Wednesday, March 27, 2013

The oldest story in our Republic.

March was an big month for the big banks. Little by little, the tragedy of Sandy Hook Elementary School is fading into memory, and the NRA and the gun lobby are proving themselves more than capable of staving off legislative reforms that according to public opinion polls enjoy broad public support. With the withering of gun reforms, the power of political money and the ability of special interests strategists to drive wedges between Red America and Blue America is once again proving out.

And why do the banks care? Because slowly but surely, people are coming around to the understanding that there is no solution to the concentration of risk in our financial system that does not begin with reducing the size and market share of our largest institutions. And only the political muscle of the financial industry lobby--manifest in political contributions and lobbying prowess--can continue to thwart this emerging consensus.

Two weeks ago, the President of the Dallas Federal Reserve Bank, Richard Fisher, spoke his mind as he said that the time has come to dramatically reduce the size and market power of our largest banks:

"Here are the facts," Fisher said. "A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system. Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8% and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks." 

Fisher went on to cite the estimated $50 to $100 billion in annual subsidies reaped by these largest institutions, to the detriment of the 5,570 other banks across our economy upon whom our economy relies for the depository services and lending that is so critical to a healthy private sector and economic growth.

Richard Fisher's speech came on the heels of a report issued a week earlier by Democrat Senator Carl Levin and Republican Senator John McCain on the "London Whale" trading losses at J.P. Morgan. The Levin-McCain Permanent Subcommittee on Investigations report suggested the need "to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight." The report, however, documented the practical impossibility of implementing the needed reforms as J.P. Morgan traders had proven their ability to hide losses from internal monitoring for months at a time, to breach bank-imposed risk limits, to manipulate risk evaluation models, and to "dodge or stonewall" regulatory oversight.

The imperviousness of large financial institutions to effective risk regulation is not news, and was argued persuasively by Greenlight Capital President David Einhorn in the months before the 2008 meltdown, yet a half a decade has passed and next to nothing has been done to mitigate trading risk and temper the unchecked derivatives exposure that continues to threaten the commercial banking system.

The conflict between the interests of the banks and the public interest is as old as the Republic. Popular distrust of Wall Street runs deep, and historically has been a conviction held across the political spectrum. In his speech, Fisher highlighted bi-partisan concerns over the issue, citing the McCain-Levin partnership as well as such odd Senate bedfellows as Democrat Sharrod Brown and Republican David Vitter finding common cause in asking the Government Accountability Office to quantify the hidden subsidies to our largest financial institutions.

To date, however, the industry has been effective in deflecting concerns over the growing concentration of financial risk and power. After the initial public anger in the wake of the 2008 collapse, the narratives that have survived the financial crisis are strongly partisan. While there continues to be periodic public clamor over how it is that no one went to jail related to the 2008 financial collapse, public debate about bank system risk has now been effectively subsumed into our larger political wars, essentially derailing any significant discussion of financial restructuring as Richard Fisher suggests.

But even as each side has their own narrative assigning blame for the 2008 collapse, no one can seriously argue two basic facts. First, as Richard Fisher points out, the size of our largest banks means that they are--financially and politically--to big to fail. Should J.P. Morgan or Goldman Sachs teeter on the brink, threatening the collapse of the globally interdependent financial system, the governments of the world will demand action, and the central bankers will take all necessary measures to prevent massive bank failure. Second, no regulatory regime can hope to monitor and control bank risk-taking to the extent recommended by the Levin-McCain Report. The only prudent path to mitigating systemic risk is to reduce the size of our largest banks, as Fisher has argued.

For all the power of the financial industry, parallels with the anti-gun lobby may lack salience, as financial reform is a fundamentally different issue from gun control. While there are real differences in public attitudes about gun ownership and government regulation, there are fewer such differences on matters of bank size and derivatives risks among the general public. Few at any point on the political spectrum believe that there is any inherent public benefit in continuing to increase the market share of our largest banks, and fewer still argue the essentiality of the $639 trillion of financial derivatives to our economic recovery. Rather, critics on the right and the left have consistently argued that the concentration of power in a few large banks constitutes a threat to the vibrancy of our commercial banking system, and the growing profitability of the financial sector over the past decade or more has created a very real brain drain from the productive sectors of the economy to a non-productive sector.

The bulwark against bi-partisan action to address the continuing threat of concentration in the financial sector is money, specifically the $1 billion of annual spending by the financial services industry in lobbying and political contributions. The contributions of the financial industry exceed any other industry, and the names of the largest donors come from that same subset of banks that are working hard to protect the deposit insurance, the unregulated derivatives trading, and the scale that combine to produce implied federal protection that reduces their cost of capital, increases their potential leverage, and enhances their profitability and executive compensation.

Distrust of Wall Street has long been an issue of equal passion on the left and on the right, but one that has been obfuscated successfully by the consensus of senators of both parties whose votes have been bought and paid for. While it is popular to decry analysis that blames both parties for the problems we face, this is an issue on which neither party can claim the moral high ground. The Republican Party has historically been the party of Wall Street, but it was Bill Clinton who did the most damage as he promoted financial deregulation at the end of his term.

While a majority of Senate has been bought and paid for, the left and the right, and specifically the Occupy Movement and the Tea Party, have much in common on this issue. Pundits on the left were too quick to ignore the anti-corporatist strain within the original Tea Party movement, which was in its inception anti-banking and anti-corporate power. Charles Koch's 2011 editorial in the Wall Street Journal said as much, but was quickly dismissed because it had the Koch name on it. But Koch's message--that corporate power over federal spending and regulation is damaging to the public interest--could have equally been delivered by an activist on the left as on the right. But instead of finding common ground, each side weakened themselves by ignoring the potential for uniting around common instrests.

Perhaps the greatest success of the bank lobby has been its success in pitting the right and the left against each other to undermine a broader understanding that the status quo is neither in the public interest nor necessary for an effective financial system. Richard Fisher's speech made an argument that is essentially non-partisan and rational. The problem is that the banking industry strategy has been effectively bi-partisan and politically masterful. They have bought the center, and can watch contentedly as pundits of the left and the right scream at each other on MSNBC and Fox even as the concentration of financial power and risk grows largely unabated.

The end of the Age of Bush?

The Supreme Court arguments regarding California's Proposition 8 and the Defense of Marriage Act has been a remarkable moment for our society to recognize the degree of movement in social attitudes on a once highly contentious issue. In a manner unimaginable just a decade ago, leading Republicans have spoken out in support of gay marriage. 

Two of the protagonists of the culture wars of the 1990s, Bill Clinton and former RNC Chair and W. aid Ken Mehlman have each expressed their regret for their past actions, Clinton for signing DOMA and Mehlman for participating in gay baiting political tactics. Both framed their prior actions as the price of pursuit of victory over principle.

Jeb Bush, an erstwhile 2016 contender, is struggling to locate himself on the principle vs. politics scale. Clearly rusty after a layoff of almost a decade since his last campaign, he has re-emerged into a Republican Party that has lost its bearings. Jeb's father, George H. W. Bush, grew up in a New England Republican political family, and represented a GOP that is almost unrecognizable today. Poppy signed on to the Revolution, but was never a true believer, and was ultimately dispatched to an early retirement by the supply-siders and the Reaganites. By the time Jeb's brother W. seized the torch, the GOP was the domain of the self-styled "values" voters, whose visceral clinging to their religion and guns created a dominant political force. Jeb seems to want to be his Dad, a prudent, cautious Republican of the old school, but the Republican landscape is no longer welcoming of his father's softer demeanor. Jeb needs an edge, but it is not coming easily.

A few weeks after stumbling over the immigration issue, changing his stance several times within a day or two, Jeb Bush apparently decided to hunker down on the issue of gay marriage, declining to join the parade of Republican heavyweights signing up in support of a more tolerant nation. Speaking this week about gay marriage and gun control, a visibly chastened Bush retreated from taking any positions on anything, providing instead a magnificent formulation of political non-speak: "The effort ought to be to find consensus, that there should be rewards politically for a consensus-oriented approach that solves problems. On the other hand, passing legislation that doesn't solve the problem isn't going to solve any problems, either. I'd be wary of simple solutions to complex problems. This is a complicated issue." 

Some issues are complicated. But often they only become complicated only when politicians are forced to choose between their own sensibilities and fears of political consequences. If Jeb wanted to seize the incrementalist center, and claim some kind of Yoda-like mantle of wisdom, he might have referred back to Justice Ginsberg's reflection on Roe v. Wade having been decided too soon, and the importance of letting a national consensus grow prior to the Court asserting itself. Not exactly a Lincolnesque strategy, but it would beat the vacuous response he came up with.

In the wake of the Conservative Political Action Committee convention, it has become conventional wisdom that the Republican Party now rests in the hands of Rand Paul and Marco Rubio. Rand Paul jumped to the fore on the issue of domestic use of drones, taking a stance that would have ignited the political left were an earlier Bush still in the White House. Republican fascination with Rubio seems somewhat overdone, as he has yet to deliver a notable speech or show particular leadership, beyond the issue of immigration where his leadership remains to be validated by visible evidence of followership across the party he purports to lead.

The depth of the animus that divides Ds and Rs has been remarkable in the effective censoring of cross-party alliances, even where there should be strong affinities, whether of politics or principle. Ron Wyden's support of Paul's filibuster should have found broad support on the left, as nothing could offer a more daunting foreshadowing of an encroaching national security state than the image of drones policing first our borders and then our cities. The President's casual response "Not yet" to Senator Paul's question about whether he had authorized the domestic use of drones may have sounded like the tongue-in-cheek remark of a man enjoying baiting an adversary, but seemed misplaced given the gravity of the topic.

But if Paul and Rubio were the stars of the party, Sarah Palin's reemergence as the belle of the CPAC ball was a stark reminder of how far the GOP has fallen. This was once the party of laws and order. Candidates waited their turn and did not show up the central command. The battles between the right and the farther right--Goldwater and Rockefeller, Reagan and Ford--were largely resolved out of the public eye. By contrast, today's Republican Party is in uncharted waters, and for the first time in decades, there is no simple template. For the first time since Ronald Reagan trounced Poppy Bush, the shibboleths that emerged in Reagan's name are withering.

Jeb Bush is supposed to be the grownup. He is governor with gravitas and substance in a party now deeply in need of both. Marco Rubio and Rand Paul make for good copy, but neither is going to be the GOP candidate three years from now. The Republican Party bench is in disarray, and Jeb may well be the Party's most viable candidate.

After a bad first month, Jeb Bush may decide that he does not have the fire anymore, that he is not willing to take on the peasants with pitchforks that undid his father or bother with the lunacy of Sarah Palin's act or entourage. But he has a real opportunity. For the first time in decades--perhaps since his father denounced Ronald Reagan's voodoo economics in the 1980 primaries--the old Republican playbook has run its course. In the chaos of today's GOP, Jeb Bush can actually write his own script, he can say what he really believes. But so far, that possibility has not sunk in. Because so far, he has not said anything at all.

Saturday, March 23, 2013

Measures of economic performance.

There is a debate raging of sorts in the economics community. Are we in a recession? On one side--claiming that economic data does not suggest that we are in a recession--is a large swath of the economics community. On the other side, feeling the slings and arrows of his colleagues derision, is Economic Cycle Research Institute founder Lakshman Achuthan. Achuthan suggests that the U.S. job growth is in decline, a stance that may be contradicted by official data but reflects the real world experience of many Americans.

Debates within the dismal science are usually quiet affairs, but this one has gone public, complete with a Youtube Hitler parody of Achuthan. But even as Achuthan has been increasingly ridiculed for his unwillingness to back off his contention that the U.S. economy is in a recession, the debate has raised a more fundamental question about the nature of economic measurement and the effectiveness of the current economic model in meeting a primary objective of producing the greatest good for the greatest number of people.

The problem of measurement is most dramatically apparent in Europe, where the return to recession was generally recognized three months ago. While recent projections suggest a deepening recession in Europe, the official data are nonetheless a stark contrast with the facts on the ground. This is particularly apparent in Spain, where projections of a 0.7% annualized rate of contraction would seem to dramatically understate the severity of the economic problems in a country with an official unemployment of 26%, where youth unemployment exceeds 50%, and where in the words of Citigroup chief economist Willem Buiter, the primary practical job seeking strategy for young Spaniards has become to leave their own country.

In the years since the 2008 economic collapse, by all measures, the United States has fared far better than Europe, where the inherent tensions between monetary integration and political independence have led to a dysfunctional polity, and labor market rigidity has created undermined economic adaptability. Yet since the collapse of the housing bubble five years ago the dichotomies within the post-Cold War U.S. economic model have become increasingly apparent.

At the same time as Europe has fallen back into recession, U.S. corporate profits have hit record highs as a share of GDP and this past week the Dow Jones hit a new high, each of which are supposed to be predictors of current and future economic vitality. But as in Europe, where mildly recessionary economic indicators in Spain stand in stark contrast to clear evidence of an economy in free fall, U.S. economic data seem to miss the central point. Simply stated, even if economists are correct that we are not officially in a recession, it is hard to argue against Achuthan's larger point that for a large share of the American workforce the U.S. economy is not working. If the U.S. economy is performing acceptably according to the standard metrics, perhaps the problem is in the metrics themselves.

If one looks at the performance of the U.S. economy over the past forty years, the record is not good for the average worker. Since 1973, wages and salaries have declined steadily as a share of GDP, from 54% to 45%. And the decline has been across sectors, as private wages declined from 43% to 37% and governmental wages declined from 11.4% to 8.5%.

This decline can be attributed to several factors. Technology has dramatically increased labor productivity (output per hour worked) even as  labor market pressures from free trade and capital mobility have suppressed real wages that might otherwise have increased with productivity growth. Globalization has created an economy in which growing productivity and wage competition have created great benefits to to investors in the form of increasing corporate profits and equity prices, while depressing real wages as a share of GDP and real family incomes in the United States.

And, as in Europe, economic pressures on real income levels in the United States have been and will continue to be exacerbated by the accelerating intergenerational transfer of resources from the young to the old. Even as wages and salaries are declining as a share of GDP, the retirement benefits of the Greatest Generation and Boomers are growing as a share of GDP, and will be funded by debts and taxes that will diminish the incomes and standard of living of their children and grandchildren for decades to come.

If globalization and free trade have contributed to declining returns to labor in the U.S., they have contributed to the elevation of upwards of a billion people out of poverty across the globe. But even regions such as India, China and east Asia that have benefitted from globalization--and the gutting of the American middle class--have seen the rise of their own plutocratic classes and the societally destabilizing impact of resulting inequalities.

The solutions are not readily apparent. To those on the left, higher corporate and income taxes are the essence of a redistributive strategy to correct increasing income inequality. Yet redistributive tax strategies do little or nothing to cure the underlying problem of work force adaptability. To those on the right, deregulation remains the key to avoiding the stagnation and constriction that handcuff the youth of Europe. It is notable that post-2008 protest movements on the left and the right each pointed to the problem of political corruption at the federal level resulting in special treatment for powerful industries.

Like many debates these days, the attacks on Lakshman Achuthan is missing the larger point. If according to the rules of the dismal science we not in a recession, it is our standard of measurement that is broken.  For most people, the definition of a recession is simple: a recession is a crappy economy. And by any measure, for the large proportion of the American workforce, that is what we have.

But the larger question since the 2008 financial collapse has been whether the underlying U.S. economic model is itself broken. If our economic model is working for a decreasing share of the population over time, democratic pressures will ultimately demand not just changes to the system of measurement, but to the system itself.