Tag Archives: Tim Fernholz

Timmy, The Bloggers And The Background, Which Is Apparently A Portrait Of Robert Rubin

Alex Tabarrok:

Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes.

There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work.  Treasury gave a good argument that reform had been deep and meaningful.

A few good lines from a senior treasury official as I recall the gist:

  • “Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front.”
  • “Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT)

There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested.

The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”

Felix Salmon:

Treasury’s blogger meeting on Monday has been covered by quite a lot of the participants — see Lounsbury, Tabarrok, and Smith.

On Wednesday, there was another meeting, this time with professional, salaried bloggers, with a decidedly center-left bias. (Tim Fernholz, Mike Allen, Derek Thompson, Shahien Nasiripour, Nick Baumann, Ezra Klein, me. Matt Yglesias was literally left out in the rain, unable to get past Treasury security.)

I half understand why Treasury makes the distinction between the two types of bloggers, but Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives.

The discussion was all held on deep background, so I can’t quote anybody. I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world.

The big picture, at least as I grokked it, is that although the recovery started off stronger than Treasury had hoped, the broad economy is still in a pretty weak position. The Fed is doing its part to try to keep a certain amount of momentum going, but fiscal policy is harder, because it needs the cooperation of Congress. And it’s far from clear what kind of fiscal legislation can be passed at this point.

On housing, the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines. And yes, Treasury would very much like to make sure that house prices don’t fall any more than they have already. There’s no Bush-style policy of trying to maximize homeownership, or anything like that, and indeed Treasury now seems pretty resigned to the fact that its much-vaunted loan-modification program is going to have only a pretty marginal effect, doing more to delay foreclosures than to prevent them. But the very powerful government guarantee on Frannie’s bonds is here to stay, you won’t be surprised to hear. And even delaying foreclosures can be a good thing if it helps to give the broader economy a bit of time to recover.

Naked Capitalism:

Readers may wonder why I haven’t written about my visit on Monday to the Treasury, but truth be told, I headed out afterward with Mike Konczal and Steve Waldman to get a drink, and we all looked at each other quizzically. I said something along the lines of “I’m not certain there is anything to write about,” and they nodded in agreement. I had less than a half page of notes.

That isn’t to say we didn’t spend nearly 2 1/2 hours in a high-ceilinged conference room, and that we didn’t engage with Treasury officials, including Timothy Geithner, in what looked like conversation. But the assumptions of both sides re process as well as substance were so far apart that it often felt like we were talking past each other.

One part of the dynamic was the home court advantage the Treasury enjoys. This is their drill, their offices, they no doubt used their spiel on others and have it pretty well debugged, and more important, they play well off each other (they give the impression of having good rapport with each other; there was some banter on their side). So they have message discipline and stay unified and still manage to look relaxed and informal. By contrast, we seven bloggers (the others were Tyler Cowen, Alex Tabarrok, Phil Davis, and John Lounsbury) were on hold in the very large corridor till the conference room cleared up, which meant we didn’t even have the chance to ask each other, “And what do you want to ask about?” Our interests were likely to be (and were) somewhat divergent, but it would have been nice to know to what degree.

Despite our heterogeniety, we all took a skeptical posture towards the Treasury team. One has to think they anticipate that, which then begs the question of what they expect to accomplish with these meetings. We aren’t journalists, so the access card does not work; the infrequency and format of these sessions means they don’t build personal rapport (and there are good reasons why not; from our end, it costs time and money to go to DC; from their end, we aren’t important enough to warrant more frequent contact).

So they may have other motivations, but a safe assumption is that they regard this as marketing, and a famous cliche is “50% of what I spend on advertising is wasted, I just don’t know which 50%.” We probably look like part of the wasted 50%, but they can’t be certain, and the costs to them of having this sort of meeting are low, so they might as well keep the experiment going.

Mike Allen at Politico:

ADMINISTRATION MINDMELD: The virtue of action on Social Security is that it demonstrates the ability to begin to affect the long-run deficits. Social Security isn’t the biggest contributor to the problem – that’s still health-care costs. But ti could help a little bit, buy time, and strengthens the odds of a political consensus behind other spending cuts or tax increases. Most importantly, it would establish more CREDIBILITY with the MARKETS. The mood of the world at the moment (slightly excessive, from the administration’s point of view) is that if you don’t do anything with spending cuts, it doesn’t get you credibility.

Tim Fernholz at Tapped on Allen:

Sure makes it seem like the administration wants to cut Social Security, doesn’t it? By chance, I was at the same deep-background briefing where Allen had his “mindmeld,” and I have to say, I don’t think he’s got it right. After reviewing my notes and a recording of the conversation, here’s my take. (The rules for this conversation were no direct quotes and no identifying the senior administration official in question.)

Allen references a part of the conversation that concerned the Deficit Commission and what the official might know about its agenda. The official believed that the largest consensus was forming around an undefined plan to support the long-term solvency of Social Security and was discussing why that hypothetical plan might help bolster political will for other deficit-reduction ideas. The official would note that Social Security is already solvent for decades.

The most important omission from Allen’s item is that the official concluded the conversation by noting that Social Security is not a generous benefit compared to other public pensions around the world and that cutting benefits, even years in advance, would be difficult to justify. More symbolically, Allen doesn’t mention that the official cited Paul Krugman when talking about Social Security’s contributions to the deficit. Finally, the reason the administration official was interested in credibility before the markets is so the government could borrow more money for temporary fiscal stimulus.

Brad DeLong

Matthew Yglesias on Allen:

Brad DeLong glosses this as part of why “Friends Don’t Let Friends Read Politico.” And certainly it is a case study in why you can’t go run and panic after reading a thinly sourced item in a traffic-hungry publication. But part of the issue here, it seems to me, is that DC officialdom ought to realize that its obsession with off the recordy-ness has some serious downsides. Treasury did two meetings this week, one that was with professional blogger types and one that was more with professional economists who also blog, and most of the attendees seem to have come away quite impressed. If that’s the case, wouldn’t people able to listen to a recording of the full session likely also be impressed? And wouldn’t it be easier to clear up misconceptions that Allen’s writeup may have created?

Structural shifts in the media industry away from the “three TV networks and a bunch of local newspaper monopolies” model have shifted the balance of power away from journalists and toward flacks. Consequently, if people want to hold off the record briefings with “senior officials” plenty of writers are going to show up. But merely because people can get away with that kind of thing doesn’t necessarily make it a good idea.

Ezra Klein:

There’s been some meta-discussion over a recent meeting between reporters, bloggers, pundits and Treasury officials. The meeting existed under the worst of all media rules: Background.

On-the-record is, well, on the record. Somebody tells me something and I tell you. Off-the-record is just the opposite: Somebody tells me something and I can’t tell you that I was told this. I can be informed by it, but no one knows how I got the information. The disadvantages of this are obvious. But the advantage is a much more honest and free-flowing conversation.

Background has neither the transparency of being on-the-record or the freedom of being off-the-record. It means I can tell you that someone told me this (“a senior Treasury official”). I really don’t understand why people use it.

But use it they do, and all the time. My favorite background offer from this administration came in an e-mail the night before HealthCare.gov launched. It was a lot of standard information on the new site that I could attribute to an “administration official” if I so chose. Why they wanted anonymity to say things like “HealthCare.gov is a new, easy to use website that helps consumers take control of their health care and make the choices that are right for them by putting the power of information at their fingertips,” I’ll never know. Was Gibbs seriously going to chew someone out for going on-the-record with that?

Mike Konczal at Rortybomb:

On Monday I took part in a blogger meeting with several members of the Treasury Department. Alex Tabarrok has a writeup, as does Yves Smith and John Lounsbury has an extensive one as well.

First off, here’s a picture of me with Robert Rubin’s portrait:

Second, have you ever seen Miracle on 34th Street? Remember at the end when that guy legally is Santa Claus because he has all that mail delivered to him? I felt a little like that seeing “Mike Konczal, Rortybomb” on paper that had Treasury’s seal:


It was a pretty casual meet and greet. There weren’t any presentations, nothing to be sold on. We went to questions immediately. Geithner is very smart and personable, and it was very useful to chat with Treasury officials on background over the strengths and weaknesses of the financial reform bill.



– They are sticking by HAMP. The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical.

– There was talk about how fiscal policy can’t move through Congress. I asked them about only 0.5% of HAMP being spent and how that could be used without Congress’ permission. Before I suggested that the remainder of the $50bn be divided into two funds, the Digging Holes Across States (DHAS) fund and the Filling Holes Across States (FHAS) fund, two far more socially productive means of spending the HAMP money than what is currently being done with it, I was told that the entire $50bn is expected to be spent by the time the program is over. I didn’t believe it; we will see.

– Overall, there seemed to be a sense of “we are done here” from the meeting. Maybe it was the fact that it is August, the informal manner of the meeting and a news cycle is driven by insane things, but there was a sense with the financial reform bill passed, deadlock in Congress and a Federal Reserve tip-toeing around its mandate things were going to slow down and options are more or less removed from the table. Which is a very scary thought with the economy the way it is.


Really fucking unbelievable. As I think I said to Mike at Netroots Nation, if HAMP is actually a program designed to boost the housing market and funnel money several billion more dollars to banks, it’s also a really fucking horrible and stupid and inefficient way to do that even without the “screwing people over” part.

Shahien Nasiripour at Huffington Post

EARLIER: Meet The Financial Bloggers, Timmy

Timmy Meets With Even More Bloggers

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Filed under Economics, New Media, The Crisis

They Have No Bread? Let Them Read American Spectator Articles!

Carol Platt Liebau at Townhall:

Angelo Codevilla has written a thought-provoking piece, positing that the great political conflict in this country is actually between the “ruling class” and the “country class.”

at The American Spectator:

As over-leveraged investment houses began to fail in September 2008, the leaders of the Republican and Democratic parties, of major corporations, and opinion leaders stretching from the National Review magazine (and the Wall Street Journal) on the right to the Nation magazine on the left, agreed that spending some $700 billion to buy the investors’ “toxic assets” was the only alternative to the U.S. economy’s “systemic collapse.” In this, President George W. Bush and his would-be Republican successor John McCain agreed with the Democratic candidate, Barack Obama. Many, if not most, people around them also agreed upon the eventual commitment of some 10 trillion nonexistent dollars in ways unprecedented in America. They explained neither the difference between the assets’ nominal and real values, nor precisely why letting the market find the latter would collapse America. The public objected immediately, by margins of three or four to one.

When this majority discovered that virtually no one in a position of power in either party or with a national voice would take their objections seriously, that decisions about their money were being made in bipartisan backroom deals with interested parties, and that the laws on these matters were being voted by people who had not read them, the term “political class” came into use. Then, after those in power changed their plans from buying toxic assets to buying up equity in banks and major industries but refused to explain why, when they reasserted their right to decide ad hoc on these and so many other matters, supposing them to be beyond the general public’s understanding, the American people started referring to those in and around government as the “ruling class.” And in fact Republican and Democratic office holders and their retinues show a similar presumption to dominate and fewer differences in tastes, habits, opinions, and sources of income among one another than between both and the rest of the country. They think, look, and act as a class.

Although after the election of 2008 most Republican office holders argued against the Troubled Asset Relief Program, against the subsequent bailouts of the auto industry, against the several “stimulus” bills and further summary expansions of government power to benefit clients of government at the expense of ordinary citizens, the American people had every reason to believe that many Republican politicians were doing so simply by the logic of partisan opposition. After all, Republicans had been happy enough to approve of similar things under Republican administrations. Differences between Bushes, Clintons, and Obamas are of degree, not kind. Moreover, 2009-10 establishment Republicans sought only to modify the government’s agenda while showing eagerness to join the Democrats in new grand schemes, if only they were allowed to. Sen. Orrin Hatch continued dreaming of being Ted Kennedy, while Lindsey Graham set aside what is true or false about “global warming” for the sake of getting on the right side of history. No prominent Republican challenged the ruling class’s continued claim of superior insight, nor its denigration of the American people as irritable children who must learn their place. The Republican Party did not disparage the ruling class, because most of its officials are or would like to be part of it.

Never has there been so little diversity within America’s upper crust. Always, in America as elsewhere, some people have been wealthier and more powerful than others. But until our own time America’s upper crust was a mixture of people who had gained prominence in a variety of ways, who drew their money and status from different sources and were not predictably of one mind on any given matter. The Boston Brahmins, the New York financiers, the land barons of California, Texas, and Florida, the industrialists of Pittsburgh, the Southern aristocracy, and the hardscrabble politicians who made it big in Chicago or Memphis had little contact with one another. Few had much contact with government, and “bureaucrat” was a dirty word for all. So was “social engineering.” Nor had the schools and universities that formed yesterday’s upper crust imposed a single orthodoxy about the origins of man, about American history, and about how America should be governed. All that has changed.

Today’s ruling class, from Boston to San Diego, was formed by an educational system that exposed them to the same ideas and gave them remarkably uniform guidance, as well as tastes and habits. These amount to a social canon of judgments about good and evil, complete with secular sacred history, sins (against minorities and the environment), and saints. Using the right words and avoiding the wrong ones when referring to such matters — speaking the “in” language — serves as a badge of identity. Regardless of what business or profession they are in, their road up included government channels and government money because, as government has grown, its boundary with the rest of American life has become indistinct. Many began their careers in government and leveraged their way into the private sector. Some, e.g., Secretary of the Treasury Timothy Geithner, never held a non-government job. Hence whether formally in government, out of it, or halfway, America’s ruling class speaks the language and has the tastes, habits, and tools of bureaucrats. It rules uneasily over the majority of Americans not oriented to government.

The two classes have less in common culturally, dislike each other more, and embody ways of life more different from one another than did the 19th century’s Northerners and Southerners — nearly all of whom, as Lincoln reminded them, “prayed to the same God.” By contrast, while most Americans pray to the God “who created and doth sustain us,” our ruling class prays to itself as “saviors of the planet” and improvers of humanity. Our classes’ clash is over “whose country” America is, over what way of life will prevail, over who is to defer to whom about what. The gravity of such divisions points us, as it did Lincoln, to Mark’s Gospel: “if a house be divided against itself, that house cannot stand.”


DRJ at Patterico:

This American Spectator essay by Angelo M. Codevilla, a professor of international relations at Boston University and former U.S. foreign service officer, is a must read for every American. Codevilla defines America’s ruling class and country class and reviews the decisions we Americans have made that will decide our and our children’s futures.

Implicit in Codevilla’s essay is the following question: Will Americans choose to be governed by a ruling class or will we return to self-governance by the country class? I think most blue states have already chosen the ruling class with its comfortable promises and European-style goals. I pray most red states and especially my fellow Texans will choose the Country Party, but at this point I have little hope it will be enough.

John Ballard at Newshoggers:

This weekend’s reading assignment is America’s Ruling Class — and the Perils of Revolution in American Spectator. Thanks to Memeorandum for bringing this piece to our attention. Only one commentary link so far, and comments there make think it may be a ton of lipstick, but I’m holding judgment until I read for myself.

Again, no, I haven’t read it yet. As I write it is printing out for me to read later, some fourteen thousand words plus. Much too long to sit here and digest at the computer monitor. If anyone else reads feel free to leave a comment and we can discuss it. I’ll do a followup later if the spirit moves me.


[A few hours later…]

I should have waited. This is a wasted post, along with several pages of ink used to print it out. I’m reminded of an exchange years ago told by a sales rep for a meat company.

Chicken farmer: “You know what that white stuff is in chicken shit?

Sales rep: “No, I never thought about it. What it is?”

Chicken farmer: “That’s chicken shit, too.”

By the end of the first page I counted half a dozen instances of spin preparing the reader to swallow what followed. Clearly the writer was breaking out more than a broad brush, a journalistic equivalent to a fire hose. I could hear Beck in the background railing about Progressives.

By the end of the second page it became fourteen pages of prose not unlike that which can be heard any time from conservative talk media. Somewhat turgid. Reading it is like driving in the rain with no windshield wipers. Turns out to be lipstick after all in a pathetic effort to legitimize the Tea Party.

Sorry to have furnished the links. I will do  better next time after due diligence. Steve and Joyner are too polite.

James Joyner, first quoting the piece:

Its attitude is key to understanding our bipartisan ruling class. Its first tenet is that “we” are the best and brightest while the rest of Americans are retrograde, racist, and dysfunctional unless properly constrained. How did this replace the Founding generation’s paradigm that “all men are created equal”?

This not only grossly exaggerates the attitudes of the current elites but confuses the flowery rhetoric of our Founding elite with their actual attitudes.  There’s not much doubt that the people who wrote and signed the Declaration and the Constitution were much less egalitarian than their successors.  Codevilla goes on the cherry pick history to demonstrate just the opposite:  An elite who became ever-more contemptuous of the unwashed masses.  After several paragraphs of this, he comes to:

Franklin Roosevelt brought the Chautauqua class into his administration and began the process that turned them into rulers. FDR described America’s problems in technocratic terms. America’s problems would be fixed by a “brain trust” (picked by him). His New Deal’s solutions — the alphabet-soup “independent” agencies that have run America ever since — turned many Progressives into powerful bureaucrats and then into lobbyists. As the saying goes, they came to Washington to do good, and stayed to do well.

As their number and sense of importance grew, so did their distaste for common Americans. Believing itself “scientific,” this Progressive class sought to explain its differences from its neighbors in “scientific” terms. The most elaborate of these attempts was Theodor Adorno’s widely acclaimed The Authoritarian Personality (1948). It invented a set of criteria by which to define personality traits, ranked these traits and their intensity in any given person on what it called the “F scale” (F for fascist), interviewed hundreds of Americans, and concluded that most who were not liberal Democrats were latent fascists. This way of thinking about non-Progressives filtered down to college curricula. In 1963-64 for example, I was assigned Herbert McCloskey’s Conservatism and Personality (1958) at Rutgers’s Eagleton Institute of Politics as a paradigm of methodological correctness. The author had defined conservatism in terms of answers to certain questions, had defined a number of personality disorders in terms of other questions, and run a survey that proved “scientifically” that conservatives were maladjusted ne’er-do-well ignoramuses. (My class project, titled “Liberalism and Personality,” following the same methodology, proved just as scientifically that liberals suffered from the very same social diseases, and even more amusing ones.)

The point is this: though not one in a thousand of today’s bipartisan ruling class ever heard of Adorno or McCloskey, much less can explain the Feuerbachian-Marxist notion that human judgments are “epiphenomenal” products of spiritual or material alienation, the notion that the common people’s words are, like grunts, mere signs of pain, pleasure, and frustration, is now axiomatic among our ruling class. They absorbed it osmotically, second — or thirdhand, from their education and from companions. Truly, after Barack Obama described his opponents’ clinging to “God and guns” as a characteristic of inferior Americans, he justified himself by pointing out he had said “what everybody knows is true.” Confident “knowledge” that “some of us, the ones who matter,” have grasped truths that the common herd cannot, truths that direct us, truths the grasping of which entitles us to discount what the ruled say and to presume what they mean, made our Progressives into a class long before they took power.

In reality, what we had was a government that took on more and more power in order to address the ills of society.   Maybe the practical difference is moot.  But the fact of the matter is that there was never an age when the governing class thought themselves the equal of the governed:  They’ve always thought themselves smarter and better.

Further, cherry picking statements like Obama’s unfortunate campaign slip obscures the fact that most politicians — especially on the Republican side — actually go out of their way to flatter the Real Americans who aren’t part of the Beltway Elite.   Indeed, elite has been a bad thing as long as I can remember.

Dan Riehl:

The essay breaks it down into a country class – the people, versus a ruling class – the establishment. Also, consider that, if the Democrat machine is better at gaining control of the levers of power and using them, the Republican Party is better at keeping its country class of would be followers down. That’s part of why we saw a Netroots on the Left, but chiefly see only more establishment-related punditry being elevated on the Right.

Of course, the Netroots is now being marginalized, even by the ruling Democrats, because it served its purpose. But there’s yet to be the same larger genuinely peopled-power movement on the Right, because the Republican ruling class is so set on marginalizing it, while funding more ruling class-related punditry in new media, before a more genuinely people-powered form of punditry ever rises up on the Right.

Take the ruling class away, and the real battle for America’s future is out here between the Left, Right and would be centrist blogs. Were it purely democratic, and not now largely formed by the flow of capital, I’m confident the center-Right would ultimately win out. It best reflects the views of a majority of the American people. So, I don’t fear the type of revolution upon which Codevilla speculates. But whether or not that battle ever truly takes place remains to be seen.

The so called conservative pundit class that is actually DC-centric punditry in new media is not our true ally. It functions more as a filter, or governor of our beliefs and desires as regards politics, than our enabler. And that will remain true until more people stop being nice to it, or fawning over it, simply because it has power and is purported to be wise. Its more truly Reaganesque thinking has long been corrupted by money, influence, access and power, just as has the GOP establishment.

Joyner responds to Riehl:

He approvingly cites the Ruling Class vs Country Class piece that I discussed in my previous post and, I gather, thinks that he’s doing his part of the latter by refusing to politely engage those on his side of the aisle who don’t see themselves as part of a religious war against the evil Left.

The problem with this, as Reagan himself noted, “somebody who agrees with you 80% of the time is an 80% friend not a 20% enemy.”  If David Frum and David Brooks and George Will are outcasts in the conservative movement, then Reagan’s “Big Tent” becomes a lean-to.  Winning such a war is thus a Pyrrhic victory.

It’s doubtless true that there are plenty of us in the right-of-center blogosphere who aren’t firebrands.   We’re not enamored of Sarah Palin and the Tea Parties. We support homosexual rights and an immigration policy based on reality rather than frustration.  But we’re still on the same side on most issues.

Further, Frum and Brooks and Will and the like are much more effective in articulating conservative ideas than those who preach to the choir.  If you treat people who disagree with you with contempt, they’ll rather quickly tune you out.  So, you’re left with firing up the people already carrying pitchforks.

To what end?

Ross Douthat:

For anyone with an appropriate skepticism toward meritocracy and its works, there’s an obvious critique of my suggestion, in today’s column, that America might be better off if our top-flight colleges welcomed more students from demographics — the white working class, rural America, evangelical Christians, etc. — that are currently viewed with suspicion and hostility by the highly-educated elite. Part of the problem with meritocracy is that it homogenizes in the name of diversity: It skims the cream from every race and class and population, puts all of the best and brightest through the same educational conveyor belt, and comes out with a ruling class that’s cosmetically diverse but intellectually conformist, and that tends to huddle together rather than spreading out to enrich the country as a whole. This is Christopher Lasch’s lament in “The Revolt of the Elites” — that meritocracy co-opts people who might otherwise become its critics, sapping local communities of their intellectual vitality and preventing any kind of rival power centers from emerging. And it’s something that Angelo Codevilla gets right (while getting a number of other things wrong) in his recent blast against the American elite:

Never has there been so little diversity within America’s upper crust. Always, in America as elsewhere, some people have been wealthier and more powerful than others. But until our own time America’s upper crust was a mixture of people who had gained prominence in a variety of ways, who drew their money and status from different sources and were not predictably of one mind on any given matter. The Boston Brahmins, the New York financiers, the land barons of California, Texas, and Florida, the industrialists of Pittsburgh, the Southern aristocracy, and the hardscrabble politicians who made it big in Chicago or Memphis had little contact with one another … Nor had the schools and universities that formed yesterday’s upper crust imposed a single orthodoxy about the origins of man, about American history, and about how America should be governed. All that has changed … Today’s ruling class, from Boston to San Diego, was formed by an educational system that exposed them to the same ideas and gave them remarkably uniform guidance, as well as tastes and habits.

With this in mind, one could easily argue that it would be terrible for America if the meritocratic elite admitted more members of what Codevilla calls the “country party” to its ranks, because that would represent the final victory of centralization and homogenization over local allegiances and competing power centers. Once inside the machinery of meritocracy, aspiring farmers would become bureaucrats, R.O.T.C. cadets would enter investment banks, and evangelicals and Mormons would join the ranks of purely secular do-gooders. Better for such young people, and for the country, if they’re educated locally and stay local, rather than ascending and leaving their communities behind.

My only rebuttal to this argument would be the somewhat pessimistic point that centralization is very difficult to roll back, that some sort of broad national elite is probably here to stay, and that given those premises it may make more sense to create more room for real diversity within that elite — by holding meritocracy to its professed ideals — than to hope vainly for a localist revolution that undercuts the ruling class’s political and cultural authority. But good intentions often go awry, and I concede the possibility that this prescription could only end up making America’s current divisions even worse.

Tim Fernholz at Tapped:

The key fact that Douthat never returns to is that Buchanan is homophobic, racist, and anti-Semitic. Those despicable Ivy Leaguers are right! There is also plenty of evidence that Buchanan is wrong — starting with the fact that a plurality of Ivy Leaguers are white Christians. So Douthat has to draw a narrower case — that America’s elite colleges discriminate against not just white Christians but working-class, rural white Christians. Oh, and the presumption is that they must be his kind of Christian — you can’t be liberal and Christian, or “elite” and a Christian. As Adam notes, what discrimination exists comes down to a question of class, not culture.

Douthat’s second strange equivocation is the concern he is trolling — that the lack of interaction between poor white Christians and liberals creates a dangerous paranoia between groups in this country. (As a side note, I’d love to know how much time Douthat spends with white, rural, working-class Christians himself.) He observes that conservative-leaning white voters think Obama is a “foreign-born Marxist,” among other conspiracies, while liberals perceive an increase in “crypto-Klansmen and budding Timothy McVeighs.”

Once again, the conspiracy theories of the conservatives have no basis in reality. Meanwhile, the idea that liberals see right-wing conspiracies “everywhere they look” reveals that Douthat has as little knowledge of liberals as he does of rural, working-class whites. Liberals do fret that the Tea Party and like-minded right-wing groups are providing an outlet for racist and violent sentiments, but that’s only because the Tea Parties do provide an outlet for racist sentiments — and McVeigh-types have already attacked federal buildings and been arrested for plotting similar escapades.

This is the worst kind of opinion column, a sort of tease — Douthat airs competing claims but declines to weigh in on either side, instead offering a mealymouthed support for a kind of soft affirmative action for, well, he doesn’t quite say white Christians, which is where he began his column, but for those whom he believes are culturally affiliated with white Christians.

Douthat responds:

The “competing claims” I aired, so far as I can tell, were what I consider the more unfortunate paranoias of left and right — and yes, I do decline to throw my support to either side. As for my “mealymouthed” conclusion, Fernholz basically gets it right: I  support, albeit with some ambivalence, a kind of soft affirmative action on elite campuses for the sort of Americans — Southern and Midwestern, blue-collar and rural — who are much more likely than the current population of the Ivy League to be conservative white Christians.

This doesn’t mean that I want to see some kind of “evangelical quota” at elite schools. It just means that I regard greater religious and ideological diversity as a likely (and happy) consequence of greater socioeconomic and geographic diversity. And not, I should note, because white Christians from Montana or Alabama are hapless victims whose sufferings need to be redressed. It’s just that so long as top-tier colleges claim to be in the business of molding a suitable national elite for a country as vast and varied as the United States (as opposed to just admitting the absolute smartest people possible, regardless of race or class or ideology or geography), they have an obligation to extend their idea of “diversity” to encompass many more factors than just race and ethnicity. (The same goes for elite faculties, too, but that’s another story …)

Adam Serwer at The American Prospect:

Douthat never actually suggests that the admissions process relies too much on factors that favor the wealthy — he merely suggests that minorities are getting too many of the scraps and that lower-class whites are therefore correct to fight with people of color for the gristle being tossed under the table. Douthat never questions — and these days few do — the implicit size of the pie retained by the wealthy, as though being born into the type of family that can afford to send you to Andover is a matter of individual merit. It’s possible to argue that both African Americans and lower-class whites are underrepresented on elite college campuses — not exactly hotbeds of racial diversity either — but Douthat doesn’t make that argument.

More frustrating is the way Douthat uses this single study to conclude that Buchanan — and by extension the conservative grievance mongers arguing that there’s an “advantage” to being a Latino jurist given Sonia Sotomayor‘s rise to the Supreme Court (percentage of Supreme Court Justices who have been Latino, .009 percent, percentage who have been white, 98 percent), that there’s some truth about the idea that the Obama Justice Department won’t protect white voters (false) and the idea that the Affordable Care Act was “reparations” (47 percent of the uninsured are white) are actually onto something about white Christians being discriminated against. It seems a little odd to extrapolate from this single study on affirmative action in college admissions that white Christians as a whole are having a harder time in life than everyone else, given that a white guy just getting out of prison has an easier time finding a job than a black man who has never been. If you’re white and lower class, by the time you get out of college you’ve picked up enough to know how to fake the requisite social markers — if you’re black, you’re still black.

When you get down to it, Douthat’s right that being a white Christian is actually easier if you have oodles of money, but when has being broke in America, regardless of race, ever been easy? Douthat’s implicit conclusion isn’t really that we should expand the share of the pie at elite institutions to the underrepresented as a whole; it’s  to wave his foam finger for one group of underrepresented people over another.

Daniel Foster at NRO:

I’m disappointed by both Tim Fernholz’s and Adam Serwer’s takes on Ross Douthat’s column yesterday. Responding to empirical evidence that poor, white Christians are among the least well-represented “minority” groups at elite colleges, they both more or less default to saying ‘yeah, well, it sucks to be poor.’

Except Douthat’s point is that, when it comes to elite college admissions, it sucks more to be poor and white than it does to be poor and black, and a fortiori, that poor blacks’ chances improve as they get poorer, while just the opposite is the case for whites. Either Serwer and Fernholz are okay with this or they aren’t. But they won’t say, leaving us to assume that they view it as acceptable collateral damage in the battle for diversity.

They also dismiss as so much whining the feelings of alienation from “elite” culture felt by poor, working class whites — at their peril and ours.

I know, this sounds dangerously mushy-headed for a card-carrying conservative, and I’m not saying our top national priority should be the self-esteem of blue-collar whites. But that poor whites feel disenfranchised from participation in “elite” institutions is a problem whether or not they actually are, all the more so since we live with a political culture that tells them they have nothing to complain about. In some cases, feelings of discrimination become consequentially indistinguishable from actual discrimination. So when smarmy liberals look at poor gun-and-religion-clinging whites and ask what’s the matter with Kansas, this is part of the answer.

Arnold Kling, going back to the original subject:

I put the essay in a class that I call “neo-reactionary.” Other writing in this vein ranges from the best-selling (Jonah Goldberg’s Liberal Fascism) to the obscure (Mencius Moldbug’s old blog posts) to somewhere in between (Arthur Brooks’ The Battle, which I still have not read.)I call the outlook neo-reactionary because it is sort of like neoconservatism with the gloves off.

Some core beliefs that I share with the neo-reactionaries:

1. At its worst, Progressive ideology is an ideology of power. It justifies the technocratic few infringing on the liberty and dignity of the many.

2. At their worst, Progressives are intellectual bullies. They delegitimize rather than attempt to persuade those who disagree with them.

3. American government has become structurally less libertarian and less democratic in recent decades. For example, Codevilla writes,

The grandparents of today’s Americans (132 million in 1940) had opportunities to serve on 117,000 school boards. To exercise responsibilities comparable to their grandparents’, today’s 310 million Americans would have radically to decentralize the mere 15,000 districts into which public school children are now concentrated. They would have to take responsibility for curriculum and administration away from credentialed experts, and they would have to explain why they know better. This would involve a level of political articulation of the body politic far beyond voting in elections every two years.

Amen. I live in one of those mega-school districts, which gives unbridled power to the teachers’ unions. The widely-unread Unchecked and Unbalanced has much more on this theme. (Note to intellectual bullies: please do not confuse nostalgia for decentralized school districts with nostalgia for “separate but equal.”)Where I part company with the neo-reactionaries (and for all I know, Jonah Goldberg parts company a bit as well) is on the following:

1. Brink Lindsey has a point. The Progressives are not wrong on everything, and conservatives are not right on everything.

2. Tyler Cowen has a point. Manichean, confrontational politics is a dubious project. Questioning your own beliefs can be more valuable than issuing a call to arms to those who share them.

3. Tyler Cowen has another point. Do not think that the majority of people are libertarians. Both Codevilla and Arthur Brooks assert, with evidence I regard as flimsy at best, that two-thirds of the country is on their neo-reactionary side. I strongly doubt that, and even if it were true I do not believe that democratic might makes right.

I think that ideology is partly endogenous. I do not think that it is an accident that an ideology of rational technocratic control grew up as America urbanized and as enormous scale economies emerged in the industries made possible by the internal combustion engine, the electric motor, radio, and television. I do not think it is an accident that the Progressive ideology will be challenged as the Internet starts to alter the economy and society, reducing the comparative advantage of mass production and mass media while increasing the comparative advantage of local autonomy and individual expression. The Internet serves as a constant reminder of the wisdom of Hayek.

We live in interesting times.

UPDATE: More Douthat

Tim Fernholz and Conn Carroll at Bloggingheads

UPDATE: More Douthat


Filed under Go Meta

Playing Nice (And Looking For The Rock?)

Fred Kaplan in Slate:

Hamid Karzai is in Washington for a four-day love fest designed to show the world that, despite the occasional quarrel, the state of the Afghan-American partnership is sound. But not quite beneath the surface, discordant noises are all too evident.


hen Obama meets with Karzai on Wednesday, he has a fine line to walk. On the one hand, he does have to shore up Karzai’s confidence. It wasn’t just Eikenberry’s leaked memo that sent the Afghan president into a tizzy. Vice President Joe Biden had once walked out on a dinner with him (for good reason); U.S. envoy Richard Holbrooke had yelled at him (ditto); finally, just before (perhaps prompting) Karzai’s flip-out, the Washington Post quoted a senior U.S. official threatening to kill or capture his brother, Ahmed Wali Karzai, for drug dealing.

On the other hand, Obama has to continue pushing President Karzai to clean up his act, even threatening him with consequences if he doesn’t. If Obama doesn’t succeed on both tracks, his war strategy is doomed.

The goal of a counterinsurgency campaign, after all, is not so much to defeat the enemy—in this case, the Taliban and other insurgents—but rather to secure the local population so that the government can provide local services and thus gain the people’s loyalty.

As Gen. McChrystal put it in a memo to Obama last September, the war’s focus must be on “the will and ability to provide for the needs of the population, by, with, and through the Afghan government.” (Italics added.) That same month, Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, noted in hearings before the Senate Armed Services Committee that the Afghan government’s corruption—and, therefore, its “lack of legitimacy”—posed as big a threat as the Taliban. Sen. Lindsey Graham, R-S.C., asked, “We could send a million troops, and that wouldn’t restore legitimacy in the government?” Mullen replied, “That is correct.”

This assessment fits a broad historical pattern. A new study by the RAND Corp., How Insurgencies End, finds that weak democracies (and that’s one way to describe Afghanistan) have “a particularly poor record at countering insurgency,” winning only 15 percent of the time. To win such wars requires public support; and public support, the study concludes, “can be won only if reforms are both legitimate and effective.”

If Karzai doesn’t institute reforms—so that he can provide basic services and thus gain the trust of his people, and they don’t feel they have to turn to the Taliban—then the war is a waste of blood and money.

Given Karzai’s track record, it’s tempting to drop him and find somebody else. The problem is, there isn’t anyone else. Karzai is the only president of Afghanistan, and no viable alternative seems to be waiting in the wings. If Obama wants to fight this war (and he decided in December that he does, at least for now), he’s stuck with working “by, with, and through” Karzai. And that being the case, he and his senior officials have to act as if they’re working by, with, and through him enthusiastically. The appearance of ambivalence only emboldens the enemy.

David Ignatius at WaPo:

Diplomats who know Karzai well stress that his style is quintessentially tribal and conspiratorial — traits that have been honed by Afghanistan’s history over the past three decades, when trusting the good intentions of foreigners was not a healthy bet. It was almost inevitable that Karzai would react to public criticism in such a mercurial way, denouncing America and threatening to join the Taliban.

As one diplomat observed some weeks before the Afghan leader’s visit: “When Karzai feels he is on the defense, he goes into a defensive crouch. If we want him on our side, we have to convince him that we are in this together.”

That’s the sort of advice that finally seems to have gotten through to the Obama team: Given that they have no alternative to working with Karzai, whom we have proclaimed the democratically elected president of Afghanistan, the best approach is to stroke him in public — all the better in an elaborate East Wing press conference. Save any criticisms for private meetings.

Not an ideal relationship, certainly, but for the moment a necessary one. Wednesday’s make-nice performance reminded me of the comment by humorist Wynn Catlin: “Diplomacy is the art of saying ‘nice doggie’ until you can find a rock.”

Spencer Ackerman in The Washington Independent:

At the White House this afternoon, Presidents Barack Obama and Hamid Karzai committed themselves to a “long-term partnership,” in Obama’s words, “that is not simply defined by our military presence.” Both expressed confidence in the ultimate success of a war in its ninth year.

All this happens as thousands of U.S., NATO and Afghan forces are moving into the city and surrounding environs of Kandahar. Senior officials in charge of shaping the operation have cautioned against viewing Kandahar as an iconic invasion campaign. Unlike the February operation in Marja, where 15,000 NATO and Afghan troops invaded and a governance structure of unproven capability was essentially airlifted into an area under Taliban control, the approach to Kandahar involves bolstering governance and economic efforts in parts of Kandahar currently under government control and expanding them outwards into Taliban-held territory. That will require intense and persistent coordination between NATO militaries, NATO civilians, their governments back home, Afghan security forces, local Afghan government officials and national Afghan government officials. A source in Kandahar considers it all a pipe dream.

That source passed on the following assessment of how counterinsurgency efforts across Afghanistan are shaping up, over a year after Obama embraced them at the strategic level and nearly a year after Obama tapped Gen. Stanley McChrystal and Amb. Karl Eikenberry to implement them. The source’s reluctant viewpoint, which is making its way through official channels in Afghanistan, is that the coordination necessary for successful counterinsurgency between civilian and military forces is not in evidence.


The source’s assessment, titled “A Counterproductive Counterinsurgency,” is reprinted below in full, with minor interruptions in the text for clarity.

A Counterproductive Counterinsurgency

The counterinsurgency methodology which is currently being employed in Afghanistan is not going to lead coalition forces to victory in this war.

The idea of “counterinsurgency” appears to be a viable way for success on paper. Military units, along with NGO’s [non-governmental organizations], the Department of State, GIRoA [the Afghanistan government], and other government agencies work together to emplace the clear, hold, build strategy in key areas of the battlefield. Like communism, however, counterinsurgency methods are not proving to be effective in practice.

Counterinsurgency methods must make quick and effective use of information. However, the joint environment of the theater of operation makes it difficult for efficient information dissemination. Coalition units are still apprehensive about distributing information to consumers who do not wear the same uniform — and many units still have major breakdowns in following guidance directing the flow of information up to higher decision-making elements; or down to the soldiers on the ground. The result of stove-piped information sharing channels maximizes the amount of time that insurgent forces have to seek out coalition vulnerabilities and exploit them.

The passive approach taken to reintegrate the enemy is also proving to be ineffective. Coalition forces who are using the idea of projects and Provincial Reconstruction Teams to pacify local insurgents are experiencing long delays in getting their recommended courses of action approved, funded and then complete. Additionally, there is often a poor hand-off from kinetic [read: military] forces who relinquish control of a previously hostile area to non-kinetic groups who are empowered to “win hearts and minds.” It is evident that there is little attention to ensuring that the local population is prepared for the transition of combat troops occupying their home one month and then smiling faces knocking on their doors the next. Additionally, coalition participants are not yet capable of recognizing the human terrain of their area once they assume control of it.

The human terrain layer of the battlefield is a necessary component of mission planning and success in a counterinsurgency environment. Coalition forces have become aware of the utility of understanding it but have failed to quantify their efforts in exploiting it. The fact that insurgent groups are still integrated within the population of areas that have been under coalition control for long periods of time is indicative of their ability to more effectively exploit the human layer of the battlefield and mitigate the effects of a counterinsurgency campaign. The adage still holds true today that “we have the watches, but they have the time.” The enemy still has the discipline to outlast our commitment to the area.

As if the breakdown of communication and process methodology in place isn’t enough to negate the effectiveness of counterinsurgency operations, we must also contend with the effects of the media, and a world population that cringes when it is witness to overt aggression and the marginalization of people. In this response, the leaders of this campaign have taken too many precautions to ensure that everyone is content with the tact taken. An effective counterinsurgency can only be waged by an organization that is capable of committing to support only those it empowers, remains quiet until it strikes, and effectively owns the world of information. Once it is capable of identifying the vulnerabilities in core infrastructure before the enemy is able to exploit them—and strikes with precision to seal them up, the enemy will dissolve and we will find the war is won.

The author of this paper clearly accepts several of the premises of counterinsurgency theory — in particular, the recognition that the sentiments of the local population are what McChrystal called “strategically decisive.” I asked what the author meant by the “core infrastructure” he identified as the key objective for operations in the memo’s last paragraph. The answer? All of the relevant considerations that shape an Afghan’s assessment of whether to side with the Taliban or with the Afghan government — the economic environment, the local power structure, and so forth. Spoken like a true counterinsurgent.

But the problem, in this individual’s view, is that NATO and Afghan forces are insufficiently and inconsistently contending for those key counterinsurgency prizes. Which is another way of saying the strategy is not succeeding on its own terms.

Andrew Exum:

I am just back from a ten-day trip to the Arabian Peninsula, so expect posting to remain lighter than usual for the next few days. I want to highlight, though, the unclassified U.S. government assessment on the war in Afghanistan which the executive branch is required by law to submit to the Congress every six months. The bottom line:

The continuing decline in stability in Afghanistan, described in the last report, has leveled off in many areas over the last three months of this reporting period. While the overall trend of violence throughout the country increased over the same period a year ago, much of this can be ascribed to increased International Security Assistance Force (ISAF) activity. Polls consistently illustrate that Afghans see security as improved from a year ago. At the same time violence is sharply above the seasonal average for the previous year – an 87% increase from February 2009 to March 2010.

Translation: We have halted the Taliban’s momentum. Violence is up, but we expected this to happen as we escalated our activities.

The president’s December 2009 speech, we should note, explicitly called for halting the Taliban’s to be the #1 goal of our military efforts. So that’s good news. But for me, this report is not nearly as important as the one that will be delivered after the next Friedman Unit. The next FU will really and truly be important because a) we will be able to actually assess the full effects of the as-yet-incomplete Obama surge of troops and b) we will likely use that assessment to decide how fast and in what way we will begin to withdraw U.S. and allied units beginning in June 2011.

That having been said, if you are one of those — and I have heard this the most from military officers — who complains we do not have a strategy for the war, this report is instructive because it lays out, in detail, the strategy. You can then turn around and argue that the assumptions underpinning the strategy are faulty or that counterinsurgency is a poor operational choice, but you can’t argue that folks have not thought about ends, ways and means.

Tim Fernholz in Tapped:

On the occasion of Hamid Karzai’s visit to Washington and the beginning of a broad new counterinsurgency operation around the major city of Kandahar, two assessments of the conflict in Afghanistan have emerged that are worth perusing.

One account, provided by Spencer Ackerman, is a description from a Kandahar-based source of a counterproductive counterinsurgency that won’t result in victory, concluding that “the enemy still has the discipline to outlast our commitment to the area.” A second, provided by CANS’ Andrew Exum, is a declassified government assessment; Exum translates the bureaucratese: “We have halted the Taliban’s momentum. Violence is up, but we expected this to happen as we escalated our activities.”

The differing accounts reflect both the challenge of trying to create a coherent picture of what is going on in that region and whether America is actually using the right policy levers — be they military, political, or developmental — or even has the right levers to change the situation on the ground. (It’s a challenge I ran into reporting this story, from earlier in the year, on the problems of the U.S. strategy in the country.) Given the challenges of prediction and even measurement of success, Exum’s conclusion — that it will take another six months to assess the results of the surge in Afghanistan, and particularly how that affects the withdrawal calendar — is probably accurate. But even then it will be hard to answer whether the mission is worth the cost.

Joe Klein at Swampland at Time:

Two major events loom now–or perhaps not. One is Karzai’s peace jirga, scheduled for June, which won’t be much more than a futility festival if there isn’t some sort of Taliban presence. The other is NATO’s planned Kandahar offensive, another futility festival if Karzai’s government continues its history of corrupt and pathetic governance in the province. I have a nagging doubt about the latter event; unless there’s something I’m missing–entirely possible, by the way–the absolutely crucial civilian side of this operation is in disarray. But, again, the coming events in Kandahar will determine the future of the Obama Administration’s commitment to this effort.

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FinReg Brings Us Back To Waterloo, Yet Again

Simon Johnson at Baseline Scenario:

The bank lobbyists have the champagne out – the Brown-Kaufman amendment, which would have capped the size and leverage of our largest banks – was defeated in the Senate last night, 33-61.  Feeling ascendant, the big banks swarm forward to take on their next foe – the Kanjorski amendment (that would greatly strengthen the power of regulators to break up megabanks), which they plan to gut in the backrooms.

This is overconfidence – because the consensus against them is beginning to shift significantly.  Partly this is the result of great efforts by Senator Ted Kaufman, Senator Sherrod Brown, and their colleagues over recent months and weeks.  Partly this is due to all the people who came on board and pushed hard.

But, as in many such cases, it is also a question of luck – and timing.

The European sovereign debt crisis is deepening.  And the picture that is worth many thousands of words is the NYT’s graph of interlocking debt within the eurozone.

As far as anyone can ascertain, this is almost all debt held by banks (often then “repo-ing”, or borrowing against it as collateral, at the European Central Bank.)

In other words, the European megabanks – lauded by Senators Dodd, Corker, Warner and others as a model for us to follow – are up to the eyeballs in bad debt.  Their governance has completely failed.  Their regulatory systems have been gutted – on their way to being turned into ash.

None of this would matter, of course, if the eurozone policy elite had its act together and could terminate its current position with minimal losses.  But it cannot – the deer are in the headlights.


To the victors last night in the Senate: congratulations – your opponents have fallen back.  Your generals are known to be invincible, your forces are the best, and your resources are without limit.

And so we wait for you again, on a gentle slope and behind a ridge – appropriately enough with our backs to Brussels.  Welcome to Waterloo.

Jane Hamsher at Firedoglake:

The Kaufman “break up the banks” bill got drubbed tonight because it was perceived as a Democratic bill and the banks could work through the GOP to kill it, which gave the ConservaDems cover for opposing it too.

But nobody got on the floor of the Senate today to speak against Audit the Fed.  They were all scared shitless.  The left/right coalition supporting the bill  includes everyone from Richard Trumka, Bill Black, Andy Stern and Jamie Galbraith to Grover Norquist, the Campaign for Liberty and Freedomworks on the right.   We worked hard to put that coalition together for the past year, and it was transpartisan by design.  If you stood against Audit the Fed, you were  just a  shill for the banks.  There’s no justification.  It made the dividing lines extremely clear: populism vs. corporatism, with no ability to take refuge in the safe crannies of partisanship.

It took a lot of courage for the people involved in that coalition to join together and say “enough.” Party hacks on both sides launched endless personal attacks against those involved, accusing them of “consorting with the enemy” in a desperate attempt to restore a disfunctional chess board.  But everyone stood their ground, and when all else failed, the White House put the squeeze on Bernie Sanders.

David Dayen at Firedoglake:

Only, outside of a couple upstart groups like A New Way Forward, the progressive movement determined it not a cause worth fighting for. It’s just a plain fact that breaking up the mega-banks would have 10,000 times the impact of the public option – or auditing the Fed, for that matter – and absolutely nobody in the progressive coalition cared. There’s no doubt that something this transformative was a tough road – the White House didn’t go totally on the record but they weren’t exactly for it, with the Treasury Department’s Neal Wollin saying in a press event yesterday that “What’s really key about this is that the institutions be less risky, that they not pose threats to the broader system.  Size is one attribute with respect to risk, but there are other attributes.” Given the political capture of our governmental system by Wall Street, something of this magnitude was always a high climb.

And yet it got three more Republican votes than the public option ever got in its history. Yesterday, at the Financial Crisis Inquiry Commission, Henry Paulson – Henry Paulson! – came out for it, saying “we should not move ourselves back to a system of consolidated, monolithic commercial banks.” Alan Greenspan – Alan Greenspan! – said in March that Federal Reserve data showed no positive effect from economies of scale for anything but a mid-sized banking institution, pinpointed at only around $100 billion in assets (some of our banks are over a trillion right now). Conservative academics supported it. Republicans in the Senate made the argument for everyone, saying that the current bill didn’t stop too big to fail.

But practically nobody on the progressive side foresaw its power, its simplicity, preferred to look at other priorities, and Wall Street won big in a time when their political influence is at a low ebb. That 28 Democrats will get off the hook with this vote, because nobody bothered to look into it, is astonishing, given those facts.

This is a failure of the progressive movement. You fight the fights worth fighting for, and nothing – nothing – has been more worth fighting for, which got a vote on the floor of the Senate during the Obama Presidency, than this. Nothing at all. It’s a viciously cruel irony that a coalition called Mobilize For Our Economy just formed on the DAY that the Safe Banking Act went down to defeat.

Jane claims that “the Kaufman “break up the banks” bill got drubbed tonight because it was perceived as a Democratic bill and the banks could work through the GOP to kill it, which gave the ConservaDems cover for opposing it too.” If this were true, there was never any reason to spend six months on a public option campaign, because Safe Banking was far more bipartisan and far more transformational. It may not have had bright shiny poll numbers that could be touted, but that would be because nobody ever tried to force it into the national conversation. We have a problem with financial behemoths that cannot be regulated. It’s at the root of everything we’ve seen in the economy in the last decade. If you’re not willing to fight that fight you’re not really willing to change anything.

On that midday press conference, Kaufman referenced the big drop of the stock market and said, “The idea that there’s not going to be another financial crisis is a victory of hope over reality.” The idea that progressives were either blindsided, completely unaware or too preoccupied with whatever other nonsense to whip this vote is a victory of cynicism over hope.

Reihan Salam:

My guess is that Dayen and I disagree on many things, but my sense is that while the Safe Banking Amendment was far from flawless — I’m still not convinced that size is as centrally important as the bill’s sponsors, and its intellectual architects Simon Johnson and James Kwak, believe — it did include a variety of other measures that would really would alleviate the TBTF problem, thus making it a pretty decent second best option. The fact that it attracted the support of three reliably conservative senators — Shelby, Ensign, and Coburn — suggests that this was a lost opportunity for the right. Now that the bulk of the Republican caucus has coalesced around the Dodd bill, plus trivial tweaks, Senate Republicans have left close observers scratching their heads: if this is the endgame, why fight back at all?

Tim Fernholz at Tapped:

There won’t be any votes today or Monday, but there was one more positive development yesterday: A compromise has been reached on Sen. Bernie Sanders’ bill to audit the Fed, which will apparently allow for more transparency while protecting independent monetary policy. That means the White House and Senate leaders are supporting the amendment. If progressive economist Dean Baker thinks the deal is a win for reformers, it probably is.

Dean Baker at Talking Points Memo:

The effort to audit the Fed got a big boost last night when Senator Bernie Sanders reached an agreement with Chris Dodd, the chair of the banking committee. Under the deal, the Government Accountability Office (GAO) would undertake a full audit of the special facilities created by the Fed since December of 2007. GAO would make the findings from its audit available to the Congressional leadership. It would also make most of the details of the Fed’s transactions available to the public.

To cope with the economic crisis, the Fed created 13 different special lending facilities. At their peak last year, these facilities had lent out more than $2 trillion. The Fed has only disclosed aggregate data about these facilities, telling us how much each one lent out month by month. It has refused to disclose any information about the specific loans and beneficiaries. This means that we have no way of knowing how much Citigroup, Goldman Sachs or anyone else benefited from these facilities.

Under the terms of the deal, by December 1 of this year the Fed will have posted on its website all the loans that were part of these facilities. Any interested journalist, academic, blogger or generic snoop can read through the data and find exactly how much money Goldman Sachs got, at what interest rate, with what collateral and when they paid it back. This is a big victory.

More Dayen, on Baker:

Yes it is, and as I have come to understand, the entire point of conducting an audit of the Fed was to get at these special lending facilities. “What have you done with our money” was the key question, which will be answered under the terms of this deal (which still has to go through a conference committee and a final vote, mind you).

Now I know Ron Paul and some libertarians are angered by this deal. But understand that Ron Paul doesn’t want an audit of the Federal Reserve. He wants to end the Federal Reserve. The best-selling book “End the Fed” that he wrote tipped me off to this. He wants to go back to hard-money policies and a return to the gold standard. Now, you can argue that this would end the cartel of central bankers scheming with their monetary policy, or that it would turn US monetary policy into the inflation-uber-alles laissez-faire mess we’re seeing in Europe that is threatening a global depression. The consequences for Paul’s favored end-state would be catastrophic if implemented in real time. This Fed is failing in different ways – and their actions should draw more scrutiny – but eliminating it would return us to the Stone Age.

And so you should probably know who you’re dealing with. There’s no good reason for the restrictions on this particular audit, but in its streamlined form, it seeks to answer one question – what did the Fed do on an emergency basis with two trillion dollars in taxpayer money. Not only does the Sanders amendment force an answer to that question, it opens it up to public scrutiny in ways that Paul-Grayson didn’t. As Baker says, this is a beginning and not an ending for transparency and accountability.

David Vitter may offer the original proposal for a vote and more power to him. But an audit really is just an audit. Ron Paul wanted to use an audit as a tool to destroy the Fed.

Meanwhile I think there’s some needed perspective here. Fed transparency is important but it pales in comparison to the very real efforts to force fundamental changes to how Wall Street operates, changes that have thus far been batted down without people batting an eyelash. That has been the ongoing failure of this debate, sidetracked over an issue (however important) about opening up the books rather than ones that would actually legitimately constrain the runaway finance sector.

Ezra Klein:

As the FinReg process has pushed forward, controversy has centered around two amendments: Bernie Sanders’s proposal to audit the Federal Reserve and a proposal by Sherrod Brown (pictured) and Ted Kaufman to break up large banks. Grouping the two of these together has been a little bit weird; one transforms Wall Street while the other directs a government agency to keep us abreast of what they’re doing with our money.

But the Federal Reserve has fought the effort for transparency as if it were an effort to break them apart. Ben Bernanke’s letter on the subject sounds alarmed, to say the least. But because the Fed was never able to make a very good case that their new powers shouldn’t result in somewhat more transparency, they’ve lost. Now, a modified version of Sanders’s amendment seems sure to pass.

Conversely, the Brown-Kaufman proposal to break up the banks failed last night, 61 to 33. In some way, I’d say you’re seeing the fundamentals of these policies assert themselves. Audit the Fed is not a radical bill and it’s actually a bit hard to argue against it. Breaking up the banks makes a fair amount of sense, but it’s substantively a lot more radical than anything else in the legislation.

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Filed under Economics, Legislation Pending, The Crisis

In A Bad Mood About Moody’s, Part II

Paul Krugman in NYT:

The bad news is that most of the headlines were about the wrong e-mails. When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing.

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.

The rating agencies began as market researchers, selling assessments of corporate debt to people considering whether to buy that debt. Eventually, however, they morphed into something quite different: companies that were hired by the people selling debt to give that debt a seal of approval.

Those seals of approval came to play a central role in our whole financial system, especially for institutional investors like pension funds, which would buy your bonds if and only if they received that coveted AAA rating.

It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job. It’s all too obvious, in retrospect, how this could have corrupted the process.

And it did. The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.

These skewed assessments, in turn, helped the financial system take on far more risk than it could safely handle. Paul McCulley of Pimco, the bond investor (who coined the term “shadow banks” for the unregulated institutions at the heart of the crisis), recently described it this way: “explosive growth of shadow banking was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out fake IDs.”

Tim Fernholz at Tapped:

The financial-reform bill in the Senate does not do a ton to solve this problem. That’s in part because it’s a difficult problem to solve. Ratings agencies are paid by the people selling debt — an obvious conflict of interest — but no one else wants to pay for them. Someone buying debt has a better incentive to pay for a rating but that creates a free-rider problem where one buyer funds ratings for an entire universe of potential purchasers. The whole thing is a strange phenomenon of the market.

In the meantime, what we’ll get is tinkering around the edges: A new office in the SEC, new examination authorities, disclosures of methodology from the raters, some internal firewalls between sales staff and raters. But you still have sellers paying for ratings. Paul Krugman thinks this proposal to have the SEC essentially run the process and act as a middle-man between sellers and raters might be a better idea.

The other possible solution, mentioned in that proposal and hinted at in the legislation, is to introduce actual competition among the ratings agencies. The current legislation would stop regulators from relying on these agencies when they make decisions in order to take away their legal weight and create better incentives; currently, ratings agencies seem as responsible for the quality of these securities as the companies issuing them. However, as another proposal suggests, further steps to lower the regulatory barriers of entry to potential competitors of the existing agencies might be an even better answer.

This may be a weird case where smart deregulation could bring greater safety to the market.

Jennifer Rubin at Commentary:

A reader calls my attention to Paul Krugman’s column. Krugman gets his share of criticism around here, so it’s only fair to point out when, as the reader put, he “actually makes sense.”


This at least seems to be an area worth exploring in greater depth. But as Krugman points out, the current legislation doesn’t do much about this issue. (”The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in ‘knowing or reckless failure’ to do the right thing. But that surely isn’t enough, given the money at stake — and the fact that Wall Street can afford to hire very, very good lawyers.”)

One problem with huge reform efforts is that they usually focus on the wrong problem. In this case, the frenzy to eliminate risk — an impossibility if one wants to preserve entrepreneurial dynamism — has obscured more productive activities, including reduction or elimination of conflicts of interest, which is a worthy legislation goal. But “increasing rating companies’ independence” doesn’t sound nearly as exciting as “going after Wall Street greed.” So we never quite get around to it.

Lawrence Wright at Roosevelt Institute:

The three large US-based credit rating agencies – Moody’s, Standard & Poor’s, and Fitch – provided excessively optimistic ratings of subprime residential mortgage-backed securities (RMBS) in the middle years of this decade, actions that played a central role in the financial debacle of the past two years.  The strong political sentiment for heightened regulation of the rating agencies – as expressed in legislative proposals by the Obama Administration in July 2009, specific provisions in the financial regulatory reform legislation (H.R. 4173) that was passed by the House of Representatives in December, and recent regulations that have been promulgated by the Securities and Exchange Commission (SEC) – is understandable, given this context and history.  The hope, of course, is to forestall future such debacles.

The advocates of such regulation want to grab the rating agencies by the lapels, shake them, and shout “Do a better job!”  But while the urge for expanded regulation is well-intentioned, its results are potentially quite harmful.  Expanded regulation of the rating agencies is likely to:

  • Raise barriers to entry into the bond information business;
  • Rigidify a regulation-specified set of structures and procedures for bond rating;
  • Discourage innovation in new way of gathering and assessing bond information, new technologies, new methodologies, and new models (including new business models).

As a result, ironically, the incumbent credit rating agencies will be even more central to the bond markets, but are unlikely to produce better ratings.

Matthew Yglesias:

The term “deregulation” is normally associated with the right, but there’s a long tradition of progressive deregulation in this country aimed at bolstering competition and forcing firms to be disciplined by each other rather than by captured regulators. Ted Kennedy, for example, played a key role in bringing price competition to air travel and trucking. And via Tim Fernholz, here’s a proposal in that spirit from Lawrence Wright at the Roosevelt Institute to unravel the regulatory cartel that keeps the ratings agencies in business no matter how badly they screw up.

I’m not sure this is the be-all and end-all of the issue. Ultimately, I think some kind of ratings agency “public option” (to coin a phrase) could be a good idea. But as a first step, deregulation makes sense to me. The way it works right now, for many purposes you have to rely on one of the established agencies. Consequently, there’s no real market discipline on their myriad conflicts of interest. It’s a recipe for disaster, it was a disaster last time around, and while there are good ideas in the main regulatory reform bill I don’t think it addresses the ratings agencies in any kind of satisfactory way.

Dean Baker at The Center For Economic And Policy Research:

The obvious way to fix the conflict is to take away the hiring decision from the issuer. The issuer would still pay the rating agency but a neutral party — the SEC, the stock exchange on which the company is listed, the local baseball team — would make the decision as to which agency gets hired.

Some of us have been pushing this one for a while (e.g. here and also Plunder and Blunder), but Congress has preferred much more complex regulations that would have no impact on the basic conflict of interest. However, Paul Krugman comes to the rescue in his column today. Maybe now someone in Congress will be able to think clearly on this issue.

Kevin Drum:

I guess this is my question: if you do this, the ratings agencies no longer have any incentives to do much of anything. There are three of them, and presumably each one would get a third of the business at a price set by the SEC. So their incentive would be to hire the cheapest possible analysts and cut costs to the bone. The result would be ratings agencies even less able to cope with complex modern securities than the current ones.

This is what stonkers me about the ratings dilemma: there just doesn’t seem to be any good answer. Turning the ratings agencies into regulated utilities might be better than the current situation, but not by much. And if you’re going to do that, why bother with ratings agencies at all? Why not just have the SEC provide ratings?

I’ve read other proposed solutions too. Open up the business to more firms, for example, or pay the agencies based on the accuracy of their ratings. But the first doesn’t really get at the conflict of interest, and the second is difficult because it often takes years before you know if a rating is accurate.

I remember once someone telling me that after every financial crisis ever, the ratings agencies are always rolled out as sacrificial lambs. They had always been too optimistic, or too stupid, or too corrupt, or something. And then there’d be a hue and cry about “fixing” them, even though the real problem was that every single person on Wall Street, buyers and sellers alike, had wanted them to do exactly what they did: help inflate a bubble that made everyone truckloads of money. The hue and cry, he suggested, was more a way of deflecting blame from the real villains than it was a serious attempt to address an underlying problem.

I don’t remember who told me that, and I don’t even know for sure if it’s true. It’s stuck with me, though. I’m just not sure what the answer is here.

Ezra Klein:

The ratings agency business has two apparent settings: Hopeless conflict of interest or heavily regulated utility with an incentive to cut costs. But they play a very important role in the system. So why not make them — or some basic version of them — public? It would be better for both accountability and incentives.

The obvious problem is that a public rating agency might be too conservative, but on the one hand, I’m not sure that’s a bad thing, and on the other hand, the market could always ignore the rating. It’s much more dangerous for the ratings agencies to be paid to tell the market what it wants to hear rather than for them to be erring on the side of conservatism and forcing the market to think hard about whether the thing it wants to hear is really true.

EARLIER: In A Bad Mood About Moody’s

UPDATE: More Yglesias

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Happy Easter!

Chris Dierkes at The League:

By going from death on Good Friday straight to Resurrection on Easter Sunday, the process is taken to be very individualistic and the grief cycle and the entire train of the religious movement are not embodied:  caught between heaven and earth (Good Friday), laid in the tomb and descended to the dead/hell (Holy Saturday), raised from the dead (Sunday).

The essential key of Holy Saturday is found in the prayer above:  it is the Great Sabbath.

The Great Sabbath links to the Jubilee, the cycle of Seven Sabbath years (7 cycles of 7 years=49/50th year), when the land will lie fallow, the slaves released, and God will sacrifice himself (Yom Kippur) in order to bring Atonement and Re-Creation (i.e. Redemption) to the entire Universe.

The Tomb is one pole whose equal and opposite is the creation of the Universe.  As God rested on the 7th day of Creation, so God now rests in death on the 7th day.  God’s life in human flesh in the character of Jesus of Nazareth (according to this story’s framework) is now fulfilled.  Just as the completion/fulfillment of prayer lies in silent repose, the completion of the Incarnation lies (literally) in The Tomb.

While it would seem God has failed, that Death has won the ultimate victory killing even God, the truth (so this day proclaims) is otherwise.

A new creation will be born.  Death is defeated by its over-reach.

The Cosmic Jubilee on this day is announced to Hell, i.e. to the Dead.

Easter Sunday then becomes the 8th Day of Creation.  A new Adam Paul will say.  A new humanity (The Body of Christ, The Corporate Body of the 8th Day, the Church of the 8th or Resurrected Day) is called to walk in this world.

The late great Roman Catholic theologian Hans Urs von Balthasar wrote movingly of Holy Saturday.

Balthasar picks up on theme of hell in ancient pagan writings.  Think for example of Odysseus in hell, meeting the shades.  There is a mania about the place, a frenzy, a confusion, a dis-integration.  For Balthasar, Jesus on Holy Saturday loses all personality and succumbs to the state of modern, anemic souls, lost in the isolation of industrialized existence, full of isolation and meaningless.  Jesus enters into the godless state of our existence.  He is no more.  Dis-membered.  Un-articulated both physically and spiritually.

Only to be re-membered and re-vivified by The Father through the power of The Holy Spirit on Easter Sunday.  To be born into a new universe of life and discourse, a new bodily body and language, an 8th day existence.

But for today, the Great Sabbath pointing towards the hope for an Ultimate Sabbath, when all of the land, when the very heart of creation will experience liberation.

Erick Erickson at Redstate:

In the end of the sabbath, as it began to dawn toward the first day of the week, came Mary Magdalene and the other Mary to see the sepulchre. And, behold, there was a great earthquake: for the angel of the Lord descended from heaven, and came and rolled back the stone from the door, and sat upon it.

His countenance was like lightning, and his raiment white as snow: And for fear of him the keepers did shake, and became as dead men. And the angel answered and said unto the women, Fear not ye: for I know that ye seek Jesus, which was crucified.

He is not here: for he is risen, as he said. Come, see the place where the Lord lay.

And go quickly, and tell his disciples that he is risen from the dead; and, behold, he goeth before you into Galilee; there shall ye see him: lo, I have told you.And they departed quickly from the sepulchre with fear and great joy; and did run to bring his disciples word.

And as they went to tell his disciples, behold, Jesus met them, saying, All hail. And they came and held him by the feet, and worshipped him.

Matthew 28:1-9

Rod Dreher:

I will never forget the snowy Easter morning of 1998, watching Cardinal O’Connor stride up the center aisle of St. Patrick’s Cathedral, crozier in hand, while we all sang the magnificent Catholic hymn, “Lift High the Cross.” As a former Catholic, now happily Orthodox, I miss “Lift High the Cross,” and I deeply miss the Easter Vigil liturgy, especially the Service of Light in the beginning, with the Easter fire, the Paschal candle, and the chanting of “Christ our Light.” It is awe-inspiring.

While Catholics and Anglicans celebrate the Service of Light, the Orthodox tradition begins with prayers in the dark church, then involves the entire congregation parading three times around the Church singing ancient hymns, and ends with the chief priest knocking on the doors of the church, as if it were Christ’s tomb. When the doors burst open, the lights come on, and Easter (Pascha) is here. Everyone sings this marvelous hymn: “Christ is risen from the dead, trampling down death by death, and upon those in the tombs bestowing life!” I love that, and I love the Paschal sermon of St. John Chrysostom, which is read from every Orthodox pulpit on Pascha. It begins like this:

If anyone has labored from the first hour, let them today receive the just reward. If anyone has come at the third hour, with thanksgiving let them feast. If anyone has arrived at the sixth hour, let them have no misgivings; for they shall suffer no loss. If anyone has delayed until the ninth hour, let them draw near without hesitation. If anyone has arrived even at the eleventh hour, let them not fear on account of tardiness. For the Master is gracious and receives the last even as the first; he gives rest to him that comes at the eleventh hour, just as to him who has labored from the first. He has mercy upon the last and cares for the first; to the one he gives, and to the other he is gracious. He both honors the work and praises the intention. Enter all of you, therefore, into the joy of our Lord, and, whether first or last, receive your reward. O rich and poor, one with another, dance for joy! O you ascetics and you negligent, celebrate the day! You that have fasted and you that have disregarded the fast, rejoice today! The table is rich-laden; feast royally, all of you! The calf is fatted; let no one go forth hungry!It is a hymn of mercy and thanksgiving both.

Today I was driving around listening to the Easter broadcast of Nick Spitzer’s terrific public radio show “American Routes.” Nick was playing black gospel music, and white gospel roots music. He played Lucinda Williams’ version of “Great Speckled Bird,” and I listened to all of this and thanked God silently for the black and the country white traditions of sacred music. You don’t get hymns like that or singing like that in white Catholic or Orthodox churches, and it is a great and glorious thing.

Tim Fernholz at Tapped:

Forgive me for this parochial digression, but I will not be going to Mass this Easter Sunday.

You’ll know why if you’ve been reading the papers. The rash of newly uncovered sexual-abuse scandals in the United States and Europe paints a terrible picture of the church’s ability to protect its most vulnerable charges from the predations of its leadership. While the pattern of abuse in the church has been known to Catholics in the United States at least since the scandals in Massachusetts were revealed at the beginning of the decade, the news of Pope Benedict XVI’s own complicity has finally worn through my tolerance.

That, and the awful timing. Easter is a holiday of joy for Christians: Christ is risen! These scandals, though, call for reflection more appropriate to the current Lenten season of repentance, and I sense very little remorse from the church — not enough for me to celebrate with it when Lent ends this weekend.


The events of the last decade increasingly convince me that it is not people who are leaving the church; it is the church that is leaving the people. How can Benedict expect to bring sinners to God or dare write that gay relationships are the “destruction of God’s work,” when he cannot admit to the church’s own complicity in actual moral transgressions? It is truly a sad day when an institution designed to be a contemporaneous intermediary between humans and the divine is increasingly less relevant than the ancient texts at the center of the faith. The church’s mandarins see their future in a faith that is narrower and clings to the past. They couldn’t be more wrong.

John Allen, a correspondent for the National Catholic Reporter who is more deeply versed in church politics than I, argues Benedict deserves credit for improving the church’s response on sexual abuse. It is a low bar. The church’s glacial pace of reform may have been appropriate in the Middle Ages, even in the last century, but for Catholicism to be vibrant in the future depends on greater, and more rapid, change. This must begin not with the doctrinal debates I would have but with the far, far simpler task of confession and penance that it would expect from any believer.

This weekend I’ll pray to commemorate the Resurrection and share an Easter meal with friends. For this Sunday, at least, I’ll choose exit, in the hopes that the church might someday hold itself to its own high standards.

David Freddoso at Washington Examiner:

Tim Fernholz of the American Prospect announces that he will not be attending Mass on Easter.

To sum up, he offers two reasons he will stay home this weekend:

1) The child sex scandals demonstrate that Church leaders are too evil, too incompetent, and/or both, for him to celebrate Christ’s resurrection with them.2) The bishops’ opposition to abortion and same-sex marriage demonstrates that the Church teachings do not match his personal views.

To the second objection, not even God can force a man to belong to a Church whose moral teachings he rejects.

But to the first objection, we are now seven centuries past Dante putting dozens of popes and bishops in Hell in his Inferno. We are eight centuries past Saint Dominic’s warning to the Pope that his greed had crippled the Church’s mission. And we are twenty centuries past the apostle Judas betraying Jesus Christ for 30 pieces of silver.

Perhaps millennia of experience can confirm that it is too much to expect men of the cloth to be either holy or competent. This is no excuse for what any of them did or allowed to happen — especially to children: remember what Christ said about the millstone. But the clergy’s shortcomings present the feeblest, lamest excuse for skipping Mass. It would at least be understandable if Fernholz pleaded out on account of unbelief or a desire to smoke weed instead behind the bell tower.

Catholics don’t attend mass because they approve of the pope, the bishop, or the priest. We attend because we want to share in the Body and Blood of Christ. If Fernholz believes it is the holiness of its members or leaders that makes the Church holy, then he is unfamiliar enough with the Gospel from Holy Week that he should do himself the favor of attending the Good Friday service (which is not a Mass). It  serves as a good reminder of what we did to Jesus the last time we had a crack at him in the flesh.

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Dodd’s The Word, Part II

Wall Street Journal prints Chris Dodd’s fact sheet on the bill:


Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.

Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

David Corn at Mother Jones:

Elizabeth Warren, the lead advocate for the proposed Consumer Financial Protection Agency, seems to like—or, at least, not dislike—the financial reform package (finally) released on Monday by Sen. Chris Dodd, the Democratic chairman of the Senate banking committee. In the summary of the legislation, Dodd notes that his bill would create the CFPA as an independent bureau within the Federal Reserve—which could pose problems—but that it will have the power to write and enforce rules governing the sale of various financial products, including credit cards and mortgages. Yet its enforcement powers would not extend to banks with less than $10 billion in assets. In a statement, Warren notes:

Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks.

That sounds like a cautious endorsement

John Carney at Forbes:

Spreading the Fed’s authority risks making this problem of market homogenization even worse. Hedge funds and insurance companies escaped the financial crisis intact, largely because they weren’t subject to the same regulators whose views on prudence so damaged the banks. Subjecting a broader range of financial firms to the Fed’s market views will create more systemic risk, leaving more firms in vulnerable if the Fed gets it wrong again.

The new powers being proposed for the Fed would allow it to order financial firms to “reduce risk.” Which is to say, the Fed’s view of risk will even more directly control the financial system. The Fed will be able to impose its views of risk on a broader range of financial firms. But that is exactly what regulators thought they were doing when they incentivized banks to buy up mortgage backed securities through sliding-scale capital requirements.

In short, the regulators’ views of prudent banking got us into this mess. Allowing the Fed to fail upward is just a recipe for another—likely worse—crisis.

Daniel Indiviglio at The Atlantic:

The next stop as I continue to go through Senate Banking Committee Chairman Christopher Dodd’s (D-CT) new financial reform proposal (.pdf) is how he intends to resolve too big to fail firms. As with most other sub-proposals I’ve discussed thus far, this one largely resembles what’s found in the House bill. The big differences have to do with the creation of a “Orderly Liquidation Authority Panel” of bankruptcy judges to bless the resolution and the size of the fund to pay for it.

Both proposals call for firms to create resolution plans. In each proposal, the Treasury Secretary, Federal Reserve Chairman, relevant regulator or the firm itself requests resolution. The firm’s failure must pose a systemic risk to the U.S. economy in order to utilize this process instead of the bankruptcy code. The Federal Reserve Board and the relevant regulator’s board or commission vote on whether or not to proceed. A two-thirds vote is required. All of this is essentially identical for both Dodd’s and the House’s versions.

Orderly Liquidation Authority Panel

Next, the House version turns the process over to the FDIC, who completes the resolution process. Dodd’s proposal, however, takes a quick detour. He wishes to establish a panel of three bankruptcy judges who must first approve. If they agree that the firm in question is, indeed, in default or in danger of default, then the FDIC takes over.

This is an interesting deviation, and I suspect that Senate Republicans may have had a hand in this provision, based on reports during the compromise process. I’m a little mixed on whether it’s a good idea or not. I don’t know that it would hurt much — the judges must decide within 24-hours, so it would still be pretty quick. But then, a lot can happen in the world of finance in a day’s time.

John Berlau at Big Government:

For more than 150 years, state law has governed the director nomination and election process for corporations and their shareholders. In states such as Delaware and Nevada, where many companies are incorporated, any shareholder can nominate a candidate for the board, but that candidate has to pay for the campaign out of his or her own pocket. Under Dodd’s bill, the federal government would force the companies and other shareholders to subsidize the campaigns of dissident shareholders and include their candidates in a company’s own proxy materials.

But as I have written in BigGovernment.com, subsidizing certain shareholders to let them run director candidates on the cheap opens the floodgates to special interest agendas that hurt the bottom line for ordinary shareholders. “Groups from unions to animal rights groups could run their own candidate for corporate directors and promote their special interest agendas at the company’s (and ultimately other shareholders) expense,” I wrote.

And leaders of 17 groups representing a broad spectrum of the center-right coalition — from my Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America – recently sent a letter to members of the Senate Banking Committee pointing out that with proxy access: “Everything on the anti-market political wish list from cap-and-trade carbon restrictions, to animal rights activism, to interfering with defense contractors to advance foreign policy objectives would be possible. These initiatives, whatever their merits, belong in the political arena, not in corporate boardrooms where the focus should be on maximizing shareholder value.”

The bill also takes the unwise step of coercing companies into cookie-cutter corporate governance procedures such as separating the chairman and CEO. Some corporate governance activists have flagged this as a bad practice, but there is no empirical evidence that it harms shareholder returns. In fact, shareholders of Google and Berkshire Hathaway seem quite pleased with their CEOs – Eric Schimidt and Warren Buffett, respectively (both of whom supported Obama) –  also serving as chairmen, and would be quite angry if the government were to penalize this practice that had been so effective for these companies’ growth and profitability.

In the meantime, as I have noted in the New York Daily News, Citigroup’s having a separate chairman and CEO throughout most of the last decade did nothing to prevent that firm’s financial implosion that resulted in taxpayer bailouts. Different governance structures may work better for different firms, as an entrepreneurial startup may opt for a close-knit board and a more established company may want to separate these positions. Regardless, shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and that these matters shouldn’t be dictated to them by the government

Finally, the one-size fits all corporate governance procedures would greatly reduce the competitiveness of Delaware and Nevada in attracting firms from all over the world incorporating their because of the variety of corporate structures the states allow that work both for entrepreneurs and investors.

Paul Krugman:

OK, I’m still evaluating the Dodd proposal for financial reform. But here’s my puzzle: the bill, as I understand it, calls for an independent Consumer Protection Agency, with a director directly appointed by the president, but one that is “housed” at the Fed.

What, exactly, does that mean? Physical location is presumably not the issue; I don’t know if all Fed staffers are currently in the main complex, but there have certainly been times when some departments spilled over into other locations. (Back in 1977, when I was an intern at the International Finance Section, we were located in the Watergate!)

Does it mean that the staff will all be long-term Fed employees? Then that would, to at least some degree, compromise the agency’s independence. Or is it purely a cosmetic issue? If so, who exactly is being diverted?

I’m not prejudging this — there’s a lot to look at. But I’m puzzled.

Joseph Lawler at The American Spectator:

That is, it’s written up to include loopholes to allow hedge funds to continue whatever risky or abusive practices they’ve engaged in previously. The key loophole is that there is no real common definition of a hedge fund. The only concrete distinguishing feature of a hedge fund is that it has under 100 owners. Usually a hedge fund entails some combination of a long/short strategy and leverage, but not necessarily. There is no bright line dividing what are referred to as hedge funds, private equity funds, and venture capital funds — they are legally similar firms distinguished mostly by different business models . Yet Dodd would attempt to “close loopholes” on hedge funds without affecting private equity or venture capital firms. How? From the text (pages 377-378, pdf):

Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection….   Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules… to define the term ‘private equity fund’ for purposes of this subsection.’

In other words, the Democrats would pass the bill, satisfying the left-wing’s resentment of Wall Street fat cats, and then give hedge fund managers six months either to lobby for very wide definitions of venture capital and private equity or to make whatever small organizational changes are necessary to get away with calling their firms venture capital or private equity instead of hedge funds.

Tim Fernholz at The American Prospect:

So what happened to the much-lauded Volcker rule, which would limit the size and scope of bank activities, in Sen. Chris Dodd’s latest financial reform bill? It’s a bit complicated, but essentially the rule is gone.Regular readers will recall that the key distinction between the Volcker rule, as proposed by the Obama administration, and similar provisions in the House bill, was that the Volcker rule was mandatory: It required regulators to ban proprietary trading, hedge and private-equity funds from commercial banks, and would offer specific limits on the size of a bank’s liabilities. The House bill, on the other hand, would simply give regulators the authority to limit a firm’s size and scope however they pleased if they determined it was necessary. While the House authorities were more powerful, they are also less likely to be implemented; the Volcker rule provides definitive, hard and fast lines.

Well, no more. The new method is that the Systemic Risk Council will have six months to study how and why to implement the size and scope rules, and then recommend how to write those rules, or even if they should be written at all. Basically, it’s regulatory discretion with a time limit: The council has six months to do the research and nine months after that to write rules that could be either totally cosmetic or, less likely in my view, actually effective.

Chris Good at The Atlantic:

In a CNN/Opinion Research Poll conducted in January (results at PollingReport.com), Wall Street reforms ranked behind the economy, unemployment, terrorism, the deficit, health care, education, Afghanistan, Iraq, and taxes–in that order–as an issue that President Obama and Congress must deal with. 64% said it was important; 36% said it wasn’t.

Polling has indicated that many Americans think the federal government helped Wall Street too much in its response to the financial crisis, and Obama has said, many times, that no one wanted to undertake the financial bailout initiated under the Bush administration and then stewarded by the Obama administration–that helping the banks was a distasteful necessity.

It would stand to reason that financial reform is the counterweight, politically, to the unpopular bailout; that if the public is angry that banks got saved, an ensuing regulatory crackdown is the political move that would placate that sense of unjustness–the price the banks must pay to the taxpayer, so to speak.

But if it isn’t high in voters’ minds right now, will it have much political effect?

UPDATE: Kevin Drum collecting reactions. His collection:

Ryan Avent at Free Exchange at The Economist

Mike Konczal at Rortybomb

UPDATE #2: Paul Krugman

UPDATE #3: Krugman in NYT

More Konczal at Ezra Klein’s place

Jonathan Chait at TNR


Filed under Economics, Legislation Pending, The Crisis