James Pethokoukis

Politics and policy from inside Washington

America’s challenge

Jan 22, 2010 19:10 UTC

From the great David Goldman:

When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world’s largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world’s demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.

Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, “We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes.”


Beware of unintended consequences.

Some of the perpetrators of the Loans-to-deadbeats Ponzi scheme were just as well inteded as you two gentlemen are.

Changes this massive are extremely dangerous. Always. Maybe the impact would be super-duper. But who really knows?

Better for the government just to get the hell out of the way.

Posted by proreason | Report as abusive

Bernanke could be latest victim of Massachusetts Miracle

Jan 22, 2010 14:20 UTC

It seems that support for the renomination of Ben Bernanke is falling by the day, says ABC News. Liberals in Congress want him gone. Then again, they want pretty much the whole Obama economic team gone. But Geithner and Summers aren’t up for a Senate vote. Bernanke is. And if Dems start bailing, don’t expect Republicans to save him. No politician in America gains anything by voting for Bernanke. A “no” vote is a free vote. Wall Street still loves him, though. Geithner, too.

UPDATE: Count Russ Feingold of Wisconsin as a “no” vote.

UPDATE 2: Boxer of California , too

UPDATE 3:  Nevada’s Reid is non-committal


Unfortnately, you are wrong about no one liking Greenspan. The fools at Time magazine like him. All the bankers, other Fed officials and bankers who never saw the crash comming like him. Almost all the hacks on CNBC, and all the bankers and businessman that benefited from the bailouts whom they interview, like him.

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More on the new Obama bank plan

Jan 21, 2010 14:18 UTC

Mark Calabria of Cato, a supersmart observer of the financial sector in DC, gives me his two cents:

I find it hard to believe that the govt has any clue as to what correct size and level of trading is for banks. Sounds like nothing more than cheap politics.

Ex ante, no one told Bear was too big. So is the size limit going to be even smaller than Bear?

Obama misses one reason for banks becoming so large: their fund advantage due to “too big to fail” – if he were serious he’d come up with a plan to end too big to fail, rather than a plan for permanent bailouts.

And where’s the break-up plan for fannie and freddie? Just seems like just picking winners and losers based on politics.

I don’t see it going anywhere in the Senate [though I'm] not completely ruling it out. House could easily pass something so stupid – it is the House after all.

It does complicate financial reform – Obama might just be killing financial reform – hard enough time reaching agreement.


Taxes should be paid by all for our shared services: police, courts, military etc. We can’t have our own armies or competing courts and police departments. This is the role of government. “Fairly” raising those taxes will always be contentious. Our current byzantine system screams for reform. The “bank tax” is just the latest example of how far off course Washington has gone. Taxes are being wielded as clubs to inflict punishment on those out of favor with the current group of tyrants.

Through “sin” taxes, corporate taxes, “windfall profits” etc. we demonize profits and undermine the capitalist system that has put the US on top. If we go along with this we allow the left to imply that profits are immoral.

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Nicole Gelinas on the new Obama plan

Jan 21, 2010 13:27 UTC

She emails me on the Obama plan to limit bank activities:

1) I think that they are now panicking and veering from solution to solution. They will roil the markets and just make themselves panic more. Politically, i’m not sure. It will be hard for republicans to be against this, just like it is hard for them to fight the bank tax. Although if markets fall by hundreds of points, it gives the GOP an opening to say that Obama doesn’t know what he’s doing.

2) As for the merits – the problem is, Bear and Lehman didn’t have insured deposits, didn’t have recourse to the Fed, etc., but still posed significant risk. Why? Because by securitizing, derivative-izing and short-term-izing all manner of long-term debt, non-commercial banks made the economy’s store of credit much more vulnerable to market exuberance on the upside and panic on the downside. Mortgage and other credit depended at the margins not on bank balance sheets but on speculative demand.

3) To deal with that, I think we need consistent (and likely higher) margin requirements, capital requirements, clearing rules, etc., no matter who is holding/trading the debt. That would protect the economy more by putting a buffer between the pure, raw market and these debt instruments, just as we did long ago with equity markets.

4) I fear that if we curtail the big banks without doing these other things, the risks will just move, and people will continue to move their savings accounts into money markets to fund these risks. In fact, that is why we got rid of glass-steagall on the first place – to let banks compete fairly with the non-banks that had stolen their business.

5) So, do the margin and capital stuff to recognize the world we live in today … Doing that will make the economy better able to withstand financial failure, anyway, and the market, knowing this, will bring the institutions down to manageable size.

Obama escalates his War on Wall Street

Jan 21, 2010 13:14 UTC

Obama’s plan to limit risky activities at big banks is more about forcing Republicans to take tough votes than preventing another credit meltdown.The Volcker Plan was already rejected by the WH econ team (Summers, Geithner) and this is being pushed by the political team (Rahmbo, Axelrod) in the wake of the Massachusetts Meltdown. (In fact, this may help tamp down pressure from congressional Dems to dump the econ team.)

The WH can’t trumpet the economy, can’t trumpet healthcare, so Plan C is to go after Wall Street and make the GOP look like its best friend. Who cares that some of the worst problem children of the financial crisis were relatively small and undiversified? Wasn’t it regulator pushing for Wells Fargo to absorb Wachovia, and BofA to absorb Merrill? But I think the Dems will be surprised at how many GOPers might go along with this, starting with John McCain who has already advocated the return of Glass Steagall. But he will be far from the only one.


Maybe I don’t really understand what Glass Steagall was all about, but I’m pretty sure I understand that we didn’t have a meltdown as humongous as 2008 when it was in effect. And I also wonder if 2001 wasn’t also partially a result of it not being in place.

I’m a big free-market guy, but it sure seems to me that doing away with that act was a factor in the toxic mix of 2008. It certainly didn’t start the whole mess. The government did that. Thanks Barney, Chris and Franklin. But letting the riverboat gamblers get their greedy hands on mom and pop’s savings sure had something to do with it.

Gramm made a mistake, and it hurt the country.

I’m not with the idiot in the White House on much, but this is one situation where he has a point. Of course, he couldn’t care less about helping the country. He is only playing his class warfare games because his pants have been pulled down on every other idiotic Marxist scheme he has tried so far.

Posted by proreason | Report as abusive

Scott Brown the Black Swan

Jan 20, 2010 17:27 UTC

Ed Yardeni expands on my theme:

The political upset in Massachusetts yesterday may very well be one of those bullish Black Swans. In his 2007 book on this subject, Nassim Nicholas Taleb explained: “What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Brown’s upset victory certainly wasn’t expected even a week ago. No one seriously expected that the Democrats would lose “Kennedy’s seat” in the Senate. This development is bound to have a major impact on the political balance in Washington. This outcome certainly makes sense after the fact. It wasn’t predictable prospectively, but it is obvious retrospectively.

Last summer, I started to project that Gridlock might win in the Congressional elections on November 2, 2010. I certainly didn’t expect that it might win at the beginning of this year, and just in time to checkmate PelosiCare. The Constitution of the United States of America was written by lawyers. They intentionally designed a political system of “checks and balances” that dispersed political power among three branches of government. We call it Gridlock, which has a negative connotation, but that was the intended outcome more often than not. Our system works best when it doesn’t work for the promoters of policies that are not in the national interest.


See Federalist #51.

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Brown win could spark Obama war on Wall Street

Jan 20, 2010 16:06 UTC

Scott Brown’s stunning capture of the Massachusetts Senate seat held for decades by Ted Kennedy was a political black swan, a near-unpredictable event.

The result ends the Democratic supermajority in the Senate and leaves key parts of the Obama agenda in deep trouble. But the biggest loser just might be Wall Street. Desperate Democrats may see anti-bank populism as a way of holding power as the November midterm elections approach.

The last days of the heated Senate race saw the first attempts at that political gambit. Democratic candidate Martha Coakley’s allies in Washington, both the White House and national Democratic officials, used President Barack Obama’s proposed bank tax as a cudgel to bash Brown via emailings and telephone calls.

But the game was probably over by then for Coakley. A combination of high unemployment, an unpopular healthcare reform bill and the candidate’s own lack of charisma and effective experience were more than enough to clinch an easy Brown victory.

A historic victory, really. It is hard to overstate just how “blue” a state Massachusetts is. Obama won it by 26 percentage points in 2008. Until now the state’s 10 U.S House members, two U.S. senators and all statewide officers were Democrats. The state hasn’t had a Republican U.S. senator since 1979. And, of course, the seat Brown captured had been held by the late Edward Kennedy since 1962.

Now Brown’s victory threatens the healthcare reform bill that Kennedy championed on his deathbed. Democrats could still ram it through before Brown makes it to Washington. But potential legal challenges make that unlikely.

As it is, Brown’s election is enough of a systemic shock to freeze the political process on Capitol Hill. Moderate Democrats in both chambers are nervous about their previous “yes” votes for healthcare. They may be unwilling to make any more. The prospects look even bleaker for cap-and-trade energy legislation, a bill with even less support than healthcare.

Financial reform legislation was already likely to get milder rather than stronger. But not so the rhetoric. Unable to trumpet the economy, hitting Wall Street is one of the few political bullets Democrats have left.

So expect the Obama administration to go all out for the bank tax with increasingly harsh words for big financial institutions. Democrats may also be more willing to consider controversial proposals banks hate, like letting judges rework mortgages. But given the Massachusetts precedent, it may not be enough to save the party from a wipeout in the fall.


The real Obama is coming out. He literally hates big business because he believes that most people are victoms of our capitalistic system. Profit is an evil thing. His definition of fairness is socialism. His programs will all be anti business and lead to more big government.

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Mass. U.S. Senate showdown: Brown vs. Coakley (Live Blogging)

Jan 20, 2010 00:09 UTC

Live blogging the Massachusetts US Senate race between Democrat Martha Coakley and Republican Scott Brown:

9:30  Scott Brown wins, Martha Coakley loses. Also losing: Wall Street as POTUS, Dems will ramp up attacks. I’m done for tonight.

9:24 Brown has accepted concession call from Coakley (per Fox)

9:22 AP calls is for Brown

9:20 Boston Globe says Coakley calls Brown to concede

9: 18 70 percent of vote in, Brown +7

9:13 All eyes on Boston returns where Coakley seems to be strengthening

9:09 If margin of Brown lead holds up, I can’t see him not being seated ASAP

9:04 60 percent in in, Brown +7

9:02 Coakley get not getting the Boston vote she needs.

9:00 I have yet to hear from or talk to a single political analyst at this point who thinks the race is still in doubt. Brown +5 with 52 percent in.

8:58 45 percent in Brown +5

8:47 Wasserman at Cook Report: Cook Report does NOT officially call races, but if I were working for a network I would have enough #s to project: Brown Wins

8:42 Brown +7 with 21 percent percent in.

8:35 Dave Wasserman of Cook Report: Brown needed 59% in Danvers, he got 63%. Brown consistently overperforming our model by 3-4 % pts

8:32 With 11 percent in, 53-46 Brown

8:26 Brown seems to be overperforming in key counties

8:23 With 4 percent in, 52-47 Brown

8:10 Preliminary election day poll from Rasmussen:

  • Among those who decided how they would vote in the past few days, Coakley has a slight edge, 47% to 41%.
  • Coakley also has a big advantage among those who made up their mind more than a month ago.
  • Seventy-six percent (76%) of voters for Brown said they were voting for him rather than against Coakley.
  • Sixty-six percent (66%) of Coakley voters said they were voting for her rather than against Brown.
  • 22% of Democrats voted for Brown. That is generally consistent with pre-election polling.

8:07 Politico: Sr. Dem on Boston ‘High turnout in more conservative wards. Not high enough in Af-Am, Latino and more progressive wards.’

8:03 Brown source: Cautiously confident

7:51 Dem meme for the night is that Coakley was a lousy candidate in a bad environment; any other major Mass. Dem would have won by double-digits

7:44 TheHyperFix: From a Dem operative in Mass. : “Boston turnout numbers not good for Coakley.”

7: 40 On MSNBC: Pat Buchanan  says Brown victory means GOPers should run as populist, Tea Party in 2010

7:34 Pundit Review: Very upbeat atmosphere here at Brown HQ.

7:30 Chris Matthews: Could be a “sad night, a tragic night” for those who want healthcare.

7:20 Polls in MA close in 40 minutes

7:17 WSJ poll finds only 35 percent approval of Obama agenda, though his personal approval ratings are above 50 percent.

7:09 Intrade betting market puts Brown at 80 percent and steady. Waiting for hard numbers.

7:02 MSNBC’s Chris Matthews says Brown election would be “deliberate, pre-meditated” murder of healthcare reform


Pelosi and Reid tried to use Ted Kennedy. Ted wanted Health care for every one, but not the way the democrats were applying it. Mass. has told Obama what our great country is about.It isn`t over yet untill Pelosi, Reid, and all the bribed congress are removed also.If the whole U.S. congress does not begin to work together for us soon,we will have to fire a lot of them on both sides.

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My chat on financial reform with Nicole Gelinas, part two

Jan 19, 2010 19:58 UTC

This is the second edition of my chat with the fabulous Nicole Gelinas, author of the phenomenal must-read, must-own After the Fall: Saving Capitalism from Wall Street and Washington.  (Part one is here.)

What was a reasonable alternative to TARP?

We were never going to escape this debacle without pumping massive amounts of taxpayer money into the financial system. By 2008, the erosion of market discipline and prudent regulations (which go together) had left the economy vulnerable to a historic financial disaster. The proverbial black swan would have been if we not gotten the crisis.

Washington could have deployed TARP funds better than it did, though. Bush-era Treasury Secretary Henry Paulson’s first mistake was in thinking that he could use TARP finds to hide financial-industry losses. That is, he wanted TARP to buy up bad securities from banks at higher-than-market prices. As the S&L crisis proved nearly two decades ago, the economy can’t recover until bad assets find their real market price. Yet more government distortion just delayed that process.

What Paulson and, later, Geithner eventually did was better: pumping capital into banks so that they could withstand at least some of their losses on mortgage-related securities and other investments. Still, though, Washington used TARP to shield bondholders to the TARP banks from their losses – meaning that “too big to fail” lives another day.
How would a conservatorship of a TBTF firm work?

No firm should be “too big to fail – so it really would be a conservatorship for failed financial firms.

We learned in the Great Depression that some firms cannot fail through the normal bankruptcy process. Bank failures caused unacceptable economic panic and social harm. The FDIC was the elegant solution. It protected small depositors from losses and from service interruption, muting financial panic in a crisis. But it also allowed markets to discipline bad banks, because uninsured lenders still took their losses.

The task of a conservatorship for failed financial firms should be the same: to enforce market discipline of failed financial firms in an orderly manner – with creditors taking their losses – while protecting the economy from the disordered panic that we saw after Lehman.

A conservatorship could carry on operations at a failed financial firm, just as the FDIC does with failed banks when it cannot find a buyer. But lawmakers must make clear that the conservator’s goal is liquidation: to spin off good assets into more competent hands, with creditors responsible for any shortfall, just as they are in bankruptcy.

With AIG, the government has never made clear whether it’s trying to save AIG or wind it down. So we have the bizarre situation of AIG executives saying that the company stock is worthless even as it trades on public markets in the double digits. Meanwhile, private-sector insurance companies must compete against a government-guaranteed behemoth.

A conservatorship won’t work, though, unless lawmakers and regulators enact other rules to make the economy better able to withstand financial-industry failure. I talked about some of this in my answers to your other questions. The main goal is to insulate the economy somewhat from the natural excesses of financial-industry optimism and pessimism, without micromanaging finance. Borrowing limits mute optimism, because they prevent investors from bidding assets up with no money down (think housing in 2005, stocks in 1928).

Other regulations can mute pessimism. When the old uptick rule governed “short sales,” stock sellers couldn’t sell a stock down to zero. Pushing financial instruments onto exchanges, too, can mute panic — again, look at AIG.


She is blowing smoke and missing the lesson.

How about a Constitutional amendment that bans all future bailouts of people, entities, corporations, municipalities, and U.S. states?

No other measure would impose the kind of discipline that is required.

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Brown vs. Coakley: The Bay State Brawl!

Jan 19, 2010 18:33 UTC

A few thoughts and observation about  the US Senate race Massachusetts:

1) No exit polls, so we’ll have to wait for the actual vote count as well as turnout in key counties.

2)  Intrade betting market has Scott Brown at 78 percent, up 10 points in the past hour or so.

3) Reporters keep looking for a Coakley surge but have had a tough time finding one .

4) Even a narrow Coakley win will leave lots of Washington Dems wondering if they should retire in what looks like a strong Republican year.

5)  Either way, expect Dems to do a lot more Wall Street bashing since they think the issue stuck to Rs during the race.

More to come …