Volcker has long been suspicious of financial products that most
people can’t understand.
One of his four grandchildren, Colin Zima, heard about it a lot when
he studied financial engineering.
“He would constantly joke about me studying to be a crook,” says
Zima, 25, who worked at UBS for a year before taking a job in 2007 as
a statistician at Google Inc. in San Francisco.
The new job made his grandfather happier, he says.
Saturday, June 27, 2009
Why I LIke Paul Volcker
From a recent Bloomberg profile:
Saturday, June 20, 2009
The Obama Administration: Success and Failure
The pluses of an Obama administration:
The failures:
It's just a shame. I always thought that a good crisis (like the Great Depression) would push the country toward better policies. I guess I just underestimated the power of big business. They own the country and enough of Congress to prevent any measures that restrict their profits. I know that I shouldn't be surprised, but I just thought that this time would be different. During the 1930s, it was different. FDR didn't stray into socialism, but there's a reason he's was considered the #1 enemy of business.
I think the reason such an effect has not been felt is the groupthink optimism among the media and business class. Starting in March, they all of the sudden decided things were getting better -- even when they weren't. As a result, the crisis mentality has now passed, the business interests are lobbying more than ever to prevent systemic change. On top of that, many in finance are warning about inflation (Inflation! When the economy is deflating with no end in sight!*), a device used to prevent any further government action.
The economy, as things are currently structured and absent any better plans, is going to fall off a cliff again at some point in 2010 or 2011. Unfortunately, unlike last year's collapse, this one will be blamed on Obama. (In truth, people would be right to blame him and Democrats for failing to step up to the plate.) Sadly, I can then envision a Republican having a shot in 2012. It would be like Robert Taft getting elected in 1936. It will be downhill from there...
Any hope? The things that can happen to prevent this from happening:
-- an economic meltdown at the end of this year, which causes a stronger government reaction and propels Obama forward (likelihood = less than 15%)
-- a solid health care bill that assures lower costs for care/drugs and coverage of at least 75% of the uninsured; this will be a big political victory that will bring the administration good will from everyone except the healthcare-industrial complex (20-30%)
-- some decisive international event (less than 10%)
-- a Middle-East regional peace deal including a Palestinian state (less than zero)
-- a surprise change in course in which the Obama team takes over a large bank, precipitating a mini-meltdown and allowing for further regulation (30-40%)
-----
*All of this talk about the national debt annoys the hell out of me. It's very clear that majority of the current debt is a result of two people: Ronald Reagan and George W. Bush. Reagan tried to outspend the Soviet Union while cutting taxes and put us in a 3 trillion dollar hole (carried over into Bush I), and then Bush's combined policies (the prodigal tax cuts, the prodigal war in Iraq, and the prodigal non-negotiated Medicare drug benefit) doubled it. [Obama's contribution could only be the recovery package, and that will pay for itself in terms of economic growth.] Of course, during those Republican administrations, few Republicans and business people talked about deficits. Now, that's all they talk about. The deficit is not a real problem; it is a talking point to combat Democratic policy proposals. It worked under Clinton and it's working now.
Why we're really screwed...
The bottom chart is really interesting, because it shows what the normal was in the pre-New Deal economy vs. what has been the norm in the Postwar era. Unemployment increasing by 10-15% was the average before WWII. Since then, the average increase has less than 5%. The Depression was "great" because it featured an increase in the 20-25% range. Comparatively, an increase of 8-10% (for a 12-14% unemployment rate) would be just as catastophic today. What people (and even economists) don't seem to understand is that comparing statistics' absolute values are useless. For one, the way that the government has tracked and measured unemployment has changed over the past century. Additionally, the labor market stabilized in the postwar era, creating different expectations and standards of living. One might conclude that our better standards of living today would allow people to withstand an economic environment similar to the 1930s; yet, as standards have risen, so has expectations. The depression will look different this time (not as in your face), but it's effect will be just the same.
If we reached 25% unemployment today, as we measure U3, the government would fall, people would be rioting in the streets, etc. It would be something close to armaggedon. That is not going to happen. On the other hand,15% is within the realm of possibilities (and would correspond to 25% of people unemployed, discouraged from looking, and underemployed). In such a case, we would likely witness a twenty-first century version of what happened back in the 1930s.
Oh, and just in case you think I changed my mind about Bank of America eventually going under, look at this chart showing how much capital BofA would if unemployment reaches 12.4% (the "Your Scenario" in red):
- Better appointments and leadership in the federal bureaucracy
- Better image abroad
- A more competent and well-spoken leader
- Better court appointments
The failures:
- Inability to pass significant changes to the financial status quo
- Inability to pass a strong bill to combat climate change and oil dependence
- Inability to strongly re-regulate business (be it banks or telecoms)
- Inability to fundamental transform health care in America (at least it's looking this way)
It's just a shame. I always thought that a good crisis (like the Great Depression) would push the country toward better policies. I guess I just underestimated the power of big business. They own the country and enough of Congress to prevent any measures that restrict their profits. I know that I shouldn't be surprised, but I just thought that this time would be different. During the 1930s, it was different. FDR didn't stray into socialism, but there's a reason he's was considered the #1 enemy of business.
I think the reason such an effect has not been felt is the groupthink optimism among the media and business class. Starting in March, they all of the sudden decided things were getting better -- even when they weren't. As a result, the crisis mentality has now passed, the business interests are lobbying more than ever to prevent systemic change. On top of that, many in finance are warning about inflation (Inflation! When the economy is deflating with no end in sight!*), a device used to prevent any further government action.
The economy, as things are currently structured and absent any better plans, is going to fall off a cliff again at some point in 2010 or 2011. Unfortunately, unlike last year's collapse, this one will be blamed on Obama. (In truth, people would be right to blame him and Democrats for failing to step up to the plate.) Sadly, I can then envision a Republican having a shot in 2012. It would be like Robert Taft getting elected in 1936. It will be downhill from there...
Any hope? The things that can happen to prevent this from happening:
-- an economic meltdown at the end of this year, which causes a stronger government reaction and propels Obama forward (likelihood = less than 15%)
-- a solid health care bill that assures lower costs for care/drugs and coverage of at least 75% of the uninsured; this will be a big political victory that will bring the administration good will from everyone except the healthcare-industrial complex (20-30%)
-- some decisive international event (less than 10%)
-- a Middle-East regional peace deal including a Palestinian state (less than zero)
-- a surprise change in course in which the Obama team takes over a large bank, precipitating a mini-meltdown and allowing for further regulation (30-40%)
-----
*All of this talk about the national debt annoys the hell out of me. It's very clear that majority of the current debt is a result of two people: Ronald Reagan and George W. Bush. Reagan tried to outspend the Soviet Union while cutting taxes and put us in a 3 trillion dollar hole (carried over into Bush I), and then Bush's combined policies (the prodigal tax cuts, the prodigal war in Iraq, and the prodigal non-negotiated Medicare drug benefit) doubled it. [Obama's contribution could only be the recovery package, and that will pay for itself in terms of economic growth.] Of course, during those Republican administrations, few Republicans and business people talked about deficits. Now, that's all they talk about. The deficit is not a real problem; it is a talking point to combat Democratic policy proposals. It worked under Clinton and it's working now.
Why we're really screwed...
The bottom chart is really interesting, because it shows what the normal was in the pre-New Deal economy vs. what has been the norm in the Postwar era. Unemployment increasing by 10-15% was the average before WWII. Since then, the average increase has less than 5%. The Depression was "great" because it featured an increase in the 20-25% range. Comparatively, an increase of 8-10% (for a 12-14% unemployment rate) would be just as catastophic today. What people (and even economists) don't seem to understand is that comparing statistics' absolute values are useless. For one, the way that the government has tracked and measured unemployment has changed over the past century. Additionally, the labor market stabilized in the postwar era, creating different expectations and standards of living. One might conclude that our better standards of living today would allow people to withstand an economic environment similar to the 1930s; yet, as standards have risen, so has expectations. The depression will look different this time (not as in your face), but it's effect will be just the same.
If we reached 25% unemployment today, as we measure U3, the government would fall, people would be rioting in the streets, etc. It would be something close to armaggedon. That is not going to happen. On the other hand,15% is within the realm of possibilities (and would correspond to 25% of people unemployed, discouraged from looking, and underemployed). In such a case, we would likely witness a twenty-first century version of what happened back in the 1930s.
Oh, and just in case you think I changed my mind about Bank of America eventually going under, look at this chart showing how much capital BofA would if unemployment reaches 12.4% (the "Your Scenario" in red):
Monday, June 15, 2009
The Status of Health Care and Education: An Obama Report Card
The four most important parts of Obama's presidency were:
Health care -- Universal access to health care (or, even better, universal health care), combined with reduced costs both in general and for consumers (When I put it this way, this does sound like an impossibility, doesn't it?)
Reduction in carbon emissions -- Through some kind of system that puts on a price on carbon dioxide emissions (i.e., polluting the air), and in turn, a large-scale investment in all things renewable and green.
Education reform -- Improving the quality of education and the teachers that provide it.
Economy/Banking -- Lead the US out of economic crisis and toward sustained recovery.
In case you want the short version, here's a summary:
Obama and the Democrats in Congress are giving too much ground on a universal health bill and an emissions reduction bill. As a result, both will end up being incremental measures that fail to address urgent problems. Both opportunities will be squandered, the economy will continue to tank due to burden of health costs and, by 2030, permanent climate change will have become solidified.
These both will be trumped by more pressing concerns. Because of Obama's tentative action on the economy, the US will experience another economic meltdown in 2010 and 2011, and the country will experience a 3-5 year slump afterward.
Detailed Analysis:
Health care is a difficult situation. The ideal (but also necessary) solution is made up of several key points.
1) Eliminate the link between employment and insurance, which will reduce costs for employers, make the US workers more competitive with foreign workers, and likely push up wages.
2) Lower premium costs for most people
3) Subsidies or Medicaid for people who cannot afford insurance
4) Decrease health care use (and, therefore, costs) through prevention, effectiveness studies, and quality of care incentives for doctors (as opposed to pay per procedure or paint pricing).
5) Large investment in medical education, including incentives for students who become general practitioners
6) Regulation that mandates minimal standards for all health plans and ensures no discrimmination or pricing differences based on age OR a government-run backstop plan, if strong regulations aren't passed
An even more ideal scenario would be for the federal government to merely increase the Medicare tax from 2.9% (currently split between the employer and employee) to 9%. If my math is accurate, this would be enough money to cover everyone under a Medicare-like system. Unfortunately, as you well know, this will never happen.
Currently, the Obama administration (and most other people) are afraid of severing the link between employers and health care, so (1) is a non-starter. Subsidies and increased Medicaid coverage (3) will be able to pass Congress. Iniatives to increase costs (4) will also be included, but that will not be enough (see later). Investments in education (5) is a no-brainer, but will likely not allocate enough money to be fully effective.
The problem lies with points (2) and (6). Whether premiums are lowered for everyone (2) is based on two things. First, it depends on health care spending in general to decrease, which will only be accomplished by the elimination of wasteful procedures and drugs. Second, the government must either pass regulation to help keep costs down or provide an alternative public plan that (through its competitive prowess) forces private plans to decrease premiums. If you're still with me (sorry if this is confusing), then you'll realize the crux is how much power the government will have to dictate what health care should be and what it should provide. Currently, the government has extremely little say. Most lapses are dealt with in the courts, and even the FDA has been asleep for much of the past decade. Unfortunately, government control of health matters is a tough sell, because the population has been brainwashed by an 80 year barage by medical industry organizations, including the AMA.
But if the government doesn't step in, a) health care costs will continue to skyrocket, b) more people will be left uninsured, and c) the quality of care will continue to decrease for some segments of the population. The reason I've been advocating for a government plan is because, with its bargaining power, it will be able to tell doctors: we are going to pay you based on the patient outcomes instead of how many procedures you do. The medical industry, just like our financial sector, is another example of capitalism run amok. Too many doctors and pharmaceutical/device manufacturers make more money on quantity instead of quality. Several studies have shown that this leads to poor patient outcomes. Meanwhile, insurers are doing their best to cover only healthy people that never use their insurance, while trying to deny reimbursement to those who do. Both models are anathema to the goal of improving people's health.
The federal government can balance things out by doing a few keys thing:
A) Using bargaining power to decrease the price of drugs and services
B) Using bargaining power to change doctor, pharemaceutical, and manufacturer incentives.
C) As a result of 1 and 2, reduce the price of premiums
D) Provide subsidies to people that still cannot aford insurance
Bargaining power will likely only exist if the federal government establishes its own plan that covers a large number of people. In numbers lies power, because the government can hold back funds from organizations that don't do what it says.
After following the debate for the past few weeks, I'm convinced that any public plan will be neutured to make sure that has limited negotiating power, the same price structure as private plan, and the inability to cover anyone that already has "adequate" insurance. This will result not allow for A, B, and C of the things that need to be done. That is, unless the government tries to federal regulate all insurance providers, establishes a agency to study drug and procedure effectiveness, and attempts to change the way that doctors get paid. Unfortunately, the first part will be rejected by the Supreme Court as a violation of federal power, the second part will be effective in reducing costs but not effective enough, and the third will be called fascism, communism, and a lot of other bad names. Therefore, without a strong public plan, any hope of results A, B, and C are eliminated.
As a result, costs will continue to rise, choking the US economy. Thirty million people will still be uninsured and many more will be inadequately insured. Basically, the system will improve slightly, stay expensive, and remain a catastophic burden. Unless something significant happens, this is where we are heading. D
Education: This will be short, because I haven't been reading much about this.
Mostly, I've heard that the Education department is interesting in better testing, higher salaries for teachers, and more charter schools. This, combined with the money in the Recovery Art, is a good start. But a large part of the problem is local control of school and funding discrepancies. A real solution would include federal funds for all schools, federal control of school standards, higher salaries for all teachers, better education effectiveness studies, less than 25 students per class, increased science funding, measures to increase the time that parents can spend with their children (shorter work week, better welfare for single mothers, etc), and fines for parents of students who do poorly in school.
On the college side, costs are shooting up and the only federal response is to increase the Pell Grant by a few thousand. While this was great news, too many problems still exist. For one, college loan debt is too high. Obama has spoken about eliminating private lenders from public loan programs, but this is not enough. Either the cost of tuition has to be leveled or decreased, or the government has to begin providing larger subsidies for more students. Many recent studies suggest that high loan debt for students messes up the general economy and creates inefficiencies. C+
Health care -- Universal access to health care (or, even better, universal health care), combined with reduced costs both in general and for consumers (When I put it this way, this does sound like an impossibility, doesn't it?)
Reduction in carbon emissions -- Through some kind of system that puts on a price on carbon dioxide emissions (i.e., polluting the air), and in turn, a large-scale investment in all things renewable and green.
Education reform -- Improving the quality of education and the teachers that provide it.
Economy/Banking -- Lead the US out of economic crisis and toward sustained recovery.
In case you want the short version, here's a summary:
Obama and the Democrats in Congress are giving too much ground on a universal health bill and an emissions reduction bill. As a result, both will end up being incremental measures that fail to address urgent problems. Both opportunities will be squandered, the economy will continue to tank due to burden of health costs and, by 2030, permanent climate change will have become solidified.
These both will be trumped by more pressing concerns. Because of Obama's tentative action on the economy, the US will experience another economic meltdown in 2010 and 2011, and the country will experience a 3-5 year slump afterward.
Detailed Analysis:
Health care is a difficult situation. The ideal (but also necessary) solution is made up of several key points.
1) Eliminate the link between employment and insurance, which will reduce costs for employers, make the US workers more competitive with foreign workers, and likely push up wages.
2) Lower premium costs for most people
3) Subsidies or Medicaid for people who cannot afford insurance
4) Decrease health care use (and, therefore, costs) through prevention, effectiveness studies, and quality of care incentives for doctors (as opposed to pay per procedure or paint pricing).
5) Large investment in medical education, including incentives for students who become general practitioners
6) Regulation that mandates minimal standards for all health plans and ensures no discrimmination or pricing differences based on age OR a government-run backstop plan, if strong regulations aren't passed
An even more ideal scenario would be for the federal government to merely increase the Medicare tax from 2.9% (currently split between the employer and employee) to 9%. If my math is accurate, this would be enough money to cover everyone under a Medicare-like system. Unfortunately, as you well know, this will never happen.
Currently, the Obama administration (and most other people) are afraid of severing the link between employers and health care, so (1) is a non-starter. Subsidies and increased Medicaid coverage (3) will be able to pass Congress. Iniatives to increase costs (4) will also be included, but that will not be enough (see later). Investments in education (5) is a no-brainer, but will likely not allocate enough money to be fully effective.
The problem lies with points (2) and (6). Whether premiums are lowered for everyone (2) is based on two things. First, it depends on health care spending in general to decrease, which will only be accomplished by the elimination of wasteful procedures and drugs. Second, the government must either pass regulation to help keep costs down or provide an alternative public plan that (through its competitive prowess) forces private plans to decrease premiums. If you're still with me (sorry if this is confusing), then you'll realize the crux is how much power the government will have to dictate what health care should be and what it should provide. Currently, the government has extremely little say. Most lapses are dealt with in the courts, and even the FDA has been asleep for much of the past decade. Unfortunately, government control of health matters is a tough sell, because the population has been brainwashed by an 80 year barage by medical industry organizations, including the AMA.
But if the government doesn't step in, a) health care costs will continue to skyrocket, b) more people will be left uninsured, and c) the quality of care will continue to decrease for some segments of the population. The reason I've been advocating for a government plan is because, with its bargaining power, it will be able to tell doctors: we are going to pay you based on the patient outcomes instead of how many procedures you do. The medical industry, just like our financial sector, is another example of capitalism run amok. Too many doctors and pharmaceutical/device manufacturers make more money on quantity instead of quality. Several studies have shown that this leads to poor patient outcomes. Meanwhile, insurers are doing their best to cover only healthy people that never use their insurance, while trying to deny reimbursement to those who do. Both models are anathema to the goal of improving people's health.
The federal government can balance things out by doing a few keys thing:
A) Using bargaining power to decrease the price of drugs and services
B) Using bargaining power to change doctor, pharemaceutical, and manufacturer incentives.
C) As a result of 1 and 2, reduce the price of premiums
D) Provide subsidies to people that still cannot aford insurance
Bargaining power will likely only exist if the federal government establishes its own plan that covers a large number of people. In numbers lies power, because the government can hold back funds from organizations that don't do what it says.
After following the debate for the past few weeks, I'm convinced that any public plan will be neutured to make sure that has limited negotiating power, the same price structure as private plan, and the inability to cover anyone that already has "adequate" insurance. This will result not allow for A, B, and C of the things that need to be done. That is, unless the government tries to federal regulate all insurance providers, establishes a agency to study drug and procedure effectiveness, and attempts to change the way that doctors get paid. Unfortunately, the first part will be rejected by the Supreme Court as a violation of federal power, the second part will be effective in reducing costs but not effective enough, and the third will be called fascism, communism, and a lot of other bad names. Therefore, without a strong public plan, any hope of results A, B, and C are eliminated.
As a result, costs will continue to rise, choking the US economy. Thirty million people will still be uninsured and many more will be inadequately insured. Basically, the system will improve slightly, stay expensive, and remain a catastophic burden. Unless something significant happens, this is where we are heading. D
Education: This will be short, because I haven't been reading much about this.
Mostly, I've heard that the Education department is interesting in better testing, higher salaries for teachers, and more charter schools. This, combined with the money in the Recovery Art, is a good start. But a large part of the problem is local control of school and funding discrepancies. A real solution would include federal funds for all schools, federal control of school standards, higher salaries for all teachers, better education effectiveness studies, less than 25 students per class, increased science funding, measures to increase the time that parents can spend with their children (shorter work week, better welfare for single mothers, etc), and fines for parents of students who do poorly in school.
On the college side, costs are shooting up and the only federal response is to increase the Pell Grant by a few thousand. While this was great news, too many problems still exist. For one, college loan debt is too high. Obama has spoken about eliminating private lenders from public loan programs, but this is not enough. Either the cost of tuition has to be leveled or decreased, or the government has to begin providing larger subsidies for more students. Many recent studies suggest that high loan debt for students messes up the general economy and creates inefficiencies. C+
Saturday, March 07, 2009
The GD Comparison
The current decline from peak of the Dow Jones Industrial Average directly corresponds to that of the Great Depression:
The 18-month trend:
381.17 (9/3/29) -- peak level reached
183.76 (3/3/31) -- 51.8% decline
14,164.53 (10/9/07) -- peak level reached
6,754.50 (4/9/09) -- projected, with the same 51.8% decline
We currently stand at 6626.94 (53.2% off peak), so we might actually end up with a worse drop (in percentage terms) than back then.
The ultimate bottom was reached on 07/08/32 when the market hit 41.22, a 89.2% drop 34 months (or 2 years, 10 months) after peak.
If we followed that trend today, we would reach a bottom of 1531.76 on or around August 14, 2010.
Let's hope that doesn't happen.
----
The 2000-2002 decline also lasted around 34 months. The peak was reached on 1/14/00 at a level of 11,722.98 while the trough was 7,422.84 on 10/07/02, a 36.7% decline over 33 months.
The 18-month trend:
381.17 (9/3/29) -- peak level reached
183.76 (3/3/31) -- 51.8% decline
14,164.53 (10/9/07) -- peak level reached
6,754.50 (4/9/09) -- projected, with the same 51.8% decline
We currently stand at 6626.94 (53.2% off peak), so we might actually end up with a worse drop (in percentage terms) than back then.
The ultimate bottom was reached on 07/08/32 when the market hit 41.22, a 89.2% drop 34 months (or 2 years, 10 months) after peak.
If we followed that trend today, we would reach a bottom of 1531.76 on or around August 14, 2010.
Let's hope that doesn't happen.
----
The 2000-2002 decline also lasted around 34 months. The peak was reached on 1/14/00 at a level of 11,722.98 while the trough was 7,422.84 on 10/07/02, a 36.7% decline over 33 months.
Friday, March 06, 2009
DED Alert (March 6 Edition)
More Dire Economic Data:
This morning, the unemployment rate for February was announced at 8.1%, a significant increase from January and part of an alarming upward trend. More than 650,000 jobs were lost last month and that number -- like those of previous months -- will likely be revised upward. All told, we have lost 2.6 million jobs in the last six months and 4.4 million over the course of this 15-month (and counting) recession.
Could we see 10% by the end of the year? Or even by June?
Goodbye 1982, hello 1933.
This morning, the unemployment rate for February was announced at 8.1%, a significant increase from January and part of an alarming upward trend. More than 650,000 jobs were lost last month and that number -- like those of previous months -- will likely be revised upward. All told, we have lost 2.6 million jobs in the last six months and 4.4 million over the course of this 15-month (and counting) recession.
Could we see 10% by the end of the year? Or even by June?
Goodbye 1982, hello 1933.
Friday, February 27, 2009
Report Card: My Two Conerns
My main concerns are in two broad areas: the "wars" and the economy.
In Iraq and Afghanistan, Obama is keeping too much of the status quo in place. His commitment to Afghanistan would have been noble six years ago, but now it threatens to lead to Vietnam-style escalation. From various things I've read, it looks like "success" in Afghanistan can only be achieved through diplomacy, strong economic investment, and acute, targeted military actions. A broader strategy, according to many experts, risks a quagmire in which hundreds of American troops die and the country continues to move toward outright civil war and complete collapse. We risk doing something similar to what we did in the late 80s and 90s. On Iraq, the continued presence of American troops for the next year is probably wise, but the idea of keeping 50,000 there after 2010 is scary. Such an action will continue to hurt us in the Arab world ("American colonialism") and will likely do little to improve the state of the country. Right now, economic investment and bringing in other countries are the keys. If we could manage to balance Iran, Saudi Arabia, Syria, the French, and the UN, we could probably establish some kind of broader coalition for peace. What we really need is other people to start pumping money into the country (construction, infrastructure, and bribes) to get this going. And we also need to get the Iraqi government to fully integrate the Sunnis back into the power structure. (Kicking out al-Maliki would go a long way, but that cannot happen democratically.) Having 50,000 soldiers there is unnecessary and counter-productive. Obama should declare that the US will not take any permanent bases in Iraq and also that all but a few thousand soldiers will leave by the end of his first term, the vacuum to be replaced by international forces. But I don't see either of these changes happening.
On the economy, some positive measures have been passed or advanced. The "recovery" plan is a good start, as is the housing program presented last week. They need to be improved upon over the next six months, or the general effectiveness of these measures will be greatly reduced. (GDP dropped by an annualized rate of 6.2% in the fourth quarter of 2008. That's really bad* and bodes poorly for the remainder of 2009.) The main impediment is a lack of boldness on the part of Obama's economic officials. A big mistake was the twin appointment of Larry Summers as head of the National Economic Council and Tim Geitner as the Secretary of Treasury. They are both (mostly) unreformed Rubinites (acolytes of Clinton's pro-business Treasury secretary), who make too many paeans to the private sector. Right now, we have a crisis that was caused by the idiocy, unnecessary complexity, wishful thinking, and greed of the private sector -- in particular, the banking industry -- and we need to take steps to clean up their mess. Geitner and Summers are trying to keep the banking industry on life support (or in zombie-dom) when they are better off recreating the whole industry. (The US banking/financial model of the last twenty years has, to put it simply, failed. We need to get rid of adjustable loans, crap securities, credit default swaps (CDS), structured investment vehicles (SIV), the rating agencies, and credit cards. Yes, credit cards.) The process of recreation would be slow, but right now it's not happening at all. The failure to revamp the banks through government takeover is an inability to take the needed medicine. Instead, the economic officials are just praying that positive estimates of future growth will come true and be the panacea. It's more wishful thinking. By not solving the banking crisis, the government is precipitating a future cataclysm, in which banks still fail despite all of the government money shoved at them. Better to fix this now then let it send the economy downward again a year from now. Instead of one 27-month recession, we may end up with a 20-month one followed by another 15-month one. We might as well suffer all the pain at once. Obama needs to limit the influence of Summers and give more power to former Federal Reserve Chairman and current Economic Recovery Advisory Board Chairman, Paul Volcker. We need an additional recovery package of $300bn and a more comprehensive housing plan. Most importantly, we need to declare the biggest banks insolvent, take them over, and reform them in smaller, private pieces. This has to be done, some way or another, starting in the next two months.
Nevertheless, despite some missteps so far, it's definitely been a five week sea change in American politics. I still find it amazing that Barack Obama is the president, but all of these concrete actions are diminishing my sense of positive disbelief. It's becoming a reality.
----
*The third worst quarterly drop in GDP since 1947; only 1958 (Q1, -10.6%) and 1982 (Q1, -6.4%) were worse.
In Iraq and Afghanistan, Obama is keeping too much of the status quo in place. His commitment to Afghanistan would have been noble six years ago, but now it threatens to lead to Vietnam-style escalation. From various things I've read, it looks like "success" in Afghanistan can only be achieved through diplomacy, strong economic investment, and acute, targeted military actions. A broader strategy, according to many experts, risks a quagmire in which hundreds of American troops die and the country continues to move toward outright civil war and complete collapse. We risk doing something similar to what we did in the late 80s and 90s. On Iraq, the continued presence of American troops for the next year is probably wise, but the idea of keeping 50,000 there after 2010 is scary. Such an action will continue to hurt us in the Arab world ("American colonialism") and will likely do little to improve the state of the country. Right now, economic investment and bringing in other countries are the keys. If we could manage to balance Iran, Saudi Arabia, Syria, the French, and the UN, we could probably establish some kind of broader coalition for peace. What we really need is other people to start pumping money into the country (construction, infrastructure, and bribes) to get this going. And we also need to get the Iraqi government to fully integrate the Sunnis back into the power structure. (Kicking out al-Maliki would go a long way, but that cannot happen democratically.) Having 50,000 soldiers there is unnecessary and counter-productive. Obama should declare that the US will not take any permanent bases in Iraq and also that all but a few thousand soldiers will leave by the end of his first term, the vacuum to be replaced by international forces. But I don't see either of these changes happening.
On the economy, some positive measures have been passed or advanced. The "recovery" plan is a good start, as is the housing program presented last week. They need to be improved upon over the next six months, or the general effectiveness of these measures will be greatly reduced. (GDP dropped by an annualized rate of 6.2% in the fourth quarter of 2008. That's really bad* and bodes poorly for the remainder of 2009.) The main impediment is a lack of boldness on the part of Obama's economic officials. A big mistake was the twin appointment of Larry Summers as head of the National Economic Council and Tim Geitner as the Secretary of Treasury. They are both (mostly) unreformed Rubinites (acolytes of Clinton's pro-business Treasury secretary), who make too many paeans to the private sector. Right now, we have a crisis that was caused by the idiocy, unnecessary complexity, wishful thinking, and greed of the private sector -- in particular, the banking industry -- and we need to take steps to clean up their mess. Geitner and Summers are trying to keep the banking industry on life support (or in zombie-dom) when they are better off recreating the whole industry. (The US banking/financial model of the last twenty years has, to put it simply, failed. We need to get rid of adjustable loans, crap securities, credit default swaps (CDS), structured investment vehicles (SIV), the rating agencies, and credit cards. Yes, credit cards.) The process of recreation would be slow, but right now it's not happening at all. The failure to revamp the banks through government takeover is an inability to take the needed medicine. Instead, the economic officials are just praying that positive estimates of future growth will come true and be the panacea. It's more wishful thinking. By not solving the banking crisis, the government is precipitating a future cataclysm, in which banks still fail despite all of the government money shoved at them. Better to fix this now then let it send the economy downward again a year from now. Instead of one 27-month recession, we may end up with a 20-month one followed by another 15-month one. We might as well suffer all the pain at once. Obama needs to limit the influence of Summers and give more power to former Federal Reserve Chairman and current Economic Recovery Advisory Board Chairman, Paul Volcker. We need an additional recovery package of $300bn and a more comprehensive housing plan. Most importantly, we need to declare the biggest banks insolvent, take them over, and reform them in smaller, private pieces. This has to be done, some way or another, starting in the next two months.
Nevertheless, despite some missteps so far, it's definitely been a five week sea change in American politics. I still find it amazing that Barack Obama is the president, but all of these concrete actions are diminishing my sense of positive disbelief. It's becoming a reality.
----
*The third worst quarterly drop in GDP since 1947; only 1958 (Q1, -10.6%) and 1982 (Q1, -6.4%) were worse.
Obama Report Card (38 Days In)
Immediate Problems
Stimulus Plan - B
$200bn too small; too many tax cuts, not enough infrastructure spending or govt-backed jobs
Housing Plan - B (B+ if bankruptcy law change is passed)
Rewards some bad behavior; not comprehensive enough; but fixes 50-60% of problems
Banking Plan - D
Half measures and vagaries: the government is playing witch doctor to zombie banks by using voodoo accounting
General
Foreign Policy (in general) - B+
Some dialogue with Iran and Syria; a reasonable line with China and North Korea; better relations with Europe but not as connected on economics as should be; a better, more moderated stance on Russia and missile protection politics; firmer criticism of Israel in Gaza; strong special envoys (Holbrooke, Ross, and Mitchell)
Iraq - C-
Troop pullout is a little slow; a residual force of 50,000 is unacceptable, as are bases; need to work more with neighbors/UN
Afghanistan - C
Putting more troops in could be dangerous; not enough movement yet on diplomacy with Taliban/Pakistan
Health Care - A-
Good measures in stimulus plan; a down payment for universal coverage in the budget; end of govt over-payments to private plans; electronic medical records; drug/device effectiveness studies; and general thought to decreasing overbearing costs
Energy - A
Great choice for secretary in Steve Chu; large stimulus investment in green power grid and related research; large budget outlays for green investment, paid for by large-scale cap-and-trade taxes on polluters; commitment to fuel efficiency increases and a leveling off of the US carbon footprint
Budget/Taxes - A
Strongly prioritizes health care, renewable energy, and education; decreased inequality by raising taxes as much as 10% on the rich (30% on hedge fund managers) and lowering taxes for the other 95%. See a rare, glowing column by Paul Krugman.
Accountability - A
New measures to restrict lobbying after service in the White House; openness in budgeting and stimulus expenditures
Fixing Government Abuse of Laws - B
Closure of Gitmo, but possible inability to find a better solution; less secrecy; no large break on wiretapping or missile attacks in Pakistan
Education - B+
An end to private lenders for govt-backed loans; increase in Pell Grant amount; money for new school construction and tech; focus on the future; BUT support for charter schools and other problematic education ideas
Cabinet and Other Major Personnel Picks - B
Great picks like Steven Chu, Hilda Solis, and Shaun Donovan; bold picks like Hilary Clinton and keeping Bill Gates; strong regulators at the EPA and SEC; some good people in policy and congressional affairs; BUT problems with people dropping out and a major failure of imagination for his economics team (Tim Geitner is a Larry Summers lackey and Summers is bully who doesn't know what he is doing); Obama should have picked Paul Volker for Treasury.
Stimulus Plan - B
$200bn too small; too many tax cuts, not enough infrastructure spending or govt-backed jobs
Housing Plan - B (B+ if bankruptcy law change is passed)
Rewards some bad behavior; not comprehensive enough; but fixes 50-60% of problems
Banking Plan - D
Half measures and vagaries: the government is playing witch doctor to zombie banks by using voodoo accounting
General
Foreign Policy (in general) - B+
Some dialogue with Iran and Syria; a reasonable line with China and North Korea; better relations with Europe but not as connected on economics as should be; a better, more moderated stance on Russia and missile protection politics; firmer criticism of Israel in Gaza; strong special envoys (Holbrooke, Ross, and Mitchell)
Iraq - C-
Troop pullout is a little slow; a residual force of 50,000 is unacceptable, as are bases; need to work more with neighbors/UN
Afghanistan - C
Putting more troops in could be dangerous; not enough movement yet on diplomacy with Taliban/Pakistan
Health Care - A-
Good measures in stimulus plan; a down payment for universal coverage in the budget; end of govt over-payments to private plans; electronic medical records; drug/device effectiveness studies; and general thought to decreasing overbearing costs
Energy - A
Great choice for secretary in Steve Chu; large stimulus investment in green power grid and related research; large budget outlays for green investment, paid for by large-scale cap-and-trade taxes on polluters; commitment to fuel efficiency increases and a leveling off of the US carbon footprint
Budget/Taxes - A
Strongly prioritizes health care, renewable energy, and education; decreased inequality by raising taxes as much as 10% on the rich (30% on hedge fund managers) and lowering taxes for the other 95%. See a rare, glowing column by Paul Krugman.
Accountability - A
New measures to restrict lobbying after service in the White House; openness in budgeting and stimulus expenditures
Fixing Government Abuse of Laws - B
Closure of Gitmo, but possible inability to find a better solution; less secrecy; no large break on wiretapping or missile attacks in Pakistan
Education - B+
An end to private lenders for govt-backed loans; increase in Pell Grant amount; money for new school construction and tech; focus on the future; BUT support for charter schools and other problematic education ideas
Cabinet and Other Major Personnel Picks - B
Great picks like Steven Chu, Hilda Solis, and Shaun Donovan; bold picks like Hilary Clinton and keeping Bill Gates; strong regulators at the EPA and SEC; some good people in policy and congressional affairs; BUT problems with people dropping out and a major failure of imagination for his economics team (Tim Geitner is a Larry Summers lackey and Summers is bully who doesn't know what he is doing); Obama should have picked Paul Volker for Treasury.
Wednesday, January 28, 2009
Obama's Bi-Partisan Risk
It's worth remembering what happened to Bill Clinton in 1994. Trying, along with his wife, to pass a comprehensive healthcare plan, he ignored suggestions from Democratic members of Congress and alienated them in the process. The resulting discord killed the plan, in spite of the large Democratic majorities in the House and Senate.
Fast forward to today and we find that some Democrats in the House are frustrated by the neglect that Obama has shown them. In his quest for fabled bi-partisanship, the President has ignored his true constituents. This is often a charge leveled at Democrats, who frequently go out of there way to talk to the other side while ignoring their base. [This is not the case with Republicans.] African-Americans have found this to be a real problem since the 1970s. Tonight, on Rachel Maddow's MSNBC show, Pete DeFazio expressed his frustration with the disportionate time that Obama and his aides have spent talking to Republicans. He spoke like someone who has not been allowed sufficient input and who is fed up with tax cut orthodoxy.
And what has been the result? The stimulus plan is dragged down by excessive tax cuts, including many that will have no stimulative effect on the economy. Meanwhile, public transit has gone mostly ignored and (as I've mentioned before) infrastructure spending on the whole is at least 1/3 less than it needs to be. Obama, his team, and the leadership in Congress have padded the bill with bipartisan posturing when real solutions are needed, solutions that may raise eyebrows among the commentariat. Perception only goes so far, though. If the economy fails to recover or our infrastructure collapses, appearances will no longer matter.
Not a single Republican voted for today's House stimulus bill. Some may come around when the bill is finalized, but the true lesson is that Republican support doesn't matter. No matter what Obama does, no matter how much he wines and dines them or fawns at their supposed influence, the Right no longer matters. They don't have the voters and most of their common faiths have recently been proved to be bankrupt. It may be a good tactical move to reach out to them, but that need only go so far.
Republicans are not going to vote for universal health care either. The biggest losers from such a bill are some of the Republicans' biggest supporters. They will fight it to the end. Nevertheless, even though the Republicans don't have the votes to stop it, health care could again be lost if Obama doesn't get his own house in order. It's time for him to start listening to suggestions from outside the Washington consensus. Including only the bare minimum of tax cuts may not be savvy, but it's right. Nationalizing the banks may sound un-American, but it's likely essential to economic stabilization. In his Inaugural speech, Obama asked the nation to take responsibility and put away childish things. I can think of nothing more childish than wasting money on illusory bipartisanship.
Fast forward to today and we find that some Democrats in the House are frustrated by the neglect that Obama has shown them. In his quest for fabled bi-partisanship, the President has ignored his true constituents. This is often a charge leveled at Democrats, who frequently go out of there way to talk to the other side while ignoring their base. [This is not the case with Republicans.] African-Americans have found this to be a real problem since the 1970s. Tonight, on Rachel Maddow's MSNBC show, Pete DeFazio expressed his frustration with the disportionate time that Obama and his aides have spent talking to Republicans. He spoke like someone who has not been allowed sufficient input and who is fed up with tax cut orthodoxy.
And what has been the result? The stimulus plan is dragged down by excessive tax cuts, including many that will have no stimulative effect on the economy. Meanwhile, public transit has gone mostly ignored and (as I've mentioned before) infrastructure spending on the whole is at least 1/3 less than it needs to be. Obama, his team, and the leadership in Congress have padded the bill with bipartisan posturing when real solutions are needed, solutions that may raise eyebrows among the commentariat. Perception only goes so far, though. If the economy fails to recover or our infrastructure collapses, appearances will no longer matter.
Not a single Republican voted for today's House stimulus bill. Some may come around when the bill is finalized, but the true lesson is that Republican support doesn't matter. No matter what Obama does, no matter how much he wines and dines them or fawns at their supposed influence, the Right no longer matters. They don't have the voters and most of their common faiths have recently been proved to be bankrupt. It may be a good tactical move to reach out to them, but that need only go so far.
Republicans are not going to vote for universal health care either. The biggest losers from such a bill are some of the Republicans' biggest supporters. They will fight it to the end. Nevertheless, even though the Republicans don't have the votes to stop it, health care could again be lost if Obama doesn't get his own house in order. It's time for him to start listening to suggestions from outside the Washington consensus. Including only the bare minimum of tax cuts may not be savvy, but it's right. Nationalizing the banks may sound un-American, but it's likely essential to economic stabilization. In his Inaugural speech, Obama asked the nation to take responsibility and put away childish things. I can think of nothing more childish than wasting money on illusory bipartisanship.
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