Sat, 21 Nov 2009
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
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.
08:19 - 18 Nov 2009 [/y9/no]
Sat, 14 Nov 2009
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
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
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 is, we fear a party that can actually do things that people want.
15:10 - 02 Nov 2009 [/y9/no]
Sun, 01 Nov 2009
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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