Kevin Drum

Banking Health

| Thu Aug. 27, 2009 11:57 AM EDT

Can the banking industry earn its way back to good health?  In the long run, sure.  But in the short run, things don't look so hot.  Here's today's press release from the FDIC:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate net loss of $3.7 billion in the second quarter of 2009, a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008.

....Indicators of asset quality continued to worsen during the second quarter. Both the quarterly net charge-off rate and the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) reached the highest levels registered in the 26 years that insured institutions have reported these data.

...."Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," Chairman [Sheila] Bair noted. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."

There's a vicious circle at work too.  As more banks go under, the FDIC has to assess higher fees to banks to keep its insurance fund solvent.  Those higher fees depress profits, which in turn keeps the industry underwater.  That's part of what happened this quarter: if it weren't for a special assessment of $5.5 billion the industry would have shown higher earnings.

Bank health, like employment, is a lagging indicator, so today's report doesn't necessarily mean the economy isn't starting to improve.  But the fact that loan quality continues to deteriorate and writeoffs continue to skyrocket sure isn't good news.  If unemployment stays at 10% or above for the next year, as the CBO now projects, this isn't going to turn around any time soon.

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"Socially Useless"

| Thu Aug. 27, 2009 1:28 AM EDT

Now here's a bank regulator who's talking like he's found religion.  The Guardian glosses an interview in the British Prospect:

Lord Turner, chairman of the Financial Services Authority, warned bankers that he would support a new wave of taxes on the City to prevent excessive profiteering if they continue to take excessive risks.

In a searing critique of the industry, Lord Turner described much of the City's activities as "socially useless" and questioned whether it has grown too large...."The really fundamental question is whether the overall level of financial services pay is a consequence of the swollen financial sector which has resulted from oversimplistic financial deregulation. This is not a question that any of the politicians have focused on but I think it's an important and legitimate issue of public concern," he said.

....He told Prospect: "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.

"And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions — Tobin taxes."

Italics mine.  The FSA didn't exactly cover itself in glory during his predecessor's term, so maybe Turner is just talking tough because he wants to keep his job.  But if that's what it takes to turn a technocrat into a populist, then that's what it takes.  I sure wouldn't mind hearing a harangue like this from an American regulator once in a while.

As for the transaction tax, I don't know how practical that is.  But if it can be made to work, it's a good idea.  Not only would it raise some money, but it would put a crimp in some of the most highly leveraged investment schemes, which fundamentally depend on tiny returns multiplied by billions of dollars.  A transaction tax would make a lot of them unprofitable.  So it's a twofer.

Ben's Second Term

| Wed Aug. 26, 2009 9:23 PM EDT

What do we have to look forward to from Ben Bernanke's second term as chairman of the Fed?  The New York Times asked a bunch of economists for their predictions.  Here's Mark Thoma:

My worry is that as time passes, we’ll forget how bad things were and the desire to impose necessary new regulation will fade. Here’s where I think Mr. Bernanke’s experience will be crucial. He was there at every step in the development of the Fed’s response to the crisis and he will not soon forget the problems he faced (nor repeat his mistakes), making it more likely that he’ll be a forceful and passionate advocate for new regulation before Congress. [Italics mine.]

Boy, do I hope this is true.  But it strikes me as woefully wishful thinking.  One of the reasons I opposed reappointing Bernanke is that I'd like to have someone running the Fed who's serious about reregulating the financial industry, both at a macro and a consumer level.  With Bernanke, though, we're taking a flyer.  We're hoping that the crisis of the last two years has fundamentally changed his view of market self-regulation, and that he'll apply the same suppleness and creativity he showed dealing with the meltdown to dealing with post-crisis regulatory issues.  And maybe he will.  But people rarely change lifelong worldviews even after they've lived through a catastrophe, and Bernanke has done nothing to make us think he's an exception.  Contra Mark, my guess is that when it comes to actual, concrete legislation and rulemaking, he'll revert to the same Ben Bernanke he's always been.  When that happens, we'll have missed our only chance for years to really reform our financial system.

And here's former Fed economist Vincent Reinhart with another prediction:

The White House will likely learn that a Fed chaired by Ben Bernanke will follow a policy uncomfortably tight as the 2012 election looms into sight. [Italics mine.] Bernanke has espoused a commitment to low inflation over his entire career. He also is a democratic and consultative chairman, so the voices of monetary conservatives among Fed officials will be heard loudly and frequently.

Now this one I believe.  That's what Fed chairmen usually do to Democratic presidents, after all.

Robotic Warfare

| Wed Aug. 26, 2009 7:02 PM EDT

Matt Yglesias muses on what the growing use of drone aircraft means for the Air Force:

The military [...] is an institutional culture that puts a great deal of stock on honor, courage, and difficult physical work. A service that consists of guys sitting in cubicles playing video games is going to have trouble holding its head high amidst a warrior ethos. And consequently, the Air Force is tending to resist the technological imperative to go more remote. Ultimately, however, that resistance is doomed and it’s not really clear what will come of it.

There's another side to this: what happens when drones become really, really good?  Right now they're at about the technological phase that airplanes were in during World War I: nice tools in specific circumstances, but not really overall game changers.  But that won't be true for much longer.  Advances in drone technology are likely to come pretty quickly, and the result is going to be a very large fleet of drones that are bigger, faster, stealthier, more maneuverable, have better optics, and can accomodate far more — and more effective — weaponry than today's models.  And since they're relatively cheap and using them runs no risk of loss of life, there's going to be very little institutional or public  pressure against using them.  This is likely to mean they'll get a lot of use.

You see the same two-edged sword with police officers being armed with tasers.  It's great that they have a nonlethal alternative to shooting people, but the fact that they have a nonlethal alternative also means they have less reason to avoid using it.  Result: lots of people being tasered.

It's not just drones, of course.  It's the entire robotic revolution in warfare.  When we get to the point where one side is able to conduct war effectively with virtually no fear of loss of life, does that mean that public pressure against war will start to fade away?  After all, demand curves slope downward.  When war becomes cheaper, we'll get more war.  Right?

Are Teachers Too Hard to Fire?

| Wed Aug. 26, 2009 6:19 PM EDT

Steven Brill writes in the New Yorker about "rubber rooms," where Big Apple teachers accused of incompetence spend years sitting around collecting paychecks while their cases are adjudicated.  But that's only a symbol of what reformers think is the larger problem: namely that virtually no one is ever fired for poor job performance after their three-year probationary period is up and they have tenure.

In seven years [...] unsatisfactory ratings for tenured teachers have risen from less than one per cent to 1.8 per cent. “Any human-resources professional will tell you that rating only 1.8 per cent of any workforce unsatisfactory is ridiculous,” [Dan] Weisberg says.

Is this prima facie evidence that the system isn't working?  Based on my experience, I'd say yes.  On the other hand, I'd also say that, at least in the places I'm familiar with, virtually everyone who got fired was let go within the first year or two they were with the company.  Very few who had been around for more than three years got fired.  On the third hand, occasional layoffs often provided excuses to get rid of poor performers, so perhaps that shrank the pool of people who would otherwise have eventually been axed.

So....I dunno.  Opinions?

Phone Books

| Wed Aug. 26, 2009 5:09 PM EDT

Claire Thompson asks:

When was the last time you looked up something in the phone book? What did you do the last time you got a free phone book dropped off on your doorstep—did you recycle it? If you’re like most people these days, your answers to those questions are probably “I don’t remember” and “No.”

Well, in my case the answer is "last year" and "yes" — the latter because we all have recycling bins in my neighborhood, so pretty much everything gets recycled with no effort on my part.

But I certainly don't use phone books much.  In fact, even that time last year wasn't for my own benefit.  It was for my Korean neighbor, who knocked on our door late one night and told us he'd locked himself out of his house and could he please use our phonebook to find a locksmith?  So I called a few locksmiths for him.  (And, along the way, learned that most "24-hour locksmiths" are anything but.)

The really mysterious part of all this, though, is that despite the fact that phone books seem like they ought to be a dying breed, there are more of them than ever.  I just looked, and we have not one, not two, not three, but four different yellow pages directories.  One from Verizon, one from Yellowbook, and two from AT&T (they come in two different sizes for some reason).  They're all crammed with ads, which must mean people are using them, but I do sort of wonder who that is sometimes.  I use the web almost exclusively for this kind of thing these days, and I imagine that most people in my upscale neighborhood do too.  So why all the phone books?

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The Placebo Effect

| Wed Aug. 26, 2009 1:50 PM EDT

In Wired, Steve Silberman writes about the well-known placebo effect: sometimes a sugar pill all by itself can help cure a disease or reduce its symptoms.  That's why it's not enough for drugs in clinical trials to work.  They have to work better than a placebo.

The placebo effect is mysterious enough on its own.  But there's more.  It turns out that placebos work better in some countries than other others.  It also turns out that ratings by trial observers vary significantly from one testing site to another.  But what's most mysterious is that the placebo effect actually seems to be getting stronger over time. Not only are new drugs having a harder and harder time beating out placebos, but older drugs that have been retested are having problems too:

In many cases, these are the compounds that, in the late '90s, made Big Pharma more profitable than Big Oil. But if these same drugs were vetted now, the FDA might not approve some of them. Two comprehensive analyses of antidepressant trials have uncovered a dramatic increase in placebo response since the 1980s. One estimated that the so-called effect size (a measure of statistical significance) in placebo groups had nearly doubled over that time.

It's not that the old meds are getting weaker, drug developers say. It's as if the placebo effect is somehow getting stronger.

....But why would the placebo effect seem to be getting stronger worldwide? Part of the answer may be found in the drug industry's own success in marketing its products.  Potential trial volunteers in the US have been deluged with ads for prescription medications since 1997, when the FDA amended its policy on direct-to-consumer advertising. The secret of running an effective campaign, Saatchi & Saatchi's Jim Joseph told a trade journal last year, is associating a particular brand-name medication with other aspects of life that promote peace of mind: "Is it time with your children? Is it a good book curled up on the couch? Is it your favorite television show? Is it a little purple pill that helps you get rid of acid reflux?" By evoking such uplifting associations, researchers say, the ads set up the kind of expectations that induce a formidable placebo response.

Unfortunately, that's about it.  The mystery of the increased response to placebos remains a mystery.  No one really knows why it's happening.  But it's all pretty fascinating anyway, and the whole piece is well worth a read.

Grassley's Problem

| Wed Aug. 26, 2009 12:20 PM EDT

Chuck Grassly is in no danger of not being reelected.  So why is he being so bad-tempered about healthcare reform?  Ezra Klein says it's because he's under tremendous pressure from his fellow Republicans, who have the power to punish him if he supports a Democratic healthcare bill:

This is the final year that Grassley is eligible to serve as ranking member — the most powerful minority member, and, if Republicans retake the Senate, the chairman — of the Senate Finance Committee. His hope is to move over as ranking member of the Judiciary Committee, or failing that, the Budget Committee. But for that, he needs the support of his fellow Republicans. And if he undercuts them on health-care reform, they will yank that support. It's much the same play they ran against Arlen Specter a couple of years back, threatening to deny him his chairmanship of — again — the Judiciary Committee. It worked then, and there's no reason to think it won't work now.

This kind of discipline is normal in a parliamentary system where everyone on both sides is expected to support the party line.  But that discipline is the flip side of a system in which the majority party has the power to turn its campaign platform into law using only its own votes.

You really can't have one without the other.  If you have an intensely whip-based system, in which the opposition party is expected to oppose unanimously, then the majority party has to have to power to govern using only its own majority.  Conversely, if you have a system in which legislation only passes if party members cross lines, then discipline necessarily needs to be weak.

Not to be tedious about this, but this is yet another example of how Congress has become schizophrenic in the age of the routine filibuster.  We either need a system in which the majority rules, or we need a system in which party members cross lines to form temporary alliances.  Right now we have neither.

UPDATE: Via email from reader Thomas F.:

AAAARRRRGGGG!!!!

Grassley does not want health care reform. Grassley does not want health care reform. Grassley does not want health care reform.

As a result, he does not have a problem. He will string this along in the service of his very very very conservative ideology and in service of the Republican party. But he will not support or vote for it in the end, and he will participate in the Gang of Six only as a way to slow legislative progress as a tool to derail the whole thing.

This might go a wee bit too far, but point taken.  I was using Ezra's post as an excuse to blather about the filibuster, but I probably shouldn't have let his implicit Grassley appraisal stand without comment.

Durable Goods

| Wed Aug. 26, 2009 11:33 AM EDT

This is a little bit confusing.  Durable goods orders were up in July, but it turns out it was mostly because Boeing had a good month:

As encouraging as the report appeared at first glance, it also suggested businesses were still cutting back. Orders for non-defense capital goods excluding aircraft, a barometer of business investment, fell 0.3 percent in July after rising 3.6 percent in June. New orders for computers and related products fell 2.8 percent after rising 0.5 percent in June.

The report today is likely to bolster the view, shared by a growing number of economists, that the recession is winding down or has already ended. It was further proof the manufacturing sector has begun to stabilize as businesses start to restock. Businesses had been slashing inventories for months as they tried to catch up with falling demand.

Aside from commercial jets, orders for durable goods fell 0.3% after rising in June, which "suggested businesses were still cutting back."  But three sentences later this bolsters the view that the recession is winding down.  What am I missing?

Ted Kennedy Passes

| Wed Aug. 26, 2009 1:46 AM EDT

According to news reports, Sen. Edward Kennedy has died.  R.I.P.