Granted, too-big-to-fail is an issue that has populist resonance on both right and left. Still, given McCain's trajectory over the last few years, this isn't necessarily a fight I'd have expected him to pick. Good to see him involved. Politico's Victoria McGrane has the story:

The anger at the nation’s financial behemoths is taking shape in a variety of ways, most notably in a bill from Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), who are targeting big financial institutions such as JPMorgan Chase and Citigroup.

The bipartisan duo’s bill would reinstate the Depression-era law that built a wall between commercial banking and the riskier activities of investment banking. The separation — originally set up in the Glass-Steagall Act — was repealed in 1999.

On the other hand, this does continue McCain's long-established pattern of sticking his finger in the eye of politicians who defeated him (the Obama administration opposes a bank break-up). So maybe it's not so surprising after all.

Key business sector gauge at highest level since 2006.

Brad DeLong: Obama economic team has exceeded expectations.

Lending in Europe contracts again.

Leonhardt is optimistic on the effects of healthcare rationing.

Dissecting the Fed's plan to offer CDs to banks.

Continuing a tradition of mine, here is a shamelessly subjective list of the most noteworthy research which came out in the last year:

Putting a new spin on the idea of sticky wages, Lena Edlund, Joseph Engelberg, and Christopher A. Parsons point out that the earnings of high-end prostitutes don't fall as fast as the decline in the sex-worker's physical attractiveness.

William Nordhaus makes a mathematical argument for why it's impossible to ever accurately measure happiness.

Before there was Superfreakonomics, before there was even Freakonomics, there was Steve Levitt and John Donohue's (in)famous abortion paper claiming that a major cause of declining crime rates was the legalization of abortion. Reviewing follow-up research 10 years after Levitt and Donohue's original paper, Theodore Joyce finds little support for the abortion-crime link.

Yale's (and AIG's) Gary Gorton released a much-discussed paper on the nature of banking panics.

The always-interesting David Galenson surveyed art-history textbooks concluded that Alfred Stieglitz was considered by scholars to be the greatest photographer of the 20th century.

A pair of papers (one by Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo and another by Gauti Eggertsson) provided strong evidence that fiscal policy can be particularly effective when interest rates are close to, or below, zero.

Research: Those in positions of power are more likely to cheat.

Tyler Cowen: Maybe Fed isn't targeting inflation because it would hurt bank recovery.

Charts of the day: Some financial indicators return to pre-crisis levels.

Felix Salmon: Why banks will be fine if we cap credit card rates. 

How much did the Tiger Woods scandal cost his endorsers?

I'm sure Morgan Stanley is reconsidering the way it compensates executives, as described in today's Wall Street Journal, mostly because of the general outcry over executive pay. But I'd guess the recent Goldman Sachs initiative on this front a few weeks ago also made the issue a bit more urgent.

The Journal piece notes that the Morgan proposal doesn't go as far as Goldman's, which would pay 2009 bonuses to top executives entirely in the form of stock that can't be sold for five years (as opposed to cash) and can be clawed back if the executive turns out to have placed some lousy bets. That's true enough. On the other hand, it looks like the Morgan proposal is intended to be permanent, not just apply to this year. (At least one of the proposals Morgan is floating.) And it seems to have a reasonably strict clawback provision, too. Per the Journal: "Under one idea being considered, most of the top 30 Morgan executives would submit 65% or more of their pay to deferrals or 'clawbacks'—or the possibility of returning money in the event of future losses." (Not clear what the current arrangement is, though.)

If Morgan ends up making its reform permanent, its hard to believe Goldman can go back to the status quo ante in 2010. Which, again, is why I thought Goldman might be setting itself up a bit with its initial pass at this. Then again, maybe the political pressure for executive-pay reform is so strong that Goldman was always going to have to make some long-lasting changes. And, in the grand scheme of things, Goldman's 2009 proposal isn't that onerous even if the bank adopts it permanently.

How much are Iran's economic woes a factor in the continued unrest?

How low rates are making saving an unattractive option.

Fed gets a little more specific on plans to mop up excess reserves.

Chart of the day: Paying more and getting less for healthcare in the U.S.

And TNR's Franklin Foer and Noam dissect Obama's nudgeocracy.

The Journal has a wide-ranging story today on the extent to which the government's role in the economy has grown. The gist of the piece is that the expansion has been significant, which is almost certainly true, at least in the short-term. (Much of the intervention will be unwound in the next few years, though some of it won't.)

Still, I'm not entirely sure this is the right question to ask. Given that the whole financial system came close to disintegrating last fall, and that the real economy nearly followed, anyone but a complete neanderthal would have expected a pretty significant government expansion. The question is whether government expanded more, less, or about as much as we would have expected. Coincidentally, the editors of our web site have re-posted the piece Frank Foer and I wrote on this subject back in May, which argues that the expansion of government under Obama isn't as significant as you might have predicted. Ditto for his ambitions going forward. We now have about eight months' more data to work with, but I think the argument still holds up reasonably well.

Relatedly, a subtext of the Journal piece is that the consequences of all the government expansion are more negative than positive at this point. Take, for example, this detail:

Bank of America Corp. also has repaid its aid, freeing itself from the condition lenders hate most about the bailouts: Treasury oversight of executive pay. Even so, it sought the Treasury's advice on a pay package before hiring a new chief executive.

The bank was considering paying $35 million to $40 million to hire Robert Kelly, CEO of Bank of New York Mellon Corp., much of it to buy out his unvested shares and options. The Bank of America board wanted to know how that would go over in Washington. Treasury paymaster Kenneth Feinberg told the bank that if it were still under his purview, he would reject the package. Around the same time, President Obama publicly bashed "fat cat" bankers.

With those two signals, the talks with Mr. Kelly fizzled, according to officials involved with the decision. The bank instead promoted an insider, Brian Moynihan, who had been working to repair the bank's reputation in Washington. ... Mr. Moynihan, by contrast, told Obama aides in October that Bank of America wanted to work with the White House to achieve U.S. policy goals in areas like small-business lending and foreclosure prevention.

I think we can all agree that, in an ideal world, a board should be able to hire the best possible candidate for a job, regardless of his political skills. But, of course, we're pretty far away from that ideal. When it comes to the financial sector, one of the things that makes the world fall far short of the ideal is the government backing (both explicit and implicit) that makes it much, much cheaper for big banks to borrow money.  As Dean Baker pointed out to the Journal:

There's an interesting back-and-forth between Dan Gross and Tim Geithner in Newsweek's year-end interview issue:

GROSS: There have been, and continue to be, calls for you to go. How do you deal with those?

GEITHNER: I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they're necessary to do and better than the alternatives. ...

This is a theme I wrote about in my profile of Larry Summers earlier this year. I don't think you can underestimate the extent to which the financial crises in Mexico and Asia were a formative experience for the Obama economic team--especially in shaping their thinking on the intersection of politics and economic policy.

In his memoir, then-Treasury Secretary Robert Rubin, who both men worked for at the time, summed up his views on the Mexican crisis by citing "the difficulties our political processes have in dealing effectively with issues that involve technical complexities, shorter-term cost to achieve longer-term gain, incomplete information and uncertain outcomes, opportunities for political advantage, and inadequate understanding." Obviously, these same difficulties made a big impression on Geithner and Summers, too. So they were more prepared than most for the political backlash this time around, even if the intensity may have surprised even them on occasion. 

So it sounds like GM's new CFO--Chris Lidell, recently of Microsoft--is a real catch. According to today's Wall Street Journal:

GM began wooing Mr. Liddell before he left Microsoft, said a person familiar with the situation. He quit the software maker during the early stages of those talks, begun in early fall, to consider other jobs, including a CFO post at another major company as well as private-equity opportunities, this person said. GM ended up "chasing him for a long time," this person added. ...

Since joining Microsoft in 2005, Mr. Liddell became well regarded among investors for helping to guide it through a bumpy period as it shifts to a more mature company from the hot growth story it once was.

And God knows GM could use a little help with its finances. As the Journal reminds us:

The finance team led by Mr. Young was criticized by the board of directors in recent meetings for lacking "basic bread-and-butter financial discipline" and being short on accountability, according to people who attended the meetings. The department suffered the public embarrassment in 2009 of running out of money, leading to GM's bankruptcy.

GM hasn't made a profit since 2004, and had to overhaul its accounting and finance staffs in past years due to weakness in controls and other matters.

Still, the fact that the Journal highlights Lidell's "potential to ascend to a chief executive post" is more than a little disconcerting. As I explain in this recent piece, one of GM's big problems over the last several decades is that its top executives have mostly come from the financial side of the company rather than the operations side. Lidell seems more competent than his predecessors in GM's finance office. But, with his extensive CFO and investment-banking resume, giving him the top job would do nothing to address the deeper conceptual issues that have dogged GM's leadership. 

Several commenters have responded to my recent story (and blog posts) about the decline of U.S. manufacturing by insisting it's no big deal if the manufacturing sector shrinks. The United States will gradually replace current manufacturing-sector work with higher-value-added manufacturing and service-sector work, the argument goes, just as we replaced agriculture with manufacturing during the last century. (About 40 percent of the labor force toiled in agriculture in 1900; that was down to about 2 percent in 2000.) These critics are confident we either won't miss a beat or will get a lot richer in the process.

I think there are at least three big problems with this argument, which I may elaborate on later, but will just briefly lay out here:

1.) U.S manufacturing has major competitive problems; the agricultural sector doesn't--and, so far as I can tell, didn't develop them as it shrank. American farmers consistently produce more than we consume; American manufacturers do not.  In 1980, we ran a surplus in agricultural food production of $20.4 billion; in 2008 that was $32.7 billion (though it was significantly smaller as a percentage of the total amount traded). By contrast, in 1980 we ran a trade surplus of $17.4 billion in manufacturing; last year we ran a deficit of $433.2 billion. So while both sectors have become more productive over time, food production stabilized relative to domestic demand even as the sector shrank, while manufacturing continues to decline relative to domestic demand. That means our foreign competitors our eating our lunch in manufacturing; not so in, well, lunch.

2.) The beauty of manufacturing is that wages and productivity aren't necessarily tied to education level. A person with a high school diploma (or less) can make a middle-class living in the manufacturing sector. (See the example of FormFactor in my piece about Ron Bloom.) By contrast, wages and productivity are much more closely tied to education level in the service sector. A person with a high school education or less will generally do very badly in a service-sector job--there are very few service jobs that can provide them with a middle-class living.

Now it would be great if everyone would go to college and be able to thrive in the post-industrial economy. But, in reality, there's always going to be a significant portion of the population that doesn't get beyond high school. Which means that an economy with almost no manufacturing is probably an economy with much greater income inequality. (This obviously wasn't a problem during the transition from agriculture to manufacturing, for the opposite reason.)

Read this one by Binyamin Appelbaum and David Cho of The Washington Post. It's just a terrific piece of financial journalism for a popular audience.

For what it's worth, I agree with Felix Salmon that there aren't any good alternatives to the Fed when it comes to regulating big banks. I also think the Fed acquitted itself reasonably well once the financial system melted down last year. And I can't think of a better person to rethink the Fed's approach to bank regulation than Dan Tarullo, whom Obama appointed to the Fed board.

But boy did the Fed screw up in the run-up to the crisis. (And far more than anyone else I blame Greenspan--who really imposed his will on the institution during the 18-plus years he ran it.) Appelbaum and Cho will send the acid gushing into your stomach.

Update: Just to illustrate what we're talking about with Greenspan, the piece notes that:

The hands-off approach also was a matter of philosophy. Rather than scrutinize banks directly, the Fed decided to push them to appoint internal risk managers who imposed their own checks and balances. Regulators focused on watching the watchmen. Bernanke's predecessor, Alan Greenspan, said that banking was becoming too complicated for regulators to keep up. As he put it bluntly in 1994, self-regulation was increasingly necessary "largely because government regulators cannot do that job."

Greenspan revisited the theme in a 2000 speech, saying, "The speed of transactions and the growing complexities of these instruments have required federal and state examiners to focus supervision more on risk-management procedures than on actual portfolios."

Hmmm...

Examination shows New Century didn't relax its lending standards.

Should we be optimistic about the increase in temp hiring?

Justin Fox is leaving Time for the Harvard Business Review.

The young may be thriftier than we thought.

Why we should forgive the Fed for screwing up its oversight of banks.