The Big Picture: Why I'm a radical

Building off the post below about how the crucial issues of Wall Street are off the table - as you can read in this from Ezra Klein:

"They both appear to agree that the proper response to the financial crisis is a bill that focuses on the ability of regulators to detect risk and dismantle failing firms. Reshaping Wall Street -- either by putting more government into it in the form of size caps and leverage limits and taxes, or taking the government out of it -- doesn't really seem to be on either party's agenda."

-Something has done an incredible amount to destroy our society

and reshaping it isn't even ON THE AGENDA of EITHER major party

-this is where people like Noam Chomsky are dead right when they talk about how close the parties are on the fundamental questions of the distribution of power

-how the crucial questions of the distribution of power and resource aren't even allowed to be debated

I would advise our readers to read the book 13 Bankers by Simon Johnson and James Kwak and read their website baselinescenario.com. A post today reflects my thinking on this, especially the parts in bold:

The second problem, again in Krugman’s words:

“The reforms currently on the table . . . only deal with part of the problem: they would make finance safer, but they might not make it smaller. . . .

“We’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy.”

This is the long-term challenge (see my charts here). Finance is an intermediate input. At the margin, every little innovation that makes markets more liquid does provide a small benefit to the economy in the form of better capital allocation; but in many cases those benefits are not enough to justify their transaction costs, let alone the negative systemic externalities we saw recently. The flowering of finance in the past three decades gave us the illusion of growing real GDP — especially in the past decade, when GDP growth was dominated by finance and real estate. Now we need to rebalance the economy toward productive activities.

The bad news is that the administration and Democrats in Congress will face a strong temptation to pass the reform bill and declare victory. The conventional wisdom is that you don’t get re-elected by saying, “We passed a bill that is pretty good, but doesn’t solve the root problems, so we need to do more in the future.” It’s better politically to say you fixed the problem once and for all, then cross your fingers and hope for the best.

The good news is that there seems to be a growing number of voices saying that we need structural change in the financial sector. Besides Krugman and Arianna Huffington, Martin Wolf has chimed in as well, arguing that making the current system safer, though necessary, is insufficient:

“The financial system would remain a doomsday machine. There are three difficulties. First, there is no sound basis for deciding how much capital is enough. Second, . . . it is profitable to take risks whose upside accrues to oneself and whose downside accrues to others. So the safer regulators try to make the system, the more risk it can take on. Finally, it is easy to create the desired risk via regulatory arbitrage.”

Serious academic economics is also questioning the value of a large financial system. A paper byNicola Gennaioli, Andrei Shleifer, and Robert Vishny (cited by Krugman here) shows how excessive production of securities (the phenomenon of the past decade) can be caused by mistakes in risk perception, making the financial system more fragile as a result. (As a another result, the social benefits of innovation can be outweighed by the social costs.)

So in the long term, I agree with Krugman: “These [current] reforms should be only the first step. We also need to cut finance down to size.” Given that whatever comes out of Congress will be imperfect in anyone’s eyes, whether the Obama administration agrees will be of crucial importance."

The problem is that based on appointments and decisions I have no confidence that Obama is anywhere close to the right side on this issue. And the people and institutions that destroyed security and opportunity for most Americans, stealing it to finance their lavish lifestyle, getting bailed out while everyone else suffered, will continue to keep their wealth and power. Neither political party will do anything about it. The answer is to move the Democratic Party to the left so that it actually stands for doing something. That's the right move substantively, and it's the only way to avoid crushing defeats in the midterm. But too many Democrats are so caught up in the Wall Street Knows Best worldview, as well as the high-paying jobs in the finance sector that await them, that they won't do what's right on the merits or politically. We can bemoan this, or we can make them see the light, through organizing, primary campaigns, and advocacy.

The Daily Strike-5/5/10-FinReg Amendments Begin

Good evening and welcome to the Daily Strike. I apologize for my negligence yesterday, but unfortunately you will have to get used to it. I'm going on vacation next week!

THE SENATE: The Senate finally began consideration of amendments to the Financial Regulation bill, after a week and a half of stalling and obstruction. Republicans refused to allow votes on amendments, even when offered a chance to subject those votes to a 60 vote threshold. If Democrats wanted to vote on amendments, they'd have to invoke cloture, which would take 60 votes and three days worth of time, per amendment. Republicans finally allowed for the consideration of a few amendments after a deal was struck early in the day between the top Democrat on the Banking Committee, Chris Dodd (CT), and the top Republican Richard Shelby (AL). Dodd agreed to remove the provision that would have set up a liquidation fund, paid for by big financial institutions, that would unwind firms that were "too big to fail." That provision has been taken out, though at this point it is unclear what the replacement provision is.

As part of the agrement, Republicans allowed votes on two Obama administration nominees and two amendments. The two nominees (Gloria Navarro of Nevada, and Nancy Freudenthal to be District Judges in Nevada and Wyoming respectively) each were confirmed overwhelmingly. Navarro's vote was unanimous, while Freudenthal's was opposed only by Senator Coburn (R-OK).

The Senate then voted on the first amendment to the bill, offered by Senator Boxer (CA). The amendment clarifies that the bill does not provide for taxpayer bailouts. The amendment doesn't really have any substantive effect. Rather, it gives Democrats the ability to refute the bogus Republican charge that the bill is one giant "taxpayer bailout." The Boxer amendment passed by a vote of 96-1, with only Senator Kyl (R-AZ) voting no (not sure what that's about). The Shelby-Dodd agreement we alluded to above passed by a margin of 93-5, with Senators Coburn (R-OK), Cornyn (R-TX), DeMint (R-SC), Dorgan (D-ND), and Hatch (R-UT).

There are no further amendment votes scheduled at this point. The two most contentious amendments may not get votes at all. An amendment offered by the odd duo of Senator Sanders (I-VT) and DeMint (R-SC) would call for an audit of the Federal Reserve. I agree generally that we should know how the Fed is pumping money into the economy, but I am afraid that the amendment seeks to undermine the independence of the Federal Reserve, which is crucial to monetary stability. I'm conflicted on this one.

I'm not conflicted on the other contentious amendment. Senators Brown (OH) and Kaufman (DE) still intend to offer the SAFE Banking Act as an amendment, which would limit the size of financial institutions. In what has been a major disappointment, the Obama administration has opposed this amendment behind the scenes. I guess they believe that the size of banks was not the main culprit in the financial crisis. I disagree. This amendment would assure that the fate of the economy would no longer be in the hands of a few firms that make a bunch of risky bets.

Hopefully we'll see votes on these amendments in the next couple of days.

THE HOUSE: The House just dealt with suspension bills today. Tomorrow, they'll consider the "Cash for Caulkers" bill that will authorize reimbursements to families who weatherize their homes.

We did get some sad news out of the House today. Rep. David Obey, a liberal stalwart who has been in the House since 1969, announced his unexpected retirement. Obey is the powerful chairman of the House Appropriations committee. His retirement opens up another potentially competitive seat, especially since the Republicans have already found a viable challenger. Obey was always on the right side of the issues. He was a passionate advocate for shrinking the massive gap between the rich and poor in our society, for campaign finance reform, and for investing money in critical areas underfunded by Republican administrations and Congresses. He will be missed.

That's it for today. See you tomorrow evening!

The Daily Strike-5/4/10-No Real Entry Today

Sorry, folks! I won't be able to write tonight's entry due to some very serious obligations....ok the hockey game is at 7:30 and I want to get my haircut and I don't want to stay up late. Basically, the right-wingers started their fearmongering on the Times Square attack, everyone's mad at BP, and there were no amendment votes on the Financial Regulation bill.

The Daily Strike-5/3/10-Rule Britannia!

Good evening and welcome to the Daily Strike. Since not much happened in politics since I wrote this morning, I thought I'd change gears and give my thoughts on the General Election in Great Britain, which will take place this Thursday.

ACROSS THE POND: We thought our elections were interesting, but the one about to take place across the Atlantic Ocean looks like it will be a barn-burner.

First, the basics. Britain is a constitutional monarchy, with most government powers vested in the House of Commons, which has 650 seats. Voters will elect individual members in their constituencies (equivalent to our Congressional districts). If one party gains a majority, it will form a government. The executive powers of government are vested in Ministers, which are usually Members of Parliament (MPs) of the ruling party. The parties that do not finish first make up the opposition.

Currently, the ruling center-left Labor party controls 356 seats, the Conservative Party (the Tories) control 198 seats, and the left-leaning, libertarian-ish Liberal Democrats control 62 seats. The last election was held in 2005.

Labor has been in control of government since 1997, so it would seem only natural that voters would be ready for a change. Polls over the past few years have showed Conservatives generally ahead of their Labor counterparts. A few weeks ago, it looked likely that Conservatives would win perhaps a small majority in the next parliament.

But recently, the Liberal Democrats, led by Nick Clegg, have surged in the polls. They now come in a close second to the Tories in most polls, ahead of the Labor party. Clegg was boosted by a strong performance in American-style national debates, and by his outsider status. Much like the U.S., Britain seems somewhat fed up with the two major parties.

The current Prime Minister Gordon Brown further jeopardized Labor's status with an enormous gaffe last week, when he was caught calling a supporter "a bigoted woman" on a hot mic. Brown has never faced election as a party leader (Tony Blair was still in office in 2005) and he is anything but a charismatic politician. He has tried to gain traction by portraying his opponents, especially Conservative Party leader David Cameron, as risky bets during tough economic times, and ongoing wars in Iraq and Afghanistan.

The complicated thing about this election is that, much like the U.S., the national popular vote is not entirely indicative of the next parliament. Results in individual constituencies can vary greatly from the national result, meaning that conceivably a party could gain a majority in parliament while not getting the most votes. Unlike the U.S., however, voters generally vote for individual candidates based on their party affiliation. It seems like there is much less "personality driven" voting in Great Britain. That usually means that the advantages of incumbency (constituent services etc.) are not as prevalent.

So what will happen on Thursday? Nobody really knows. Nate Silver, using some complicated formula that I won't even begin to understand, projects that the Conservatives will win 299, 27 short of a majority. He projects the Labor Party winning 199 seats, and the Liberal Democrats winning 120. This seems to represent the consensus of most analysts that the Conservatives will win a plurality of seats, but will come up just short of a majority. If no party gains a majority, there will be a "hung parliament."

British tradition dictates that no matter who has a plurality of votes in a hung parliament, the current ruling party (Labor, in this case), has the first opportunity to try and form a majority. Labor would have to convince pretty much every Liberal Democrat, most likely, to merge and create a coalition government. I don't see this happening. There is a good deal of animosity between the two parties. Labor also would not want the Liberal Democrats to have a role in government, because they fear that Liberal Democratic ministers may undermine the broader Labor agenda. Both parties fear that if the Liberal Democrats join the government, they will push for institutional reforms that would make it easier for third parties to gain greater representation in parliament (like proportional representation).

Could Conservatives team up with Liberal Democrats to form a government? Also unlikely, since the two parties' agendas are so diametrically opposed. Most likely, therefore, is that the Conservatives will form a "minority government." A minority government is highly unstable, because a majority of the parliament could both block legislation and vote to dissolve the parliament. Perhaps the conservatives would be content with a minority government for a short time to highlight differences between the parties, so that they could then hold new elections promptly, and try again to achieve a majority.

Pretty complicated stuff, but fear not. I will do my best to explain it further if any of you all have questions.

What does this all mean for the United States? The Liberal Democrats are thought of as the least pro-U.S. of the major parties. They favor a full and complete withdrawal from Iraq and would want the European Union to be Britain's primary diplomatic arena. The Conservatives are much more pro-U.S., and are steadfastly skeptical of the European Union.

I will keep you posted with what happens in Britain. Cheerio!

Yes, that was extremely corny.

The Weekly Strike-5/3-5/9

Good morning and welcome to the Weekly Strike. I thought this week would be dominated by the fight over financial reform, but a lot of other stories are dominating the news, most notably the oil spill in the gulf coast. Let's get to the week in politics.

THE WHITE HOUSE: Just when the White House wanted to hone in on Wall Street reform, they have been distracted by events beyond their control. The oil spill in the gulf coast is turning into an unmitigated disaster. By the time all is said and done, this could be a bigger spill than the Exxon-Valdez catastrophe in 1989. Some conservatives have tried to suggest that this is Obama's Katrina, which is patently absurd. For one, the lives of millions of Americans aren't under immediate threat. Two, Obama has done a good job coordinating state and local efforts in the gulf region, including close work with potential adversary Louisiana Governor Bobby Jindal (R).

The White House also had to focus this weekend on the failed terror attempt in Times Square. Explosives found in a car failed to detonate. It doesn't look like this will be a major story, mostly because the suspect appears to be a white guy. The double standards in our society are pretty amazing.

The President's schedule is pretty light to start the week. This morning, he hosts a reception at the Naval Academy for winners of the "Commander in Chief" awards. Later this afternoon, he holds a dinner for the Business Council. The schedule for the remainder of the week is in flux, but I expect him to make one or two appearances on the road.

THE SENATE: Now that Republicans have relented in their obstructionism, the Senate can begin debate on Wall Street reform. Votes on amendments will begin tomorrow. Unlike previous legislation where Democrats wanted to fend off inevitable attempts to make the bill worse, this amendment process may offer progressives some opportunities. Anger at Goldman Sachs after their performance at a Senate hearing last week perhaps has given more momentum to proponents of reform. One particular amendment that might come up, offered by Senators Kaufman (DE) and Brown (OH) would break up the big banks and prevent them from becoming "too big to fail." I'm afraid the Obama administration is opposed to this approach, as is Banking Chairman Dodd (CT). The Big Picture may write more about this amendment, but it would be shameful to see it go down in flames. Not only is it good policy, but it would be very good populist politics.

The other key amendment to look out for is a chance to re-enact the Glass-Stegall Act, which separates banks from other financial institutions. The act was overturned by the Gramm-Leach-Bliley Act in 1999. I'm not too confident on this amendment going though, simply because of the influence of lobbyists, but I'll do my best to keep my hopes up.

THE HOUSE: After taking up suspension bills today and tomorrow, the House will take up the so-called "Cash for Caulkers" bill. The bill will give rebates to individuals and businesses for retrofitting for energy efficiency. The bill has one Republican cosponsor, so I expect it to pass very easily. Perhaps the Senate can include the bill as part of its comprehensive energy package that it will take up...err...at some point.

That's it for now. Leave some comments!