Scott Brown, Senator with truck, supports big banks

Senator Scott Brown, what would a hedge fund manager drive? Not a truck.

Apparently, Scott Brown is a common man, who drives a truck, just like any other regular Joe six-pack.  However, when Democrats proposed having the banks foot the $20 Billion cost of Financial Reform, he balked.  Instead, he moved for taxpayers to foot the bill.  Say what?

In fact, the $20 Billion will come out of the remaining TARP funds, which were supposed to be paid directly towards the deficit.  Didn’t Scott Brown campaign on deficit reduction? His voters certainly considered it a priority.  Huh?

Some banks, those that take deposits, will have to pay slightly higher assessments to the FDIC; however hedge funds and investment banks get off scot-free.  Sound familiar?  So I guess Brown should probably trade in his truck for whatever hedge fund managers are driving these days.  Porche?  Mercedes?  Anyone have any helpful tips for the intrepid Senator?

Financial reform at last – is it enough?

Former Federal Reserve Chairman Paul Volcker, Chair of the President's Economic Recovery Advisor Board, and author of the Volcker Rule

Last night, just before the clock turned to midnight, almost two years after the global financial system nearly collapsed, House and Senate committees reached agreement on reconciliation of their respective Financial Reform packages.  The bill should be headed for a successful vote.  What level of protection will we have going forward?

Looking back, the economy nearly collapsed because of too much systemic risk spread across financial institutions that are “too big to fail.”  At the 11th hour, after Bear Sterns nearly collapsed, and Lehman Brothers went into bankruptcy, the surviving financial institutions converted into bank holding companies and received access to the Discount Window at the Federal Reserve, which allowed them to reduce their leverage with basically free money.  In addition to that bailout, much of the toxic assets on the books of these institutions were bought or guaranteed by the Fed.

Would it be enough to require these institutions to hold more capital?  Simon Johnson points out that the targeted requirement of 10-12% is actually what Lehman Brothers had on the book before they collapsed.

One good aspect of this bill is the inclusion of a compromise Volcker Rule.  Paul Volcker, the former Federal Reserve Chairman who proposed the rule, intended to restrict the ability of banks whose deposits are federally insured from trading for their own benefit. Banks and large Wall Street firms, who view it as a major incursion on their most profitable activity, fiercely oppose the Volcker Rule.  The compromise would allow them to continue some investing and trading activity, no more than 3 percent of a fund’s capital; those investments could also total no more than 3 percent of a bank’s tangible equity.

The proposal by Senator Blanche Lincoln that would have banned banks from any derivatives activities was loosed to a requirement that banks and the companies that own them be required to segregate the activity.  In theory this would prevent depositors money from being traded in derivatives, but isn’t this just shuffling around the balance sheet instead?

The new Consumer Protection Agency is a good move.  If the President puts someone like Elizabeth Warren in charge, we will see standardized, consumer friendly credit card statements, along with many other sensible reforms.  Of course, an exception for Auto Dealers was negotiated at the last minute.  If you go outside any military base you will she signs that say “financing available for E-1 and above.”  What those signs don’t say is that the interest rates for those E-1’s will be 30%, and that those 18-year-old kids just want the shiny new car.  In the same vein, I hope payday lenders will be subject to the new Agency, though I don’t doubt that powerful legislators may have exempted them as well.

Ultimately, at the end of the day, while there are admirable measures in this Reform, and while it is better than the status quo, this bill does nothing to deal with institutions being too big to fail.  The Brown Kaufmann amendment, which was defeated by among other opponents, The White House, would have forced banks to become smaller and limited what they could borrow from the Fed.  We taxpayers will one day have to confront these massive institutions and bail them out again, with the proverbial gun to our head.  It is inevitable.

It is instructive to look at the history of Bear Sterns, as detailed in the excellent book, House of Cards.  When that firm became a stalwart after the Great Depression, the partners were all personally invested in each financial investment decision.  They had skin in the game, and they were much more conservative as a result.  Deregulation in the 1980s and the 1990s allowed firms like Bear Sterns to leverage, more and more, their clients funds, and engage in riskier and riskier behavior.  Without the personal investment, the people in charge of Bear Sterns were no longer worried about the long view, just the next quarter.  Much like politicians who are simply worried about re-election and not about proper governance, these denizens of Wall St. were now only concerned with rising stock price and short term gains.  We lost something along the way, and unfortunately, we are not going to get it back.

Will Halter top Lincoln?

This is an odd election year, with primaries, run-offs, and special elections appearing on a monthly basis.  Today voters in California and Arkansas will make important decisions.

In California, voters will determine the fate of Proposition 14, which would replace the Primary system with a new system that would allow the top two vote getters to face off in November, in both California and Congressional races.  If that proposed system were in place in Kentucky, where the May Senate primary was known nationally as Rand Paul’s decisive victory, in fact the two Democratic Senate candidates, Jack Conroy and Daniel Mongiardo, would face each other again in a rematch, leaving Paul, who received less votes than both Democrats, out of the November election altogether.

In California, both political parties oppose Proposition 14, because it threatens their power.  California is crippled financially, with Democrats and Republicans unwilling to agree on a path forward, and with voter-driven financial restrictions on tax increases.  Voters, of course, can at the same time demand spending increases through the Proposition system.

In Arkansas, Senator Blanche Lincoln is fighting for her political life in a run-off against Lt. Governor Bill Halter.  Will we see a Halter-top?  Unions committed to this election after Lincoln reversed her position on the Public Option and Card Check.  Predictably, this is yet another centrist that will be defeated.  David Brooks wrote an excellent column recently about two competing theories of change, founded in the writings of Thomas Paine and Edmund Burke:

“We Americans have never figured out whether we are children of the French or the British Enlightenment…Today, if you look around American politics you see self-described conservative radicals who seek to sweep away 100 years of history and return government to its preindustrial role. You see self-confident Democratic technocrats who have tremendous faith in the power of government officials to use reason to control and reorganize complex systems. You see polemicists of the left and right practicing a highly abstract and ideological Jacobin style of politics.  The children of the British Enlightenment are in retreat. Yet there is the stubborn fact of human nature. The Scots were right, and the French were wrong. And out of that truth grows a style of change, a style that emphasizes modesty, gradualism and balance.”

Is a Halter victory a victory for the French Enlightenment? Not quite, but it is a sign that centrists, as Brooks eloquently writes, lack a clear identity.  Too often, we just see what they are against, and not what they are for.  Lincoln, in a desperate bid to save her political seat, took a bold step with an amendment to reform derivatives.  Unfortunately, the amendment will die in committee. Lincoln only played that card when she was desperate; that was obvious to everyone.

Epistemic closure

I gave up my subscription to the New York Times, primarily out of financial necessity.  I am fortunate to be a full-time MBA student, which allows me time each morning to enjoy some damn fine coffee and pore over the news of the day.  When I decided to give up the Times print edition, I realized I would save about $600 a year.  What I didn’t realize is that by forsaking the print Times and instead getting my news from the web, I could gain more clarity in the process.

I read blogs before, of course.  Simon Johnson and James Kwak became indispensable in the fall of 2008.  My professor John Ehrenfeld approaches sustainability from a unique, necessary perspective.  Nate Silver is an astute political observer.  Here in Rhode Island, Ian Donnis and Scott MacKay, veteran journalists, cover the local political scene for WRNI better than anyone else.

However, by spending an hour surveying blogs and sites like the Atlantic, I am able to gain a more complete perspective on the news of the day.  I discovered new conservative voices like Andrew Sulivan and Megan McArdle at The, that provided the intellectual critique I have always longed for from the right.  In short, the time I spend at my laptop is much more fruitful that the time I spent with ink-stained hands poring over the Times.  I still read the Times online of course, especially David Brooks and Paul Krugman.

This morning, I happened upon an ideological debate on the right that would have completely passed me by in the old ink-stained days.  Julian Sanchez, a research fellow at the Cato Institute, writes about the idea of epistemic closure on the right, or what he calls the “universal tendency toward confirmation bias plus a sufficiently large array of multimedia conservative outlets to constitute a complete media counterculture, plus an overbroad ideological justification for treating mainstream output as intrinsically suspect.”

After the passage of health care, David Frum, a fellow at the American Enterprise Institute, was fired for saying that conservatives “followed the most radical voices in the party and the movement, and they led us to abject and irreversible defeat.”  Conservatives, he said, missed their chance to work serious with Democrats to craft a bill together.   Of course, he pointed out there “the harm that our overheated talk is doing to us. Yes it mobilizes supporters – but by mobilizing them with hysterical accusations and pseudo-information, overheated talk has made it impossible for representatives to represent and elected leaders to lead.”

Of course, I saw the Jon Stewart-FOX back and forth this week and thought Stewart provided excellent media criticism as he often does, but when I jumped in the blogosphere I discovered that Stewart’s critique was just the latest salvo in a battle touched off by Sanchez’s post.  Ross Douthat, the young conservative for the Times, wrote that:

“Conservative domestic policy would be in better shape if conservative magazines and conservative columnists were more willing to call out Republican politicians (and, to a lesser extent, conservative entertainers) for offering bromides instead of substance, and for pandering instead of grappling with real policy questions.”

That led Jim Manzi at the National Review to offer a scathing critique of Liberty & Tyranny, the best-selling pop-conservative book, which attacks the idea of human-caused global warming, among other arguments.  Manzi calls the critique of global warming “awful. It was so bad that it was like the proverbial clock that chimes 13 times — not only is it obviously wrong, but it is so wrong that it leads you to question every other piece of information it has ever provided.” Reading the response at Red State is priceless:

“What I am concerned about, however, is the extent to which those who fancy themselves conservative intellectuals – folks like Manzi, Frum, Douthat, Brooks, Sullivan and others – believe they are the second coming of Bill Buckley (hardly), but dismiss talk radio show hosts (and forums like RedState) as nothing more than blowhard hacks who pour out their own koolaid for the slobbering masses, too stupid to know the difference.”

The voices at Red State, at FOX, at the American Enterprise Institute, and obviously on the radio seem to embody this idea of epistemic closure.  The firing of David Frum simply shows that AEI is unwilling to have voices that dissent from the party line.

Epistemic closure means that you only want to have your own views reinforced, that you will favor information that confirms your own beliefs over information that may unsettle those beliefs.  Today, when the Republican Party has become the ‘Party of No,’ it seems that only the left is seriously critiquing the issues of the day.  Scott Brown, the newly elected Senator of Massachusetts, recently replied, when asked about how he would change the Financial Reform Bill before Congress, said “well, what areas do you think should be fixed? I mean, you know, tell me. And then I’ll get a team and go fix it.”  Simon Johnson offers a real critique here.  Unfortunately, the orthodox Republican view against regulation cannot be questioned, even in the face of the recent financial crisis.  Until the intellectual right is given room to grow, the conservative base is doomed to minority status.

Personally, when I can see the many perspectives across the political spectrum, it helps to inspire critique of my own assumptions.  I still miss the ink-stains sometimes, and value the unmatched reporting of the Times, but am optimistic of all that the internet has to offer.