Wednesday, November 5, 2008
At the very least, I wanted to make a small contribution during this political season to promoting a better understanding of the political process for those who were trying to make some difficult choices in the election.
It was never my desire to guide anyone's choice or substitute my opinion for theirs. It was only to provide some counsel to those looking to deepen their own understanding and make better choices.
This was important to me, because, as I've stated, we've got the system we deserve in my view. If voters were better informed, politicians would respond by raising the tenor of the political discourse. Now that the election is over, however, it seems to me that the main reason for this blog (even if I didn't realize what it was when I began this summer) has come to an end. Accordingly, I plan to cease my posts.
While writing this blog, I have learned a good deal about the world of blogs. It's a lot like business. You need a product for the market and you need to work hard at something you're passionate about to attract readers, whose blog reading time is as limited as customers' cash.
With the election over, I don't think there is a market right now for the type of blog I'd want to have if I continued blogging here. Most people either want more depth on specific issues than I can devote with my other commitments, a more narrow focus than suits my interests, or more partisanship (which I am unwilling to provide).
So, thanks for reading. It's been fun.
Tuesday, November 4, 2008
Sunday, November 2, 2008
Unlike the civil service, political appointees come and go with different administrations, and generally serve at the pleasure of the President. They play an important role in the executive branch as intermediaries between the President and the unelected civil service who are on the front lines. As Light describes them, political appointees "play a central role is managing the chain of command, interpreting legislation, overseeing regulations, and faithfully executing the laws." Without a competent person in these roles, the business of the executive branch can slow or even come to a halt.
Light is concerned that the process by which political appointees are identified, recruited, appointed and, if necessary, confirmed is broken. What is needed is a "fast, simple and fair appointments process." What we have, however, has been best characterized as "nasty and brutish without being short." This is due to "needless forms, needless delays" and the sense by all involved that a candidate is "innocent until nominated." As a result, the management of the executive branch suffers as mediocre appointees fill these posts, or they remain unfilled for large amounts of time.
Light notes that extensive screening and many questionnaires appointees must fill out. They are unnecessarily time consuming, requiring the candidate to spend inordinate amounts of time locating every last address and phone number since college. Light estimates that a candidate will have had to answer 240 separate questions, including 61 on personal and family background, 32 on tax and finances, 35 on legal proceedings,7 on public and organizational activities and even one on the people they hired for child care.
Appointees are generally left to navigate these with little help from the White House. Outside help from lawyers and accountants must be paid for by the appointee. They then have to wait while overworked investigators from various federal agencies confirm their accuracy. The process keeps getting longer. President Kennedy took just two months to get his Senate confirmed appointments finished. The current President took nine.
Light does not discuss the Senate's confirmation process in much detail, which is too bad because it's every bit as bad. Senate committees have their own questionnaires, sets of interviews, etc. in preparation for a confirmation hearings. The hearing itself is generally a breeze in comparison to filling out the forms and going through the staff interview. Once that is completed, the committee needs to schedule a hearing, which requires Senators' attendance. Merely getting a confirmation hearing on the calendar can delay the appointments for months.
Light's research had revealed that appointees are most motivated by the honor and chance to serve their country. Further, they are motivated by the future leadership opportunities that holding a political appointment will provide. The federal government is unlikely to offer pay that is comparable to the private or even non-profit sectors. Presidents can provide more support for their appointees through the Office of White House personnel, which all too often doesn't act as if it really cares whether someone appointed ever takes the position. Forms and questionnaires can be streamlined.
Here, I'll add a few suggestions of my own, having staffed several confirmations in the Senate. The White House and Senate staff should devise uniform questionnaires to streamline the appointment process. Further, the number of appointees subject to Senate confirmation is ridiculous and it seems every time Congress creates a new position, the Senate insists it confirms it to gain leverage in negotiations with the White House even when the particular appointment isn't controversial. The President should agree to reduce the number of appointees (leaving more work to the civil service) in exchange for the Senate's agreeing to reduce the number of appointees subject to Senate confirmation.
I can dream, can't I?
Saturday, November 1, 2008
Obama has revolutionized campaign fundraising, employing the Internet to tap into more donors than any candidate in history. The campaign has reported $160 million in contributions from donors of $200 or less, more than a third of the $458 million raised. But as Obama sets records, his fundraising has come under increased scrutiny.The Washington Post has a more disturbing take:
The Democratic candidate's donors also include "Derty Poiiuy," an individual with a scatological sense of humor who has given $950. "Mong Kong" has contributed $1,065 and lists an address in a nonexistent city. "Fornari USA" gave $800 and listed the address of an apparel store of that name near San Francisco.
Sen. Barack Obama's presidential campaign is allowing donors to use largely untraceable prepaid credit cards that could potentially be used to evade limits on how much an individual is legally allowed to give or to mask a contributor's identity, campaign officials confirmed. Faced with a huge influx of donations over the Internet, the campaign has also chosen not to use basic security measures to prevent potentially illegal or anonymous contributions from flowing into its accounts, aides acknowledged. Instead, the campaign is scrutinizing its books for improper donations after the money has been deposited.There's a big difference between a campaign that receives illegal donations despite taking reasonable precautions against them. If the Post is correct, then, the Obama campaign has failed to live up to its obligations to take them. Even worse is the possibility that this is something more than negligence, although there has been no proof of that.
Given that one of the reasons to vote for Obama has been his very well run campaign, this is disturbing news in any case. The campaign needs to come clean immediately about what went wrong, why, and discipline those responsible. If it sweeps it under the rug, it will all come out during the transition, making it very hard for Obama's administration to get off to a strong start.
Friday, October 31, 2008
As a voter, you have a public trust. It is your duty to cast an informed ballot. You owe it to those who died so that you might have it. You owe it to your countrymen who will have to live with the consequences of your collective votes. I would argue that its less important who you vote for than that your vote is informed.
That means some work for this weekend. Think not? Perhaps you know who you'll vote for for President. Great. Can you give me three reasons? If not, perhaps you need to think about it a little more.
Even if you can provide a cogent reason for your presidential vote. If so, who are you voting for for Congress? The state legislature? The school board? Why? What are the ballot questions up for a vote? Are you voting yes or no? Why?
See. You do have some homework. So do I.
The local papers likely have a voting guide that will provide some information about the candidates, and most office seekers now have websites - even guys running for the legislature and the school board. Still stumped? Look at your neighbors houses. Do you see some lawn signs? Ask them why they are supporing that candidate. Not every political discussion needs to turn into a debate.
Thursday, October 30, 2008
the men who would be President have been running for months in a parallel universe, a place where a Chief Executive changes laws by waving a hand and reorders society at the stroke of a pen. "When I am President," the candidates declare — and off they go into dreamspeak, describing tax codes down to the last decimal point and sketching health-care reforms far beyond the power of any single person to enact. In their imaginary, reassuring cosmos, America is always a mere 10 years — and one new President — away from energy independence. And the ills of the federal budget can be cured simply by having an eagle-eyed leader go through it line by line.After the election, however, they need to come back to work with a Congress that will have a different view of the world and a different agenda (less so when the same party runs both, but the differences never disappear all together):
In an instant, the winner is sucked through a wormhole back into the real world. A world in which Congress, not the President, writes all the laws and gets the last word on the budget. Where consumers decide which cars to drive and how many lights to burn. And where the clash of powerful interest groups makes it easier to do nothing about big problems than to tackle them.Von Drehle goes on to make an informed speculation about what each candidates' presidency might look like in what the situation is likely to look like in Washington with a Democratic Congress, a tottering economy and the many other constraints the next President will need to deal with. It's worth reading in its entirety before you vote (you are voting, right?) on Tuesday.
Tuesday, October 28, 2008
The lies concerned certain gifts that were given by Alaskan business interests that he failed to disclose. Because it's generally not very well reported, I'll just say that there was no allegation that Stevens actually did anything in return for them (something implied when the papers claim he was convicted of "corruption").
The trial involved a fair amount of controversy, including an element of prosecutorial incompetence if not outright misconduct. Accordingly, Stevens is fighting on in bid for reelection. He will likely remain free pending appeal.
Stevens certainly does have a right to his appeal, and may very well win. However, the people of Alaska are entitled to honest government and to rest assured that they have it. Stevens should have stepped aside given his indictment and let someone else carry the flag for the Republican Party, which has been damaged as a multitude of GOP Congressman have now been convicted for not fulfilling their ethical duties as Members of Congress.
The Washington Post's editorial captures an important, larger lesson from the Stevens case:
There is a larger lesson in the Stevens prosecution, which is the sense of entitlement to which public officials can fall prey and, perhaps among the most powerful, a sense of imperviousness to the ordinary rules. After all, they may tell themselves, they work long hours for far less money than they could make in the private sector. After all, they have done so much for their constituents... This is a mind-set that has been on sad display all too often in Washington in recent years, and, in truth, it is something that not even the most stringent ethics laws can fully protect against... Mr. Stevens worked to give so much to his state, but he forgot the most important duty he owed its citizens: honest service.
Monday, October 27, 2008
We have begun to demonize each other. Rather than claiming one person has the better idea, or represents greater experience, etc., we've begun simply condemning our opponents as being stupid, less the fully patriotic, or even desirous of hurting other people.
Much of this is at a symmetrical level or, if asymmetrical, it goes from bottom to top. In other words, it might be one voter attacking another, one politician attacking another, or a voter attacking a politician.
Rarely do politicians attack voters, though, especially those who elect them.
Hence the odd case of John Murtha, a Democrat from Pennsylvania who is a key member of the House of Representatives:
Rep. John Murtha (D-Pa.) is in an unexpectedly tight race for an 18th term after effectively calling the constituents of his southwestern Pennsylvania district racists and rednecks.There may be a lot of questionable individuals, but as a whole, "we, the people" have done pretty well. Presidents Roosevelt and Reagan placed a great deal of trust in the electorate. Today's politicians would do well to remember their example.
Earlier this month, he told the Pittsburgh Post-Gazette’s editorial board that “there’s no question Western Pennsylvania is a racist area” in response to a question about Barack Obama’s prospects in his district.
Friday, October 24, 2008
Thursday, October 23, 2008
Today, I'll do the same for Senator McCain.
The Dallas Morning News recommends Senator McCain for several interesting reasons.
First, given the uncertainty facing America, Senator McCain's experience makes him the more certain helmsman at a time when it really matters. Next, divided government is more likely to spend less and be more fiscally disciplined than a Democratic President and a Democratic Congress. Finally, Senator McCain is actually more on an outsider with a proven track record of effectively changing policy than Senator Obama, who has pretty much hewed to his party's line and has a much better record talking about change than effecting it.
The United States is in crisis. The economy is melting down. Our military is at war on two fronts... In better times, America could afford to consider entrusting the White House to an appealing newcomer like Mr. Obama and giving control of the presidency and Congress to the same party... But in this time of great anxiety, the American people need a leader of experience guiding the ship of state.The Budget:
The last time the nation saw Washington make real progress on deficit reduction was the 1990s, when a Democrat controlled the White House and Republicans held Congress. True, Republicans failed to cover themselves in deficit-reduction glory when they held the executive and legislative branches, but we read that as an argument in favor of divided government.Change:
Mr. McCain has often opposed his own party when he believed it was the right thing to do. For example, though he supported the Iraq war, Mr. McCain emerged early as a critic of the Bush strategy at a time when the safe Republican move was go along to get along. His leadership was arguably a key factor in forcing the Bush administration to change its ways, adapting a strategy that finally worked...In contrast:
You don't see that kind of independence with Mr. Obama, who has marched in spending lockstep with his party and mostly ducked questions about entitlement reform and budget cuts.Simply put, the Morning News sees Senator McCain's experience and proven record at reform, coupled with a concern about one party running Washington to be the best reasons to vote for Senator McCain.
The argument about the desirability of divided government being the best reason to vote for Senator McCain (i.e. we know there will be a Democratic Congress) is one you're likely to hear more and more of. On the one hand, you could say we need the government to act in a unified and swift fashion these days given the state of the world and that electing Obama will lead to a more vigorous, effective government. On the other, the track record of the Republican Congress with a Republican president from 2000- through 2006 may given many voters pause.
Again - just want to make clear this isn't an endorsement - just a summary of some good reasons to consider Senator McCain, as I did for Senator Obama a couple posts down.
Wednesday, October 22, 2008
The husband of North Carolina Democratic Senate hopeful Kay Hagan is a lifelong member of an exclusive country club that didn’t admit its first black member until 1995, Hagan’s campaign disclosed Tuesday.I don't throw around the word "racist" lightly, but belonging to a country club that didn't admit people based on race as late as the early 1990s? That seems to fit the bill. (Edit: I don't mean to call Mr. Hagan a racist - just stating my belief that belonging to a club that has a de facto racist membership policy as the story claims is unacceptable behavior).
Charles “Chip” Hagan III, a businessman and former Democratic county leader, “supported opening up membership” at the 1,000-member Greensboro Country Club — but remained a member for years despite his opposition to the club’s de facto segregation policy, Hagan spokeswoman Colleen Flanagan told Politico.
The whole story is here, and needs to be read to be believed.
Now, the question for state senator (and aspiring US Senator) Kay Hagan (pictured):
What did she know and when did she know it?
Monday, October 20, 2008
What makes it especially persuasive is that Zakaria doesn't pretend it's a no-brainer, or that Senator McCain isn't a worthy candidate.
He simply makes a persuasive case of Obama, and deals with rather than ignores his candidate's shortcomings (calling Sarah Palin a "rabble rousing ultra conservative" however, betrays Zakaria's biases however).
Zakaria makes a point I've made privately. Simply put, the most impressive thing Obama's done has been this campaign. If he runs his White House like he ran his highly professional, disciplined campaign that will have (assuming he wins) defeated two seasoned political professionals, the country will have strong leadership:
Let's be honest: neither candidate has past experience that is relevant to being president, except that they have now both run large, multiyear, multimillion-dollar, 50-state campaigns. By common consent, McCain's has been chaotic and ineffective, while Obama has run a superb operation, and done so with little of the drama and discord that usually plague political machines.He also doesn't shy away from one of Obama's biggest strengths - the symbolic message his election would have at home and abroad:
Imagine what people around the world would think if they saw America once again inventing the future. And imagine how Americans would feel if they saw their country once again fulfilling its founding creed of equal opportunity, if they saw that there really were no barriers in their country, not even to the highest office in the land, not even for a man with a brown face and a strange name.An Obama presidency means that the nation's leading politican (President Obama), entertainer (Oprah Winfrey) and athlete (Tiger Woods)will all be African-Americans. This is not a little deal.
Note: this is NOT an endorsement - just a plug for some civil, well reasoned political debate we're getting too little of these days. Before anyone accuses me of being in the bag for Senator Obama, please be assured I'll publish a similarly thoughtful case for Senator McCain.
Friday, October 17, 2008
In his New York Times op-ed, Warren Buffett declares that it's a great time to purchase stock in American companies. This is an exceptional statement for several reasons.
First, Buffet will likely be a very serious voice in an Obama presidency on economic matters, although I'd be surprised if he had a formal job. At his age and with his schedule, I can't imagine he'd be interested unless told that he was indispensable in the job. Still, as someone who issued warnings several years ago, he has a great deal of credibility.
Next, it's also significant because Buffett's never been a big stock guy:
I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.Most interesting is his reasoning. It's not out of "patriotism." No. It's sheer greed:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful...fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.In short, he expects to earn a LOT of money on others' fear and inability to bear risk. He concludes by noting that those who wait for signs of recovery will be too late:
In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
Thursday, October 16, 2008
Some of the answers are very enlightening. Did you know the amount of shortfall in the Medicare (medical care for the elderly) dwarfs the amounts we're talking about spending on the financial crisis? Yet, both Senators Obama and McCain are proposing to make things worse in this regard. The answers of Steve Steckler, Rep. Zach Wamn (R-Tennessee) and Kenneth Scott are particularly on point.
Wednesday, October 15, 2008
Accordingly, I've found some useful links that will help you better comprehend what is going on in the financial world and how it could affect someone who does not play in it regularly. I've arranged them by the iTunes playlist style into beginner, next steps and deeper cuts.
Planet Money - both a blog and a podcast, the NPR team makes a lot of complicated things easier to understand, and does a good job interviewing some really great guests.
Momey Magazine - a collection of relevant news articles from CNN / Money website is here.
David Leonhardt - The "Economic Scene" weekly columnby the New York Times's best business reporter (and main reason to read the Times) is housed here in addition to his excellent work for the Sunday Times magazine.
Martin Wolf - The Financial Times's highly respected columnist is held in high regard in finance ministries across Europe.
Baseline Scenario - The website of MIT economist Simon Johnson (who has been EVERYWHERE talking about the financial crisis) and a couple other smart guys. Baseline Scenario isn't technical, but it does get further into the details for those interested. In particular, their "baseline" narrative and recommendations is a good weekly read.
Monday, October 13, 2008
A while ago I lauded Senator Obama for criticizing his own staff's inappropriate comments. When his press people went over the top in attacking Sarah Palin, Obama took them to the wood shed.
Yesterday, Senator McCain did the same with his own supporters, who were accurately maligning Senator Obama:
At one point, Senator McCain even took a microphone away from a woman who insisted Senator Obama was an "Arab." (see photo)
Fearing the raw and at times angry emotions of his supporters may damage his campaign, John McCain on Friday urged them to tone down their increasingly personal denunciations of Barack Obama, including one woman who said she had heard that the Democrat was "an Arab."Each time he tried to cool the crowd, he was rewarded with a round of boos.
Senators McCain and Obama are trying to keep this election civil. I hope their supporters can do the same.
Although unfortunately known for his acidic columns assailing the Bush administration, Krugman is also a pathbreaking specialist in international trade, and his popular articles explaining international trade are among the best I've read. The research that led to the award specficially examines how economies of scale affect trade patterns.
I have to admit to being of two minds about Paul Krugman, because there are two Paul Krugmans - the partisan political commentator and the dispassionate trade economist. I'm happy to see the latter recognized.
Friday, October 10, 2008
Today comes an article from George Soros on the Danish housing market, and the lessons it has to offer the US:
I wouldn't pretend to know whether Soros's proposals make sense. What I DO know is that we should take a long look at how other nations that have successful housing markets have done it, which is one more great task for the staff of A COMMISSION.
To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.
Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market...
Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price.
Just today, Senator McCain offered up the oldest Washington stunt in the book you pass the buck to a commission to study the problem. But here's the thing this isn't 9/11. We know how we got into this mess. What we need now is leadership that gets us out. I'll provide it, John McCain won't, and that's the choice for the American people in this election.There you have it. McCain's for it, so I'm against it. I can't admit that the other guy came up with a good idea first, so I'll attack the idea.
Here's what Freakanomics blogger, and business school (and law school) professor Ian Ayres has to say to Senator Obama:
It’s one thing to criticize McCain for inaction, but I disagree with Obama’s claim that we know how we got into this mess. In fact, if pushed, I would say I knew a lot more about the causes of 9/11 than I do about the causes of the mortgage crisis...Study the causes, and THEN regulate (or more likely re-regulate). What a novel idea. Usually, the Democrats complain about Republicans' contempt for reflection and learning. We can safely say that such disdain is bi-partisan.
But to my mind, there are still dozens of important unanswered questions.
How much of the crisis was caused by subprime borrowers who made mistakes by borrowing (i.e., would not have borrowed if they had better information)...
Was this a failure of Super Crunching? Was it a failure of corporate governance (in that the managers of the buying firms had incentives to unprofitably grow their empires)? Was the failure caused by originator fraud (or the moral hazard of substituting bad-doc loans for what historically had been high-quality loan pools)?
I think it is probably some mixture of all three — with poor corporate-governance incentives particularly explaining the failure of the rating agencies to start downgrading the debt earlier.Knowing the answers to these causal questions is important if we are going to craft useful policy responses.
The plan essentially calls for injecting capital in the banks in exchange for equity (stock). It also calls for increasing the guarantees on despositors' funds.
Paul Krugman weighs in, favoring the British proposal:
on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.I heard a similar sentiment on NPR's Planet Money podcast, with Wall Streeters voicing their opinions that if the government would simply guarantee ALL desposits and other forms of bank savings, the credit markets would get moving again.
Such a move is currently under consideration here in the US.
But we need to act quickly.
Thursday, October 9, 2008
Economist Greg Mankiw has a sound proposal:
In short, the government should put on the table a standing offer to match private investors dollar for dollar when they offer to invest in a bank. If Warren Buffett offers to buy shares of bank X, the government matches the offer. This way, the market sets the price rather than having the government determining what to buy and how much to pay.
Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.
I hope someone who matters is listening. Mankiw is a former Chair of the Council of Economic advisors and can probably still get his calls returned even though he has been back in Cambridge, MA, for several years now.
Wednesday, October 8, 2008
Northwestern Journalism Professor Alan Schroeder:
New York University Historian Diane Ravitch:
The Nashville event was not the worst debate ever, but it definitely qualifies as the worst of the five general election town hall meetings that have taken place since 1992.
Both candidates spouted the same by-now stale slogans and rhetoric. Neither had anything new to say. Both pointed fingers to blame the other for everything that is wrong in the nation and the world. Neither xpressed a genuine emotion or uttered an original thought or expressed a memorable line for future generations. This "debate" was just plain boring.
And the most memorable quip from Washington lobbying powerhouse Tom Korologos:
I certainly didn't feel the same way. I thought it was a low key, fairly civil discussion where the candidates talked to real people rather than some self important journalists or a studio audience.
Probably, but can’t say THE worst, since I didn’t see any of the Martin Van Buren debates.
Instead, I agree with Harvard Business School prof Rosabeth Moss Kanter:
What’s the standard for a good debate? Memorable zingers? Blood on the floor? Instant solutions to crises, in 2-minute packages? That’s not my standard. What this debate lacked in reality TV entertainment, it made up for in showing the contrasts between how the candidates think and therefore their instincts as potential leaders in troubled times.
Tuesday, October 7, 2008
What Is Fannie Mae?
Fannie Mae (an acronym for Federal National Mortgage Association) is a private company that began life as a New Deal federal government agency but was privatized in the 1960s by President Johnson, who wanted to move its debt off the federal government's books. Its role was (is) to purchase mortgages from lenders, bundle them into investment securities and sell them into the market. This allowed the home lenders to take the loans off their books and make new ones. Fannie Mae also guaranteed those securities. Because it had special status under federal law, lenders were willing to lend to Fannie at lower rates, believing that the federal government would stand by should Fannie ever go belly up - a belief that turned out to be true.
What Went Wrong?
As the home loan market grew, more and more actors in the financial community were willing to take on this role. This forced Fannie to take bigger risks. At the same time, Fannie was faced with increasing pressure from Capitol Hill, which began to worry that its activities might lead to either problems in the market, cost taxpayers large sums of money if it needed to be bailed out, or both. To ward off more oversight and regulation, it sucumbed to legislators' demands that it increase the amount of lending it did to lower income groups, which are by nature riskier. The increased risks it took to compete in the hot housing markets and placate federal law makers (and regulators) put it in a precarious position. After years of tremendous growth (any payments to its top executives), federal regulators discovered accounting fraud at Fannie in 2004. In recent years, as many of the loans Fannie bundled and resold go into default, its had to make good on its guarantees, leading to staggering losses.
About one year ago, Congress and federal regulators, knowing Fannie's state, pressured them to buy up a lot of bad subprime loans - in other words to act in much the way the US Treasury proposes to do under the bailout. Despite being a supposedly private entity, Fannie sucumbed and did so, making its balance sheet even worse.
Why is All This Important to the Current Situation?
By packaging these bad loans, Fannie helped take what should have been a crisis in one market - housing finance - and distributed all over the world as investors purchased them. Precisely how much of the fault should be placed on those who operated Fannie and those who pressured it into riskier and riskier activity remains the subject of much debate.
Anyway, the article is well written, in plain English and worth the time it takes to read.
Kick off is earlier tonight than the previous debates - (CORRECTION ( 9 pm EST / 8 pm CST)
Monday, October 6, 2008
First, US laws in many states give homes inordinate protection against debt collectors. Such loans are "non-recourse" meaning that the borrower can only be held liable up to the home's value. If the home proves to be worth less than the loan, there's little the lender can do to make up the difference. If that's the case, it certainly gives people a strong incentive to borrow more than is prudent, knowing that they can, at worst, only lose a home they couldn't afford anyway. Why not take a risk?
Next, mortgages in Australia tend to be fixed only for a short term, which protects banks from a situation where it makes a lot of long term fixed loans, but needs to finance them with shorter term loans more subject to variable interest rate markets. Banks won't find themselves having low interest streams of income from 30 year fixed mortgages while needing to pay high interest rates themselves. Further, US laws in many states prohibit lenders from charging home owners from pre-paying their mortgages. Banks are in a heads I win (interest rates go up and home owners keep their fixed rates), tails you lose (interest rates go down so home owners refinance) situation.
Finally, if bundling home loans and turning them into securities, getting them off the books of banks was such a prudent way of doing business, why did the government need to set up the operation by creating Fannie and Freddie? Apparently, this wasn't such a hot idea in the view of the private sector.
Frankly, I don't know whether her assessment is accurate, but it is very interesting, and its worth exploring whether the roles of these state laws in the US that protect home debt and fix mortgage terms have played a role in this mess. As I have stated below, I think there's a lot of causes to be examined, which is why we need a commission to thoroughly investigate before we regulate / re-regulate or deregulate further.
The odd thing is the committee that's holding the hearings. The House Government Oversight and Reform Committee (Chairman Henry Waxman) will hold 5 hearings:
October 6th: Lehman Brothers
October 7th: AIG
October 16th: Hedge Funds
October 22nd: Credit Rating Agencies
October 23rd: Federal Regulators
This Congressional activity actually reinforces why we need a commission. This particular committee has absolutely no jurisdiction over the activities in question, no jurisdiction over the laws that might need to changed and no expertise in the issues involved. Further, it is one of the most politically charged congressional committee.
Expect a lot of heat and little light.
Congress has now acted to staunch the bleeding, passing the financial bailout bill on Friday.
The question is, where do we go from here?
There are many different hypothesis on how we got into this mess (it's the government's fault, it's our fault, it's Wall Street's fault).
We need to sort them out.
One suggestion I have is to form a commission to study the causes and report back to Congress on them. In an ideal world, this would be done as an alternate to Congressional hearings, which will be created around the preferred explanation that will yield the politically correct policy answer. Realistically, Congress will need to hold hearings regardless to just show it's busy trying to protect the voting public. That's fine, but we still need a commission (note: Senator McCain has suggested the creation of one as well)
Why a Commission?
First, the issues involved in the meltdown and the causes are highly technical. Doing the job right will involve bringing together top experts in finance, law, housing markets, economics and other disciplines. Even were Congress to bring temporary staff on board, it could not replicate the expertise needed to do the job.
Next, the Commission's work will necessitate the pronouncement of some harsh truths. For instance, to do its job, the commission will need to say, in effect, that many people shouldn't be in the homes they have. There will no takers for that role among our elected officials (thanks mostly to us for shooting the messenger). The medicine will best come from those who won't face those homeowners in the next election.
What Should the Commission Do?
The Commission should, in essence, write the narrative. It should explain as best it can how we got here. For instance, that was the best thing the 9/11 Commission did. It provided a clear, well written account of WHAT HAPPENED. Having a similar narrative for the financial crisis would help educate the public, and make it easier to swallow the sort of medicine that will be necessary to get us through the next year or so.
What shouldn't the Commission Do?
This is perhaps the most important question.
I think the Commission should avoid making any recommendations. The reason for this is because there is the danger that the recommendations will drive the narrative. In order to make a recommendation look justified, Commission members and staff will lean towards an explanation that supports it. That will interfere with the creation of an unbiased hard look at what happened.
Further, the need to avoid strife (e.g., public dissenting) will force compromises. Members will need to hold their nose on certain recommendations to get others. They will then feel bound to support a compromised product after its completion. This will reduce the informed opinion available to Congress after the report is issued.
Once the report on "why" is out, Congress can hold hearings and invite individual Commissioners to comment on what should be done going forward. It can then fulfill its role of listening to the experts and making the needed legal changes.
For a dissenting view, see here. Notably, the main argument against one is that McCain suggested one. Obama needed to attack McCain, so he criticized the idea. As a result, if you're for McCain, a commission is a good idea. If you're for Obama, it's a bad one. If a commission isn't created politics, not the merits of the idea, will be why.
Friday, October 3, 2008
It wasn't easy, and required some extra "help" if you know what I mean.
CNN lists the special earmarks included that made it just a little easier for House members to vote for the bill this time around, having voted against it just a few days earlier.
They include favorable tax treatment for children's arrows (I am NOT making this up), accelerated deductions for race track owners (ditto) and a wool subsidy that was probably created three wars ago.
It all brings to mind German Chancellor Otto von Bismarck's famous quote about laws being like sausages. It's better not to see them get made.
The picture is not good:
almost 100 corporate treasurers held an emergency conference call yesterday to discuss the challenges they are facing rolling over lines of credit with their banks. In some industries, lines of credit are the lifeblood of even completely healthy companies. They operate like home equity lines of credit: you draw down money when you need it (like to make payroll), and you pay it back when your customers pay you back. (In most business-to-business transactions, money changes hands some time after goods are delivered; hence the pervasive need for short-term credit.)
Now, however, banks are demanding much higher interest rates, lower limits, and stricter terms when lines of credit expire, or are even pouncing on forgotten clauses in contracts to force renegotiations of terms... The banks aren’t doing this because they think their borrowers are in any danger of not paying them back; they’re doing it because they want to hold onto the money because they are afraid of liquidity runs...
This is how fear in the banking sector translates very quickly into higher costs and less cash for healthy companies in the real economy.
I am not even sure when the last time that 100 corporate treasurers took the time to get on the phone to speak to one another like this. It sounds like they're sharing information more freely than I could ever imagine at the usual trade association meeting. That this call even occurred should clue policy makers into understanding what's happening in American businesses (which, by the way employs the taxpayers about whom so many profess concern).
those who thought Sen. Biden would wander off into the rhetorical excesses,overstatements and verbal excesses for which he is sometimes prone were...disappointed. He was, instead, disciplined and evenly modulated.
Those who were eager to see Gov. Palin lapse into incoherence were disappointed; she didn't...she decided to debate as a voice of old-fashioned common sense rather than a voice of deep knowledge.
Wednesday, October 1, 2008
(CBS/AP) The Senate pushed toward passage Wednesday of a $700 billion financial industry bailout, and opposition to the package among House Republican conservatives appeared to be softening as well, thanks partly to a provision to increase insurance for people's deposits.Still, too many Americans remain unclear on why Washington (and Wall Street) believes it needed. Here's as coherent a justification as I've seen:
One major reason a significant proportion of public opinion is against the rescue plan is the general failure to make the connection between panics in the financial sector and the ordinary lives of everyday people; simply saying that the plan is necessary to prevent (or moderate) a recession smacks too much of “trust me” to be credible.
The connection is that much of the ordinary activity in the real economy relies on credit - think no further than the volume of purchases made using credit cards. (Although banks have been reducing credit limits, there is little risk for now that credit cards will stop working overnight.) And in today’s conditions, when many financial institutions are potential victims of liquidity runs, lending has virtually ground to a halt.Many businesses rely on short term lending to run their day to day operations. Many items that were once purchased are now leased. That activity is bound to dry up. As companies find that they can't find buyers for their products, they'll begin to lay off more and people. Even those who retain their jobs will stop spending on all but the essentials, and those people who provide other "non-essential" goods an services will lose their jobs, etc., etc.
Tuesday, September 30, 2008
Democracy can be ugly, depressing and frustrating but it is what determines our fate as a nation. We govern by leadership or crisis. Unfortunately, today, we largely govern by crisis. If there is to be a way forward in resolving this crisis, it will only happen when the leadership of the nation, both Republican and Democratic, decide that governing is more important than winning.
Monday, September 29, 2008
The main editorial from the Wall Street Journal labels it a "rescue," but for Main Street - not Wall Street.
Perhaps that's the best way to characterize it - a bailout for Wall Street but a rescue for Main Street.
Here's the Journal's case for it:
it deserves to pass because in reality it is an attempt to shield middle America from further harm caused by the mistakes of Wall Street and Washington...With this vote, Congress is at last taking some ownership for the mess its policies helped to create by fueling the credit housing mania earlier this decade...We agree with those who say there are better ways to provide this public capital, but Treasury Secretary Hank Paulson's plan should do some good, and if executed properly shouldn't cost taxpayers anything close to its $700 billion showroom price.
Professor and Former Treasury Official Gary Clyde Hufbauer:
The vote in favor should be a no-brainer. The Congressional rank and file can choose this bill or a great big crash. But the national financial cleanup has just started. Come April 2009, this week's rescue bill will be seen as the end of the beginning
Columbia University Banking Professor Charles Calomiris:
The bill is better than nothing, so I would vote yea, but it is a close call. The right approach, which the vast majority of economists who have studied such matters supported, was preferred stock injections into financial firms. This was rejected without a hearing by Congress, and the scandal in this process was the complete absence of independent testimony.Center for Economic Policy Research Co-Director Dean Baker:
The bailout is a classic case of Washington herd mentality in which all right-thinking people know that they are supposed to support the bailout, but none of them really knows why.
We have been given several different rationales for the bailout, including the claim that it is needed to prevent the collapse of the system of payments; that it is necessary to prevent a Great Depression; and it is a form of anti-recession stimulus.
None of these claims is true...This deal taxes middle income people to support incompetent Wall Street bankers. That’s a bad deal.
The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street’s follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.
Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is “yes”. The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer.
That's not to say we don't need to take a hard look at our current financial system and the regulations it operates under. But this will take some time to do it right. What's most needed after the bailout is a commission to look into the whole subprime meltdown and the resulting credit crunch and propose the necessary revisions to our current system. But that's the next stage. Right now we need to get the bailout right.
Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.
This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.
Sunday, September 28, 2008
Lobbyists are a part of how Washington works. That's a good thing, because what lobbyists mostly represent is information. With Washington regulating the smallest details of our lives (Congress recently outlawed the traditional lightbulb, but the prohibition won't kick in for a few years), it needs to understand how what it is doing will affect US businesses, the jobs they provide and individual consumers. Although Members of Congress have staff, and some supporting agencies such as the Library of Congress and the Government Accountability Office, they don't have nearly enough information to do the job without a lot of bad, unintended consequences.
Saturday, September 27, 2008
In his second chapter of A Government Ill Executed, Paul Light looks at the current composition of the federal work force, the trends, and what they imply for the ability of the federal government to operate proficiently.
Noting that his 2nd characteristic of of an energetic federal service is clarity of command, Light thinks this is one area where Hamilton nods to Jefferson. Hamilton, as Secretary of the the Treasury, was noted for the details of his orders, down to the armaments that would be on each Coast Guard cutter. "Nothing was too trivial for his attention," says Light. In addition, the federal government work force is undergoing with Light calls "thickening," which refers to the addition of more and more layers between those who run the agencies and those on the front line who execute policy and gain the insight as to what's really happening on the ground.
Additional layers are the result of two things, says Light. The first is additional missions that bring with them their own bureaucracy. The second is the misperception that more leaders equals better leadership. Instead of just a Secretary and a couple of Assistant Secretaries overseeing the civil service, we now have so many layers, especially of political appointees, that we now have people with titles that can barely fit on a business card: "Associate Principal Deputy Assistant Secretary." Modern developments along these lines include a proliferation of "Chief of Staff"s and C-level (e.g., Chief Financial Officer, Chief Acquisition Officer, etc.) to further confuse the thicken the executive branch hierarchy.
As a result, communication of what is expected from the top to the bottom becomes obscured and makes it all the more difficult for the President to get his agenda enacted. Also, key information from the "front lines" never gets to the decision makers at the top. Accordingly, we get faulty government responses to crisis like Hurricane Katrina, doubts about weapons of mass destruction never get aired at the level where decisions are made, and safety concerns about the space shuttle getting lost.
We also have a problem when we consider this with the broken confirmation system we'll discuss later. Because so many offices remain vacant for long periods of time, important information and decisions sit on empty desks. The more layers, the more opportunities for this to occur.
The key is to reverse this trend, says Light, "thin the system."
In this respect, Light looks to Jefferson rather than Hamilton for inspiration. Hamilton believed in highly prescriptive edicts that would filter down through a broad chain of civil servants. Jefferson believed in delegation, following broad principles rather than detailed orders and the use of informal communication over normal bureaucratic modes. Light noted that Jefferson understood that with new missions come new bureaucracy, which obscures clarity of command. Although the often start out flat, they have a tendency to thicken over time he observed.
While Light does a masterful job of describing the problem and the reasons for its evolution, he is much less enlightening on how to thin the federal government. He notes that most Presidents since Carter have understood the problem and endeavored to correct it, but little has been accomplished on this front other than cosmetically.
A few thoughts. First, a "thick" federal bureaucracy seems to be another price we pay for too many missions in addition to not having enough resources as we discussed earlier. Second, it's important to realize than "thinning" the government in this regard doesn't mean cutting workers but rather flattening so that information from the front lines goes through fewer hands on its way to the Oval Office.
Reforming the civil service in this way is clearly important, but it will require a big overhaul that will meet with fierce opposition from government employees and the unions that represent them. Perhaps one helpful step would be for the next President not to appoint someone to every box on the org chart. That would mean abstaining from awarding a "plum" however (and the political juice it creates for him). It's unclear whether that's asking too much.
Friday, September 26, 2008
Subject: SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP
I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.
I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.
I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTION IS 100% SAFE.
THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.
PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.
YOURS FAITHFULLY MINISTER OF TREASURY PAULSON
(Update: 3:01 PM - we're ready to rumble)
The debate, hosted at the University of Mississippi, will focus on foreign policy. It's slated to begin at 9 EST. The four broadcast networks, NPR and C-SPAN are all planning to carry it.
While we can expect the candidates to segueway to discuss domestic politics, particularly the financial crisis, there are still some really important issues to discuss regarding foreign policy. They include:
(1) The war on terrorism - first and foremost. Terrorism is still the biggest foreign threat to the US despite everything else that has happened.
(2) Iran - the mullahs are pushing forward on nuclear power. Iran is a terrorism supporting state according to the US State Department (a designation that both Republican and Democratic administrations have made). A nuclear Iran is definitely a major concern from the standpoint of non-proliferation.
(3) Non-proliferation - it used to be that nation state cooperation was necessary to develop weapons of mass destruction. Today, that's not the case. The next administration needs a new approach for a new problem.
(4) Russia - Russia recently invaded and trashed the independent Republic of Georgia over an ostensible border dispute. The real purpose was to send the message to the US that Russia is still a world power to be reckoned with.
Hopefully, those doing the questioning will hold the candidates' feet to the fire on these issues.
Senator McCain has not given any indication of his views on this, which is very troubling. His intervening in the process, then, is pointless showboating at best.
So far, Obama has shown a steadier hand in dealing with our nation's most pressing domestic issue.
On the other hand, Senator Obama has not shown an understanding of the nation's financial health that previously I credited him with having. When asked whether the bailout would alter his ambitious health care plan, he said "no":
Barack Obama told CNBC's Chief Washington Correspondent John Harwood that his plan to reform the nation's health care policy won't fall victim to the government's $700B bailout plan.
HARWOOD: So no change in your health care plan?
OBAMA: Well, the--but keep in mind, my health care plan is paid for. And I continue to believe that rolling back the Bush tax cuts on the wealthiest Americans makes sense. They are still going to be wealthy after those are rolled back. I still believe that it is important for us to make college more affordable. And I think it's important that all those things are paid for in light of this huge additional potential expense.
It may have been paid for, but the bailout isn't.
That's like saying that you had planned to buy a new car and had saved for it. Now that you find you need a new roof, and don't have any money saved. Are you still buying the car?
Not if you're responsible, or as Paul Krugman likes to call it, a "grown up."
In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis.
the fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.