Kevin Drum

Letting Banks Be Banks

| Wed Sep. 16, 2009 9:33 PM EDT

Back in the dim past, investment banks were mostly in the business of providing advice and underwriting services to their clients.  Oh, they traded a bit on the side with their own money too, but not a lot.  That was sort of risky, after all.  Better to focus on giving other people advice about what to buy and sell rather than doing it themselves.

But times changed, fixed commissions went away as a guaranteed source of easy income, and proprietary trading started to grow more important.  And why not?  Since investment banks were also market makers, their prop desks had privileged access to streams of information that most investors could only dream of.  Why not use that information instead of letting it go to waste?

So use it they did.  In fact, they used it so voraciously that eventually trading became by far their biggest profit centers.  Basically, investment banks became gigantic hedge funds with a bit of investment banking tacked on to the side.  And that's not all.  By the year 2000, two more things had happened.  First, the Glass-Steagall Act was repealed in 1999, which allowed investment banks to merge with commercial banks.  Second, investment banks had all become public companies, which meant they not only had enormous amounts of capital to invest, but none of their traditionally risk-averse partners were personally liable if they lost it all.

I think you know how this all turned out.  Long story short, they lost it all.  What's more, their losses would have taken down the entire banking system if they hadn't been rescued via massive government intervention.  Along the way, the last of the investment banks technically disappeared, when Morgan Stanley and Goldman Sachs got Fed permission to convert themselves into ordinary bank holding companies.

Given all this, you might wonder if it was such a good idea to let banks engage in proprietary trading in the first place.  Instead, why not limit them to taking deposits, making loans, underwriting stock and bond offerings, giving M&A advice, and so forth?  That's what banks do, after all.

Well, it turns out that Paul Volcker is wondering the same thing:

"Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," he said in a speech to the Association for Corporate Growth in Los Angeles.

....Mr. Volcker said banks should be banned from "sponsoring and capitalizing" hedge funds and private-equity firms, and said "particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading."

He also said collateral and leverage restrictions against the largest non-banking institutions "may be needed."

I like the way this Volcker fellow thinks.  Let banks do banking, protected by federal guarantees, while securities trading is firewalled safely away from the plumbing of the financial system.  And even at that, if your hedge fund or private-equity firm is big enough that it might destroy the world too — think LTCM — it gets regulated as well.

Anybody got a problem with that?

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Paying the Piper

| Wed Sep. 16, 2009 6:05 PM EDT

My nerd license is probably going to be revoked for saying this, but I'm bored with the nonstop blogging over the Baucus healthcare bill that was released today.  (That's the "chairman's mark" for those dedicated to terminological exactitude.)  My lack of interest stems from two facts: (a) it's pretty much what we all thought it was going to be, and (b) it's basically just a starting point for negotiations, not an ending point.

Still, I'd like to highlight this comment from James Kwak:

One reason the Baucus bill is “cheaper” than the House bill is that it has lower subsidies. For illustration, let’s assume that the whole $140 billion difference is due to lower subsidies. Relative to the House bill, then, the Baucus bill costs the government $140 billion less; but it costs middle-income people exactly $140 billion more, since they have to buy health insurance. The difference is that in the House bill, the money comes from taxes on the very rich; in the Baucus bill, it comes out of their own pockets. Put another way, the Baucus bill is the House bill, plus a $140 billion tax on people making around $40-80,000 per year. That’s not only stupid policy; it’s stupid politics.

Can't argue with that.  As regular readers know, I'm more concerned with subsidy levels than I am with the public option.  This is why.  The public option is a good thing, but even in the best case it's available to only a small number of people and will likely have only a modest impact on the cost of health insurance.  Subsidy levels, conversely, affect lots of people and have a significant impact on the cost of health insurance.  According to CBPP, for example, a family making $45,000 would have to pay annual premiums of $4,800 under the Baucus plan, compared to $3,600 under the House plan or $2,500 under the Senate HELP plan.  That's a pretty big difference.

So: adopt the the Baucus version of subsidies and when 2013 rolls around you'll have lots of pissed off middle income families desperately trying to scrape up an extra five grand each year.  Adopt the HELP version of subsidies instead and these registered voters families will mostly think they're getting a pretty good deal.  And to fund it, all you have to do is raise taxes on, say, Wall Street bankers.  What's not to like?

Cool Cats

| Wed Sep. 16, 2009 3:17 PM EDT

Atrios comments on George Bush's use of language:

While I don't think Bush referring to Obama as "this cat" is really racist, in the sense of suggesting some sort of animosity towards people of color, but I think there's a reasonable chance that race played a part, in the sense that Bush would've been much less likely to refer to a white guy with that term.

But from the same article, here was Bush on another occasion:

The president asked his secretary, Karen, to bring him the Rose Garden remarks he’d just delivered that day....When he finally got them, he put his half-glasses on and looked at them. “See, this was fine today,” he said. “But we got to make this understandable for the average cat.” He proposed an outline for another speech that talked about the situation our economy was in, how we’d gotten here, and how the administration’s plan was a solution.

I think Bush just has an odd attachment to calling people "cats."  Surely some other former White House staffers could enlighten us about this, though.

Water in the Burbs

| Wed Sep. 16, 2009 2:12 PM EDT

The city of Palmdale is running out of water, and as a result prices are going up.  Way up:

“My bill went from $12.80 to $185,” [Tracey] Summerford, a Neighborhood Watch captain, told the water board.

“My water bill went from $139 to $468,” [Mary] Sanchez said at that meeting. Since then Sanchez received another monthly bill, one for $324. Together that meant she owed the water district $792, plus a prior balance that brought her total to $924. “That’s my two car payments,” said Sanchez, who moved into her home in November....I feel discouraged. I feel like we should have stayed in Santa Clarita and lived in our apartment.”

Water blogger OTPR thinks she's just seen Armageddon for the burbs:

There it is.  There’s the end.  This is the turning point I’ve been waiting for.  With water costs this high, she’d rather be in a city apartment.  I’ve been wondering for years what would herd people in from the exurbs.  It struck me as a race between costs of water and costs of firefighting.  For a while, the cost of gas and the commute was coming on strong, but that horse fizzled.  Now we need people to know this before they lock themselves into houses.  Ms. Sanchez, don’t become a water district activist!  Spend your energy telling your friends not to do what you did!   Tell them the house and lawn isn’t worth it.  You can still save them.  That’s what we need.

This is sort of California-centric, since water isn't necessarily a suburban problem everywhere.  Schaumburg still has plenty of water from Lake Michigan, I assume.  Still, it is kind of breathtaking.

On the other hand, plenty of people who live in the Valley have $500/month electric bills in the summer from running their air conditioners, and they move/stay there regardless.  So maybe all that happens here is that people grumble for a bit and then get used to high water bills, just like they've gotten used to high air conditioning bills.

In fact, considering that Palmdale has high water bills and high air conditioning bills and high summer fire hazards AND sits right smack on top of a major fault line — well, the fact that people still live there at all probably means that people are willing to live just about anywhere no matter what it costs.  Maybe a $200 water bill is just another pinprick.

Quotes of the Day

| Wed Sep. 16, 2009 12:35 PM EDT

First up, Rush Limbaugh's take on Monday's schoolbus incident in which a couple of black kids beat up on a white kid:

In Obama's America, the white kids now get beat up with the black kids cheering.

Charming, as always.  Next up, Obama communications director Anita Dunn:

Dunn played down the role that race could have in fueling the rancor. "I think that is less a part of it than some other people might think," she said. "If you look at the history of this country, you see that in times of great stress and change, there are people who are concerned, who are threatened, there are people who are scared."

Roger that.  Move along folks, nothing to see here.

Obama and Big Labor

| Wed Sep. 16, 2009 12:04 PM EDT

James Pethokoukis listens to Barack Obama's two recent speeches to labor audiences and wonders if he's decided to throw Big Labor off the bus:

Both speeches were fiery, pro-union stem winders. Yet the president barely mentioned the top item on Big Labor’s 2009 political agenda, the Employee Free Choice Act....But the card check bill has struggled mightily on Capitol Hill and could clearly use a boost from the White House. Still, the president didn’t speak its name in Lordstown and devoted just a single sentence in Pittsburgh. Is that any way to treat the folks who poured tens of millions of dollars into Democratic campaigns last year?

I don't know why Obama decided not to mention EFCA, but I'll bet it was more tactical than anything else.  Keeping a low profile might just be the better strategy right now.  Arlen Specter, for example, now says that he's a full-throated backer of EFCA, and he thinks other Democratic fence-sitters might be too.  Mark Kleiman comments:

The legislation no longer has “card check” (automatic unionization once 50% of the workers have signed a pro-union petition) but it has two other provisions that, between them, do almost the same thing:  snap elections and real enforcement of NLRB rules against union-busting. 

And it has the provision that’s  more important than any of that:  binding arbitration on a first contract if the two sides can’t agree.   Right now, companies can just refuse to make a deal, wait six months, and then run a de-certification election (using the same dirty tricks they use in the initial elections) with the argument that “This useless union you guys voted for can’t even get you a union contract.” 

If Specter is right — and telling the truth — about Nelson and Lincoln, this year might see the passage of the most important piece of pro-labor legislation since the Wagner Act.

I'm not sure Obama needed to talk about EFCA.  He had just slapped labor-pleasing tariffs on Chinese tires, his stimulus bill has created thousands of unions jobs, and he's nominated three labor-friendly choices to fill vacancies on the NLRB.  Everyone listening to him knew that.  He can afford to keep EFCA under the radar for the time being.

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Killing Healthcare Softly

| Wed Sep. 16, 2009 11:15 AM EDT

With friends like Kent Conrad, who needs Republicans?  WTF?

UPDATE: Oops.  Never mind.

Why Bipartisanship Matters

| Wed Sep. 16, 2009 1:10 AM EDT

Barack Obama plans to partially pay for his healthcare program by reining in Medicare costs.  Megan McArdle thinks that's a problem:

To my mind perhaps the most worrisome part is that anything Obama does to "pay" for this program is something that cannot be done to "pay" for our growing Medicare problem.  Slashing provider reimbursements, Medicare advantage, etc, if it is done, is something that should be done in order to close the projected 3.4% budget gap in 2019.  Once we've used them for new entitlements, we are less able to pay for the entitlements we've already got.

In other words, if we cut reimbursements as a way of offsetting the cost of Obama's universal healthcare, we can't later cut reimbursements as a way of reducing Medicare costs and reining in the looming Medicare deficit.  The money is already gone.  So what will we do instead?

The answer is obvious: we'll eventually raise taxes.  Or, more accurately, we'll raise taxes more than we otherwise would, since tax increases of some size are now inevitable regardless of what we do.  This is part of the price we're paying for the tactical decision Republicans have made to oppose every Democratic program sight unseen.

Step back for a moment and you'll see why.  Bipartisanship is in bad odor these days because it's associated with a knee-jerk, David Broderish tendency to assume that the answer to any policy dilemma is automatically halfway between the liberal position and the conservative position.  But that sells bipartisanship short.  Where it shines is its ability to allow politicians to make tough decisions.

If all you want to do is hand out goodies — tax cuts, prescription drugs, defense contracts — life is easy.  Everyone loves goodies.  You don't need help from your opposite numbers to get stuff like that through Congress.

But what if you want to pass something tougher?  Something that takes as well as gives?  If you have bipartisan support, you can do it right: you can stand up to special interests and K Street lobbyists and enact real reform.  But you can only do this if you have political cover and plenty of votes.  If, instead, you have to do it in the face of implacable partisan opposition, then you can't afford to make any more enemies.  Every vote is precious, and that means instead of standing up to special interests, you have to buy them off.  All of them.

Take healthcare reform.  Republicans used to be in favor of reining in Medicare costs, which normally means that this would be a fertile area for bipartisan cooperation.  But the Republican Party has decided in recent weeks that its short-term political interests dictate unbending opposition to everything healthcare related.  So suddenly they're Medicare's biggest defender, screaming about euthanasia and death panels and brigades of bureaucrats getting between seniors and their healthcare.  As a result, no Democrat in his right mind will seriously touch Medicare.  Instead, special interests are bribed to cooperate, Medicare is left largely untouched, and the can is kicked down the road.

The same thing has happened with the climate change bill.  Historically, Democrats were the party of command-and-control: if you want to regulate emissions, just pass a law telling everyone how much they're allowed to emit.  Done deal.  It was conservatives who first introduced the idea of cap-and-trade, which uses market mechanisms to reduce emissions more cheaply and efficiently than command-and-control.  Democrats were initially skeptical, but after it turned out to work pretty well on acid rain they decided to throw in their lot with conservatives like John McCain and Newt Gingrich — who until recently were supporters of a cap-and-trade approach to greenhouse gas emissions.

But no longer.  Republicans have decided to unanimously oppose cap-and-trade, and that's left Democrats with no choice but to buy off every special interest on the planet.  The Waxman-Markey climate bill has turned into an orgy of dealmaking and logrolling because that's the only way to get anything done when the loss of even a few votes is enough to sink your whole bill.

When you have bipartisan support, though, you can afford to make tougher decisions.  That's how Social Security got rescued in 1984.  It's how tax reform was passed in 1986.  It's how welfare reform was passed in 1996.

Now, you can decry this all you want.  Maybe Democrats ought to stand up for their principles no matter what the cost.  Death before dishonor.  Etc.  But that's not the way life works, or ever has worked.  If you want healthcare reform that really tackles costs, you need bipartisan support for pissing off the people who are going to lose either money or services from the deal.  If you want a fair and straightforward cap-and-trade bill, you need bipartisan support to keep the special interests at bay.  If you don't get it, then you've got no choice but to watch your flanks like a hawk and ensure that you do nothing that can be used against you at election time.  And the can is kicked down the road.

That's the price we're all paying for the Republican decision to be the Party of No. Instead of difficult decisions on healthcare costs, we get mostly smoke and mirrors.  Instead of serious reductions in greenhouse gases at the least possible cost, we get a porkfest.  It's irresponsible and feckless, but until Republicans are made to pay some kind of price for it, it's not likely to change.

Starting Over in Afghanistan

| Tue Sep. 15, 2009 7:50 PM EDT

Lt. Col. JJ Malevich, a Canadian officer, wonders why the Afghan National Army isn't more capable of running small hit-and-run operations that seriously disrupt Taliban operations.  Bruce Rolston says it's because we've spent the last eight years ruining their ability to do exactly that.  Instead, we've trained them to be adjuncts to sophisticated Western armies:

If we left Afghanistan tomorrow, lock stock and barrel, two things would happen to the security forces. The first would be the ANA and ANP would completely evaporate as functioning institutions in much of the country, probably in a matter of days if not hours. They are still very much artificial constructs that we've imposed, and wholly dependent on our technology for their survival so long as they continue to use the tactics we've taught them. The second would be that the revitalized Northern Alliance and other forces that the ANA replaced would resume doing exactly the kinds of nifty hit-and-run things, to protect their enclaves, that Malevich is talking about. Because that IS how they fight, when left alone.

To get the current Afghan army to do those things, you're talking basically starting over at this point... or taking a good chunk of the country and letting them run it with a bare minimum of Western troop support, operating almost covertly within their ranks. It would have to be a low-risk area of the country, because if you did that right now in the South the insurgents would eat them for lunch, but in another part of the country it might be possible.

Here's what we've trained the ANA to do, instead. They can in some circumstances involving the locals be useful interfaces for our forces. They can hold and defend fixed locations and the immediate environs. They can force-multiply small Western dets, which would be a lot more useful if there weren't more westerners in the south than ANA right now. They can do effective IED sweeps daily, and other such activities where the cumulative risk to Western troops would simply be too high. Umm, that's about it.

Maybe Bruce is too pessmistic.  Who knows?  But this is the kind of conversation I'd sure like to see our top officers in Afghanistan forced to have.  Because what Bruce is saying, essentially, is that the last eight years have been squandered.  Actually, worse than squandered: thanks to us, the Afghans are less capable of disrupting the Taliban than they were in 2002.

At least, that's how it sounds to me.  In the same way that a lot of foreign aid projects in the 50s and 60s were wasted efforts because they couldn't be sustained by local populations, our military training in Afghanistan has been wasted because it's light years beyond what Afghans are able to sustain on their own.  They can act as gofers for NATO units, but that's about it.

So here are a few questions: Is it really true that after eight years the Afghan army is no more capable than it was in 2002?  Is it really true that our current training regimen is completely counterproductive?  Would we better off leaving and just allowing the Northern Alliance to do its thing with arms and materiel that we provide?  If we start from scratch instead, how many years will it take to turn things around?  Petraeus and McChrystal never have to address blunt questions like this — at least, not in public — but it might be time for that to start.  I'm a little weary of the happy talk.