When you get to the end of your rope,
tie a knot and hang on.
Franklin D. Roosevelt
Financial Overhaul Reform: A Brief Critical Note
One thing predictable about Obama is his confidently stated, absurd populist talking points. We've repeatedly seen him, for instance, he has claimed credit for having saved American from another depression with his $787B stimulus plan (and counting). (To this day, Democrats laughingly refer to the legislation as "bipartisan", when in fact it only attracted 3 GOP votes over the entire Congress, one of which has since flipped to the Democrat side. ) The real crisis was during the economic tsunami of the 2008 Presidential campaign, when funds nearly froze overnight; we could have seen companies without short-term funds necessary to pay vendors and employees. He claimed the stimulus would keep official unemployment under 8%; he claimed infrastructure spending would have multiplier effects. But in fact only a small percentage of allocated funds were disbursed during the first 6 months, and as of February, unemployment among construction workers was just shy of 25%. Remember how Obama continued bailouts of Ford and Chrysler, claiming an economic Armageddon, that nobody would buy cars from bankrupt car companies, and then reversing course (but making sure his lower-standard union allies got preferential treatment over bondholders)? Are you really telling me arcane university studies and state bailouts, or up to 80% of green energy stimulus money going to foreign producers was a good way to spend our grandchildren's money? Why has the Obama Administration had to resort to phony job claims over the stimulus, like $77K in stimulus money funding 160 Bridgewater State College work-study students?
If anything, the Obama Administration has provided a case study of the hubris of progressives to "manage" a difficult economic environment. At first I held out hope for the Obama economic team with Christina Romer and Larry Summers. After all, Romer's research showed that fiscal policy during the Great Depression was largely negated by the anti-growth impact of tax increases; you would think that she would be wary of all these class warfare tax increases as the Bush tax cuts expire (not to mention increasing investment tax increases, including a Medicare surcharge), not to mention health care, cap-and-trade, etc. As for Larry Summers, his economic research (and policy advice under Reagan and Clinton) has focused on the beneficial aspects of corporate and capital TAX CUTS and indicated that unemployment benefit extensions and welfare payments adversely affect employment and thus should be SCALED BACK. So I'm completely baffled by whatever influence Romer and Summers have had on Obamanomics, which seems to go against their principal research findings.
Obama responds, of course, that letting the economy find its own bottom is the same "failed policy" of the Bush Administration. (I'm not sure what he's referring to; after all, under Bush, we had one of the largest increases in government spending since LBJ, the first major expansion of entitlement spending (Medicare drug coverage) in years, and the economic intervention of TARP was hardly laissez faire economics.)
Obama has made a principal goal of financial regulatory reform the regulation of derivatives; in particular, Sen. Lincoln (D-AR) is promoting a heavy-handed approach to derivatives (with some basic exemptions for buyers of underlying commodities). Derivatives are essentially hedges that one can purchase or sell regarding pricing of a commodity or even something like interest rates (i.e., swaps). A bank might extend a long-term loan at a fixed-interest rate. It might want to hedge against the risk that the market interest rate eventually exceeds that rate, which adversely affects its ability to service new loans.
I'm not going to rehash AIG here, but basically AIG was insuring the values of mortgage-based securities, implicitly government-guaranteed. In a normal portfolio approach, you diversify your risk, e.g., among securities, across industries, especially those with contrasting business cycles. For mortgage notes, that might include geographic and/or income-based risk. The way MBS were constructed, it was very difficult to assess the market value of the underlying assets; we then ran into a largely illiquid market where buyers didn't want to catch a falling knife. AIG was essentially hedging holders of MBS against a collapse in value. Because of accounting rules, the holders of MBS had to declare the market value as defined by sales in an illiquid market. To mitigate losses on their MBS, Goldman Sachs and other companies basically exercised their derivatives. AIG had not properly hedged their own positions (e.g., by purchasing other swaps and/or establishing a proper reserve relative to the number/amount of swaps it was writing) and hence found themselves insolvent; to a large extent, the government decided an AIG failure could cascade multiple other failures e.g., worthless derivatives and having to record all their paper losses and hence decided it could best to contain the damage at the source. Why existing regulators, credit rating bureaus, customers, etc., did not properly assess the amount of AIG's risk or vulnerability of the system to bankruptcy of a single vendor, I don't know.
A number of progressives like George Soros blame speculators in the derivatives market, e.g., using MBS derivatives to bet on a declining real estate market. I am not convinced, because speculators add to market liquidity, which is a good thing. I do that the market was less efficient because of a lack of transparency, which provided some competitors an unfair competitive advantage, and I do think that there is an issue if you have market players, without proper margins or reserves.
Going back to the Lincoln proposal, we see a number of policies, for example, that deal with the nature and extent of collateral (which is more flexible for target commodity buyers) and restrictions on the nature of what kinds of business that can market derivatives. In essence, she doesn't want investment banks engaging in risky derivatives using funds that are guaranteed by the government and/or have access to cheap federal funds.
The bottom line is that the purchasers of derivatives are concerned that excessive regulation will raise their costs of doing business and many vendors are concerned about losing a profitable line of business.
On the broader picture of financial overhaul reform, a key dividing line between Democrats and Republicans is a proposal of the government to essentially take over/bailout a financial institution (versus go through bankruptcy); the GOP considers this as making government bailout of financial institutions a permanent operational process. Financial institutions should be treated like any other insolvent company. In addition, the GOP believes that an industry-preferred, less onerous clearinghouse is sufficient (in contrast to the exchanges favored by Lincoln and progressives). Also, the GOP thinks that the consumer protection piece of the legislation is ancillary and dubious, outside of the scope of needed reform.
In short, it is clear where I stand here: I do not like codification of too-big-to-fail, I want the consumer protection part stripped from the bill, and I think that the Democratic position is obtrusively micromanaging the nature and extent of the derivatives market in a counterproductive and unnecessary manner.
But what I really dislike is the way Obama is consciously trying to manipulate the issue in a deceptive, populist way, not surprising given the way he has constantly scapegoated "Wall Street greed" over the past 2 years. Democrats have been bashing banks since the first Washington administration. What he has failed to acknowledge is the fact that the speculative real estate market is a direct consequence of political pressure to provide mortgage money available to riskier lower-income buyers, a key progressive objective.
Peggy Noonan on How to Save the Catholic Church
Peggy Noonan provides a less strident version of Maureen Dowd's formulaic feminism in claiming that the Church's future is tied up by pushing morally superior women into positions in the hierarchy. Noonan in this essay, unlike Dowd's , does not smear Pope Benedict XVI; her take is on what she considers to be the corrupt, insular bureaucracy which she thinks is the real problem, e.g., Cardinal Law's transfer to the Vatican--sort of a perverse version of the double-meaning Peter Principle (i.e., St. Peter was the first pope) within the context of morality.
First, I think that Noonan is oversimplifying and underestimating the Church's motives in an assignment. Second, I think that Noonan is also repeating Dowd's presentist/cultural bias in terms of framing the issue. Third, I think there are significant challenges in reforming the Church's bureaucracy and improving its public relations. This has more to do with administrative competence and the sheer logistical issues in leading over a billion Catholics. Fourth, while I myself am open to extending the actualization of women within Church hierarchy, I have found in my own experience that women are just as fallible as men when it comes to morality and management or leadership. I don't want to write an anecdotal account of individual versus gender-based differences; I've had more male than female managers or clients, so my observations lack sufficient statistical power. But I'll point out the reason that a favorite aunt, one of the finest women I've ever known, left her sister/nun congregation after a number of years did not have to do with male clergy.
I think part of the problem is that a number of good priests, like my Uncle Roger, have never aspired to serve within the Church hierarchy. His vocation was to serve as a simple priest of God. He's the finest man I've ever met. I'm less cynical than Ms Noonan; I think most of those who serve in the hierarchy are good men, but like all fallible human beings, they are sometimes mistaken, show poor judgment or say the wrong thing. Any priest engaging in sexual misconduct is not only committing a grave sin but is in material violation of his vows. What I would like to see are priests like my uncle serving the Lord reluctantly in the hierarchy.
Political Cartoon
Chan Lowe notes the moral hazard implicit in the dealings with the government. Who got elected based on taking the long-term perspective, on not requesting federal projects, bases, infrastructure in his district or state? If there are more lower-income voters than high-income voters, why would Dem-ogugues not only force Peter to pick up Paul's tab but take some of the leftover cash in Peter's pocket and hand it over to Paul? Why should Peter go back to the ATM? Maybe he should only carry enough cash to cover his own tab... Every time the GOP talks entitlement reform, the Dems use it to create fear, uncertainty and doubt among senior citizens--even if it means their own kids and grandkids won't have the same entitlements...
Musical Interlude: More "Yesterday" Songs
Carpenters, "Only Yesterday" an all-time favorite
Foreigner, "That Was Yesterday"
Stevie Wonder, "Yester-Me, Yester-You, Yesterday"
Spinal Starecase, "Today More Than Yesterday"
