Kevin Drum

Is the Geithner Plan Working?

| Thu Jul. 23, 2009 4:16 PM EDT

As I mentioned last night, big banks are handing out big paychecks again.  Matt Yglesias says this is all part of the plan:

The Obama administration didn’t want large financial institutions to fail. They also didn’t want to try to get congress to appropriate funds on the scale that would be needed to take the banks over, clean house, and recapitalize them publicly. What they came up with was a strategy of implicit and explicit guarantees designed to allow financial institutions to recapitalize themselves through profits. And big profits mean big paychecks. This is an ugly solution to the problem, but for whatever it’s worth it’s working.

That's true.  The idea that banks could be safely recapitalized via earnings was explicitly part of the Obama/Geithner plan.  And maybe this was safer than pessimists like me thought, since the two weakest banks, Citi and Bank of America, had already received massive federal guarantees on their toxic assets in addition to their TARP money.

Still and all, I'd caution that it's only working so far. The Geithner plan leaves the banking sector fairly weak, and while this is OK as long as things continue to improve, it could yet become a big problem if there's another shock and things take a turn for the worse.  So let's hope there aren't any more shocks.

Advertise on MotherJones.com

Chart of the Day

| Thu Jul. 23, 2009 2:27 PM EDT

Maybe you know this, maybe you don't, but generally speaking you can't sue your credit card company if you have a dispute with them.  The fine print in your contract says that all disputes have to be resolved by an arbitrator.  And not just any arbitrator: it has to be one chosen by the credit card company.  Probably one with a record of siding against the consumer 99.8% of the time.

But those days may be ending thanks to Lori Swanson, the attorney general of Minnesota.  She sued one of the two biggest arbitration outfits in the country last week and they caved almost immediately.  Within days they announced they'd no longer be taking new cases.

So what was Swanson's complaint?  Simple: it turns out the National Arbitration Forum had affiliated itself with a debt collection conglomerate, something that might have made them just a wee bit less than perfectly neutral in consumer debt disputes.  The affiliation was done through a chain of intermediaries to try and keep everything on the QT, but it was still there.  The chart on the right shows how it worked.  Here's the explanation from the court filing:

Accretive, Agora, Axiant, the Forum, and Mann Bracken form a complex web of companies that compose some of the largest debt collectors and arbitrators of consumer credit card debt in the country.

....In June 2006, principals of Accretive, LLC met in Minnesota with Edward Anderson and Michael Kelly, officers of the National Arbitration Forum....Among other things, Accretive promised the Forum that it could provide it with “[i]ntroduction to legal collections individuals” and stated that “we believe Accretive would be a great partner to help NAF become a billion dollar company.”

....Under the proposal, Cline’s company — Accretive, LLC — would acquire a 40 percent ownership interest in the Forum and the right to appoint two members to its board of directors. Accretive promised to play an “active role in landing new customers.”

....The Forum — aided by principals of Accretive — thereafter went to great lengths to concoct an elaborate corporate structure that conceals — but does not legitimize — the affiliations that undermine its claims of independence and neutrality. For example, for most of its existence, defendant NAF, Inc. operated as a standalone company. As part of the transaction between the Forum and Accretive, both companies created new companies that would conceal the affiliation between them. The Forum formed Forthright, and Accretive formed Agora. As a result, at no time is Accretive publicly disclosed as an owner of the Forum....In fact, the three defendants — NAF, Inc., NAF, LLC, and Forthright — effectively operate as one enterprise.

Italics mine.  Basically, a guy named J. Michael Cline, who owned a bunch of debt collection companies, put together a plan to secretly buy a stake in NAF.  Result: synergy!  NAF rules against the consumer and one of Cline's companies collects the debt.

There's plenty more like that if you plow through the rest of the complaint.  And needless to say, NAF claims that nothing shady was going on at all: their rulings would have continued to be completely fair and neutral regardless of who their partners were.  You can decide for yourself if you believe them.

UPDATE: There are two big arbitration outfits, NAF and the American Arbitration Association, and both have stopped taking new cases.  However, Swanson's office didn't sue AAA.  They only sued NAF.  The post has been corrected to reflect this.

California's Great Irony

| Thu Jul. 23, 2009 12:40 PM EDT

In the LA Times today, Harold Meyerson echoes a common complaint about California's two-thirds rule for approving tax increases and budget resolutions:

The most basic principle of any democracy is that of majority rule, with minority rights running a clear but close second. Simple though this precept may be, California seems to have gotten it backward. The budget deal that emerged from Sacramento on Monday was the result of minority rule — the consequence of a state Constitution that vests more power in the minority party than the constitution of just about any other state.

....Californians need to amend their state Constitution, in convention if need be, to end the practice of minority rule. Democracy — not to mention the future of the state — depends on it.

I agree, but I wonder if Republicans ever stop to think about how badly these rules have hurt them too?  Don't get me wrong: for various reasons, California would probably be a blue state these days regardless of whether we had a two-thirds rule or not.  But the fact is that Californians, like most people, are generally unfriendly to tax increases.  And yet they keep voting for Democrats anyway.  Why?

Well, why not?  Everyone knows the two-thirds rule will keep them from raising taxes, so if you like them for other reasons there's no reason not to vote for them.

But what if they could boost tax rates?  Then, basically, their bluff would be called.  They'd have to either raise taxes, thus pissing off a lot of people and giving Republicans a great campaign issue, or they'd have to leave taxes alone and take responsibility for cutting services.  There would be no Republicans to blame it on.  And guess what?  That might make Democrats quite a bit less popular.

Now, it's unlikely that anything could turn the California legislature over to the GOP in the near future, but in the past 25 years California has had only one Democratic governor — and we recalled him after five years in office.  We're not all that unfriendly to Republicans.  If Democrats had the power to raise taxes — and actually did it — we might become even less unfriendly toward the GOP.

In other words, even though the two-thirds rule is the only thing that currently gives Republicans any influence at all in Sacramento, repealing it might be their only long-term hope of ever taking back the California legislature.  Ironic, isn't it?

Where are the Witnesses?

| Thu Jul. 23, 2009 12:14 PM EDT

Question about Henry Louis Gates' encounter last week with Cambridge's finest: what's up with the witnesses?  The initial reports suggested there were half a dozen onlookers, but I haven't heard anything further about this.  It's hard to believe that no one has managed to round up at least a couple of them since Thursday.  Like, say, the neighbor who took this picture.  Have I just missed something?  Did I read the initial reports incorrectly?  Or what?

Anybody know?

Business and Healthcare

| Thu Jul. 23, 2009 11:14 AM EDT

Yesterday a reader emailed to ask whether the business community was supporting or opposing healthcare reform.  Well, as the Washington Post notes, the Chamber of Commerce recently came out against it while Wal-Mart has come out in favor:

Less noted has been the diversity of opinion among small and medium-size businesses. Many agree with the Chamber that a public insurance option would undermine the private insurance market and that requiring companies to provide coverage would impair job growth. Others say the current system is so broken that they are assessing whether to support the reform plans.

The wait-and-see approach that many businesses are taking — alternately skeptical and hopeful — is a further sign that the alliances that previously scuttled health-care reform may be scrambled this time around, not just in the health-care industry but also in the business world at large. President Obama and congressional Democrats face formidable obstacles to their reform efforts, but one factor in their favor is businesspeople who may not be as inclined as they were in the past to bring grass-roots pressure against reform.

This is probably about as good as we could have hoped for.  When the bullets finally start flying, it was always unlikely that either big or small businesses would be enthusiastically in favor of healthcare reform.  It's just not in their DNA, and the web of allies and lobbyists they're part of naturally works to keep them skeptical.  Still, the mere fact that they're divided, not rabidly opposed, demonstrates just how far things have come since 1994.  Whether that's enough to help deliver a few Republican and Blue Dog votes is hard to say, but at least it probably won't cost us any.

Ka-Ching!

| Thu Jul. 23, 2009 1:55 AM EDT

I'm glad to see that things are back to normal:

Wall Street, helped by improving profits, is on track to pay employees as much as, or even more than, it did in the pre-crisis days. So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year.

....Some analysts and investors had especially sharp words for Wall Street rival Morgan Stanley, which reported Wednesday that it had set aside $6 billion so far this year for compensation expenses even as it recorded its third straight quarterly loss. In reporting its second-quarter results, Morgan Stanley said it lost $1.26 billion, after accounting for one-time charges including an $850 million expense related to paying the government back after its bailout. Still, the company set aside $3.9 billion in compensation expenses, representing 72 percent of its revenue for the quarter.

As long as bankers are paid obscene salaries and bonuses, all is right with the world.  I'm sure we'll all rest easier tonight knowing this.

Advertise on MotherJones.com

Press Conference Liveblogging

| Wed Jul. 22, 2009 8:30 PM EDT

Half an hour into tonight's press conference Barack Obama has answered a grand total of three questions.  This is not a good performance.  He really needs to pick up the pace and make his answers crisper and more comprehensible.

UPDATE: Aside from the rambling nature of his replies, I don't think Obama has been good on substance either.  His opening statement had a little bit of good stuff about healthcare security, but he's spent the vast bulk of his time on deficits and cost cutting.  That's just not a good sales job.

UPDATE 2: All done.  I'm curious to hear what other people thought, but this really struck me as nowhere near his usual performance.  Obama avoided giving direct answers, rambled a lot, kept interrupting himself with asides, and didn't explain things in terms that ordinary viewers were likely to understand.  He's supposed to be the communicator-in-chief, but I wouldn't be surprised if a lot of people came away more confused than they were when they tuned in.  Bottom line: There were bits and pieces that were fine, but overall I'd give it a C-.  Other comments?

Bending the Curve

| Wed Jul. 22, 2009 7:16 PM EDT

Brad DeLong tries to figure out why the Congressional Budget Office has been so pessimistic about the potential for healthcare reform to reduce long-term costs:

The problem, I think, is that the CBO has a category for cost control but no category for getting system incentives right. It is a budget office, after all, not a philosopher-king office. The problem, however, is that it is the only arbiter out there. And there appear to be a lot of members of congress who think controlling costs = getting system incentives right.

I don't think we should care much about costs: it might be in the future we want to spend a lot on health; it might be that in the future we develop magic treatments and so want to spend a lot less. If we get the system incentives right, then whatever we spend on health will turn out to be the right thing to do.

There are useful things we can do that will help control costs.  Better IT, for example.  Lower administrative overhead.  Comparative effectiveness research.  For the most part, though, these are one-shot deals.  They're worth doing, but you only get to do them once.  And once they're done, costs keep going up.  They go up from a lower base, but they still go up.

Then, as Brad says, there are things that help align incentives better and (maybe, possibly) bend the curve of rising healthcare costs downward.  Moderate copays, for example, can help reduce unnecessary doctor visits.  Cheap (or free) access to preventive medicine can keep chronic ailments from turning into expensive acute crises.  Paying doctors straight salaries probably promotes more efficient use of expensive services than either capitation or fee-for-service. Universal coverage can prevent overuse of expensive emergency room services.  A more sensible malpractice regime might reduce defensive medicine (and more fairly compensate victims of genuine malpractice in the bargain).

But in the end, both as individuals and as a society, we're going to spend as much on healthcare as we feel like spending.  And why not?  We should spend our incomes on whatever we value the most, and for a lot of us that's healthcare.  If that turns out to be 30% of GDP, then it's 30% of GDP.

And that's what will eventually bend the curve in healthcare costs: when we all finally decide that we're spending enough.  Whether we're doing it as individuals, as employees with healthcare insurance, or via tax dollars, we'll get serious about controlling costs when we decide that costs have gotten too high.  Until that happens, though, well-designed incentives may make things more efficient but won't appreciably reduce the rise in total spending.  I don't think politicians can afford to say that in public, but it's probably true.

Time to Leave the Island

| Wed Jul. 22, 2009 5:04 PM EDT

Rich Miller of Bloomberg reports:

Global investors give Federal Reserve Chairman Ben S. Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend.

Well, I don't favor it — and this has nothing to do with whether Bernanke has done a good job or not.  Just look at a couple of the quotes Miller dug up.  "He's the best, maybe around the world," says one guy.  "If he weren't renominated, it could have potentially very serious and severe repercussions on the stock market and the economy," says another.  Spare me.

Look: Bernanke isn't indispensable, any more than Alan Greenspan or Paul Volcker or William McChesney Martin were.  But everyone thought they were indispensable at the time, and that's a dangerous way to think about these guys.  Putting Fed chairmen on a pedestal, as the financial community does routinely, breeds both complacency and insularity.  In the long run, it's bad for business.

Wall Street needs to calm down and learn that being Fed chairman for a few years doesn't make someone superhuman.  The world won't end if Bernanke is replaced by one of the other dozen or so highly qualified candidates available, and Obama should take the chance to demonstrate this when he chooses Bernanke's replacement.

How to Be a Very Serious Person

| Wed Jul. 22, 2009 2:23 PM EDT

If you want to be a Very Serious Person in the foreign policy wonk community, Stephen Walt lays out the rules of the road here.  I'm not sure he's correct about #5 and #6, but the others sound about right.  Via Dan Drezner.