The Center Way

May 31, 2010

Financial Regulation

Filed under: Finance, Politics — Tags: , , , , , — Jesse @ 12:56 pm

As a finance person, I assume some may wonder what I think of the financial regulation bill meandering through Congress. As it is a lazy holiday weekend, I’ll outsource it:

In two weeks, I am supposed to speak on a panel entitled “Financial Re-regulation.” My question is, what re-regulation? To me, re-regulation means you would reverse some step that you took toward deregulation. But the new financial reform bill does not reverse any of those steps, as far as I know.

For example, the new bill does not repeal Gramm-Leach-Bliley, a 1989 law that ratified the de facto breakdown of the separation between commercial banking and investment banking, which is often blamed for the crisis. You would think that for symbolic reasons, if nothing else, you would repeal that law and go back to Glass-Steagall. Of course, I do not think there is much connection between GLB and the crisis, so I am not advocating repeal. I am just pointing out an inconsistency between one narrative of the financial crisis (it was caused by GLB) and the actual response.

In fact, if you wanted to restore the distinction between commercial banking and investment banking, you would need an entirely new law. That is because Glass-Steagall did not contemplate money market funds (are they commercial banking or investment banking?) or mortgage-backed securities (same question) or credit default swaps (ditto). There is no clear-cut inherent distinction between commercial banking and investment banking. It is true that some folks have a reasonable intuition that combining certain functions may be anti-competitive or unsafe and unsound, but that intuition needs to be articulated in a way that speaks to the modern financial world.

Back to the main point–if we are re-regulating, then what was deregulated? For example, where did subprime mortgages come from? Can anyone point to a particular legal or regulatory barrier that was removed in the last two decades? If so, has the new legislation restored this barrier?

When banks created structured investment vehicles (SIVs), collateralized debt obligations (CDO’s), and other innovations, did this require a specific deregulation? Were the actions of the credit rating agencies a result of their becoming deregulated in some way? In my own analysis of the crisis, I point to capital regulations that rewarded CDO’s, SIVs, and the manufacturing of AAA-rated securities. But that was not deregulation. And it was not reversed by the legislation.

Perhaps the centerpiece of the new legislation is a consumer protection agency for financial products. But if the core problem was a lack of consumer protection, what we should have seen was banks extracting profits from loans and foreclosures. Instead, banks got wiped out by losses. As Tyler Cowen points out, given where the losses took place we should be talking about predatory borrowing.

As I have said before, there is no coherent narrative that connects an analysis of the causes of the crisis to the financial reform legislation as written. Rather, the bill serves to deflect blame from government’s role in pursuing housing policy through dubious mortgage market intervention and from the mutual overconfidence of large financial institutions and their regulators.

The new law is not re-regulation. The regulations it contains are largely irrelevant to financial stability. And potential regulations that would improve financial stability (such as increasing the use of subordinated debt to discipline banks or requiring sizable down payments on mortgages) are not in the bill.

To sum up: The bill is largely an effort by politicians to say they “did something” without really doing anything.

May 30, 2010

Must Read: Jesus Christ, Capital Defendant

Filed under: Politics, theology — Tags: , , , — Travis @ 11:12 pm

In the Huffington Post here.

None of these echoes of Christ’s journey in our modern system, of course, is in itself an overwhelming argument against the death penalty. Nor is any bit of that story more of a condemnation of capital punishment than the fact that Christ came upon a legal execution and told the executioners that they did not have the moral authority to continue the killing (in John 8, the stoning of the adultress). Still, I do think that there is something powerful in simply considering Christ as a criminal defendant. That subtle change in perspective can change worlds. No, Christ was no murderer. He was the opposite of the venal criminals who largely populate death rows. Yet, it is at Christ’s invitation that we visit him when we visit those in prison, and I would imagine that there is no exception for death row. If it was God who wrote the story of Jesus as a criminal defendant, then it was God who told us that how we treat criminal defendants is important, and we need to heed that message even when it runs against our most fervent urge towards retribution and finality.

Massive Student Loans

Filed under: economics — Tags: , , — Jesse @ 9:48 am

The NY Times has a new article called “Placing the Blame as Students Are Buried in Debt.” They basically tell the story of a girl who is 26, went to NYU and now has almost $100K in debt, but is making $22/hr as an assistant to a photographer in San Francisco – thus, not making any progress on her massive debt.

They give a pass to Sallie Mae, the government organization that does student loans. Sallie Mae lent her about $40K, but then eventually said “No” when she amassed too much debt. But she was halfway through her degree – what was she supposed to do at that point? I guess she could transfer to a state school, say CUNY or something, but then she’d still have, say $50K of debt but a less “prestigious” degree.

They don’t come out an say it, but they want to place the blame on Citibank, who gave the second, $60K loan to bring the tally up to $100K. What were they thinking? Well, student loans are guaranteed by the Federal Government, so I’m pretty sure what they were thinking is that they would get their money back no matter how risky the loan is. So it wasn’t illegal, and it wasn’t a bad business decision. But was it unethical?

Perhaps. But do we want major, multinational banks (or even small community banks) deciding how much money we should be able to borrow for school? Imagine this conversation: “Well, we see that you’re majoring in religion and women’s studies. If you transfer to Pre-Med or Pre-Law, we’ll loan you the money because then you’re more likely to have a better debt situation, but if you won’t change your major, then we can’t lend it to you. It just wouldn’t be right because your earning power won’t be enough.” Or, like Sallie Mae, they could have just said “No” and then she has no choice but to leave NYU. Then the headline would be “Bank denies loan to intelligent, deserving student at NYU” or worse “Banks discriminate against women’s studies majors; solidify glass ceiling.”

How about this: her parents? Granted, she gives her mom a pass (her dad died when she was young), but I’m not so sure. So, you’re going to a college that costs $25K per year, huh? What kind of job are you going to get to pay off $100K when you graduate, because I can’t help you. I love you and want what’s best for you, but I’m just not sure this is it. There are lots of great state schools in New York where you can get a quality education – we should consider those instead. Some may call for financial counseling; that’s fine, but this doesn’t seem like rocket science to me – skip the interest rates, compounding, and everything and just consider the principal.

Or, we can fix it by removing the government guarantee of student loans. As soon as private lenders need to investigate the situation to determine their likelihood of repayment, many more loans like this will get denied. But get ready for the “poor student denied student loan and the American Dream” stories.

For everyone else, here is the best rule of thumb I’ve heard: You shouldn’t graduate with more debt than you expect to make in your first year of annual salary. If you’re getting an engineering degree and expect to make $50K, that’s your limit. If you’re going into social work and it’s closer to $25K, then that’s your limit. Skip the interest rates, just compute what you’ll pay in tuition, room and board each year, subtract out what you (or your parents) can contribute, multiply by 4 (you’ll finish in 4 years, right?) and that’s what you’ll owe.

May 29, 2010

Growth, Government, and Neo-Liberalism

Filed under: economics, Politics — Tags: , , , — Jesse @ 1:41 pm

There has been a debate in the Econ blogosphere about neoliberal policies and their effect on growth. That is techno-econ speak for “is smaller, less-regulated government better or worse for the citizens of a country?”

It started with Paul Krugman saying that the conservative idea that the US was crap until Reagan came along and fixed it is largely a myth. He has an interesting case, showing that economic growth was pretty steeply positive through 60’s and and early seventies with very high marginal tax rates, strong labor unions and the like. Then, in the late 70’s and 80’s the growth curve actually levels off as marginal tax rates go down.

Scott Sumner took the other side, sort of, by comparing the US rate of growth to other countries at the same time. His basic argument is that a lot of countries around the world experienced phenomenal growth post-WWII because their populations were engaged in productive labor rather than shooting at each other. Then, he shows global growth slowed considerably in the 1970’s across the board, and the “flattening” that Krugman showed was generally true worldwide, but the US’s growth outpaced virtually every other country in the 1980’s in particular. His basic point is that the US economy was going to slow down anyway with everyone else, and deregulation and reforms of the 1980’s allowed higher growth than would otherwise have happened.

Krugman responded with multiple points, but one good one I want to highlight: that we primarily measure growth as GDP, which is a measure of economic output. Thus, we capture things like wages, jobs, and consumption; what we do not capture is leisure. Time at home with your family is certainly a great positive, and he gives the example of France, which does not always do well in these measurements, but French are somewhat legendary in their consumption of leisure, which is surely a benefit to be included.

What to take from all of this? My take is that the high marginal tax rate/strong labor union period of the post-WWII time period likely wasn’t as bad as some conservatives make it out to be, but that doesn’t mean there is a strong case to be made to go back to it. Correlation is not causality. Secondly, there was benefit to the Reagan deregulatory movement of the 1980’s. Sumner also shows in his post that the countries that have grown the most since the 1980’s (even Sweden!) have implement deregulatory policies.

Now, that does not prove that deregulation all the time is good. It is very possible that these countries had certain over-regulated industries, which by deregulating, provided growth benefits. There is path dependence. But I remain convinced that, in general, market mechanisms – i.e. prices – provide valuable information which evaluate quality that are not possible with government services.

P.S. StatsGuy at BaselineScenario has a great post decomposing the Hertiage Foundation Freedom Index. I don’t quite agree with everything he says, but it’s a good post on this topic as well. He argues that Good Government matters more than Less Government. I think they are pretty linked; he separates them.

May 27, 2010

Things I did not know, Music Industry edition

Filed under: Uncategorized — Jesse @ 5:32 pm

…people only made money out of records for a very, very small time. When The Rolling Stones started out, we didn’t make any money out of records because record companies wouldn’t pay you! They didn’t pay anyone!

Then, there was a small period from 1970 to 1997, where people did get paid, and they got paid very handsomely and everyone made money. But now that period has gone.

So if you look at the history of recorded music from 1900 to now, there was a 25 year period where artists did very well, but the rest of the time they didn’t.

That was Mick Jagger, who apparently studied Economics at the London School of Economics!

HT: Jerry Brito via MR.

May 26, 2010

10 ways to escape the partisan echo chamber

Filed under: Politics — Tags: , , — Travis @ 7:16 am

According to Will Saletan. Read the whole thing here. His advice?

  1. Treat insularity as a weakness.
  2. Don’t be a sucker for conspiracy theories.
  3. Never define yourself by an enemy.
  4. Don’t outsource your beliefs to your allies.
  5. Seek wisdom, not just victory.
  6. Distrust polarization.
  7. Look in the mirror.
  8. Beware abstraction.
  9. Test your theories.
  10. Overcome your urges.

May 25, 2010

When people choose poorly

Filed under: economics, Politics — Tags: , , , , , , — Jesse @ 9:31 pm

Who wrote this? (scroll all the way to the bottom)

if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.

And what would you do about it? The story goes on to discuss conditions in an African village where this is true. But this is by no means isolated to Africa – we know that many poorer people in the United States make poor choices with their money.

This is, I think, a pretty good example of where people differ. My tendency is toward non-intervention, because I place a high value on person freedom of choice, including the decision to choose poorly. And this is why it is so hard to help the poor. Because honestly, it would best if we could just hand them cash in the form of a negative income tax.

For those who don’t know, a negative income tax would work like this: we set a threshold, say, $30,000 per year and pass a law that says that everyone gets that amount. If your income is below that amount, you get a check from the government (it could be every other week like a paycheck, similar to withholding taxes now) to top up your income to that level. Once you pass that level, you begin paying taxes.

This does a lot of wonderful things. First, it allows people to get a job, even a low paying one. Much research has shown that a lot of our happiness is tied to employment; there is a dignity and identity to be found in the fact that you go to work each day. Also, we know that if often takes a job to get a job: many social networks form around employment relationships. Those who are unemployed automatically lose their best means of finding a job – their coworkers. This way, there is a much smoother transition from potentially minimum-wage jobs to better jobs when all the while you have enough to provide for your family.

Second, it levels the playing field in many ways for the poor – their money is green as well. They can choose the products they like, perhaps even find their child a tutor after school. They no longer face the silly restriction on what they can buy with food stamps at the grocery store* and in general can live what should be a relatively middle class life. Here, as well, there is dignity – the power and freedom to choose for yourself. Because most programs for the poor come with a lot of strings attached.

But that’s exactly the point. What would go with this is the removal of all the controls around these programs – we couldn’t use government money to alter behavior. They may buy alcohol or even drugs. They may buy a brand new full size car or truck. And most people don’t like that.

So, the government implements all sorts of programs which attempt to save the poor from themselves; helping them while trying to coerce their behavior. This requires some convoluted rules, lots of oversight and lots of inconvenience for the poor. This causes lots of means testing which make the climb out of poverty quite steep when you compute the marginal tax rates.

To be sure, there are other problems here. First, no congressman will ever vote for this because it is too broad-based and could only be funded by the removal of many individual programs. Also, if/when recipients choose poorly, they will clamor for a higher bar to be set because they “don’t have enough to live on” after they’ve gotten their new iPads and 3G cell phones to buy diapers for their baby.

But it gets at a deeper issue: How much should the government use it’s power to coerce it’s citizens to behave “well”? My answer is “as little as possible” and that may be many of your answer as well. But the nuts and bolts of where one of us says “no” and another says “yes” is a recurring dividing line in American politics.

*A Wisconsin senator (maybe Vermont?) got the WIC program to mandate the purchase of something like 2 gallons of milk to use the program. Not only is this silly for a single mom with one child (who may not yet be able to drink milk) but it is highly problematic for those in cities who have to take groceries home on the bus. But that senator got his/her milk subsidy! And helped the poor, too! I can find a citation for this if you’d like, but don’t feel like look it up right now.

It was Nicholas Kristof in the NY Times. We know where he stands:

If we’re going to make more progress…we need to look unflinchingly at uncomfortable truths — and then try to redirect the family money now spent on wine and prostitution.

Judicial Elections: Guessing Isn’t Voting

Filed under: Politics — Tags: , , , , , — Travis @ 10:26 am

From Jonathan Bernstein, via Andrew Sullivan:

It’s not remotely realistic to expect that voters make careful decisions about judges. Not really because of the technical expertise needed to do so, but because of the numbers game. Voters don’t sit down and carefully consider the case for and against handfuls of state judges, on top of federal, state, and local legislative and executive branch candidates, not to mention in many places both state and local ballot measures. Instead, voters use shortcuts, with the big one being party affiliation. O’Connor’s preference is for a yes/no vote on incumbent judges (something already used in some states), but in reality voters have no idea who their states’ judges are, much less whether they’re doing a good job or not. What this translates into is incumbent judges who are safe unless they annoy a well-funded interest group, a coalition of groups, or a political party. Is that really what we want? Judges who know that their jobs are safe as long as they don’t rattle any cages — at least not any cages that can do full-scale opposition research and produce TV ads?

May 11, 2010

Personhood and Abortion

Filed under: Uncategorized — Tags: , — Jesse @ 10:23 pm

Megan McArdle posted a while back what I thought was a very interesting comparison between the abortion debate and slavery. The basic idea is that the abortion debate, like the slavery debate, centered primarily on personhood.

Once you saw that an African was a person, just like you, slavery seemed reprehensible. It seems, now, that the argument in abortion circles is now one of personhood of the fetus.

The definition of personhood (and, related, of citizenship) changes over time.  It generally expands–as we get richer, we can, or at least do, grant full personhood to wider categories.  Except in the case of fetuses.  We expanded “persons” to include fetuses in the 19th century, as we learned more about gestation.  Then in the late 1960s, for the first time I can think of, western civilization started to contract the group “persons” in order to exclude fetuses.

This is old enough, that it is in the context of the person who killed an abortion doctor, Tiller, in Kansas, I think:

Perhaps I find the certainty of the pro-choice side so disturbing because it feels a lot like the certainty of the warbloggers in the run up to the Iraq invasion.  As some of Hilzoy’s commenters point out, I was myself too caught up in it, which makes me cautious of getting caught up again.  The pro-choicers seem to be acting as if people who shoot abortion doctors are some weird species of moral alien, whose actions can only be understood in Satantic terms, and who cannot and should not be negotiated with, because they only understand raw displays of power.  Yet it seems to me that if I were in a society that believed fervently in the personhood of a fetus, I would very possibly agree, and view Tiller’s murderer the way I’d view someone who, say, assassinated Mengele.

This is something I’ve been thinking about recently as I’ve seen picture after picture of by unborn children with eyes and hair, jumping around as we see them on the ultrasound. Are they people? At 5 weeks, their hearts were beating. At 32 weeks, all they are doing is growing in size and then they relocate from inside the womb to outside the womb. There are lots of milestones in between. Is simply physical relocation the definition of the beginning of personhood?

So, are fetuses human beings? If they are, what does that imply about our abortion laws? Can you still say “Gosh, abortion is pretty terrible, but I don’t think I can handle making it illegal’?

But I am also aware that a lot of very fine thinkers were seduced into reasoning that Africans weren’t people.  Whatever evidence they thought they had, we’re pretty sure how they arrived at their conclusions:   African personhood would have caused enormous personal and social upheaval.  Thousands of their friends and family would have personally suffered enormously without their slave wealth.  Ergo, slaves weren’t people!

France’s burqa ban

In this article in Slate, Christopher Hitchens wastes his considerable wit arguing stupidly in favor of France’s burqa ban, which is supported by French president Nicolas Sarkozy. He compares burqas to the masks of the KKK and posits that in a democracy, we all have the right (!?) to see each other’s faces.

So it’s really quite simple. My right to see your face is the beginning of it, as is your right to see mine. Next but not least comes the right of women to show their faces, which easily trumps the right of their male relatives or their male imams to decide otherwise. The law must be decisively on the side of transparency. The French are striking a blow not just for liberty and equality and fraternity, but for sorority too.

He also contends that “pseudoliberals who take a soft line on the veil and the burqa” only make this allowance for one religion, Islam. No. It is the backers of this proposed law who single out Muslims. I have yet to hear of a French ban on prescribed coverings for, say, nuns. The law is paternalistic and the implications are xenophobic. Hitchens gives the game away with this line: “The burqa and the veil, surely, are the most aggressive sign of a refusal to integrate or accommodate.” Ah, yes. We must strip away all differences. You have to dress as the French dress, speak as they speak, (worship as they worship?), or you have no place in France. Hitchens exposes his devotion to the secular state, where any separation from Enlightened Society (TM) must be eliminated.

The irony is that by trying to aggressively force this kind of cultural assimilation, France sets itself up as antagonistic toward Muslims, and is probably driving greater wedges between the segments of its society. I would never claim that the U.S. has no history of shame in the area of ethnic and cultural differences, but I know this kind of law would never fly here.

Now, I understand the concern of French legislators for women in patriarchal family groups who are forced to wear the burqa and endure other restrictive and abusive practices. I personally find the burqa oppressive. But I’m not the boss of how other people dress. And you aren’t going to overcome centuries of tradition with a law like this. Those women who do not choose to wear the veil (there are many who do choose it, including many converts to Islam), but are forced to, will be just as oppressed. Only now they won’t be allowed to go outside.

So here’s my view, which I think is pretty common sense: nobody should have to wear anything they don’t want to wear, and also nobody should have to not wear anything they do want to wear. Where there is an unavoidable conflict between religious law/ethnic custom and some legitimate safety need of the government (like taking photographs of one’s face to get a driver’s license) then public safety comes first and some folks might not be able to participate. But that should be a last resort, and the law should bend over backward to allow people to express their faith as they see fit. And if you are bothered by women in hijabs, Sikh men in turbans, or Jewish men with payot, that probably says something about you.

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