Much of our regulation of banking was created during FDR's terms as President, during the Great Depression. A leading figure in that Administration was Marriner Eccles, who instituted much of the banking regulation and became Chairman of the Federal Reserve. Eccles was the founder of First Security Bank of Utah and a descendant of Mormon Pioneers.
Among one of the major accomplishments of the regulation was dividing commercial banking from investment banking. Broadly, commercial banking was limited to taking deposits and providing a certain rate of return, in turn lending that money out locally, usually to its same customers, at a slightly higher rate of return, thus turning a profit. It was relatively risk-free. Stocks, bonds and other securities, which carried greater risks, but also greater returns on investment was the purview of investment banking. The investment banks finaced larger capital projects, dealt with larger nation-wide corporations and not only bought and sold securities, but provided financial advice on topics such as mergers and acquisitions.
The creation of the Federal Depositor Insurance Corporation, although largely financed by the banks themselves, guaranteed deposits in the advent of a bank failure, thus providing "moral hazard" in that the U.S. government stood behind the deposits...if self-funding was exceeded, the full faith and credit of the United States stood behind the deposits (up to a certain limit on each account).
In general, the Federal Reserve regulated commercial banking, and the subsequent Securities and Exchange Commission (SEC) was created to regulated the investment banks (Wall Street).
Other financial instituions (such as Savings and Loans, Credit Unions, etc.) sprang up over time and were intially regulated through state law. Following the Savings and Loan crash in the eighties and nineties, which occured largely by deregulating them and allowing them larger markets (such as real estate and development lending, the Office of Thift Supervision was created at the federal level to oversee the Savings and Loans sector - or what was left of it.
Beyond banking and financial institutions, local, state and federal government regulation followed the expansion and increasing complexity of the broader society. Indeed, the rise in government regulatory and oversight functions became known as the "Progressive Era," running from the late eighteen hundreds to the nineteen twenties, particularly the Administrations of Theodore Roosevelt (the "Trust Buster") and Woodrow Wilson. During this era, the country experienced hugeindustrial and population growth and became a world power. Perhaps, government desired a sense of sharing that power, as critics of the era today profess, but much of this was due simply to the normal constraint of democracy upon the economic system of capitalism.
Waves of immigrants arrived to staff the country's growing industrial power. Citizenship conveyed voting power and voting power brought about the concept of "social justice" wherein government intervened to prevent the worst forms of exploitation. In some respects, the "worker" of the new largely industrial North was little better off than the pre-Civil War slave of the agrarian South...and as government stepped in to bring an end to slavery, it subsequently stepped in to regulate the use of labor in the North. It is difficult to defend Child Labor laws as "socialism," although the immigrants of industrialization brought many of those ideas as well.
I would suggest that the "Progressive Era" did have a profound change on American society in a sense similar to the expansion of Rome or any historical Empire. As the population grew in both numbers and diversity of ethnic cultures, the need for greater administrative control and "law" grew with it.
There is a second important factor in this growth of government power, democracy. Throughout human history, the wealthy and powerful have seldom had a problem accessing government...whether a monarch or a president; a Roman senator or a U.S Congressman. Democracy didn't overturn this, but it did shift the emphasis from the rule of a minority to the rule of the majority, consequently giving a "voice" to all within the society via their "vote."
Time is up for today...will continue for another post or two on this topic.
Tuesday, May 11, 2010
Tuesday, May 04, 2010
The Community Reinvestment Act (CRA)
The first CRA bill was passed in 1977, under the Carter Aministration, and was pretty much an outgrowth of the earlier Great Society of LBJ and Civil Rights. IT's immediate justification was anti-discrimination regarding bank lending in low income, minority neighborhoods and intended to eliminate a common banking practice of "redlining." Redlining consisted of avoiding lending in these neighborhoods, according to the banks, because of poor credit performance, high rates of crime and the general higher risk found there.
The "counter-argument" was not to deny the statistical evidence regarding these factors, but to insist that "credit worthiness" needed to be based on individual performance, rather than neighborhood performance and to do otherwise was to continue a system of segregation that perpetuated the very factors the banks pointed to as reasons for non-lending.
Over the years, particularly as African Americans gained seniority in Congress, as a result of re-election, and rose in the Congressional leadership (particularly in the House of Representatives and the Democratic Party), the original CRA legislation was from time to time stregthened. Pressure was bought to bear on the Federal Reserve to, in turn, pressure the banks under their jurisdiction into paying greater attention and they responded by establishing offices in the various Federal Reserve regional banks to perform studies, coordinate banks and civic groups (such as ACORN)to encourage more communication, and to publish guidelines for the banks to use, which used "alternative measures of creditworthiness" for low-income, minority loan applications (e.g. combining household income although everyone in the household might not be part of a "traditional family," etc.).
As I understand it, it was not however, until the Clinton Administration and the growing merger mania and push for deregulation and expansion of national banks, that CRA compliance went from something approaching "voluntary," to meaningful penalities for non-compliance. Much of what had heretofore been informal became formal. Reports were required to measure compliance via 12 "assessment critieria," and banks were "scored" on the degree of compliance. At least one major bank expansion (The Continental Bank of Illinois request to purchase a smaller Arizona bank) by a Federal Reserve ruling that held Continental Bank to be CRA non-compliant.
This simultaneous expansion, but consolidation through mergers and acquisitions, in the wake of the failure of numerous Savings and Loan banks earlier created new opportunities for financial services. The intense competition created through the expansion and consolidation was a factor in the drive for increasingly "innovative products" (perhaps an equal contribution in this drive was the advancement of information technology which allowed the real-time sharing of information, the gathering of large data bases, etc.).
Personally, I would contend that much of this was also driven by the now middle-class hunger for credit and a growing awareness within the financial services industry that a great deal more money could be made by pressuring the more numermous "customers" living on the margins, than the "fat cat on the hill" who had the resources and education to avoid what become essentially a variation of "pay-day lending."
In a 1990's Michael Moore documentary, Moore interviews economist and real estate Professor Elizabeth Warren (now Chairwoman of the Financial Crisis Inquiry Commission). Warren relates the story of her conducting a seminar for banking executives at Citigroup on how they may avoid consumer risk through a more careful screening of credit applicants. As she wound up the several hour presentation, the senior executive in the room spoke up, telling her: "That's very interesting Professor Warren, but it is from those people living on the edge of bankruptcy that we make most of our money."
Thus, far more than the CRA Program and "banks being forced to lend to low-income minorities who were poor risks," I'd suggest that banks found they could not lend fast enough.
Studies since the economic crisis in the Fall of 2008 conducted by the Federal Reserve, the FDIC, several Universities and numerous other independent sources tend to uphold this conclusion.
In a December 4, 2008 speech to the Consumer Federation of America, Shelia Bair, Chairwoman of the FDIC (and a Bush appointee), stated: "I think we can agree that a complex interplay of risky behaviors by lenders, borrowers, and investors led to the current financial storm. To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not Guilty."
Bair points out that during the "bubble" of subprime mortgages from 2004-2006 (I'd suggest 2003-2006), only about 25% of the subprime loans (termed "higher-priced loans," since increased risk increased the loan fees and interest rates) were made by CRA-covered banks. Three-fourths of the subprime loans made during this period were made by private independent mortgage companies and large-bank affliates not covered by CRA rules.
The other studies back up Bair's conclusion. A Fed study showed that there was no significant difference in the foreclosure rate in low-income, minority neighborhoods, covered by the CRA, than in low-income, NON-minority neighborhoods.
Another study showed that mortgages made last...just before the crash...failed first, as lending standards decreaded, decreases unrelated to the CRA. And, as Bair concluded in her speech: "And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth...pure and simple.
In the next post...we'll explore banking deregulation.
The "counter-argument" was not to deny the statistical evidence regarding these factors, but to insist that "credit worthiness" needed to be based on individual performance, rather than neighborhood performance and to do otherwise was to continue a system of segregation that perpetuated the very factors the banks pointed to as reasons for non-lending.
Over the years, particularly as African Americans gained seniority in Congress, as a result of re-election, and rose in the Congressional leadership (particularly in the House of Representatives and the Democratic Party), the original CRA legislation was from time to time stregthened. Pressure was bought to bear on the Federal Reserve to, in turn, pressure the banks under their jurisdiction into paying greater attention and they responded by establishing offices in the various Federal Reserve regional banks to perform studies, coordinate banks and civic groups (such as ACORN)to encourage more communication, and to publish guidelines for the banks to use, which used "alternative measures of creditworthiness" for low-income, minority loan applications (e.g. combining household income although everyone in the household might not be part of a "traditional family," etc.).
As I understand it, it was not however, until the Clinton Administration and the growing merger mania and push for deregulation and expansion of national banks, that CRA compliance went from something approaching "voluntary," to meaningful penalities for non-compliance. Much of what had heretofore been informal became formal. Reports were required to measure compliance via 12 "assessment critieria," and banks were "scored" on the degree of compliance. At least one major bank expansion (The Continental Bank of Illinois request to purchase a smaller Arizona bank) by a Federal Reserve ruling that held Continental Bank to be CRA non-compliant.
This simultaneous expansion, but consolidation through mergers and acquisitions, in the wake of the failure of numerous Savings and Loan banks earlier created new opportunities for financial services. The intense competition created through the expansion and consolidation was a factor in the drive for increasingly "innovative products" (perhaps an equal contribution in this drive was the advancement of information technology which allowed the real-time sharing of information, the gathering of large data bases, etc.).
Personally, I would contend that much of this was also driven by the now middle-class hunger for credit and a growing awareness within the financial services industry that a great deal more money could be made by pressuring the more numermous "customers" living on the margins, than the "fat cat on the hill" who had the resources and education to avoid what become essentially a variation of "pay-day lending."
In a 1990's Michael Moore documentary, Moore interviews economist and real estate Professor Elizabeth Warren (now Chairwoman of the Financial Crisis Inquiry Commission). Warren relates the story of her conducting a seminar for banking executives at Citigroup on how they may avoid consumer risk through a more careful screening of credit applicants. As she wound up the several hour presentation, the senior executive in the room spoke up, telling her: "That's very interesting Professor Warren, but it is from those people living on the edge of bankruptcy that we make most of our money."
Thus, far more than the CRA Program and "banks being forced to lend to low-income minorities who were poor risks," I'd suggest that banks found they could not lend fast enough.
Studies since the economic crisis in the Fall of 2008 conducted by the Federal Reserve, the FDIC, several Universities and numerous other independent sources tend to uphold this conclusion.
In a December 4, 2008 speech to the Consumer Federation of America, Shelia Bair, Chairwoman of the FDIC (and a Bush appointee), stated: "I think we can agree that a complex interplay of risky behaviors by lenders, borrowers, and investors led to the current financial storm. To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not Guilty."
Bair points out that during the "bubble" of subprime mortgages from 2004-2006 (I'd suggest 2003-2006), only about 25% of the subprime loans (termed "higher-priced loans," since increased risk increased the loan fees and interest rates) were made by CRA-covered banks. Three-fourths of the subprime loans made during this period were made by private independent mortgage companies and large-bank affliates not covered by CRA rules.
The other studies back up Bair's conclusion. A Fed study showed that there was no significant difference in the foreclosure rate in low-income, minority neighborhoods, covered by the CRA, than in low-income, NON-minority neighborhoods.
Another study showed that mortgages made last...just before the crash...failed first, as lending standards decreaded, decreases unrelated to the CRA. And, as Bair concluded in her speech: "And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth...pure and simple.
In the next post...we'll explore banking deregulation.
Monday, May 03, 2010
The Economic Crisis
For the past few months, I've been engaged in internet discussion and research concerning the economic crisis, the bailout of American banks and its origins.
What motivated this interest was a question in my mind regarding right wing, conservative claims, primarily on public internet forums, that the origin of the crisis could be traced to the Carter Administration's sponsered legislation termed the Community Reinvestment Act (CRA). The "theory" put forward is that, through this legislation, and subsequent amending legislation during the Clinton Administration, U.S. banks were "forced" by the Federal Government into making bad loans to low-income, minority neighborhoods and that this federal government intervention led directly to the collapse of the subprime mortgage market.
Additionally, the more recent Democratic guilty parties are Christopher Dodd, currently head of the Senate Banking Committee and Barney Frank, Chairman of the House Financial Services Committee (the House of Representatives equivalent of the Senate Banking Committee).
Supposed "proof" of these charges are that Dodd received special treatment regarding his own home loan from a Countrywide mortgage program called "Friends of Angelo," Angelo being the founder and CEO of Countrywide. The "proof" regarding Frank is that Frank (with an openly gay sexual orientation) had a boy friend at one of the Government Sponsered Enterprises (Freedie Mac or Fannie Mae) and repeatedly defended the GSEs, referring to them as "financial sound," when in fact they were on the brink of bankruptcy due to their portfolio of bad mortgages. Associated with these charges are the repeated attempts by the Bush Administration and the Republican Congress to "reign in" the GSE's and prevent undue risk.
In sum, the conclusions arrived at from this interpretation of the cause of the economic crisis are: 1) government intervention into the banking system - via the CRA - orginated the bad mortgage problem leading to excessive forecluses leading, in turn, to the economic crisis. 2) Democrats were basically behind the CRA and the subsequent protection of the GSEs, which led to the crisis, since the GSEs are the single largest underwriters in the U.S. mortgage industry.
There are a few "side-lights" to this general theory. One is that ACORN, supported by Democrats, particularly Barack Obama (during his work as a Chicago Community Organizer)was a major, basically African-American, organization that pressured Democratic politicians into support for the CRA and banks (through the organization of demonstrations, disruption of banking business and discrimination law suits), and thus played a major role in causing the economic breakdown.
After checking into the above, I found that there was indeed "some truth" in the facts, but that the facts in themselves did not lead to a cause and effect conclusion regarding the charges and the economic meltdown. Further, I had two doubts regarding that cause and effect: 1) if the CRA "caused" the meltdown, why didn't it occur earlier, at a time closer to the inception of the CRA? 2) if Democrats were primarily to blame for subprime loans, why did the growth in the number and value of subprime loans virtually double under a Republican President, George Bush, and a Republican Congress?
Thus, I began my own research into the economic crisis of 2008-2009.
What follows in a series of posts are my own conclusions...beginning in the next post with a debunking of the above theory and then exploring what I now consider to be largely an accidential convergence of errors into the "Perfect Storm."
Those "errors" consist broadly of four events: 1) massive deregulation of the financial services industry; 2) The events of 9/11/2001 and its impact on national economic policy; 3) the failure of risk management models; and 4) global competition in a global economy, wherein the United States, ridden with debt, and guided by obsolete economic policy, has tried to maintain its post WW II status as the "model" for that global economy.
More in the next Post.
What motivated this interest was a question in my mind regarding right wing, conservative claims, primarily on public internet forums, that the origin of the crisis could be traced to the Carter Administration's sponsered legislation termed the Community Reinvestment Act (CRA). The "theory" put forward is that, through this legislation, and subsequent amending legislation during the Clinton Administration, U.S. banks were "forced" by the Federal Government into making bad loans to low-income, minority neighborhoods and that this federal government intervention led directly to the collapse of the subprime mortgage market.
Additionally, the more recent Democratic guilty parties are Christopher Dodd, currently head of the Senate Banking Committee and Barney Frank, Chairman of the House Financial Services Committee (the House of Representatives equivalent of the Senate Banking Committee).
Supposed "proof" of these charges are that Dodd received special treatment regarding his own home loan from a Countrywide mortgage program called "Friends of Angelo," Angelo being the founder and CEO of Countrywide. The "proof" regarding Frank is that Frank (with an openly gay sexual orientation) had a boy friend at one of the Government Sponsered Enterprises (Freedie Mac or Fannie Mae) and repeatedly defended the GSEs, referring to them as "financial sound," when in fact they were on the brink of bankruptcy due to their portfolio of bad mortgages. Associated with these charges are the repeated attempts by the Bush Administration and the Republican Congress to "reign in" the GSE's and prevent undue risk.
In sum, the conclusions arrived at from this interpretation of the cause of the economic crisis are: 1) government intervention into the banking system - via the CRA - orginated the bad mortgage problem leading to excessive forecluses leading, in turn, to the economic crisis. 2) Democrats were basically behind the CRA and the subsequent protection of the GSEs, which led to the crisis, since the GSEs are the single largest underwriters in the U.S. mortgage industry.
There are a few "side-lights" to this general theory. One is that ACORN, supported by Democrats, particularly Barack Obama (during his work as a Chicago Community Organizer)was a major, basically African-American, organization that pressured Democratic politicians into support for the CRA and banks (through the organization of demonstrations, disruption of banking business and discrimination law suits), and thus played a major role in causing the economic breakdown.
After checking into the above, I found that there was indeed "some truth" in the facts, but that the facts in themselves did not lead to a cause and effect conclusion regarding the charges and the economic meltdown. Further, I had two doubts regarding that cause and effect: 1) if the CRA "caused" the meltdown, why didn't it occur earlier, at a time closer to the inception of the CRA? 2) if Democrats were primarily to blame for subprime loans, why did the growth in the number and value of subprime loans virtually double under a Republican President, George Bush, and a Republican Congress?
Thus, I began my own research into the economic crisis of 2008-2009.
What follows in a series of posts are my own conclusions...beginning in the next post with a debunking of the above theory and then exploring what I now consider to be largely an accidential convergence of errors into the "Perfect Storm."
Those "errors" consist broadly of four events: 1) massive deregulation of the financial services industry; 2) The events of 9/11/2001 and its impact on national economic policy; 3) the failure of risk management models; and 4) global competition in a global economy, wherein the United States, ridden with debt, and guided by obsolete economic policy, has tried to maintain its post WW II status as the "model" for that global economy.
More in the next Post.
Sunday, August 23, 2009
Health Care
Hmmm? What a curious situation. September should be interesting.
The system is such that it was to be expected that the most liberal bill would come out of the House. Founding fathers designed it that way. Most populist views, left or right, come from the House, "The People's Chamber." The Senate, on the other hand, was to represent the status quo...the establishment. Basically, the Senate represents the sovereignty of the States; the House, the sovereignty of the People.
That coupled to gerrymandering House districts to ensure "safe seats" and the seniority system, almost assures that the more radical base of each party controls their party's leadership in the House.
Nevertheless...President Obama's handling of the situation was less than "excellent." "Excellent?"...Downgrade that to "less than good." If he cannot get a health care reform bill through, I would expect heads to roll in the White House...perhaps starting with his Chief of Staff.
And, two trillion off on the deficit projection? More heads...perhaps his chief of the Domestic Economic Council.
Granted, he has one of the most difficult tasks in recent memory...but running afoul of politics doesn't help. They missed the Town Hallers and Democratic Blue Dogs and were over focused on the Clinton single payer "left" in the House leadership positions.
If you look at each piece of the Obama platform separately,you miss the message. Each is a tactical piece of an overall strategy...namely the rebuilding of the American Economy to restore a strong and prosperous middle class, that saves and pays taxes, rather than spends and acquires debt. That goal, puts him squarely against most of the status quo who have profited off an over-emphasis on the global economy over a generation.
Investors do not invest to create American jobs. They invest for a return on the investment - i.e. to make more money. If the economy is geared toward riding over-valued assets (bubbles) or toward company's yielding the best returns by the utilization of cheap foreign labor...trickle down economics may continue to work...but only for the countries with whom we run large trade deficits.
A Democratic society cannot exist as a nation of a few rich and very many poor. The poor will use their vote to acquire social programs that substitute for what the private sector is not providing them...and the wealthy will be stuck with higher and higher taxes to pay for it. On the other hand, if wealth is spread over the more numerous middle class, then the vote aligns with economic policy...and the middle class shares the tax burden.
Obama's pieces are aimed at an economic restructuring, both to rebuild the American infrastructure and to compete better globally: health care, education and energy independence.
But if loses on Round 1...the rest will be far more difficult.
The system is such that it was to be expected that the most liberal bill would come out of the House. Founding fathers designed it that way. Most populist views, left or right, come from the House, "The People's Chamber." The Senate, on the other hand, was to represent the status quo...the establishment. Basically, the Senate represents the sovereignty of the States; the House, the sovereignty of the People.
That coupled to gerrymandering House districts to ensure "safe seats" and the seniority system, almost assures that the more radical base of each party controls their party's leadership in the House.
Nevertheless...President Obama's handling of the situation was less than "excellent." "Excellent?"...Downgrade that to "less than good." If he cannot get a health care reform bill through, I would expect heads to roll in the White House...perhaps starting with his Chief of Staff.
And, two trillion off on the deficit projection? More heads...perhaps his chief of the Domestic Economic Council.
Granted, he has one of the most difficult tasks in recent memory...but running afoul of politics doesn't help. They missed the Town Hallers and Democratic Blue Dogs and were over focused on the Clinton single payer "left" in the House leadership positions.
If you look at each piece of the Obama platform separately,you miss the message. Each is a tactical piece of an overall strategy...namely the rebuilding of the American Economy to restore a strong and prosperous middle class, that saves and pays taxes, rather than spends and acquires debt. That goal, puts him squarely against most of the status quo who have profited off an over-emphasis on the global economy over a generation.
Investors do not invest to create American jobs. They invest for a return on the investment - i.e. to make more money. If the economy is geared toward riding over-valued assets (bubbles) or toward company's yielding the best returns by the utilization of cheap foreign labor...trickle down economics may continue to work...but only for the countries with whom we run large trade deficits.
A Democratic society cannot exist as a nation of a few rich and very many poor. The poor will use their vote to acquire social programs that substitute for what the private sector is not providing them...and the wealthy will be stuck with higher and higher taxes to pay for it. On the other hand, if wealth is spread over the more numerous middle class, then the vote aligns with economic policy...and the middle class shares the tax burden.
Obama's pieces are aimed at an economic restructuring, both to rebuild the American infrastructure and to compete better globally: health care, education and energy independence.
But if loses on Round 1...the rest will be far more difficult.
Thursday, July 23, 2009
Obama and the Health Plan
Ah...a frustrating day on the Internet trying to explain how government works.
Background: The founding fathers feared primarily two things - too powerful a government and mob rule. To take care of the first, they gave us checks and balances; to take care of the second, they fore go direct democracy and gave us representative government.
They intended that the two chambers of Congress to off-set one another...sort of a check and balance within Congress, as well as the others between branches. Te House was elected from numerous districts and directly by the people. Roughly, this the House equates to Britain's House of Commons, as it used to be. The House was intended to be "the people's chamber." It was designed to be larger than the Senate on purpose...to make it more difficult to get consensus. To off-set this, they gave them the "right" to propose appropriations (and more difficult to get them).
The upper chamber, the Senate, was elected via the Sate legislatures...not directly by the people. This was the equivalent of Britain's House of Lords, as it used to be. Although there was no inherited aristocracy, the F/F's recognized American elites, in the form of successful businessmen, planters, and a professional class (doctors, lawyers, etc.). By electing the Senate through the State legislatures, they created a barrier for the popular election of a demagogue and expected the Senate to represent these elites. Being a smaller chamber, it also was intended to be more collegial and more conservative than the lower chamber.
Although we abandoned, through Constitutional amendment, state legislature election of the Senate and went to direct popular elections, many of the basic intentions of the F/F's remain today in regard to the "nature" of the separate chambers.
In other words, the F/F's foresaw that legislation coming out of the House would be more representative of the "people" and perhaps transitory in nature. The brake on momentary popular fads was the requirement that legislation pass both chambers and be signed by the President before coming law.
Subsequent evolution enhanced rather than reduced these peculiar chamber orientations. The seniority system coupled to the gerrymandering of "safe districts" for both parties, virtually ensured that bills coming out of the House would represent the extremes of the Parties' positions. In other words, Committee Chairmen tend to be those who have been elected and reelected from safe districts and as such represent the views of either the most Republican of Republican districts or the most Democratic of Democratic districts.
All of which brings me to Obama and health care...but keep in mind the above.
One reason Obama is appearing to "rush" the House toward a vote is that he understands the legislative process and the above. He knows that whatever comes out of the House will not be the same bill that is eventually sent to him for signature.
The Senate will review the House bill and propose, in their own bill, less radical and more conservative alternatives. Both bills will then go to a Conference Committee, composed of representatives fom the House and Senate, for resolution of the differences. If Obama is reluctant to read every word of the thousand page House bill, it is with the understanding that there are two additional thousand word bills that lie ahead and that he will only have to put his name to the last one out of Congress. So, his impatience is in the vein of "let's get on with the process."
The second factor lies in how he reached the Presidency in particular. Remember that the real election in 2008 was fought out in the primaries for the Democratic nomination. The party was split very closely between himself and Clinton and one of their most pronounced differences was in the health plans each presented. So, he recognizes that there is a wide difference within the Democratic Party as to just what is meant by universal health care...and he must tread carefully to arrive at a Party consensus.
The third factor lies in his position within the Party itself. Clinton was, for the most part, the choice of the Party establishment, taken over from Bill (and with notable exceptions in the left wing who never forgave Bill for blowing his opportunities over...well, we all know that story...moving toward the center after his election and losing Congress in the 1994 elections). Indeed, many in the left of the Democratic Party had the same reaction to Bill as many on the right in the Republican Party had to George Bush and John McCain...i.e. they were not successful because of their lack of faithfulness to he cause.
I've digressed. In sum, Obama knows he must unify the Party and "prove" himself to Party pros. Many of these "pros" are old timey Democratic politicians, who now head up Committees and want to make sure Obama shows them proper respect, understands the limits of his authority, etc. I suspect, this is the major reason he has been vague with Congress on exactly what he wants, instead of sending them a detailed draft bill. He is "deferring" to them and the legislative process.
However, some form of universal health care has been on the Democratic agenda since Harry Truman. Additionally, he is right about the need for reform and future costs (more on that tomorrow). He'll wait it out to year end and expect something to reach his desk before then. In this way, no one gets mad on the Democratic side (and since they have the votes, it doesn't matter if Republicans get mad or not). And, he comes out the winner. When history forgets who held what committee chairmanship, he will be remembered as the Democratic President that enacted Health Care Reform...and if he handles all of this well, he'll gain respect among those same Chairman, who will be so quickly forgotten.
Background: The founding fathers feared primarily two things - too powerful a government and mob rule. To take care of the first, they gave us checks and balances; to take care of the second, they fore go direct democracy and gave us representative government.
They intended that the two chambers of Congress to off-set one another...sort of a check and balance within Congress, as well as the others between branches. Te House was elected from numerous districts and directly by the people. Roughly, this the House equates to Britain's House of Commons, as it used to be. The House was intended to be "the people's chamber." It was designed to be larger than the Senate on purpose...to make it more difficult to get consensus. To off-set this, they gave them the "right" to propose appropriations (and more difficult to get them).
The upper chamber, the Senate, was elected via the Sate legislatures...not directly by the people. This was the equivalent of Britain's House of Lords, as it used to be. Although there was no inherited aristocracy, the F/F's recognized American elites, in the form of successful businessmen, planters, and a professional class (doctors, lawyers, etc.). By electing the Senate through the State legislatures, they created a barrier for the popular election of a demagogue and expected the Senate to represent these elites. Being a smaller chamber, it also was intended to be more collegial and more conservative than the lower chamber.
Although we abandoned, through Constitutional amendment, state legislature election of the Senate and went to direct popular elections, many of the basic intentions of the F/F's remain today in regard to the "nature" of the separate chambers.
In other words, the F/F's foresaw that legislation coming out of the House would be more representative of the "people" and perhaps transitory in nature. The brake on momentary popular fads was the requirement that legislation pass both chambers and be signed by the President before coming law.
Subsequent evolution enhanced rather than reduced these peculiar chamber orientations. The seniority system coupled to the gerrymandering of "safe districts" for both parties, virtually ensured that bills coming out of the House would represent the extremes of the Parties' positions. In other words, Committee Chairmen tend to be those who have been elected and reelected from safe districts and as such represent the views of either the most Republican of Republican districts or the most Democratic of Democratic districts.
All of which brings me to Obama and health care...but keep in mind the above.
One reason Obama is appearing to "rush" the House toward a vote is that he understands the legislative process and the above. He knows that whatever comes out of the House will not be the same bill that is eventually sent to him for signature.
The Senate will review the House bill and propose, in their own bill, less radical and more conservative alternatives. Both bills will then go to a Conference Committee, composed of representatives fom the House and Senate, for resolution of the differences. If Obama is reluctant to read every word of the thousand page House bill, it is with the understanding that there are two additional thousand word bills that lie ahead and that he will only have to put his name to the last one out of Congress. So, his impatience is in the vein of "let's get on with the process."
The second factor lies in how he reached the Presidency in particular. Remember that the real election in 2008 was fought out in the primaries for the Democratic nomination. The party was split very closely between himself and Clinton and one of their most pronounced differences was in the health plans each presented. So, he recognizes that there is a wide difference within the Democratic Party as to just what is meant by universal health care...and he must tread carefully to arrive at a Party consensus.
The third factor lies in his position within the Party itself. Clinton was, for the most part, the choice of the Party establishment, taken over from Bill (and with notable exceptions in the left wing who never forgave Bill for blowing his opportunities over...well, we all know that story...moving toward the center after his election and losing Congress in the 1994 elections). Indeed, many in the left of the Democratic Party had the same reaction to Bill as many on the right in the Republican Party had to George Bush and John McCain...i.e. they were not successful because of their lack of faithfulness to he cause.
I've digressed. In sum, Obama knows he must unify the Party and "prove" himself to Party pros. Many of these "pros" are old timey Democratic politicians, who now head up Committees and want to make sure Obama shows them proper respect, understands the limits of his authority, etc. I suspect, this is the major reason he has been vague with Congress on exactly what he wants, instead of sending them a detailed draft bill. He is "deferring" to them and the legislative process.
However, some form of universal health care has been on the Democratic agenda since Harry Truman. Additionally, he is right about the need for reform and future costs (more on that tomorrow). He'll wait it out to year end and expect something to reach his desk before then. In this way, no one gets mad on the Democratic side (and since they have the votes, it doesn't matter if Republicans get mad or not). And, he comes out the winner. When history forgets who held what committee chairmanship, he will be remembered as the Democratic President that enacted Health Care Reform...and if he handles all of this well, he'll gain respect among those same Chairman, who will be so quickly forgotten.
Monday, July 13, 2009
Grading Obama
Dear Friends and Family:
We're experiencing a rainy day in the midst of a month of sunshine here in Seattle. Seems like an appropriate time to return to this blog.
I've also spent more than a few evenings arguing Obama's case on internet forums. I consider this my "community service." Although I completely understand some of you are NOT Obama fans, I am looking forward to somewhat more positive responses.
OK...grading Obama.
As of the closing days of July 2009, I think I give him something between a B- and a B. Considering that he is probably facing the most difficult times of any President since FDR, that isn't all that bad. Without judging the policies themselves, I grade him down a bit in his post-election movement toward the center. While this was envitable for practical political reasons, the movement IS a departure from the campaign rheotric that stirred the liberal wing of the Party (e.g. ending the wars, prosecuting torture, White House transparency, etc.).
I keep reminding myself, however, of the three major platform planks: energy self-sufficiency, health care and education (more on the economy in a moment). Pleasantly, he does not appear, IMO, to have moved his focus much from these issues. I suspect giving ground elsewhere may, in part, be due to the necessity of lining up conservative and moderate Democratic Congressional votes to push these substantive issues through in the first two years.
Aside from some R&D money and what may be up and coming tax code changes, the mainstay of energy self-sufficiency seems to lie in the cap and trade proposals. The recent G-8 meeting, wherein he appartently received less than overwhelming support from developing nations for similar global cap and trade programs was, unfortunately a set-back for his domestic proposals. I even heard a "clean coal" advocate using the old AFL-CIO slogan regarding "free trade," in effect saying "what the American Energy Industry needs is a Level Playing Field."
Hmmm? Where were these guys when the issue was labor?
The developing countries reluctance on top of our carbon intensive domestic energy producers may put the issue on the Congressional back burner (even though the House has passed its own version already). When we do finally get something, I am beginning to suspect it will include all sorts of waivers and be generally watered down. On the positive side, I think Obama understands what he is taking on and will take what first steps he can politically, with the intent of slowly whittling away at the problem during an economic recovery. So far, he has been the most pragmatic President in my memory.
I think he'll be somewhat firmer on health care (even trading some of his immediate cap and trade desires for some health care gains). His proposal is already somewhat to the right of the Clinton primary proposals and consequently he does not have much "room" to move further right and still hold Democratic support. Further, health care costs are hitting American pocketbooks on a daily basis, whereas cap and trade, although needed, is pretty much assured to raise energy costs over the short term. Aside from the broader economic problems, I would bet (at the moment) health care will be the major accomplishment of 2009-2010.
A few things have already been done in education (Pell Grants, teacher retention via the Stimulus Package, etc.). My own feeling is that any substantive push on education improvement will ultimately involve meeting the teacher's union head-on (standardized testing for BOTH students and teachers). This will require some very fancy footwork and I believe he'll delay big changes in this sector until he has a better track record on other major issues (i.e. basically more power within his own Party).
On the economy front, despite the whinning about earmarks and pork, I am impressed with the way he has linked his core platform issues with use of Stimulus money...i.e. more bang for the buck. On the banks, he side-stepped the trap of "nationalization," and refused to nationalize, even when people as far on the right as Libertarian Alan Greenspan were calling for nationalization. And, adding compensation limits to loan terms was smart and a virtual 100% guarantee that the loans would be repaid as quickly as possible.
Overall, on the economy, I see Obama as using government to encourage the re-direction of private investment. "Change" comes hardest to those who have profited most from the status quo...and it will be an uphill battle, but if he can, through tax policies, grants, R & D funding, etc., make it actually more profitable to private investors to invest in his policies, that will lay the groundwork for a meaningful economic recovery. Tough job...more on this point and foreign policy next time.
We're experiencing a rainy day in the midst of a month of sunshine here in Seattle. Seems like an appropriate time to return to this blog.
I've also spent more than a few evenings arguing Obama's case on internet forums. I consider this my "community service." Although I completely understand some of you are NOT Obama fans, I am looking forward to somewhat more positive responses.
OK...grading Obama.
As of the closing days of July 2009, I think I give him something between a B- and a B. Considering that he is probably facing the most difficult times of any President since FDR, that isn't all that bad. Without judging the policies themselves, I grade him down a bit in his post-election movement toward the center. While this was envitable for practical political reasons, the movement IS a departure from the campaign rheotric that stirred the liberal wing of the Party (e.g. ending the wars, prosecuting torture, White House transparency, etc.).
I keep reminding myself, however, of the three major platform planks: energy self-sufficiency, health care and education (more on the economy in a moment). Pleasantly, he does not appear, IMO, to have moved his focus much from these issues. I suspect giving ground elsewhere may, in part, be due to the necessity of lining up conservative and moderate Democratic Congressional votes to push these substantive issues through in the first two years.
Aside from some R&D money and what may be up and coming tax code changes, the mainstay of energy self-sufficiency seems to lie in the cap and trade proposals. The recent G-8 meeting, wherein he appartently received less than overwhelming support from developing nations for similar global cap and trade programs was, unfortunately a set-back for his domestic proposals. I even heard a "clean coal" advocate using the old AFL-CIO slogan regarding "free trade," in effect saying "what the American Energy Industry needs is a Level Playing Field."
Hmmm? Where were these guys when the issue was labor?
The developing countries reluctance on top of our carbon intensive domestic energy producers may put the issue on the Congressional back burner (even though the House has passed its own version already). When we do finally get something, I am beginning to suspect it will include all sorts of waivers and be generally watered down. On the positive side, I think Obama understands what he is taking on and will take what first steps he can politically, with the intent of slowly whittling away at the problem during an economic recovery. So far, he has been the most pragmatic President in my memory.
I think he'll be somewhat firmer on health care (even trading some of his immediate cap and trade desires for some health care gains). His proposal is already somewhat to the right of the Clinton primary proposals and consequently he does not have much "room" to move further right and still hold Democratic support. Further, health care costs are hitting American pocketbooks on a daily basis, whereas cap and trade, although needed, is pretty much assured to raise energy costs over the short term. Aside from the broader economic problems, I would bet (at the moment) health care will be the major accomplishment of 2009-2010.
A few things have already been done in education (Pell Grants, teacher retention via the Stimulus Package, etc.). My own feeling is that any substantive push on education improvement will ultimately involve meeting the teacher's union head-on (standardized testing for BOTH students and teachers). This will require some very fancy footwork and I believe he'll delay big changes in this sector until he has a better track record on other major issues (i.e. basically more power within his own Party).
On the economy front, despite the whinning about earmarks and pork, I am impressed with the way he has linked his core platform issues with use of Stimulus money...i.e. more bang for the buck. On the banks, he side-stepped the trap of "nationalization," and refused to nationalize, even when people as far on the right as Libertarian Alan Greenspan were calling for nationalization. And, adding compensation limits to loan terms was smart and a virtual 100% guarantee that the loans would be repaid as quickly as possible.
Overall, on the economy, I see Obama as using government to encourage the re-direction of private investment. "Change" comes hardest to those who have profited most from the status quo...and it will be an uphill battle, but if he can, through tax policies, grants, R & D funding, etc., make it actually more profitable to private investors to invest in his policies, that will lay the groundwork for a meaningful economic recovery. Tough job...more on this point and foreign policy next time.
So much to comment on; so little time
Seems I haven't written anything for a few months...will begin using this again shortly...please stay tuned.
Wednesday, February 18, 2009
Recent Developments in the Economic Crisis
In addition to Obama's Mesa, Arizona speech unveiling his plan to mediate housing foreclosures, Fed Chairman Bernanke today addressed the National Press Club (a rare event for a Fed Chairman) and took questions from reporters following his speech (an apparently even more rare event for a Fed Chairman).
I noted one disturbing, in-passing answer to a question relating to Geithner's "stress tests" for the major banks. While he largely dodged the question, by correctly pointing out that Geithner should answer the question, he did give his own interpretation. He said he thought it was part of an effort to understand all of the assets and liabilities of the banks and then "test" their financial positions against a variety of worst case scenarios.
Uh...was that an indirect admission by the Chairman of the Federal Reserve that we have given these same institutions some $310B in emergency taxpayer funding WITHOUT understanding their exact financial situation? If so, this seems to support my idea that the reason Paulsen turned away from the original intention of using the TARP funding to acquire bank bad assets and sell them (much like the Resolution Trust Company, established for bankrupt Savings and Loans) is due to one of three things or a combination of the three: 1) in a generally declining economy and falling house prices, banks don't know how to value either assets or liabilities, 2) they know, but don't want to tell the government, or - worst case - 3) they aren't sure what they have.
Other item on the front page of tomorrow's NYT regarding UBS's decision to cooperate with the U.S. and turn over the names of U.S. citizen's who were evading U.S. taxes in UBS accounts. UBS stands for United Bank of Switzerland. UBS has already admitted to the accounts and their intent, but have to date refused to release the names, which presumably include numerous U.S. VIP's. This has the potential to become a huge scandel. UBS has said they made $200M/yr just on the fees charged to manage the accounts, which may run into billions. The IRS is said to be looking at 19,000 names.
Look for Phil Gramm's name. He's the former Chairman of he Senate Banking Committee and largely responsible for eliminating most of the safeguard's put into the regulatory system over banks following the Great Depression. [Most recently notable as John McCain's senior economic advisor until his famous "Americans are a nation of whinners" remark.
Following his Senate success at deregulating the banks, Gramm joined the board of UBS and became a VP within its U.S. operations, at roughly the same time the bank now admits it's special U.S. accounts were started. His first assignment with UBS was to oversee their acquisition of Paine Webber, for which he received an estimated $750,000.
Gramm's wife, Wendy, was head of the Commodity and Futures Trading Commission. One of her last acts there (they both left Washington about the same time) was to "deregulate" commodity futures trading, for among other things, natural gas. Within a year of her departure, she was named to the board of a Houston, Texas company that was at the time the largest distributor of natural gas in the country - ENRON.
Ah well..we're all innocent until proven guilty, but it would not surprise me if both of them found themselves in a federal prison by 2010.
I noted one disturbing, in-passing answer to a question relating to Geithner's "stress tests" for the major banks. While he largely dodged the question, by correctly pointing out that Geithner should answer the question, he did give his own interpretation. He said he thought it was part of an effort to understand all of the assets and liabilities of the banks and then "test" their financial positions against a variety of worst case scenarios.
Uh...was that an indirect admission by the Chairman of the Federal Reserve that we have given these same institutions some $310B in emergency taxpayer funding WITHOUT understanding their exact financial situation? If so, this seems to support my idea that the reason Paulsen turned away from the original intention of using the TARP funding to acquire bank bad assets and sell them (much like the Resolution Trust Company, established for bankrupt Savings and Loans) is due to one of three things or a combination of the three: 1) in a generally declining economy and falling house prices, banks don't know how to value either assets or liabilities, 2) they know, but don't want to tell the government, or - worst case - 3) they aren't sure what they have.
Other item on the front page of tomorrow's NYT regarding UBS's decision to cooperate with the U.S. and turn over the names of U.S. citizen's who were evading U.S. taxes in UBS accounts. UBS stands for United Bank of Switzerland. UBS has already admitted to the accounts and their intent, but have to date refused to release the names, which presumably include numerous U.S. VIP's. This has the potential to become a huge scandel. UBS has said they made $200M/yr just on the fees charged to manage the accounts, which may run into billions. The IRS is said to be looking at 19,000 names.
Look for Phil Gramm's name. He's the former Chairman of he Senate Banking Committee and largely responsible for eliminating most of the safeguard's put into the regulatory system over banks following the Great Depression. [Most recently notable as John McCain's senior economic advisor until his famous "Americans are a nation of whinners" remark.
Following his Senate success at deregulating the banks, Gramm joined the board of UBS and became a VP within its U.S. operations, at roughly the same time the bank now admits it's special U.S. accounts were started. His first assignment with UBS was to oversee their acquisition of Paine Webber, for which he received an estimated $750,000.
Gramm's wife, Wendy, was head of the Commodity and Futures Trading Commission. One of her last acts there (they both left Washington about the same time) was to "deregulate" commodity futures trading, for among other things, natural gas. Within a year of her departure, she was named to the board of a Houston, Texas company that was at the time the largest distributor of natural gas in the country - ENRON.
Ah well..we're all innocent until proven guilty, but it would not surprise me if both of them found themselves in a federal prison by 2010.
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