Kevin Drum

Watching the Finance Lobby at Work

| Thu Dec. 10, 2009 12:42 PM EST

After following the sausage-tastic construction of healthcare reform over the past year, no one should be surprised to learn that financial regulatory reform is likely to be even harder to get right.  After all, the finance lobby is bigger and more pervasive than the medical lobby.  What's more, they benefit from the fact that they frequently lobby for things so arcane that no one really understands them.

Take derivatives.  (Please.)  One of the key changes that reformers want to see is a regulation that requires credit derivatives to be traded on an exchange, just like stocks and pork belly futures.  It wouldn't solve all the world's problems, but it would add a layer of transparency to the derivatives market that would help regulators keep a better handle on brewing problems.

Barney Frank agrees, and so the House bill includes a section that requires credit derivatives to be traded on an exchange.  Except there's an exception for "end users" who want to buy things like currency hedges as part of their day-to-day business, not as a financial speculation.  That's basically fine.  But the exception was worded in a way that would allow pretty much anyone to claim they were an end user doing real hedges, not speculation.  So after a big fight the wording was changed.  Hooray!

But as Nick Baumann reported the other day, the Project on Government Oversight says that a subsequent amendment may gut the rule yet again.  It allows derivatives to be traded on either an exchange or a "swap execution facility."  Mike Konczal explains further:

First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms....This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?).

....[Another sentence] allows an intermediary to execute a swap, ignoring the section 2(k) which is the meat of the reform, as long as the swap is recorded somewhere. Now we already have, from above, that a swap execution facility can be something other than the exchange. This is a rule that guts the regulation right out the door, and for no apparent benefit to reform. Many of these alternative swap facilities will be owned by the banks, so it won’t necessarily force the price transparency that has been promised. To trust regulators to simply do the right thing is naive at best when the ability to follow fixed rules is available.

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Obama in Oslo

| Thu Dec. 10, 2009 12:11 PM EST

Ross Douthat thinks that Barack Obama threaded the needle pretty decently in his Nobel acceptance speech today:

He didn’t give the address that American neoconservatives would have written for him, obviously, but pieces of that speech showed up — the defense of the war in Afghanistan and the idea of just war in general; the Bush-ian, “make no mistake, evil does exist in the world” line; the insistence that “the United States has helped to underwrite global security for sixty years, with the blood of our citizens and the strength of our arms.” He didn’t give a Gandhian ode to nonviolence, or an activist’s paean to human rights, but those threads were woven in as well.

He talked up international institutions, promised action against climate change, and took credit for ordering the closing of Guantanamo (one of the few applause lines, inevitably), but at the same time he praised the use of force for humanitarian purposes, and reserved the right to act unilaterally in America’s interests. He defended diplomatic outreach to Iran, called on the world to put pressure on Iran’s nuclear program, and promised that the world would stand behind Iran’s protestors — and he made it all run smoothly together, in rhetoric if not in reality. And he managed to co-opt everyone from M.L.K. to J.F.K. to Nixon to John Paul II and Reagan along the way.

I didn't listen to the speech, but I've read it and I mostly agree.  (Here's a transcript.)  Frankly, though, I really don't think neocons have much to complain about even if Obama didn't use the opportunity to announce construction of a new generation of nuclear missiles or something.  Given that he was, after all, accepting a peace prize, it was a surprisingly robust defense of war and America's military role in the world.  Surprisingly Bushian, really, with one obvious caveat: among the many wars he mentioned as necessary and justified, there was one that was deliberately conspicuous by its absence: Iraq.  So neocons have that to gripe about if they're in a griping mood.  (And when are they not?)

One additional thing that struck me, though, was that the speech seemed pretty mechanical.  Like his West Point address.  It's possible that this is more an artifact of reading the transcript vs. hearing the speech, but it sounded to me a little too obviously like he was trying to thread a needle.  There wasn't any single place where I felt like he laid down a marker and really spoke about something he believed deeply in.  Dan Drezner made (I think) a related point: "Pick a paradigm, and you can find a sliver of the speech dedicated to its theoretical propositions."  But he also explained it: "Doesn't this imply that the speech was logically contradictory?--ed.  No, it implies that the world is a hell of a lot more complex than any of these theoretical approaches.  Alas, knowing when to apply each of these worldviews is more art than science."

And there's another parallel between Obama's West Point speech and this one: both times he told his audience (i.e., the one actually in the room with him) something they didn't want to hear.  At West Point he stressed that we have limited resources for war when those resources are desperately needed at home.  In Oslo he stressed that wars aren't going away and the United States is going to keep fighting them.  Is this a demonstration of bravery?  Or an indication that his real audience is always the one on TV?  Either way, I'd say it worked better this time than it did last week.

Tired of Bankers?

| Thu Dec. 10, 2009 1:29 AM EST

General Electric CEO Jeffrey Immelt spoke at West Point today:

I think we are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed — both terrible traits. Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.  As a result, the bottom 25% of the American population is poorer than they were 25 years ago. That is just wrong.

John Gapper comments:

Mr Immelt’s remarks are the latest — perhaps the strongest — among business and financial leaders calling for self-restraint and a change in attitude. Such appeals have fallen on deaf ears.

....Many people — probably most — believe that bankers’ bonuses are profoundly unfair, especially since they were not curtailed in the wake of the financial crisis. Meanwhile, bankers regard themselves as victims of  populism kindled by politicians and the media.

The significance of Mr Immelt’s speech, I think, is that the leader of one of the biggest companies in the US is willing to say publicly what many non-business people feel. Leaders in non-financial industries have worried since last year about being tainted by the behaviour of bankers. Now, it seems, they are running out of patience.

Well, we can hope.  But I hope Immelt keeps in mind that it's not just bankers.  They may be the worst offenders, but they're not the only ones.

Taxing Banks

| Wed Dec. 9, 2009 6:55 PM EST

A couple of days ago I wrote about Britain's proposed super-tax on big bank bonuses.  Today, via , I see that it would work a little differently than I thought:

Banks will be charged a 50 percent tax on 2009 bonuses of more than £25,000, or $40,800. It will be imposed on the pool of bonuses paid by a bank, rather than individual payments, and it will be paid by the bank — not by the recipient of the bonus. It will take effect immediately and will affect banks’ 2009 profits.

For what it's worth, I like this approach better than an individual tax because it gets more directly at what the immediate outrage is.  Basically, the banking system was about to go under last year as a result of its own folly and was rescued by the government.  With a couple of exceptions, however, instead of outright nationalizing the weakest banks, the rescue plans in both Britain and the U.S. were aimed at boosting bank profits and letting them earn their way back to solvency.  You can argue about whether this was the right approach or not, but it's the approach we took.  Given that, it makes sense to give banks a strong incentive to retain their outsize earnings and use them to strengthen their balance sheets instead of paying out huge bonuses to their traders and executives.

Of course, this also puts paid to the whole idea that the tax might be a human rights violation.  Unless you want to argue that a bank has human rights.  Do you?

Quote of the Day: Climate Denialism

| Wed Dec. 9, 2009 5:19 PM EST

From Al Gore, on why climate deniers get so much attention:

If the people that believed the moon landing was staged on a movie lot had access to unlimited money from large carbon polluters or some other special interest who wanted to confuse people into thinking that the moon landing didn't take place, I'm sure we'd have a robust debate about it right now.

I just happen to have a good example of this on tap.  Last night I read a post over at Volokh about how climate data was being faked.  I sighed and moved on.  Then, about an hour ago, I got an email from a conservative reader asking if the Volokh post undermined my faith in global warming.  I told him it didn't.  Then, a few minutes later, I noticed Megan McArdle linking to the same post.  Obviously this thing wasn't going to go away quietly.

Basically, the Volokh post (by Jim Lindgren) passes along an analysis by Willis Eschenbach claiming that the instrument data for Darwin Airport in Australia shows flat or declining temperatures if you look at the raw data, and only shows an increase if you "homogenize" it.  Conclusion: the evidence of warming isn't from the data at all, but only from the manipulation of the data!  But via Tim Lambert, here's an excerpt from the original NOAA paper that explains how the homogenization was done:

A great deal of effort went into the homogeneity adjustments. Yet the effects of the homogeneity adjustments on global average temperature trends are minor (Easterling and Peterson 1995b). However, on scales of half a continent or smaller, the homogeneity adjustments can have an impact. On an individual time series, the effects of the adjustments can be enormous. [Italics mine.]

So, if you're a climate denier, what would you do?  You'd look for local effects and you'd look for an individual time series.  Look hard enough and you're bound to find some with large changes due to the homogenization.  And then you'd cry foul.  The books are being cooked!

Well, as I told my emailer, I'm not qualified to judge this stuff.  Neither is he.  Neither is Willis Eschenbach.  But it's easy to make a pretty graph that looks damning and then demand that the scientific community address it.  And when they don't — because it's amateur crap and isn't worth anyone's time — the deniers have a scalp.  Look!  The scientific community is so corrupt they won't even look at our evidence!  And Fox and Drudge and the Wall Street Journal all merrily pass it along.

Rinse and repeat.  Unfortunately, it's working pretty well.  More from Tim here.  Chris Mooney addresses the larger problem here.

Importing Socialism

| Wed Dec. 9, 2009 2:34 PM EST

Byron Dorgan (D–ND) has proposed an amendment to the Senate's healthcare bill that would legalize reimportation of prescription drugs from Canada.  No big surprise there: Dorgan's a Democrat, after all.  But drug reimportation has lots of Republican supporters too, including Olympia Snowe, David Vitter, Chuck Grassley, and John McCain.  Ezra Klein notes just how nonsensical this is:

The case for drug reimportation, as Vitter says, proceeds from the recognition that residents of other countries get much, much lower prices on drugs than Americans do. Many of these drugs were invented by American companies and produced in American factories. But Canada gets them at a discount. Why?

Well, Canada's government bargains its prices down. So does the French government, and the German government, and the British government....But Medicare, and the federal government more generally, are barred from doing the same. And this isn't just about drugs. The story is similar for everything from surgeries to doctor's visits.

....In closing, Vitter urged the Senate to "take this step and do what we all say should be a top priority and actually lower health-care costs. I urge all my colleagues to come together and do this in a bipartisan way." Boiled down to its essentials, Vitter just made a case for a bipartisan embrace of a single-payer system.

Drug reimportation is quite possibly the most ridiculous and hypocritical way conceivable to get lower pharmaceutical prices.  If you think the government should bargain down drug prices, then at least have the spine to say that the government should bargain down drug prices.  Don't outsource the job to Canada's government-run healthcare system, which, according to conservative conventional wisdom, is little better than an icy death factory that dooms its citizens to bad hips, painful cancer deaths, and endless waiting lines.

There are times when I feel that I'm pretty inured to political opportunism and duplicitousness.  But railing against any kind of government interference in the health industry as death panels and socialism, and then turning around and suggesting we take advantage of the benefits of an actual socialist healthcare system really takes the cake.

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Reebok's Unhidden Agenda

| Wed Dec. 9, 2009 1:26 PM EST

Thankfully, I haven't yet seen a TV commercial for Reebok's new EasyTone shoe.  But Sophia Lear brings me up to date here:

It took being assaulted by this ad a few times to pinpoint what makes it so horrifying. The message of the ad seems to be: what women really want is to have a butt so cute that they will be objectified like the woman in the ad.

It took a few viewings to figure this out?  Here's the very first line of the ad:

Reebok EasyTone shoes not only look fantastic, they'll help make your legs and butt look great too.

Emphasis very decidedly in the original, accompanied by the camera zooming in for a tight closeup on the woman's butt.  This is not a subtle sales pitch.  You can see for yourself at the link.

Joe Lieberman is 21% Right (And 79% Wrong)

| Wed Dec. 9, 2009 12:56 PM EST

Joe Lieberman's latest excuse for not supporting a public option is that it would pay lower prices to hospitals, which would then make up the difference by charging higher prices to everyone else.1  This is called "cost shifting," and this morning I got a timely email from Austin Frakt telling me that there was some handy new high-quality research from Vivian Wu on exactly this question.  Is Lieberman right?  Is cost shifting real?

Wu’s main result is that on average prices paid to hospitals by private payers increases by 21 cents in response to each dollar reduction in public revenue. By way of comparison, this 21% rate of cost shift is about half of the lowest estimates produced by industry studies and is far below their common assumptions of 50% to 100%.

....The policy implications are clear. Wu doesn’t state them, but I will. Within the range of variation studied by Wu, with respect to hospital payments, overall health costs can be reduced by 79 cents per dollar of Medicare payment reduction, the other 21 cents being shifted to the private sector. However, the more competitive the hospital market the less the cost shift. For some hospitals in some markets Wu found cost shifting rates as low as 5%. Therefore, sound public policy would encourage greater competition among providers (wherever possible) in tandem with reductions in public payments. Doing both concurrently would reduce public health expenditures with minimal impact on private payments.

In other words, Lieberman is, at most, 21% right.  There's a little bit of cost shifting, but the vast majority of payment reduction actually goes toward reducing payments.  Hospitals might not like that, but why shouldn't the rest of us?

And this reminds me: I've got several posts from Austin bookmarked that I never quite got around to blogging about, and I suppose at this point I never will.  They tend to be pretty wonky, but if you like that kind of stuff you should check out his blog.  It's called The Incidental Economist.

1Actually, I don't know for sure if this is his latest excuse.  He changes them too fast for me to keep up.  But I'm pretty sure this was one of the more recent ones.

It's Adobe's Fault

| Wed Dec. 9, 2009 12:32 PM EST

As you all know, the Transportation Security Administration mistakenly posted a copy of its screening manual a few days ago, providing access to lots of interesting little nuggets about how they operate.  The manual was supposed to have sensitive portions blacked out, but as in so many previous cases, the people who did it didn't realize that PDF documents come in several flavors:

Government workers preparing the release of a Transportation Security Administration manual that details airport screening procedures badly bungled their redaction of the .pdf file. Result: The full text of a document considered “sensitive security information” was inadvertently leaked.

....This is not the first time that redacted documents have leaked sensitive data.  AT&T lawyers defending their company in a spying suit made the same mistake three years ago in a redacted court filing. Confidential details discussed during a closed-door settlement hearing in a lawsuit against Facebook were revealed earlier this year when parts of the hearing transcript were insufficiently redacted. Federal prosecutors also made redaction errors in court documents they filed against two San Francisco reporters who covered the BALCO steroids story.

In 2003, the Justice Department botched the redaction of a controversial workplace diversity report, and in 2000 the New York Times inadvertently leaked the names of CIA collaborators when it published an improperly redacted CIA file on its website that documented American and British officials’ engineering of the 1953 Iranian coup.

I've long wondered when government agencies will finally figure out how PDF documents work, but so far the only answer is "not yet."  In the meantime, my great fear is that some overzealous bureaucrat is finally going to get tired of this and decide that the only answer is a government-wide ban on PDFs.  Or perhaps a government-wide ban on searchable PDFs.  That would be a huge pain in the ass for the rest of us.  But you just know it's coming if this kind of thing keeps happening.

Quote of the Day: Fredo Fesses Up

| Wed Dec. 9, 2009 11:55 AM EST

From Alberto Gonzales, explaining why, in hindsight, it was wrong for the Bush administration to purge U.S. Attorneys on flimsy grounds:

We should have abandoned the idea of removing the U. S. attorneys once the Democrats took the Senate. Because at that point we could really not count on Republicans to cut off investigations or help us at all with investigations. We didn't see that at the Department of Justice. Nor did the White House see that. Karl didn't see it. If we could do something over again, that would be it.

You know, most people would at least be smart enough not to admit something like this in public.  But not Gonzales.