Kevin Drum

Healthcare Reform After a Month

| Thu Apr. 22, 2010 1:20 PM EDT

So how is public opinion on healthcare reform coming along? Here's the top line from a Kaiser Family Foundation poll taken last week:

Democrats outnumber Republicans, so overall 46% of the country favors the bill vs. 40% who don't. Still, independents remain skeptical: 46% are unfavorable vs. 36% who are favorable.

That's going to take some work to overcome. On that score, there's some good news and some bad news. The good news is that Kaiser also polled some of the specific provisions of the healthcare bill that take effect quickly, and virtually all of them were extremely popular. Every single one polled over 50% and virtually all of them were favored by more than two-thirds of the respondents. Even Republicans approved of most of them.

So that's something to work with. And the bad news? People are pretty savvy about who the bill will help: the poor, the uninsured, and those with preexisting conditions. However, only 31% think it will help them, and broadly speaking, they're probably right about that in the short term. For most voters, then, we're going to have to appeal to the better angels of their nature, and that's always a crap shoot.

This all comes via Austin Frakt, who points to another part of the poll that says 26% of the country got at least some of their information about healthcare reform via blogs and non-media websites. Not bad! Only 6% said it was their most important source, but that doesn't strike me as surprising. After all, even for me I'd have to say that it's a close call whether blogs or traditional news media were my most important source of information about healthcare reform. Being a healthy part of the mix is probably about as much as we can hope for.

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Obama on Financial Reform

| Thu Apr. 22, 2010 12:54 PM EDT

President Obama's big speech on financial reform is here. After hearing it, I don't feel so bad about being unable to make the subject fascinating. If even Obama can't make it sound interesting, what chance do I have? Here's the Reader's Digest version:

First, the bill being considered in the Senate would create what we did not have before: a way to protect the financial system, the broader economy, and American taxpayers in the event that a large financial firm begins to fail....Second, reform would bring new transparency to many financial markets....Third, this plan would enact the strongest consumer financial protections ever.

So: resolution authority, derivatives clearing, and the CFPA. All good stuff. Important stuff. Better than nothing. But in the great battle between those who want to bust up the big banks and those (like me) who want to implement serious, wide ranging limits on leverage — well, guess what? We're both losers. Structurally, Wall Street just isn't going to change much after all this stuff is passed.

Basel I, II, III

| Thu Apr. 22, 2010 12:15 PM EDT

After my lunch with Felix Salmon a few weeks ago I demanded better coverage of international negotiations over capital standards in the banking industry. Why? Because "international negotiations over capital standards in the banking industry" is possibly the most boring sounding topic of all time; the talks all happen behind closed doors; and it's supremely important.

A higher capital standard is sort of like requiring a higher down payment on a house: not only does it mean you're borrowing less, but it also means you have a bigger equity cushion in case the value of the house drops. It makes it harder to overextend yourself on a house you can't afford and it means you won't be wiped out by a small drop in the house's value. In a nutshell, this is what we want to do to banks: force them to buy less house and maintain better reserves against the possibility of disaster. It will make them less profitable, but it will also make them safer.

Now, we've been through all this before. The original Basel standards for capital adequacy were OK but not great. But the Basel II standards were a disaster. Partly this was because every country has different financial customs and different sectors where it's stronger or weaker, and every country wanted to protect both its own customs and its own strongest sectors. The result was lots of flexibility. Too much flexibility.

But that was then. After a global financial meltdown we're all going to suck it up and get serious, right? Guess again:

Countries involved in the negotiations agree banks should maintain larger capital reserves, but disagree on key details, including definitions of core terms. Officials are instead moving to protect the interests of their own banking industries while penalizing others elsewhere.

....In the talks, some U.S. government officials are fighting what they view as an anti-American proposal that would prevent banks from counting as part of their capital cushion a specific type of security favored by U.S. banks known as a trust-preferred security.

Several other governments are pushing to change the way tax credits are counted as capital, amid arguments that the rules help banks in certain countries but hurt others. French officials are lobbying against rules that could force some of their banks to divest themselves of insurance subsidiaries or face major blows to their capital. The Japanese are also opposed to elements of the new rules.

Meanwhile, U.K. and U.S. officials have clashed over British attempts to require foreign banks to stash more cash in their U.K. subsidiaries. A top official with the U.K.'s Financial Services Authority, Britain's top regulator, says the policy is a response to the U.K. getting burned by the collapse of Lehman Brothers, which taught the agency "to be cautious about relying on other regulators."

Yuck. This is a big part of what made Basel II so toothless. But it's important stuff, because it's one of the keys to a safer banking sector. The United States can, if we want, implement tough rules on our own — and I think we should — but banks are too globally interconnected to make this the best solution. A safe American banking sector doesn't do anyone much good if the riskiest practices just move to Frankfurt or Tokyo. So boring or not, keep your eyes on this.

Blank Stares

| Thu Apr. 22, 2010 11:22 AM EDT

Sen Chris Dodd (D–Conn.), chairman of the Senate Banking Committee, on the financial meltdown:

The first week in February, we had our first hearing on the crisis of 2007, and it was on the mortgage crisis. We had witnesses who laid out exactly what was going to happen; in fact, they underestimated what would happen, and they were ridiculed for estimating what they did! And all that spring we went back and forth had meetings, we had a big gathering at the Banking Committee room with all the major players on mortgages. We had an awful time getting Hank Paulson to recognize anything. And Ben Bernanke, too. They'd come to meetings and they'd kind of have this blank stare, all during that spring, through that summer, into the fall.

Blank stares? Really? I can almost buy that with Paulson, but Bernanke? He obviously didn't see the housing bubble in time, but whatever else you might think of the guy, he doesn't really strike me as the blank stare type.

Next Stop: Kandahar

| Wed Apr. 21, 2010 4:33 PM EDT

Michael Cohen is feeling pretty pessimistic about the next stage of the war in Afghanistan:

All the warning signs about operations in Kandahar are blinking red. We have a civilian population that fears NATO intervention and is broadly sympathetic with the Taliban; we have a US military untrained in the ways of counter-insurgency and chafing at restrictive ROEs; we have an Afghan government that is hardly supportive of the mission and with Karzai's drug-dealing brother in charge of Kandahar not terribly interested in good governance and ending corruption; and of course we have a vicious insurgent force more than happy to up the ante by murdering innocent civilians and using mosques as execution chambers.

Read the whole thing for the details that provoked this conclusion. I hope that Cohen and I are both wrong, but I sure have found it difficult to find anything lately that makes me hopeful about the possibility of success in Afghanistan. I won't be at all surprised if the headlines coming out of there ten years from now look pretty much the same as they do today.

Good News on Financial Reform

| Wed Apr. 21, 2010 1:47 PM EDT

Blanche Lincoln's legislation to rein in derivatives trading passed its first hurdle today:

The Senate Agriculture Committee on Wednesday approved legislation to tighten regulation of derivatives trading, with a single Republican, Senator Charles E. Grassley of Iowa, joining Democrats in supporting the measure. The vote was 13 to 8.

The defection of Mr. Grassley, who is the senior Republican on the Finance Committee and is up for re-election, illustrated the increasingly difficult political position for Republicans in opposing the legislation....His vote to support the measure underscored the potential political peril in opposing tighter rules for Wall Street, at a time of public frustration over the return of huge earnings and blockbuster bonuses even as unemployment remains high and the economy struggles to recover in much of the country.

Like I said yesterday, originally I didn't take Lincoln's proposal seriously. It seemed like it was just a stalking horse, a way for her to look tough and get some good hometown headlines even while knowing that it would quickly get watered down. And that might still happen, of course. Her derivatives language still has to survive a merger with the Banking Committee bill, a vote on the Senate floor, and then the conference report. The odds of coming through all that unscathed are pretty remote. never know. Republicans are obviously feeling some heat on this, and it's not as though anyone outside of Wall Street has any sympathy for the derivatives industry. For now, this remains a possible bright spot on the financial reform horizon.

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The McConnell Line

| Wed Apr. 21, 2010 12:49 PM EDT

From a conversation on Twitter yesterday about financial reform:

Brian Beutler: Corker warns that the GOP is screwing up by lying about reg reform:

Matt Yglesias: Has "lie like crazy" ever failed as a political strategy?

Bizarrely enough, it looks like the answer might be yes. GOP wordmeister Frank Luntz famously advised Republicans a couple of months ago to attack any financial reform bill as a "bailout" regardless of what was actually in it, and Senate Minority Leader Mitch McConnell took that to heart and has been doing exactly that ever since.

Unfortunately for McConnell, it turns out there really is a limit to just how baldly you can lie and get away with it. The Senate reform bill quite plainly bans bailouts, and McConnell found himself under attack from all corners. President Obama called him out on this, PolitiFact labeled his statements flatly false, fellow Republican Bob Corker told reporters McConnell was wrong, and even Mark Halperin refused to dredge up some unlikely way to defend him. And guess what? It might actually be working:

After a week of attacking the pending legislation as a ticket to new taxpayer "bailouts," McConnell is striking a different tone. Monday on the Senate floor, he called for lawmakers to move beyond "personal attacks and questioning each others' motives" to "fixing the problems in this bill."

And McConnell conceded, after being chastised by no less than President Obama in his weekly radio address, that "both parties agree on this point: no bailouts. In my view, that's a pretty good start."

...."I'm happy to hear my counterpart, my friend, Senator McConnell talk about the need for more negotiations," said Senate Majority Leader Harry Reid (Nev.), in remarks on the floor following McConnell's speech Tuesday. "We don't stand in the way of that."

Granted, McConnell might just be changing tactics. And his change of heart may be motivated more by politics than the pummelling he took over this. After all, the bailout lie wasn't really any worse than the death panel lie. The big difference is that healthcare reform was unanimously opposed by conservatives, so nobody minded the lie. Financial reform is a little different, and relentless hostility could pretty easily backfire. That makes lies a little more costly.

Still, we seem to have reached a limit of some kind, and McConnell crossed it. Maybe we should name this the McConnell Line or something so that we know when future politicians have crossed it.

The Treasury Play

| Wed Apr. 21, 2010 12:05 PM EDT

I've heard one version or another of this story about a million times now. Here is William Cohan's take on why Wall Street is so damn profitable right now:

Mostly [] Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

I guess I'm demonstrating hopeless naivete by asking this, but huh? The market for U.S. treasury bonds is huge and extremely competitive, and the risk of holding treasurys is approximately zero. So if banks have access to giant pools of cash that cost them 0.5%, they should start bidding down the treasury rate until this particular arbitrage play is only barely positive. Treasury yields would very quickly end up around 0.6%, not 3%.

And yet, like I said, I've heard this same basic story over and over and over. Can someone with some serious financial sophistication explain it to us hicks? Are big banks, big as they are, not big enough players to really affect Treasury prices, so they're just free riding on a price set by the rest of the market? What's really going on here?

UPDATE: So far, the consensus in comments is that this whole story is wrong. Banks can borrow from the Fed at low rates, but those are overnight loans. They can buy treasurys at high yields, but those are ten-year notes. Chart here. As The Lounsbury puts it: "One does not finance a 10yr note off of a 24 hour repo. Of course buying and reselling (trading desk) using the overnight funding is possible, although the spread is not what he implies."

The Playbook Crowd

| Wed Apr. 21, 2010 11:31 AM EDT

Here is Mark Leibovich of the New York Times on how Mike Allen's "Playbook" has become the abridged Bible of modern time-crunched Washington:

“The people in this community, they all want to read the same 10 stories,” [Allen] said, table-chopping in the Hay-Adams. “And to find all of those, you have to read 1,000 stories. And we do that for you.”

As a practical matter, here is how Allen’s 10 stories influence the influentials. Cable bookers, reporters and editors read Playbook obsessively, and it’s easy to pinpoint exactly how an item can spark copycat coverage that can drive a story. Items become segment pieces on “Morning Joe,” the MSNBC program, where there are 10 Politico Playbook segments each week, more than half of them featuring Allen. This incites other cable hits, many featuring Politico reporters, who collectively appear on television about 125 times a week. There are subsequent links to Politico stories on The Drudge Report, The Huffington Post and other Web aggregators that newspaper assigning editors and network news producers check regularly. “Washington narratives and impressions are no longer shaped by the grand pronouncements of big news organizations,” said Allen, a former reporter for three of them — The Washington Post, The New York Times and Time magazine. “The smartest people in politics give us the kindling, and we light the fire.”

For years I've avoided reading Playbook (and The Note and First Read) solely because everyone else does read them. That doesn't mean it doesn't influence me, of course, it just means that I'm unaware of the influence. I remain unsure whether I'm better off that way or not.

But groupthink is hard enough to avoid already. Deliberately immersing yourself in it just seems absurd. I guess if I were more of a political junkie I'd understand.

Quizlet of the Day

| Tue Apr. 20, 2010 11:43 PM EDT

According to a study of students in the College of Arts and Sciences at the University of Oregon, the major with the highest average SAT math scores is....Math. You probably guessed that. But here's a harder one: which major had the highest SAT reading scores? Answer below the fold.