James Pethokoukis

Politics and policy from inside Washington

Hey, what about taxes and housing policy?

Jun 17, 2009 14:07 UTC

Arnold Kling makes some good points about what is missing in the White House financial reform plan:

Two gaping holes in the white paper are housing policy and tax policy. On housing policy, a wide range of interest groups promotes leveraged purchases of houses. The net effects of this are the opposite of good public policy–private benefits for people in the real estate and mortgage industries with social costs in the form of paying for subsidies and cleaning up the mess.

Both the President and the white paper blame this excess leverage on greed and faulty compensation structures. What about taxes and subsidies? Our high corporate tax rate, along with the deductibility of interest for corporations, encourages corporations to look for ways to minimize equity financing. For individuals, government-subsidized mortgages and the tax deductibility of mortgage interest help to encourage over-leveraging.

Overall, the white paper offers a highly skewed narrative of the financial crisis. All of the misbehavior took place in the private sector. No mention is made of government policies that contributed. Instead, the story is one of government that needed a better regulatory structure and more powers.

Intellectually, this is a very disappointing piece of work. But given political considerations, I cannot say that I am surprised.

My quick spin on Obama’s financial reform plan

Jun 17, 2009 13:56 UTC

After perusing the 85-page draft,  a few brief thoughts come to mind, though more later:

1) This plan has got to be a great disappointment for those who want to “break up the banks” or put in place limits on their size and scope.

2) Following on my first point, the plan really does nothing about the supposed “too big too fail” problem. In fact, it enshrines the concept by making the Fed the watchdog over these firms. Rather, the reforms try and make sure that TBTF firms don’t get in trouble to begin with. But there is a huge moral hazard issue in place that has not gone away.

3) I think it is unlikely that these reforms get passed this year, what with the SC nomination and healthcare and climate change to deal with — all of which are more important to Obama and his legacy than financial reform.

4) Also enshrined: the Community Reinvestment Act. Great.

5) It is interesting that the Bernanke and Bair are talking about financial literacy today since this plan assumes financial literacy is an impossibility, thus it advocates the creation of a consumer safety commission for financial products.

6) And as I have written before, giving the Fed more regulatory influence inherently makes it a more political institution. Better to have it focus on monetary policy. This is going to be  BIG issue for Congress.


HVCC—new legislation for appraisals. hopefully it will be repealed. i have a qualified buyer wanting to buy dream home on the lake and the property was appraised incorrectly. The appraiser used values of homes not on the lake, under devaluating the property by $90K. With this new legislation the appraiser cannot have any communication with anyone but the lender.
Meanwhile my couple have sold their home and there are no other properties that are comparable in the area.

Posted by Maria Seay | Report as abusive

Bill Clinton for Fed chairman

Jun 16, 2009 20:47 UTC

As long as we are politicizing the Federal Reserve and shredding its independence, why not Bill Clinton for Fed chairman? It’s not as loopy an idea as you might think. While the Fed chief has typically been an economist or banker, that’s not always true of central bankers in other countries. The former head of Iceland’s central bank, David Oddsson, previously served as that nation’s prime minister.

The thing is, when you look at the outlines of the Obama administration’s plan to revamp the U.S. financial regulatory system, a career politician as Fed chairman begins to kinda-sorta make sense. (Although Oddsson did turn out to be a bust.) According to an op-ed by White House economist Lawrence Summers and Treasury Secretary Timothy Geithner that generally described the plan, America’s central bank would grow in power and responsibility as it morphs into a systemic risk regulator. In addition to its continued monetary policy role, the SuperFed would supervise large and interconnected firms whose failure could threaten the stability of the financial system. (Why juice up the Fed? Since the central bank serves as a lender of last resort for the financial system, the government argues, why not give the power to help prevent problems for happening in the first place? That makes sense only if one overlooks the Fed’s so-so record as a regulator. One guess about who was supposed to be keeping tabs on Citigroup.)

Regulation by its very nature is a political act, balancing competing interests and claims from various stakeholders. (As it is, the Fed’s enlarged role during the financial crisis has drawn such lawmaker scrutiny that it is hiring its own lobbyist.) And how might those concerns mesh with the Fed’s role as an inflation fighter? The Fed already has a dual mandate — price stability and full employment — that some hawks argue serves as a policy distraction. A broader regulatory portfolio would further muck up the Fed’s mission. In another crisis, Regulator Fed might be tempted to argue for forbearance, so Monetary Fed wouldn’t have to resort to quantitative easing.

Charles Calomiris of Columbia Business School has pointed out, for example, that during the 1980s emerging market debt crisis many regulators loosened capital standards because they feared the macroeconomic impact of so many banks going bust. And what if a situation arises where what’s good for price stability is bad for the financial system?

Moreover, the White House plan would put in place a “council of regulators” to deal with systemic risk. How exactly the Fed would interact with that group is unknown, but it’s hardly a stretch to think a politician’s skill set would be helpful. And whose people skills are better than America’s 42nd president? Of course, a better choice would be to get the Fed out of the financial supervision game altogether and let it focus on monetary policy. Unfortunately, the Obama White House has gone out of its way to avoid political turf battles that would arise from a radical regulatory overhaul, which is why it is proposing so little consolidation of existing regulatory agencies. In fact, it might even be adding a new one in the form of a financial products safety commission.

There does look to be some good in the regulatory plan, particularly a push to make the originators of securitized loans keep some skin in the game. And it seems likely that at least the Office of Thrift Supervision is going to get the axe. Good ideas both. But while there may be a case for a financial regulator with systemic oversight, a SuperFed is not the answer.


Great comparison – the former chairman of Iceland’s Fed was not an economist. Perhaps you forgot that Iceland went bankrupt.

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Should budget-strapped California lose voting rights?

Jun 16, 2009 20:42 UTC

That is the tongue-in-cheek idea from Ed Morrissey:

Perhaps Congress should set the rules so that any state applying for a federal bailout will get treated like the District of Columbia. Since they seem keen on surrendering their sovereign status, they can have non-voting delegations to the House and Senate until they repay whatever federal dollars they take to cover their shortfall.  Considering the vast majority of California’s elected representatives on Capitol Hiill, that would be in practical terms a net plus for Congress, although an egregious violation of the Constitution.  (Yes, I’m being glib.)


Haha! Funny idea! I think though if there were a Democrat governing California, the fed’s would gladly throw money at them.

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Volcker: Mark-to-market accounting made things worse

Jun 16, 2009 20:29 UTC

The former Fed chair and current Obama adviser speaks (via the Big Picture):

There isn’t much doubt that attempts to enforce strict application of mark-to-market accounting procedures has contributed to confusion, uncertainty and inconsistencies among financial institutions. There is a strong case for reviewing the application of so-called fair value standards to commercial banks, insurance companies and perhaps certain other regulated financial institutions.

The problem is not only the difficulty of measuring value in highly disturbed market conditions. More broadly, strict mark-to-market accounting — entirely appropriate for trading operations and investment banks — may introduce a degree of volatility in reporting incompatible with the basic and essential business model of banks, which inherently intermediate maturity and credit risks.

Did Obamacrat healthcare reform just flatline?

Jun 16, 2009 20:19 UTC

Perhaps at least the public option. Francis Cianfrocca notes that the health insurance stocks are up strongly on a down market day:

So you’d guess they’re in big trouble, right? Think again. As I write around 1pm EDT on Tuesday the 16th, all four of those stocks are up sharply, anywhere from 3 to almost 7 percent. The other dominant companies in health insurance are the “Blues,” Blue Cross and Blue Shield. It’s harder to get financial information on them.

White House: Climate change could turn Minneapolis into Miami

Jun 16, 2009 18:25 UTC

This long awaited U.S. government report sees U.S. temps rising as much as  10 degrees this century. Here is the exec summary. Unless this stuff comes with an economic cost-benefit anlysis of mitigation strategies, you are really only getting half the story

Obama throws Kennedy healthcare bill under the bus

Jun 16, 2009 18:08 UTC

From ABC News:

This is not the Administration’s bill,” White House press secretary Robert Gibbs said in a statement following the Congressional Budget Office’s analysis of Sen. Ted Kennedy’s health care reform legislation, “and it’s not even the final Senate Committee bill.

My spin: Remember, this is the more liberal, robust approach to reform.

Healthcare reform may cost $4 trillion over ten years

Jun 16, 2009 16:39 UTC

Here is another analysis of the Kennedy health plan, from consultancy HSI:

1) The plan lowers the uninsured significantly, to less than 1% of the population, but not without a cost of over four trillion dollars over 10 years.

2)There are no provisions in the legislation to offset this course. Even if the most generous estimate of the employer sponsored tax exclusion ($300 billion per year, including collecting FICA contributions from employers) where used and combined with fraud estimates and block granting all of Medicaid (acute and long term care), this would be a challenging proposal to finance with budget neutrality.

3) Finally, the public plans will be quite successful in recruiting large numbers of Americans.

4) They will also likely crowd out at 79 million individual contracts with existing private insurers.

My spin:  This analysis does not consider offsets such as taxes to pay for the program. But just how high would taxes have to go to pay for a $400 billion a year plan? Quite high. Even ending the employer tax exclusion still leave you with a deficit.

VAT attack on healthcare

Jun 16, 2009 16:29 UTC

Ezra Klein notices that the value-added tax option to pay for healthcare reform is still floating around. Not a good idea, he says:

Levying a VAT to pay for coverage of the uninsured seems like a quick way to kill health-care reform. For the 85 percent of Americans with health insurance coverage, the VAT would be nothing but a charity tax. It wouldn’t buy them anything, as it does in the European systems. It wouldn’t free them from premiums, as it does in the Emmanuel/Fuchs voucher program. Republicans would view it as a major new tax. If Congress wants to rebuild American health care around a VAT, that’s probably a good idea. But simply slapping a new national sales tax atop the existing system? That doesn’t get you anything in terms of efficiency, and it’s going to scare the hell out of the middle class.


Hi James,
Good Reporting, keep it up please.
Did you hear anything about this story?
http://www.asianews.it/index.php?l=en&ar t=15456&size=A

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