Felix Salmon

Tracy Alloway has the transcript of the White House background briefing on the new, Volcker-inspired, banking regulations. And yes, they do require extra legislation:

We want to take legislative steps. We will ask Chairman Dodd and Chairman Frank to supplement what is already in their bills with legislative steps that don’t just authorize but actually require regulators to prohibit one form of that risky activity, and that’s proprietary trading by firms that own banks. So it is a legislative step.

While there is an element of better-late-than-never here, there’s no doubt that this legislation really should have been included in the original House bill. Going back and asking Barney Frank to include a whole new set of rules and regulations after already having battled hard to get the present version through seems highly inefficient, at the very least.

And here’s the bit that Simon Johnson was so upset about:

The liability cap will be structured in such a way that it constrains future growth that leads to excessive concentration in our financial system. It’s not designed to reduce the share of any existing firm.

It’s designed to make sure that we don’t end up with a system that some other countries have in the world, in which there’s enormous concentration in their financial sector. So it’s designed to constrain future growth. It’s not about reducing liabilities within — the share within the existing structure…

The focus really is on making sure that in the future that firms don’t grow so concentrated that they would exceed this kind of cap overall on sources of funding. It’s designed to constrain future growth so that we don’t have the extent of concentration you see in many other major advanced countries in the world that were — resulted in way more devastating damage to those countries during the financial crisis even than occurred here in the United States.

In other words, the biggest US banks aren’t too big right now, we just want to make sure that they don’t get a lot bigger.

The problem is that the biggest US banks are too big. And being too big is not a relative thing, it’s an absolute thing. Yes, RBS was bigger, in relation to UK GDP, than any bank in the US — just as UBS was enormous relative to Swiss GDP. But JP Morgan Chase is bigger than either of them. And in a globally interconnected world of multinational financial institutions, it’s silly to give the biggest US institutions a pass just because they’re based in a large country. Essentially, the government seems to be saying “we’ve got lots of taxpayers, so we can afford to bail these institutions out if necessary”. But of course they can’t. And as a result, the liability cap should be set to prevent Goldman Sachs or anybody else from having a bloated trillion-dollar balance sheet. Such things aren’t necessary, and the systemic risk they pose is potentially devastating.

Since the Volcker Rule hasn’t even begun to be codified in the form of actual legislation yet, no one has much of a clue how much the ban on prop trading and internal hedge funds might reduce big banks’ balance sheets. But if you read the transcript, the Senior Administration Officials make no attempt to spin the ban as a way to shrink banks. Instead, they simply say that it’s not fair for banks to use their government backstop to get cheap funding for proprietary bets.

My feeling, then, is that the effect of this legislation on bank size will be marginal even if it passes — and that there’s a very good chance it won’t even get that far. I fear that in an attempt to gain the rhetorical high ground, the administration has only succeeded in giving itself yet another intractable legislative headache.

2009 was the year when stocks and unemployment both rose substantially: the ultra-loose monetary policies being followed by central banks around the world seemed to help capital more than they did labor. That’s good for banks in general, and for Goldman Sachs in particular, which makes its money from markets rather than from lending.

But Goldman’s executives seem to have realized the implication here: that the banks own employees would be foolish to leave right now, even if they’re paid much less than they might have had reason to expect. Last week we learned that their compensation would be just 36% of total revenues; today, we’re told that partners (but not necessarily top traders) in London are having their bonuses capped at £1 million.

I’m sure they’re unhappy about this: after all, Deutsche Bank made an early decision that any pain from the UK bonus tax would be shared across the organization, rather than being concentrated on senior executives in London. It was probably reasonable to assume that the one-for-all-and-all-for-one culture of Goldman Sachs would take the same path, but no: you can be sure that partners everywhere else in the world are going to make significantly more than their London counterparts.

There might be an element of nod-and-a-wink here, with the top brass at Goldman telling the London partners privately that they can expect an outsize bonus for 2010, once the tax is out of the way. But what’s obvious is that Goldman doesn’t particularly feel that it’s competing for talent with other banks this year — at least not at the partner level. If you’ve got a good career at Goldman Sachs, you’re better of eating one year’s reduced bonus than you are jumping shop to somewhere with a much less certain future.

Barack Obama ran what was arguably the most disciplined and on-message presidential campaign in history. But all that the Republicans need to do right now to ensure that financial regulatory reform never happens is sit back and watch the Democrats fight each other to a bloody stalemate. It’s inconceivable that the GOP would ever allow itself to get into a mess like this.

I don’t think anybody anticipated this turn of events back in June, when we saw the first relatively detailed Treasury proposal on the subject. Sure, there were a lot of problems with it, but it was necessary, the Democrats had control of both houses of Congress, and at least it was something. What’s more, insofar as there were weaknesses in the proposal, they were generally a direct consequence of the fact that Treasury had been careful to put together a proposal which could pass political muster.

Except, Treasury’s finely-honed political calculations turned out to be somewhat awry: it wasn’t long before Barney Frank was tearing into one of the key legs of the proposal, removing both community banks and the vanilla option from the Consumer Financial Protection Agency.

And then Chris Dodd came along, with his own set of entirely idiosyncratic ideas: where Treasury put the Fed at the center of the regulatory nexus, for instance, Dodd wanted to remove it from that role entirely. And where Treasury soft-pedaled on regulatory consolidation, for fear of angering powerful constituencies, Dodd went much further, combining not only the Office of the Comptroller of the Currency with the Office of Thrift Savings, but throwing in the Federal Deposit Insurance Corporation for good measure.

At this point, all semblance of party discipline had clearly broken down. Did the Republican leadership in the Senate ever put forward versions of White House proposals which were fundamentally at odds with what George W Bush’s White House wanted? There’s a time and a place for negotiating these things, but Dodd seemed to have slept through that entire time period, releasing his list of bright ideas a good five months after the release of the Treasury plan should have put an end to the discussions.

And then, of course, Scott Brown won in Massachusetts, and the White House, in something of a panicked move, decided to marginalize its key economic advisors — Tim Geithner and Larry Summers — in favor of the more radical, if much less thought-through, ideas of Paul Volcker. Again, there’s a lot to like in those ideas. But we’re now up to four competing conceptions of financial regulatory reform: Treasury’s, Frank’s, Dodd’s, and Volcker’s. And that’s just within the Democratic party; the Republicans, of course, rejuvenated by the result in Massachusetts, have their own ideas. And if you thought Big Finance was powerful before the Supreme Court decision in Citizens United vs FEC, you can imagine how wary many Democrats are now of risking the ire of the lobby with the deepest pockets of all — and how keen they are to have its support.

The upshot of the whole sorry story is that the Democrats seem to be very good at doing the divide-and-conquer work of the banking lobby all on their own; the lobbyists’ main job is to stand back, keep quiet, and watch the process get mired down in endless second-guessing and debate. After all, the one thing that everybody in government can agree on right now is that they want to crack down on bankers in some way or other. The problem is that with no end in sight to the fight between all the competing ideas currently doing battle in Washington, there’s a very good chance that none of them will win, and that we’ll end up with the worst of all possible worlds: a continuation of the status quo.

Update: Tim Fernholz responds.

I think, but I’m not sure, that I’m a key vector through which A Tool to Deceive and Slaughter started going viral: my blog entry on the artwork got picked up by Tyler Cowen (and others) before the artist, Caleb Larsen, was interviewed by Wired.co.uk in a story which was then Slashdotted. The work, which was originally priced at $2,500, had a couple of days to go when I blogged it, but didn’t end up selling in that auction.

When the piece automatically relisted itself, however, the bids started rolling in, and the latest bid is $4,250 with over 4 days to go. Since no one bought the work in the previous auction, all of that money is going to go to Larsen (and possibly his gallery).

So here’s one question: say that you put in a bid after seeing my blog entry, and won the piece for $2,500. Would you be sitting on an immediate profit of $1,750 right now, less $262 for Larsen, who gets 15% of any appreciation in value? Or is the fact that Larsen is still the seller one of the reasons for the work’s current price?

It would seem to be reasonably obvious that the higher in value this auction goes, the greater the probability that it will mark the highest point in the piece’s long-term price trajectory, which could weirdly undercut the whole point of the piece. Let’s say that it sells for $10,000, and that the buyer then immediately lists it on eBay for its new market value of $10,000. If it doesn’t sell at that level for a few weeks or months, there’s a good chance that it will never again reach that level.

So what happens when the winning bidder has owned the piece for a while? Here’s what the contract says:

Upon purchasing the Artwork, Collector may establish a new value for the Artwork. The new value may not exceed current market expectations for the Artwork based on the current value of work by the Artist. This value may be reassessed quarterly. This value will be set as the minimum bid of the auction.

This language, it seems to me, allows the winning bidder to keep the minimum $10,000 price tag on the artwork more or less in perpetuity. It’s justifiable the first time around, and then going forwards the winner has only a right, and no obligation, to reduce that price tag if the market value falls. (The value may be reassessed quarterly, but it doesn’t have to be.)

If the buyer wants to sell the work, then, perhaps because eBay starts charging her an insertion fee every week, she can bring down the price to something more likely to clear. But if she likes it and wants to keep this seemingly uncollectable artwork for herself, she probably can — at least until someone is willing to pay more than she did for it.

The upshot is that there’s a decent chance of a rather ironic outcome to this auction: that the piece which constantly sells itself on eBay only ever gets sold once, by the artist to a collector. Just like a normal work of art which never tries to sell itself at all.

It’s auf Wiedersehen but not goodbye to Justin Fox, as he leaves his perch at Time to blog anew at HBR come Monday. His value to the blogosphere was clear from his very first post, a thousand-word disquisition on how boards of directors are a bit like an tonsils: “a largely useless, if mostly harmless, institution”. It included this passage:

As recently as the early 1900s, the board had a pretty clear function. It was the perch from which big shareholders and creditors watched carefully over the men they had hired to manage their companies (as is true today at companies controlled by private equity firms). But the very success of some of these pioneers of industrial capitalism led to the undoing of this model. Corporations outlived their founding shareholders, outgrew the need to borrow money, and, as the stock market captured the public imagination in the 1920s, found their shares in the hands of thousands of small investors in no position to watch carefully over anything. Managers naturally took charge, and boards became appendages entirely beholden to them.

If only the Chief Justice of the United States spent more time reading blogs! James Fallows finds this passage from oral arguments in the case in which John Roberts helped overturn over a century of jurisprudence to allow corporations to spend unlimited amounts of money in political campaigns:

” ‘When corporations use other people’s money to electioneer,’ as Kagan explained, ‘that is a harm not just to the shareholders themselves but a sort of a broader harm to the public,’ because it distorts the political process to inject large sums of individuals’ money in support of candidates whom they may well oppose.

“Roberts sharply challenged this line of argument. ‘Isn’t it extraordinarily paternalistic,’ he asked, ‘for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it? … ‘ “We the government have to protect you naive shareholders.” ‘

Of course, as both Fox and Fallows could have explained to Roberts, that isn’t how it works at all. Here’s Fallows, making mincemeat of Roberts’s argument:

Virtually all such “wealth” as my wife and I hold, apart from our house, is in low-cost indexed mutual retirement funds. I literally have no idea which specific companies I might have bigger or smaller positions in. By the prevailing wisdom of the day, I’m behaving rationally for a non-expert prudent investor. By Roberts’ standard, I am “too stupid to keep track” of what every one of these companies is doing and shifting my positions day by day in response. Or maybe just too lazy.

As long ago as 2003, Roberts owned no fewer than 46 different common stocks, on top of 31 different mutual funds, one ETF, and a REIT. I very much doubt that he was keeping track of what all of the corporations he owned were doing, and selling his shares or objecting in the corporate context if he didn’t like it. And I don’t think that he believed that his mutual-fund managers were doing that either. Maybe he assumed that the magical qualities of the efficient market hypothesis meant that he didn’t need to do that, and that some other group of shareholders would do it for him. Although it’s hard to understand why someone who believed so strongly in the EMH would own 46 individual common stocks.

In any case, a perusal of Justin’s book would surely have disabused Roberts of his faith in the EMH. But clearly, Roberts has read Fox in neither blog nor book form, and as a result we are now left with a devastating piece of jurisprudence which threatens to fundamentally alter US democracy for decades to come. Of course, it’s not Justin’s fault that Roberts didn’t read him. But it does go to show just how powerful a single blog entry can, theoretically, be.

What would happen if Ben Bernanke withdrew his name from consideration as Fed chairman tomorrow, and Barack Obama picked up the phone and asked Paul Krugman to step into the breach? Bruce Bartlett reckons that “Paul has enough sense not to accept the position even if it is offered–just as Milton Friedman rejected Reagan’s offer for him to replace Volcker in 1982″ — but I’m not so sure. After Simon Johnson proposed the idea this morning Krugman said that it was “crazy” — but he did so without saying that he would refuse the job if offered. I think he’s sensible to leave the door ajar: it’s really hard to say no to a president who asks you to serve your country by taking what Matt Yglesias calls “the single most important domestic policy job in the country”.

Take another look at that Krugman blog entry: most of it is taken up with reasons not to confirm Bernanke. The only reason to confirm Bernanke, in Krugman’s book, is that he’s “a great economist” who acted forcefully at the height of the crisis. But we’re not at the height of the crisis any more, and Bernanke isn’t about to leave the FOMC any time soon — in fact, he’d probably stay on as chairman* more or less indefinitely, as Krugman or any other potential successor wended their way through a long and inevitably partisan nomination process. Would he lose power and influence as a lame duck? Not if the new nominee was public in supporting his policies, as Krugman probably would be.

Krugman asks the key question:

Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?

The answer, I’m beginning to think, might actually be yes. Right now, the FOMC isn’t really doing very much: it’s keeping rates at zero, and trying to wind down some of the extraordinary measures which it implemented during the crisis. But there’s a very good chance that the biggest job of the next Fed chairman is not going to be monetary policy: instead, it’s going to be bank regulation, once some kind of financial-reform bill has been passed in to law. And on the regulatory front, Bernanke — who opposes the creation of a Consumer Finance Protection Agency, and who sat meekly by as the Fed allowed all manner of mortgage abuses during the subprime boom — looks very much like the conservative Republican that Yglesias says he is.

In an ideal world, then, it might well make sense to have Bernanke stay on the FOMC — as he will, his term as governor doesn’t expire until 2016, and he could easily be re-nominated as a governor at that point — while Krugman, as chairman, steered the Fed as a whole towards an approach to bank regulation which is much closer to the Obama/Volcker/Warren view of the world than to the Bernanke/Summers/Geithner view of the world.

The problem, of course, is that it’s incredibly hard to get there from here, and given the obstacles to getting anything done now that the Republicans in the Senate can block anything they want, it doesn’t make a lot of sense to put a huge amount of political capital into trying to get a partisan like Krugman through the confirmation process.

The base-case scenario is still that Bernanke gets confirmed as Fed chairman, and that when some version of financial regulatory reform finally gets signed into law, the Fed’s powers of regulatory oversight will be boosted substantially. At that point, the nation will need the Fed to be a strong regulator which takes its new responsibilities seriously and is proactive about restraining Wall Street’s natural tendencies towards societally-dangerous behavior.

I’m not convinced that Bernanke is the best person to run such an organization — after helping to engineer, during the crisis, a series of mergers which only exacerbated the problems of too-big-to-fail banks, he has done nothing to counteract the effects of his actions, nor has he indicated that he would like to do so in future. As Krugman says, he seems to have “been assimilated by the banking Borg”. The Fed is the organization best placed to be a tough and effective regulator — but it can only fulfill that role if it has the willingness as well as the ability to reign in America’s biggest banks.

On the other hand, there are now four conceptions of financial regulatory reform floating around Washington — Treasury’s, Frank’s, Dodd’s, and Volcker’s. It’s a mug’s game to presume to predict how they’ll all coalesce into a final law, which means that it’s a bit silly to start nominating a Fed chairman in the expectation that the job will, in future, include a lot more regulatory oversight than it does at present. And on the monetary-policy front, Bernanke is as good a choice as anybody could hope for.

*Update: Either that, or Donald Cohn, his vice-chair, would take over as chairman.

Does Mexico make more from illegal drugs than it does from oil? I’d love to see where these numbers are coming from — Reuters

Barney Frank: Let’s abolish Fannie and Freddie — Globe

Wyclef Jean Demanded a $100,000 Fee to Appear at a Fundraiser for His Own Hometown — Gawker

On the difficulty of trying to define prop trading — Kid Dynamite

Dave Winer’s email requesting he be removed from Twitter’s suggested user list — Scripting (Background here)

The Chinese population ages 20-24 will fall from 125 million in 2010 to just 68 million in 2020 — Caing

Dominoes Keep Falling After Scott Brown’s Win. Is Bernanke next? — Atlantic Wire

Nicholas Carr uses Hal Varian to explain why paywalls can work in theory. But in practice, for the NYT? Jury out — Rough Type

Did Vladimir Putin meet Ronald Reagan? — Hot Air

Go read this interview with Steve Waldman, one of the econoblogosphere’s most thoughtful and intelligent writers. Here he is on the morals of walking away from your mortgage:

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

And here he is on the fetish of homeownership:

I think the government has chronically oversubsidized mortgage lending and homeownership. We cannot know what would have been, but I think we’d have a different and better housing market if we didn’t tilt the scales of the buy/rent decision towards BUY BUY BUY. The business of shelter provision for middle class families is horribly inefficient, literally a cottage industry. Absent all the subsidies, middle-class housing might have become professionalized by now, which could lead to enormous savings in money and aggravation for people who now waste time fighting with plumbers and roofers on an ad hoc basis. It’s remarkable that homeownership rates have kept rising even as people’s tenure in jobs has fallen and mobility has grown more valuable. We’ve made homeownership a totem of middle class prosperity. In doing so, we may have, um, foreclosed consideration of a variety of superior arrangements.

I love the idea of “professionalizing” housing: call it the German model. I’d note that an interesting hybrid exists in Manhattan: the co-op apartment building, where you pay a substantial monthly fee to a landlord-like figure who deals with most of the headaches of ownership, and where the board insists on high minimum-net-worth requirements before anybody can buy into the building, to help avoid the risk of foreclosure. It doesn’t really scale, though, and it doesn’t solve the mobility problem.

In order to believe that there was a connection between moral hazard and the financial crisis, says Jim Surowiecki,

you also have to believe that the banks knew that what they were doing was reckless, and that there was a meaningful chance that it would wreck their companies, but decided that it was still worth doing because if everything went south, the government would step in. And that, even before Dimon’s comment yesterday, always seemed improbable.

But look what has happened in Sweden, when the government imposed a too-big-to-fail fee on its biggest banks, to help make up for the fact that it would have to bail them out in the event of a crisis.

According to Swedish officials, the stability fee has been welcomed by the banks that dominate the financial system. Smaller credit and financing companies complained bitterly, though, arguing that they would never be helped by the government in the event of a failure.

Maybe this is just the difference between Swedes and Americans — but I do think that there is a very real benefit to banks of having a government backstop. And they know it.

Gabriel Snyder does his own math, and comes to exactly the same conclusion as both me and Erick Schonfeld: optimistically speaking, the NYT is likely to make no more than about $35 million a year from a nytimes.com paywall — a small fraction of its digital advertising revenues. Has anybody come up with a bigger number than that?

I’m not sure what to make of this, though, from Snyder:

Quantcast’s estimate of NYTimes.com traffic includes a breakdown of how often each of those users are actually visiting the site. Like most sites, the Times has a tiny core, just 1% or 170,000 users, who visit the site more than one time per day or 30 times a month.

Interestingly, in order to get to his $34 million figure, Snyder has to have double that number of people paying $100 a year. But here’s the thing: the NYT has 800,000 paying subscribers already — and the paper has said that they will have free access to the website whatever happens. One big question, then, is the degree of overlap between the most loyal core of nytimes.com readers, on the one hand, and the equally-loyal, and larger, group of NYT print subscribers, on the other. If just 25% of the NYT’s print subscribers visit the website daily, that’s all of the website’s most loyal visitors right there!

So while the maximum upside to implementing a paywall is $35 million or so in annual subscription revenues, the minimum upside is zero. I don’t actually think that the number of daily nytimes.com readers is as low as 170,000, and I do think that the NYT should somehow be able to make at least as much money out of its new paywall as it did from TimesSelect — something on the order of $10 million a year. But given the number of stories that the NYT is going to give away to every reader for free, that’s by no means a foregone conclusion.

The Epicurean Dealmaker has some stern words for those — Andrew Ross Sorkin springs to mind — who would say that there are some things only big banks can do:

The assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock… Wholesale institutional clients make a point of using more than one investment or commercial bank for virtually all their financial transactions, no matter what they are. In fact, the bigger the deal, the more banks the customer usually uses. This is because banking clients want to 1) spread transaction financing and execution risk across multiple service providers and 2) make sure none of these oligopolist bastards has an exclusive right to grab the client by the short and curlies. Just look at securities underwriting data, for chrissakes: as the number of independent investment banks has shrunk (and their product lines, geographic reach, and balance sheets have swollen) over the past 20 years, the average number of book running underwriters per transaction has risen. This is not the result one should expect if one believes customers prefer to use giant universal banks as one-stop shops.

The next time that you hear a senior investment banker intoning ponderously about the importance of being able to serve clients across multiple geographic regions and asset classes, ask for references. These banks all claim to be so client-focused, but where are the clients’ encomia to the megabank model?

If there was a wave of jubilation in corporate America when JP Morgan bought Bear and BofA bought Merrill, I think I missed it. Is there a single multinational saying “this is great, now we can use just one institution for all our banking needs”? Of course not. And even if there was a bank big enough to keep the entirety of a $20 billion loan to Pfizer on its own balance sheet, there’s no way that Pfizer would accept such a deal.

Being big is great, if you’re a big bank. But for the rest of us, big banks do little but increase systemic risk. There’s certainly no indication of any economies of scale when it comes to things like fees on our checking accounts. So the next time you think that someone else surely values these banks’ size, think again. Yes, they can be extremely profitable. But that doesn’t necessarily mean they’re valuable, on a societal level.

Lending Club CEO Renaud Laplanche said something very interesting in his response to my most recent post on peer-to-peer lending. “Currently, the platform is ‘demand constrained”, meaning that we have more investors willing to invest in these loans than loans available,’ he wrote.

That’s a big change from when I met Laplanche in April, so I asked him what has happened since then. He replied:

It is a big change indeed. The platform went from being supply-constrained most of last year to now being demand-constrained. I believe 3 factors contributed to the shift:

1. Our track record continues to get longer, inspiring more confidence to investors, who now invest larger amounts. The average net return after defaults and fees remains over 9%.

2. The dynamics on both sides of the platform are different: investors are repeat customers and the entire base contributes each month, with more than 10,000 investors contributing each an additional $500 to their account each month on average. On the other side, each borrower takes one loan and that’s pretty much it for the next 3 years. We do very little upsell to borrowers, for risk management reasons. So the base getting bigger is not helpful on the borrower side, for now.

3. There are certainly macro-economic factors, with investors’ sentiment evolving. Investors are a lot less risk-averse now than they were a year ago, and those who were only taking FDIC-insured products are looking for yield again.

There’s good news and bad news here. The good news is that the investors keep on coming back with new money: they’re happy with the returns they’re getting and the default rates they’re seeing. But the bad news is that it’s becoming harder to find sufficient borrowers to meet investor demand — and no investor wants to put thousands of dollars into Lending Club, only to see it kept in cash, earning no interest.

The pressure on Lending Club to weaken its underwriting standards, then, is going to be intense — but it’s precisely those underwriting standards which investors are relying on and which set Lending Club apart from the likes of Prosper.

The best-case scenario here, of course, is that Lending Club will become better known among individuals and small businesses wanting to borrow money, and will be able to do much more matching of investors with borrowers. But I also have a concern that Lending Club, and other peer-to-peer lenders, risk becoming the Heloc of the new decade.

Back during the housing boom, people who found themselves over their heads with credit cards could wipe the slate clean(ish) by paying them all off with a home equity line of credit. The problem was that if you’ve gotten yourself over your head with credit cards in the past, you’re likely to do so again in the future — only with that big Heloc to add to the total debt load.

By far the most popular category of loans on Lending Club is debt consolidation. And indeed it makes perfect financial sense for people paying enormous interest rates on their credit cards to refinance it all at Lending Club, tear up their cards, and embark upon a life of newly-discovered frugality. On the other hand, it makes very little sense for those people to refinance everything at Lending Club if the main effect of doing so is simply to reopen those old credit card lines, and find themselves in a situation down the road where they’re paying not only the Lending Club obligations but also a whole pile of new credit-card obligations on top.

For a while there, at the beginning of 2009, I believed that Americans really were rediscovering the wonders of living within their means. But in hindsight they simply didn’t have any money or credit. If the Lending Club spigots continue to open up, we might just be creating a whole new asset class of loans which are weighing down Americans who should never have spent so much in the first place. Personal expenditure, it seems, will always expand to fill the amount of credit available. And that might not bode well for Lending Club investors down the road. Can the company’s underwriting standards stop that from happening? Right now, it’s impossible to tell for sure.

There’s a lot of blame to go round for the chaotic implosion of Lehman Brothers in September 2008. But very high up the list is the utter lack of communication and cooperation between authorities in the US and the UK: while panicked all-nighters were being pulled at the New York Fed offices, no one attempted to bring the Brits into the loop until it was too late. And given that the only solution was an acquisition by a British bank — Barclays — the failure to have UK regulators on board proved fatal.

So it’s good news that regulators in the US and the UK have signed a memorandum of understanding, detailing how they’re going to work much better together in future. Except, the MoU only covers depository institutions, which means, I think, that it wouldn’t have helped with Lehman anyway. And then there’s the issue that the whole thing is, in the words of Paul Murphy, “complete guff“. There’s lots of passive voice (“as the condition of a Firm deteriorates, it is expected that cooperation between the Authorities will intensify”), and even more CYA (“This MOU does not create any legally binding obligations, … or confer upon any Person the right or ability directly or indirectly to obtain… any information”).

What’s more, there’s a risk that this kind of thing has the same deleterious effect that bilateral free trade agreements have on the WTO: if the UK and the US think that they have worked things out, then there will be less urgency to put together something genuinely international and comprehensive. So while Murphy thinks it’s all “a bit academic”, I fear it might even work out to be positively harmful.

Jay Rosen says he’s “uncommitted” in terms of passing judgment on the NYT metering plan, but the broad outlines of his take seem clear: insofar as it’s a metering plan as that term is commonly understood, it’s not a good idea. But it isn’t, and we still don’t really understand what it is, so it’s still too early to judge.

Jay explains most of this in his latest post, where he talks about a pledge from NYT CEO Janet Robinson and digital chief Martin Nisenholtz that “If you are coming to NYTimes.com from another Web site and it brings you to our site to view an article, you will have access to that article and it will not count toward your allotment of free ones.”

Jay is right that insofar as we can take this at face value, it massively changes the whole concept of what a metered paywall is, to the point of inventing a whole new approach. Certainly, if this is true, I’ll happily continue to link to the NYT just as I’m doing right now, since all my readers will be able to follow my link, no matter how many times they’ve accessed nytimes.com that month, and no matter whether or not they’re subscribers. In fact, this is exactly what I said the NYT should do in constructing a metered system.

But will the NYT follow through on this pledge? It seems to me that they’re simply asking everybody to use external aggregators as a replacement for the nytimes.com homepage as the best tool for reading the site. Even people using the NYT’s own RSS feeds to find the stories they want to read might well be able to consume an unlimited amount of online content for free.

Or to put it another way: if this is true, then they’re not actually charging for NYT content; they’re charging for NYT navigation. What you get charged for isn’t reading NYT stories, but rather navigating from one NYT page to another. If you get to that second page any other way — by following a link in your RSS reader or your favorite blog or a news aggregator of some description — then you need no subscription at all.

Now, the navigation at nytimes.com is excellent, and I can see that some people might be willing to pay for it. But it’s a pretty weird thing to charge for.

What’s more, a scheme along these lines ends up hurting the NYT’s blogs most of all. The way that the NYT’s blogs are formatted, to read them you need to navigate separately from post to post — exactly the kind of behavior which will get charged under the new system. Reading a long magazine article costs nothing, if you get there from an external link; reading Paul Krugman’s blog, by contrast, will use up a lot of your monthly allotment, if you want to catch up on his most recent posts.

So while this policy is great for external blogs, like mine, it’s atrocious for internal blogs. Is that really something the NYT wants? I don’t think so — and as a result I suspect we might see some backtracking on this front between now and implementation.

Update: Josh Young makes a good point when he says there’s another way of looking at this paywall: it’s essentially a charge for being ignorant of any doors to NYT content beyond the nytimes.com homepage. Which dovetails with my thesis that the real target here is print subscribers, who tend to be less web-savvy.

There are two big questions overhanging the Volcker/Obama announcement yesterday: will it be enacted, and if it is, will it make any difference.

If you look at Obama’s rhetoric during the announcement (“if these folks want a fight, it’s a fight I’m ready to have”), the enemy is Big Finance — and certainly the Republicans would not look good if they attempted to filibuster a bill like this. The real problem, however, is the Democrats, who are surely more desperate for financial-industry money than ever, given yesterday’s Supreme Court ruling, and who have in recent years raised much more money from Wall Street than Republicans have.

Mark Thoma is as pessimistic as I’ve seen him Economics of Contempt is pessimistic when it comes to the chances that the Democrats will line up behind Obama on this one:

I don’t even know why I took the time to write about this, because there’s zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media’s focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill.

The question here is how much damage Dodd and Frank and Congressional Democrats in general will suffer if, after lining up next to Volcker and Obama yesterday, they essentially ignore the whole thing. Can failure to insert a Volcker rule into financial-reform legislation harm them politically? It’s not easy to see how it would. So I suspect that all eyes should be on Dodd and Frank for the time being: unless and until they start being as friendly with Volcker as Obama has suddenly become, there’s a good chance that this legislation will never happen. Given Dodd’s attitude to the Consumer Finance Protection Agency, I’m not holding my breath. And if you think that yesterday’s fall in the stock-market is some kind of indication that the legislation will happen, Barry Ritholtz has something to say to you.

Still, let’s say something like this passes. Will it be effective? On this front I’m cautiously optimistic. No, it won’t singlehandedly prevent another financial crisis — but I’m getting a bit tired, at this point, of people criticizing necessary moves on the grounds that they’re not sufficient. It’s true that excessive proprietary risk-taking at banks was not the proximate cause of the crisis, but that doesn’t mean we shouldn’t scale such activity back.

It’s important to appreciate, here, the pecking order within investment banks: traders rule, these days — they make orders of magnitude more money than bankers — and if you’re a trader, the more risk you take, the more money you make.

Traders start off small, filling client orders. As they become more experienced and more successful, they’re allowed to manage increasingly-large positions. You don’t need to be a prop trader to do that. Let’s say you’re trading equities, and you want to make a bet that A will rise while B won’t. Then every time a client sells you a block of A stock, you take your sweet time selling it on into the market, while your bid on B stock is less aggressive, and you will sell it with more alacrity. You’re still a client-focused market-maker, but you’re taking on extra proprietary risk.

Eventually, your risk book and your compensation becomes so big that you move over to the prop desk, where you don’t need to worry about dealing with individual clients any more — you’re just in the market, making short-term directional bets.

If you become very good at that, you’re going to start looking at the amount of money that you’re making for your employer, and thinking that you could capture a much larger chunk of that sum if you were running your own hedge fund. You then either strike out on your own, or else you threaten to strike out on your own, and stay only if your employer upgrades you from prop-desk to fully-fledged internal hedge fund.

For some reason, the vast majority of external and internal hedge funds which are started by former star traders don’t do very well: look at Goldman’s Global Alpha, or UBS’s Dillon Read Capital Management, or even for that matter Old Lane Capital Partners, an external hedge fund founded by Morgan Stanley refugees which then became an internal hedge fund at Citigroup. (Or, for that matter, just look at the internal Bear Stearns hedge funds whose collapse marked the beginning of the financial crisis.) But in any case, there’s no doubt that such funds add to the overall riskiness of their parent bank.

It’s true, then, that if you ban internal prop desks, a lot of those prop trades and traders will simply remain on the trading floor proper, where they’re nominally acting on behalf of clients — much of that risk will remain within the organization. But at the same time, if the Volcker rule passes, traders at investment banks will no longer be able to aspire to a career path where they first become prop traders and then eventually leave to start their own hedge fund, either internally or externally.

What’s more, as John Kemp has pointed out, the very fact that prop trading is banned would force regulators to be much more in market-markers’ faces than they have been until now. Thoma says that we’d be better off just boosting the budget of the regulatory agencies, but the fact is that the Volcker rule would probably have that effect. Here’s Kemp:

Enforcing a separation between proprietary trading and market making will require considerable intrusion from regulators (either in the form of rather blunt prohibitions or very intensive supervisory visits and demands for data).

Until now, supervisors have been reluctant to interfere this much in the internal workings of banks. But beefed up regulation is the inevitable condition for taxpayer support, and Obama’s endorsement will stiffen regulators’ resolve in the United States and elsewhere.

Or, to put it another way, the Volcker rule is a means to the end of increased regulatory oversight of broker-dealers. I sincerely hope it becomes a reality; we’ll see how much pressure is brought to bear on Frank and Dodd to make it so.

Update: Sorry, I thought I was quoting Mark Thoma when in fact I was quoting Economics of Contempt. It’s hard to tell when <ol> lists are blockquoted!