Barry Ritholtz has a good summing-up of a new paper (pdf) by three IMF economists on the link between lobbying and risk-taking by lenders. The gist: Firms that made the riskiest loans spend the most on lobbying Congress. And what were their lobbying aims?
• prevent any tightening of lending laws that reduce the benefits of short-termist strategies over long-term profits;• allow systematic underestimation of default probabilities by overoptimistic bankers;• not just to originate loans that carry more risk, but to convince legislators that such lending is prudent;• to thwart bills aimed at lax lending standards and riskier loans;• to tighten regulations that restrict entry by others preventing competition;• to have a higher probability of receiving preferential treatment in a crisis.
The general takeaway here is that Congress is a bit, ahem, compromised when it comes to dealing with the financial sector. It's compromised in dealing with lots of other industries too, of course, but the finance-insurance-real-estate crowd is bigger and richer than any other industry, plus it just caused the worst economic downturn since the Depression. Those who would address the financial problems of the past few years with better laws and regulations (a group of which I am a member) have a big problem when the rulemakers are captured not just by the industry they regulate but the dodgiest parts of that industry. So what do we do about this?
1. Get out of the regulating business. This is the libertarian solution, and while it reeks a bit of libertopianism, there is a basic truth behind it: The less affected by regulation and/or government spending an industry is, the less it spends on campaign contributions and lobbying, as a general rule.
2. Shine a light on what's going on so the public interest can trump private interests. This does work sometimes. And the increased attention paid to the House Financial Services and Senate Banking committees over the past couple of years has made life more difficult for financial industry lobbyists (at least, that's what people in the financial industry say).
3. Do something about all that lobbying and campaign giving. The problem here is that past efforts at campaign finance reform seem to have only made things worse.2. Lobbyists and Students
As usual, the senate is where progressive legislation goes to die.
The private lending companies that earn billions of dollars in undeserved profits from the federal student loan program are working overtime to kill a bill that would stop their gravy train once and for all — and should have been enacted long ago. The House stood up to the powerful lending lobby last fall and passed a student loan reform bill. The White House has been pushing the Senate, but it is having trouble finding its spine and has yet to introduce a bill.
The House version phases out the wasteful part of the federal college lending program that pays private lenders a rich subsidy to make risk-free loans that are guaranteed by the government. The bill also expands another, more reliable and less expensive federal loan program that permits students to borrow directly from the government through their colleges.
The arguments for moving in this direction are irrefutable. The subsidized program, for example, was supposed to keep loans flowing during recessions. But the loans dried up in the last credit crunch, forcing the government to rescue the program. The direct program, by contrast, suffered no such disruption. In addition to being more reliable, the direct program costs less. The Congressional Budget Office estimated last year that the country could save about $80 billion over the next decade by ending the private system and moving to the direct one.
Some lenders say the new system would lead to more student defaults, but contracts between the government and loan-servicing companies clearly state that the companies will be evaluated partly on how successful they are at preventing defaults.
The new system would, of course, cut into lenders’ profits. But by redirecting the savings into a variety of federal programs aimed at needy students — including the Pell grant scholarship program — Congress would be putting the money to good use.
Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? He argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones? Is it that, in the nature of the case, there is more money backing one side than the other?
The argument against regulating hedge funds, private equity firms, and the like was that the participants in those markets were expert, knowledgeable managers of wealth. Since they had a lot at stake, they would be motivated and able to estimate risks fairly, foresee pitfalls, price accordingly, and keep each other honest. In fact, as Cassidy shows, incentives were often perverse, short-run greed overcame long-run caution, information was hidden or badly processed, and the complexity of financial engineering outran the capacity for rational calculation. “Rational irrationality” and herd behavior led to disaster. In the case of financial markets, the “realists” have by now perhaps won out over the “utopians.”
How much do all those exotic securities, and the institutions that create them, buy them, and sell them, actually contribute to the “real” economy that provides us with goods and services, now and for the future? The main social purpose of the financial system--banks, securities markets, lending institutions, and the rest--is to allocate society’s pool of accumulated savings, its capital, to the most productive available uses. It does a lot of this, beyond doubt.
We would be much poorer without a functioning financial system, and the flow of credit and equity purchases that it permits. If anyone who wanted to start a business--a software company, a biotechnology laboratory, a retail store--had to do so with his or her already saved-up wealth and the help of relatives, many good ideas would go unrealized, and some wealth would lie idle or be wasted.
But those needs were being taken care of a quarter-century ago, and well before that. The securitization of mortgages and college loans is not intrinsically a foolish or useless idea--it enlarges the pool of capital available to finance home purchases and college educations; but the opportunity for you and me to bet a large sum of money on the outcome of somebody else’s bond issue is not nearly the same sort of thing.
Take an extreme example. I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favorable transactions minutes or even seconds before the next most clever competitor can make a move. Deep pockets in a large market can make a lot of money out of tiny advantages. (Of course, if you have any such advantage the temptation is irresistible to borrow a lot of money to enlarge your bets and your profits. Leverage is good for you, until it isn’t. It is not so good for the system.) A lot of high-class intellectual effort naturally goes into trying to invent ways to find those tiny advantages a few seconds before anyone else.
Now ask yourself: can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? It can be enormously profitable to the financial services industry, but that may represent just a transfer of wealth from one person or group to another. It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.
If that suspicion is valid--I emphasize that the necessary calculations have not been made and will be hard to make--the conclusion would be that our poorly regulated financial system is not only dangerously unstable, but also too big and too complex, absorbing talent and resources that could be better used doing something else. What is inadmissible is the assumption that, if the market creates a large and convoluted financial system, the market must be right. John Cassidy’s book should confer on a thoughtful reader a lasting immunity to erroneous free-market sloganeering, whether simpleminded or devious, while still conveying some feeling for what a well-functioning market system can actually do. Both ideas are important.4. To Heal Haiti, Look to History, Not Nature
HAITI is everybody’s cherished tragedy. Long before the great earthquake struck the country like a vengeful god, the outside world, and Americans especially, described, defined, marked Haiti most of all by its suffering. Epithets of misery clatter after its name like a ball and chain: Poorest country in the Western Hemisphere. One of the poorest on earth. For decades Haiti’s formidable immiseration has made it among outsiders an object of fascination, wonder and awe. Sometimes the pity that is attached to the land — and we see this increasingly in the news coverage this past week — attains a tone almost sacred, as if Haiti has taken its place as a kind of sacrificial victim among nations, nailed in its bloody suffering to the cross of unending destitution.
And yet there is nothing mystical in Haiti’s pain, no inescapable curse that haunts the land. From independence and before, Haiti’s harms have been caused by men, not demons. Act of nature that it was, the earthquake last week was able to kill so many because of the corruption and weakness of the Haitian state, a state built for predation and plunder. Recovery can come only with vital, even heroic, outside help; butsuch help, no matter how inspiring the generosity it embodies, will do little to restore Haiti unless it addresses, as countless prior interventions built on transports of sympathy have not, the manmade causes that lie beneath the Haitian malady.Much more...
5. The Tea Partiers: Fraudulent Fiscal Conservatives
I think the MSM is missing the real focus of this movement. We keep describing the tea-partiers as fiscal conservatives. But this is patently untrue on its face.
They have no plans to cut serious spending whatsoever. They love their Medicare, as they screamed at us last August. Do you remember them revolting against Bush's unfunded, Medicare prescription drug bill, the worst act of fiscal vandalism since the Iraq war? They want much more defense spending. And does anyone think they would ever touch social security? Tell me of one speech this weekend in which any serious spending cuts were actually proposed.
On healthcare costs, any attempt to restrain the massive fiscal burden of the care of people in their last days and hours of their lives - by entirely voluntary attempts to get them to prepare powers of attorney in advance - will be described as death-panels. This new form of Christianity - unlike the vast tradition stretching back to the Middle Ages - believes that even those in a vegetative state should be kept on feeding tubes for ever.
Everything they stand for is about more spending, not less. Remember that none of these people were up in arms when an evangelical president was adding trillions of debt, with not even a gesture at funding any of it. And they want to cut taxes as well.
So why are they really there?
They want their country back. That's what they tell us. I watched a CNN segment where one woman explicitly described Obama as Satan's agent. And the biggest applause of the Palin speech was her reference to children with special needs, her brilliant way of telling the base that she is a real pro-lifer and not a fake one. That's why she hauls little Trig everywhere she goes. He's a pro-life prop. A special needs child would be kept at home, cared for intently, and out of the limelight.
This is about Christianism, permanent war against Islam, rounding up illegals (did you hear Tancredo?) and a culture war against the cities and "unreal Americans". Unreal means not Christianist.
Know fear.
No comments:
Post a Comment