've ever heard. One of the big problems with healthcare reform is that the public is sick of the process. The last thing they want is for Congress to spend several more months flailing around on it. What's more, does anyone seriously believe that Democrats would get any Republican votes for a smaller bill? That's just a fantasy. Oh, they'll happily negotiate and delay, since that not only makes Dems look hapless and craven, but prevents them from getting anything else done in the meantime. It's a twofer. But when it comes time to vote? Every single one of them will invent some reason that the smaller bill is still fatally flawed. The final vote will be 59-41 and months will have been lost for nothing.

Realistically, there are only two choices now: either pass the Senate bill or else wait another 15 years for any kind of serious healthcare reform. That's it. That's the choice.

The Deficit Shell Game

| Wed Jan. 20, 2010 12:53 PM EST

The White House has cut a deal to create a shiny new "deficit commission" that will report back later this year on ways to get the federal budget under control. Unfortunately, there are lots of reasons to think that this is either worthless or the next best thing. Let's count the ways:

  1. Jon Chait points out that Republicans aren't on board: "A grand compromise to raise taxes and reduce spending would be a terrific thing. The Democrats are just delusional if they think this commission will produce it. Read the story again — it's an agreement between Obama and Congressional Democrats. There's just no way the GOP, which is calling for more tax cuts and demanding that Obama preserve even the waste in Medicare, will buy in." True. In fact, most conservatives still refuse even to accept the fact that our skyrocketing deficit is mostly the fault of GOP policies from the Bush years, and congressional Republicans are already under pressure not to support any commission that doesn't take tax hikes off the table up front. This is not a recipe for a reality-based recommendation.
  2. That 1982-83 Social Security commission that's the model for this one? Turns out it didn't work. Stan Collender glosses a New York Times account from Monday: "Former Social Security Commissioner Robert Ball, one of the Greenspan Commission's most prominent Democrats, has written in a yet-to-be-published memoir that the commission wasn't able to agree to anything.  Instead, Reagan and House Speaker Tip O'Neill, neither of who were members of the commission, privately agreed to a deal.  The Greenspan Commission was pushed to take credit for it so that it looked more bipartisan-partisan and less of a backroom deal that was really the case."
  3. Paul Krugman points out that even the agreement we did get from the Greenspan commission wasn't so hot.  To paraphrase: the 1984 deal raised payroll taxes (which are paid primarily by the middle class) and provided breathing room to maintain cuts to the income tax (which are paid primarily by the well off). The basic bargain was that this would be reversed in a few decades: starting around 2020 or so, income taxes would have to be raised in order to pay off the trust fund while keeping payroll taxes steady. Whether you like the deal or not (I don't, especially), that was the deal. More here. But as Krugman points out, Republicans have pressed ever since to abrogate it halfway through, pretending that the trust fund is just a "shell game." In other words, now that the middle class has spent three decades paying for their half of the deal, the wealthy want to be let off the hook for their half — and Republicans support them. They'd probably do the same with a deficit commission.
  4. It probably won't work anyway. The commission's recommendations are just....recommendations. The House and Senate still have to vote to approve them, and they're free to amend or filibuster them just like any other proposal. The politics of deficit reduction stay exactly the same, commission or no commission.

I'm probably missing some basic problems, but four is enough. I guess this is good fodder for Obama's upcoming State of the Union address, and probably also a good way to keep this stuff off the table until after the midterm elections, but that's about it. This is all about optics, not reality.