Well, this is going to be fun. Chris Dodd is headed toward a tough reelection campaign. So he stays at the head of the Banking commitee instead of moving to Health since a) that is where the action will be in 2010 and b) it is a great place to raise tons of money. He wants a non-Fed superregulator while the WH wants the Fed in that role. And now the Blue Dogs are cooking up their own reform plan. The whole thing will be at the epicenter of a white-hot lobbying campaign. And then there are the personalities; Dodd, Frank, Bair, Bernanke, Geithner. The politics are every bit as treacherous as those of healthcare.
Politics and policy from inside Washington
OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:
When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!
Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:
The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.
Now that does sound like an endorsement of TARP. If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind.
Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit. Probably the best way to approach it is to say that while TARP was better than doing nothing, there were better alternatives — asset auctions, debt swaps — that should have been planned for after Bear Stearns and executed. In any event, his criticism of TARP is fairly mild here — though it certainly does raise the issue of serial flip-floppery.
Some polling results from a healthcare poll from global branding firm Siegel+Gale:
– 37 percent understand the president’s plan
– 17 percent believe the plan is deficit neutral
– 20 percent believe funding will come from a fine on the wealthy.
– 32 percent actually support the president’s plan
– 40 percent have no idea how is being paid for
– 34 percent think everyone other than Congress will be pushed into public plan
“Clearly the whole health care issue is fraught with complexity, political in-fighting, and emotion that is not helped by poor media coverage. So I’m not surprised that the American people have thrown up their hands – even sophisticated consumer advocates are not clear about the plan,” says Alan Siegel, Chairman and Founder of Siegel+Gale.
Time for another speech!
My Reuters amigo Christopher “Black” Swann goes after the Fed plan to curb Wall Street pay — with a vengeance. Here is a bit, but read the whole thing. Your brain will thank you:
1. The Fed is certain to be outmatched. In one corner you have a central bank that has been notoriously spineless on regulatory matters. The institution is crammed with officials who have traditionally seen themselves as defenders of the banking system and advocates of laissez faire. … In the opposing corner you have heavy-weight Wall Street institutions with armies of lawyers dedicated to gaming the regulatory system.
2. There is a deeper objection to the Fed’s effort. The real problem is not the structure of bank pay but its scale. The received wisdom remains that longer-term incentives will curb risk taking. Lock up bonuses in stock and you will tame bankers. The experience of the 2008 financial crisis screams otherwise. In the case of Lehman Brothers and Bear Stearns, leading bankers were major shareholders. Richard Fuld was heavily invested in Lehman stock and saw the bulk of his fortune evaporate when the firm collapsed. Ownership does not seem to lower risk.
3. The key, then, is to curb the overall amount of risk that banks can take on. The main tool for doing this is by insisting on much larger capital reserves. This kills two birds with one stone. Tighter capital rules will increase the stability of the financial system and limit the exposure of taxpayers in the event of failure. In addition, tighter capital rules are the most reliable way of bringing down overall bank pay.
Bruce Bartlett makes the case that a) either taxes need to be raised or spending cut to bring America back to fiscal solvency, b) there is little historical evidence that spending can be cut, and thus c) taxes are headed higher. Certainly Congress has show itself willing to raises taxes (1982, 1991, 1993) by large amounts and not cut spending. Both the 2005 effort by the Bush administration to fix Social Security and the current effort to reign in healthcare costs are further evidence. Yet you certainly wouldn’t want to close the hole purely by raising taxes, would you? I think they would have to rise by 50 percent, IIRC. We would definitely be on the wrong side of the Laffer curve then. Spending is really Obama’s Nixon-to-China opportunity …
After a big speech by the POTUS and the leak of a Fed proposal to monitor and curb Wall Street pay (really, pay at thousands of banks), what has changed about Too Big Too Fail, erratic Fed monetary policy and U.S. housing policy? They’re the true villains of the financial crisis. You want to limit leverage and raise capital requirement? Fine. But the WH is taking its eye off the ball, I think …
The Obama administration wants the Federal Reserve to be the maximum regulator of the American financial system. As Treasury Secretary Timothy Geithner told the Senate Banking Committee, “The Federal Reserve is best positioned to play that role. It already supervises and regulates bank holding companies, including all major U.S. commercial and investment banks.”
The problem, of course, is that most informed observers have concluded that the Fed failed to adequately supervise and regulate banks during the lead-up to the financial crisis. Count Senator Chris Dodd, chairman of the Senate Banking Committee, in that camp. “There’s not a lot of confidence in the Fed at this point,” Dodd said right after the White House released its financial reform proposal.
This is where Daniel Tarullo makes his appearance. The newest member of the Federal Reserve has apparently authored a plan to have the central bank approve compensation policies potentially But previous to joining the Fed, Tarullo was an influential economic adviser in the Obama presidential campaign.
So now what we have, I think, is Obama’s man at the Fed pushing a politically savvy plan that could bolster the Fed’s standing as a tough regulator in the eyes of Congress and deflect some of the criticism of the central banks past failings. Score one for the White House in its push to make the Fed super-regulator.
Surely, the timing couldn’t be better. Not only has the administration been refocusing attention on passing financial reform – witness the president’s tough Wall Street speech – but next week’s G-20 meeting will include extensive discussion about banker pay issues.
But this is a case where good short-term politics makes for bad long-term bad policy. The greater the Fed involvement in the regulatory process, the greater attention it will receive from Congress – and the greater the threat to its cherished independence.
As it is, the Fed’s historic efforts to rescue the financial system have raised concerns on Capitol Hill that it has too much power with too little oversight. That’s why Rep. Ron Paul’s bill to audit the Fed, according to Financial Services Committee Chairman Barney Frank, will pass the House this year. (Indeed, what Paul really wants to do is end, not mend the Fed.)
Really, could anyone possibly believe that having the Fed become the pay czar at 5,000 banks would lessen congressional interest in its activities, including monetary policy? Not to mention that a better solution to excessive financial risk taking is the restoration of market discipline on Wall Street.
Better that Wall Street understand the consequences of poorly incentivized pay structures. “Too big too fail” remains the biggest threat to America’s fragile financial system.
Talk about a phenomenally bad idea. According to the WSJ:
Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions. … Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.
Me: Team Obama wants the Fed to be the super-regulator of the financial system. Sen. Chris “I have no confidence in the Fed” Dodd, chairman of the Senate Banking Committee, would prefer a new, separate entity. A now here we have a plan that would see the Fed doing the kind of thing a super-regulator might do. It is like the Fed is saying, “Hey, we know we dropped the ball before. We get it. Now we are getting tough. Trust us.” And don’t ignore the fact that the guy pushing this is Daniel Tarullo, a Fed governor and Obama economic adviser. This is like a joint Fed-WH operation. Also don’t forget that this is coming right before the G-20 meeting where there are expected to be calls to get tough on banker pay. So one could view this as a PR ploy by a WH that is less enthused about pay restrictions than Europe.
Of course, this is a lousy idea. Banker pay didn’t cause the financial crisis. The government should not be micromanaging private-sector compensation. Also, the more the Fed is involved in the regulatory process, the more it is open to political scrutiny. Yves Smith seems to think this will tamp down support for Ron Paul’s Fed audit bill. Actually, I think this increases support for the bill since the more powerful the Fed seems, the greater the attractiveness of increased oversight and congressional meddling.
I recently had the opportunity to sit down and chat with Jared Bernstein, the chief economic policy adviser for Vice President Joe Biden. Here are some major excerpts of what Bernstein had to say about healthcare reform, the Obama stimulus, the deficit and the future of the American economy.
You have strong ties to liberals. Is it a public healthcare option or nothing for them?
I think it’s a mistake to think that the progressive community writ large is coming from a position of public option or nothing. People who have been following this for decades recognize the historic opportunity at hand and are much more interested, just like the president, in a mechanism to induce competition and lower cost than one specific option.
The recession is worse than the administration predicted. So shouldn’t the stimulus be bigger?
I think the stimulus had to be big enough to offset what has turned out to be the deepest recession since the Great Depression yet not too big such that it would have fiscal effects that were more than we or the Congress were willing to sign off on. We wanted to craft the largest, most diverse package that the market, both political and …
Are you talking more about voter reaction to big deficits or financial market reaction?
The latter. Our goal, in the context of fiscal rectitude, you want a stimulus that gets into the system, ramps up quickly, gets the job done and gets out. We have a massive job to get done here given the depth of the recession, and therefore we passed the largest stimulus in the history of the country. But that doesn’t give you carte blanche to disregard the deficit impacts. And so getting the recovery act up into the system, ramped up, helping to offset the losses, generate GDP growth, create and save jobs — we are very pleased to see that in action, though we’re not out of the woods yet.
One thing to consider is that at this point we have obligated about 35 percent of the stimulus, so you’ve got two-thirds left to do. And that is really important because this unemployment rate is going to go up before it starts coming down.
There was no conceivable stimulus package that would have filled up the hole we were in. I think the best package any government would have implemented would have offset some of that pain and set up for a robust recovery moving forward. And I think that’s where we are.
So were you seeing the boundaries where any gain from a bigger stimulus would be offset by higher interest rates?
I would say it this way: We went into this with a two year program in mind. We didn’t want this to have long tails such that it would dribble out into years three and four. We wanted to cut significantly the deficit that greeted us at the door in our first term. Given those constraints, a stimulus package of almost $800 billion was as far as we thought we could legitimately push it. So was $787 billion exactly the right amount? Of course no one could say. But from where I am sitting right now, it appears to have been the right size to pull the economy back from the brink, ramp up and then leave the system in such a way as to help bring the deficit down by the end of our first term.
By itself, the stimulus isn’t a huge addition to our overall liabilities.
If you look at the fifty-year budget shortfall, the recovery act explains three percent. Clearly that is being driven by something else and that something else is healthcare.
Do you think the economy is suffering from what economists call hysteresis, such that the economy has snapped and we’ll get long-term, high unemployment? After all, it’s not like people can go back to being mortgage lenders or working for the Big Three in vast numbers.
I don’t think so. Some of what you are describing is a speculative bubble, and that is something we don’t want to get back to. But there is nothing that’s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post –’95, elevated, 2 ½ percent range and has been a real important boost for the economy.
The president has said that this next expansion can’t be one built on froth and bubbles and excessive speculation and has to built on innovation. And one of the areas he touts in that regard is energy. That is a critical insight, and historically government has played a role in precisely moments like this in helping to incentivize and stimulate innovation, whether it’s railroads or transistors or the Internet or, now, green technologies.
We want to make sure the right incentives are in place for the market to move in that direction. But this president is not at all engaged in five-year plans. This is incentives, say, through the tax code like the investment tax credit. This is training programs and education programs to give people the skills they need to enter this sector. This is not the government creating these sectors by any means. This is the government incentivizing private capital.
When should people begin to really worry about the federal budget deficit, if not now?
There are times to worry deeply about the deficit and times to worry deeply about the economy. But if the economy is not moving strongly in the right direction, the deficit will suffer as a result. If there is something out there that is potentially creating a huge kink in the hose so that the economy just can’t reach its natural potential, you better deal with that kink — and that’s healthcare One of the great visions of this president is that he’s not waiting until healthcare is absorbing 30 percent of our economy. He’s trying to get a jump on this. It is an absolutely critical piece in unleashing the potential of the economy.There is no way you are going to rationalize your debt in the long run if your economy is in the kind of shape it would have been in if we hadn’t taken these steps to get from where we were, barreling toward the cliff, to a point where the private sector kicks in, takes over and we fade out.
But will government have to spend a lot more money on transforming the economy?
We spend about $8 billion on high-speed rail and a similar amount on the grid. You don’t build a a high-speed rail system or a smart grid in the United States of America for that amount of money. What you do make is a downpayment and create some first move advantage — you sink some of the sunk costs, you incentivize private-sector capital sitting on the sidelines that may be waiting to see where this is going. That is the role of government, not to build this stuff by ourselves.
What about a second stimulus?
We envision a public sector that kicks in when the private sector is on the mat, and then we get out of the way. But our work is nowhere near done until we have robust monthly job growth. I was asked if we were happy about that 200,000 monthly job loss. We’ll be happy when we’re adding 200,000 jobs. It’s natural to ask if we are going to need a second stimulus. It is simply too early to say. None of us have a crystal ball and none of this inconceivable. But I get the sense that when the stimulus fades, we should get the private sector kicking in and picking up the slack as the public intervention unwinds. If that is the case, we won’t need a second stimulus. And if it’s not, that is something we’ll have to look at.
How would you divvy up credit for avoiding an outright depression between the Federal Reserve, the stimulus and the economy naturally bouncing back?
The way to think about the interventions is that they attack different parts of the problem. The financial interventions have really helped to begin to thaw the credit markets. But supply without demand is like being dressed up with nowhere to go. So the recovery act created more money for consumers through tax cuts and other payments and the direct infrastructure spending. So I think it’s the combination of helping to loosen the log jam of credit while at the same giving a real solid Keynesian boost on the demand side. They both played a considerable role.
Despite the economy stabilizing, unemployment is still high and home values are still way down. Plenty of folks are pretty worried about the future. What should they know?
The president and vice president understand what folks like that need, which is a vibrant private sector economy where credit flows freely, responsibly, transparently — but an economy where growth is not about asset bubbles that serve the precious few but much more broadly-shared prosperity. This administration is devoted to boosting human capital — the education and training people need — but at the same time incentivizing investment in areas where this economy has to grow — green technologies, healthcare , the smart use of energy, advanced batteries. These are the growth sectors of the future. The government can’t and has no desire to run these sectors. But we can certainly play a role. Hopefully that gives people hope that their leaders get it. But I don’t expect people to feel better about this economy until a) it is growing and b) they are share in the growth.
From Greg Mankiw:
In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.
Let me try to put CBO’s point in a more familiar setting:
Your friend Joe, who says he want to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.
“Ahem, Joe,” you whisper, “Aren’t there a lot of calories in that?”
“Yes,” he says, “but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. That exercise will more than work off those extra calories.”
“But that’s what you said last week, when you asked for piece of cake. And you didn’t go.”
“Yes, I know” he replies ruefully, “but this time I really mean it….Can you please pass the pie?”