Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Guest Post at Business Insider: Animated Gifs and Monetary Policy

    Sep 11, 2012Mike Konczal

    I have a guest post up at Business Insider, which uses animated gifs to explain the current battle over monetary policy in the aftermath of the recent Jackson Hole conference. Hope you check it out.

    I have a guest post up at Business Insider, which uses animated gifs to explain the current battle over monetary policy in the aftermath of the recent Jackson Hole conference. Hope you check it out.

    It was inspired by a post where Joe Weisenthal responded to an animated gif of a baby throwing money out the window as a metaphor for QE by explaining, in detail, why it was wrong. I pointed out that you can only respond to an animated gif with more animated gifs - and then we realized we needed to corner the market on the no doubt soon to boom monetary policy animated gif industry.

    For reference, this Ann Friedman article on animated gifs is a great, and the whatshouldwecallme tumblr is a fun place to check out continuously updated animated gifs.

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  • The Chicago Teachers Union Strike Viewed From the Local Level

    Sep 10, 2012Mike Konczal

    As of 10 p.m. last night, the Chicago Teachers Union has gone on strike. Here is a webpage for why they are striking, complete with the one-page explanation and the 46-page one. Here's PCCC's summary.

    As of 10 p.m. last night, the Chicago Teachers Union has gone on strike. Here is a webpage for why they are striking, complete with the one-page explanation and the 46-page one. Here's PCCC's summary. Here's a local teacher explaining why he is on strike.

    As Bill Barclay at Dissent Magazine noted, there was a special bill passed last year that required 75 percent of teachers to vote -- with absentees counted as no votes! -- to strike. Stand For Children CEO Jonah Edelman said at the Aspen Ideas Festival that “the unions cannot strike in Chicago" because that requirement, only required of teachers, was so restrictive. Turns out that this strike got 90 percent of teachers (and 98 percent if you exclude the absentees).

    I reached out to two Chicago journalists and writers - Yana Kunichoff and Micah Uetricht - who are covering the situation locally to get their on-the-ground perspectives. A lightly edited transcript of the interview with each follows. I hope to have more coverage of this very important event in the days to follow.

    Mike Konczal: Please introduce yourself.

    Yana Kunichoff: My name is Yana Kunichoff. I'm a journalist for Truthout, which is a progressive online news magazine. I've written for a lot of independent media, where my focus has been immigration, investigative issues, and social justice activism. I've been living in Chicago for four years now.
     
    Why is a strike happening?
     
    YK: There are several layers to why this strike is happening. The shallowest, headline news one is because the Chicago Teachers' Union (CTU) and Chicago Public Schools (CPS) were not able to agree to a contract. A deeper reason is because this is one of the first times that an education public sector union has resisted and pushed back against the privatization and changes that have been happening in the education sector.
     
    Looking back at bills passed last year and before, they all narrowed what the teachers' union is allowed to strike over. On paper, the biggest questions are on merit pay and seniority rights. But there are all these other points. Rahm Emanuel said in his press conference after the strike was declared that the two points under debate "are not financial." The two big issues under debate, from Emanuel's point of view, are teacher evaluation and principals having the full ability to hire and fire teachers.
     
    What's it like for Democrats in Chicago?
     
    YK: I don't know how much I can speak to the battle in the Democratic Party. There's an interesting contradiction that exists in Chicago. If you are a liberal in Chicago you support Obama, but at the same time there's a possibility you support the union. I know people supporting the campaign that support the teachers' union, even though someone associated with the administration is trying to smash it.
     
    How is the Chicago community as a whole reacting?
     
    YK: Chicago is a pretty divided city, with neighborhoods divided by class. I spent today riding my bike around Latino, working-class neighborhoods -- Pilsen, Little Village, and North and South Lawndale. These are areas that aren't doing well in this economy.
     
    I'm seeing a lot of cars honking their horns, and police running their siren while they go by a school picket. The people that have to deal with the daily reality of school cutbacks, or mental health clinic shutdowns, or how'll they get home in winter with less public transit, the people who deal with austerity budgets, are in support of the teachers' strike.
     
    Chicago is becoming increasingly gentrified, though, with more people who don't rely so much on public services. I'm not sure what they think of the strikes yet.
     
    Most people will get their news from nationally-targeted coverage of the strike. As someone from Chicago, covering it locally, what would you like people to know?
     
    YK: The charter system is something that started in Chicago but has since been brought national. These kinds of policies that work against teachers aren't going to stay contained to one city. This trend will continue into other cities and states, especially where unions are weak. So this is where the fight is happening. When you are here on the ground, it feels like a strong line of opposition. Opposition to policies that aren't just national but international - think of places like Greece and the more general fights against austerity happening across Europe here.
    The national coverage will watch the specific contract terms, though they'll miss that 10 years from now, the specific, narrow terms will matter less than whether or not a union in an American city will have been successful in pushing back in this way. This is a fight over public resources, public jobs, and the idea of a public that isn't discussed by national media as if it exists. Will there be public schools as we understand them in 10 years?
     
    I also spoke with Michah Uetricht separately.
     
    Mike Konczal: Please introduce yourself.
     
    Micah Uetricht: I'm Micah Uetricht, and I'm an organizer for a group called Arise Chicago as well as a freelance writer. I've been covering the teachers' strike in Chicago from the ground.
     
    What is the core of this strike about?
     
    MU: Last night, at the conference announcing whether or not the teachers were going to go on strike, several reporters asked CTU President Karen Lewis and Vice President Jesse Sharkey about what the core issues were. Both repeatedly emphasized that there weren't one or two core issues but it was instead about the total package. The package included wages, compensation, and benefits, but also the vision of what school reform looks like. CTU started talking about school reform that actually makes schools work for kids.
     
    So there are traditional things that unions go on strike for, like wages and benefits, but also the bigger picture vision of what school reform is going to look like.
     
    What's the energy like covering this strike from the streets in Chicago?
     
    MU: I've been around a lot of strikes and labor actions, but this is totally like nothing I've seen before. I'm about five miles north of Chicago, and I've been on my bike going from actions to picket lines. Every public school I passed had crowds of 40, 50, 60 teachers. The energy is incredible. People were up at 5 in the morning to picket at their school, and then move to phone bank.  It's a big feat of organizing that CTU has pulled off.
     
    How is the Chicago community as a whole reacting?
     
    MU: The community support piece of the strike has also been incredible as far as I've seen. There's a lot of support from parents, community members and others. There's a group called Parents for Teachers that has been active, and a very vibrant Chicago Teacher Solidarity Campaign. Both have done an amazing job organizing before and during the strike.  People beyond the usual suspects are getting involved in this fight.
     
    The city has worked really hard to try and divide parents against teachers, painting teachers as overpaid and greedy and harming students. So I was expecting to see some hostility from people on the streets, but all morning long I saw no stories of negativity or hostility. I'm looking for signs that average Chicagoans are annoyed or angry, but I haven't seen any yet. People I've talked to haven't seen any yet either.
     
    Most people will get their news from nationally-targeted coverage of the strike. As someone from Chicago, covering it locally, what would you like people to know?
     
    MU: CTU is very vocal in saying that the Democratic Party in Chicago and Rahm Emanuel are not serving their interests. In Chicago the Democratic Party is the major party, and they are pushing this austerity agenda, and so a lot of the future of whether or not unions are afraid of calling out Democrats will be determined here.
     
    This is a fight over public sector workers, and we've seen that a lot over the past several years. We saw it in Wisconsin under Governor Walker, for instance. In that fight, the labor movement and the left in general made some serious missteps, and suffered a pretty crushing defeat with the law and the loss of the recall.
     
    In Chicago, I haven't seen anyone say this explicitly, but my sense is that they learned from that fight that you have to be in the streets to win these fights. The CTU is incredibly well organized, especially down at the rank-and-file level. That shows when you are wandering around Chicago today, where 40 or 50 people are on every line and more in the streets. The recent laws that push against public sector unions have forced them to organize the entire organization, keeping their membership involved the whole way, and it is paying off today.
     

    Note: This post has had slight edits of the transcript for clarification (4:24pm ET, 9/10/12).

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  • Romney Will Solve the Crisis with the Exact Same GOP Plan of 2008, 2006, 2004...

    Aug 31, 2012Mike Konczal

    Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

    Romney's five-point plan to adress the specific aspects of our current jobs crisis recycles, nearly word for word, plans from far different economic times.

    I've been watching the 2012 Republican National Convention, trying to get a sense of what the conservative diagnosis is for our weak economy and what they'd do in response. Is it the bizarro stimulus of raising interest rates, balancing the budget, and forcing foreclosures? Is there a secret housing plan? Or will it be a program of Reactionary Keynesianism, with an expanded military, massive tax cuts for the rich, and a SuperDuperCommittee to recommend tax expenditures that will go nowhere?

    I take these arguments seriously -- I actually really enjoy making maps to help explore them. One argument worth bringing up is the idea that they are just proposing to do the policies they want all the time anyway -- the policies they wanted in 2008, or 2006, or 2004 -- but are pretending there's a reason it would be extra important given our current recession.

    So on August 30th, 2012, with unemployment at 8.3 percent and with a serious long-term unemployment problem, Mitt Romney gives the RNC acceptance speech. He outlines a plan to create 12 million jobs in the next four years. As Jared Bernstein pointed out, that's what Moody's says will be created anyway. But forget that. How will Mitt Romney do this? He has a five point plan (numbers in [brackets] here and in the rest of the post are added by me):

    And unlike the president, I have a plan to create 12 million new jobs. It has 5 steps.

    [1] First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.

    [2] Second, we will give our fellow citizens the skills they need for the jobs of today and the careers of tomorrow. When it comes to the school your child will attend, every parent should have a choice, and every child should have a chance.

    [3] Third, we will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.

    [4] Fourth, to assure every entrepreneur and every job creator that their investments in America will not vanish as have those in Greece, we will cut the deficit and put America on track to a balanced budget.

    [5] And fifth, we will champion SMALL businesses, America’s engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most. And it means that we must rein in the skyrocketing cost of healthcare by repealing and replacing Obamacare.

    So his plan focuses on domestic energy production, school choice, trade agreements, cutting spending, and reducing taxes and regulations. This must be a set of priorities reflecting our terrifying moment of mass unemployment, right?

    Let's flash back to September 4th, 2008, at the RNC where John McCain is giving his speech accepting the 2008 Republican presidential nomination. Unemployment is 6.1 percent, though the Great Moderation is coming to an end; within a year it'll be close to 10 percent. Two weeks later, as Lehman Brothers was collapsing, McCain would say "the fundamentals of our economy are strong." What were his recommendations for the economy in that nomination speech?

    I know some of you have been left behind in the changing economy, and it often sees that your government hasn't even noticed... That's going to change on my watch...

    [3] I will open new markets to our goods and services. My opponent will close them...

    [4] I will cut government spending. He will increase it...

    [5] We all know that keeping taxes low helps small businesses grow and create new jobs...

    [4] Reducing government spending and getting rid of failed programs will let you keep more of your own money to save, spend, and invest as you see fit...

    [2] Education -- education is the civil rights issue of this century. Equal access to public education has been gained, but what is the value of access to a failing school? We need to shake up failed school bureaucracies with competition, empower parents with choice...

    [1] We'll attack -- we'll attack the problem on every front. We'll produce more energy at home.. Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.

    It's the same exact agenda. Specifically, the Romney agenda for job creation in 2012 is stuff that John McCain wanted to do anyway in 2008.

    Let's go back further. On September 2nd, 2004, George W. Bush is at the RNC, giving his speech accepting the nomination to run for a second term as President of the United States. Unemployment is 5.4 percent. A major housing bubble is kicking into high gear, and the country is debating the aftermath of the invasion of Iraq and the future of the War on Terror. A few months later, people will be talking about a permanent Republican majority. What are some priorities for a second George W. Bush term in creating jobs?

    To create more jobs in America, America must be the best place in the world to do business.

    [5] To create jobs, my plan will encourage investment and expansion by restraining federal spending, reducing regulation and making the tax relief permanent.

    [1] To create jobs, we will make our country less dependent on foreign sources of energy.

    [3] To create jobs, we will expand trade and level the playing field to sell American goods and services across the globe.

    [5] And we must protect small-business owners and workers from the explosion of frivolous lawsuits that threaten jobs across our country. Another drag on our economy is the current tax code, which is a complicated mess...

    [4]  To be fair, there are some things my opponent is for. He's proposed more than $2 trillion in new federal spending so far, and that's a lot, even for a senator from Massachusetts.

    It's the same agenda, mentioned back to back almost in the same order. Bush mentioned No Child Left Behind several times, though I'm not sure if that matches up with the school choice of [2] in Romney's economic plan for school choice, so I excluded [2]. It's always time for cutting spending, more oil drilling, free trade, and lower taxes and regulation to fix the economy.

    Let's do one last one. January 31st, 2006, George W. Bush is giving his State of the Union address. Unemployment is 4.7 percent. With the economy healthy and growing (in Bush's mind), now is the time to build on the strengths and address the weaknesses of the economy. What does he suggest?

    Our economy is healthy and vigorous, and growing faster than other major industrialized nations...

    [5] Because America needs more than a temporary expansion, we need more than temporary tax relief. I urge the Congress to act responsibly and make the tax cuts permanent.

    [4] Keeping America competitive requires us to be good stewards of tax dollars. Every year of my presidency, we've reduced the growth of nonsecurity discretionary spending. And last year you passed bills that cut this spending.

    [3] Keeping America competitive requires us to open more markets for all that Americans make and grow... With open markets and a level playing field, no one can out- produce or out-compete the American worker...

    [1] Breakthroughs on this and other new technologies will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025.

    Again, President Bush mentions No Child Left Behind, but I'm not sure whether it overlaps with [2].

    But the same exact playbook is there in 2006, as it was in 2004 and 2008, and as it is in 2012. Domestic oil production, school choice, trade agreements, cut spending and reduce taxes and regulations -- it's been the conservative answer to times of deep economic stress, times of economic recovery, times of economic worries, and times of economic panic. Which is another way of saying that the Republicans have no plan for how to actually deal with this specific crisis we face.

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    George W. Bush image via Shutterstock.com.

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  • What Could Romney's Secret Housing Plan Look Like?

    Aug 24, 2012Mike Konczal

    Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages.

    Josh Barro, writing from his new column at Bloomberg, wonders if Mitt Romney has a secret economic plan to fix housing: "But where I think a big improvement from Romney is likely is on housing policy. While Romney has been conspicuously silent on housing, one of his top advisers, Glenn Hubbard, advocates an aggressive plan to restructure mortgages. The Hubbard plan would lower mortgage rates and reduce principal for underwater borrowers, both of which would stimulate the economy. That's a tough sell to Republicans in Congress -- but they would be much more open to it under a Republican president than a Democratic one."

    As David Dayen noted in a great, comprehensive Salon piece, none of this matters if Congress doesn't extend a special law put into place during the crisis that keeps principal reduction, even reduction from a short sale, from being treated as income, and thus requiring it to be taxed. The law is set to expire on Dec. 31, 2012. Extending it has bipartisan support in the Senate, but none in the House so far. I can't emphasize how much this matters - homeowners would get a giant tax bill under any relief program, making them difficult to do. It isn't clear what Romney would do about this.

    It's worth noting that the Hubbard plan is very similar to the ongoing Home Affordable Refinance Program (HARP) in that it uses the GSEs to refinance underwater mortgages. HARP was revamped earlier this year to HARP 2.0, which removed a 125 percent loan-to-value limit and waived certain representations and warranties for lenders. It's still early, but it looks like there is a big increase in the number of underwater mortgages refinancing (FHFA data). Over 40 percent of the HARP refinances in July were from mortgages with an LTV over 125 percent. As will become relevant in this post, their proposal is GSE driven and avoids bankruptcy reform, as "moving mortgage debt into bankruptcy courts could well reduce future credit availability and hamper long-run economic growth and homeownership."
     
    (The original Hubbard plan from 2008 featured mandatory principal writedowns for negative equity, with the losses shared equally by the lender and the government. In exchange, the government gets a lien on the home worth 20 percent of any increase in value. This is much different than current HARP policy and constitutes a really bold approach. However, this negative equity and shared appreciation part is entirely missing from the current 2011 version of the proposal. I'm not sure why Hubbard dropped that section; certainly it's not because the housing market has done better than expected.)
     
    How can we analyize what potential solutions a Romney presidency could embrace? There's normally one dimension we think of in terms of housing crisis policy, and that is how aggressive we are in dealing with underwater debt and foreclosures. Should we refinance underwater mortgages to create lower monthly payments and take advantage of low interest rates? Should we go further and reduce principal debt, either outright or in exchange for some form of equity claim?
     
    But there's another, equally important dimension, and that's the mechanism through which these policies are enacted. What is the vehicle that will be used to execute policy? There are four general cases that can be put into play.
     
    The first policy mechanism tries to go through the financial sector and the mortgage servicing system as it currently exists. This takes the market as it is and tries to nudge agents to act a different way with various incentives. The Home Affordable Modification Program (HAMP) program does this by trying to nudge the industry with payments to make modifications that lower interest rates and payments. HAMP was consciously not designed to do principal reductions, though it does have a very small, limited program now. 
     
    There's a second policy vehicle driven by the fact that the GSEs are in conservatorship under the FHFA. The FHFA's mission is to "Provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market," which can support a variety of policy ideas. As mentioned above, HARP is responsible for refinancing GSE loans, and the Hubbard plan focuses on refinancing through the GSEs. Timothy Geithner's recent effort to get the FHFA to support principal reduction through a program called Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) was recently rejected by FHFA acting director Ed DeMarco. Several progressives responded by calling for DeMarco to be fired.
     
    There's a third policy vehicle designed to change the basic legal framework for how bankruptcy works. Bankruptcy law could be modified, even temporarily, to deal with the consequences of the housing bust. The mass modification program (also see here at Slate) proposed by Eric Posner and Luigi Zingales, for instance, worked through bankruptcy law. The failed effort to pass a "cramdown" or lien-stripping amendment was entirely about letting judges write down mortgage debt in bankruptcy.
     
    And then there's the fourth mechanism of direct government policy. Here the government actively goes out and purchases and manages mortgages. The New Deal created the Home Owners' Loan Corporation (HOLC) to directly purchase mortgages; we could recreate such a mechanism today. Both John McCain and Hillary Clinton argued for such programs during the 2008 campaign. Senator Merkley's recent plan would do this for refinancing; eminent domain proposals would do this for principal reduction.

    Let's grid out those two dimensions:

    With this grid in mind, let's re-examine the high-level critique of the Obama administration's housing policy. During the debate over the second round of TARP, the then-incoming Obama administration promised to take action on bankruptcy reform and hinted toward direct government action, or the top two rows in the grid. Larry Summers wrote to Harry Reid promising action on "reforming our bankruptcy laws." Donna Edwards wrote that she "appreciate[d] the personal commitment that Senator Obama" would look "at a program such as one that existed in the 1930s to 1950s to work directly with homeowners."

    This did not happen. Timothy Geithner was against direct government action from the beginning, as this letter he wrote to Brad Miller shows. The administration was publicly silent and privately pushed against reforming bankruptcy. The administration also seemed asleep at the wheel when it came to pushing for big action through the GSEs, making no recess appointments and only updating HARP and pushing for principal writedowns this year.

    Their main effort was to work through the already existing mortgage framework. This effort has largely been seen as a failure. This isn't surprising, as there are well-documented problems with our current mortgage servicing system. The same problems with Wall Street slicing and dicing mortgages that were present when the housing bubble was inflating are still there now that it has collapsed.

    We often don't get second chances in life, but the Obama administration had a second chance at a serious reform of this broken system when news of the scandals surrounding financial fraud started breaking. Though there's still a taskforce out there somewhere, I think it is safe to say the administration wanted to remove these problems rather than take them on directly, which would have opened up a space to reform the current system. They succeeded. This only leaves working through the system.

    Maybe your eyes roll when you read the term "neoliberal hegemony," but there's something to the idea that the Obama administration simply felt that the only legimate way to try and deal with the foreclosure crisis was by nudging the incentives of various markets this or that way. The market is the ultimate, efficient arbiter of value, and policy should only seek to adjust some incentives here and there. Measures to intervene directly by the government, or measures to change the way property is regulated through bankruptcy, were ignored right away. Those actions require the government to act as a force in the marketplace directly, or to acknowledge that the economy is created through law and can be adjusted accordingly, both of which are taboo under neoliberal economic ideology.

    Working within a system, no matter how aggressive your actions are, means you don't ultimately have to challenge that system. As Harper's wrote back in 2009, in a great essay on President Obama as Hoover, "The common thread running through all of Obama’s major proposals right now is that they are labyrinthine solutions designed mainly to avoid conflict." In a practical sense, for Romney to go bigger than Obama on housing would require either adjusting the bankruptcy code, running a government program that directly intervenes in the marketplace in a big way, or firing DeMarco. In the theoretical sense, it would likely require challenging the reigning paradigm in political economy as well as challenging the current financial system. Are these actions realistic for Romney?

    Mike Konczal is a Fellow at the Roosevelt Institute. Follow or contact the Rortybomb blog:

      

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  • The Problem of Committing Against Bailouts

    Aug 22, 2012Mike Konczal

    Economist Robert Stein had a recent post at the American Enterprise Institute about ending Too Big To Fail (h/t James Pethokoukis). His major advice, which frames the rest of his argument, is that "Ideally, the federal government would end Too Big To Fail (TBTF) by credibly pre-committing not to bailout large financial firms when they run into trouble."

    Economist Robert Stein had a recent post at the American Enterprise Institute about ending Too Big To Fail (h/t James Pethokoukis). His major advice, which frames the rest of his argument, is that "Ideally, the federal government would end Too Big To Fail (TBTF) by credibly pre-committing not to bailout large financial firms when they run into trouble."

    There's some other problems with the piece [1], but I want to run with this statement. The implication is that the Dodd-Frank financial reform act doesn't do such things. Let's take a second and document what Dodd-Frank does in terms of pre-committing to avoid bailing out a large financial firm, and where the problems with such a process could really occur.

    Federal Reserve: Dodd-Frank strips out previous language from the Federal Reserve Act that was used to execute the (unpopular) emergency lending facilities (Sec. 1101). The Federal Reserve can no longer use its 13(3) powers to, in "unusual" circumstances, provide support for an "individual, partnership, or corporation." That language has been removed, and replaced with "program or facility with broad-based eligibility.” Dodd-Frank explicitly writes into the Federal Reserve Act that "any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company." Going further it writes "The Board shall establish procedures to prohibit borrowing from programs and facilities by borrowers that are insolvent."

    Provided we want the Federal Reserve to act as a lender-of-last-resort, this is a proper way to do it. At one point, even Richard Shelby seemed to think these reforms were the right approach.

    Activating Resolution Authority: Now let's look at what is required to activate an orderly-liquidation action, or what is often called resolution authority. This is the FDIC taking over a failing financial institution and winding it down. If you've seen movies where two people need to turn their key to activate a nuclear weapon, then you'll understand that there's a three-key mechanism for resolution authority (Sec. 203).

    The Treasury Secretary, after consulting with the President, needs to determine whether resolution is an appropriate path for a firm, one where "the failure of the financial company and its resolution under otherwise applicable Federal or State law would have serious adverse effects on financial stability in the United States." The Treasury Secretary then needs the recommendation of 2/3rds of the Board of Governors, as well as 2/3rds of FDIC (with the SEC replacing the FDIC for brokers and dealers, and the Federal Insurance Office for insurance companies), to approve going forward with resolution. So you have three institutions who have to turn their keys for resolution to go, institutions including both independent regulators and people with politicial accountability.

    What should guide the recommendation for the Board of Govenors and the FDIC? Their written recommendation requires "an evaluation of the likelihood of a private sector alternative to prevent the default of the financial company" as well as "an evaluation of why a case under the Bankruptcy Code is not appropriate for the financial company." The default setting in the law is that the private sector alternative is always better to government action, and that the Bankruptcy Code is always better than resolution. This is consistent with the logic of those who want the government to pre-commit to as little action as possible.

    Executing Resolution Authority: If the FDIC starts to resolve a failing financial company using its liquidation powers, what strict, legal limitations does it have to follow? There's a section titled "Mandatory Terms and Conditions for all Orderly Liquidation Actions" (Sec. 206) that can give us a start. If there's a liquidation, the FDIC has to wipe out shareholders if necessary ("ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Fund are fully paid") and hit creditors ("ensure that unsecured creditors bear losses in accordance with the priority of claim provisions").  The government isn't allowed to redo TARP or AIG and buy equity in the firm to keep it alive ("not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary"). The FDIC can't act for "the purpose of preserving the covered financial company."

    They also have to fire management ("ensure that management responsible for the failed condition of the covered financial company is removed") and fire board members ("ensure that the members of the board of directors...are removed") by law. There's explicit legal language to allows FDIC to claw back compensation (Sec. 210, "may recover from any current or former senior executive or director substantially responsible for the failed condition of the covered financial company any compensation received during the 2-year period preceding"). It's difficult to imagine a firm really excited about going through such a procedure.

    The Problem: Dodd-Frank goes out of its way to pre-commit against further bailouts. The problem with pre-committing against bailouts isn't Dodd-Frank; it's that the financial sector broadly will be too unstable and that Dodd-Frank won't have sufficient reforms in place to keep that in check. Remember the bailouts of 2008 were the results of GOP-appointed Hank Paulson, GOP-appointed Sheila Bair and GOP-appointed Ben Bernanke, all with the support of a Bush White House-sponsored EESA, going to Congress and asking that an emergency bill be passed to allow for TARP. Dodd-Frank cannot prevent that from happening again no matter what its precommittments are. No law can prevent Congress from acting in such a way. The best that can be done is set up the basic legal structures of the financial industry to make it so it isn't prone to collapse and abuses, and when there is failure to make sure losses are allocated in a fair way.

    [1] Stein also proposes that "One way to signal this intent would be phasing out deposit insurance, a cornerstone of the government’s involvement in 'safeguarding' the financial system." Mark Calabria at Cato has called for capping deposit insurance access from its current 10 percent to 5 percent as anti-TBTF policy; Tim Carney and Matt Yglesias like this idea as well.

    Let's graph out the size of major financial institutions in both their deposit and non-deposit dimensions, using a chart I use to help explain the SAFE Banking Act that would Break Up the Banks:

    If we had to place Lehman Brothers or Bear Stearns, the shadow banks that caused the market panic, the shadow banks that need to be folded under traditional banking regulations, on this graph, it would clock in more like Morgan Stanley than Wells Fargo. You could proceed with such a 5% cap on deposit liabilities - though Treasury would tell you that it just forces banks to go into the more prone-to-panic and poorly regulated non-deposit/repo market for funding, as you can see from Bank of America above - but it would regulate Wells Fargo more than it would regulate firms like Citigroup, Goldman Sachs or Morgan Stanley, or the firms where the focus should be.

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