Sat, 21 Nov 2009

Fixing banks -- Will it work?

I'm not really sure anyone remembers this, but we had a bit of a financial crisis last fall. Remember that? Banks too big to fail, but they failed anyway? Financial armageddon avoided via all-weekend meetings in New York and DC. Sunday evening announcements about who'd get billion-dollar bailouts the next day? Good times, those.

What's funny about it is that though we bailed out the banks, we didn't create any way to prevent banks and hedge fund operators from doing the exact same thing all over again. We added some conditions to some of the bailout money. Some of these have been honored in the breach, with executives at several bailed-out banks and investment companies awarding themselves a few billion dollar's worth of bonuses.

So it's with a mixture of pleasure and anxiety that I read that financial reform bills are making their way through both the House and the Senate. If congressional battles over health care reform ever get off the front pages, you'll be reading about attempts to reassemble a regulatory apparatus to protect our financial system from its excesses. That is, a year after the colossal bailouts of last fall, it's finally time to expend some effort to make sure they don't have to happen again.

Last week saw the presentation of an ambitious bill by Senator Christopher Dodd (D-CT), providing a kind of counterpoint to a House bill to do more or less the same, championed by Rep. Barney Frank (D-MA). The bills differ in important details, and both are fairly complex pieces of legislation. I'm optimistic that at last some of these issues are being discussed, but anxious because it doesn't seem to me that the solutions on the table are likely to be effective.

The financial debacle of last year was attributable not only to out-of-control financial speculation, but also to unconscionable lending practices necessary to feed that speculation. That is, investors were making tons of money speculating with derivatives based on mortgages, and so that drove up the demand for mortgages past the supply of safe borrowers. But rather than accept that limit, Wall Street geniuses invented arcane math that persuaded them they could safely ignore common sense.

(And yes, you'll hear people blame bad lending on the Community Reinvestment Act, which is supposed to make loans more available in poor neighborhoods, or on Fannie Mae and Freddie Mac, the mortgage giants designed for a similar goal. But there are few facts to support that perspective. Most of the troubled lending was at institutions not covered by the CRA, and Fannie and Freddie lost market share during the heights of the bubble, since their loans were held to a higher standard than loans from private brokers and lenders.)

In addition to forcing the supply of loans to tinker with, the other thing banks and hedge funds did was to increase the leverage of their investments. By a variety of supposedly-sophisticated strategems, investors figured out ways to parlay very small bets into very big investments. If you only have to put up a million dollars in order to bet a billion dollars, then if you win, you're a genius.

The problem is that leverage works great in reverse, too. That is, if you lose your bet, you don't have the billion to pay back and you're in deep trouble. In a nutshell, that's what happened last fall to AIG, Citibank, Lehman Brothers, Merrill Lynch and all the rest.

Both the Frank and Dodd bills attempt to address questions of leverage. They both allow the regulating agencies (they disagree about who that agency is) to set standards for leverage, and allow intervention of various kinds if the standards are violated. This is well and good, but it's hard for me to imagine it working well in practice. Mostly these regulations seem to be an invitation for firms to hire even more engineers to invent new forms of credit derivative designed to mask the size of the original investment.

Part of the reason the regulations are written like this is that Dodd and Frank both want to leave the essential business of "financial innovation" untouched. Both bills seem motivated by the idea that this is something valuable and worth protecting. Thus there are no provisions for confining derivative purchases to certain exchanges, where they can be regulated directly, as we do now with stock purchases. What this means is that the laws will be in place for regulating leverage, but the only way to actually do it is for the regulators to stay abreast of all that innovation, which seems exhausting and improbable.

But really, who does financial innovation serve? The evidence seems fairly clear that it mainly serves to fuel the casino economy of Wall Street and has little or nothing to do with the real economy of goods and services.

The bills also fall a bit short on the consumer end. There are provisions for increasing oversight, but some of the simplest solutions are off the table. For example, in September, the Obama administration abandoned a proposal to have banks offer consumers "vanilla" versions of their products. A vanilla checking account would be a basic account, with no "overdraft protection" that charges you $39 when you bounce a check, and a vanilla loan wouldn't have hidden interest rate changes. Unfortunately, banks make billions by hiding these kinds of scams, so those simple reforms disappeared in favor of doing the same thing with audits and regulatory scrutiny.

I'm in favor of the simple-but-crude school of regulation. I'd rather have a simple system that perhaps makes innovation harder but is safe over a more complicated regulatory system that depends on intrusive auditing and a sophistication race between regulators and bankers. It would be irresponsible not to address the problem of restoring trust in our financial markets, but as they say, humility is a virtue.

12:56 - 21 Nov 2009 [/y9/cols]

Wed, 18 Nov 2009

Letter from the Mayors

In my mailbox this morning. They're exactly right.

The one quibble I have is that there's nothing wrong with binding arbitration. The binding arbitration rules in, for example, Connecticut are quite clear about what are the proper reasons an arbitrator can use to rule one way or the other in a dispute. It's possible to draw those rules to favor unions, and it's possible to draw them to favor management. We should adopt binding arbitration, and then argue about what are the proper grounds for a ruling, but that's a far smarter course than just throwing the whole idea out the window.

Coalition of RI mayors: Best medicine for RI is smart state funding policy

Prescribing a "crash diet" to 39 people you have never met will make some more healthy, make others sick and will kill a handful. Doctors don't prescribe in this way, for obvious reasons. Instead, they base their recommendations on detailed individual histories and a strong understanding of the symptoms. They know who they're dealing with, they see what's wrong and they follow the best practices for fixing the problem.

Everyone knows that Rhode Island's economy is not well. Recently, we have seen signs of courageous and incisive state and municipal leadership, for instance, on education and pension reform. However, when it comes to overall state funding policy, many elected officials - including the governor - are still prescribing a blanket crash diet for Rhode Island's 39 cities and towns. This is not a way to lead our state back to fiscal health. Rhode Island's 39 municipalities have dramatically different fiscal profiles. Only by taking a detailed history can we understand how they got this way and how we might go about fixing it. A history of poor fiscal management in some of our municipalities has resulted in wild deviations between similar communities: some have lifetime Blue Cross insurance for teachers and their spouses while others do not; some have as much as 50 percent more police officers per capita than others; some have millions of dollars more in pension liabilities than others.

Binding arbitration, including the proposed teacher contract legislation, is an example of state policy that will continue to widen the gap between efficient and inefficient communities. These inequities were arguably brought on by the cities and towns themselves or have been the result of wayward binding arbitration decisions, which favored labor unions. But the state is not blameless in that it has, for decades, failed to incentivize good fiscal behavior - indeed it has often done just the opposite. And in other important respects, gross fiscal inequities have been created between similar cities and towns by poor state policy dating back several decades. Three attributes mark good governmental funding policy at any level: 1) the funding is equitable; 2) it's transparent; and 3) it rewards the right kinds of behavior. Our current state funding policies bear none of these hallmarks.

Anyone who feels compelled to weigh in on the issue of state funding to cities and towns should at the very least have a fundamental understanding of each community's budget and should be well versed in the two major funding policies that determine how 75 percent of the shrinking pot of state aid, millions less than the often reported $1.1 billion, is distributed. Many taxpayers could not name these two funding sources. They are the education funding policy, which distributes $700 million to school districts and the "vehicle excise phase out" funding policy, which allocates $140 million to municipalities. More troubling, most local and state elected officials as well as the media would not be able to explain how these funding programs work: that is, what rules govern the distribution of funding to Rhode Island's cities and towns. Efforts to regionalize municipal services will be much more effective if these two funding policies are reformed.

Every Rhode Islander should adopt the slogan, "My student is my student! My car is my car!" State funding for education to any municipality should be based on the actual students in its district schools. State aid in a vehicle tax program should be based on the assessed value of the cars owned by the citizens of a city or town. Believe it or not, this is not how it works in Rhode Island. As a result, we have inequitable distributions of revenue to cities and towns, to the tune of tens of millions of dollars going to the wrong places.

Consider this: a main reason that Rhode Island is one of the highest spending and lowest performing states in the nation on education is because we fail, time and again, to get the right amount of money to the right places at the right time. A strong education funding policy would be based on individual student need, establishing the base level of state support every student requires and providing additional support through an equitable and transparent formula for special needs that require costly additional services. This measurable amount of funding would follow a child to any Rhode Island public school parents choose. Only in this way can we get taxpayer's dollars where they were intended to go. Only in this way can we avoid the practically comic system under which we now live, where a district can continue to receive tens of millions of dollars for thousands of students who no longer attend its schools or, in many cases, even live in the district, while another district can face an influx of costly students and not receive one additional dime in state aid. Only in this way can the state stop providing fiscal incentives for bad results like high dropout rates.

Likewise, an intelligent vehicle tax policy would be based on one state vehicle tax rate. State policy aside, a 2004 Ford Explorer parked in a driveway in Barrington is worth the same amount of money as when it is parked in a driveway in Warwick. Currently the state allocates funding to communities based on vehicle tax rates, frozen in 1998, rewarding communities with the highest tax rates and penalizing communities with the lowest tax rates. Depending on where the Explorer is registered cities and towns can receive checks as low as $59 or as high as $460. Some may call this policy property tax relief but no one can defend it as fair tax relief. That this has to be explained reveals what a mess the state of Rhode Island has gotten itself into. This is not about pitting one community against another. As municipal leaders we are ready to live with a state system that is fair and well thought out. That system would aid us based on who we, as communities, really are, rather than based on who we were a quarter century ago. Fair and well thought out. That's the best medicine. Prescribe it to us and we'll take it, and live with it and make it work.

Daniel J. McKee Mayor of Cumberland This letter was written for a coalition of the following officials supporting funding-policy reform: Lincoln Town Administrator T. Joseph Almond Warwick Mayor Scott Avedisian Providence Mayor David N. Cicilline Pawtucket Mayor James E. Doyle Smithfield Town Manager Dennis G. Finlay Cranston Mayor Allan W. Fung Tiverton Town Administrator James Goncalco North Smithfield Town Administrator Paulette D. Hamilton Westerly Town Manager Steven T. Hartford East Greenwich Town Council President Michael B. Isaacs North Providence Mayor Charles A. Lombardi Central Falls Mayor Charles D. Moreau Johnston Mayor Joseph M. Polisena

08:19 - 18 Nov 2009 [/y9/no]

Sat, 14 Nov 2009

Are they serious?

Last week, Congress finally passed an extension to unemployment benefits, after about five weeks of debate in the Senate. The final vote in the Senate was 98-0, but the bill had to overcome three Republican filibusters along the way. In other words, zero Republican Senators were brave enough to vote against the bill, but dozens cooperated in delaying and stalling it.

In other Congressional news last week, Republicans in the House trumpeted a new bill to be their version of health care reform. It's an assemblage of some old ideas: limits on malpractice lawsuits, eliminating barriers to interstate competition in health insurance, promoting healthier lifestyles, and creating "risk pools" where people who have been denied coverage for pre-existing conditions can have a second try.

The problem, of course, is that few of these ideas have anything like evidence in their favor, even if some of them sound plausible. There are states with lots of insurance competition, states with lots of joggers, and also states with strict limits on malpractice lawsuits, and you know what? Medical costs routinely drive people into bankruptcy in those states, too. Essentially, this plan is good for healthy people who already have insurance, but no one else.

The Congressional Budget Office agrees with me. They scored it, as they have scored all the Democratic plans, and according to their score, the plan would be more expensive, and cover fewer people than the Democratic plan it's meant to "improve" upon. According to the CBO, about 17% of Americans don't have coverage, and after ten years of the Republican plan, they predict that about 17% of Americans still won't be covered.

The CBO report essentially tells us that the Republicans are not serious about solving this problem, just as the legislative shenanigans in the Senate showed us they are not serious about providing unemployment benefits to people who need them. These are serious problems. Our economy, our government and our families are being devastated by a health care crisis brought on by decades of spiraling prices. We also face two wars, a maimed economy and the prospect of drowning our coastal cities before the century is out.

Really, "serious" hardly begins to describe it, but in the face of all that, we have a minority party on the national level that seems utterly uninterested in anything except maneuvering for partisan advantage. (Abetted, of course, by a small number of Democratic senators and representatives who imagine that "centrism" is a higher good than addressing actual problems.) This is simply not a serious way to govern.

At the state level, the picture isn't really so different, in some ways. Our state is facing a nearly unprecedented fiscal crisis at both the state and municipal levels, brought on by years of poor policy choices combined with the tanking economy. And yet, there are a large number of legislators who simply are not serious about addressing it. The problem here is that party labels are little help in understanding the action.

So here's my guide to telling whether someone is serious about solving our problems, or if they're just posturing. First test: if they say anything like "we can't raise taxes" -- they're not serious.

Now I don't like to pay taxes any more than anyone else. But people who say stuff like this want you to ignore the fact that -- even in the face of a still-escalating budget crisis -- we're still planning to cut the taxes of our wealthiest citizens next year. No joke. In fact, your leaders are planning a more expensive cut this coming year than in the past year, but it only benefits people who earn more than about $200,000 a year.

Second test: If they talk about "spending less" and won't say how, they're not serious. You'll hear a lot of talk about unions and labor contracts, but little of that is serious, either. You can only get just so much blood from any particular stone. I have no doubt the Governor will try to squeeze more from state employees, but we're looking at deficits of around a quarter of the entire state payroll. State employment is already lower than it's been in a couple of decades. Can it go lower while we still pretend we're not cutting services?

Third test: watch out for the "big idea." We've seen lots of magic bullets proposed and passed -- early retirements, Medicaid waivers, off-books borrowing -- and their record is pretty mixed, at best. Putting your hopes in a single leaky basket is another sign of not being serious. Over the past week, the Governor has floated the idea of selling the Central Landfill in Johnston, and Rep. Douglas Gablinske (D-Bristol,Warren) suggested selling our bridges. Privatizing these state assets would give the state a shot of cash, but money doesn't fall from the sky. A private bridge operator would immediately establish or raise tolls to pay for their investment. A private landfill operator would either raise the rates cities and towns pay or dump so much trash so quickly the landfill fills up. Long term, the only people who would benefit would be the new owners, and the Wall Street financiers who always seem to net millions off deals like these.

Our state took several years to make this catastrophe. We did it with policies and laws that were popular at the time, but that have not served us well. Getting out of trouble will be long, slow work. I do not believe the task is hopeless, but it will take serious work and serious people to carry it out, not facile analysis or magic bullets.

16:00 - 14 Nov 2009 [/y9/cols]

Fri, 06 Nov 2009

Too much forgetting allowed

In 1660, Mary Dyer was hanged on Boston Common. Her crime? Being a Quaker. Her execution was part of a tragic and shameful chapter in our nation's history. So why is there a statue of her in front of the Massachusetts State Capitol east wing? Proponents of removing "Providence Plantations" from our state's name might ask themselves this question.

The statue was erected in 1959, and it wasn't put there because the Massachusetts legislature approved of her execution. No, it was put there because legislators there thought it important that people remember the example of her courageous life, her devotion to freedom of conscience (she traveled back to Massachusetts in protest of the law and was executed), and the heinous laws under which she was put to death.

After all, what, is memory for? It's not just for wallowing in nostalgia; it's the way we avoid making the same mistakes over and over again.

As for ourselves, so also for our society. Our nation's history is one of mistakes made and rectified -- of lessons learned and addressed -- sometimes with statuary, and other times with court decisions, regulations and laws. Why do we regulate barbers, pharmacists, and insurance companies? Because of bad experiences we've had with head lice, quack remedies, and insurance fraud.

We sometimes forget these lessons, and guess what happens then? We get to learn them again.

In the name of "modernization", the 1990s saw the almost complete disassembly of the financial regulatory structure erected in the wake of the Great Depression. The Glass-Steagall rules separating investment banks and insurance companies from commercial banks were eliminated, interstate banking was allowed again, and rules regulating commodity, energy, and financial investments were loosened or erased. And presto, we got a series of speculative bubbles -- in tech stocks, energy, and credit derivatives -- the last of which maimed the economy of the entire world, with as yet no certainty it can be rebuilt.

In other words, there is altogether too much forgetting allowed in American public life.

Last week, one of the many bills passed in the Assembly's mad two-day session called for a referendum in 2010 on whether to remove "and Providence Plantations" from the state's official name. The argument is that this refers to a shameful episode in our state's past and that it should therefore be excised.

Now it is true that "Providence Plantations" originally referred to Roger Williams's grand experiment with freedom of conscience -- the cause to which Mary Dyer sacrificed her life. There is nothing shameful about that. In fact it's a source of honor, and we should all be grateful that the tenet became a principle of our nation's laws. (Plus, Roger Williams is one of the few historical figures I know about where learning more about him has led to more respect rather than less.)

Less fortunately, it is also true that slavery was an important part of colonial life here. By 1755, over 11% of the state's population were black slaves. Slaves were widely used in agriculture and as household help here, just as in other parts of the colonies. Bristol and Newport merchants played an outsize part in the slave trade, too. Sad to say, there is plenty shameful about this part of our history, and to many people, the word "plantation" conjures up associations with slavery. But one can agree with that while still not wanting to eliminate the word from our lives.

Senator Harold Metts said this change will "pay some respect to our ancestors who were forced into slavery, and will stop serving as a constant reminder to present-day Rhode Islanders of our painful past." He may, perhaps, be right about the second part, whether you take the word to refer to the original settlement, or to the slave-holding plantations that came to exist here. But I say instead that it is precisely because it is a constant reminder that it should be preserved. It's the preservation of reminders like this that show respect, not the elimination of them.

Mary Dyer's likeness sits in front of the Massachusetts capitol not because people wanted to forget, but because it's important to remember. We honor her sacrifice by commemorating it with the statue -- and with the first amendment.

By all means, let us move on from the ugly racial divisions of our past. It will be a great day when race becomes irrelevant to our society. But let's move on in our thoughts, our actions and our laws, not by forgetting, denying, or erasing the shameful parts of our nation's history. When the referendum rolls around a year from this November, I'll vote no -- to preserve our state's original name, and all the memories of its history that name evokes.

15:49 - 06 Nov 2009 [/y9/cols]

Mon, 02 Nov 2009

Imagine

Orrin Hatch on the dreadful scenario of passing health care reform:

"And if they get there, of course, you're going to have a very rough time having a two-party system in this country, because almost everybody's going to say, 'All we ever were, all we ever are, all we ever hope to be depends on the Democratic Party,' " Hatch said during an interview with the conservative CNSNews.com.

"That's their goal," Hatch added. "That's what keeps Democrats in power."

That is, we fear a party that can actually do things that people want.

15:10 - 02 Nov 2009 [/y9/no]

Sun, 01 Nov 2009

They really are like that

The doctrinaire libertarian pole of the health care reform debate is occupied by real, prominent, people. It may sound like a cartoon, but the people behind it seem to be serious.

19:06 - 01 Nov 2009 [/y9/no]

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