Kevin Drum

Healthcare Countdown Begins

The House finally gets serious and sets a deadline.

| Fri Mar. 12, 2010 8:03 PM EST

Things are looking up on the healthcare front:

House leaders laid plans to hold what Speaker Nancy Pelosi called a "historic" vote on health care as soon as late next week, aides said Friday, while President Obama pushed back an upcoming trip to Asia by three days to remain in Washington.

....Under the latest plan, which was still being developed this week, the House would accept the version of health-care reform that the Senate approved on Christmas Eve, with the promise that Congress would adopt adjustments to the new law soon after. The timetable under consideration would put the bill up for a final vote in the House on March 19 or 20.

That's only a week away. And it gets even better!

Democratic Congressional leaders struck a tentative agreement on Thursday that breathes new life into President Obama’s proposed overhaul of federal student loan programs. The deal would bundle the bill into an expedited budget package along with the Democratic health care legislation, which would allow for both measures to be passed by the Senate on a simple majority vote.

....The bill would end government payments to private, commercial student lenders, leaving the government to lend directly to students. It would also redirect billions of dollars to expand the Pell grant program for low-income students, and to pay for other education initiatives.

Now we're talking. A vote by next weekend, and while we're at it we'll also end the insane practice of paying banks billions of taxpayer dollars to make federally guaranteed loans that the federal government can make directly for a lot less. That's what we elected these guys for.

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Earmark Peacockery

Earmarks may be bad, but they don't raise the deficit a single dime.

| Fri Mar. 12, 2010 7:41 PM EST

Bruce Bartlett isn't impressed with the budgetary implications of eliminating earmarks:

It's obviously true that earmarks are not a significant cause of rising federal spending; eliminating all of them will save at most one percent of the budget.

Bruce, you gotta read your own blog! Here's Stan Collender a couple of hours earlier: 

As Andrew notes and I've remarked on previously, eliminating earmarks doesn't actually reduce spending; all it does is change who makes the decision from Congress to an executive branch agency. Unless the appropriation is reduced at the same time the earmark is eliminated, which no one is suggesting, the amount that will be spent will remain the same.

This is, for some reason, one of those never-remarked aspects of earmarks. Everyone assumes that they raise spending, but they don't. They just redirect it. I don't understand why earmark opponents endlessly get away with pretending otherwise.

In fairness, if earmarks were eliminated and the related budget authority were eliminated too, it would cut spending a bit. But that's not what anyone is proposing. Until they do, the posturing is even worse than Bruce suggests.

(There are, of course, other reasons to eliminate earmarks, as both Bruce and Stan acknowledge. The primary one is a belief that federal funds ought to be disbursed by federal agencies using neutral guidelines, not handed out as rewards/payoffs by members of Congress to favored interests in their districts. My tentative view is here: cap earmarks, don't eliminate them. But I wouldn't mind eliminating them either.)

Friday Cat Blogging - 12 March 2010

| Fri Mar. 12, 2010 4:03 PM EST

This morning everyone was pondering the great outdoors. On the left, Inkblot and his shadow peer out the sliding glass door wondering if it's safe to go outside. The hummingbirds are thick as flies these days, and they might attack! On the right, Domino peers out the bedroom window and watches the people go by. Her conclusion: it's time for a nap.

Don't forget: daylight saving time starts Saturday night/Sunday morning. One more hour of sunlight in the evening! Hooray! And don't try to use "I forgot to set my clock" as an excuse for missing church, either. Nobody's buying it anymore.

Earning Money the Old Fashioned Way: Stealing It

| Fri Mar. 12, 2010 3:44 PM EST

So why did Lehman Brothers collapse? A 2,000-page bank examiner's report released yesterday places a lot of the blame on plain old fraud:

The examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances....According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money.

....A large portion of the nine-volume report centers on the accounting maneuvers, known inside Lehman as “Repo 105.” First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny.

According to Mr. Valukas, Mr. Fuld ordered Lehman executives to reduce the bank’s debt levels, and senior officials sought repeatedly to apply Repo 105 to dress up the firm’s results. Other executives named in the examiner’s report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O’Meara, Erin Callan and Ian Lowitt.

More here from the Wall Street Journal and here from Reuters' Antony Currie. And just for some additional background fun, here's a short document on the general subject of "control fraud" written by Bill Black. He wrote the book on the subject (literally: you can buy it here) and handed out this short summary at a conference I attended last year. Enjoy.

Chart of the Day: Getting Rich in the Stock Market

The S&P 500 may not be as good as Wall Street wants you to believe.

| Fri Mar. 12, 2010 3:07 PM EST

CJR's Ryan Chittum points us to the chart below, which compares S&P 500 stock market returns over the past 50 years (blue bars) to those same returns after accounting for trading and management costs, dividend and capital-gains taxes, and inflation (red bars). It's part of a Bloomberg piece by David Wilson summarizing a report prepared by David Bianco, chief U.S. equity strategist at Bank of America Merrill Lynch. Once you take into account all the adjustments, the annual average return of the S&P 500 goes from 9.5% to 1.3%. Chittum comments:

Just remember when those financial advisers tell you to expect 8 percent to 10 percent annual returns that in real money over the last 50 years, you took home a measly 1.3 percent. As I wrote in January: "You have to wonder if there’s a connection to be drawn between the low savings rate and the idea that took hold in the last three decades, which still hasn’t been extinguished even after this miserable decade, that investing in stocks means you’ll get big returns on your money."

Of course, your basic money market account is returning about 0% these days, give or take a few mils, so it's not as if we little guys have a ton of other great investment opportunities. Luckily, the Wall Street tycoon set is still doing well. It's not all bad news out there, my friends.

The Future of Healthcare Reform

Today's bill is just the first step. But reform will continue for decades more.

| Fri Mar. 12, 2010 2:29 PM EST

Charles Pierce has some questions for me about healthcare reform:

I am not unsympathetic to the arguments made by Kevin Drum or Matt Y. here, even though I think the opprobrium heaped on Jane Hamsher is wildly disproportionate.....Ask me what I'd do, and I'd probably vote for the ongoing POS that is the Senate bill. However, I would like both Kevin and Matt [] to explain the "stepping-stone" argument to me. Why, precisely, should I believe that, that once we pass the POS, any opportunity to improve it, largely by the process of political evolution, will remain?

....After all, it's unlikely that the new system proposed in the ongoing POS will become so wildly popular, and so seriously armored by public approval, that there will be a substantial political risk to having opposed it in theory, or to opposing it in practice. Not by next autumn, anyway....Why shouldn't the Republicans run on a promise to repeal the new system, and then follow through by doing exactly that?....Can somebody explain to me how the surviving Democratic politicians, even if they hang onto their majorities, will muster the will and skill to move toward "further reform in the future," as Mr. Drum puts it, given what we've seen of their performance with overwhelming congressional majorities?....Again, everyone, please show your work.

Obviously there's no kind of geometric proof for this, but let's take a crack at it anyway. There are two separate questions here.

First, if healthcare reform passes, what's to stop Republicans from repealing it if they get control of Congress in November? That one is easy: Barack Obama's veto pen. As it happens, I also think that Republicans will find that it's far more difficult to repeal an actual existing bill with a bunch of popular provisions (pre-existing conditions, subsidies for the poor, etc.) than it is to make cheap, stemwinding speeches about onrushing socialism to tea party crowds, but that's really secondary. They couldn't muster 60 votes for repeal, and if they did, they certainly couldn't muster 67 votes in the Senate and 290 votes in the House to overturn a veto.

Second, what's the argument for longer term progress? This isn't quite as black and white, but the historical evidence is pretty clear. Look at virtually every other advanced economy in the world. They started off with small programs and grew them over time. Germany spent over a century getting to universal healthcare. France started after World War II and didn't finish until 1999. In Canada, national healthcare started in Saskatchewan in 1946, spread to the other provinces over the next couple of decades, and became Medicare in 1984. The trend here is pretty obvious: once people get a taste of universal healthcare, they like what they see and they don't stop until the job is finished.

But the United States is different! Fine. Take a look at social programs in the United States. Social Security provided meager benefits and only modest coverage when it was first passed. Over the course of the next 40 years it became a full-fleged universal pension plan. Medicare passed in 1965 with a limited payment structure and has been improved ever since. Prescription drug coverage wasn't added until 2003. You see a similar direction for things like federal home loan programs, civil rights measures, S-CHIP, gay rights, and practically every other social program ever passed. Progress is uneven, and sometimes even goes backward, but the general trend is pretty clear.

Once healthcare reform is passed, everyone will breathe a sigh of relief and move on to other issues. Republicans will huff and puff, but they don't have the votes to overturn it and they know it. (Why do you think they're resisting it so rabidly? They know perfectly well that entitlement programs practically never go away once they've been passed.) Then, down the road, future congresses will start to make changes. Maybe a Medicare buy-in. Maybe bigger subsidies. Maybe a public option outside of Medicare. It won't happen overnight, but within 20 or 30 years the current bill will almost certainly turn into de facto national healthcare. It's likely to be based on private health insurers in some way, but that's how they do it in Germany and the Netherlands too, and it works fine. Eventually it'll work fine here too.

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Shifting Into Neutral

Why didn't drivers of runaway Toyotas shift to neutral?

| Fri Mar. 12, 2010 1:28 PM EST

Fair warning: I haven't paid a ton of attention to the whole Toyota sudden acceleration thing, so maybe this has all been discussed to death. But I keep wondering what's really going on. If your engine is racing and you stand on the brakes, your car will stop. Right? Or, at the very least, it will certainly slow down a lot. And while I understand why you might not want to turn off the ignition, since that can lock up your steering, you can always put your car into neutral and coast to a stop. Why didn't the drivers of runaway Toyotas do this?

Obviously panic is part of it. If my car suddenly started racing off at a hundred miles an hour, maybe I wouldn't be thinking clearly enough to put the car into neutral. But a couple of days ago a guy in San Diego got plastered all over my TV when his Toyota went crazy and eventually had to be stopped by a CHP patrol car. Today, someone asked him about his reaction:

Sikes called 911 on Monday to report that his gas pedal was stuck and his blue 2008 Prius was speeding at 94 mph down a freeway near San Diego. A CHP officer helped bring the car to a stop, but not before two calls to police dispatchers that spanned 23 minutes.

Asked why he didn't simply put his car in neutral, Sikes said: "You had to be there. I might go into reverse. I didn't know if the car would flip. I had no idea how it would react."

Seriously? His car was speeding at 94 mph for 23 minutes and he was afraid to put his gearshift into neutral? Or just turn the ignition off once he got to a relatively straight portion of the freeway? The linked story gives plenty of other reasons to think this whole thing might be a hoax too.

But even for the non-hoaxsters, what's the deal? A few seconds of panic I can understand, but your first reaction would be to jam on the brakes, and once that got you into non-heartpounding territory wouldn't you just shift into neutral and slow to a stop? Do I only think this way because I've spent most of my life driving stick shifts, where neutral plays a bigger role than it does in an automatic transmission? Does this have something to do with it? What am I missing here?

The Left and Healthcare

| Fri Mar. 12, 2010 12:13 PM EST

Matt Yglesias made a good and underappreciated point about the Democratic healthcare bill yesterday. There's a core group of lefties that oppose it for idiosyncratic reasons, "But the point I want to emphasize is that theirs is a pretty marginal point of view. 'The left,' in both its traditional institutional forms (unions, civil rights groups) and its online grassroots forms (MoveOn) is very firmly behind this bill." Greg Sargent amplifies:

Americans United for Change is set to announce a $500,000 ad campaign in the districts of multiple House Dems across the country, a source familiar with the plans says. The labor federation AFSCME is preparing a "significant push in the weeks ahead," according to an AFSCME official, who adds that ads could air before and after the House votes on the Senate bill, providing cover for Dems who find themselves under assault after voting Yes. Americans for Stable Quality Care, a pro-reform coalition which is working with the labor powerhouse SEIU, is finalizing plans for a major buy in multiple districts, an official familiar with the plans says.

So unions are spending heavily in support of the bill, MoveOn's members support it 83%-17%, Nancy Pelosi is putting the screws on her caucus members, Harry Reid is doing the same in the Senate, and President Obama is finally pulling out all the stops too — both in front of the cameras and behind the scenes. Among the netroots, Markos Moulitsas says it's time to stop screwing around and pass the bill, and virtually every liberal member of the wonkosphere favors it as well. Ditto for church groups and civil rights groups. That's an enormous amount of firepower, and that's why, despite all the last-minute posturing and kvetching and preening, I think this bill is going to pass. In the end, that's just too much pressure to bear. Nancy Pelosi is going to get her 218 votes.

But it'll be close! If you haven't called your member of Congress, do it today. For a full list of congressional names and phone numbers, go to Congress.org. Type in your representative's name and it will pop up an information page that includes a phone contact. Don't know who your representative is? Enter your zip code and it will tell you.

The Problem With CDS, Cont'd

Yet more wankery about credit derivatives.

| Fri Mar. 12, 2010 1:21 AM EST

Yesterday I suggested that credit default swaps might make financial markets inherently less stable. If a bond issuer defaults on, say, a $10 million bond, the buyer of the bond is out $10 million. However, if a hundred people buy CDS protection on that bond, then when the bond defaults the sellers of CDS are out $1 billion. A $10 million event has turned into a $1 billion event. During an economic contraction, when there are lots of defaults, this has the potential to spark a full scale panic.

But is this a real problem? It's obviously not a problem for the buyers of CDS, who all make a bunch of money in the event of a default. But the sellers are a different story. During the financial bust of 2008, AIG, which had sold billions of dollars worth of CDS protection that it couldn't pay off, went kablooey and had to be bailed out by taxpayers. That's a problem.

Felix Salmon, responding to yesterday's post, notes that following the meltdown of 2008, "there isn’t a company in the world — not even Berkshire Hathaway — which can write CDS protection without having to put up collateral." And if new regulations put CDS on open, tradable exchanges, that will make collateral requirements even more standard. That's all good. Then he says this:

But the most important thing to note is that the true villain here is not CDS so much as it is leverage. If I buy a bond and it goes to zero, I lose money, but there are few systemic consequences. If I’m a leveraged institution, however, and I bought that bond with borrowed money, then the consequences can be dire. Writing CDS protection is essentially the same as buying a bond, and writing CDS protection while putting no money down — as AIG did — is just as dangerous as buying a bond on zero margin.

....Sensible CDS regulation can and should, then, put tight limits on how much leverage a net seller of credit protection can be allowed to have. And by all means, if you want to keep things symmetrical, apply the same limits on how much leverage a bond investor can be allowed to have. But the CDS market is more dangerous, just because it’s so much bigger.

Felix, you had me at "leverage"! But now I have two more questions. First, how likely is it that tight leverage limits will be placed on sellers of CDS? Right now, market discipline is taking care of things, but as memories of 2008 fade that won't be enough. And I don't think leverage limits on CDS sellers are part of either the House or Senate reform bill, are they?

Second, one of the benefits of the CDS market is that it provides liquidity and price discovery. As Felix says, "The CDS market worked, during the crisis, even as the market in corporate bonds failed: bonds weren’t pricing, and CDS were....People will invest in bonds if they believe they can exit their positions when they want. And the existence of CDS makes exiting a bond position much easier than it ever used to be — which in turn makes the bond market much more efficient. If you banned CDS, the price of credit would surely rise."

But to a large extent, the superior liquidity and price discovery of the CDS market is attributable to its greater size, which in turn is attributable to leverage. If you tightly limit leverage, don't you also constrain the size of the CDS market? And if you do that, will it still provide any noticeable liquidity benefits compared to the market in the underlying securities themselves?

So I'm still on the fence about this. However, for a more full-throated takedown of the CDS market, see the full-throated Dean Baker here. He doesn't believe it's likely that the CDS market will ever be properly regulated, and even if it is he doubts that the benefits of CDS outweigh their risks. And that's not even to mention the role of CDS in the great synthetic CDO debacle. What kind of regulation would it take to put a permanent end to that?

Grammar Police

Go ahead, make my day.

| Thu Mar. 11, 2010 6:39 PM EST

Ezra Klein:

Like most bloggers, I'm not too fond of e-mails correcting my grammar.

Really? I like getting emails about grammar and spelling. I mean, don't be a dick or anything, but if there's a mistake to be corrected or a usage issue to be debated, bring it on. We strive for linguistic greatness around here.