The Next Bubble?

Scary words from economist Simon Johnson:

By not changing incentives for powerful bank insiders, we are lining ourselves up for another big “moral hazard trade” – think of this as a bailout by the Federal Reserve of everyone, but especially banks. Current and future bank executives will take risk again – but next time it will be risk with the public’s money. A housing bubble led to the current difficulties but the meta-bubble is a rise in financial services as a share of the economy, which has been underway since the 1980s. In the latest manifestation of the ensuing shift in economic and political power towards the financial sector, an unsustainable “Fed bubble” is potentially underway. This may lead to outcomes that are considerably worse than what we have seen so far. [E.A.]

Johnson is a proponent of revised regulation for the financial industry, and he is optimistic that the will exists to make it happen. If there was some way to insure that we implement the correct regulation, rather than just any regulation, I might share some of his zeal for a new regulatory regime.

There are two major hurdles to this outcome. First, it is difficult, if not impossible, to know for certain what the optimal regulatory scheme is. Second, even if it were knowable, the reality of our political system may make implementation impossible.

Given this, I am even more frightened by his warning regarding the existence of a Fed bubble, and what its end might mean for the economy.

Waking up after the California dream

Well, it appears Colin Powell was wrong. The rejection of California's ballot measures on spending caps and tax hikes went down to defeat. Strong evidence, I would argue, that voters do not want to pay taxes for services and that what they are looking for is more free government services in their life.

California's recent history is the nation's in microcosm (a really big microcosm). Spending has simply outpaced revenues. As long as credit was easy and relatively cheap, borrowing was far more attractive than either cutting spending or raising taxes. This approach to fiscal matters has taken a beating recently. The recession has meant falling revenues and the collapse in the credit markets has made borrowing much more costly.

CBS News reports:

Between the 2004 and 2008 fiscal years, total state spending increased by around 44 percent, far outstripping tax revenues. Debt has tripled in six years. All this is true even though Californians enjoy one of the heaviest income tax burdens in the nation.

So now what? McArdle argues for cutting California loose and letting them go bankrupt, even though she doesn't think this is likely. It is possible that we could see a bailout of California by the federal government.

California's particular brand of fiscal insanity combined self-imposed spending mandates with self-imposed restrictions on raising revenues. It would be exceedingly difficult to argue that Californians were deserving of a bailout. Perhaps the only argument that could sway many is the claim that California's failure would be detrimental to the health of the nation as a whole. That may be true, but it is also the case that, in the long term, it is not clear which would be worse, bailout or bankruptcy.

An Empty Slate

I used to really enjoy reading Slate.com, but over the last few months it seems to have lost some of its luster. If pressed, I don't think that a few days ago I could have pinpointed what it was that has caused my disappointment. All I had was just a vague feeling of not-so-freshness. When I came across this post from Matthew Yglesias though, it brought a focus to my previously hazy notion.

The quality of the writing from a wide variety of perspectives on an even wider range of topics, was what made Slate a great site. Politics, policy, television, books, music, architecture, shopping, business, the environment, Slate covered it all and in ways that were never dull and often often unexpected. It is this range that, of late, has been missing and I think I know why. Slate has developed too many new spin-off websites devoted to narrow interests and in the process starved the original Slate of the variety and quality that made it special.

The recent past has given us the new sites The Big Money, The Root, Foreign Policy, and now DoubleX. All brought to you by something called Washington Post.Newsweek Interactive, LLC. Who knew that limited liability may also limit your ability to be entertaining and informative.

It's as if the leadership at Slate looked at the mortgage backed securities debacle and decided that was a great business model for new media. They had a depth and breadth of content bundled together at one terrific site, Slate. A site where not every piece was a home run, or appealed to every reader, but that was its strength; it would bend, but not break. Someone visits the site because they like the advice column, but they stay and read Fred Kaplan on Pakistan. Instead of imitating that bundled structure, Slate has chosen to slice it up, just like those mortgage backed securities. So rather than a Slate characterized by variety, we now have tranches of content scattered across other sites.

As I've argued before, the slicers have a habit of keeping the weakest tranche for themselves. Now I am not saying the content at any of these spin-offs surpasses the original Slate, yet. But can a Slate site featuring Jack Shafer and Seth Stevenson on the media be far off? I suppose we'll always have Hitchens, but then what? A site dominated by reviews of gangsta rap or Hollywood's latest attempt to gin up some cash by appealing to our most debased tastes is not a site I'm interested in, no matter how well written.

Channeling your content into narrow fields not only leaves the original site weaker, but creates a new site that is weak on two counts. First, the new site is devoted to a single topic. What happened to reading across the curriculum? Second, the new site is largely dominated by a single way of thinking about that single topic. The DoubleX site is dedicated to women's issues, and run by women that have many ties to the original Slate. This results in a site with an editorial worldview that is a mix of post-feminist girl power and limousine liberal. While this particular brand of fusion punditry may have a broad appeal to mostly urban, college educated women, did we really need another entire website dedicated to promoting it? I don't think so.

By splintering their content, Slate is running the risk of splintering their audience as well. At a time when so much of the old media seem on the verge of non-existence, it's a little bit sad to see one of the veterans of the new media diminish, no matter how slightly. Emptying Slate of what made it great would be a mistake.

NPR's Planet Money Suffers Mental Eclipse

For coverage of the economic crisis you could do a lot worse than the folks at NPR's Planet Money. They host a three times weekly podcast, maintain a blog, and contribute reporting to other public radio programs. On last Friday's podcast, however, correspondent Adam Davidson apparently disengaged his brain when he put on his headphones.

The apparent cause of his sudden onset stupidity was an interview with Congressional Oversight Panel Chair Elizabeth Warren. One would think that a radio reporter on a national news outlet ought to be able to conduct an interview, but not in this case. The interview devolved into what was essentially a shouting match between Davidson and Warren. For the record, Warren got the better of him as Davidson's argument was mostly reduced to stammering and "yeah, buts," at least in the clips they played on the podcast.

Even if Davidson had carried the argument, one can only wonder why on earth any journalist with even the flimsiest pretense of objectivity would allow himself to let an interview turn into such a mess. Remember, this was an interview by a reporter. Davidson was not moderating a debate between persons with differing viewpoints. He started, I think, to inform his listeners about the current state of the COP's work and instead gave us a negative example of how a reporter should act.

His problem with Warren's work as far as I could tell, boiled down to the fact that Warren believes the current economic crisis requires a two-pronged solution. This solution includes a component to address the malfunctioning financial system and a component to address what Warren sees as the attack on the American middle class that has taken place over the last thirty years or so. Warren's views on this are well known, and not always liked; but it isn't as if she discovered her desire to champion the middle class after she began working on TARP issues.

Davidson could easily have done some actual reporting and questioned Warren on her views. The questioning could have even been (gasp!) tough. Instead, he chose to argue against her position himself. His main argument against Warren's economic two-state solution to the problem: It is not widely held by a majority of mainstream economists.

For a reporter to put their journalistic reputation on the line and engage in a partisan argument is already a dicey proposition, to do so when the force of one's argument rests on an appeal to conventional wisdom is lunacy.

I'm not going to search the NPR site for a citation, but I would be willing to bet that many NPR reporters, possibly even Davidson himself, have interviewed many people during this crisis that were widely regarded as fools for their unconventional takes on the approaching economic collapse not that long ago. (Nouriel Roubini or Peter Schiff anyone?) For Davidson to quite literally shout at Warren that she is wrong to think that the solution to this crisis goes through the American middle class simply because this is not a widely held view is just ridiculous.

I guess I owe Megan McArdle an apology since I was wrong to think that she was the only reporter that didn't like Elizabeth Warren. This latest episode makes me wonder if there are any reporters out there that are not so in the thrall of our nation's financial and political elites that they cannot consider, and possibly report on, some alternative view of the facts. Especially a view that has the audacity to be unconventional.

Update: The Confluence has the real reason why Davidson gave Warren the business: Sexism. Here I thought it was just his slavish devotion to dominant memes (uh, I think that means he thinks like everyone else) but I'm a man so what the hell do I know. Frankly I'm not sold on misogyny as the explanation for Davidson's bad behavior. I can't confirm this, but I hear that he once refused the offer of a piece of gum for the sole reason that it had not been recommended by 4 out of 5 dentists! Sorry. I can't help it. It is just so easy in this case.

Can we govern out of ignorance?

Yglesias and others have highlighted a recent poll in which only 24 percent of respondents correctly identified the current 'cap & trade' proposal as having to do with the environment.

29 percent thought this phrase had to do with regulating Wall Street. I didn't dive into the poll results, but does this mean that people thought the New York Stock Exchange was going to require traders to wear hats while they worked?

This reminded me of a recent description I read of one our nation's political debates which the paper described as being marked by 'ignorance and enthusiasm.' This is no way to run a country. I've said it before (somewhere) but I will say it again: An ill-informed and uninterested electorate will always and everywhere result in bad governance.

There is something of a chicken and egg problem at work here. Is our government exceedingly complex in order to keep a majority of people ignorant and allow those in power to remain in power? Or has the complex bureaucratic apparatus sprung up to fill the void left by a disengaged and ignorant public?

Either way, the only options going forward are increased civic involvement to force a return to government by and for the people; or our continued enfeeblement at the hands of government and the inevitable enslavement that will result.

Canaries, Coal Mines, California, & Colin Powell

While the general may be a smart and patriotic American, the new Powell doctrine strikes me as more ivory tower than Army HQ. Here is Powell:

"The Republican Party is in deep trouble," Powell told corporate security executives at a conference in Washington sponsored by Fortify Software Inc. The party must realize that the country has changed, he said. "Americans do want to pay taxes for services," he said. "Americans are looking for more government in their life, not less."[E.A]

Maybe. I would say that it is more likely people want to pay as few taxes as possible, while securing the maximum possible benefits for themselves. That is to say, their first preference is for someone else to pick up the check, but if they are stuck with the bill they had better get a great value for their money.

Good news for us and Powell, we may have a way to test this in a real world laboratory.

California's Proposition 1A is set for a vote next week. This proposition amounts to the combination of tax increases with spending caps. In other words, are Californians ready foot the bill for the government that they currently have.

Many, including Smitty at The Winning McCain, and WI's own DAD29, see the CA vote as a test case for whether or not Powell is correct in his judgment of voters' attitudes toward taxation and government size.

If the revenue increase are rejected by CA voters, what does that say about the supposed tidal wave of progressive sentiment that supposedly swept the country resulting in an Obama victory?

Unfortunately for progressives, you can't change human nature. If you ask people, they will tell you sure, everyone deserves food, shelter, and access to medical care. If you asked them to vote or sign a petition based on that same notion many would do so. If you asked them to actually pay for it though, I think that apparent tidal wave of progressive sentiment would look more like low tide at a California beach.

I learned a new word last week

Skullet. Apparently this is a variation on the classic mullet except the person is bald on top. This combines the shiny top of the head with the long hair down the back of the neck.

Minnesota Viking's mascot Ragnar rocks the skullet:


Hmmm. I wonder how Favre would look with in a purple jersey and a skullet.

Fed Up: Why we need small government populism

There's been something of a dust-up over a purchase of Goldman Sachs stock by the Chairman of the New York Federal Reserve; a purchase made while Goldman had business before the Fed, which is also Goldman's regulator.

Over at Slate, Eliot Spitzer has a great piece describing the special place of the New York Fed in our financial system and how it is entirely dominated by the large financial institutions it is supposed to be regulating. Here's the takedown:

So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?

It is now clear that there is something even worse than too much regulation, worse, even, than too little regulation. Namely, a public regulatory scheme that is little more than a thin veneer covering a privately controlled system utilized to deliver private gain.

Not illegally mind you, this is strictly above board. It is the use of access and influence to provide maximum value for shareholders, the primary duty of those that run public companies.

There is nothing wrong with trying to deliver value to shareholders, but the means for doing so used to be production of valuable goods and services. If we have entered a time when the means to deliver shareholder value is by having the ear of government officials, we have truly entered the age of decadent capitalism.

This phenomenon highlights the limits of effective regulation. When regulation is complex and carried out in secret, there will be those that will find ways to game the system. Always.

Minimal regulation intended to prevent only the most calamitous outcomes, enforced in full view of the public is the best hope we have of preserving our own welfare and preventing the very real human suffering that results when government serves the interests of business before it serves the interests of the people.

Tell Me Where It Hurts: Fixing Healthcare in the U.S.

Let's see, stimulus, budget, what's left? Oh yeah, we have to fix the healthcare system. It's not clear to me whether or not the Obama cap & trade energy plan is dead, but it appears everyone has the appetite for taking on health care reform.

No doubt I won't be solving all problems related to healthcare with this single blog post, but why should that dissuade me. It may even be the case that I end up with more questions than answers.

Front and center in the debate over healthcare will be the question of a public versus a private health insurance system. While I generally favor market based approaches to issues over government based ones, it is not at all clear to me that the area of health insurance is one in which a functioning market, as that term is normally understood, can exist.

To Market To Market

I would say that any definition of a market, any market, would have to include the fact that buyers and sellers come together and make an exchange at an agreed upon price. So why can't this work for health insurance?

Take the case of generally younger, healthier people. These are exactly the types of people that insurance companies would like to have as customers. They are likely to pay more in premiums than they generate in claims. But this likelihood isn't a secret to the insurance buyers. They know they are unlikely to incur a lot of health related expenses. Therefore, they want low premiums and they may simply choose to go without insurance altogether if the price of premiums increases even slightly.

On the other hand, take the case of generally older, less healthy people. These are the types of people that insurance companies try to avoid. They are likely to generate more claims than premiums. Again, the insurance buyers know this as well. In this case, the older, less healthy people are not only willing to pay higher premiums, generally speaking, they should be willing to pay even dramatic increases in premiums as long as they are able; and as long as they believe the premiums are a bargain compared to the cost of the health care services they are likely to need.

Given these circumstances, you have sellers trying to attract the group of buyers that don't see their product as a necessity, while simultaneously trying to avoid the buyers that do.

This phenomenon is self-reinforcing. If buyers are particularly sensitive to price then insurance companies take that as a signal that they are generally healthy, exactly the kind of people they want to sign up, but keep losing even over small price increases.

While on the other hand, if buyers are willing to pay more, insurance companies take this as a sign that these people know they are likely to need medical care, exactly the kind of people that insurance companies want to avoid.

So sellers don't want to sell to the people that really want to buy; the people that sellers do want to sell to, don't want to buy.

Given this state of affairs, it is hard to see how any system that is even nominally a free market could provide for our health insurance needs.
______________________________________
No doubt this is not the last post on this topic. And, for the record, I do not think a bureaucratic approach will work either. I mean do we really want the Federal Department of Life & Death making these decisions?

Dems on Deficits OR Kagen & Pelosi: Two Mouths, No Brain

Kevin at Lakeshore Laments beat me to the punch on the absolute lunacy of the claim by Rep. Steve Kagen that the House budget resolution is, “fiscally responsible...while cutting our deficit over the long-term.”

Yesterday morning, I heard Speaker Pelosi saying much the same thing, they must be working from the same script. Here she is from her blog:

As we go forward, we must take the country in a new direction and in doing so, reduce the deficit. We are not here to heap mountains of debt on our children and our grandchildren. That is what was done in the last years in the Bush Administration. This budget calls a halt to that and says ‘no.’ It says no more debt; we’re going in the opposite direction. We’re reducing the deficit as we create good paying jobs in our economy, as we cut taxes for the middle class in our country.

So, just as Kevin did, I give you the CBO chart of the projected deficit:

SOURCE: CBO, White House Office of Management and Budget | The Washington Post - March 21, 2009

The President's budget, which was only slightly revised by the Congress:

• Does heap mountains of debt on our children
• It only cuts the deficit relative to the massive deficits incurred as a way to get out of the current financial crisis
• I don't see any way that it could be characterized as saying "no more debt"

The Speaker is not entitled to her own facts any more than the Bush administration was. In this case, her assertions so wildly inaccurate that I don't see how anyone could take them seriously.

Cramdown gets crammed down

The Senate is currently debating a bill aimed at helping stem the foreclosure crisis. By far the most controversial provision was an amendment that would have allowed bankruptcy judges to modify a mortgage, including reducing the amount owed which is know as a "cramdown."

The major banks, including those that are currently using government money and protection as a means of avoiding bankruptcy themselves, opposed the cramdown provision.

I'm no bankruptcy judge, but I believe current law allows for a cramdown of a mortgage on an investment property, a second home, and on commercial properties. So it is only a mortgage on a primary residence, you know the one that people really need to avoid being put into the street, that does not allow for a reduction in principal.

A sensible provision that may provide for an actual reduction in foreclosures during these unusually bad economic times may be just what we need; sadly it may also be just what our government is unable to deliver.
_______________________
For more details on the cramdown, visit Senatus or OpenCongress