The People's Business

Waste, Fraud and Abuse...

2011-07-07T11:23:00.000-04:00

Generally when a politician indicates that he'll obtain more revenue and / or pay for a program or tax cut by identifying and eliminating "waste, fraud and abuse," there are few further details as to what that constitutes and how he'll actually get rid of them.

In the Wall Street Journal, though, NYU Professor Paul Light outlines how he'd save $1 trillion through eliminating waste, fraud and abuse:

* Eliminate about one third presidential appointees, senior and midlevel federal employees: $100b. Light estimates that this would, in essence, put the government at about the same structure as it was in 1960 (although much larger). Since 1960, there has been a significant growth in the number of levels of federal employees in cabinet departments from about 7 to 18 in his estimation. This represents needless bureacracy in his view.

* Only hire for these positions upon a certification of need to meet a national priority as determined under the Government Performance and Results Modernization Act. $250b

* Curb improper payments: $500m

* Elimination of duplicative systems: $100b

* Restore the use of federal productivity measures to eliminate activities whose costs outweigh their benefits (one good example can be found here - NPR's Planet Money team talks about the USG's spending $300m on dollar coins unwanted by the public).

* Reform federal payroll practices to reward performance rather than seniority: $100b.

* Cut the number of federal contractors by 500,000, end automatic pay hikes and demand productivty gains from the remainer. $300b

As a tool of implementation, Light calls for the creation of a Government Reorganization Committee, modeled after the Resolution Trust Corporation. Such a committee would have broad authority to make decisions liquidating government assets, collecting moneys owed, and proposing legislative proposals to Congress that it would receive up or down votes (i.e. no burying or amending the proposals).

Of course, such proposals would meet strong resistance from many quaters, particularly government employee unions. It's also to be seen whether Congress would hand over such sweeping authority to unelected policy makers. Finally, there will be many who doubtless take issue with Light's proposals and potential savings numbers.

Still, for $1 trillion it's a debate worth having.

2011-07-07T10:33:00.000-04:00

Today in Congress

July 7, 2011

The Senate will continue debating S. 1323, while the House will continue working on H.R. 2219 (Defense appropriations). In essence, the Senate is continuing to posture on political matters while the House does the real work of governing.

As much as I prefer not editorialzing, the above is sadly true. When the Republicans waste time on a measure solely for political purposes (as they have done in the past and will do so again in the future) I'll point that out as well.

For now its the Senate's Democratic leadership that is guilty of wasting the chamber's time on nothing other that trying to score political points.

Today in Congress, July 6, 2011

2011-07-06T09:11:00.000-04:00

Today in Congress

July 6, 2011

The Senate will take up S. 1323, a "sense of the Senate" that "any agreement to reduce the budget deficit should require that those earning $1 million or more per year make a more meaningful contribution to the deficit reduction effort." This is a political measure intended to force Republicans into taking a hard vote. I'd expect Republicans to keep it from coming to a vote, forcing a "cloture" vote to shut off debate. That will fail (requiring 60 votes) but it will put Republicans on record for the 2012 election as the "party of the rich."

The House will take up the bill funding the Department of Defense, as well as two items deemed to be non-controversial: a bill to reauthorize the Belarus Democracy Act of 2004 and a resolution on the Israeli-Palestian conflict. The latter reaffirms its support for a two state solution in the Middle East, achieved through direct negotiations between the parties. Most substantively it calls on the administration to exercise the US's veto power in the UN for any attempt to establish a Palestinian state outside Israeli-Palestinian negotiations. Both measures are being placed on the suspension calendar, which provides for only short debate, and requires a 2/3 vote of the House. This indicates that the House leadership does not expect serious opposition (not that they aren't occassionally surprised).

Fixing the Confirmation Process

2011-07-05T20:27:00.000-04:00

You can still visit the old Senate chamber, where the US Senate met from 1819-1859

One of the very worst things about how Washington works is the Senate confirmation process.

Even many routine, insignificant, part time government appointees must receive Senate confirmation for jobs with a tenure that generally lasts less than two years. In sum, about 1,200 appointees are subject to Senate confirmation. Between the amount of paperwork and disclosure, committee hearings, floor action, and a potential "hold" for reasons that have nothing at all to do with the nomination itself, it can take nearly as long to be confirmed as the person will hold the post for which she was confirmed.

The situation has grown significantly worse in recent decades. While cabinet officers are still confirmed with relative promptness, confirmation for the all important subcabinet posts have slowed from 114 days during the Reagan administration to nearly 200 during the Obama administration.

As a result, many sane persons decline such appointments, and the government is denied the services of some of the most talented people this country has to offer. Instead, a cadre of job holders who have previously been Senate confirmed tend to shuffle in and out of posts over the years.

Despite all of this, the Senate has generally been uninterested in changing its ways on confirmations, preferring instead the leverage it can exercise over the executive branch to needed reforms to improve the workings of government.

On June 28th , though, the Senate finally passed legislation, S. 679, the Presidential Appointment Efficiency and Streamlining Act, that would significantly improve this situation. First, the bill would eliminate the need to confirm 170 positions. These are mostly non-policy roles, e.g. public affairs, internal management officials, etc (most prominent would be the US Treasurer, not to be confused with the Secretary of the Treasury). Next, it would provide for expedited consideration for another 250 appointees for part time boards and commissions.

Of special interest is the irregular methods used by the Senate to accomplish this task. A special committee of Senators was formed with members from both the Rules Committee (which has jurisdiction over internal Senate operations), the Committee on Homeland Security and Governmental Affairs (which has jurisdiction over the confirmation process generally) and others with a "stake" in the system. This ad hoc group drafted the legislation, which sailed through a chamber too often stifled in partisan gridlock by an impressive 79-20 vote. Whether such tactics can work on other issues remains to be seen.

While the bill must, of course, still go to the House for approval before being sent to the President, it is expected to do so without much controversy as the House does not play a role in the confirmation process. The Senate's willingness to pass a bill that would reduce its own leverage for the good of government overall is one very bright ray of bi-partisan sunshine in a city too often marked by competition for political power.

Incomphrensible

2011-01-10T10:19:00.000-05:00

The weekend's events, nothing short of a political assassination (one hopes an attempted one), are generating a lot of heat, but not much light.

One theme's that is being discussed a lot is the role of heated political rhetoric. While it doesn't appear that this particular event was closely related, but politicians of all stripes are re-thinking their use of langugage and metaphors of violence (I always have hated the term "war room," mostly used by civilians who have never seen anything like the hardships endured by those who serve in the military). That's a good thing regardless.

So far, the best thing I've seen is Walter Shapiro's take. He notes the trend towards less accessibility of people to their leaders, and wonders who quickly the weekend's events will accelerate this trend, and interestingly how more security would affect the mindset of Members of Congress:

Equally troubling will be the psychological effects on House members themselves as Congress gives way to the inevitable security mania. Although there is no way of proving it, I have long nurtured the belief that living inside a protective bubble exaggerates the self-importance of public officials. If everyone must be screened and frisked before being allowed to see a freshman congressman, it is easy to imagine how this legislator might soon believe that he is entitled to perks worthy of the court of Louis XIV.

Some advice for a new chairman

2011-01-03T09:40:00.000-05:00

Rep. Darrell Issa (R-California) is the incoming chairman of the House Committee on Oversight and Government Reform. The Committee's chief role is to monitor the workings of government (oversight) and fix what's broken (reform). It doesn't enact the laws and regulations that govern us directly, but rather the laws and regulations that govern those who carry out the laws. Those oldest of enemies, "waste, fraud and abuse" are its meat and drink.

Issa has let it be known he plans a very aggressive agenda, with an average of a hearing a day (thank goodness I'm no longer working on Capitol Hill!) and vigorous investigation of the executive branch. He thinks he could possibly save $200 billion, all told. Happy hunting.

While I appreciate his optimism and think a little additional oversight is a good thing (oversight lacks when both parties control Congress and the executive branch), it's clear that Issa really needs to step up his own performance when it comes to public statements.

Most notably, Issa called President Obama "one of the most corrupt presidents in modern times." Now, this is utter nonsense (though arguably not much dumber than some of what was said about Obama's predecessor - it comes with the territory in these partisan times), but its the sort of thing politicians say all the time when they're hyperventilating on partisan talk radio and TV shows with some talking head urging them on. The difference is, Mr. Issa, you're no longer the irrelevant backbencher who needed to say outrageous things in order to get the media to pay attention, but the Chairman of a congressional committee with subpoana authority.

Fortunately, Mr. Issa seems to get it, saying he regretted his language and trying to explain it in context of an administration that has (thanks to Congress mind you) a large amount of discretionary authority, the kind that Congress rotuinely gives the President in a crisis.

For his sake and ours, I hope Issa grows in office, and focuses on his stated priorities:

1. Impact of regulation on job creation.
2. Fannie/Freddie & the Foreclosure Crisis
3. Financial Crisis Inquiry Commission and the failure to identify origins of the financial crisis
4. Combating corruption in Afghanistan
5. WikiLeaks

6. FDA/Food & Drug Safety.

The lesson here is when you move from the minority to the majority, your demeanor and style need to change as well.

Fidelity to Law For Its Own Sake

2010-11-22T10:17:00.000-05:00

The Financial Crisis Inquiry Commission, established by Congress, announced that it will delay, slightly, its report, due in December to January. The reason is apparently completely innocuous - it simply wants to publish its report in book form, which will delay release by a few weeks.

There's only one problem.

The statute (aka law) that created the commission requires it to report by December 15th, 2010.

Four members of the Commission dissented from this decision for this reason. The dissenters point out that the work is complete and the report can still be delivered on time.

It raises the interesting question of fidelity to law simply for the sake of fidelity to law.

You would think...

2010-11-17T06:06:00.003-05:00

You would think that the Washington Post would be a good source for an evenhanded treatment of the economic policies of the incoming House majority.

You'd be wrong.

Steve Pearlstein, who's been writing such gems as full throated defenses of Fannie Mae for as long as I can remember, sums up the incoming House majority's skepticism of current economic policy, to wit:

-quantitative easing
-retaining the Bush tax cuts for households making over $250,000
-unlimited unemployment benefits

as follows:

"GOP to jobless: Drop Dead"

To be fair to Pearlstein, this is from the headline, not the column, and headlines are generally written by editors - not the person who wrote the article or column, so I'll reserve the possibility he (a) didn't write it and (b) chewed out the person who did.

The fact is, there are serious policy arguments on these issues on both sides (see, for example, a critique of the fed's quantitative easing by some of the nation's leading economists). Pearlstein himself claims to have concerns. Why he can voice them but others can't isn't clear. I think there's a distinctly unparliamentary name for criticizing others for something you do yourself, but let's not go there. The name calling obscures these honest policy differences, and reduces our chances of finding the middle ground that Pearlstein and his ilk claim to seek.

Instead, Pearlstein goes on about William Jennings Bryant, and only cites economic authorities that fit the Post's preconceived preferences for big government. If the big government policies are the right ones (and I have defended some, e.g. TARP) they certainly need better defenders.

McConnell and Earmarks

2010-11-15T15:37:00.001-05:00

Senate Minority Leader Mitch McConnell (R-KY) announced that despite his longstanding support for earmarks as a member of the Senate appropriations committee, he was going to support a ban on earmarks.

I've written about my views on earmarks before. In short, I view them as a bad practice in that their existence (a) politcizes spending and (b) incentivizes more of it than would otherwise occur.

Critics note that "earmarks account for just three-10ths of 1 percent of federal spending." Yet, they're the tail that wags the dog. If members aren't guaranteed their share of ribbon cuttings and publicity, the allure of running up big bills their constituents ultimate pay becomes much diminished.

Here are my questions for Senator McConnell:

(1) Why the late conversion given your past support?
(2) Given that Republicans are in the minority, the Senate's practice will likely still embrace earmarks regardless. Are you pledging that Republicans (and yourself) will abstain from earmarks even as they see their Democratic colleagues engaging in it?
(3) House Democrats were down on "earmarks" before the 2006 election that brought them to power, yet once given the majority embraced "legislatively directed spending" (i.e. earmarks). What pledge can you give that Republicans will retain their opposition to earmarks when it really counts (i.e., when they are in the majority)?

How to Restore the American Dream

2010-11-10T14:15:00.000-05:00

How to Restore the American Dream is one of the better pieces I've read recently on how the world really works and what it will take to get back on our feet.

"No Final Victories"

2010-11-01T11:19:00.000-04:00

E.J. Dionne is a columnist I do not, shall we say, consider essential reading. Today's column on tomorrow's election offers an opportunity for explaining why (to be clear, I don't believe he or anyone else I'm referring to in this post is an "idiot" - I just thought the picture was funny).

Dionne mostly relates a dinner conversation he had with a Democratic Member of Congress, Patrick Murphy, who relates how Democrats had thought that after the election of 2006, where they took control of Congress and 2008, where they captured the White House and got 60 votes in the Senate needed to prevent a fililbuster, they were some sort of "permanent majority" and that the Republicans would be in the wilderness for an extended period if not forever.

Such an attitude was on display at such entities as The New Republic:

What conservatives have yet to do is confront the large but inescapable truth that movement conservatism is exhausted and quite possibly dead.

The New York Times, no longer the "gray lady" or even, in fact, a shadow of its former self rejoiced after the 2008 election that conservatism was not only defeated, but even discredited.

I haven't been in Washington as long as Dionne, Sam Tenenhaus or the New York Times, but one thing I've learned is that there is no such thing as permanent victory in a democracy. Republicans who spent and waged war more like progressive Democrats learned that. Now Democrats are learning this all over again, as if losing control of Congress in 1994 wasn't enough. Is 14 years really long enough time to forget what you've learned?

Apparently.

What Do You Call This Again?

2010-10-19T10:35:00.000-04:00

The latest idea from Congressional Democrats is to make a one time payment to Social Security recipients.

Politically, this makes a lot of sense. Seniors vote, and who wouldn't want a "bonus" these days? Put your Republican opponent in the position of having to oppose it.

They're promising to push this once Congress returns after the election in a "lame duck session" (i.e. one that takes place between the election and the seating of new members and removal of old ones not re-elected).

The rationale is that Social Security recipients have not received an increase in their payments for cost of living this year.

Why?

Because, according to the government statistics, the cost of living didn't actually rise.

Supporters argue that this is "stimulus" and that seniors are struggling, and have to deal with depleted savings. No word on why taking money from a working family of four and handing it to someone to augment their depleted savings will have an economically "stimulative" affect.

To recap: Democrats are offering seniors an additional payment that was not earned, to which they are not entitled under current law, and which has no policy rationale.

What would you call this?

TARP May Actually Make Taxpayers Money

2010-10-01T15:57:00.000-04:00

It's been a while since my last post. I wasn't kidding when I said I wouldn't post anything unless there was something that compelled me to write.

What's gotten my off the couch was this from the New York Times:

Even as voters rage and candidates put up ads against government bailouts, the reviled mother of them all — the $700 billion lifeline to banks, insurance and auto companies — will expire after Sunday at a fraction of that cost, and could conceivably earn taxpayers a profit.
...
the once-unthinkable possibility that the $700 billion Troubled Asset Relief Program could end up costing far less, or even nothing, became more likely on Thursday with the news that the government had negotiated a plan with the American International Group to begin repaying taxpayers.

For all the criticism that the TARP program received, I thought voting for it was the right thing to do. I had always thought that the media coverage of it as costing $700 billion was overblown because it obviously wasn't the case as we knew SOME of the costs would be recovered.

That we could actually be "in the black" on this thing was, I thought, a disingenous selling point. The payoff was really keeping the financial system from going under (which as we know it didn't although we may never understand exactly how much TARP contributed to this).

Never Mind - Nothing to See Here

2010-07-22T08:23:00.000-04:00

In an apparent end to the controversry surrounding the firing of several US attorneys toward the end to the Bush Administration, the special prosecutor has opined that:

The investigative team determined that, based on the evidence already developed by OIG/OPR and Congress, as well as the additional evidence developed through the criminal investigation, that evidence did not demonstrate that any prosecutable criminal offense was committed with regard to the removal of David Iglesias. The investigative team also determined that the evidence did not warrant expanding the scope of the investigation beyond the removal of Iglesias. Additionally, the investigative team determined that there was insufficent evidence to show that any witness made prosecutable false statements to either Congress or OIG/OPR, or corruptly endeavored to impede a congressional inquiry.

I'm no fan of the Bush Justice Department as it existed under Attorney Generals Ashcroft and Gonzalez. In short, there is insufficient evidence that any of the activity related to this episode rose to the level of criminality. We'll see if the press, which covered this story ad nasuem when it first broke, gives the story's end the same coverage it gave its beginning.

Getting the Economy Moving...

2010-07-12T14:28:00.000-04:00

One of may favorite journalists, Fareed Zakaria, reports that the British are proposing to tackle the deficit as a means of convincing investors that England is a good place to do business:

the new chancellor, 39-year-old Tory George Osborne, [has] presented a budget that promised to get Britain’s fiscal house in order with sharp cuts in spending, coupled with tax increases. It landed in the midst of a heated debate across the industrialized world about how to best get the economy back on track. Osborne and his boss, Prime Minister David Cameron, have come down firmly on one side of this debate, hoping that a major effort to reduce the deficit will reassure bond markets and investors that Britain is a safe and compelling place to put their money.

Meanwhile, the Washington Post's policy blogger Ezra Klein, characterizes the debate within the Obama White House as between those who wish to spend their way to prosperity vs those who argue, ala Osborne, that restraint is a quicker way to prosperity:

we're starting to hear rumblings of a fight within the White House. The political side, we're told, wants to focus on the swelling deficit, which it believes is contributing mightily to the public's sense that the economy isn't being effectively managed. Karl Rove, who's been on the political side of a White House himself, agrees with them: "People's concern about the spending and the deficits and the debt and the out-of-control government have been growing and growing and growing," he said on Fox News. "And it's one of the key drivers in the 2010 election."

The economists disagree: They see a weak economy that still needs government support.

You got that? Those who believe in restraining borrowing are Karl Rove type political hacks, while the economists all support increased government spending. Economics is that black and white in Klein's world. All we need to do is keep spending and things will get better.

In fact, of course, there are economists on both sides of this vital question (and probably those who take different viewpoints all together). One thing IS for certain however: anyone who is telling you there's a painless way out, such as Klein, isn't being realistic.

Beating A Dead Horse

2010-06-30T10:08:00.000-04:00

The notion that we ought to take our time to study and understand a problem before reacting to it, especially when it comes to something as complicated as legislating, is one I've discussed several times, most recently with regard to financial services reform. Still, Congress is on the precipice of enacting a massive financial services reform law despite the fact that the Commission that Congress itself created to better understand the causes and nuances of the crisis has not yet completed its work.

Why?

One proponent of reform, federal judge and author of A Failure of Capitalism on the financial crisis, Richard Posner, explains this phenomenon:

But just as politics requires that President Obama be seen to be doing something about the oil leak in the Gulf of Mexico, though there is nothing he can do, so politics requires that Congress be seen to be doing something to prevent another economic disaster, though there is nothing it needs to do.

Posner doesn't say that the government doesn't need to change its policies, but that the changes necessary aren't changes in the law. In short, they can be made largely without Congressional action. Now, that's a problem, because if Congress doesn't solve the problem by passing a bill (the only thing Congress does is change the law by enacting bills) then Members won't be able to claim credit by the November election.

And THAT's why its rushing to pass legislation despite the ongoing work of the Financial Crisis Inquiry Commission - a government body created BY CONGRESS to report on the crisis's cause. The Commission's work is ongoing (today, in fact, it is holding a hearing on the part played by derivatives, the regulation of which was one of the most contentious issues that delayed the financial services bill) yet their work will not be factored into the legal reform.

The Tea Party Explained

2010-06-28T11:17:00.000-04:00

This analysis is one of the best explanations I've read about the Tea Party, which is a loose collection of people who share one thing in common: frustration with the status quo. It comes in the wake of the South Carolina primaries that saw two Tea Party favored candidates prevail. In both cases, they were minorities beating middle aged white guys.

A pattern seems to be emerging that runs through the views of those who identify with Tea Party, and it doesn't appear to be a strictly "throw the bums out" mentality. It doesn't make sense to punish people for nothing other than incumbency, and many incumbents are surviving.

The question is why some incumbents survive if the Tea Party nothing more than a "throw the bums out" style movement:

This question that can be easily answered by those who have argued all along that the Tea Partiers are just a collection of crackpots and dodos, incapable of seeing where their true self-interest lies. What else would you expect from such idiots? But there is another way of interpreting the South Carolina primaries. The real target of Tea Party wrath is not the establishment or incumbency, but cronyism.

Such cronyism exists in many aspects of life, not the least of which is Wall Street and its relationship with Washington, DC. There is, perhaps, nothing more American than the notion people should advance on their own merits rather than their status or birth.

It will be interesting to see how this theme continues to play out through the rest of the year.

Campaign Finance I

2010-06-02T11:43:00.000-04:00

I'm not sold on the concept of publicly financing campaigns. It should not be easy for any crackpot to get hold off taxpayers' money to launch a loony, joy ride of a political campaign.

Still, articles like this from the excellent Ruth Marcus make me willing to re-consider:

Washington operates on the tacit understanding that campaign contributions grease the way for access and influence. Both sides in this transaction, lawmaker and donor, perceive, or at least present, themselves as the victim: elected officials as captives of a system that demands incessant fundraising; donors as the target of a none-too-subtle shakedown scheme.

As the legislative director for Teledyne Controls, a California defense contractor, told OCE investigators, "It does go through your mind whether you are buying influence." Yah think?

Having spent 10 years on the Hill, I wouldn't say money buys results (except in a few highly publicized cases where people went to jail), but it can get you a hearing, without which you have little or no chance of getting what you're looking for. Even the late Paul Simon (D-IL) acknowledged that his time was limited, and when handed his list of phone calls gave preference to big donors.

Most so-called campaign finance reforms have, in my view, made the system even worse. Limit how much individuals can give? OK - you simply empower "bundlers" who can bring many individuals together. Even worse, because only small amounts can come from any one source, it takes MUCH more time for Members to fund raise. Every lunch hour and free evening becomes a fund raising session whereby a Members Chief of Staff will her take over to the Republican or Democratic Committee to start placing phone calls to lobbyists and constituents.

This is time not working on the nation's problems or even time socializing and getting to know one another personally. Don't underestimate the importance of this latter activity - its one of the reasons Washington has become so nasty.

Some proposals from Brookings

2010-06-01T11:01:00.000-04:00

This came across my desk this morning.

Titled "Econonic Growth and Institutional Innvotation: Outlines of a Reform Agenda," the policy monograph by William Galston discusses how our institutional design can affect our economy.

Galston starts from the premise that our economy is hampered by three deficits: fiscal (also known as the US budget deficit), savings (the lack thereof by US citizens) and investments. He proposes that these be attacked by such things as Commissions that are insulated from the political process, yet still answerable to Congress. Mandatory individual accounts added to Social Security. And the creation of a "National Infrastructure Bank" funded with US tax dollars. Such reforms would be impossible in our current climate, so institutional reforms that will empower centrists must be enacted.

To me, these are the more interesting suggestions: (1) replace the current system of having state legislatures draw political districts for themselves and the US House and (2) mandate voting. I'll take a closer look at these ideas in some of my next posts.

Even more insane than I imagined...

2010-05-25T13:40:00.000-04:00

As you'll recall, the agency that overseas safety at offshore drilling facilities, the Minerals Management Service (MMS) (an agency within the US Department of Interior) was structured in such a way as to create a conflict of interests. In short, its funding came from the operations of the entities it was supposed to oversee from a safety perspective. If your budget comes from an entity's operations, what are the odds you'll shut it down, even if you're concerned about safety?

This flaw was addressed rapidly as Secretary of the Interior Ken Salazar announced that MMS's collection and safety functions would be separated.

Today's Post contains the strongest evidence to date that the agency's conflict of interests created a situation where this situation was possible. Amazingly, MMS officials' bonuses were tied to how meeting federal deadlines for leasing offshore oil and gas exploration, according to the Washington Post Reports of environmental risks triggered reviews that delayed leases according to the story.

In short, the incentives for the individuals with oversight of the safety of offshore drilling facilities were paid based on how fast they could get drilling approvals done.

If this story is ever told in a productive manner it will be one of failed government design as much as anything else.

Yesterday's Elections

2010-05-19T09:56:00.000-04:00

I'm not a political analyst, so I'll leave the analysis to others. I'd just warn you that 90% of those who claim to be political analysts aren't very good at it, or have agendas other than providing the unvarnished truth.

Here are a few links for your consideration:

http://www.realclearpolitics.com/horseraceblog/

http://www.centerforpolitics.org/crystalball/

http://rothenbergpoliticalreport.blogspot.com/

http://www.cookpolitical.com/

The Financial Crisis Explained - Gambling With Other People's Money

2010-05-17T12:56:00.000-04:00

Russ Roberts has made a career out of explaining difficult economic topics by relating them to ordinary life in a readable manner. He explained why we should support free trade in The Choice and other economic concepts in several other novels that involve economic themes.

He's just issued a paper that explains the recent financial crisis very well. You can download it here.

His critique is well balanced and very nuanced. It covers all the bases to some degree, although it focuses most heavily on the problem he sees at the heart of the matter: government actions created a bailout expectation that led creditors to not act with their usual caution when it came to the housing market. He partitions blame between the government and private actors who advocated the government's actions for personal gain. I like that he takes a degree of personal responsibility, acknowledging that he had downplayed concerns about high leverage (ratio of debt to capital). Most important, he rejects any easy, simplistic answers from the left (Wall Street Greed) or right (all due to Freddie and Fannie).

Here's just a very short "summary of the summary" to give you a taste:

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

I don't agree with everything he says, this is probably one of the best pieces I've seen for those who aren't financial policy buffs but want to understand the connection between government activity and the economy a little bit better.

The Inmates are Running the Asylum

2010-05-13T10:20:00.000-04:00

The Washington Post's editorial page sounds a worried note after a conservative Republican lost his primary bid for not being quite conservative enough (i.e. he had voted for TARP and had co-sponsored a relatively moderate health care reform proposal with a Democrat) and a Democrat from West Virginia who had shown a willingness to compromise on greenhouse gas regulation lost as well. In short, two fairly well respected Members who were willing to work with others on compromises lost to candidates who made it clear that compromise was not in their vocabulary:

For many party cleansers, working across party lines constitutes treason. We agree that elected officials ought to be guided by principles that they are willing to fight for. But we also see a difference between fidelity to principle and dogmatism. If Republicans cannot accept that Democrats may make some reasonable arguments, and vice versa, then nothing will get done

I normally don't blog on electoral politics, but this trend has obvious implications for governance if Members of Congress believe that the only way to keep their seats is to scream across the aisle rather than actually governing. In future posts, I hope to look at what institutional reforms can be made to keep parties from becoming hostages to their most extreme elements.

Because, right now, the inmates are running the asylum in both parties.

The New Prime Minister

2010-05-12T14:07:00.000-04:00

It hasn't taken as long as some feared for Britain to get a new government. Conservative leader David Cameron and Liberal Democrat leader Nick Clegg have formed a coalition government (the first since the end of World War II apparently) between the two parties, with the Conservatives getting most of the leading offices given that they won the largest number of votes. But Clegg will serve as the Deputy Prime Minister and several other top government posts will go to Liberal Democrat MPs.

Interestingly, one of their first moves will be to enact legislation fixing the term of Parliament at 5 years. Under current law, a Parliament may last up to 5 years, but a Prime Minister may dissolve Parliament, thereby causing an election, earlier if he or she chooses. The move may help to solidify the coalition (allaying Liberal Democrat fears that the Conservatives would call new elections once their polling looked better, gain a majority, and kick them out) but it also seems like good government (prohibiting a politically motivated call for a new election by the party in power for the purposes of political advantage.

Still, this could have profound effects on the entire British political system, and render it looking much more like that of the U.S. in several ways.

For example, suppose the Prime Minister loses the majority. Would Britain be stuck with a prime minister who lacks majority support in the Parliament? If so, it could come to resemble the US system, where the President and Congress frequently do not come from the same party, a little bit more.

More importantly, it would also likely end the tradition of short, inexpensive campaigns because candidates will know exactly when the elections will be and can start campaigning earlier than the usual 30 day window from when the PM announces an election and when it takes place. Such a change may wind up with very profound effects. As a result of longer, more expensive campaigns, voters may wind up paying less attention and fewer going to the polls.

Learning the Right Lessons Part II

2010-05-11T10:22:00.000-04:00

Learning the right lessons from a failure is the first step towards improving future performance, in life, in business and especially in government. As we discussed earlier, the most important aspect of the government's oversight of the safety of offshore drilling rigs may have been the merger of two conflicting tasks, safety and revenue collection, in the same agency.

The AP is now reporting that the administration is looking into splitting the Minerals Management Services into two different agencies centered around these very different tasks. As we learned last week, the British took a similar step years ago, and improved their safety record as well. Even if the Wall Street Journal didn't seem to get it quite right when it wrote its headline, Department of Interior Ken Salazar seems to understand.

The Federal Workforce - Faster Hiring

2010-05-11T09:41:00.000-04:00

Federal employment rules are an embarrassing anachronism. They were created for a time when the government was smaller, its duties much more limited, and the typical functions were routinized ones, such as typing and filing. One aspect of this is the incredibly long time it takes to hire anyone. A short summary of the issue can be found here.

At least one aspect of this operation appears headed for improvement. Today's Washington Post reports that President Obama is ordering the feds to step up hiring.

This is welcome news. The federal government needs to replace a lot of workers who are scheduled to retire soon. In 2008 the Partnership for Public Service projects over one-third of the Senior Executive Service (SES), which constitutes the core leadership of the civil service will retire. We need to keep a steady flow of quality candidates coming through the pipeline merely to maintain the government's capacity. Whether you're a fan of "big government" or not, a government with big responsibilities but without the resources to carry them out is a failed government, and something that would benefit no one. A long, complicated hiring process deters people from entering the pool, reducing the overall quality of the federal workforce.

Some of the changes include ditching government - only forms and requirements (a problem not only in hiring but many other aspects of government such as contracting) in lieu of more traditional applications and resumes and allowing agencies to hire someone who had applied for a position at another one in the same department (but not across departments, which would require an Act of Congress).

Now, let's talk about (a) making promotions and salary increases based more on merit and less on seniority and (b) getting rid of poor performers.

Regulatory Incentives: A Case Study

2010-05-07T11:12:00.000-04:00

A Wall Street Journal (subscription) story caught my eye, "Oil Regulator Ceded Oversight to Drillers":

The small U.S. agency that oversees offshore drilling doesn't write or implement most safety regulations, having gradually shifted such responsibilities to the oil industry itself for more than a decade.
Instead, the Minerals Management Service—now caught up in the crisis of the Deepwater Horizon rig that for weeks has sent crude oil gushing into the Gulf of Mexico—sets broad performance goals for the industry. Oil producers and drilling companies are then free to decide for themselves how to meet those goals, industry executives and former regulators say.

Let's break this down. What does it mean, exactly, to say that the agency has ceded its regulatory authority?

In short, it's something called "performance based" regulation. The agency, in this case something called the Mineral Management Service (MMS), sets performance expectations, but doesn't tell the agency HOW it must reach the performance expectations. In theory, this should allow for less expensive regulations than the traditional "prescriptive" model (where I tell you HOW you must do something, but generally absolve you from the results if you comply).

MMS has now made clear it will be shifting away from a performance based system to a more prescriptive based one soon after last week's disaster in the Gulf.

I'm not so sure it was the model of regulation, or the fact that industry practices were adopted as the standards rather than rules written by federal regulators, that caused the problems MMS faces. In fact, the Journal appears to have "buried the lede" (i.e. put the most important part of the story in the middle rather than up front).

Some interesting facts emerge about MMS (which is an agency within the US Department of the Interior): Enforcement of safety rules isn't MMS's "primary responsibility" although it does inspect rigs. Instead, its to "verify how much oil is being pumped, which is key to another MMS duty, maximizing payments the government receives for oil and gas rights from energy producers." As a result, the agency, which is funded by fees and rental receipts, faces a "conflict of interest" according to former MMS employees.

Does this make a difference in safety? Very possibly.

Consider this: fatalities on oil rigs is four times higher in the US than in Europe. The UK had a similar model, but recently separated its safety function from its revenue collection function. The result has been an improved safety record.

The story goes on to detail how the MMS failed to follow-up on instances where the industry had failed to meet safety standards, etc. In short, poor enforcement rather than poor regulations may have been at fault here.

Note: this is not the first time in recent years MMS has come under fire. In 2008 it was cited for "a lack of ethical culture" after fairly shocking evidence of misbehavior occurred.

A minority government for Her Majesty...

2010-05-07T09:13:00.002-04:00

The British people have spoken...now the politicians will decide what they said. No party received a majority in the House of Commons, so now a coalition will need to be formed - something that country hasn't dealt with since the 1970s. In the US, of course, we've had divided government with one party controlling Congress and another the White House.

Will be interesting to see how this all plays out...

Better Bills

2010-05-05T09:00:00.003-04:00

Yesterday, we asked why might Congressional bills be so long?

Despite the massive size of the financial reform bill, it may be the content, not the length, that is problematic. From Monday's New York Times:

As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis.

Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac.

Others simply argue that it is premature to pass sweeping legislation while so much about the crisis remains unclear and so many inquiries are in progress.

Specifically, there IS a federal Financial Crisis Inquiry Commission that is supposed to be reporting on the causes of the crisis. Congress created it and asked it to report in December of 2010. Without a sound understanding of such causes, it would seem that a solution would be premature, no? So why the rush to legislate before the report you asked for is due?

One reason, unfortunately, might be found in Congressional Quarterly's (subscription required) current cover story about how Democrats are looking to re-brand their populist image and tap into the public's general anger in time to avoid major losses in the up-coming November elections:

The debate over financial services regulation, which was engaged on the Senate floor last week and is expected to dominate Congress this month, is a template for the Democrats’ new game plan for rebranding and promoting some of their longstanding initiatives.

Whether bills have been considered thoroughly, and through the regular order, is a better yardstick by which to measure than length.

The British Elections

2010-05-04T09:53:00.002-04:00

Jacob Weisberg of Slate has a piece on tomorrow British elections. He asks a good question: why should we care (other than just the sporting aspect of electoral politics)? Here's his take:

Our American campaigns have become decadent spectacles of horrifying length and expense characterized by 30-second attack ads, a class of parasitic professionals, and a running media freak show.

By contrast, Britain's feel pure. They are swift (four weeks!), substantive, and not entirely driven by fundraising. Spouses are treated as human beings and allowed their own lives. The electorate is informed and engaged. The candidates are more spontaneous and accessible.

Weisberg goes on to describe his experience covering the race, which has some interesting comparisons with our own long, expensive and seemingly vacuous elections featuring a bored, inattentive and too often uninformed electorate.

Why Congressional Bills Are So Long

2010-05-04T08:43:00.001-04:00

Historian John Steele Gordon thinks he knows:

One reason, I cynically suspect, is precisely to make them unreadable...The political elite would rather work in the dark and is confident that the Washington press corps won’t go to the trouble of actually reading a bill that’s longer than War and Peace (and a lot less entertaining). As a political public-relations man once told me, “Nobody ever went broke underestimating the work ethic of the average reporter.”

But there are two other reasons. One is that a vast bill makes it easier to sneak in clauses that go unnoticed until they are law...The second reason is Washington’s increasing fascination with global reform rather than piecemeal reform. Only touchdowns, it seems, are now allowed in the game of political football; moving the ball down the field just won’t do. The health-care debate would have been a lot shorter and a lot less politically divisive had both sides simply agreed to enact those reforms that a substantial majority of each house agreed with — such as of insurance abuses — and then saw what else was needed. Regulating derivatives would be a piece of cake if it were not tied to “financial reform” in general.

From my own experience in writing legislation (10 years in Congress), I'd say that Gordon, who is an excellent financial historian, has it mostly wrong.

No one ever told us to write bills longer on purpose. I'd say of the causes he identifies, the last (a preference for global over piecemeal reform) is the soundest. The reason have more to do with the increasing size of the congressional agenda and the diminishing floor time, meaning that you can't do several bills on one topic any longer. Once a financial reg bill is done, Congress won't want to take it up again, so everything needs to be loaded into one package.

British Elections - Brits prepare for minority government rule

2010-05-03T13:18:00.000-04:00

I've always been fascinated by the British political system, which is generally referred to as a parliamentary democracy. It's highly useful to study because it represents a different style of government that works well for a nation very much like our own, which uses a presidential system, and there's lots of useful lessons in comparing the way the British approach things to our own.

One aspect of the parliamentary system is that the ruling party is determined by parliamentary elections. The leader of the party that wins the most seats becomes Prime Minister and forms a government. The Prime Minister does not personally stand for election nationwide, although I suspect a lot of votes for local Members of Parliament ("MPs") are cast based on who the party's leader is rather than the local MP. In short, there's no "ticket splitting" (voting for a congressional candidate from one party and a President from the other) the way we understand it in the US.

Still, the English will go to the polls on Wednesday, and for the first time since the 1970s are likely to split votes among three parties - the Conservatives (aka the "Tories"), Labour, and the Liberals. Labour is the incumbent party, but the least likely of the three to win the most seats. Accordingly, we'll likely see a minority government, where the party that wins the most seats will need to work with other parties to form a working majority.

We'll be watching and trying to learn from this...should be very interesting!'

For more, British historian Simon Schama breaks it down for the readers of the New Yorker.

Note: the picture above is the Prime Minister's official residence at number 10, Downing Street, in London.

Learning the Right Lessons

2010-05-01T12:45:00.001-04:00

As I mentioned on Monday, I'm looking for some good stories related to derivatives that will help people understand the hubbub over them a little better.

Fareed Zakaria's column on Goldman Sachs is a good place to start. As you've no doubt heard by now, Goldman has been sued civilly by the SEC and its executive were grilled by the Senate Permanent Subcommittee on Investigations in the past couple of weeks.

Zakaria demonstrates that one doesn't have to opposed derivatives regulation to understand the dangers, however, inherent when one firm is made a scapegoat for an industry:

the rage surrounding the Goldman case can cloud our perspective and distort public policy. We're going through a familiar part of America's boom-and-bust cycle. Having been mesmerized during the go-go years, having unduly lionized and feted industries, firms, and people as they rode the wave, we now want to throw these people to the wolves. We need to step back for a moment and try to understand what happened and learn the right lessons.

Whether new regulations are warranted is best left to a blog dedicated to studying financial issues, but making sure our processes and methods of oversight are calibrated to learning the right lessons is of vital importance to all fans of good government.

Senate Committee Hearing - The History of the Filibuster

2010-04-29T08:42:00.001-04:00

On April 22nd, the Senate Rules Committee held its first of a projected series of hearings on the filibuster. The hearing focused on the filibuster's history and evolution as a rule and practice. Witnesses included Professor Professor Sarah Binder (George Washington University), Robert Dove (former Senate Parliamentarian), Stanley Bach (former Library of Congress specialist on Senate procedures) and professor Greg Wawro (Columbia).

Chairman Charles Schumer (D-New York) opened by calling the current practice a "strait jacket" that is increasingly making the Senate a body where 60 votes is needed to accomplish more and more rather than the traditional majority of members present and voting. He made clear that this had occurred under both parties and that the purpose was to determine whether changes were necessary rather than assigning blame (noting that he had likely made many anti-reform statements when Democrats were in the minority).

His Republican counterpart, Senator Robert Bennett (R-Utah), however, committed himself to defending the filibuster, noting that it gave the minority a "voice" and served as a check against one party rule even when that party held the presidency and majorities in both houses of Congress. He was joined in this sentiment by Senators Robert Byrd (D-West Virginia), Republican Leader Mitch McConnell (R-Kentucky) and Pat Roberts (R-Kansas).

Only Senator Tom Udall (D-New Mexico), a leading advocate of reforming the rules, called for reforming not only the filibuster, but other related rules as well.

The statement of members and witnesses can be viewed here as well as some video of the hearing.

Just a few highlights:
.
Dove: the filibuster is very characteristic of the Senate's role in our government, which is to slow consideration of measures and ensure thorough deliberation before enacting laws.
Bach: until 1917 the Senate never provided means to limit debate. The trend towards increased filibusters is part of a larger trend of other devices employed by members to wring concessions such as the "hold" (blocking nominations from being voted on), more contested "motions to procced," etc. In the past, a filibuster required members to stay on or near the floor and precluded anything else from being done. Today, a Senator just files a notice with the appropriate leadership offices and the Senate agrees not to move forward.
Wawro: today's filibuster is a different animal than the one historically employed by the Senate. In the past a determined majority could wear down a filibustering minority. Modern practice does not allow for this, making the filibuster less a tool of delay as in years past rather than the 60 vote super-majority requirement it is today.

A few things we might conclude then:

* The filibuster is neither a constitutional mandate nor a deliberately designed provision to protect the minority as some would have us believe. Rather, it seems to have developed organically under the Senate's rules, which provided no means to terminate debate. Further, today's filibuster is different not only in quantity, but quality as well, and something past generations of Senators wouldn't have recognized. Because its operations imposes less of an imposition on the Senate and its members, which means it may be used less sparingly.

* Even so, the 60 vote super-majority requirement of today's Senate may simply be the contemporary manifestation of the founder's intent and design that the Senate would ensure full consideration of measures and guard against hastily conceived laws.

* Given the other procedural trends, perhaps the filibuster problem is actually a symptom rather than a cause of the Senate's ills - one implication is that these hearings should be expanded to look at a broader range of Senate procedural issues.

The Citizens United Case

2010-04-28T09:00:00.007-04:00

Perhaps no Supreme Court case since Bush v. Gore has engendered such dyspeptic rage at Citizen United v. FEC, a 5-4 ruling that held laws prohibiting independent expenditures by corporations advocating on behalf of a candidate's election to be unconstitutional.

It may seem unusual that corporations have "free speech" rights that extend to elections. It seems that it is this proposition is behind much of the outrage. If you have a problem with that, however, you should have gotten angry a long time ago when the court first stated that proposition. That such a right extends to corporate spending on behalf of a ballot proposal was announced many years ago in the First National Bank of Boston v. Bellotti case. Extending the reasoning of Bellotti to advocacy for a candidate doesn't seem like such a leap if you accept the court's reasoning in these prior cases. This did mean reversing its decision in Michigan Chamber v. Austin, a case that, itself, was not terribly consistent with the Court's previous rulings in this area.

For our purposes, the question however is what has been the affect on our government? So far, we've seen no evidence that corporations have any interest in availing themselves of this newly declared liberty. Right now the big winners appear to be the portion of the Washington bar specializing in campaign finance laws.

Congress is getting ready to take up legislation that will provide transparency to efforts by corporations to finance independent campaigns for or against one candidate (Note: corporations and labors may still not actually donate $ to the campaign itself - the activity must be truly independent). Interestingly, it's liberal groups, however, that are voicing concerns about having to disclose their donors.

We'll keep watching corporate activity here to see what the impact of the ruling is. As an in-house corporate lawyer, my own guess is not a whole lot as companies are (a) loath to spend money on politics unless it directly affects its short term bottom line, and (b) very risk adverse when it comes to the resultant publicity.

Former "Law and Order AG": Too Many Crimes

2010-04-27T09:00:00.001-04:00

When Ed Meese was Attorney General, he was caricatured by the press and the Reagan administration's political opponents as being insensitive to the rights of the accused.

Of course, Meese didn't help matters any when he famously stated that "if a person is innocent of a crime, then he is not a suspect."

Still, Meese was actually a highly capable public servant, and I recall the amazement of my fellow law students, who had been prepared to protest him, when Meese spoke to a packed auditorium and convinced the vast bulk of them of the need to be more sensitive to the constitutional protection of property rights in the early 1990s.

So, it may surprise many to learn that Meese's current concern with the criminal justice system today is that the criminal law it too hard on people:

America is in the throes of "overcriminalization."

We are making and enforcing far too many criminal laws that create traps for the innocent but unwary — and threaten to turn otherwise respectable, law-abiding citizens into criminals.

Meese cites as examples a 12 year old girl being prosecuted for eating a french fry in the DC public transit system, an elderly cancer patient being arrested for failure to trim her hedges, and a high school science student being taken into custody by the FBI for failure to affix a required sticker to a package containing his science project.

The problem illustrated by these cases is that we're criminalizing non-traditional activities. The criminal law was once used to deter people from doing things we all knew were subject to the criminal law - such inherently bad things as murder, robbery and rape. We could reasonably say that every citizen should know this, and had no excuse if they committed such an act because "ignorance of the law was no defense."

The same cannot be said today. According to the American Bar Association we have criminalized over 3,000 offenses (just under federal law) and there's "no conveniently accessible, complete list" of them.

A website dedicated to these issues can be found here:

http://www.overcriminalized.com/

If I find some cogent criticisms of this proposition and movement, I'll be sure to note them.

The Congressional Debate Over Derivatives

2010-04-26T09:53:00.001-04:00

I recall Congress debating derivatives several years ago. Listening to members talk about them was painful. One member even discussed them as if Congress was discussing mathematical derivatives (such as that above) and asked why Congress thought it could regulate mathematics. Needless to say, nothing was done at the time.

With the financial crisis and the role that derivatives well publicized (if not totally agreed upon), it appears Congress is now ready to tackle them.

Derivatives (as in the financial type - no the mathematical) are simply agreements for party A to pay party B some money if something else happens (interest rates go up, the price of wheat falls, the dollar rises against the ruble). For many parties, such as farmers and manufactures, its a useful tool to "hedge" against a risk that party doesn't want to bear. In current parlance, hedgers are known as "end users" and are generally thought to be ok sorts of folks. The other guys are the "speculators" or those who create them to speculate rather than hedge any risk that derives from their business operations. These are mainly Wall Street types.

The main questions being debated: to what extent must derivatives be standardized and traded through exchanges (with the exchange serving as a middleman) rather than customized and traded "over the counter" directly between two parties? Next, to what extend should financial institutions need to segregate their derivatives trading from other financial activities?

These topics are way to complex to do justice to them in a blog, but I'll try to post some links to useful sources for those who want to learn more soon.

The Senate Takes an Inward Look

2010-04-23T12:12:00.000-04:00

Members of the US Senate are not, by nature, terribly self analytical.

It's not their fault. Really. They're awesome. Just ask their staff and the lobbyists who make up, between them, 75 percent of Senators' human contact.

So it's noteworthy that the U.S. Senate Committee on Rules and Administration ("Senate Rules") is holding a series of hearings designed to assess the current state of the U.S. Senate's filibuster rule, which allows for unlimited debate until "cloture" is invoked. Because a cloture vote requires 60 votes, the minority can, in affect, require that virtually any measure taken up by the Senate require a 60 vote (out of 100 Senators) super majority.

This isn't terribly surprising. At present, Senate Democrats are frustrated with the increased use by the minority Republicans of the filibuster. When the Republicans had control of the Senate, they too were frustrated by the filibuster, and held hearings of their own in 2003.

To the great credit of Chairman Charles Schumer (D-New York), he recognizes that the increased use of the filibuster is something that has occurred "over the last decade" (implicitly acknowledging that it's a bi-partisan problem) and that the best place to begin with is the history of the filibuster. When you really want to understand something, beginning with history is usually the best place to begin. You not only know the "what," but equally importantly, the "why."

I'll be following these hearings, which began yesterday - summarizing and commenting where appropriate.

Coming Out of Retirement

2010-04-23T11:49:00.000-04:00

Too much is going on for me to keep indefinitely silent. There are simply too many things that are interesting and important. Rather than not blog at all, I've decide to "re-open" shop with some modifications.

(a) It's ok if I don't post every day.

(b) It's ok if no one reads it.

My inability to make a daily, high quality post, and the fairly low "hits" number were discouraging to me. But I've decided it's quality rather than quantity in both numbers of posts of readers that really counts.

TPB

Going Out of Business

2008-11-05T07:00:00.002-05:00

When I started this blog, I wasn't sure exactly where it was going to go or evolve.

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.

DC Lawyer

Election Day - Time to Vote

2008-11-04T07:00:00.002-05:00

Freedom is Not Free - Please Don't Took Yours for Granted

A Government Ill Executed - Posts of Honor

2008-11-02T11:38:00.000-05:00

In chapter 3 of A Government Ill Executed, Paul Light turns to the state of federal political appointees.

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.

Appointment

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.

Confirmation

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.

Lessons Learned

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?

Internet Donations

2008-11-01T07:55:00.003-04:00

The Internet has made contributing to political campaigns very easy.

But has it made it too easy?

Specifically, there are reports surfacing that Senator Obama's campaign has been the recipient of illegal contributions from those ineligible to contribute, or those making contributions under false names, thereby evading Federal Election Commission (FEC) rules.

While this was just something percolating on conservative web blogs, I hadn't paid too much attention. However, the story has now gone mainstream.

The LA Times reports:

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 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.

The Washington Post has a more disturbing take:

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.

Weekend Homework

2008-10-31T10:19:00.000-04:00

"Your every voter, as surely as your chief magistrate, exercises a public trust."

-Grover Cleveland

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.

Reality Will Set In...

2008-10-30T10:10:00.003-04:00

David Von Drehle at Time makes a good point. During the campaign, the candidates speak of themselves in a vacuum, as if the President were an all powerful monarch, rather than the chief executive in a constitutional republic:

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.

A Public Office is A Public Trust

2008-10-28T10:36:00.003-04:00

Senator Ted Stevens (R-Alaska) was convicted by a jury yesterday of lying on his disclosure forms.

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.
(emphasis added)

Incivility from an odd source...

2008-10-27T12:23:00.004-04:00

When I started blogging, one concern I had was the state of our political discourse.

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.

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.

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.

Friday Laugh

2008-10-24T15:30:00.002-04:00

The Case for McCain

2008-10-23T10:21:00.005-04:00

A few days ago, I synthesized from a well written opinion piece about why Americans should elect Senator Obama to the Presidency.

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.

Experience:

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.

Not much surprises me...

2008-10-22T13:24:00.003-04:00

so this really caught my eye.

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.

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.

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).

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?

Best Case for Obama

2008-10-20T20:02:00.005-04:00

The most persuasive endorsement for Senator Obama's presidential campaign I have seen comes from Fareed Zakaria of Newsweek.

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.

Skate to Wear the Puck is Going

2008-10-17T15:27:00.004-04:00

This is not a personal finance blog, and I have no intention of making it one. Still, I think this is the most important thing I've read all day for reasons that have to do with public policy.

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.”

What Issues AREN'T the candidates talking about?

2008-10-16T18:24:00.002-04:00

Today's Politico Arena asks its panel of experts.

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.

The Financial Crisis - Where to Look for Information

2008-10-15T09:45:00.002-04:00

The news is full of people talking about Wall Street and the economy. But a lot of it doesn't make anything more clear. If anything, someone who spends a couple hours reading the papers and watching TV may be more confused than when she started.

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.

Beginner:

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.

Next Steps:

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.

Deeper Cuts:

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.

More Civil Than They're Saying

2008-10-13T09:34:00.004-04:00

The press has continued to claim that the McCain has "sunk to new lows" etc, etc. In fact, Senator McCain and Senator Obama have actually run a relatively civil campaign. Certainly better than the last two.

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:

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.

At one point, Senator McCain even took a microphone away from a woman who insisted Senator Obama was an "Arab." (see photo)

Senators McCain and Obama are trying to keep this election civil. I hope their supporters can do the same.

Congratulations Paul Krugman

2008-10-13T09:12:00.004-04:00

I just wanted to congratulate Paul Krugman, an economist at Princeton and columnist for the New York Times. Krugman has been awarded this year's Nobel Prize in economics.

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.

Another task for a Commission on the Financial Crisis

2008-10-10T16:24:00.005-04:00

A little while ago, I posted on an Australian perspective on the US housing market, and how Australian rules differed from the US's.

Today comes an article from George Soros on the Danish housing market, and the lessons it has to offer the US:

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.

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.

We don't need no stinkin' commission!

2008-10-10T15:41:00.004-04:00

Sadly, it appears that once elected President, Senator Obama will not have any use for a commission to examine what led to the financial crisis. He has publicly stated:

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...

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.

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.

The British Are Coming!

2008-10-10T11:55:00.006-04:00

The hottest topic of debate relative to the handling of the financial crisis is a proposal put on the table by Her Majesty's Government (that's their finance minister to the right).

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.

A Sound Proposal

2008-10-09T17:19:00.005-04:00

There is a growing concensus that the US needs to move quickly to help recapitalize banks (that is, give them money to keep operating while taking shares of stock in return). The question is how best to do this? How will the government know how much to pay, and how will it avoid wasting funds on banks that are beyond salvage (so-called "Zombie banks")?

Economist Greg Mankiw has a sound proposal:

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.

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.

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.

The Chattering Classes Were Not Amused

2008-10-08T20:15:00.006-04:00

The Politico asks whether last's night debate was the "worst ever."

Northwestern Journalism Professor Alan Schroeder:

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.

New York University Historian Diane Ravitch:

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:

Probably, but can’t say THE worst, since I didn’t see any of the Martin Van Buren debates.

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.

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.

What Went Wrong with Fannie

2008-10-07T14:04:00.004-04:00

Competition from other market players, pressure from Congress and other causes of Fannie Mae going off the tracks are well chronicled in this New York Times story. If you're looking for one thing to read to understand what Fannie Mae is and what happened to bring it down, necessitating a federal government takeover, this is a great place to start.

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.

Debate Reminder

2008-10-07T13:34:00.004-04:00

The Presidential candidates are back at it tonight at Belmont University. There will be plenty to talk about now that the rescue has passed.

Kick off is earlier tonight than the previous debates - (CORRECTION ( 9 pm EST / 8 pm CST)

An International Perspective on the US Financial Crisis

2008-10-06T16:55:00.004-04:00

In today's Wall Street Journal, columnist Janet Albrechtson of the Australian discusses the how bias towards "home ownership for all" helped to create a fast and loose environmen t with home loans in the US. She notes that Australia's banks are still sound, and that the relatively small country's 4 largest banks are among the only 20 AA rated banks around the world and that the International Monetary Fund's (IMF) latest report gives the Australian banking industry a clean bill of health.

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.

Congressional Hearings Already Underway

2008-10-06T11:04:00.004-04:00

As I posted below, I knew Congress would need to hold hearings, but I didn't realize they would happen so soon given that Congress is actually not in session.

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.

A Necessary Commission

2008-10-06T09:45:00.010-04:00

A Call for a Commission on the Financial Crisis

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.

The Sausage Factory

2008-10-03T16:34:00.004-04:00

The bailout passed, and has already been signed by the President.

It wasn't easy, and required some extra "help" if you know what I mean.

You don't?

Oh.

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.

Happy Friday!

The Bailout: Corporate Treasurers Report In

2008-10-03T09:57:00.003-04:00

According to the team at the Baseline Scenario, the treasurers at America's leading corporations got together to share their current experiences in the credit markets.

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).

Judging the Debates - How To

2008-10-03T08:12:00.008-04:00

In today's papers, we get the usual smattering of nonsense about who "won" the VP debate last night.

* The Politico things Biden did ("it is hard to count any objective measures by which Biden did not clearly win the encounter").

* The Wall Steet Journal's Peggy Noonan in her own, beautifully written way disagrees - "She (Palin) killed."

* Pollsters are rushing to ask the American people their views: (CNN says Biden 51 - Palin 36).

What is this? A high school debate? A football game?

I think we can do better than that if we ask ourselves two questions. What did the candidates need to do to help their chances, and did they accomplish it?

For Senator Biden, it was fairly straight forward. His ticket leads in the polls by an average of almost 6 percent. As Gerald Seib of the Wall Street Journal put it:

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.

For Governor Palin, the bar was set much higher. After some (I am told) painful interviews with Katie Couric (isn't that like getting mauled by one of those cute little house dogs?), Palin had to show a strong grasp of issues and that she could stand credibly next to one of the Senator Factory's (you know, the place where you get the smile and voice put in) smoothest products.

Again, Gerald Seib's take:

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.

In short, when watching candidates debate, avoid making the sorts of simplistic judgments that most commentators make about who "won." Ask yourself, what did this person need to do tonight, and how well did they do it?

So now, the only question is who won the face off among analysts?

I'm calling it for Seib.

Changing Fortunes for the Bailout

2008-10-01T16:35:00.004-04:00

The bailout appears to be gaining momentum on Capitol Hill. The Senate is expected to pass it tonight, and opposition in the House, which just voted it down, is said to be dissipating:

(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.

Wise Words

2008-09-30T17:02:00.003-04:00

from a wise man - Leon Panetta - on yesterday's failed vote in the US House to enact the bailout:

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.

Remember one thing: no matter who you're angry at right now, we collectively elected them.

The Case for the Bailout

2008-09-29T10:05:00.003-04:00

A colleague of mine told me the current proposed legislation to allow the US Treasury to spend up to $700b to purchase troubled assets from financial firms was either a "rescue" or "bailout" depending on whether you supported or opposed it.

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.

The Bailout: A no brainer, better than nothing or a bad deal?

2008-09-29T09:47:00.004-04:00

The Politico's Arena contains responses to the weekend's news about the bailout package. I really couldn't care less about what the lawyers and politicos think, but they do have some people worth listening to:

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.

Where We Are...

2008-09-29T07:58:00.005-04:00

Today's Financial Times sums up where we find ourselves this morning:

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 the average person on Main Street who saved and scrimped to put one third down on her home with a fixed 30 year mortgate support the bailout? The Times answers"

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.

Finally:

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.

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.

Lobbyists and Special Interests

2008-09-28T12:00:00.001-04:00

Full Disclosure: Although lobbying is such a small part of my job I actually don't even need to register as a lobbyist, I have done so in compliance with my employer's policy of adhering to a "gold standard" of political transparency. Therefore, I am technically one of "them."

Both candidates have made a show of how they'll control Washington's "special interests" and the lobbyists who represent them. But, we know that many of McCain's top advisors are lobbyists, and we recall that Obama's VP hunt was initially led by Washington fixer and pre-eminent insider (and former Fannie Mae CEO), James Johnson. Others on Obama's team were lobbyists before coming on board, and presumably may return to that vocation.

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.

That's where lobbyists come in. We provide information, and occasionally advocate for a client, much like a lawyer does in court. Rather than represent clients before the judiciary, lobbyists represent them before the executive and legislative branches. As a profession, it is very highly regulated at the national, state and local levels, and became even more so a couple of years ago after enactment of new ethics laws that were supposed to address recent abuses, but in fact, had little or nothing to do with them.

Like any job, lobbying can be done well and ethically, or poor and unethically. Our government benefits from the former as much as it suffers from the latter. Rather than talking about lobbying as something that needs control, then, we should ask candidates for office to specify what lobbying activities concern them and how what solutions they propose will solve them.

A Government Ill Executed - Clarity of Command

2008-09-27T12:00:00.001-04:00

(Note: this is part of an ongoing discussion of Paul Light's book A Government Ill Executed. Other posts on this book can be accessed by clicking the tag below)

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.

A New Twist on the Nigerian Bank Scam

2008-09-26T17:00:00.000-04:00

Although it's about a very serious subject, this joke spam is hilarious:

Subject: SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

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

Tonight's Debate

2008-09-26T14:00:00.001-04:00

We're still unclear as to whether we're on for a debate tonight.

(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.

Happy Friday

2008-09-26T13:00:00.000-04:00

A cartoon from The Hill provides some insight into the initial skepticism to the Treasury's bailout, er, rescue proposal.

Obama - a good moment and a bad one

2008-09-26T11:00:00.004-04:00

Senator Obama has generally been speaking in favor of the financial bailout concept. Agree or disagree with him, he's shown some leadership.

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.

Huh?

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."

"The Adults in the Room"

2008-09-26T06:51:00.005-04:00

Today's Wall Street Journal headlines the largest banking failure in US history:

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.

Here's the most important paragraph, though:

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.

Although he veers a little into the lunacy that has gained him some readers he shouldn't covet and lost him some he should, Paul Krugman asks the right question - Where are the grownups?

His answer, though, that they're to be found in Congress, is fairly laughable (see yesterday's post for one example). Further, some of his criticisms are part of the "bad Paul" (the NY Times political columnist) rather than the "good Paul" (the Princeton economics professor).

Meanwhile, House Republicans are pushing an alternative approach. Rather than having the government purchase the bad investments from banks, they would prefer an alternative where the banks would buy insurance from the government for the debt.

I'm not entirely clear on the details of this proposal and it doesn't sound like it would address the problem of banks having too little equity to debt to continue to lend. However, the Journal reports only 30-40 House Republicans will support the proposal on the table between the Administration and Senate Democrats.

House Republicans, however, are in the minority. Democrats control both chambers of Congress. They are afraid, however, that the public will blame them for their costs of the bailout and are unwilling to proceed without strong Republican support, even though it's not need for passage.

In short, Krugman's "adults in the room" are playing CYA, big time.

Will WaMu's failure change the dynamic and get what looks to be a good compromise between Senate Democrats and the Treasury back on track?

Stay tuned.

The list for Profile in Courage Awards...

2008-09-25T12:00:00.002-04:00

just got shorter.

House Speaker Nancy Pelosi takes her name out of the running by declaring that she won't support a bailout unless a significant number of House Republicans (who are of course in the minority in that chamber) vote for it:

House Speaker Nancy Pelosi is telling Democrats that she will not support President Bush’s $700 billion bailout of the financial sector unless there is significant Republican support for the controversial plan...The politics of the bailout are tricky and dangerous for both political parties...As a result, Pelosi (D-Calif.) has effectively sent the message that if she is going to jump off a cliff to rescue Wall Street, she wants House Minority Leader John Boehner (R-Ohio) and George W. Bush holding her hands when she leaps.

This may make sense politically. There will be a fair amount of political backlash for the bailout plan.

As I've stated below, however, there are good reasons to be skeptical. But whether Speaker Pelosi supports it should turn on something other than how much political cover she has, don't you think?

Former Bush Economist Voices Concerns Over Plan

2008-09-24T11:58:00.004-04:00

If you only read one thing today about the Treasury's proposal to purchase bad Wall Street debt, make it this:

The financial system is the heart of our economy and it is in trouble. If we do not fix it soon, we risk a serious recession...Bold action can be designed with lower costs to taxpayers, while accomplishing the goals Treasury Secretary Henry Paulson has laid out. Elected officials should act quickly -- but carefully.

This quote contains only the beginning and end so you can see where the authors, including former Chair of the Council of Economic Advisers Glenn Hubbard (a Bush appointee) and his co-authors are coming from.

We need to act, they say, but we also need to get it right. Hubbard gives the Administration credit for taking urgent, decisive action, but he also gives due props to Senate Democrats who want to add some good ideas as well (unfortunately, some Democrats have less helpful ideas though). He and his co-authors provide three concrete suggestions for improving the Administration's proposal.

This article is the exact opposite of 90 percent of what I've seen and heard on the situation - one with no exterior motive to help position one candidate or ideology.

Art: the cartoon accompanied the original article in the online Wall Street Journal.

Skepticism Over The Treasury Plan

2008-09-23T13:00:00.002-04:00

I don't want to pretend I know what you're thinking when it comes to the government's plan to address the mess in the financial system. It may be something like this though:

Thank goodness someone has a plan. Don't bother me with the details, just do what it takes to fix it and let's get on with our busy daily lives.

That's pretty much how I reacted when I learned we had termites in our walls.

When the bill ranges in the billions of dollars, though, we probably should bother to stop, learn a little bit more, and ask a few questions before plunging ahead.

First, a summary of the problem via Paul Krugman:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

Next, a summary of the Treasury's proposal to address it. The Treasury would be legally empowered by an Act of Congress to purchase troubled assets to promote market stability and "unclog" our financial markets. The limit on this authority would be set at $700 billion. The assets are "intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans." The government would sell off the assets once they regained some value.

One big question will be "how much will the government pay?" As law professor Hal Scott notes, pay too much and the public will be outraged. Pay too little, though, and we'll fail to accomplish our objective. Another is whether this is even the right model. Some, such as Krugman, have suggested that the Fannie Mae bailout from a few weeks ago is a better model, with the government actually taking ownership.

I'd like to think that there's a little time for rationale discussion and that the markets, knowing that help is on the way in one form or another remain calm. Otherwise, we'll just need to buckle in.

Quote of the Day

2008-09-23T12:00:00.001-04:00

"When normal Americans know who the Secretary of the Treasury is, that's not good."

-Wil Durst, political satirist

Normally, we're all for people know more, rather than less, about key government policy makers, but there's a more than a grain of truth to the above. At right is Andrew Mellon, who was Treasury Secretary during the stock market crash of 1929. Mellon would have been decidedly opposed to the Federal Government's proposal to purchase assets from financial institutions (or "cash for trash" as Paul Krugman has dubbed it).

Don't Leave Town for the Weekend...

2008-09-23T04:20:00.004-04:00

is the recent lesson I've learned.

A few weeks ago, I came back into town to learn that the Federal Government had taken over Fannie Mae and Freddie Mac.

On Monday, the Wall Street Journal reported that Wall Street as we knew it was over, as the two largest remaining investment banks had opted to convert to bank holding companies:

With Goldman Sachs and Morgan Stanley becoming commercial banks, and the other three big investment banks/brokerage houses being acquired by commercial banks, politicians and the press won't have Wall Street to kick around anymore. Headlines now shout about a $700 billion "Bailout for Wall Street." Yet strictly speaking, Wall Street as we knew it no longer exists. (emphasis added)

You know, you go out to the country to pick some pumpkins and buy some cider, and Wall Street goes out of business. This is becoming all too typical. What's next perhaps? The Onion gives us a clue in the photo above.

A good laugh...

2008-09-22T11:24:00.003-04:00

is what we could use right now rather than a civics lesson. This is a personal favorite from The Politico.

What Might a McCain Presidency Look Like?

2008-09-21T12:00:00.000-04:00

Last month, John Fortier of the American Enterprise Institute asked an important question. How would John McCain govern?

He noted a few McCain character traits:

McCain’s governing style displays a healthy balance between loyal insiders and outside advice. McCain has attracted loyal long-term staffers, such as chief of staff and co-author of his best-selling books, Mark Salter, but he also seeks counsel from a wide range of advisers inside and outside his campaign...

This is important because one of the chief failings of the current administration, in my view, has been insularity. People from inside Bush World were given key posts, even when not suitable. Outsiders who were tapped really didn't wield real power. Compare that to Ronald Reagan who made his chief GOP rival's campaign manager his Chief of Staff. A good leader will reach out and hire the best people, regardless of their past affilations.

With McCain’s emphasis on fiscal responsibility, lower spending and cutting congressional pork, a McCain presidency would likely see vetoes of appropriations bills and budget showdowns with Democrats. On this front, McCain would probably find strong backing from his Republican colleagues, who while in the minority would support fiscal restraint wholeheartedly.

As a Republican President with a strong record of fiscal restraint dealing with a Democratic Congress, McCain would likely do a fairly good job keeping spending in line. That's a big advantage he's got in my view over Senator Obama, who likely will go along with Congressional spending wishes because he's got some ambitious plans of his own, e.g., health care.

Fortier surmises that McCain's record of bi-partisanship and independence from his own party's line means that he'd work better with a Democratic Congress than any of his GOP rivals would have, which I find to be a reasonable assertion.

What Might an Obama President Look Like?

2008-09-20T12:00:00.001-04:00

In his Politico column Wednesday, American Enterprise Institute scholar John Fortier asked what an Obama Presidency might look like. Given the current trend back toward Obama in most of the polls, this is a question many may be pondering between election day and January 20th, 2009.

Specifically, Fortier considers what is likely to be the political dynamic in 2009 (a strongly Democratic, fairly unified Congress) in conjunction with Obama's political record to date.

Obama’s legislative career has been spent mostly in the minority (ed: thus making it harder to accomplish goals)...He has modest but bipartisan accomplishments (italics added)...[as a state Senator] he championed a measure to expand health care, state legislative ethics reform and an anti-racial profiling bill that won unanimous support. In the U.S. Senate he worked on anti-nuclear proliferation efforts with Sen. Dick Lugar (R-Ind.) and on government accountability measures with Sen. Tom Coburn (R-Okla.), a conservative stalwart.

In this regard, he is similar to Senator McCain. Whereas McCain is quick to rub his bi-partisanship in his party's eye, though, Obama does so in a lower key manner that doesn't ruffle his party's feathers, says Fortier.

Another key "tell" for Fortier is that the Obama campaign has been very professional. It's been cohesive, lacking the leaks and backbiting that mark many presdiential campaigns. This bodes well for a smooth executive branch under President Obama.

As a President with liberal majorities in both Houses of Congress, Obama won't need to work very hard to reach out to Republicans. In fact, his biggest critics may be some in his own party who feel he doesn't go far enough:

But Obama would face some difficulties. He has bipartisan instincts, but political circumstances point neither to him courting GOP lawmakers nor at Republicans reciprocating. His chief difficulty is raised expectations. An Obama win, combined with strong congressional gains in 2006 and 2008, would embolden Democratic activists to push for an ambitious agenda. But the cost and complexity of health care reform, continuing costs of keeping troops in Afghanistan and even Iraq, and the reality that only a few agenda items can be tackled in the first year may frustrate the base or perhaps cause Obama to push for too much, only to disappoint. Managed correctly, a plan that gets 75 percent of what Obama wants on health care or energy would be a major victory, even if some see it as unambitious.

This is something I have thought for a while. There's so much excitement around the Obama campaign, and so much expectation, that if he is seen as failing to deliver quickly on key promises such as bringing US troops home from Iraq, he may find his strongest supporters becoming his biggest critics.

Tomorrow, we'll look at Fortier's take on a McCain presidency.

Reality and the Next President

2008-09-19T12:00:00.001-04:00

Whoever the next President is must accept that much of his agenda will need to be set aside given today's new realities.

George Bush did not come into office talking about fighting a war on terrorism. Nor did he plan to take over large segments of the US financial sector. Don Rumsfeld went to the Pentagon to downsize and retool our fighting forces away from those suited to a large ground war towards a lighter, more agile force concerned with containing small outbreaks at a moment's notice.

Then came 9/11, Iraq, the financial crisis, and the rest is history.

Similarly, Franklin Roosevelt was elected to fight the Depression and wound up fighting World War II. The ability to change with conditions was what historian Doris Kearns Godwin labeled as the 4th trait of great Presidents.

Neither Senator Obama nor Senator McCain are particularly well equipped to handle the situation Wall Street finds itself in, nor the threat it poses to the economy.

Let's admit that up front.

Obama's strong point is social policy, e.g. health care and McCain's is foreign policy and defense. McCain once famously admitted to not knowing much about economics, and Obama was simply politically saavy enough not to admit the same.

In today's Wall Street Journal, political veteran David Seib notes that the new reality will impose serious limits on the politcal agendas of both candidates:

The domestic agenda of the next president is shrinking. Nobody, anywhere, knows how much of a financial burden the federal government has taken on in the past few weeks, but the cost of bailing out Fannie Mae, Freddie Mac and American International Group Inc. -- to say nothing of the potential cost of riding to the rescue of American auto makers, which looks increasingly likely -- could conceivably run into the hundreds of billions...
Tax increases will be harder to sell. Sen. McCain is right: A period of a shaky economy is a bad time to talk about increasing taxes. And the economy as well as the markets figure to still be shaking in January from the shocks delivered. That's a problem for Sen. Obama's proposal to increase the capital gains tax.

But tax cuts get problematic as well in this environment. Though tax cuts to juice up a lagging economy make a lot of sense, the amount of tax revenue the feds bring in also will be a bigger issue -- especially if the Chinese and world financial institutions grow leery of continuing to loan money to finance American spending. Can the government afford to both bail out financial giants and take the big hit to its own revenues that would come from, say, eliminating the alternative minimum tax, as Sen. McCain proposes? Or are the government's needs for money now just too great? Either way, the next president's path on taxes is getting more complicated.

Instead of spending billions on a national health care system or anything else, we'll need to have a debate on the role of government in the economy:

The mega question -- what is the role of the U.S. government in the nation's economy? -- isn't just on the table, but at the center of the table. The next administration will have to decide not just what financial firms the government ought to own and run, but how heavy the government's hand should be. These are questions the country faced in the Great Depression, and to a lesser extent during the savings-and-loan crisis of the 1980s, but they are back with exclamation points, and will be dumped in the lap of the new president.

Whoever the next President is must accept that much of his agenda will need to be set aside to deal with these questions, as unprepared as they are to deal with them.

Energy and the Candidates

2008-09-19T10:12:00.007-04:00

Before there was a financial crisis, there was an energy crisis. It was essential that candidates pour forth ideas on energy, because to not have an energy "plan" meant you "didn't care."

And, as we know, there's nothing worse than a candidate who doesn't care.

Unfortunately, according to one analysis, the candidates put more work into producing plans than the thought in them. The American magazine lambasts both for producing ideas that are "inconsistent with economic reality" to put it nicely.

Among the "Worst Energy Ideas of 2008" according to The American are:

1. Energy Independence - the notion that we should strive to end any foreign trade when it comes to energy (because to trade means you are dependent on your trading partner).

2. Use It or Lose It - the notion that energy / oil companies should waste their resources drilling on current leases where they don't think there's a lot of oil and gas before asking for leases on the properties where they DO believe it to be.

3. Disguised Subsidies - called "market based payments," we're still talking about spending tens of billions of dollars to subsidize technologies that aren't commercially feasible despite the high costs of energy.

4. Green jobs - this sounds nice, but in operation is "a laundry list of new ways the government can give money to various constituents. It attempts to fix multiple problems at once, but would likely fix very little."

This article is a shorter version of a think piece put out by The American's publisher, the American Enterprise Institute (AEI). A more complete analysis is here. The bottom line on both candidates' position is labeled, unfortunately, "Incoherent At Best."

Perhaps the most interesting part of that paper isn't its look at the various policies offered by the candidates and how they contradict themselves, but rather how they came to do it:

While both candidates showed signs of having coherent energy policies at the beginning of their campaigns, the pandering as Election Day nears has produced incoherent platforms that signify a deep lack of seriousness.

In short, they started making sense, but political "realities" (or the perception thereof) caused them to change course, offering ideas that made little sense in light of their previous positions. At the end of the political season, then, here's where we are:

If there is a dominant pattern in the energy platforms of the Obama and McCain campaigns, it is one of profound lack of serious thought, rampant confusion, and transparent pandering. Each candidate now has a fistful of mutually contradictory goals: reducing GHG emissions while expanding fossil fuel production, opposing subsidies except when they are supporting subsidies, embracing energy sources they caveat to death, and wanting to reduce energy use while lowering prices.

Recall Senator Obama once talked about renegotiating NAFTA, only to retreat, blaming his earlier statement on the heat of the campaign. When our system of electing leaders causes them to move from sensible positions to insensible positions, something is seriously broken.

McCain and Earmarks

2008-09-18T12:00:00.000-04:00

One of Senator McCain's chief rallying cries is his strong opposition to earmarks. Accordingly, I thought it might be useful to discuss what earmarks are and why we should support a President who wants to reduce or even eliminate them.

First, what an earmark actually is depends largely on who you ask. But, generally, they are restrictions placed by Congress on spending that, in essence, steers money towards a particular project.

Earmarks are not necessarily bad. They can be worthy and non wasteful. Many, however, are likely wasteful - wasteful earmarks are what we refer to when we talk about "pork barrel" spending. And earmarks are more likely to be wasteful than if they were spent through a competitive bidding or grant process conducted by the executive branch civil servants because they are awarded based on political pressure rather than merit.

A better way to think of an earmark than the formal definitions offered by government agencies such the Government Accountability Office and the Office of Management and Budget is to recall our civics 101. After all, Congress has the "power of the purse" but to what detail? $1 billion for national defense is pretty clearly not an earmark. $27,430 for construction of a parking lot at a DoD facility in Fort Worth clearly is. Note that the former is an end - the latter a means.

In short, my own definition of an earmark is the appropriation of funds that specifies the means by which a legitimate government purpose shall be executed (or something like this).

Congress should decide that government should do, and the executive branch should decide the methods. For example, Congress should decided to spend taxpayer money to cure cancer, but the contracts and grants should be made by the executive branch. This is because of their institutional capacities. Congress has the political legitimacy to decide how much to spend and on what ends, and the executive branch has the expertise and disinterestedness to make sure that the money goes to the best suited entities who can perform the research rather than those with the most political power.

An earmark, then, is a violation of this principle. It directs money specifically, sometimes in such a manner that there can only be one recipient.

An earmark in a bill itself is the law of the land, and the President must abide it. Most earmarks though appear in a committee report, however,and are just Congressional "wishes" that an agency feels pressure to comply with (given that it would like more money from Congress in the future). Legally, though, such wishes can be ignored. President Bush directed agencies to ignore such earmarks, which is wise (although he's really late to the party and only started doing so after Congress changed hands to the Democrats).

Yesterday's Politico has a story about how Senator McCain may find eliminating earmarks difficult. The thrust is that even Republican members would revolt if McCain tried to take away what lawmakers call "legislatively directed spending." What it omits however is that these warnings come almost exclusively from members of the Appropriations Committees rather than rank and file members. It's those members who would have the most to lose politically if earmarks were curtialed.

I'd note that even though Senator McCain has been the biggest critic of earmarks, it was Republicans who turned everyday earmarks into the Christmas in Washington the system has become. Democrats came into power in 2006, taking Control of Congress and promisong to fix this, but they quickly changed their tune once elected, so this is a bi-partisan disgrace.

To the degree that the next President can reduce the amount of federal dollars spend pursuant to earmarks or "directed spending," the better.

Happy Constitution Day!

2008-09-17T13:19:00.004-04:00

Today is the 221st anniversary of the signing of the Constitution.

Happy Constitution Day!

In celebration, take the Constitution Day quiz here.

Also, please visit the website of the National Constitution Center, which is a wonderful place to visit if you're in the Philadelphia area.

The Line in the Sand...

2008-09-17T10:34:00.005-04:00

apparently just got wiped out by the tide.

Yesterday, Treasury Secretary Hank Paulson was gaining kudos for his refusal to bail out Lehman Brothers. He had drawn a "line in the sand" and we'd all be better off for Treasury's "tough love":

All summer, U.S. Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke talked about "moral hazard." Firms need to be careful, they said, because the government is not going to come to the rescue of just anybody.

But then came Bear Stearns, and Fannie and Freddie:

But in March, the Federal Reserve swept in with a $30 billion credit line to help JP Morgan Chase scoop up Bear Stearns. And just a week ago, the Treasury announced it was spending billions to take over Fannie Mae and Freddie Mac.
Observers, such as Former Fed Chair Alan Greenspan, who cautioned that Washington was getting too close to viewing the Fed as "a magical piggy bank," wondered if Paulson and Bernanke had the stomach to let a big bank fail.

Seems they do.

As one EPSN football analyst likes to say: Not So Fast My Friend.

Today, we learn that the Fed has bailed out insurance titan AIG:

The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

Congratulations. As an American taxpayer, you now own an insurance firm.

Here's the Economist's take:

They may have had no choice. Markets did not completely fall apart after Lehman’s bankruptcy, as some had feared, but they were highly agitated...Officials worried that the collapse of AIG, with its $1 trillion balance sheet and operations in 130 countries, could send the financial system into a tailspin....The AIG bailout shows how hard it is for America’s financial authorities to steer a straight course through a crisis that is piling one systemic threat onto another.

Former Labor Secretary Robert Reich (Clinton) captures the political irony:

Ironically, a free-market-loving Republican administration is presiding over the most ambitious intrusion of government into the market in almost anyone's memory. But to what end? Bailouts, subsidies, and government insurance won't help Wall Street because the Street's fundamental problem isn't lack of capital. It's lack of trust.

Meanwhile, amidst the noise, comes some clear thinking from the New York Sun:

The Treasury Department and the Federal Reserve don't appear to be operating under any clear principles as they go about seizing or saving companies or refusing to...What has become clear is that Mr. Paulson's decision suddenly to seize Fannie Mae and Freddie Mac without so much as a shareholder vote or even a clear capital crisis hasn't exactly inspired confidence in the rest of the financial sector. Rather than stopping the trouble, it spread it, so that Lehman Brothers failed, AIG cratered, and Merrill Lynch ceased to be independently viable.

The Sun goes on to note the imbalance that now exists in the insurance marketplace:

But what does it mean for the rest of the insurance industry that the federal government may now own 80% of AIG? If you are Geico or Aflac or New York Life, how are you supposed to compete with a company that has the power of Uncle Sam behind it?

And finally, after all we've heard about moral hazard (the risk that a bailout will cause others to act without regard to risk thinking, they too, will be bailed out:

And what is the message sent about other big companies in the financial services industry that AIG has qualified as too big to fail? Then the other financial giants such as Citigroup, JPMorgan Chase, and Bank of America almost certainly fall into that category and now become implicitly federally backstopped institutions in their own right.

The Sun is asking the right questions at least. Someone at Treasury had better have good answers.

The Candidates and Wall Street

2008-09-16T07:45:00.000-04:00

With Wall Street in disarray after the bankruptcy of one giant and the takeovers of two others, the two candidates for President are struggling to reassure voters that they have the magic solution.

The good news is that neither has argued that the government should have stepped in to save Lehman Brothers. Although that may cause some short term pain, it's a road that can only lead to worse things if large firms decide that there's not a price to be paid for failure in the marketplace.

While Politico has this topic as their "Arena" question (where they ask their slate of experts for their thoughts), there's not likely to much useful to be found there as most respondents aren't economists or financial experts.

I thought it might be useful to link to some more interesting perspectives:

Here's First Trust's Brian Wesbury:

The US is moving through its deepest set of financial market difficulties since the 1980s and 1990s, during the banking and S&L crisis. The key thing to remember here is that the emphasis belongs on the word financial. These financial market problems are not a result of widespread economic weakness, otherwise known as a recession.

An international perspective from the London Times:

By deciding essentially to wipe out shareholders in Fannie Mae and Freddie Mac and acting even more harshly to the shareholders of Lehman Brothers this weekend, Mr Paulson has sent the clearest possible message to investors around the world: do not buy shares in any bank or insurance company that could, under any conceivable circumstances, run short of capital and need to ask for government help; if this happens, the shareholders will be obliterated and will not be allowed to participate in any potential gains should the bank later recover.

Here's Paul Krugman, who's always worth reading on technical economic issues even if his political commentary is off kilter:

Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain... The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?

There are many, many more perspectives being offered. A good roundup is at Real Clear Markets, sister site to Real Clear Politics.

What Makes A Great President?

2008-09-14T18:10:00.000-04:00

Doris Kearns Godwin, author of two highly regarded studies of the Lincoln and Roosevelt administrations, offers 10 personality traits of great presidents based on her life time study of Presidents, beginning with her working with LBJ.

They include:

1. The Courage To Stay Strong: "A President needs the ability to withstand adversity and motivate himself in the face of frustration."

2. Enough self confidence to surround yourself with first rate people: "Good leadership requires you to surround yourself with people of diverse perspectives who can disagree with you without fear of retaliation."

3. The ability to learn from mistakes: "To lead successfully, you must be willing to acknowledge and learn from your mistakes."

4. A willingness to change: "Conditions change, and Presidents must respond."

5. Management skills (what she calls emotional intelligence): "A President must encourage his closest advisers to give their best and remain loyal."

6. Self control: "Great leaders manage their emotions and remain calm in the midst of trouble."

7. A popular touch: "The best Presidents have an intuitive awareness of public sentiment, a sense of when to wait and when to lead."

8. A moral compass: "Only strong leaders have the courage and integrity to follow their convictions when the risk of losing popular support is great."

9. A capacity to relax: "FDR held a White House cocktail hour every evening. Its cardinal rule: Nothing was to be said of politics or war... Lincoln possessed a life-affirming sense of humor and a legendary ability to tell long, winding tales"

10. A gift for inspiring others: "One of the key qualities of a great President is his ability to communicate national goals to the people and to educate and shape public opinion."

You can read about these attributes in more details and with examples from Lincoln and Roosevelt in her article.

A New Twist On Income Ineqaulity

2008-09-14T12:00:00.001-04:00

One of the biggest condondrums for a politician is how to deal with a problem when the reality and the public's perception don't fully mesh. Income inequality is arguably one of these types of problems. Even if its not, is inequality a problem in and out itself? Perhaps its only a problem when the economy is stagnant?

When I first went to work on Capitol Hill, I read Robert Samuelson's The Good Life and Its Discontents and it influenced my thinking heavily on this very problem about reality vs. perceptions in economic policy.

Published in 1995, it addressed the question of why there was so much discontent with things in America at a time when we had never been so prosperous as measured by traditional economic yard sticks (athough now out of print, it can still be had for a song through Amazon's Z-shops).

The most important lesson from the book that I learned was that there was a large gap between reality and perception in many important areas of public policy, particularly economics. We could feel like we weren't doing well even though, in fact, by all traditional indicators we had never been doing better. Of course, this isn't to say we shouldn't feel the way that we do. Merely that how we feel about our economic situation can't always be explained in wholly rational terms.

For instance, in his review, economist-turned-NY Times Rock Star Columnist Paul Krugman noted:

The spectacular growth in inequality is given barely two pages, while a 15-page chapter is devoted to what Samuelson regards as excessive demands for equality. Rising poverty and homelessness are mentioned largely to question whether things are as bad as they seem in the statistics; the huge rise in poverty among children (a rise that is partly obscured in the overall poverty statistics by the decline in the number of elderly poor) goes unmentioned.

In his other writings, Krugman has made a similar point: equality is an essential part of happiness. To him, people are happier if they're like everyone else in their neighborhood than they are if they became better off than they had been, but their neighbors' prosperity exceeded theirs. So, the name of the game for the past couple decades hasn't been actual life quality per se, but inequality, which is widely acknowledged to be growing (with disagreement as to the causes).

Or has it? Perhaps, again, it depends on your yardstick.

A new study posits that we've only been looking at one half of the equation - income - without considering what's happening in terms of costs. While the things the wealthy have purchased (generally serves) have increased in price, the things lower income Americans purchase (commodities) have fallen:

high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries. For most of the past three decades, the price of non-durable goods has been falling relative to the price of the service —investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.

Once again, things aren't as bad as they seem.

Perhaps.

Stay tuned.

Of course, none of this addresses the government's responsibility to remedy what some might call an uneven distribution of income and others might label an uneven earning of income. What is that responsibility and how do we rememdy this?

Required Reading for Voters - Looming Fiscal Crisis

2008-09-13T12:00:00.000-04:00

While I might occasionally recommend a book or article, it's rare that I'd label something as "required" (i.e., containing information that you really need before going to the polls). Reviewing the Peter G. Peterson Foundation website, however, I came across one such document, the Foundation's State of the Union's Finances (SUF).

The SUF is a 24 page pamphlet with color charts and to educate voters on the US government's looming fiscal crisis and what they can do to better inform themselves. The Foundation is led by David Walker (pictured), the former Comptroller General of the United States, so it's a pretty credible statement of our national finances.

Here's the heart of the pamphlet:

the federal government's financial condition is worse than advertised and we are on an imprudent, irresponsible and unfair path...

More specifically:

without reform, federal deficits and debt will rise so high relative to gross domestic product (GDP) that they will threaten our economic strength, our international status, our standard of living, and eventually, our national security...Since the middle of 2007, problems in the U.S. housing sector have illustrated what happens when lendors lost confidence in borrowers. If our ability to manage our nation's fiscal affairs is called in to question, we are likely to face even more severe economic challenges, including sharply higher interest rates, further downward pressure on the dollar, higher prices for oil, food and other necessities and greater unemployment.
(emphasis in original)

Among the reforms the Foundation advocates are: entitlement reform (e.g., Social Security and Medicare), tax reform, health care reform (to reduce US spending on it)

Some of the recommendations for citizens are pretty common sense: registering to vote, informing themselves about the candidates' positions, holding them accountable, etc. In short, if you spend a little time with this document, you'll be light years ahead in making yourself a more educated voter.

I do have a few thoughts / reservations about this document:

-Like other budget focused groups such as the Concord Coalition, the Peterson Foundation seems to be more concerned about the deficit than the overall amount of spending. They seem agnostic about whether we have a lot of spending or a little spend, so long as its paid for in current taxes. However, the reason we're concerned about large deficits is the high taxes we'd need to pay in the future to pay them off. For the same reason, we should be concerned about excessive taxation now, which reduces the private sector's ability to invest in the future. Therefore, I'd like to see more emphasis on curbing spending.

-Next, simply asking candidates their views on the budget deficit won't be very helpful given that they will of course (a) be very concerned, (b) won't want to specify how they'll address these sorts of problems. Most important for a voter - look at the candidates' website for their "issues" and see whether they identify reforming entitlements and addressing the national debt as a priority. Those that haven't bothered to list it are not paying attention, regardless of how they answer your questions about it.

George Washington Doesn't Work Here Anymore

2008-09-12T12:00:00.002-04:00

"I Cannot Tell A Lie"

The Internet is a wonderful source of information, but it can also facilitate the dissemination of false information as well, as all of us who have received dozens of virus hoaxes from our computer wary parents can attest.

Most people know that for computer related and many other hoaxes, Snopes is the place to check to see whether a fishy Internet story is real.

There's also a good site that examines the veracity of political news and candidates' claims as well from the Annenberg Public Policy Center at the University of Pennsylvania.

Check it out here.

Promises, Promises (part II)

2008-09-11T13:06:00.004-04:00

A little while ago, I linked to a column in CQ Politics criticizing Senator Obama's economic plans. I said I'd also link to the second part of the article criticizing Senator McCain's, so here it is.

John Cranford goes after McCain as he did Obama, saying:

[McCain's] candid remarks that he doesn’t really understand economics, that he doesn’t know exactly how many houses his wife owns, that he thinks $5 million in income is a measure of “rich,” are all signs that McCain isn’t fully engaged on the No. 1 issue of this campaign...
And even though truth-telling may not always be the path to winning elections, there are ways to acknowledge reality without complaining that the public needs to get over its malaise and to stop its whining.

Yet McCain hasn’t seemed to find them.

Specifically,

McCain does have an economic platform, of course. But it barely acknowledges the financial squeeze felt by the middle class (not to mention the poor, whose numbers continue to increase), and offers minimal doses of salve — chiefly a gasoline tax “holiday” that’s been roundly dismissed. McCain largely ignores the persistent financial calamity in the housing market, other than to embrace foreclosure relief measures that are similar to those already enacted and to promise no bailouts for corrupt lenders and speculators. And he papers over the federal government’s budgetary troubles with platitudes about trimming waste and eliminating earmarks, while improbably promising a balanced budget by 2013.

Most interesting, Cranford hits McCain for not acknowledging that tax cuts have not been shown to lead to economic growth in his estimate even though McCain calls for preserving the Bush tax cuts:

Under McCain’s tax proposals alone, about $5 trillion in additional government debt would be piled onto future generations over the next decade, according to the nonpartisan Tax Policy Center run by the Urban Institute and the Brookings Institution. That’s a 50 percent increase over what we and our children owe today.

Despite claims that those tax cuts spurred economic growth, Cranford says that:

The rate of job growth since the end of the last recession has been less than half what it was in the 1990s. Business investment this decade — the presumed wellspring of new employment opportunities — has been a fourth as rapid as it was in the previous 10 years.

I think Cranford actually misses a lot in his analysis, though. People forget that Republicans ran Congress for 6 of the 8 years Clinton was President, and that they cut taxes pretty steeply in 1997. At the same time, the government actually balanced the budget, proving that if you're willing to restrain spending, tax cuts and balanced budgets can go hand in hand.

But of course, here in Washington, DC that's a very big "if."

In addition to what Cranford has written, I'd reiterate that McCain is behind Obama when it comes to confronting our gravest domestic problem - the out of control growth that Social Security and Medicare will face over the coming decades. Read more about that problem and the candidates' views here.

Both parts of Cranford's article are worth reading, but I think he went at Obama a little harder than he did at Bush.