Ryan [Avent] doesn’t quite seem happy with the conclusion that moral hazard didn’t have much to do with this particular crisis, but I think it’s the right one. As I argued last year, when it comes to institutions, the moral hazard explanation for what went wrong doesn’t really hold much water. In order to believe that the banks engaged in reckless behavior because they assumed that if they got into trouble, the government would bail them out, you have to believe not only that financial institutions thought it would be fine if their share prices were driven down to near-zero as long as they were rescued in the end. You also have to believe that the banks knew that what they were doing was reckless, and that there was a meaningful chance that it would wreck their companies, but decided that it was still worth doing because if everything went south, the government would step in. And that, even before Dimon’s comment yesterday, always seemed improbable, because all of the accounts of the banks’ behavior in the years leading up to the crisis suggest that most of them were swept up in housing-market hysteria like everyone else.
In a way, the moral-hazard argument ascribes far too much foresight, intelligence, and rationality to the banks. It assumes they were coldly calculating the chances and consequences of failure and forging ahead nonetheless, when the reality seems to be that for the most part they were blissfully ignorant and arrogant about the flaws in their lending and investment strategies. The crisis, in that sense, was caused less by the fact that the banks were too big to fail than it was by the fact that they never seriously considered the possibility that they might fail.
When House and Senate members who already voted for their respective chambers’ versions of health reform need to debate opponents who say things like “he voted for Obamacare, I was always against it” what do they intend to say in response? “No, I only voted for one specific version of it; I opposed the alternate version in the other branch of Congress and that one was the unpopular one. The version I liked was really great.” Is that going to make sense to voters? Seriously, what’s the plan? I know some people who work on the Hill read the blog . . . what’s your boss going to say?
The whole thing's a mess... he mixes up short-run and long-run problems... doesn't realize the different conditions that existed when Clinton was in office.... Take his call for a "bold effort to create jobs." Besides his recommendation to shift attention away from health care reform by trying to pass a health care reform bill, his other three recommended policies are payroll and supply side tax cuts on business, immigration reform (to make citizenship easier, that's fine, but it won't help with jobs), and deficit reduction (which won't help with jobs either, and will likely reduce the level of social insurance worsening conditions for the working class and the poor).
So the proposal is, for the most part, for six months of payroll tax cuts granted to a limited number of firms (those less than five years old), and the same old tired set of supply side tax cuts that we always hear, most of which only work in the long-run if they work at all. To the extent that there would be any job creation effects from these tax cut policies, and some types of tax cuts could help a bit, they are likely to be more than offset by the deficit reduction and his other policy recommendations that work in the opposite direction. Does he really think voters will reward Democrats for making unemployment worse through deficit reduction? With friends like these, who needs Republicans?
We've been discussing financial regulatory reform for well over a year now.... At some point, people have to start getting specific about the wording of regulations they'd like to see.... Here, I'll kick it off. Here are two specific regulatory changes I'd like to see. They both involve Reg W, so you just know they're exciting....
Jesus H. Christ, can we please get someone to revise the derivatives exemption in Reg W so that derivatives are subject to the Section 23A limits?... We need to swing the big bats when it comes to derivatives transactions between FDIC-insured banks and their non-bank affiliates, and that means the hard quantitative caps of Section 23A. If memory serves, the reason the Fed gave for exempting derivatives (other than credit derivatives, which weren't exempted) from Section 23A was that there wasn't enough evidence yet on the risks posed by derivatives transactions between banks and their non-bank affiliates. Still waiting for that evidence, are we?
Get rid of Reg W's "ready market exemption," and go back to the old "Wall Street Journal test." Yes, I know some people thought the Fed didn't go far enough with the ready market exemption, but they were wrong then and they're wrong now. Pretty much every security has an electronic service that provides real-time data on price anymore, and the SEC is way too liberal with its definition of a "ready market." The ready market exemption basically allowed some banks (I won't name any names) to use their insured deposits to, shall we say, "support" some pretty crappy paper, like ABS and ABCP. And it wouldn't take much for comparable securities to get back into that exemption. Let's just go back to the old "Wall Street Journal test." It was conservative and reasonably clear, which is exactly what we're looking for in regulations governing large, complex financial institutions.
This isn't the stuff op-eds are made of, but this is where all the action is. You can talk about moral hazard until you're blue in the face — and then Wall Street will take your lunch money anyway, and they'll do it in a comment letter on some proposed interim rules you weren't even aware of.
I know and admire Diane Lim Rogers. She's a friend, colleague, and frequent co-conspirator when it comes to budget. But Brad DeLong has her number with this post: No Diane, having any budget commission is not necessarily better than not having one.
I truly wish this wasn't the case. But when, as Brad points out, a commission is really just an excuse to do less now and a subterfuge for what's really happening, I don't see the value. Given all the failed budget commissions and summits of the past and the fact that the moon and stars don't seem to be in proper alignment for one to succeed now, I'd much rather have members of Congress take their lumps at the next election for not using the power they already have to deal with the deficit than to promise for no apparent reason that somehow a commission is going to be different this time.
What would be better than a commission? A serious Ross Perot-like outside effort that so raises the deficit issue in the minds of voters that the politics of not dealing with it changes. That's when some thing will actually occur.
6) Brown Voters' Attitudes Toward Gruber-Romney-Obama Health Care: More than half of them like it:
John Sides: The Monkey Cage: A nice tidbit from the Washington Post/KFF/Harvard poll of MA special election voters (pdf): "As you may know, Massachusetts has a law that is aimed at assuring that virtually all Massachusetts residents have health insurance. Given what you know about it, in general, do you support or oppose the Massachusetts Universal Health Insurance Law?"
Among Brown voters, 51% support this law and 44% oppose it.
7) GRAPH OF THE DAY: From David Beckworth:
8) BEST NON-ECONOMICS THING I HAVE READ TODAY:Matt Taibbi: Translating David Brooks:
A friend of mine sent a link to Sunday’s David Brooks column on Haiti, a genuinely beautiful piece of occasional literature. Not many writers would have the courage to use a tragic event like a 50,000-fatality earthquake to volubly address the problem of nonwhite laziness and why it sometimes makes natural disasters seem timely, but then again, David Brooks isn’t just any writer. Rather than go through the Brooks piece line by line, I figured I’d just excerpt a few bits here and there and provide the Cliff’s Notes translation at the end. It’s really sort of a masterpiece of cultural signaling — if you live anywhere between 59th st and about 105th, you can hear the between-the-lines messages with dog-whistle clarity. Some examples....
TRANSLATION: Don’t bother giving any money, it doesn’t do any good. And feeling guilty about not giving money doesn’t do anyone any good either. In fact, you’re probably helping by not doing anything....
TRANSLATION: I, David Brooks, am doing my Christian best right here at home. Look, I even used a capital “L” in the word “Lord.” And I wrote that thing about Obama’s Christian Realism a few weeks ago. So I‘m doing my part. Of course I’d volunteer to help, but intellectually I just don’t think volunteering really helps. I mean, there are studies and everything....
TRANSLATION: Although it is true that Haiti was just like five minutes ago a victim of a random earthquake that killed tens of thousands of people, I’m going to skip right past the fake mourning period and point out that Haitians are a bunch of lazy n------ who can’t keep their dongs in their pants and probably wouldn’t be pancaked under fifty tons of rubble if they had spent a little more time over the years listening to the clarion call of white progress, and learning to use a freaking T-square, instead of singing and dancing and dabbling in not-entirely-Christian religions and making babies all the fucking time. I know I’m supposed to respect other cultures and keep my mouth shut about this stuff, but my penis is only four and a third inches long when fully engorged and so I’m kind of at the end of my patience just generally, especially when it comes to “progress-resistant” cultures....
TRANSLATION: The best thing we can do for the Haitians is let them deal with the earthquake all by themselves and wallow in their own filth and s----- engineering so they can come face to face with how achievement-oriented and middle-class they aren’t....
p.s. Did I miss anything? Because I think that’s pretty much it. One would have thought a column on the Haitian’s lack of an achievement culture could maybe wait until after the bodies were cold, but… hey, who am I to judge?.... Again, unlike Brooks, I actually lived in the Third World for ten years and I admit it — I’m not exactly in the habit of sending checks to Abkhazian refugees, mainly because I’m not interested in buying some local Russian gangster a new Suzuki Samurai to tool around Sochi in. And I’ve actually seen what happens to the money people think they’re giving to Russian orphanages goes, so no dice there, either. But you know what? Next time there’s an earthquake in Russia or Georgia, I’m probably going to wait at least until they’re finished pulling the bodies of dead children out of the rubble before I start writing articles blasting a foreign people for being corrupt, lazy drunks with an unsatisfactorily pervasive achievement culture.... An earthquake is nobody’s fault. There’s nothing to do after a deadly earthquake but express remorse and feel sorry. It’s certainly not the time to scoff at all the victim country’s bastard children and put it out there on the Times editorial page that if these goddamned peasants don’t get their act together after a disaster this big, it might just be necessary to start swinging the big stick of Paternalism at them...
9) STUPIDEST THING I HAVE READ TODAY: Rick Santorum, former Senator (R-PA). Let me turn the microphone over to Angelica Oung: Rick Santorum's Price: $7,750:
By now we've all heard about Rick Santorum's bill seeking to prevent the National Weather Service from actually sharing weather forecasts with Americans. You see, that 'socialized weather' business has got to stop. It's taking the bread right out of the mouths of private web-based forecast providers who work so hard to make a profit by repackaging that information the NWS just want to give away for free. One such firm is Accuweather, which just so happens to be based in Pennsylvania, just like the good senator. Fancy that.
[T]hroughout 2003 and 2004, both Joel and Barry Myers have donated nearly $2,750 to Santorum's 2006 re-election efforts. Public records also showed that since 1999, the Senator received nearly $5,000 in contributions from AccuWeather executives, raising questions of whether the company attempted to court favor with the Senator through campaign contributions.
Count it up...$2,750+$5,000=$7,750. For a blatant gimme bill introduced in congress? That's what I call value!
10) HOISTED FROM THE ARCHIVES: DeLong (April 2005): When Malfunctioning Policy Development Efforts Attack!:
Peter Orszag is a national treasure: Mark Schmitt: "I'm watching the Finance Committee hearing on Social Security. Peter Orszag of Brookings and the Center on Budget and Policy Priorities just had a wonderful metaphor to respond to the idea that private accounts are a 'sweetener' or 'dessert' to Social Security that will make it easier to swallow the tax increases or benefit cuts that would ensure solvency. 'That's like trying to convince your kid to eat spinach by offering him a turnip for desert.'"...
I'm told that the White House has for months had numbers like Robert Shiller's and Goldman Sachs's thumbs-down assessments of the desirability of private accounts on the terms the administration has offered them. Yet they haven't bothered to change the terms, or even to make the argument that financing investments by borrowing from your Social Security defined-benefit account at 3% plus inflation is a good deal.
Something very similar used to happen with Ira Magaziner and company: Marina Weiss--Bentsen's senior health care aide--would go in there and say, "Ira, we don't think these numbers will work. Moreover, Robert Reischauer at CBO and Breaux's and Moynihan's people in the Senate think like us--they won't think this will work either. And you need Reischauer, Breaux, and Moynihan to be enthusiastic or this is going nowhere."
And there would be no response.