On President Obama's Community College Plan and Public Options

Jan 9, 2015Mike Konczal

Looks like a smart plan he announced yesterday. I wrote about it, and public options more generally, here at The Nation. I hope you check it out!

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Looks like a smart plan he announced yesterday. I wrote about it, and public options more generally, here at The Nation. I hope you check it out!

Follow or contact the Rortybomb blog:
 
  

 

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Guest Post: Will Wall Street Win Again with Antonio Weiss Nomination?

Jan 7, 2015Brad Miller

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

Mike here. This post is from my colleague Brad Miller over the important debate on the Antonio Weiss nomination. Brad is a former U.S. Representative who recently joined the Roosevelt Institute as a Senior Fellow, so he has firsthand knowledge of the internal negotiations around financial reform. Check it out below.

The opposition to the nomination of another investment banker, Antonio Weiss, to a top position in the U.S. Treasury is not just a demagogic appeal to anti-Wall Street prejudices, as his supporters argue.

Weiss’s actual experience appears to be a poor match for the specific duties of the position in question, and may be less laudable than his supporters claim. Weiss’s principal credential appears to be that he is a product of the same culture that produced our other recent economic policymakers.

And that is the real problem for opponents, who believe that economic policies should be subject to democratic debate and require the consent of the governed.

The response to the financial crisis was the most consequential economic policy in generations. Wall Street and Washington insiders alike argue that those policies, endlessly indulgent of banks and pitiless to homeowners, were technocratic decisions that required the recondite knowledge of Wall Street professionals.

To Weiss’s supporters, disregard for public opinion is a virtue. “Making economic policy isn’t a popularity contest,” David Ignatius wrote in The Washington Post, “especially when financial markets are in a panic.” “Our job was to fix it,“ former Treasury Secretary Timothy Geithner said, “not make people like us.”

Criticism did not just come from politicians pandering to the great unwashed, however.

Most economists argued that the lesson of past financial crises was to take economic pain quickly, recognize losses on distressed debt, and take insolvent banks through an orderly receivership. The standard playbook” for financial crises since the 1870s was to “shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.” “Zombie” banks, economists argued, only delay recovery.

The Bush and Obama Administrations instead helped too-big-to-fail banks pretend to be solvent and provided subsidies and other dispensations until the banks became profitable, an effort that continues.

Unfortunately, any effective effort to reduce foreclosures required banks to recognize losses on mortgages. Insiders regarded foreclosures as a lesser concern. Geithner said that even if the government used federal funds “to wipe out every dollar of negative equity in the U.S. housing market…it would have increased annual consumption by just 0.1 to 0.2 percent.”

According to Atif Mian and Amir Sufi, two prominent economists, “that is dead wrong.” Household wealth fell by $9 trillion after the housing bubble burst in 2006, which greatly reduced consumer demand. “The evidence,” Amir and Sufi said, “is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.”

Wall Street’s critics did not lose that debate. There was no debate.

Senator Obama endorsed legislation in his presidential campaign to allow the judicial modification of mortgages in bankruptcy. President Obama never publicly wavered from that position, but Treasury officials privately lobbied against the legislation in the Senate, where the legislation died. The determination by economic policymakers to protect their immaculate policies from tawdry politics may extend to attempts by the President to intrude.

Meddling by Members of Congress was certainly unwelcome. In a private meeting between Administration officials and disgruntled House Democrats, I said that foreclosure relief efforts appeared designed to help banks absorb losses gradually, not to help homeowners. Geithner was offended—indignant—at the suggestion. Neil Barofsky, then the Special Inspector General for the Troubled Asset Recovery Program, later confirmed that was exactly the purpose of the programs—in Geithner’s words, to “foam the runway” for the banks.

The success of policies that are unacknowledged or even denied is difficult to measure. Since the financial crisis, however, the financial sector, from whence our unguarded platonic guardians came and soon will return, has prospered. Others fared less well. Wealth and income inequality widened dramatically.

Weiss has not served in government, so opposition to his nomination may punish him for the sins of others, perhaps unfairly. There is nothing to indicate, however, that Weiss questions the assumption that the North Star of economic policy should be the prosperity of the financial sector, or that policies should be freely debated unless there’s money involved.

The presidential campaign in 2016 will undoubtedly largely be about economic policy. Voters may assume that the election of one candidate or another will result in implementation of that candidate’s economic policies.

If the culture of economic policymakers remains unchanged, the public positions of candidates and the votes of citizens may not matter much.

Brad Miller is a Senior Fellow at the Roosevelt Institute. Previously, he served for a decade in the U.S. House of Representatives.

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2014's Case Study in the Vertically Integrated Conservative Movement

Dec 30, 2014Mike Konczal

The mass resignation at the New Republic had several people joking about how the magazine wanted to become “vertically integrated.” What does that even mean here? But if anything was vertically integrated in 2014, it was the conservative movement. And you could see this clearly from the reaction to the Halbig decision in July.

I’m occasionally asked what conservative sites people should read. My answer is usually that people should read the blogs of the major think tanks, like AEIdeas, Daily Signal (Heritage), and Cato-at-Liberty. There are many writers who are conservative, or who cover conservatives, who are interesting to read, of course. But if you want to understand the conservative movement as the actual movement it is, you want to look upstream to where the ideas and arguments are first formulated.

From there, you can then watch them move downstream, first to the set of gatekeepers on the right who can give these arguments credibility or otherwise charge them. From there they move down to the front line right-wing writers who incorporate them into their various Hot Takes, as well as the TV and radio stations with their massive audiences.

And we have a real-time example this year. Since 2011, think tanks have been building their Halbig argument, which is that the ACA doesn’t allow state-exchanges created by the federal government to access subsidies. They learned how to discuss it. Most of all they learned how they couldn’t call it a “glitch” but instead, given administrative law, had to argue it was a conscious decision. But the argument wasn’t part of the mainstream discussion.

But then the court case had a success July 22nd, where the Federal Circuit Court for the District of Columbia agreed with Halbig. And you could then watch it move down the river and become mainstream conservative logic almost immediately.

This is where gatekeepers were important. The editors of National Review immediately jumped on it (“States were expected to go along and establish their own exchanges. When it became clear that many states wouldn’t do so because the law was so unpopular, the IRS just rewrote the law”). One of the more important conservative gatekeepers, Ramesh Ponnuru, did the same at Bloomberg (“It's wrong, then, to say that Congress obviously didn't intend to include this restriction”).

With that, the low-level writers could write their takes and mass media personalities could speak as if this was always obviously always the case. Rush Limbaugh (“The Obamacare law specifically says [...] the only people qualified for subsidies are those who acquire their insurance through state exchanges, exchanges established by the state”) is one of many example. Those far away from the think tanks who are good at digging up embarrassing examples soon found numerous examples of Jonathan Gruber embarrassing himself once they knew what to dig for, which in turn boosted the upstream arguments. Vertical integration.

You can go back and see liberal writers trying to figure out in real time how Halbig became conservative common wisdom, when none of the conservative reporters covering the bill while this was all debated ever noted it, or that it wasn't part of the extensive rollout strategy by ACA supporters. Brian Beutler’s Why Are Conservative Health Journalists Covering for Halbig Truthers? and Jonathan Chait’s The New Secret History of the Obamacare Deniers are good examples. It shows a genuine surprise at how vertically integrated the conservative movement can be, and how quickly a new logic became their reality once an opportunity presented itself.

An important thing I noticed from the outside is how there was no strong opposition at the gatekeeper level, only mild skepticism. Reihan Salam wrote “I’m not a Halbig guy [...] I am (at best) agnostic on whether Halbig is correct.” Ross Douthat tweeted that point while describing his own “conflictedness.” But this was the extent of it. Neither they or any other gatekeepers I could find leveled a strong charge, much less a sustained case, against Halbig from within the movement. In a movement, people know when to be quiet.

I noticed this dynamic quickly when I first started reading conservatives writing about the financial crisis. Virtually all the front-line writers were mimicking an odd argument about the GSEs that I didn’t recognize from my time in the industry. I quickly looked upriver to see it all comes from AEI’s Peter Wallison. Again, some crucial gatekeepers air quiet skepticism, like his GOP colleagues on the FCIC whose email trail shows how they tried to minimize his bad arguments. But that doesn’t stop the movement writers from pushing just that narrative at all times.

Next time you read a random article from a conservative site, see if you can see how it’s just a rewritten form of some talking points created far upstream. And always remember that when a movement acts, it creates its own reality.

Follow or contact the Rortybomb blog:
 
  

 

The mass resignation at the New Republic had several people joking about how the magazine wanted to become “vertically integrated.” What does that even mean here? But if anything was vertically integrated in 2014, it was the conservative movement. And you could see this clearly from the reaction to the Halbig decision in July.

I’m occasionally asked what conservative sites people should read. My answer is usually that people should read the blogs of the major think tanks, like AEIdeas, Daily Signal (Heritage), and Cato-at-Liberty. There are many writers who are conservative, or who cover conservatives, who are interesting to read, of course. But if you want to understand the conservative movement as the actual movement it is, you want to look upstream to where the ideas and arguments are first formulated.

From there, you can then watch them move downstream, first to the set of gatekeepers on the right who can give these arguments credibility or otherwise charge them. From there they move down to the front line right-wing writers who incorporate them into their various Hot Takes, as well as the TV and radio stations with their massive audiences.

And we have a real-time example this year. Since 2011, think tanks have been building their Halbig argument, which is that the ACA doesn’t allow state-exchanges created by the federal government to access subsidies. They learned how to discuss it. Most of all they learned how they couldn’t call it a “glitch” but instead, given administrative law, had to argue it was a conscious decision. But the argument wasn’t part of the mainstream discussion.

But then the court case had a success July 22nd, where the Federal Circuit Court for the District of Columbia agreed with Halbig. And you could then watch it move down the river and become mainstream conservative logic almost immediately.

This is where gatekeepers were important. The editors of National Review immediately jumped on it (“States were expected to go along and establish their own exchanges. When it became clear that many states wouldn’t do so because the law was so unpopular, the IRS just rewrote the law”). One of the more important conservative gatekeepers, Ramesh Ponnuru, did the same at Bloomberg (“It's wrong, then, to say that Congress obviously didn't intend to include this restriction”).

With that, the low-level writers could write their takes and mass media personalities could speak as if this was always obviously always the case. Rush Limbaugh (“The Obamacare law specifically says [...] the only people qualified for subsidies are those who acquire their insurance through state exchanges, exchanges established by the state”) is one of many example. Those far away from the think tanks who are good at digging up embarrassing examples soon found numerous examples of Jonathan Gruber embarrassing himself once they knew what to dig for, which in turn boosted the upstream arguments. Vertical integration.

You can go back and see liberal writers trying to figure out in real time how Halbig became conservative common wisdom, when none of the conservative reporters covering the bill while this was all debated ever noted it, or that it wasn't part of the extensive rollout strategy by ACA supporters. Brian Beutler’s Why Are Conservative Health Journalists Covering for Halbig Truthers? and Jonathan Chait’s The New Secret History of the Obamacare Deniers are good examples. It shows a genuine surprise at how vertically integrated the conservative movement can be, and how quickly a new logic became their reality once an opportunity presented itself.

An important thing I noticed from the outside is how there was no strong opposition at the gatekeeper level, only mild skepticism. Reihan Salam wrote “I’m not a Halbig guy [...] I am (at best) agnostic on whether Halbig is correct.” Ross Douthat tweeted that point while describing his own “conflictedness.” But this was the extent of it. Neither they or any other gatekeepers I could find leveled a strong charge, much less a sustained case, against Halbig from within the movement. In a movement, people know when to be quiet.

I noticed this dynamic quickly when I first started reading conservatives writing about the financial crisis. Virtually all the front-line writers were mimicking an odd argument about the GSEs that I didn’t recognize from my time in the industry. I quickly looked upriver to see it all comes from AEI’s Peter Wallison. Again, some crucial gatekeepers air quiet skepticism, like his GOP colleagues on the FCIC whose email trail shows how they tried to minimize his bad arguments. But that doesn’t stop the movement writers from pushing just that narrative at all times.

Next time you read a random article from a conservative site, see if you can see how it’s just a rewritten form of some talking points created far upstream. And always remember that when a movement acts, it creates its own reality.

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Rortybomb's 2014 Yearly Roundup

Dec 30, 2014Mike Konczal

2014 is over, and good riddance. This year I wanted to start some formal projects, as well as write longer pieces, and I managed to do just that. Here’s the high-level stuff I did this past year.

Financialization. I started a project on financialization with the Roosevelt Institute, and I’m helping with a big inequality project helmed by Joe Stiglitz. All this will bear fruit next year, but I did a piece on financialization for Washington Monthly, Frenzied Financialization, that gives you some sense of what we’ll be doing.

(Seeing one's name on a magazine stand is still the coolest.)

Voluntarism. I wrote a big article on The Voluntarism Fantasy (pdf) for Democracy Journal, that had a lot of responses (collected here). One of my favorite pieces I’ve done; Philanthropy Daily, of all places, red-baited me, which was a neat enemy to make in 2014.



(Remember this cover?)

Piketty-Mania. There were races to see how quickly reviews of Piketty’s Capital in the 21st Century could get written. My review, Studying the Rich for Boston Review, was scheduled for late summer and had to be turned around in a week after the demand for readable summaries of the book exploded. I think my review holds up in describing the way the fault lines around the work would unfold.

The two points I wished I had included were Russell Jacoby’s fantastic comparison to the actual Marx’s Capital, on how economic critique has moved from Marx’s factories of production to Piketty’s spreadsheets of distribution, and that what constitutes a “wealth equality” agenda isn’t clear, which I later covered for The Nation. Speaking of...

The Score. I started as a columnist for The Nation with a new economics column, The Score, where I alternate with my former colleague Bryce Covert. It’s still starting up but I’m already happy with columns on socializing Uber and the growth of incarceration. It’s great to work with Bryce again and get to work with the talented editor Sarah Leonard, who is boosting the economic content of The Nation (she also helped launched The Curve with Kathy Grier since joining).

Issue Editing. I also got to help curate and edit an issue of The New Inquiry, The Money Issue. Rob Horning and I had wanted to do something with the weirdness and newness of the finance blogs circa 2007-2009, and hopefully part of that got through here with pieces by Izzy Kaminska and Steve Waldman. I’m very happy to have helped edit the excellent Disgorge the Cash by JW Mason, which will soon relate to the financialization project mentioned above.

Other Writing. I wrote less for the blog this year, but some notable pieces that caught people’s interest included how the “pragmatic” libertarian case for a basic income makes basic errors about the welfare state, explaining the end-of-year fight over financial reform, pieces on how neoconservatism and libertarians have helped get us to the policing situation in Ferguson and elsewhere, and on the limits of liberalism after the 2014 election.

Big pieces for other sites included a review of Playing the Whore for Wonkblog, explaining how we already have a public option for banking and we could expand it for Al-Jazeera America, and a group book review on the role of profit in the state for Boston Review.

What else? In other news I turned 35. My wife got me a Nick Cage in The Rock birthday cake, which is really the best present ever. I moved to Washington DC after a crazy final summer in New York. I’ve been reading a lot of history lately and want to keep incorporating that into my stuff, and I’m enjoying the Eric Foner MOOC of the Civil War era.

Anything you’d like to see different next year? Thanks for reading everyone, see you in 2015.

(Previous editions:  2013, 2012, 2011.)

Follow or contact the Rortybomb blog:
 
  

 

2014 is over, and good riddance. This year I wanted to start some formal projects, as well as write longer pieces, and I managed to do just that. Here’s the high-level stuff I did this past year.

Financialization. I started a project on financialization with the Roosevelt Institute, and I’m helping with a big inequality project helmed by Joe Stiglitz. All this will bear fruit next year, but I did a piece on financialization for Washington Monthly, Frenzied Financialization, that gives you some sense of what we’ll be doing.

(Seeing one's name on a magazine stand is still the coolest.)

Voluntarism. I wrote a big article on The Voluntarism Fantasy (pdf) for Democracy Journal, that had a lot of responses (collected here). One of my favorite pieces I’ve done; Philanthropy Daily, of all places, red-baited me, which was a neat enemy to make in 2014.



(Remember this cover?)

Piketty-Mania. There were races to see how quickly reviews of Piketty’s Capital in the 21st Century could get written. My review, Studying the Rich for Boston Review, was scheduled for late summer and had to be turned around in a week after the demand for readable summaries of the book exploded. I think my review holds up in describing the way the fault lines around the work would unfold.

The two points I wished I had included were Russell Jacoby’s fantastic comparison to the actual Marx’s Capital, on how economic critique has moved from Marx’s factories of production to Piketty’s spreadsheets of distribution, and that what constitutes a “wealth equality” agenda isn’t clear, which I later covered for The Nation. Speaking of...

The Score. I started as a columnist for The Nation with a new economics column, The Score, where I alternate with my former colleague Bryce Covert. It’s still starting up but I’m already happy with columns on socializing Uber and the growth of incarceration. It’s great to work with Bryce again and get to work with the talented editor Sarah Leonard, who is boosting the economic content of The Nation (she also helped launched The Curve with Kathy Grier since joining).

Issue Editing. I also got to help curate and edit an issue of The New Inquiry, The Money Issue. Rob Horning and I had wanted to do something with the weirdness and newness of the finance blogs circa 2007-2009, and hopefully part of that got through here with pieces by Izzy Kaminska and Steve Waldman. I’m very happy to have helped edit the excellent Disgorge the Cash by JW Mason, which will soon relate to the financialization project mentioned above.

Other Writing. I wrote less for the blog this year, but some notable pieces that caught people’s interest included how the “pragmatic” libertarian case for a basic income makes basic errors about the welfare state, explaining the end-of-year fight over financial reform, pieces on how neoconservatism and libertarians have helped get us to the policing situation in Ferguson and elsewhere, and on the limits of liberalism after the 2014 election.

Big pieces for other sites included a review of Playing the Whore for Wonkblog, explaining how we already have a public option for banking and we could expand it for Al-Jazeera America, and a group book review on the role of profit in the state for Boston Review.

What else? In other news I turned 35. My wife got me a Nick Cage in The Rock birthday cake, which is really the best present ever. I moved to Washington DC after a crazy final summer in New York. I’ve been reading a lot of history lately and want to keep incorporating that into my stuff, and I’m enjoying the Eric Foner MOOC of the Civil War era.

Anything you’d like to see different next year? Thanks for reading everyone, see you in 2015.

(Previous editions:  2013, 2012, 2011.)

Follow or contact the Rortybomb blog:
 
  

 

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Two Contradictory Arguments That Dodd-Frank is Crony Capitalism

Dec 17, 2014Mike Konczal

I’m pretty convinced that the term “crony capitalism,” as deployed by the right, is useless as a political or analytical tool. I keep a close eye on how conservatives talk about financial reform, and according to the right, Dodd-Frank is crony capitalism. Oh noes! But what does that mean, and how can we stop it? Here’s a fascinating case in point: two AEI scholars with different publications argue that we need to stop Dodd-Frank from enabling crony capitalism, and then proceed to describe two opposite, mutually exclusive sets of problems and solutions.

First, a good test question: The Federal Reserve recently required that the largest firms have a greater capital surcharge than had been originally proposed. Is that cronyism?

Here’s one story, from James Pethokoukis in ”Fighting the Crony Capitalist Alliance”: “our highly concentrated and interconnected, Too Big to Fail financial system [...] gives a competitive edge to megabanks.” How is that? Regulators create incentives for big banks to take on risks “such as investing in mortgage-backed securities and complex derivatives.” Banks are the size they are, and do the activities that they do, because of the actions of regulators.

So how do we combat this problem? According to Pethokoukis, we should “substantially raise the capital requirements for Too Big To Fail banks” to limit risk. Even more, “such capital requirements might well nudge the biggest banks into shrinking themselves or breaking up.”

Here’s another story, from Tim Carney’s “Anti-Cronyism Agenda for the 114th Congress”: Dodd-Frank is cronyism because “[e]xcessive regulation is often the most effective crony capitalism.” What’s worse is that Dodd-Frank designates the biggest firms as Systemically Important Financial Institutions (SIFIs), meaning that they pose a systemic risk to the economy. Those firms are put under more regulation, but it’s obviously a cover for a permanent set of protections.

So what should we do? According to Carney’s agenda, Congress should “open banking up to more competition by repealing regulations that give large incumbent banks advantages over smaller ones.” Well, which regulations are those? “Congress should repeal its authority to designate large financial firms as SIFIs.”

Note that though these are from the same institution and carry the same banner of fighting “cronyism,” these agendas are the exact opposite of each other. For Pethokoukis, the important goal is identifying the largest and riskiest institutions and putting aggressive regulations on them, with capital requirements set high enough that they could fundamentally shrink those banks. For Carney, it’s important that we do not identify any firm as too large that it is risky for the economy, and thus increase their capital requirements, since doing so just encourages cronyism -- indeed, it is the logical conclusion of cronyism. Don’t regulate the largest firms with more attention or care; just don’t do anything to them.

In the Pethokoukis version, the financial sector poses a real threat to the stability of the economy, and as such special efforts should be made to prevent failure and handle failure when it does occur. His answer is, essentially, to do more. In the Carney version, there’s no real danger outside the government’s interference, or at least not a danger that is worth a policy solution. His answer is to do nothing, except repeal what regulation already exists.

And, crucially, for Pethokoukis, the recent increase in capital surcharges for SIFIs are a good idea; for Carney, they enshrine the problem by working through the SIFI framework, and are a bad idea. How can a policy agenda be built around such a “cronyism” framework?

There are other problems with “cronyism” as described here. Pethokoukis blames cronyism for the concentration in the financial sector in the last few decades. However the previous argument had been that the size and geographic restrictions that prevented this concentration before the 1990s are the real cronyism. Dodd-Frank blocks a single financial firm from having liabilities in excess of 10 percent of all liabilities, benefitting smaller firms at the expense of larger ones. Is that cronyism or the opposite? Cronyism can’t just be “things turned out in a terrible way when left to the markets.”

As Rich Yeselson notes in a fantastic essay on New Left historians in the recent issue of Democracy, the Gabriel Kolko-inspired stories about how regulations evolves (stories that influence Carney) are monomaniacally mono-causal. So just quoting CEOs’ statements to the press about Dodd-Frank constitutes analysis, as the regulations must obviously flow from elite desires through their captured lackeys in the state.

But Dodd-Frank is more complicated than that - look at the effort to stop the CFPB from starting, or the epic battles both between and within regulators, the state and consumers over derivatives. Carney’s top-down inescapable vision of how reform works leaves no room for the contingency of actual efforts to fix a broken system. In turn, this leaves us with no way to actually critique what Dodd-Frank does. Worse, it conflates fighting “cronyism” with an agenda of laissez-faire economics, liberty of contract, and hard money, sneaking in a three-legged stool of reactionary thought through our concerns about fairness.

Actual cronyism is a real problem, but I’ve seen no evidence that it adds up to a systemic criticism of our economy as a whole. Instead, we need a language of accountability, benefit and power in how markets are structured. Without this, we’ll have no working compass for reform.

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I’m pretty convinced that the term “crony capitalism,” as deployed by the right, is useless as a political or analytical tool. I keep a close eye on how conservatives talk about financial reform, and according to the right, Dodd-Frank is crony capitalism. Oh noes! But what does that mean, and how can we stop it? Here’s a fascinating case in point: two AEI scholars with different publications argue that we need to stop Dodd-Frank from enabling crony capitalism, and then proceed to describe two opposite, mutually exclusive sets of problems and solutions.

First, a good test question: The Federal Reserve recently required that the largest firms have a greater capital surcharge than had been originally proposed. Is that cronyism?

Here’s one story, from James Pethokoukis in ”Fighting the Crony Capitalist Alliance”: “our highly concentrated and interconnected, Too Big to Fail financial system [...] gives a competitive edge to megabanks.” How is that? Regulators create incentives for big banks to take on risks “such as investing in mortgage-backed securities and complex derivatives.” Banks are the size they are, and do the activities that they do, because of the actions of regulators.

So how do we combat this problem? According to Pethokoukis, we should “substantially raise the capital requirements for Too Big To Fail banks” to limit risk. Even more, “such capital requirements might well nudge the biggest banks into shrinking themselves or breaking up.”

Here’s another story, from Tim Carney’s “Anti-Cronyism Agenda for the 114th Congress”: Dodd-Frank is cronyism because “[e]xcessive regulation is often the most effective crony capitalism.” What’s worse is that Dodd-Frank designates the biggest firms as Systemically Important Financial Institutions (SIFIs), meaning that they pose a systemic risk to the economy. Those firms are put under more regulation, but it’s obviously a cover for a permanent set of protections.

So what should we do? According to Carney’s agenda, Congress should “open banking up to more competition by repealing regulations that give large incumbent banks advantages over smaller ones.” Well, which regulations are those? “Congress should repeal its authority to designate large financial firms as SIFIs.”

Note that though these are from the same institution and carry the same banner of fighting “cronyism,” these agendas are the exact opposite of each other. For Pethokoukis, the important goal is identifying the largest and riskiest institutions and putting aggressive regulations on them, with capital requirements set high enough that they could fundamentally shrink those banks. For Carney, it’s important that we do not identify any firm as too large that it is risky for the economy, and thus increase their capital requirements, since doing so just encourages cronyism -- indeed, it is the logical conclusion of cronyism. Don’t regulate the largest firms with more attention or care; just don’t do anything to them.

In the Pethokoukis version, the financial sector poses a real threat to the stability of the economy, and as such special efforts should be made to prevent failure and handle failure when it does occur. His answer is, essentially, to do more. In the Carney version, there’s no real danger outside the government’s interference, or at least not a danger that is worth a policy solution. His answer is to do nothing, except repeal what regulation already exists.

And, crucially, for Pethokoukis, the recent increase in capital surcharges for SIFIs are a good idea; for Carney, they enshrine the problem by working through the SIFI framework, and are a bad idea. How can a policy agenda be built around such a “cronyism” framework?

There are other problems with “cronyism” as described here. Pethokoukis blames cronyism for the concentration in the financial sector in the last few decades. However the previous argument had been that the size and geographic restrictions that prevented this concentration before the 1990s are the real cronyism. Dodd-Frank blocks a single financial firm from having liabilities in excess of 10 percent of all liabilities, benefitting smaller firms at the expense of larger ones. Is that cronyism or the opposite? Cronyism can’t just be “things turned out in a terrible way when left to the markets.”

As Rich Yeselson notes in a fantastic essay on New Left historians in the recent issue of Democracy, the Gabriel Kolko-inspired stories about how regulations evolves (stories that influence Carney) are monomaniacally mono-causal. So just quoting CEOs’ statements to the press about Dodd-Frank constitutes analysis, as the regulations must obviously flow from elite desires through their captured lackeys in the state.

But Dodd-Frank is more complicated than that - look at the effort to stop the CFPB from starting, or the epic battles both between and within regulators, the state and consumers over derivatives. Carney’s top-down inescapable vision of how reform works leaves no room for the contingency of actual efforts to fix a broken system. In turn, this leaves us with no way to actually critique what Dodd-Frank does. Worse, it conflates fighting “cronyism” with an agenda of laissez-faire economics, liberty of contract, and hard money, sneaking in a three-legged stool of reactionary thought through our concerns about fairness.

Actual cronyism is a real problem, but I’ve seen no evidence that it adds up to a systemic criticism of our economy as a whole. Instead, we need a language of accountability, benefit and power in how markets are structured. Without this, we’ll have no working compass for reform.

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New Score: Socialize Uber

Dec 17, 2014Mike Konczal

I have a new Score column at The Nation: Socialize Uber. It's about Uber and other sharing economy companies as worker cooperatives. Normally I eyeroll when people talk about cooperatives as an economic solution, but I think there's compelling stuff here. Given that the workers already own all the capital in the form of their cars, why aren’t they collecting all the profits? I'm particularly interested in the comparisons to the Populist movement in this new economy, as back then workers also were amazed by new technologies but also wanted fairness on the terms they could access them.

We've also revamped how the Score looks, particularly the online part of it, so I hope you check it out. There's some commentary already from Will Wilkinson and Brian Dominick. It's definitely a moment where people are thinking about this, as columns from Nathan Schneider and Trebor Scholz also came out at the same time making similar arguments about worker cooperatives.

Sure Pricing

Uber is also in the news because they turned on surge pricing during a terrorist hostage situation in Sydney, Australia. This has gotten people talking about surge pricing. I don't mind surge pricing, but the moralizing way journalists talk about it is really off-putting. Matt Bruenig has a good response to an example of this by Olivia Nuzzi ("How does the world owe you a private car, priced as you deem acceptable, that didn't exist five years ago? [...] you might consider meandering over to a country with a different economic system").

To expand on Matt, there's two reasons why people might want to avoid surge pricing that virtually never get discussed.

One is that people care about fairness. As Arin Dube wrote about the minimum wage, "the economists Colin F. Camerer and Ernst Fehr have documented in numerous experimental studies that the preference for fairness in transactions is strong: individuals are often willing to sacrifice their own payoffs to punish those who are seen as acting unfairly, and such punishments activate reward-related neural circuits." This is why you see high support for the minimum wage among people who otherwise support right-wing economic ideas, as we just saw in the 2014 elections.

People care about fairness; it's in their utility function if you prefer. It's a funny economic argument where markets are meant to serve what people want, and producers are meant to meet those needs at the lowest possible cost, but if people want fairness built into the cost model then it's all sneering all the time. It's almost as if the moment is about conditioning people to serve market needs, rather than markets to serve people needs. If people demanded a cola beveridge that, say, was less sweet, would we get Daily Beast articles about "how dare you, the world doesn't owe you a less sweet cola, move to North Korea if you want to see your market demands turn into products." And there's a long history of using moral persuasion to try and limit price-gouging - check out Little House on the Prairie.

But the first issue becomes more relevant with a second concern, however, and that's the increasingly negative view of Uber's tactics. People don't have perfect information, and it's reasonable that they might want to pool the risk that they'll be targeted for price discrimination. The obvious comparison here was that early moment Amazon turned out to be charging higher prices based on your browsing history, which it promptly shut down after public outcry. (Why don't you meander over to a different country if you don't want Amazon data-mining your browser to rip you off?)

Why were people offended? Because in that case the price discimination just transfered the surplus from the customers to the producers - there wasn't any allocative effect. And the same worry can carry over to surge pricing.

Without perfect information, customers don't really know if they are getting price surged based on supply-and-demand fundamentals or on their own individual characteristics. Imagine if the algorithm increased the liklihood of price surging based on people's past willingness to select price surging. Or because a neighborhood is more like to accept price surging. I assume we'd be mad, right? That wouldn't have an allocative effect - it would just be ripping off those people because the code can tell they'd be willing to pay more.

Are they doing this now, or will they do this in the future? Normally trust is what would help mitigate both these worries, but with stories about "God mode" and their take-no-prisoners approach to everything, trust is in increasingly low supply.

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I have a new Score column at The Nation: Socialize Uber. It's about Uber and other sharing economy companies as worker cooperatives. Normally I eyeroll when people talk about cooperatives as an economic solution, but I think there's compelling stuff here. Given that the workers already own all the capital in the form of their cars, why aren’t they collecting all the profits? I'm particularly interested in the comparisons to the Populist movement in this new economy, as back then workers also were amazed by new technologies but also wanted fairness on the terms they could access them.

We've also revamped how the Score looks, particularly the online part of it, so I hope you check it out. There's some commentary already from Will Wilkinson and Brian Dominick. It's definitely a moment where people are thinking about this, as columns from Nathan Schneider and Trebor Scholz also came out at the same time making similar arguments about worker cooperatives.

Sure Pricing

Uber is also in the news because they turned on surge pricing during a terrorist hostage situation in Sydney, Australia. This has gotten people talking about surge pricing. I don't mind surge pricing, but the moralizing way journalists talk about it is really off-putting. Matt Bruenig has a good response to an example of this by Olivia Nuzzi ("How does the world owe you a private car, priced as you deem acceptable, that didn't exist five years ago? [...] you might consider meandering over to a country with a different economic system").

To expand on Matt, there's two reasons why people might want to avoid surge pricing that virtually never get discussed.

One is that people care about fairness. As Arin Dube wrote about the minimum wage, "the economists Colin F. Camerer and Ernst Fehr have documented in numerous experimental studies that the preference for fairness in transactions is strong: individuals are often willing to sacrifice their own payoffs to punish those who are seen as acting unfairly, and such punishments activate reward-related neural circuits." This is why you see high support for the minimum wage among people who otherwise support right-wing economic ideas, as we just saw in the 2014 elections.

People care about fairness; it's in their utility function if you prefer. It's a funny economic argument where markets are meant to serve what people want, and producers are meant to meet those needs at the lowest possible cost, but if people want fairness built into the cost model then it's all sneering all the time. It's almost as if the moment is about conditioning people to serve market needs, rather than markets to serve people needs. If people demanded a cola beveridge that, say, was less sweet, would we get Daily Beast articles about "how dare you, the world doesn't owe you a less sweet cola, move to North Korea if you want to see your market demands turn into products." And there's a long history of using moral persuasion to try and limit price-gouging - check out Little House on the Prairie.

But the first issue becomes more relevant with a second concern, however, and that's the increasingly negative view of Uber's tactics. People don't have perfect information, and it's reasonable that they might want to pool the risk that they'll be targeted for price discrimination. The obvious comparison here was that early moment Amazon turned out to be charging higher prices based on your browsing history, which it promptly shut down after public outcry. (Why don't you meander over to a different country if you don't want Amazon data-mining your browser to rip you off?)

Why were people offended? Because in that case the price discimination just transfered the surplus from the customers to the producers - there wasn't any allocative effect. And the same worry can carry over to surge pricing.

Without perfect information, customers don't really know if they are getting price surged based on supply-and-demand fundamentals or on their own individual characteristics. Imagine if the algorithm increased the liklihood of price surging based on people's past willingness to select price surging. Or because a neighborhood is more like to accept price surging. I assume we'd be mad, right? That wouldn't have an allocative effect - it would just be ripping off those people because the code can tell they'd be willing to pay more.

Are they doing this now, or will they do this in the future? Normally trust is what would help mitigate both these worries, but with stories about "God mode" and their take-no-prisoners approach to everything, trust is in increasingly low supply.

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The Bipartisan Policy Center Gets It Wrong: The Lincoln Amendment is Critical to Financial Reform

Dec 11, 2014Mike KonczalAlexis GoldsteinCaitlin Kline

A wide variety of people, ranging from Senators Elizabeth Warren and David Vitter to Representative Maxine Waters and FDIC’s Thomas Hoenig, are trying to stop a last-minute attempt to remove an important piece of financial reform. They are all speaking up against a move to repeal the Lincoln Amendment using language written by Citigroup in the year-end budget process.

Given the wide variety of people against it, it’s interesting how few people are for it. One of the few institutions that has defended it is the Bipartisan Policy Center (BPC), whose Financial Regulatory Reform Initiative released a statement saying:

“The Consolidated and Further Continuing Appropriations Act is consistent with BPC’s recommendations to repeal the Lincoln Amendment and to substantially increase funding for the SEC and CFTC.”

These recommendations they cite date back to a 2013 paper, “Better Path Forward on the Volcker Rule and the Lincoln Amendment,” that included arguments against pushing out swaps.

What’s their case, and does it hold up under scrutiny? We argue it does not. It misreads the purpose and scope of the Volcker Rule, disregards their own analysis on how financial reform should proceed, misses recent developments in the derivatives market, and ignores the issue of what an implicit government support means for exotic derivatives.

As a reminder, the Lincoln Amendment pushing out swaps (which we’ll refer to as 716) insists that the largest banks hold their exotic, customized, and non-cleared derivatives outside of their FDIC-insured entities in separately capitalized subsidiaries. 716 exempted most standardized derivatives, including interest rate and foreign exchange swaps, as well as cleared credit default swaps (CDS). This provision only applies to the odd and dangerous stuff.

So what are BPC's arguments?

716 and Volcker Accomplish Different Goals

Their core argument is that 716 is redundant, and therefore unnecessary, because of the Volcker Rule.  As they put it,“[L]ike the Volcker Rule, the Lincoln Amendment was intended to separate certain securities-related activities from traditional banking activities.” BPC further argues that with a “proper implementation of the Volcker Rule… the rationale for the Lincoln Amendment may no longer apply.”

This is not the case. The Volcker Rule is about risky activities, and focuses on eliminating the gambling risks associated with proprietary trading and exposure to certain types of investment funds. 716, on the other hand, is about risky products, and aims to reduce risk to the Deposit Insurance Fund (DIF) by utilizing separately capitalized entities for the riskiest derivatives.

While there is some overlap between the two, there are significant gaps. For instance, exemptions in the Volcker Rule allow some of the riskiest trades to be done within FDIC-insured entities -- things like making markets in bespoke, exotic, uncleared credit default swaps. Indeed, walking away from the financial crisis with an attitude that uncleared credit default swaps are no big issue is quite troubling. This puts the Deposit Insurance Fund at risk. 

716 complements Volcker by forcing the riskiest and most non-vanilla derivatives and CDS into a separately capitalized entity, something Volcker doesn’t do by itself. This helps protect the DIF in case a firm gets into trouble market-making bespoke trades that can’t be perfectly hedged – a Volcker-compliant activity. 

The Final Volcker Rule Isn’t Fully Implemented

Shockingly, BPC is violating its own analysis with this recommendation. In the 2013 paper, BPC “recommends a wait-and-see approach regarding the Lincoln Amendment until more experience can be gained from the Volcker Rule.” Only then, if the full implementation of the Volcker Rule is working well, could the Lincoln Amendment “be repealed without any negative effect.”

It is disturbing that the BPC supports this removal of the Lincoln Amendment before the Volcker Rule is fully implemented in mid-2015, and even before we've had time to see how it impacts the financial markets. It’s not even clear how they are judging whether the Volcker Rule is working the way they want, given that the data and metrics they rely on so heavily have only just begun to be reported to regulators, and are non-public.

Shoving a bank-written addition into a budget bill, not unlike the CFMA of 2000 which helped create the crisis, is the exact opposite of a “wait-and-see approach.”

Pushout Doesn’t Harm Bank Resolution

Another argument made against 716 was that it would complicate the ability of regulators to deal with a bank failure. BPC points out that regulators are empowered to grant a temporary stay to derivatives, preventing derivative creditors from grabbing collateral while others wait two days, as they did with Lehman Brothers. (Under bankruptcy, derivatives are exempt from this temporary stay, which can complicate and accelerate bankruptcy.)

Part of the argument is true: Dodd-Frank did grant the FDIC new powers under the Orderly Liquidation Authority, which allows them to force a 24-hour stay on derivatives (overriding the exemption), but this only applies to banks under FDIC purview.

BPC argued that the largest banks should be allowed to keep derivatives inside the FDIC accounts, so that they could utilize the FDIC’s OLA power. BPC writes that the 716 “subsidiaries would not enjoy the temporary stay on the unwinding of contracts that applies to banks under FDIC resolution procedures. Rapid termination of such contracts in the event of a bank failure would have a disruptive impact on financial markets."

But this argument is much less valid than it was when it was written, precisely because regulators are anticipating this problem. Eighteen of the major banks and the International Swaps and Derivatives Association (ISDA) agreed in October that they’d contractually apply temporary stays to derivatives. With wide agreement among the banks to apply temporary stays anyway, the proper course of action is to work through this process of standardizing derivatives for automatic stays across the financial sector, rather than trying to use taxpayer funds to backstop them.

Apart from the BPC arguments, we wish to raise an additional point:  

Should Policy Allow Firms to Capitalize on Market-Perceived Subsidies?

Keeping derivatives in FDIC-insured entities lowers their costs: creditors charge lower rates, as FDIC accounts are seen as having the backing of the federal government. And these FDIC accounts typically have higher credit ratings, which is why, in 2011, Bank of America moved derivatives from its Merrill Lynch subsidiary, which had just suffered a downgrade, into its FDIC-insured subsidiary, much to the chagrin of the FDIC.

As Peter Eavis writes in The New York Times, this directly helps Citigroup, who lobbied for and wrote the change, as they own a lot of CDS: “With some $3 trillion of exposure, the bank is one of biggest default swap dealers in the United States. Those swaps right now live inside an entity called Citibank N.A. that enjoys federal deposit insurance. Nearly $2 trillion of those swaps are based on companies or other entities with a junk credit rating.”

And as Eavis points out, it’s very likely that a huge portion of Citigroup’s CDS are uncleared, as very few CDS overall are cleared: “Only about 10 percent of such swaps are centrally cleared, according to official surveys.”

Banks keeping derivatives in the FDIC accounts lower their cost of doing business, due to the market perception of an implicit government support. It should not be the role of policy to artificially lower the cost of bank borrowing, and as such we find the case for removing the Lincoln Amendment to be unconvincing.

Mike Konczal is a Fellow at the Roosevelt Institute.

Alexis Goldstein is a former Wall Street professional, who now serves as the Communications Director at Other98.org.

Caitlin Kline is a derivatives specialist at Better Markets.

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A wide variety of people, ranging from Senators Elizabeth Warren and David Vitter to Representative Maxine Waters and FDIC’s Thomas Hoenig, are trying to stop a last-minute attempt to remove an important piece of financial reform. They are all speaking up against a move to repeal the Lincoln Amendment using language written by Citigroup in the year-end budget process.

Given the wide variety of people against it, it’s interesting how few people are for it. One of the few institutions that has defended it is the Bipartisan Policy Center (BPC), whose Financial Regulatory Reform Initiative released a statement saying:

“The Consolidated and Further Continuing Appropriations Act is consistent with BPC’s recommendations to repeal the Lincoln Amendment and to substantially increase funding for the SEC and CFTC.”

These recommendations they cite date back to a 2013 paper, “Better Path Forward on the Volcker Rule and the Lincoln Amendment,” that included arguments against pushing out swaps.

What’s their case, and does it hold up under scrutiny? We argue it does not. It misreads the purpose and scope of the Volcker Rule, disregards their own analysis on how financial reform should proceed, misses recent developments in the derivatives market, and ignores the issue of what an implicit government support means for exotic derivatives.

As a reminder, the Lincoln Amendment pushing out swaps (which we’ll refer to as 716) insists that the largest banks hold their exotic, customized, and non-cleared derivatives outside of their FDIC-insured entities in separately capitalized subsidiaries. 716 exempted most standardized derivatives, including interest rate and foreign exchange swaps, as well as cleared credit default swaps (CDS). This provision only applies to the odd and dangerous stuff.

So what are BPC's arguments?

716 and Volcker Accomplish Different Goals

Their core argument is that 716 is redundant, and therefore unnecessary, because of the Volcker Rule.  As they put it,“[L]ike the Volcker Rule, the Lincoln Amendment was intended to separate certain securities-related activities from traditional banking activities.” BPC further argues that with a “proper implementation of the Volcker Rule… the rationale for the Lincoln Amendment may no longer apply.”

This is not the case. The Volcker Rule is about risky activities, and focuses on eliminating the gambling risks associated with proprietary trading and exposure to certain types of investment funds. 716, on the other hand, is about risky products, and aims to reduce risk to the Deposit Insurance Fund (DIF) by utilizing separately capitalized entities for the riskiest derivatives.

While there is some overlap between the two, there are significant gaps. For instance, exemptions in the Volcker Rule allow some of the riskiest trades to be done within FDIC-insured entities -- things like making markets in bespoke, exotic, uncleared credit default swaps. Indeed, walking away from the financial crisis with an attitude that uncleared credit default swaps are no big issue is quite troubling. This puts the Deposit Insurance Fund at risk. 

716 complements Volcker by forcing the riskiest and most non-vanilla derivatives and CDS into a separately capitalized entity, something Volcker doesn’t do by itself. This helps protect the DIF in case a firm gets into trouble market-making bespoke trades that can’t be perfectly hedged – a Volcker-compliant activity. 

The Final Volcker Rule Isn’t Fully Implemented

Shockingly, BPC is violating its own analysis with this recommendation. In the 2013 paper, BPC “recommends a wait-and-see approach regarding the Lincoln Amendment until more experience can be gained from the Volcker Rule.” Only then, if the full implementation of the Volcker Rule is working well, could the Lincoln Amendment “be repealed without any negative effect.”

It is disturbing that the BPC supports this removal of the Lincoln Amendment before the Volcker Rule is fully implemented in mid-2015, and even before we've had time to see how it impacts the financial markets. It’s not even clear how they are judging whether the Volcker Rule is working the way they want, given that the data and metrics they rely on so heavily have only just begun to be reported to regulators, and are non-public.

Shoving a bank-written addition into a budget bill, not unlike the CFMA of 2000 which helped create the crisis, is the exact opposite of a “wait-and-see approach.”

Pushout Doesn’t Harm Bank Resolution

Another argument made against 716 was that it would complicate the ability of regulators to deal with a bank failure. BPC points out that regulators are empowered to grant a temporary stay to derivatives, preventing derivative creditors from grabbing collateral while others wait two days, as they did with Lehman Brothers. (Under bankruptcy, derivatives are exempt from this temporary stay, which can complicate and accelerate bankruptcy.)

Part of the argument is true: Dodd-Frank did grant the FDIC new powers under the Orderly Liquidation Authority, which allows them to force a 24-hour stay on derivatives (overriding the exemption), but this only applies to banks under FDIC purview.

BPC argued that the largest banks should be allowed to keep derivatives inside the FDIC accounts, so that they could utilize the FDIC’s OLA power. BPC writes that the 716 “subsidiaries would not enjoy the temporary stay on the unwinding of contracts that applies to banks under FDIC resolution procedures. Rapid termination of such contracts in the event of a bank failure would have a disruptive impact on financial markets."

But this argument is much less valid than it was when it was written, precisely because regulators are anticipating this problem. Eighteen of the major banks and the International Swaps and Derivatives Association (ISDA) agreed in October that they’d contractually apply temporary stays to derivatives. With wide agreement among the banks to apply temporary stays anyway, the proper course of action is to work through this process of standardizing derivatives for automatic stays across the financial sector, rather than trying to use taxpayer funds to backstop them.

Apart from the BPC arguments, we wish to raise an additional point:  

Should Policy Allow Firms to Capitalize on Market-Perceived Subsidies?

Keeping derivatives in FDIC-insured entities lowers their costs: creditors charge lower rates, as FDIC accounts are seen as having the backing of the federal government. And these FDIC accounts typically have higher credit ratings, which is why, in 2011, Bank of America moved derivatives from its Merrill Lynch subsidiary, which had just suffered a downgrade, into its FDIC-insured subsidiary, much to the chagrin of the FDIC.

As Peter Eavis writes in The New York Times, this directly helps Citigroup, who lobbied for and wrote the change, as they own a lot of CDS: “With some $3 trillion of exposure, the bank is one of biggest default swap dealers in the United States. Those swaps right now live inside an entity called Citibank N.A. that enjoys federal deposit insurance. Nearly $2 trillion of those swaps are based on companies or other entities with a junk credit rating.”

And as Eavis points out, it’s very likely that a huge portion of Citigroup’s CDS are uncleared, as very few CDS overall are cleared: “Only about 10 percent of such swaps are centrally cleared, according to official surveys.”

Banks keeping derivatives in the FDIC accounts lower their cost of doing business, due to the market perception of an implicit government support. It should not be the role of policy to artificially lower the cost of bank borrowing, and as such we find the case for removing the Lincoln Amendment to be unconvincing.

Mike Konczal is a Fellow at the Roosevelt Institute.

Alexis Goldstein is a former Wall Street professional, who now serves as the Communications Director at Other98.org.

Caitlin Kline is a derivatives specialist at Better Markets.

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The Financial Regulation Congress Is Quietly Trying to Destroy in the Budget

Dec 10, 2014Mike Konczal

There are concerns that the budget bill under debate in Congress will eliminate Section 716 of Dodd-Frank, using language previously drafted by Citigroup. So what is this all about?

Section 716 of Dodd-Frank says that institutions that receive federal insurance through FDIC and the Federal Reserve can’t be dealers in the specialized derivatives market. Banks must instead “push out” these dealers into separate subsidiaries with their own capital that don’t benefit from the government backstop. They can still trade in many standardized derivatives and hedge their own risks, however. This was done because having banks act as exotic swap dealers put taxpayers at risk in the event of a sudden collapse. That’s it.

Why would you want a regulation like this? The first is that it acts as a complement to the Volcker Rule. As Americans for Financial Reform notes, the Volcker Rule allows banks to make markets in derivatives. What 716 does is regulate the most exotic and custom derivatives, like the custom credit default swaps that generated the financial crisis of 2008. These derivatives are the most difficult part for the Volcker Rule to manage, so 716 adds a crucial second layer of protection.

A second reason is 716 will also prevent exotic derivatives from being subsidized by the government’s safety net. As the Roosevelt Institute’s Rob Johnson notes, removing this language would “extend guarantees to complex derivatives within banks, which in turn will subsidize and encourage their overuse.” We should be finding a balance for the derivatives market, not expanding it.

The third reason is for the sake of financial stability. The major banks have been unable to produce credible living wills describing how they can go through bankruptcy without tearing down the system. There is no world in which these banks will be closer to achieving this crucial goal by cramming themselves full of even more exotic types of derivatives.

Pushing out these risky derivatives enables the financial sector to focus more on its core job. As Roosevelt’s Chief Economist Joseph Stiglitz wrote in favor of 716, “[b]y quarantining highly risky swaps trading from banking altogether, federally insured deposits (and our basic payments mechanism) will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability.”

Stiglitz reiterated this point today, saying “Section 716 facilitates the ability of markets to provide the kind of discipline without which a market economy cannot effectively function. I was concerned in 2010 that Congress would weaken 716, but what is proposed now is worse than anything contemplated back then.”

Now many on Wall Street would argue that this rule is unnecessary. However, their arguments are not persuasive.

They might argue that many people opposed this bill at the time it was proposed, and indeed it was the source of great controversy. But what they overlook is that there was already a wave of compromise on this provision during the drafting Dodd-Frank. 716 focuses mainly on a subset of risky and exotic derivatives. Under the final law, banks can still hold most types of standardized and common derivatives, like ones for interest rates. This is the vast majority of the market. Banks can also hold derivatives that they use to mitigate their own risk. There was significant debate in 2010 over how this regulation should play out, and the final language reflects this compromise.

They might also argue that the financial sector is taking care of this issue on its own. But instead of being moved out, derivatives are being moved into backstopped banks. As the former FDIC chairperson Sheila Bair notes, the “trend has been to move this activity from the investment banking affiliates, which do not use insured deposits, into the banks where the activity can be funded with cheap, FDIC backed deposits. Section 716 would at least keep certain credit default swaps outside of insured banks.”

The question of how we should regulate derivatives and the financial markets more broadly has not been settled. There’s still an ongoing debate over how derivatives will be regulated across borders. And as noted, banks are still unable to produce credible living wills to survive a bankruptcy court. It’s for reasons like this that a wide variety of people who didn’t support the initial language of 716 now oppose removing 716: Timothy GeithnerJack LewSheila BairBarney Frank, and more.

We should be strengthening, not weakening, financial reform. And removing this piece of the law will not benefit this project.

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There are concerns that the budget bill under debate in Congress will eliminate Section 716 of Dodd-Frank, using language previously drafted by Citigroup. So what is this all about?

Section 716 of Dodd-Frank says that institutions that receive federal insurance through FDIC and the Federal Reserve can’t be dealers in the specialized derivatives market. Banks must instead “push out” these dealers into separate subsidiaries with their own capital that don’t benefit from the government backstop. They can still trade in many standardized derivatives and hedge their own risks, however. This was done because having banks act as exotic swap dealers put taxpayers at risk in the event of a sudden collapse. That’s it.

Why would you want a regulation like this? The first is that it acts as a complement to the Volcker Rule. As Americans for Financial Reform notes, the Volcker Rule allows banks to make markets in derivatives. What 716 does is regulate the most exotic and custom derivatives, like the custom credit default swaps that generated the financial crisis of 2008. These derivatives are the most difficult part for the Volcker Rule to manage, so 716 adds a crucial second layer of protection.

A second reason is 716 will also prevent exotic derivatives from being subsidized by the government’s safety net. As the Roosevelt Institute’s Rob Johnson notes, removing this language would “extend guarantees to complex derivatives within banks, which in turn will subsidize and encourage their overuse.” We should be finding a balance for the derivatives market, not expanding it.

The third reason is for the sake of financial stability. The major banks have been unable to produce credible living wills describing how they can go through bankruptcy without tearing down the system. There is no world in which these banks will be closer to achieving this crucial goal by cramming themselves full of even more exotic types of derivatives.

Pushing out these risky derivatives enables the financial sector to focus more on its core job. As Roosevelt’s Chief Economist Joseph Stiglitz wrote in favor of 716, “[b]y quarantining highly risky swaps trading from banking altogether, federally insured deposits (and our basic payments mechanism) will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability.”

Stiglitz reiterated this point today, saying “Section 716 facilitates the ability of markets to provide the kind of discipline without which a market economy cannot effectively function. I was concerned in 2010 that Congress would weaken 716, but what is proposed now is worse than anything contemplated back then.”

Now many on Wall Street would argue that this rule is unnecessary. However, their arguments are not persuasive.

They might argue that many people opposed this bill at the time it was proposed, and indeed it was the source of great controversy. But what they overlook is that there was already a wave of compromise on this provision during the drafting Dodd-Frank. 716 focuses mainly on a subset of risky and exotic derivatives. Under the final law, banks can still hold most types of standardized and common derivatives, like ones for interest rates. This is the vast majority of the market. Banks can also hold derivatives that they use to mitigate their own risk. There was significant debate in 2010 over how this regulation should play out, and the final language reflects this compromise.

They might also argue that the financial sector is taking care of this issue on its own. But instead of being moved out, derivatives are being moved into backstopped banks. As the former FDIC chairperson Sheila Bair notes, the “trend has been to move this activity from the investment banking affiliates, which do not use insured deposits, into the banks where the activity can be funded with cheap, FDIC backed deposits. Section 716 would at least keep certain credit default swaps outside of insured banks.”

The question of how we should regulate derivatives and the financial markets more broadly has not been settled. There’s still an ongoing debate over how derivatives will be regulated across borders. And as noted, banks are still unable to produce credible living wills to survive a bankruptcy court. It’s for reasons like this that a wide variety of people who didn’t support the initial language of 716 now oppose removing 716: Timothy GeithnerJack LewSheila BairBarney Frank, and more.

We should be strengthening, not weakening, financial reform. And removing this piece of the law will not benefit this project.

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Monetary Policy Event with Paul Krugman and Senator Warren Today

Dec 9, 2014Mike Konczal
I'm very excited to share that AFR, EPI, and the Roosevelt Institute have teamed up to host a conference on monetary policy, the recovery and the financial sector today. The conference will feature keynotes from Paul Krugman and Senator Elizabeth Warren.
I'm very excited to share that AFR, EPI, and the Roosevelt Institute have teamed up to host a conference on monetary policy, the recovery and the financial sector today. The conference will feature keynotes from Paul Krugman and Senator Elizabeth Warren. It also features, among many other great panelists, friend of the blog and Roosevelt fellow JW Mason (who recently wrote about monetary policy here and here, and at the old rortybomb blog here), and who has been part of the financialization project we'll be releasing soon.
 
Though the event is sold out, EPI will be posting the video after the event, and I hope you'll watch it.
 
Tuesday, December 9, 2014
 
12:30 – 4:00 p.m. ET
 
Hart Senate Office Building 902
Washington, DC
 
Sponsored by Americans for Financial Reform, Economic Policy Institute, and Roosevelt Institute's Financialization Project
 
FEATURING
Senator ELIZABETH WARREN
Economist/columnist PAUL KRUGMAN
 
Today, pressure is building on the Federal Reserve to use monetary policy to raise short-term interest rates, a move that could short-circuit a still far from complete economic recovery. Proponents of this move argue it is needed to avert wage and price inflation and prevent excessive risk-taking in the financial sector. But there are serious questions about this argument, and there are new tools available to the Fed to influence Wall Street and the wider economy. These tools and better economic analysis could allow the Fed to better target specific concerns regarding Wall Street financial risk-taking while minimizing unnecessary drag on the Main Street economy.
 
Join Elizabeth Warren, Paul Krugman, and experts on monetary and regulatory policy for a discussion of Federal Reserve economic management. The discussion will range from what the Fed’s next moves should be in monetary policy to the ways in which the Fed can use new regulatory tools to address problems in the financial market without causing unnecessary problems in the broader economy.
 
AGENDA
 
12:30pm – Keynote by Senator Elizabeth Warren
 
1:00pm -  Panel: Monetary Policy and the Economy
 
Panelists: 
 
Josh Bivens, Research and Policy Director, Economic Policy Institute
William Spriggs, Chief Economist, AFL-CIO
JW Mason, John Jay College, Roosevelt Institute
Robert Pollin, Professor of Economics and Co-Director of PERI, University of Massachusetts Amherst
 
2:15pm – Keynote by Paul Krugman
 
2:45pm – Panel: Regulatory Tools For Managing Financial Cycles
 
Panelists: 
 
Marcus Stanley, Policy Director, Americans for Financial Reform
Jill Cetina, Associate Director for Policy Studies,  Office of Financial Research
Jennifer Taub, Professor of Law, Vermont Law School
Jane D'Arista, Author, “The Evolution of U.S. Finance"

 

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The UNC Coup and the Second Limit of Economic Liberalism

Nov 13, 2014Mike Konczal

There was a quiet revolution in the University of North Carolina higher education system in August, one that shows an important limit of current liberal thought. In the aftermath of the 2014 election, there’s been a significant amount of discussion over whether liberals have an economic agenda designed for the working and middle classes. This discussion has primarily been about wages in the middle of the income distribution, which are the first major limit of liberal thought; however, it is also tied to a second limit, which is the way that liberals want to provide public goods and services.

So what happened? The UNC System Board of Governors voted unanimously to cap the amount of tuition that may be used for financial aid for need-based students at no more than 15 percent. With tuition going up rapidly at public universities as the result of public disinvestment, administrators have recently begun using general tuition to supplement their ability to provide aid. This cross-subsidization has been heralded as a solution to the problem of high college costs. Sticker price is high, but the net price for poorer students will be low.

This system works as long as there is sufficient middle-class buy-in, but it’s now capped at UNC. As a board member told the local press, the burden of providing need-based aid “has become unfairly apportioned to working North Carolinians,” and this new policy helps prevent that. Iowa implemented a similar approach back in 2013. And as Kevin Kiley has reported for IHE, similar proposals have been floated in Arizona and Virginia. This trend is likely to gain strength as states continue to disinvest.

The problem for liberals isn’t just that there’s no way for them to win this argument with middle-class wages stagnating, though that is a problem. The far bigger issue for liberals is that this is a false choice, a real class antagonism that has been created entirely by the process of state disinvestment, privatization, cost-shifting of tuitions away from general revenues to individuals, and the subsequent explosion in student debt. As long as liberals continue to play this game, they’ll be undermining their chances.

First Limit: Middle-Class Wages

There’s been a wave of commentary about how the Democrats don’t have a middle-class wage agenda. David Leonhardt wrote the core essay, “The Great Wage Slowdown, Looming Over Politics,” with its opening line: “How does the Democratic Party plan to lift stagnant middle-class incomes?” Josh Marshall made the same argument as well. The Democrats have many smart ideas on the essential agenda of reducing poverty, most of which derive from pegging the low-end wage at a higher level and then adding cash or cash-like transfers to fill in the rest. But what about the middle class?

One obvious answer is “full employment.” Running the economy at full steam is the most straightforward way of boosting overall wages and perhaps reversing the growth in the capital-share of income. However, that approach hasn’t been adopted by the President, strategically or even rhetorically. Part of it might be that if the economy is terrible because of vague forces, technological changes and necessary pain following a financial crisis, then the Democrats can’t really be blamed for stagnation. That strategy will not work out for them.

The Democrats (and even many liberals in general) also haven’t developed a story about why inequality matters so much for the middle class. There are such stories, of course: the collapse of high progressive taxation creates incentives to rent seek, financialization makes the economy focused less on innovation and more on disgorging the cash, and new platform monopolies are deploying forms of market power that are increasingly worrisome.

Second Limit: Public Provisioning

A similar dynamic is in play with social goods. The liberal strategy is increasingly to leave the provisioning of social goods to the market, while providing coupons for the poorest to afford those goods. By definition, means-testing this way puts high implicit taxes on poorer people in a way that decommodification does not. But beyond that simple point, this leaves middle-class people in a bind, as the ability of the state to provide access and contain costs efficiently through its scale doesn’t benefit them, and stagnating incomes put even more pressure on them.

As noted, antagonisms between the middle class and the poor in higher education are entirely a function of public disinvestment. The moment higher education is designed to put massive costs onto individual students, suddenly individuals are forced to look out only for themselves. If college tuition was largely free, paid for by all people and income sources, then there’d be no need for a working-class or middle-class student to view poorer student as a direct threat to their economic stability. And there's no better way to prematurely destroy a broader liberal agenda by designing a system that creates these conflicts.

These worries are real. The incomes of recent graduates are stagnating as well. The average length of time people are taking to pay off their student loans is up 80 percent, to over 13 years. Meanwhile, as Janet Yellen recently showed in the graphic below, student debt is rising as a percentage of income for everyone below the bottom 5 percent. It’s not surprising that studies find student debt impacting family formation and small business creation, and that people are increasingly looking out for just themselves.

You could imagine committing to lowering costs broadly across the system, say through the proposal by Sara Goldrick-Rab and Nancy Kendall to make the first two years free. But Democrats aren't doing this. Instead, President Obama’s solution is to try and make students better consumers on the front-end with more disclosures and outcome surveys for schools, and to make the lowest-income graduates better debtors on the back-end with caps on how burdensome student debt can be. These solutions by the President are not designed to contain the costs of higher education in a substantial way and, crucially, they don’t increase the public buy-in and interest in public higher education.

The Relevance for the ACA

I brought up higher education because I think it’s relevant, but I think it also can help explain the lack of political payout for the Affordable Care Act. It’s here! The ACA is not only meeting expectations, it’s even exceeding them in major ways. Yet it still remains unpopular, even as millions of people are using the exchanges. There is no political payout for the Democrats.

Liberals chalk this up to the right-wing noise machine, and no doubt that hurts. But part of the problem is that middle-class individuals still end up facing an individual product they are purchasing in a market, except without any subsidies. Though the insurance is better regulated, serious cost controls so far have not been part of the discussion. Polling shows half of the users of the exchange are unsure if they can make their payments and are worried about being able to afford getting sick. This, in turn, blocks the formation of a broad-based coalition capable of defending, sustaining, and expanding the ACA in the same way those have formed for Social Security and Medicare.

Any serious populist agenda will have to have a broader agenda for wages, with full employment as the central idea. But it will also need to include social programs that are broader based and focused on cost controls; here, luckily, the public option is a perfect organizing metaphor.

Follow or contact the Rortybomb blog:
 
  

 

There was a quiet revolution in the University of North Carolina higher education system in August, one that shows an important limit of current liberal thought. In the aftermath of the 2014 election, there’s been a significant amount of discussion over whether liberals have an economic agenda designed for the working and middle classes. This discussion has primarily been about wages in the middle of the income distribution, which are the first major limit of liberal thought; however, it is also tied to a second limit, which is the way that liberals want to provide public goods and services.

So what happened? The UNC System Board of Governors voted unanimously to cap the amount of tuition that may be used for financial aid for need-based students at no more than 15 percent. With tuition going up rapidly at public universities as the result of public disinvestment, administrators have recently begun using general tuition to supplement their ability to provide aid. This cross-subsidization has been heralded as a solution to the problem of high college costs. Sticker price is high, but the net price for poorer students will be low.

This system works as long as there is sufficient middle-class buy-in, but it’s now capped at UNC. As a board member told the local press, the burden of providing need-based aid “has become unfairly apportioned to working North Carolinians,” and this new policy helps prevent that. Iowa implemented a similar approach back in 2013. And as Kevin Kiley has reported for IHE, similar proposals have been floated in Arizona and Virginia. This trend is likely to gain strength as states continue to disinvest.

The problem for liberals isn’t just that there’s no way for them to win this argument with middle-class wages stagnating, though that is a problem. The far bigger issue for liberals is that this is a false choice, a real class antagonism that has been created entirely by the process of state disinvestment, privatization, cost-shifting of tuitions away from general revenues to individuals, and the subsequent explosion in student debt. As long as liberals continue to play this game, they’ll be undermining their chances.

First Limit: Middle-Class Wages

There’s been a wave of commentary about how the Democrats don’t have a middle-class wage agenda. David Leonhardt wrote the core essay, “The Great Wage Slowdown, Looming Over Politics,” with its opening line: “How does the Democratic Party plan to lift stagnant middle-class incomes?” Josh Marshall made the same argument as well. The Democrats have many smart ideas on the essential agenda of reducing poverty, most of which derive from pegging the low-end wage at a higher level and then adding cash or cash-like transfers to fill in the rest. But what about the middle class?

One obvious answer is “full employment.” Running the economy at full steam is the most straightforward way of boosting overall wages and perhaps reversing the growth in the capital-share of income. However, that approach hasn’t been adopted by the President, strategically or even rhetorically. Part of it might be that if the economy is terrible because of vague forces, technological changes and necessary pain following a financial crisis, then the Democrats can’t really be blamed for stagnation. That strategy will not work out for them.

The Democrats (and even many liberals in general) also haven’t developed a story about why inequality matters so much for the middle class. There are such stories, of course: the collapse of high progressive taxation creates incentives to rent seek, financialization makes the economy focused less on innovation and more on disgorging the cash, and new platform monopolies are deploying forms of market power that are increasingly worrisome.

Second Limit: Public Provisioning

A similar dynamic is in play with social goods. The liberal strategy is increasingly to leave the provisioning of social goods to the market, while providing coupons for the poorest to afford those goods. By definition, means-testing this way puts high implicit taxes on poorer people in a way that decommodification does not. But beyond that simple point, this leaves middle-class people in a bind, as the ability of the state to provide access and contain costs efficiently through its scale doesn’t benefit them, and stagnating incomes put even more pressure on them.

As noted, antagonisms between the middle class and the poor in higher education are entirely a function of public disinvestment. The moment higher education is designed to put massive costs onto individual students, suddenly individuals are forced to look out only for themselves. If college tuition was largely free, paid for by all people and income sources, then there’d be no need for a working-class or middle-class student to view poorer student as a direct threat to their economic stability. And there's no better way to prematurely destroy a broader liberal agenda by designing a system that creates these conflicts.

These worries are real. The incomes of recent graduates are stagnating as well. The average length of time people are taking to pay off their student loans is up 80 percent, to over 13 years. Meanwhile, as Janet Yellen recently showed in the graphic below, student debt is rising as a percentage of income for everyone below the bottom 5 percent. It’s not surprising that studies find student debt impacting family formation and small business creation, and that people are increasingly looking out for just themselves.

You could imagine committing to lowering costs broadly across the system, say through the proposal by Sara Goldrick-Rab and Nancy Kendall to make the first two years free. But Democrats aren't doing this. Instead, President Obama’s solution is to try and make students better consumers on the front-end with more disclosures and outcome surveys for schools, and to make the lowest-income graduates better debtors on the back-end with caps on how burdensome student debt can be. These solutions by the President are not designed to contain the costs of higher education in a substantial way and, crucially, they don’t increase the public buy-in and interest in public higher education.

The Relevance for the ACA

I brought up higher education because I think it’s relevant, but I think it also can help explain the lack of political payout for the Affordable Care Act. It’s here! The ACA is not only meeting expectations, it’s even exceeding them in major ways. Yet it still remains unpopular, even as millions of people are using the exchanges. There is no political payout for the Democrats.

Liberals chalk this up to the right-wing noise machine, and no doubt that hurts. But part of the problem is that middle-class individuals still end up facing an individual product they are purchasing in a market, except without any subsidies. Though the insurance is better regulated, serious cost controls so far have not been part of the discussion. Polling shows half of the users of the exchange are unsure if they can make their payments and are worried about being able to afford getting sick. This, in turn, blocks the formation of a broad-based coalition capable of defending, sustaining, and expanding the ACA in the same way those have formed for Social Security and Medicare.

Any serious populist agenda will have to have a broader agenda for wages, with full employment as the central idea. But it will also need to include social programs that are broader based and focused on cost controls; here, luckily, the public option is a perfect organizing metaphor.

Follow or contact the Rortybomb blog:
 
  

 

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