Compromise

"I just said it was like a cross between a bulldog and chihuahua,
but what I meant is it will have a fantastic hybrid vigor."
Boris Johnson - Mayor of London

Most Americans are paying little or no attention to the recent elections in the UK. I might be among them were it not for the fact that I indulge in a bit of BBC on podcast while out walking off the pounds. What I've enjoyed most about the recent UK excitement is the way the right (Cameron and the Conservatives) have so easily found a route to compromise with the (sort of) left (Clegg and the LibDems.) (Please pardon my parentheses.)

Our own Barack Obama has been attempting to travel a similar course, with many unexpected and, doubtless, heartrending roadblocks thrown up in his way. Somehow, he managed to endorse offshore drilling for oil just in advance of the destruction of the Gulf of Mexico. Somehow, he managed to endorse the SM-3 missile interceptor system just before it was shown to be pretty-much worthless. Honestly, I don't believe the guy is an asshole — but I think he's been getting some pretty bad advice.

The Far Right has taken over the Republican establishment, and the Tea Party dorks are almost a breath of fresh air — kind of like a right-of-center LibDem-ish minority. There is nobody even remotely open to compromise in the GOP except for, perhaps, Lindsey Graham and those two women from Maine. Unlike just about all the other Republicans, they're not unmitigated opportunists — they say what they mean. (I especially admire Lindsey Graham, for his genuine respect for the law.)

Frankly, Mr. President, this might be an ideal time to be a one-term president, so stop trying to compromise and take a firm stand. Dump those Rubin relics, repudiate the remnant Clintonians, and just lose the goddamned election in 2012! The steps the new president will be forced to take — to deal with an ongoing economic crisis — will be so unpopular that his or her party will be pesonae non gratae for many subsequent years.

Take one for the team, and stop trying to be all things to all people. You're not.

Debt and Taxes

Now is not the time to begin deficit and debt reduction — the economy remains in precarious condition, and unemployment and underemployment remain terribly high — but it certainly is time to start thinking about working towards a more "pay-as-you-go" system of taxation and spending. Sorry, Democrats, but spending cuts are needed; and sorry, Republicans, taxes will have to go up.

A good place to start cutting is military expenditures. The Cold War is over, and America's current adversaries are incapable of launching the kinds of attacks that require more complex and more expensive weapons systems to repel. Military contracting, by the way, is not labor intensive, so job losses would be manageable.

The Bush wars in Iraq and Afghanistan created far more enemies than they eliminated, and the Obama "surge" in Afghanistan is getting nowhere because there is no legitimate government to take over an area once it has been "liberated" from the Taliban. Let's just cut our losses, and get out with all deliberate speed. While we're at it, we can also remove our bases from Japan, Europe, and the Middle East. We can deal with terrorist strongholds with small, highly mobile forces and Predator drones.

Another cost savings could come from eliminating farm price supports. Not subsidizing corn, for example, would not only save money, but enhance public health — reducing the cost of medical care.

Yes, both the savings ideas offered above would arouse bipartisan opposition. You always can count on bipartisanship when it comes to protecting sacred cows.

As for tax increases, it makes sense to look for the money where the money is — that is, look to the individuals and corporations that have the most of it. There should be no cap on Social Security deductions, and the tax should be applied to all income, not just salary. On the other hand, there should be a cap on deductions for mortgage interest — and that cap should be gradually lowered.

There has been plenty of talk lately about a value added tax, or VAT. The good thing about a VAT is that it is hard to notice, and hence does not draw as much public anger as its first cousin, the sales tax. The bad thing about a VAT is that it is a form of sales tax, and so is regressive.

A better approach, I believe, is to stick with the income tax, but to make it much more progressive by adding more tax brackets, especially at the top end. There also must be much stricter limits on deductions and credits — taxes should not be used to create social policy. Interestingly, half of all deductions for charitable contributions are for donations to churches. I cannot imagine what social goods churches provide that make them so valuable to the American people.

None of these ideas will balance the budget, of course — much more sacrifice will be required, and supply-side nostrums about rising tides lifting all boats are just dead-out wrong. Yes, a stronger economy will help, but even in full recovery, we still will have to figure out what to do with all those people in their forties and fifties who will remain structurally unemployed. The welfare state is here to stay.

Amidst the craziness...

Well, even as I was writing yesterday's post, the Brown-Kaufman amendment failed and Bernie Sanders' proposal to increase the GAO's oversight of the Fed was watered down to a one-time audit. Why do I let myself succumb to optimism when optimism virtually never is justified? I imagine it's a safe bet that the banks won't have to spin off their derivatives desks either, and they'll find a way to defeat the Volcker Rule as well.

There's a lot of talk about a bank tax lately — to repay government for bailing out the industry, provide a cushion for the future, and just reduce the deficit — but I don't see that happening either. The administration proposal for a $50 billion fund collected from the banks to help finance future bailouts already is dead, so a permanent tax seems even less likely.

In the meanwhile, high-speed trading by computers created quite an "anomaly" in the market yesterday. It will be interesting to hear how mere humans will eventually explain it — and interesting to see if there's a complete recovery from the losses at the end of the day. Unless the problem was entirely a technical glitch that cascaded out of control, one figures that some major investors think stock prices have been a bit overheated of late, and their sell orders triggered the robotic meltdown.

It also will be interesting to learn who might have made money while stock prices were bouncing around. Is it paranoid to think that some of the quants who created the algorithms that led to the craziness might have... hmmm.

Regulating Wall Street: things looking up!

Judging by how upset Barack and his Banker Buddies have been in recent days, the financial reform bill coming out of the Senate is likely to be a lot stronger than most of us expected. Sherrod Brown and Ted Kaufman's proposal to reimpose caps on deposits and liabilities a single bank can have on its books looks like it will be part of the final bill; and while Blanche Lincoln's proposal to force banks to divest themselves of their derivatives desks is far from a sure thing, it is doing well enough to make Tim Geithner squirm.

Most encouraging is that support for these and other new restrictions have bipartisan support, showing that members of both parties have noticed the popular rage against big finance, and are afraid to buck it. There is support on both sides of the aisle for the Volcker Rule, which would bar banks from proprietary trading; support on both sides for reinstating Glass-Steagall separation of commercial and investment banking; and an extraordinary alliance of the left and the right calling for expanding GAO powers to audit the Fed.

The bank lobby — with full support of the Robert-Rubinesque contingent of the Obama administration — is working mightily to construct "placebo amendments," substitute proposals senators could vote for that would make it appear they support reform while continuing to serve the plutocrats.

So, stay alert. As many have noted, we have a once-in-a-generation opportunity to rein in the banks. If it doesn't happen this time, it won't happen until the next mega-recession comes along.

13 Bankers

I just finished reading Simon Johnson and James Kwak's 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. It provides the most cogent narrative of events that led to the crisis in finance, the crisis itself, and the responses of those in power. There is plenty of blame to go around: Ronald Reagan, Phil Gramm, Bill Clinton, Robert Rubin, Alan Greenspan, both Bushes, and an host of other government figures who bought into the myth of the "efficient market hypothesis," as well as those ruthless sons of Moloch who created the complex financial instruments that maximized the profits of megabanks while destabilizing the world's economies.

Johnson and Kwak are much nicer to Barack Obama than I think warranted, perhaps because they want to persuade him that the regulatory reform bills currently struggling through Congress are inadequate, and that he should really be thinking ahead to breaking up the banks that are "too big to fail." They attribute his timidity to being part of (and entirely surrounded by) the New York—Washington mindset that maintains that bigger is better, not to having been co-opted by the big bucks banks have thrown his way.

Maybe they're right, or maybe they just have some compunction against saying that the President of the United States is a pawn of the oligarchs. Me, I have no such compunction: the President of the United States is a pawn of the oligarchs. There. I said it.

Obama is not a stupid man, and even with Geithner and Summers talking into both his ears at once, he should be able to figure out that "too big to fail" is "too big to exist." Hell, even Alan Greenspan, despite what had to be major cognitive dissonance, came around to that point of view. As anybody who's been paying attention understands — including, of course, the bankers — the megabanks have an implicit government guarantee, just by virtue of their size and systemic importance. That is the only reason they can borrow at significantly lower interest than smaller banks — a fact that should be obvious to all.

Wall Street, naturally, has its knickers in a twist over the very limited reforms the Democrats are trying to enact, and is very likely to shift major chunks of its political contributions over to the Republicans — who remain stubbornly opposed to government doing anything at all. Will that be enough to persuade Obama to stop licking their $2000 shoes, and get serious?

Certainly not until his second term — if he gets one.

.....(later the same day).....

Okay, maybe he's not a total pawn — maybe he's just doing his usual "splitting the difference" routine. Halfway between doing nothing (as the bankers would prefer) and the right thing (breaking up the megabanks into smaller units that could be allowed to fail) is the usual, half-assed, universally unsatisfying compromise. That's what we got for health care, and that's what we'll get for financial reform.

So maybe he's not that much a pawn of the banks. Maybe he's just a pussy with no strong beliefs at all — a pussy who wants to be loved and/or re-elected.

Whatever. If it happens to be respect he wants, he's not getting any from me.

Derivatives

I have to admit I was very pleasantly surprised by the proposed derivatives regulations that came out of the Senate's Agriculture committee — so much so, that I think it would be fantastic if somebody could find a way to assign farm price supports, the next time they come up, to Banking and Finance.

Blanche Lincoln provided real leadership, and Charles Grassley bravely decided to satisfy Iowa voters rather than adhere to monolithic Republican Party discipline. (Well, maybe he had permission.) However it happened, the bill reported out of committee is significantly better than the House version.

Perhaps it's because those farm state Senators have a genuine understanding of the way derivatives are supposed to work. The reason Agriculture is responsible for derivatives is because farmers need futures contracts to manage risk . Those contracts always have been traded openly and, by and large, they have done the job for both farmers and end users of agricultural products. Markets do work, provided they are not diddled by those who look for ways to profit from market failure.

So now it's "wait and see" time again. I don't think the Republicans are dumb enough to filibuster a financial reform bill, but who knows? With enough pressure from Fox News and the minions of Dick Armey, it still could happen.

More important to the final bill, though, is what comes down from the White House. Geithner and Summers have been mouthing some of the "correct" pronouncements lately, but nobody ever should forget just how much money Wall Street has to sling around. A hell of a lot was tossed at Obama during the 2008 campaign, and thanks to the Supreme Court's decision in the Citizens United case, there will be a hell of a lot more to be tossed around in the future.

Financial regulation

On health care, the Obama administration sat back and waited for Congress to come up with something — anything. On financial regulation, the bill came straight from the administration, and it sailed right through the House.

Obama, as I've noted in the past, picked the wrong Bob — Rubin, rather than Reich. That left us with Geithner and Summers, zombie slaves of the financial industry. I'd feel a lot happier about the package from the White House if it had been written by people less ideologically committed to Wall Street. When a bill starts out weak, it only can end up as an even weaker law.

Oddly enough, I find myself in agreement with the likes of Richard Shelby and John Cornyn on at least one point: it is time to revisit the 1995 repeal of Glass-Steagall, one of the most unfortunate legacies of Robert Rubin's time in the Clinton administration. Commercial banks and investment banks should, once again, be separate — if for no other reason than to reduce the overall size of the largest institutions. Even if that were done, though, there are some institutions which would need further whittling down to ensure that there no longer are any that are "too big to fail."

At this time, the biggest banks have an unfair competitive advantage over smaller banks, in that they can borrow money at lower rates. They get those lower rates because it is assumed that government will not allow them to fail, no matter what pledges come out of Congress and the White House — and they use their surplus profits not to invest in productive businesses, but to place bets in the high-stakes casino Wall Street has become over the past fifteen years.

I can see absolutely no reason for synthetic CDOs to exist. They are nothing but side bets on real economic activity, but bets large enough to disrupt the financial system and create crises. Credit default swaps on synthetic CDOs were a large part of what brought down AIG, and made its government bailout necessary. If the very rich want to make bets on whether bonds they don't own will or will not default, let them open their own betting parlor and gamble with their own money — not with our pension funds.

Other derivatives must be openly traded, on an exchange like the one provided for in the bill now before the Senate Agriculture Committee, but with no exceptions for companies that are particularly large or well-connected. Markets cannot operate properly when they operate in secret.

Naturally, I don't expect much of the current effort to improve financial regulation, but hope it might be a step in the right direction. Yes, my fingers are crossed — but I'm not holding my breath.