Leftwing “New Republic” Takes on Obama’s “Financial Reform” Deal

The New Republic offers this view on Obama’s “financial reform” drive  now a “deal” between House and Senate “negotiators”.    Noam Scheiber is credited with this “guest post”.

“As of Thursday morning, I gave the House and Senate negotiators little chance of reaching a financial-reform deal in time for the president’s appearance at the G-20 meeting in Toronto this weekend. They’d spent the previous week working at a relatively leisurely pace—bankers’ hours, you could call them—and, characteristically, left the toughest issues for last. Well, egg on my face. After a punishing 20-plus-hour session that evoked shades of a Wimbledon match that won’t end, the conferees reached agreement earlier this morning.

At the broadest level, my feelings about this deal, at least what I know of it so far, are roughly in line with how I felt about the bill the Senate produced last month: All things equal, I’d like to have seen the country’s biggest financial institutions broken up in order to solve various moral hazard and systemic risk problems. But, given the political realities, that probably wasn’t in the cards. And the bill does address bigness in other ways. Taken together, the various new regulations significantly raise the costs of running a big financial institution, not just in absolute terms but relative to small institutions. That’s a good thing in and of itself—which is to say, independent of the specific rationale for each regulation—because it creates incentives for the biggest banks to shrink over time.

From this perspective, the understanding the conference committee reached yesterday turned out slightly better than I expected, and I thought it was shaping up to be pretty solid already. The bill preserves the regulations that hit big banks harder than small ones—things like higher capital requirements and more intrusive consumer regulation—but adds new burdens, like a $19 billion fee on the biggest banks engaged in the riskiest activities. (This is to cover what CBO determined to be the 10-year cost of implementing the new regulations.)

The rest of the last-minute compromises are a mixed bag. The negotiators did largely adopt the tougher Volcker-Rule language championed by Senators Carl Levin and Jeff Merkley—that is, the rule that would prevent banks from placing risky bets for their own bottom line. (The concern is that banks do this using taxpayer-backed funds.) The previous version of the rule, passed in the Senate, could have enabled future regulators to ignore it entirely. The only catch is that, in order to nail down the support of Senator Scott Brown, the final bill allows big banks to invest up to 3 percent of their own capital in hedge funds and private equity funds. That’s a bit tough to swallow since, as one Senate aide reminded me a few weeks ago, Bear Stearns only owned a tiny fraction of the hedge funds it bailed out to the tune of several billion dollars when their subprime investments went bad. True, the compromise has a clause that prevents the parent bank from undertaking such bailouts going forward, but I have no idea how tight that will be in practice.

The other big last-minute deal involved a proposal by Senate Blanche Lincoln to force the big derivatives dealers (basically a handful of the biggest banks in the country) to disgorge their derivatives operations and place them in a separate subsidiary, one that would have enough capital to absorb potential losses and which the banks wouldn’t be allowed to bail out. (A derivative is a bet on the prices of another asset, like a stock or a bond, or on the movement of some other variable, like interest rates or foreign exchange.) In principle, this proposal shouldn’t have aroused much opposition, since the banks are going to have raise new capital to support their derivatives operations regardless of where they house them. But, in practice, the banks’ seemed to be think that they could get away with less capital if their derivatives desks stayed put, or that their implicit backing would give them an advantage over smaller rivals when making derivatives deals. 

Whatever the case, the banks went nuts over the proposal. The compromise is to let the banks hang on to what have been dubbed less risky derivatives, like those involving interest rates and foreign exchange, while forcing riskier bets into a Lincoln-style subsidiary. My queasiness here is that it’s not clear you can know in advance which derivatives are riskiest, and it’s obviously too late once they cause a meltdown. (The whole problem with AIG’s derivatives portfolio, which led to the company’s collapse, is that it was assumed to be almost riskless. Then one day it wasn’t…). But from the vantage point of marginally increasing costs on large institutions, I consider this another step in the right direction.

Overall, there are still a number of key details that remain unclear—either because I can’t tell exactly where the conferees came down in the end, or because the final decisions have been kicked to regulators. In the first category, I don’t yet know where we ended up on exempting derivatives from what’s known as clearing—that is, submitting them to a middleman, to which both sides of the bet have to post collateral. (The middleman would then step in to make one side of the bet whole if the other collapses, a la AIG.) Banks want to avoid this for as many derivatives transactions as possible because it’s costly. And while the loophole is definitely narrower than it looked like it would be last fall, we’ll just have to wait and read the fine print to find out how much narrower.

Meanwhile, in terms of the capital banks will need to cushion themselves against future losses, much of that is yet to be determined by regulators, largely in consultation with financial officials from other countries as they hammer out new international agreements. So a good chunk of the financial reform process is really just beginning. The one twist in terms of capital is that the conferees largely prohibited big banks from counting a certain type of financial instrument as capital even though it a looks a lot more like debt to the naked eye (and, therefore, isn’t very useful for shoring up a balance sheet). In addition to being a good idea in itself, it’s yet another example of imposing new costs on big banks relative to small ones—the big banks tend to rely more heavily on this trick, and banks with less than $15 billion in assets are altogether exempted—so it’s yet another disincentive for banks to become enormous.

A final, macro thought on where we go from here: Many hands have been wrung (including my own at times) about the fact that financial bureaucrats will have so much influence over the shape of the legislation. Even if you trust Team Obama (as I do), you have to worry about their possible successors under a GOP administration bent on waging anti-regulatory jihad. In fact, you don’t even need to imagine that to be anxious. History shows that even otherwise sober-minded officials are just as susceptible to bubble psychology as the rest of us.

But if there are ways that financial regulation is likely to weaken over time, there are other ways that it’s likely to strengthen. For example, the Democratic leadership was finally forced to exempt auto dealers from the new consumer regulatory agency late last night—Barney Frank, the lead House negotiator, conceded that they just didn’t have the votes to do otherwise. But that hardly strikes me as the final word on regulating auto loans. To the contrary, now that we’ve taken the big step of creating a consumer agency, it strikes me as relatively easy to expand its purview. And I’m guessing that the next time we hear about a sympathetic military family getting screwed by a deceptive auto loan, that’s what’s going to happen. So this bill really is just the beginning in more ways than one.”

Comment:  I wonder if many Americans ever bother to pay much attention with the actual dealings suggested as “reform”  from the Marxist crowd…whether it is finance or health or education  or military or whatever “reform” the Left will cook up in the name of Peace and Brotherhood.  

The solution is more government dictatorship and small, insignificant, weak, vulnerable, almost invisible private enterprise all of whom will be forced to pay Union dues to help elect and reelect Marxists ever and forever more.  

First on the modern Marxist agenda is to marry government into Big Business.   Dennis Prager so often reminds us that “Big Business” operates amorally, which essentially is its strength as it is its cultural weakness.  Despite leftwing propaganda advanced in the American press, academia, the entertainments industry and so on, Obama soothed and petted Big Business as he soaked it for its millions to get himself elected to the White House.  

It is usually easier and more profitable for Big Business to work side by side Big Government….In Marxism all business of significance is run by government bureaucrats.  It is always easier and more profitably in the tyrannical and manipulative sense for Big Government to word “side by side” Big Business….because the “side by side”  quickly disappears.  Big Business invariably becomes merely an instrument of Government power to run citizen lives via central planning and dictate….. and all the  economic, moral, educational, and political evil that goes with such concentration of power.   Since it has the exclusive power to tax to destroy or build  what it wants to destroy or build, since it can print or not print what ever amounts of “money” needed to cover or advance its grand failures, such as Freddie Mac and Fannie Mae, and since it can control the employment and freedom of those  critics  who might notice government’s  grand failures and might write about them, since it can elect to the Courts its Bigger-Governmen- is-Better-sycophants, the voting citizen might………just might begin to realize the GRAND TRUTH of the DENNIS PRAGER ADAGE………..

 ”THE BIGGER THE GOVERNMENT, THE SMALLER THE CITIZEN!”

How small do you want to become…..fellow American citizen?

At first glance it seems very American that Big Finance should be broken up into tiny ant hills.  I’ll buy that idea.   What happens, however, to those which are more successful than others?….within the normal understandings of what successful means. Should they be fined….closed?   Who decides how big how big should be?   I’d feel safer if, to pick a number out of the blue, let’s say 25 financial institutions were big…..and another 25 financial institutions big, but not as big…..and the rest left on their own to swim as a school of fish…..or some formula like that.   Yet, on the other hand,  I’d feel better about the survival of our more democratic attitudes if there were Big Competitors to keep Big Government from becoming as  Big and tyrannical as is most likely to happen when  Obama’s Marxist  surge to conquer America reaches its climax.

George Will on the “Vapid and Hollow” Upcoming Elena Kagan Show

George Will writes the following in Investor’s Business Daily under the title, “Tossing a Few Legal Inquiries into the Void”.

Given Elena Kagan’s aversion to “vapid and hollow” confirmation hearings devoid of “legal analysis,” beginning Monday she might relish answering these questions:

• It would be naughty to ask you about litigation heading for the Supreme Court concerning this: Does Congress have the right, under its enumerated power to regulate interstate commerce, to punish the inactivity of not purchasing health insurance?

So, instead answer this harmless hypothetical: If Congress decides interstate commerce is substantially affected by the costs of obesity, may Congress require obese people to purchase participation in programs such as Weight Watchers? If not, why not?

• The government having decided that Chrysler’s survival is an urgent national necessity, could it decide Cash for Clunkers is too indirect a subsidy and instead mandate that people buy Chrysler products?

• If Congress concludes that ignorance has a substantial impact on interstate commerce, can it constitutionally require students to do three hours of homework nightly? If not, why not?

• Can you name a human endeavor that Congress cannot regulate on the pretense that the endeavor affects interstate commerce? If courts reflexively defer to that congressional pretense, in what sense do we have limited government?

• In Federalist 45, James Madison said: “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the state governments are numerous and indefinite.”

What did the Father of the Constitution not understand about the Constitution? Are you a Madisonian? Does the doctrine of enumerated powers impose any limits on the federal government? Can you cite some things that, because of that doctrine, the federal government has no constitutional power to do?

• Is it constitutional for Arizona to devote state resources to enforcing federal immigration laws?

• Is there anything novel about the Arizona law empowering police officers to act on a “reasonable suspicion” that someone encountered in the performance of the officers’ duties might be in the country illegally?

• The Fifth Amendment mandates “just compensation” when government uses its eminent domain power to take private property for “public use.” In its 2005 Kelo decision, the court said government can seize property for the “public use” of transferring it to wealthier private interests who will pay more taxes. Do you agree?

• Should proper respect for precedent prevent the court from reversing Kelo? If so, was the court wrong to undo Plessy v. Ferguson’s 1896 ruling that segregating the races with “separate but equal” facilities is constitutional?

• In 1963, President John F. Kennedy said Congress should “make a commitment . . . to the proposition that race has no place in American life or law.” Was he right?

• In 1964, Sen. Hubert Humphrey, a principal sponsor of that year’s Civil Rights Act, denounced the “nightmarish propaganda” that the law would permit preferential treatment of an individual or group because of race or racial “imbalance” in employment. What happened?

• William Voegeli, contributing editor of the Claremont Review of Books, writes: “The astonishingly quick and complete transformation of the Civil Rights Act of 1964, from a law requiring all citizens be treated equally to a policy requiring they be treated unequally, is one of the most audacious bait-and-switch operations in American political history.” Discuss.

• In a 2003 case affirming the constitutionality of racial preferences in law school admissions, Justice Sandra Day O’Connor said: “We expect that 25 years from now, the use of racial preferences will no longer be necessary to further the interest approved today.” If you are a sitting justice in 2028, do you expect to conclude that such preferences can no longer survive constitutional scrutiny because they no longer serve a compelling public interest?

• The president is morose about the court’s Citizens United decision holding that the First Amendment, which says Congress shall make “no law” abridging freedom of speech, means no laws abridging a corporation’s freedom to speak, including nonprofit advocacy groups such as the National Rifle Association and Sierra Club.

The court called it “censorship” for government “to command where a person may get his or her information or what distrusted source he or she may not hear.” Agree?

• You have noted that the court often considers legislative motives when deciding First Amendment cases. Should the court consider legislators’ motives if, in response to Citizens United, they impose new burdens on corporate speech?

• When incumbent legislators write laws restricting the quantity, content and timing of speech about legislative campaigns, are not their motives presumptively suspect?

Just wondering.

“The Myth of the Doctor Fix.”

THE MYTH OF THE “DOC FIX”

In order to prevent a one-fifth drop in the fees physicians receive under Medicare, Congress is proposing another in a series of temporary fixes.  The American Medical Association (AMA) engaged in an expensive lobbying campaign to implement the so-called “doc fix” for Medicare Part B, but Congress is unlikely to permanently solve the problem, says John R. Graham, Director of Health Care Studies at the Pacific Research Institute. 

Despite past short-term fee fixes, Medicare beneficiaries’ access to care is still tenuous.  For example, last October the Mayo Clinic decided that it could no longer accept Medicare patients at its two primary care clinics in Phoenix. 

Additionally:

• In 2009, Houston’s largest medical practice — the Kelsey-Seybold Clinic — announced it would no longer accept new patients enrolled in the traditional Medicare Part B program because reimbursements had become too low.
• Almost all of the clinic’s patients have switched to Medicare Advantage plans, most of which negotiate their own payment rates with providers.
• Unfortunately, many seniors who have access to Medicare Advantage plans will soon lose them under the health reform law, because of a roll-back in the premiums the government will pay the plans and despite the government’s insistence to the contrary.
• In fact, the Chief Actuary of the Centers for Medicare & Medicaid Services estimates that 7.4 million Medicare beneficiaries will lose their Medicare Advantage plans by 2017. 

The fundamental problem with Medicare’s fees is not the level at which the government fixes them, but that the government fixes them at all.  The system cannot be repaired: It would be far better for the federal government to simply pull the plug on the entire mechanism and convert Medicare Part B to a system of vouchers.  In return for a hard budget cap, the government would allow physicians to charge whatever fees they and their patients agreed upon.  The government could liberalize the popular, private Medigap plans to allow seniors to cover extra physicians’ fees, protecting them from the costs of outpatient care beyond the value of the vouchers, says Graham. 

Source: John R. Graham, “The Myth of the ‘Doc Fix,’” National Center for Policy Analysis, Brief Analysis No. 710, June 22, 2010. 

For text:    

http://www.ncpa.org/pub/ba710 

from the National Center for Policy Analysis

Obama Marries Big Government with Big Finance: “Too Big to Fail Survives Again!”

Zombie banks, take comfort: The zombie regulatory system lives on.

Colin Barr at Fortune, exposes another Obama solution to “run” the country from Obama Central Planning Services.   In the name of Obama progress it is called another “reform” bill ala Obamacare health “reform”.   Energy “reform in on the horizon….or is it already overhead?   Mr. Bart’s report is headed, “Too Big to Fail Survives Again!”

“The financial reform legislation hammered out Friday morning on Capitol Hill closes many of the loopholes that led to the last crisis. But it stops well short of breaking the bad habit that has fed outlandish risk-taking for almost three decades: too big to fail.

The reform bill does take strides toward a safer financial system. It will create a process for liquidating troubled financial firms, making another AIG (AIG) less likely. It will boost oversight and transparency in the derivatives markets, making the crisis virus less contagious. It will charge a group of watchdogs with keeping an eye on systemic risk, which could keep Wall Street wagers from bubbling over.

“They have made solid progress setting up a system to ensure financial calamities are less frequent,” said Raj Date, who runs the Cambridge Winter Center, a nonprofit financial policy consultant. “I would give it a B over all.”

But to earn an A grade, reformers in Congress and the administration would have had to go further.

They could have confronted the biggest threats to the taxpayer-funded safety net, and tied their own hands to send the message they won’t rush in to save the next big fool that gets in trouble.

Instead, they produced a 1,500-page bill that leaves the biggest financial firms untouched and preserves bailout powers that were infamously exploited in 2008.

So too big to fail, born in the 1984 bailout of Continental Illinois and assailed ever since, staggers forward to the next crisis.

“We need to reinforce the expectation that there will be no bailouts,” said Richard Carnell, a law professor at Fordham University who served in the Clinton Treasury. “But the approach used here entrenches the bailout expectations.”

Early on, the administration decided it wouldn’t defang the biggest risk to financial stability: the giant banks whose size and appetite for risk makes many observers nervous, and the loss-soaked mortgage insurers Fannie Mae (FNM) and Freddie Mac (FRE).

A bill proposed in April by Democratic Sens. Ted Kaufman of Delaware and Sherrod Brown of Ohio would have capped bank size and leverage, forcing behemoths such as Bank of America (BAC) and JPMorgan Chase (JPM) to slim down.

Proponents say they believe the bill was gathering strength in a Congress animated by anti-Wall Street sentiment, but was defeated by the administration’s opposition. Wall Street has been a huge campaign contributor, and the White House was loath to be seen supporting a bill that could cost high-paying jobs in a globally competitive industry.

“We were very disappointed in the way that vote went down,” said Heather Slavkin of the AFL-CIO.

The new rules do give regulators tools to break up banks should they pose a threat to the health of the financial system. But once a big financial firm runs into problems, the market inevitably gets nervous. 

Taking decisive action without either permitting market upheaval or resorting to bailouts “is very painful,” said Date. “We still haven’t instilled dramatically different debt-market discipline, and that’s what we need to do.”

To that end, it’s distressing that one of the most infamous loopholes of the last crisis lives on: the rule that allows the Fed to lend to just about anyone if their problems threaten to upset the financial apple cart.

The bill would place conditions on the Fed’s use of that power, but Philadelphia Fed President Charles Plosser would go further.

This week he proposed that the Fed relinquish that authority, which was used in a potentially costly taxpayer-backed 2008 sale of Bear Stearns to JPMorgan. Plosser said the Fed’s bailouts undermined the agency’s authority by allowing it to make spending decisions that rightly belong with Congress.

He called for an agreement that “would eliminate the ability of the Fed to engage in bailouts of individual firms or sectors and place such accountability where it rightly belongs — with the fiscal authorities.”

But regulators aren’t exactly turning cartwheels about anything that would impair their flexibility when the next crisis comes.

This, in turn, reassures creditors who lend freely to giant firms, assuming they will be saved by the taxpayer bell should a calamity develop. The free flow of capital to TBTF firms lets them grow at the expense of smaller rivals.

Until market overseers have a better grip on where the risks lie and show a willingness to act ruthlessly to stamp them out, the mentality that fed the last bubble will live on.

“Short term stability is what’s popular,” said Carnell. “But you have to be willing to accept some near-term instability for the sake of systemic health, and there is no sign that they are.” “