Kevin Drum

The Fed's Legacy

| Thu May 28, 2009 12:53 PM EDT

Ezra Klein writes about the federal response to the banking crisis:

Recently, I asked an administration official which government program we'd remember as making the most difference in averting catastrophe. Where will the history books place the credit?

"It'll be the Federal Reserve," he replied. "It'll be their decision to increase the size of their balance sheet from whatever it was before the crisis to whatever it is now." The Fed's decisions, of course, have attracted relatively less press coverage, both because the Federal Reserve doesn't speak to the press as often as the Treasury Department and because new Federal Reserve policies don't spark tiffs with the Congress, or the Republican Party, or outside economists. As such, the Fed is a bit harder for reporters to write about. But there's some evidence that it will be Ben Bernanke, rather than Tim Geithner, who our children — at least our nerdier children, the ones who study the recession of 2009 — will read about.

I don't think there's any question that this is right.  Both TARP and the stimulus bill were important, but the trillions of dollars in alphabet soup programs from the Fed have dwarfed them both.  Their relative obscurity in the mainstream media, however, probably has less to do with the Fed's low profile or lack of political fireworks and more to do with the fact that these programs are just really, really hard to describe in understandable terms.  It's not impossible to explain the impact of term lending facilities or guarantees of the commercial paper market, but it's a helluva lot harder than explaining a bank bailout or a hundred billion dollars in infrastructure spending.

Regarding Bernanke, though, it's well to remember Richard Posner's pithy summing up of his performance: "He is like a general who having been defeated in battle because of his errors manages the retreat of his army competently."  I'm still not sure that even the retreat was managed all that competently — there might well be additional financial shoes to drop over the next year — but even if it turns out that the worst is behind us, both of these sides of Bernanke's crisis management are part of his legacy.  It's still not clear what the history books are going to say about Bernanke and his Fed.

Advertise on MotherJones.com

Tough Talk on Settlements

| Thu May 28, 2009 11:55 AM EDT

I missed this yesterday:

Rebuffing Israel on a key Mideast negotiating issue, Secretary of State Hillary Rodham Clinton said Wednesday that the Obama administration wants a complete halt in the growth of Jewish settlements in Palestinian territory, with no exceptions.

....The administration has communicated its position "very clearly, not only to the Israelis, but to the Palestinians and others, and we intend to press that point," Clinton said in an appearance at the State Department with Egyptian Foreign Minister Ahmed Aboul Gheit.

I don't have a lot to say about this, aside from the fact that it's impressively tough rhetoric coming from an American administration.  I wonder if they can stick to it?

Regulatory Reform

| Thu May 28, 2009 12:27 AM EDT

The Washington Post reports on the Obama administration's plans for regulatory reform of the financial industry:

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

....Senior officials [also] favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds.

....The new [bank] regulator would assume responsibility for the safety and soundness of banks, currently divided among the Fed and three other agencies: the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. The OCC and the OTS would probably disappear, while the Fed and the FDIC would retain other responsibilities.

For what it's worth, I'd say that having a single bank regulator is long overdue.  The current structure not only doesn't make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom.  It's also a problem for big banks, which end up under the regulatory authority of multiple agencies.

The "systemic risk regulator" I'm less enthused about.  It's not necessarily a bad thing, but it's not clear to me that it would have done much to prevent the asset bubble of the past decade.  After all, the problem there wasn't the lack of a central regulator, but the simple fact that no one felt like there was a lot of risk in the system in the first place.  Regulating derivative markets may be a good idea, but the real issue isn't giving the Fed additional powers, it's getting it to take systemic risk seriously in the first place.

In any case, I'll repeat something I said earlier: specific regulations are all well and good, but I'd sure like to hear first what general principles are guiding these decisions.  My picks are (1) stronger limits on leverage, wherever and however it occurs, (2) a stronger commitment to countercyclical policies, and (3) a little more sand in the gears.  These might be the wrong principles to choose, but if they are, I'd like to hear which ones are right before a tidal wave of regulations comes heading down the pike.

The Banking Crisis Revisited

| Wed May 27, 2009 7:17 PM EDT

In an interview with Peter Baker, Bill Clinton says that although he regrets not regulating derivatives more strictly, he doesn't think that repealing the Glass-Steagall Act and allowing commercial banks to merge with investment banks was a big cause of our financial meltdown:

On the Glass-Steagall, I’ve really thought about that because No. 1, nonbank banking was already a major part of American life at that time. Letting banks take investment positions I don’t think had much to do with this meltdown. And the more diversified institutions in general were better able to handle what happened....I believe if you look at the blurring of the lines which already existed before that bill was signed — the bill arguably gave us a framework, at least, for which this process, which was happening anyway, could be regulated. So I don’t think that’s such a good criticism.

I think actually, if you want to make a criticism on that, it would be an indirect one; you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem because the bigger something is and the newer it is the harder it is to manage.

I think this is roughly right.  And frankly, even the "indirect" criticism that repeal of Glass-Steagall produced a glut of banks too big to fail seems a little hard to swallow.  After all, even if Citi and Bank of America had remained purely commercial banks they still would have been too big to fail.  Hell, Bear Stearns, a modest sized investment bank, was too big to fail.  In the event, I doubt very much that Glass-Steagall had much if anything to do with our banking disaster.

On the other hand, I've also been thinking a lot about the financial meltdown of the past two years and wondering how much of what we think we know is really true anyway.  Structured finance, for example, has gotten a lot of blame for the crisis, but Dean Baker argues persuasively that derivatives and financial engineering didn't really have much to do with it.  It was purely and simply the result of a housing bubble, and the size of the collapse and the ensuing recession are pretty much what years of academic research predicts given the size of the price runup.  You just don't need anything more to explain it.

In a similar vein, Jim Hamilton has suggested that if you model the 2007-08 runup in oil prices you get pretty much the recession that we got.  And James Surowiecki points out that the IMF's estimate of capital shortages in the American banking system isn't actually as large as a lot of us have been thinking — and the market seems to agree.  Bank stocks have been rising since early March, and after the stress test results were announced banks started raising startling amounts of private capital almost immediately.

What else?  John Hempton has argued that the FDIC's takeover of Washington Mutual, which was responsible for at least part of the flight of private capital from the banking sector, was an act of unwarranted panic.  Recent events suggest he was right.  Likewise, it turns out in retrospect that the collapse of Lehman Brothers wasn't quite the catastrophe we thought it was at the time.  Rather, it was panic in the wholesale funding markets caused by Reserve Prime breaking the buck — an event related to the Lehman collapse but by no means the same thing.

None of this is to downplay what happened.  Fannie and Freddie and Bear and Lehman and AIG really did all collapse.  The Fed really was forced to intervene in financial markets in unprecedented ways.  The banking system really did require a lot of recapitalization.  Exports really have dropped like a stone.  The global economy really is shrinking for the first time since the Depression and trade imbalances remain stubbornly high.

But here's the weird thing.  We're at a point where one of two things will happen.  Either we're close to bottoming out, as many people seem to think, which will mean that the pessimists weren't really right.  The biggest asset bubble in the past half century will have caused a bad recession but nothing worse.  Alternatively, the pessimists are right and this is just a short breather.  The worst is yet to come as home loans continue to reset, trade balances stay out of whack, consumption remains sluggish, and the world economy remains sensitive to further disasters — disasters that are almost certain to come sooner or later.

So what's my point?  I'm rambling and I might not even have one.  Except for this: I'm not sure that even the people who have been right about all this stuff have been right.  I'm not sure that anyone has been right.  Something doesn't add up, and I can't quite figure out what it is.  But who knows?  Maybe I'm just doing the equivalent of adding in decimal when I should be adding in octal.  Or something.  All I can say is, things haven't unfolded the way I've expected — or the way a lot of other people have expected — and I'm not sure what that means.  Either the worst has been averted or the worst is yet to come.  You can vote in comments.

ba-ROCK and so-toe-my-OR

| Wed May 27, 2009 2:31 PM EDT

Bob Somerby reads two front-page profiles of Sonia Sotomayor and reports back:

In the Times, Sotomayor is a person who is also Hispanic. In the Post’s formal profile, Sotomayor’s ethnicity is the headlined focus. Perhaps unsurprisingly, Goldstein’s focus on ethnicity features a peculiarly trivial, unflattering selection of anecdotes and recollections.

Meanwhile, via Steve Benen, I see that immigration zealot Mark Krikorian is fighting the good fight against pronouncing her name correctly:

So, are we supposed to use the Spanish pronunciation, so-toe-my-OR, or the natural English pronunciation, SO-tuh-my-er, like Niedermeyer? [Following up the next day:] Deferring to people's own pronunciation of their names should obviously be our first inclination, but there ought to be limits. Putting the emphasis on the final syllable of Sotomayor is unnatural in English [...] and insisting on an unnatural pronunciation is something we shouldn't be giving in to.

You know, I'm lousy at pronoucing non-English words.  If you want a nicely rolled R, look elsewhere.  But so-toe-my-OR?  Give me a break.  A five-year-old can do that.  Just like we all got used to pronouncing the president's name ba-ROCK.

This is going to be a long couple of months.

Can the Mayo Clinic Save Healthcare?

| Wed May 27, 2009 1:28 PM EDT

McAllen and El Paso are very similar places: similar people, similiar diets, similar health profiles, both border towns only a few hundred miles apart from each other.  But healthcare costs in McAllen are almost twice what they are in El Paso.  What could possibly account for that?  Atul Gawande visited McAllen to find out, and ended up getting multiple answers from a group of doctors he went to dinner with one night.  Finally he got to the bottom of it:

“Come on,” the general surgeon finally said. “We all know these arguments are bullshit. There is overutilization here, pure and simple.” Doctors, he said, were racking up charges with extra tests, services, and procedures.

The surgeon came to McAllen in the mid-nineties, and since then, he said, “the way to practice medicine has changed completely. Before, it was about how to do a good job. Now it is about ‘How much will you benefit?’ ”

....The Medicare payment data provided the most detail. Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso, and were two-thirds more likely to see ten or more specialists in a six-month period....They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.

....“In El Paso, if you took a random doctor and looked at his tax returns eighty-five per cent of his income would come from the usual practice of medicine,” [a hospital administrator] said. But in McAllen, the administrator thought, that percentage would be a lot less.

He knew of doctors who owned strip malls, orange groves, apartment complexes — or imaging centers, surgery centers, or another part of the hospital they directed patients to. They had “entrepreneurial spirit,” he said.

....About fifteen years ago, it seems, something began to change in McAllen. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.

This comes via Ezra Klein, who didn't excerpt anything from the piece because he wanted to encourage everyone to click on the link and read the whole thing.  Obviously I'm not quite so high-minded myself.  Plus there's the fact that I have a dim view of human nature: most of you guys aren't going to click the link no matter how much I tell you to, are you?

But you should!  It really is a good piece.  "Overutilization" is a boring buzzword that Gawande breathes real life into.  If you want to know why American medicine should look more like the Mayo Clinic — and why it would be both better and cheaper if it did — turn off the House reruns and read Gawande instead.  And if you want a different perspective on the same issue, try reading Shannon Brownlee's Overtreated.  It's good too.

(OK, fine, keep watching House.  It's a great show.  Just don't use it as your template for what medical care should look like, OK?)

Advertise on MotherJones.com

China and North Korea

| Wed May 27, 2009 12:34 PM EDT

Is there a point at which China will finally tire of the antics of its North Korean neighbor and put its foot down?  Barbara Demick of the LA Times offers up a modest data point today:

North Korea's latest nuclear test raises the question of just how long the bonds forged between old communist allies will endure....Increasingly, China itself is questioning whether the relationship is worth the effort.

Within the Chinese intelligentsia there is a deep divide over how to handle North Korea. The Global Times, a newspaper with close party ties, Tuesday published a survey of 20 of the country's top foreign policy experts. It found them split down the middle — 10 arguing for tough sanctions against North Korea, 10 opposed.

It's not much.  Just a blip.  But I'll bet that even five years ago opinion wouldn't have been split much at all, and if it had it wouldn't have made it into the pages of a newspaper close to the party.  The times may be — slowly, subtly, silently — changing.

Headline of the Day

| Wed May 27, 2009 12:19 PM EDT

From the LA Times:

Protesters found to be a nuisance

Yes, I suppose they are, aren't they?

Do We Need More Think Tanks?

| Wed May 27, 2009 11:43 AM EDT

Douglas Holtz-Eakin, former CBO director and John McCain campaign advisor, wants to start up a new conservative think tank, a "Center for American Progress for the right."  Matt Yglesias, who works for the actual Center for American Progress, isn't impressed:

This seems pretty misguided to me. In particular, DHE needs to think harder about the fact that there are already well-resourced conservative think tanks with plenty of capabilities. Before CAP came on the scene, there really wasn’t a “Heritage of the left.” On the right, Heritage and AEI already exist. The problem they face is that the conservative movement, as presently constituted, is not prepared to accept anything other than “tax cuts” as a solution to anything. Consequently, they’re not really even prepared to accept the premise that other problems exist. Tax cuts can’t solve climate change, so there must be no such thing! Tax cuts can’t curb inequality, so there must not be a problem with growing inequality.

But there's another way to look at this.  After all, a decade ago conservatives would have said that liberals already had think tanks too: Brookings, the Ford Foundation, CFR, etc.  The problem is that they were the wrong kind of think tank: they may have leaned toward the left institutionally, but they weren't overtly partisan.  They weren't dedicated to a cause.

So liberals decided they needed more direct competitors to Heritage and AEI, and CAP was one of the results.  Likewise, although Holtz-Eakin may say his proposed think tank is CAP for the right, my guess is that it's really more a DLC for the right.  That's what the conservative movement needs, after all.  They have plenty of partisan, conservative think tanks at their disposal, but they've ossified so much that they're now as much a part of the problem as the Republican Party's special interest base itself.  What they need is a think tank that tries to move the party back toward the sane center, one that produces ideas beyond bashing gay rights, extolling endless tax cuts, pretending that global warming doesn't exist, and cheerleading the death of ever more people from central Asia.  They need a conservative DLC, and I'll bet that's what Holtz-Eakin really has in mind.

Fundraising Finale

| Wed May 27, 2009 1:50 AM EDT

Two things.  First, I want to thank everyone who contributed to our fundraising drive last week.  These donations really help, and even the small ones add up.  Second, if you didn't contribute last week, how about doing it today instead? 

Your contributions help keep our reporters at work (including me!), but we can only keep doing what we do if our readers deliver the financial support we need to stay on the story.  This is the final week of our fundraising drive, so if you can afford to part with a few dollars, click here to make a donation.  It's a quick credit card donation form, and if you contribute $35 or more you get a subscription to the magazine too.  Thanks!