Category Archives: Politics

Blame Copenhagen Failure on China?

Hell, I don’t know; I wasn’t there. But this author was there, and he places blame squarely at China’s feet, with some help from India.

Check it out in the Guardian.

Financial Regulation Does Not Hinder Growth

David Wessel of the Wall Street Journal wrote a column today in which he proposes that the US has to choose between economic stability and economic growth. I am usually on board with Wessel, who does not follow the Journal’s usual slash and burn libertarianism, but in this case I think he’s wrong. His dichotomy is false.

The regulation that Wessel is discussing is financial regulation to curb the boom and bust cycle that we have just lived through. He asks whether “wise government rule to prevent market excesses” would also prevent the dynamic innovation that fuels economic growth. I answer emphatically NO.

As I noted yesterday, financial innovation is unrelated to business innovation. In yesterday’s post, I pointed out that the companies driving recent growth – the Googles of the world – have not depending on the innovations coming out of Wall Street. But today I will go even further. Between World War II and the S&L crisis, we had a long period of mostly financial stability, without the crises we’ve seen since then, and with a regulatory regime that had general consensus on Wall Street and in Washington. That long period of stability didn’t hinder economic growth; in fact, as the graph below shows it was one of the greatest growth periods in our nation.  Notice how much higher the growth is (the red lines) before the S&L crisis in the mid-1980’s.

Growth in GDP

Growth in GDP after WWII

I would argue that not only did financial stability and economic growth coexist during this period, but that the stability was actually helping the growth. After all, it’s a lot easier for companies to plan and budget if the financial markets are not booming and busting. And potential entrepreneurs are more likely to take the leap and start a new business if they aren’t worried about their retirement savings disappearing in a Wall Street flame-out.

So let’s not worry about financial regulation slowing down growth. Let’s focus on smart regulation that will spur growth.

Paul Volcker on Financial Regulation

Speaking of reasonable voices when it comes to financial regulation (see my post below), Paul Volcker is coming out strong for a much more rigorous set of regulations. Volcker ran the Federal Reserve before Alan Greenspan, and was considered a guru while Greenspan was still ladling Ayn Rand’s soup on Saturday nights.

Here is a link to an interview Volcker gave to the WSJ, and here is a link to a New Republic article by Simon Johnson about that interview.

The money quote from Volcker: “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy.”

Again, that is a voice of reason. We all agree that capital markets are important to the economy, and that some financial innovation is a good thing. For example, developing ways for big companies to hedge their raw materials risks can help the economy. But developing ever more complicated derivatives and securities which are backed by securities which are backed by securities which are backed by assets?  How do those innovations help the economy?

This last point is the one that puts the lie to free market ideologues. They say that financial innovation is key to fueling the American economy. But financial innovation has nothing to do with the economy outside of Wall Street. Think about the great engines of American growth that these ideologues love to mention: Wal-Mart, Apple, Home Depot, Google or Tommy Hilfiger. They all grew large and hired thousands of people without building their business on credit default swaps or mortgage backed securities. None of them care about the hundredth of a penny reduction in spread that dark pool trading creates. Real innovation in the American economy is disassociated with Wall Street. The only thing that Wall Street innovation drives is Wall Street pay packages.

Reason & Financial Regulation

National Affairs recently ran an article on financial markets and regulation that was the most clear-headed, non-ideological commentary I have seen. The author, Nicole Gelinas, makes five main points:

  1. Capital markets are important because they allocate a key resource (money!) among various projects and sources
  2. A free market of buyers and sellers, or lenders and borrowers, is the most efficient form of capital market
  3. Some regulation is essential to the smooth working of a free market
  4. This includes regulation of leverage, speculation and complicated instruments
  5. Explicit or implicit government guarantees (eg. too big to fail) distort the free market

But read the article yourself. It’s not long, and it’s awesome.

Anger at Wall Street Grows

Just a few links to articles showing how fed up folks are getting with Wall Street.

  • The NY Times with a column from a former corporate lawyer calling for a windfall profits tax on Goldman Sachs
  • Salon telling Wall Street to “just shut up” and advocating limits to lobbying by financial firms
  • A new regulatory manifesto by a fed up investment banker
  • And just for fun, an attack on private equity’s quest for capital gains tax treatment

It’s starting to look like enough people are fed up that something might happen. Of course, the financial industry has already spent $350 million this year on lobbying, setting a record, and we know that politicians listen to money more than they listen to voters.

Vote The Bums Out

The NY Times published an article yesterday about how congressmen are still taking fancy trips paid for by corporations, despite ethics rules passed in 2007 to prevent such trips. These congressmen aren’t breaking the rules, but rather exploiting loopholes to get around the rules. James Sensenbrenner, for example, the jowly representative from Wisconsin’s 5th District, took a $15,000 trip to the Alps this year, with his wife, paid for by a “non-profit” funded by Deutsche Bank, Lufthansa and other European corporations.

I would like to think that Congress might tighten up the rules to close the loopholes, but expecting Congress to police itself is like expecting Thierry Henry to report his own soccer violations. So we, the voters, have to do the police work. Regular readers of Thoughtbasket know that I regularly exhort citizens to stay informed and vote accordingly. So members of Wisconsin’s 5th District, living in the lovely Northwestern suburbs of Milwaukee, likely Brewers fans and bratwurst lovers, if you would prefer your congressman to pay attention to your needs, instead of to the needs of large German companies, then vote out James Sensenbrenner. Find a Republican who cares more about grain elevators than about Teutonic castles, who would rather tour a dairy farm than a prince’s castle.  If your congressman does not truly represent you, find one who will.

A Quick Thought on the Afghan Decision

One of the criticisms of Obama’s Afghan plan is that he announced a target withdrawal date. To his critics, that commitment to withdrawal (although it seems like a loose commitment) gives the Taliban strength by telling them they only need to wait it out for a couple of years. John McCain said “The way you win wars is to break the will of the enemy, not announce when you are leaving.” I don’t want to completely reject this view, because the tribes in Afghanistan have historically taken the long view, and 2 years is not long. But on the other hand, it’s not as if staying longer will necessarily help.

McCain views this as a traditional war, which it’s not. Al Qaeda and the extreme Taliban are religious nutjobs; we will never break their will, no matter what we do. But we can turn the moderate Taliban, and we can give the Taliban limited room to operate, by getting the average Afghan (Gul the Plumber?) on our side. And the best way to get them on our side? Give them security and then get the hell out of their country. Get their government to step up and provide services. A surge with a limit is a good way to do those things. It provides some security, it tells the Afghan government that it needs to get its act together, and it tells a people who hate occupiers that we don’t plan to occupy them. The marginalization of the Taliban that should come from all this will, I think, outweigh any psychic benefit that the hard core Taliban will get from an announced withdrawal.

CEO Council Issues Liberal Recommendations

The Wall Street Journal recently gathered a large group of CEOs together to discuss the top issues facing the country. The broad theme was “How to Rebuild Global Prosperity.” Under that theme were four subsections, and in each subsection a committee of CEOs produced five recommendations. What was fascinating to me was how each set of recommendations matched up with generally liberal positions.

The Energy and the Environment committee recommended:

  • Diversify U.S. energy
  • Promote energy efficiency
  • Cap-and-trade bill
  • Federal plan for electric grid
  • Diversity transportation systems

The Economy and Finance committee recommended:

  • Sustainable job creation
  • Bring back winning spirit in U.S.
  • Build greater certainty
  • Enact global trade pact
  • Tax reform

The Educated Work Force committee recommended:

  • Education is our top priority
  • Council for educated work force
  • Reward effective teaching
  • World-class teacher corps
  • Mobilize parents for change

The Health Care committee recommended:

  • Reform health-payment system
  • Measure health outcomes
  • Hold patients accountable
  • Reform medical malpractice
  • Promote integrated care

I’m not saying that these are a super-liberal set of recommendations. Certainly if Mother Jones or Howard Dean issued a set of recommendations on these topics, they would be different, although there would definitely be some overlap. But if you take the entire set of recommendations, I would say that they match up more closely with the Democratic platform than with the Republican platform. And if you take the Tea Party wing of the Republican Party, I’m not sure that they would agree with any of the CEO recommendations.

What does this all mean? That when you get outside of Washington DC, the country isn’t as polarized as the media makes it seem. A collection of the most powerful CEOs in the country comes up with recommendations that are mainstream liberal. The majority of citizens are sitting solidly in the center, and if politicians and pundits would stop acting like jerks – if they would stop, listen and think – then maybe we could actually solve the big problems that our country faces.

Geithner Blew It On AIG

Eliot Spitzer took Treasury Secretary Timothy Geithner to task in Slate yesterday, accusing him of incompetence in handling the AIG bailout, particularly the full payment to swap counterparties like Goldman Sachs. Spitzer’s basic position is that since the government had all the money, it should have played hardball and forced everyone to take a haircut, which is standard practice in workout situations.

As Spitzer says, “The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk.” He further notes ““In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court.” Spitzer also references the auto company bailouts, in which the government did play hardball and forced all parties to make concessions.

Regular Thoughtbasket readers will recall my supportive comments (read them here and here) of the government’s aggressive position during the auto bailouts, and so it shouldn’t surprise you to learn that I agree with Spitzer here. Geithner should have been far more forceful in making everybody feel some pain for doing business with AIG. As Spitzer says:

“Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme. Forcing them to give concessions would have been one small step toward ending the moral hazard the Fed had allowed to flourish for years.”

This seems like a good opportunity to point out the risk of having career bureaucrats deal with business situations like this. Geithner was out of his league going head to head with Wall Street. Geithner has only worked in governmental positions, except for a couple of years at Kissinger Associates, which is essentially a government position. On the other hand, the guys who ran the auto negotiations, Steve Rattner and Ron Bloom, have significant real-world experience, as investment bankers and, in the case of Bloom, negotiating workouts of failing steel companies. This is why any government agency that deals with business needs to have at least some businesspeople in high-level positions.

Stop. Listen. Think.

The more I read about politics today, the more it seems like nobody really listens to what anybody else says. One person’s words are just a starting point for an opponent’s talking points, which may or may not have direct relation to those initial words. Politicians, pundits and bloggers are all guilty of this, including your humble correspondent.

This dynamic struck me when I was reading a New Yorker article about drone strikes in Pakistan. The article questioned whether the strikes might be counterproductive, because they kill so many civilians. The article quoted enough counterinsurgency experts who felt that way to make the concept seem reasonable, and if it’s reasonable that we are doing something unproductive, let’s explore and find out. But can you imagine the shitstorm that would result if a politician actually tried to investigate the matter? If Obama announced a commission to explore the efficacy of drone strikes, Rush Limbaugh and his ilk would go ballistic (note the clever missile-based double entendre).

That thought made me realize that it’s incredibly hard to solve problems when we are unable to even discuss the problems. The possible counterproductivity of drone strikes is a legitimate issue. The question of whether a government-run health care plan is a good idea, especially given the overwhelming cost of Medicare, is a legitimate issue. How best to reform our financial system is a legitimate issue. But so many attempts to discuss these issues are drowned in demagoguery that we never get anywhere. For example, John Boehner (R-Ohio, House minority leader, complete douche) called health care reform “the greatest threat to freedom he has ever seen.” There are plenty of reasons to criticize the health care reform bill, but that sort of hyperbole doesn’t serve any policy purpose. Since both sides of the aisle agree that some reform is needed, wouldn’t it be more productive to have a reasonable discussion of policy than to ignore the facts and say things that are clearly false?

So here is what I encourage us all to do: stop, listen and think.

  • Stop: Before responding, take the time to hear somebody’s full argument. Don’t start preparing your response before they are done. Or before they have even started.
  • Listen: Actually listen to the argument, so that you can understand what they are saying. Don’t assume that you can extrapolate from who they are to what they will say.
  • Think: Truly think about what was said. What are the assumptions? Does the logic flow? Where do you agree or disagree?

If more people were to stop, listen and think, we could have far more effective discussions in this country. Of course, there is really a fourth step: respond honestly. In my example above, John Boehner doesn’t really think that health care reform is the greatest threat to freedom ever. He knows it’s not. He is just saying that because he’s been trained to talk in hyperbolic sound bites. And because he’s kind of an ass. But if we all – bloggers, protestors, commentators, politicians – can begin responding honestly after we stop, listen and think, then maybe we can all be trained to talk in terms of policies and positions instead of attacks and sound bites.