Not the Change We Need: Part VIII in a Continuing Series

Robert Reich has some good thoughts on the Obama administration’s financial regulation plan:

The plan doesn’t stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn’t require bankers to take their pay in long-term stock options or warrants, and it doesn’t even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.


In short: It’s a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 — which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 — will repeat itself within a decade, if not sooner.

This is not the change we need. It is increasingly clear that Barack Obama has little desire to be a Roosevelt, either trust-busting Teddy or regulating Franklin. There seems to be no good reason for taking such a soft touch with the financial industry, though it is enough to make me wonder whether the President’s caution may in fact be timidity. Financial regulation may not have even been on the President’s radar when he launched his campaign, but it is now one of the most important issues facing him. And this plan is not sufficient. I acknowledge that he may wish to focus on health care instead (after all, this is why torture investigations cannot proceed, why don’t-ask-don’t-tell is still policy, and why climate change legislation is being ignored), but the economic benefit of a real health care reform plan could be easily consumed in another financial meltdown 10-20 years from now. This is not the change we need.

On the same subject, we have Paul Krugman, questioning those to champion breaking up the banks.

I’m a big advocate of much strengthened financial regulation. One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible.

The point is that finance is deeply interconnected, so that even a moderately large player can take down the system if it implodes. Remember, it was Lehman — not Citi or B of A — that brought the world to the brink.

The interesting thing there, is that Krugman seems to assume that the impetus behind antitrust action against too-big-to-fail banks is the belief that if we had smaller banks, we wouldn’t need to regulate them as strongly. I disagree. I am less concerned about too-big-to-fail (a measure which, if it has any meaning, must be a measure of importance not size) than too-big-to-regulate. I have no real knowledge here, but I once witnessed the considerable work that would be needed to pursue even a fairly small alter ego claim. My instinct is that attempting to understand, let alone regulate, a multinational behemoth is a correspondingly Augean task.

Do the regulatory benefits of breaking up the banks, then, outweigh whatever benefits are obtained consolidation? I have no idea. But, this is question to ask, and it does not seem to be the one Krugman is answering.

How to Vote on the Stimulus?

From the point of view of most economists, it appears the stimulus package is both too small and misspent. The question is, then, should Congressional Democrats vote for it?

From The Hill (via Firedoglake):

Liberals in the House are already making noise that they might vote against the conference bill if it mirrors the Senate legislation.

Rep. Ed Pastor (D-Ariz.), a member of the Congressional Progressive Caucus, said last week, “Many of us may not support it in the House” if the Senate makes “so many changes,” such as adding more tax breaks and cutting spending provisions, which is what the Senate did.

I certainly understand their position – I’m furious with the spending cuts that were made and tax cuts that were added in the Senate, although I think the House bill was also too small. However, on the otherside you have economists.

Here is Paul Krugman:

Today Sen. McCaskill asks whether the Senate stimulus, as negotiated, is better than nothing.

Yes, it is — and if it comes down to that choices, a yes vote is the right thing to do.

But let’s not have any illusions about what just happened. The centrists went to work on a bill that, perhaps inevitably, was a mixture of economic muscle and useless fat; as the price of their support, they cut deeply into the muscle while leaving all the fat in place.

And Brad DeLong has a roundup of others, many who argued for more tax cuts, but say the bill needs to be passed regardless.

Personally, I don’t think a liberal revolt in the House would be productive, as much as I’d personally like to see it. I’d rather see a strong effort in the conference committee. The stimulus is so necessary that I don’t believe this is the time for this fight. Instead, I’d like to see the House add more stimulus spending at points further down the line, and fight the Senate, or the President, over those.

Published in: on February 10, 2009 at 12:52 pm  Leave a Comment  
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Stimulus, What Stimulus? (Updated)

Here is Paul Krugman’s very initial take on the Senate stimulus package (emphasis added).

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

Every state in the country is facing serious cuts in services over the next few years. In some cases, this means reduced health care or unemployment benefits. In many, layoffs of state employees. California is among the hardest hit in the country, and had its first unpaid furlough this past Friday. The furlough has the effect of lowering employees’ salaries by over 9%. All of these cuts and layoffs have the effect of pulling more money out of the economy, worsening the recession.

The bill is bad, and the blame for it largely rests with President Obama. Certainly, House Democrats deserve blame for larding the bill up, giving Republicans the chance to attack it, and the Senate deserves a healthy dose of blame for passing this milquetoast monstrosity. However, President Obama’s failure to lead on the stimulus is the real problem. He could, and should, have presented a list of demands to the House and used his serious popularity to force it through relatively unchanged. An additional future stimulus, negotiated more fully in the Congress, could have been passed in six months or so, giving Congress the opportunity to pursue its pet agendas.

A large part of his failure to lead is his obsession with bipartisanship. He attempted preemptive compromise with Congressional Republicans, which weakened the bill from the very beginning. He refused to make an aggressive, public case for a large, spending-oriented stimulus, giving Republicans cover to 1) vote against it and 2) hold it hostage. And, finally, he backed Congressional Democrats into a corner where if they didn’t weaken the bill to fit Republican sensibilities they would be seen as going against the highly charismatic and popular leader of their party. A bad move all around. I only hope than in 6 months we have the opportunity to revisit a second stimulus package – this one better designed. I also hope that California’s government lasts that long.

Update: Brad DeLong has the list of spending cut from the stimulus. What the hell was the Senate thinking?

Published in: on February 7, 2009 at 4:40 pm  Leave a Comment  
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California and the Stimulus

There are a couple of interesting stories on the stimulus package and California today. Starting with this one (h/t Calitics):

The Democratic Congressional Campaign Committee (DCCC), chaired by Congressman Chris Van Hollen, today announced the DCCC is launching a Putting Families First ad and grassroots campaign in 28 targeted Republican districts.  The ads focus on the Republicans out of step priorities by putting bank bail outs and building schools in Iraq before the needs of the Americans in the struggling economy.

Targeted California Congressmen include:

Representative Dan Lungren                         CA-03
Representative Elton Gallegy                         CA-24
Representative Ken Calvert                            CA-44
Representative Brian Bilbray                         CA-50

I’m especially happy to see Calvert targeted. I campaigned for Bill Hedrick in the past election and was pleasantly surprised to see how well he performed. I don’t expect that the ads will target the Orange County part of the district. I do think, however, that Hedrick will have to work to tighten the gap in Orange County if he wants to be able to win.

Update: This is exactly the kind of action the California Democratic Party should have taken this summer with regards to Republican obstructionism on the budget. It is still what they should be doing now – but this summer it could have yielded dividends in the election. The state party should take note.

Moving on, I don’t often have good things to say about Senator Feinstein, but I’ll give her credit for this (from CQ):

The first amendment scheduled for debate is a proposal from Patty Murray , D‑Wash., and Dianne Feinstein, D-Calif., that would boost the bill’s highway funding from $27 billion to $40 billion and its transit funding from $8.4 billion to $13.4 billion.

This is a needed amendment. The stimulus package is already weighted too strongly toward tax cuts and too small overall. Infrastructure and transit spending will help put shovels in the ground, and transit spending in particular will help advance us toward a cleaner economy. Personally, I think this stimulus package should be used much more heavily to advance the serious investment we need in clean energy.

Which is part of what makes this so disappointing:

Friends of the Earth tells Streetsblog San Francisco that Senator Barbara Boxer’s staff has confirmed that Boxer and Senator Inhofe will present an amendment to the federal Stimulus Plan for $50 billion in additional funding for highways, bringing the total to $80 billion, exactly the figure Inhofe demanded last week in a letter to the Committee for Environment and Public Works.

I’m all in favor of more infrastructure spending, and this post doesn’t indicate what the spending will be used for. There are certainly any number of highway and bridge repairs that are desperately necessary. However, I dislike seeing spending going to car-based transit and not a corresponding amount going to mass transit. Unlike others, I’m not as bothered by the cooperation with Inhofe, no matter how odious I think he is.

Finally, LA Mayor Villarigosa is going to lobby Congress for more mass transit spending for LA.

Villaraigosa wants to ensure Los Angeles remains high on the list for funding for major transportation, green-energy projects and big-ticket items such as the “Subway to Sea” as well as the mayor’s ambitious solar initiative. He also wants federal money to go directly to cities.

This may be a day late and a dollar short. The time to do this would seem to have been a week or two ago when the core of the bill was still being written. That said, I certainly believe more money needs to be spend as aid to state and local governments. Such spending may not necessarily create new jobs, but it can certainly help prevent current jobs from being lost. And when jobs are lost, the quality of government services degrade, just as more people come to rely on those services. It is a dangerous cycle of events.

Finally, one of the major objections to more infrastructure spending, and mass transit spending in particular, is that it wasn’t sufficiently ‘shovel ready’. On that subject I point to this post by Paul Krugman last week, where he argues that stimulus spending should probably continue through 2011. I am all in favor of a broader spending package even if the jobs won’t get underway immediately, especially if the spending is on projects that advance other goals, such as combating climate change. Of course, perhaps that spending should be in a stimulus round two package that can be more carefully assembled in the next couple of months.

More Good Sense from Paul Krugman

On stimulus bipartisanship:

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

We should stand our ground and pass the best stimulus package possible. Republican ideals have run the economy, more or less, for the past eight thirty years. Why should we still be listening to them?

Published in: on February 3, 2009 at 1:04 pm  Comments (2)  
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