For all of the crazy arguments against health care reform, a few of them are entirely sensible--and worth taking seriously. As I write in my latest Kaiser Health News column, which appeared on TNR’s home page yesterday, one of those is the worry that Congress won’t follow through with promises to raise the revenue--or find the savings--necessary to finance expansions of health insurance.
In other words, Congress may pass a law calling for reductions in Medicare expenditures or raising an assortment of new taxes. But the people affected by those changes--be they health care businesses that would lose reimbursements or everyday Americans facing the prospect of higher taxes--will complain. Once they do, Congress is likely to have second thoughts and repeal those measures.
I wrote the article thinking primarily about conservatives and libertarians who have made this case. But, to be clear, you don't have to be a conservative to have these concerns. Just a few days ago, for example, the New Yorker's John Cassidy warned about the likely high costs of health care reform:
Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance (an influential group, reflecting the interests of global finance in Washington) is opposed to breaking up big banks. According to the FT, he said,
“The idea that we could run modern, sophisticated, prosperous economies with a population of mid-sized savings banks is totally misguided.”
This is clever rhetoric--aiming to portray proponents of reform as populists with no notion of how a modern economy operates. But the problem is that some leading voices for breaking up banks come from people who are far from being populists, such as the UK authorities (in the news today) and the U.S.’s Thomas Hoenig.
The Fed's not about to take away the punch bowl.
Correlation of the day: A Phillies World Series win could be bad sign for the economy.
Justin Fox: Are finance professors to blame for crisis?
David Wessel has a column in today’s Wall Street Journal laying out three approaches to solving our Too Big Too Fail (TBTF) problem. The first two amount to different ways of “busting them up,” as Wessel puts it. The third, which the administration and the Fed have endorsed, amounts to forcing banks to hold more capital, scrutinizing their balance sheets more vigorously, and obtaining some sort of “resolution authority.” That last reform would allow the government to liquidate a megabank in an orderly way (like the FDIC does with smaller banks), rather than either bail them out entirely or simply let them implode, a la Lehman Brothers.
I happen to support every one of the administration’s proposals on this score. But, despite their merits, I’m not convinced they address the consequences of bigness. For that, we probably do have to talk about shrinkage.
To see why, you need to start with what the TBTF problem actually is, which Wessel helpfully explains:
Investors who lend to or trade with these firms, for good reason, believe taxpayers will stand behind the debt of TBTF firms if things go bad. So, these firms can borrow more cheaply than too-small-to-save firms. That taxpayer subsidy -- and that's what it is -- means these institutions can make riskier bets, collecting rewards if they win and sticking taxpayers with the tab if they don't.
This is an old problem. But the rescues of Bear Stearns and American International Group and the uproar over the Lehman Brothers bankruptcy have expanded it beyond ordinary big banks. The past year has established a pattern: Executives of TBTF firms may be fired and their shareholders squeezed, but bondholders and trading counterparties will be protected.
The administration proposal that gets at this problem most directly is resolution authority. As I understand it, the key part of the proposal is to require banks to have a so-called "living will"--basically a road map that would guide the government on how to value and unwind all the assets on the bank’s balance sheet.
On Wednesday, Dan Tarullo, a governor of the Federal Reserve and distinguished law school professor, dismissed breaking up big banks as “more a provocative idea than a proposal” and instead put almost all his eggs in the “creation by Congress of a special resolution procedure for systemically important financial firms.” He stressed: “We are hopeful that Congress will, in its legislative response to the crisis, include a resolution mechanism and an extension of regulation to all systemically important financial institutions” (full speech).
This put him strikingly at odds with Mervyn King, governor of the Bank of England, who said Tuesday night, quite bluntly,
“There are those who claim that such proposals [involving breaking up the largest banks] are impractical. It is hard to see why. Existing prudential regulation makes distinctions between different types of banking activities when determining capital requirements. What does seem impractical, however, are the current arrangements. Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”
Tarullo’s speech actually framed today’s problem just right: “I would suggest … that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too-big-to-fail problem.” This is consistent with the tone of King’s remarks (even if less pointed than what Neal Barofsky said).
It's fairly well-established that people could save money over the long run by making their homes more energy-efficient—better insulation, say—or even, in some cases, putting solar panels on their roofs to generate their own electricity. But many of these upgrades never happen, for a variety of reasons. Sometimes the incentives are misaligned, if, say, the landlord owns the building but the tenant pays electricity and heating costs.
I had hoped my essay, "Against Transparency," might have inspired something of a marriage between the transparency movement and campaign finance reform. To that end, I had offered something old and something new, something borrowed, and, as is my style, something blue. But like high school all over again, I have obviously fumbled on the first date
Let's work this backwards.
The U.S. Chamber of Commerce is opposing the administration’s proposed Consumer Financial Protection Agency, on the grounds that it would hurt small business. Their argument is that this agency will extend the dead hand of government into every small business.
For the Chamber of Commerce, government is the enemy of small business and should always and everywhere be fought to a standstill. Chamber Senior Vice President (and former Fred Thompson campaign manager) Tom Collamore sees this as “advocacy on behalf of small businesses, job creators, and entrepreneurs” (quoted in the WSJ link above), and the Chamber has launched the “American Free Enterprise” campaign.
Somewhere, the Chamber’s senior leadership missed the plot. What brought on the greatest financial crisis since the 1930s? What has hurt, directly and indirectly, small business of all kinds to an unprecedented degree over the past 12 months? What is killing small and medium-sized banks at a rate not seen in nearly 80 years?
While the impact of falling stock prices on older workers' retirement decisions has received a lot of attention this downturn, the more important driver of retirement rates appears to be unemployment, according to new research by Courtney Coile and Phillip Levine. (Sorry, pay-version only.) Using 30 years of data on changes in home and stock prices and labor market conditions, they conclude:
Sometime soon, maybe this week,* the Senate Finance Committee is expected to vote on the health care reform bill it spent the last two weeks debating. Inside and outside the committee, people following this process more closely than I am say the bill is likely to pass. But it's not yet a sure thing.
The committee roster is thirteen Democrats, ten Republicans. Majority vote rules. Chairman Max Baucus can afford to lose one Democrat, even if all of the committee Republicans vote against it. But if he loses two, then he needs to pick up at least one Republican.
What follows is a run-down of the five senators whose votes remain in question, based on conversations with sources over the weekend.
Strong advocates of our new G20 process are convinced that it will bring legitimacy to international economic policy discussions, rule-making, and crisis interventions. Certainly, it’s better than the G7/G8 pretending to run things--after all, who elected them?
But who elected the G20? The answer is: No one. And, in case you were wondering, there is no application form to join the G20 (although you can crash the party if you have the right friends, e.g., Spain). The G20 has appointed themselves as the world’s “economic governing council” (to quote Gordon Brown).
Is this a good idea?
For those who haven't followed the intersection between abortion rights and health care reform, today's New York Times sums up the situation:
Abortion opponents in both the House and the Senate are seeking to block the millions of middle- and lower-income people who might receive federal insurance subsidies to help them buy health coverage from using the money on plans that cover abortion. And the abortion opponents are getting enough support from moderate Democrats that both sides say the outcome is too close to call. Opponents of abortion cite as precedent a 30-year-old ban on the use of taxpayer money to pay for elective abortions.
As the article goes on to note, Obama and the Democrats have tried to accommodate this concern by specifying that insurers divide their revenue streams, with subsidies in one pile and contributions from individuals in the other. Under the planned reforms, insurers couldn't use the subsidy revenues to finance abortion services. But that may not matter:
opponents say that is not good enough, because only a line on an insurers’ accounting ledger would divide the federal money from the payments for abortions. The subsidies would still help people afford health coverage that included abortion.
The opponents have a point here. The distinction wouldn't be terribly meaningful. But, by that logic, every American taxpayer is already subsidizing abortion services.
A month-old labor dispute in Boston has taken a curious twist. It began when on August 31, a hundred housekeepers at three Hyatt hotels in Boston were fired and replaced by workers from a Georgia company, Hospitality Staffing Solutions. The housekeepers, some of whom had worked for Hyatt for over twenty years, were making between $14 and $16 an hour plus health, dental, and 401(k) benefits. Their replacements were to make $8 an hour with no health benefits. To make matters worse, Hyatt had earlier gotten the fired workers to train their replacements. Hyatt told them the workers would filling in for them during vacations.
Hyatt’s move has drawn demonstrators and a threat by Massachusetts governor Deval Patrick to bar state employees from using the Hyatt for state business. In Chicago, the home of the Hyatt Corporation, hotel workers were arrested at a demonstration in front of the Park Hyatt; and one of the fired hotel workers flew to Chicago to appeal to Penny Pritzker, whose family owns the Hyatt Corporation and who was Barack Obama’s national finance chairman. Appealing to Penny Pritzker may seem like overkill, but wait.
It is easy to dismiss the G20 communique and all the associated spin as empty waffle. Ask people in a month what was accomplished in Pittsburgh and you’ll get the same blank stare that follows when you now ask: What was achieved at the G8 summit in Italy this year?
Perhaps just having emerging markets at the table will bring the world closer to stability and more inclined towards inclusive growth, but that seems unlikely. Should we just move on--back to our respective domestic policy struggles?
That’s tempting, but consider for a moment the key way in which the G20 summit has worsened our predicament.
The Republican grandstanding on Medicare during Finance Committee hearings this week hasn't been surprising, I suppose. But the audacity is still pretty breathtaking.
As you may have heard or read by now, the Republicans are angry over proposed cuts to Medicare Advantage, the private insurance alternative to traditional Medicare. The insurers who offer Medicare Advantage plans receive a flat fee for every senior that signs up. But virtually every independent expert who has studied the program has concluded that those fees are way too high--that, in effect, the government is getting a lousy deal. So when Democrats, including those drawing up the Finance bill, were looking for revenue to finance expansions of health insurance coverage, they figured that getting rid of those subsidies was a smart idea, particularly since it would generate more than $100 billion over ten years.
The danger of these cuts is that, without the promise of those fat subsidies, some private insurers may decide to pull out of the business altogether. It happened once before, back in the late 1990s, when the Clinton Administration pushed through reductions to Medicare-plus-choice, the predecessor to Medicare Advantage. (It was basically the same program under a different name.)
Today, about ten million seniors are enrolled in Medicare Advantage plans, which tend to offer things like vision care, gym club memberships, and lower cost-sharing. Some of these people might have to give up those plans. And Republicans think this is a travesty. "Medicare shouldn't be the piggy bank," Senator Jon Kyl said on Wednesday. "The reduced costs fund a new entitlement. They don't help seniors who rely on Medicare."
Actually, that's not clear at all.
Let me start by saying that if you write a blog about finance and economics, then newspaper headlines don't really get much better than, "Palin Addresses Asian Investors," which, as luck would have it, appears on the Wall Street Journal site today.
Judging from the piece, Palin's speech was basically a lot of granular investment advice--as you'd expect:
We’ve heard Glenn Beck’s rants on Fox and read Sarah Palin’s posts on Facebook. We’ve watched LaRouche supporters disrupt town hall meetings and seen teabaggers descend upon Washington. We’ve talked about immigrants, abortion, and death panels--and listened to a woman named Betsy McCaughey explain why reform will mean pulling the plug on grandma.
We’ve heard Glenn Beck’s rants on Fox and read Sarah Palin’s posts on Facebook. We’ve watched LaRouche supporters disrupt town hall meetings and seen teabaggers descend upon Washington. We’ve talked about immigrants, abortion, and death panels--and listened to a woman named Betsy McCaughey explain why reform will mean pulling the plug on grandma.
Today's Journal story on the declining allure of a finance career has some interesting numbers:
Although the biggest banks are showing a revived appetite for risk taking and certain exotic instruments such as credit derivatives, many of the vanished jobs aren't expected to be back soon. The White House Council of Economic Advisers expects finance and insurance jobs to decline to 4.1% of the work force in 2016 from 4.8% at the end of last year, a point at which many were already gone. ...
Harvard's 2009 graduating class shows the shift in career directions. Those entering finance and consulting tumbled to 20% of graduates this year from nearly twice that in 2008 and 47% the year before, according to a survey by the university's newspaper, the Crimson. ...
Forty percent of U.S. workers are open to considering federal careers, up from 24% in 2006, according to an April Gallup poll conducted for the Partnership for Public Service, a nonprofit.
Few issues since the collapse of venerable Lehman Brothers one year ago have caused as much consternation as performance bonuses for bailed-out bankers. Yet, even among sophisticated observers, there is confusion about what really happened. So, with the benefit of a year's perspective, how should we think about banker compensation in the context of bank bailouts?
Here's a hint: The bonus outrage has distracted attention from the more important way that taxpayers underwrote the wealth of profligate bankers, which was to preserve the extensive equity holdings that senior personnel at these institutions had accumulated prior to the debacle of 2008. And this diversion, in turn, has delayed effective action that might inject a bit of moral culture into the money culture of Wall Street.
It’s now widely believed that the global recession is coming to an end, but the path out has been far from typical: This time around, China, not the U.S. has led the global recovery. With its $600 billion stimulus package and with banks lending with abandon, China has become the engine of global manufacturing and industrial activity.
Keynes' paradox of thrift holds that if everyone tries to save at the same time during a recession, then the economy continues to contract due to a fall in demand. This sends incomes lower and gives people less money to sock away, so that total savings actually fall instead of rising. The implication for our times is that a new era of frugality might not be what the economy needs.
President Obama’s speech yesterday was disappointing. As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.
But then he said: Our regulatory reforms will fix that. This is hard to believe. And even the president seems to have his doubts, because he added a plea that--in the meantime--the financial sector should behave better.
The audience was composed of our financial elite, but the Wall Street Journal reports “not one CEO from a top U.S. bank was in attendance” (p.A4). How’s that for demonstrating respect, gratitude, and a willingness to behave better?
Louis Brandeis, of course, would have seen things differently. The author of Other People’s Money: And How The Bankers Use It, was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.
Senator Jay Rockefeller, speaking Tuesday afternoon on a conference call co-sponsored with the Campaign for America's Future:
I have sat besides Max Baucus for 22 years on the Finance Committee. ... I'm probably one of his best friend among Democrats. But I cannot agree with him on this bill. ... There is no way in present form I will vote for it. Therefore, I will not vote for it unless it changes during the amendment process by vast amounts.
Rockefeller cited four main concerns: The lack of a public insurance option, changes to Medicaid, changes to the State Children's Health Insurance Program, and overall affordability provisions. He did caution that he reserved the right to change judgments once the final bill comes out, although it's unlikely that bill will look much different than what Baucus has already released.
Later in the call, Rockefeller suggested four to six Demorats on the Finance Committee had similar feelings, although he didn't say (and may not know) whether they feel as strongly as he does.
A bit of background:
Financial markets have stabilized--people believe that the U.S. and West European governments will not allow big financial institutions to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation (my version; Joe Nocera’s view). Small and medium-sized banks, however, will continue to fail as problems in commercial real estate continue to mount. The economic recovery, in the short-term, may be surprisingly strong in terms of headline numbers; this is a standard feature of emerging markets after a crisis (e.g., Russia from 1998 or Argentina after 2002). Official short-term forecasts are probably now too low, as the IMF and other organizations make the case for continued fiscal stimulus and very loose monetary policy.
However, a two-track economy appears to be developing: One part will do well (e.g., around big banks on Wall Street), and another part will struggle (many consumers and firms around the world want to reduce their debt; the same thing happened in Japan’s “lost decade”). During the 1990s, Japan had some years with good growth, but overall the decade was a disappointing deceleration of growth; the same could be true now at the global level.
Longer term U.S. growth prospects remain particularly uncertain--has consumer behavior really changed?; if finance doesn’t drive growth, what will?; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)? The implication, presumably, is higher taxes on the productive nonfinancial part of the economy--to pay for the implicit subsidies and ongoing rents of the financial sector. While many entrepreneurs understand and resent this math, they are strikingly unwilling to do anything about--or even speak out on--reining in the power of the biggest banks. Even the smaller banks--who have really been hammered by the actions of larger banks--are only just now figuring this out and beginning to express resentment; sadly, this is too late to make much difference.
