Banks Game Dodd-Frank to Irrelevance

Michael CorleoneDean Baker wrote a very short but action packed article this morning, The Banking Industry Wins on Risk Retention With Mortgages. It is following up on Floyd Norris’s article in The New York Times, Banks Again Avoid Having Any Skin in the Game. It is all about the securitization of home loans. This probably sounds familiar because this is what wrecked the economy back in 2008. Given that the financial industry didn’t get harmed for what they did before, like a spoiled child, they never learned.

Norris explained that part of the Dodd-Frank law was to have required “risk retention” or “skin in the game” in their real estate securities. So when a bank bundled up a bunch of mortgages and sold them, it would have to keep a 5% interest. But there was a way around this. If the mortgage was considered super safe, this 5% risk retention wasn’t necessary. What made a loan super safe was if the borrower had a substantial down-payment. For example, if someone put down $100,000 on a $200,000 house, it was unlikely to be a problem because the home would have to go down in value by 50% in order for the bank to lose any money.

But this isn’t going to happen. The problem is that the banks had a lot of support in wanting to get rid of any requirements on loans. The economy is sluggish and people are having a hard time getting loans. So a chorus of voices rose up and said that we must do everything we can to encourage the banks to loan. Sigh. I am so tired of this. This is the neoliberal hellscape we now live in. It would be easier if the government just loaned the money directly. But instead, we have to allow private banks to enrich themselves making home loans, which the government guarantees. The banks do a useless job for a lot money at no risk to themselves.

The bottom line is expressed by Barney Frank, “The loophole has eaten the rule…” Except it is worse than that; maybe it would be better to say, “The loophole ate the rule and then died of poisoning.” And the truth is that it probably doesn’t matter. But bad policies are always enacted when they seem reasonable. It seemed reasonable for Bill Clinton to destroy welfare as long as the economy was doing great. It was only after the dot-com crash that it became clear that we still needed welfare as we had known it. So sure, the securities will be fine this year and net year. They may even be fine for the next decade. But eventually, we’ll see the same thing happen again.

Dean Baker pointed out that loans with no down-payments were four times as likely to default as loans with a 20% down-payment. He added, “It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.” It simply would have made loans slightly more expensive. But that was not how it was presented.

The the banks have won. Again. Just as expected. I remember back when we were in the middle of the crisis in 2008, there were bankers saying that the government really did need to regulate the banks because the bankers just couldn’t help themselves. But after the government stepped in and saved them, their tunes changed. Even the most minor of regulations were met with screams, “Socialism!” The bankers managed to water down the initial Dodd-Frank law, which was bad enough. But laws always have to be turned into policies by the bureaucracy. So the bankers have been working that system as well. And in the end, the people of the United States get the Michael Corleone deal that we can’t refuse, “Nothing.”

That Film About Money

James SchamusI just found out about a film project, We the Economy. It is subtitled, “20 Short Films You Can’t Afford to Miss.” I learned about it indirectly via Tristero over at Digby’s Blog. The recommended films by James Schamus are very good. Sadly, that isn’t true for much of the other films.

I haven’t watched all of the series, but most of what I’ve watched has not impressed me in terms of substance. It’s not a surprise that the group got money to make its highly polished films. I would say they overall tilt decidedly rightward. What’s kind of sad is that in many cases, it isn’t clear that the artists making the films really understand. For example, the film on Debt and Deficits treats short term deficits as though there is a disagreement about them in a recession. That’s not true. There is only a disagreement about them when a Democrat is in the White House.

But of special concern is the Recessions episode. It is visually stunning, but is based upon John Steele Gordon’s ideas about recessions, which are largely that recessions are based upon supply shocks. He gives some minor lip service to the demand side of the equation, but that’s all. For example, he claims that recessions are all about bankers not loaning. Sometimes, certainly. What about right now? Oh, that’s right: we aren’t in a recession! It’s just that millions of people are out of work. I don’t know much of Gordon’s work, but he seems like one of these people — pretty much the standard in policy circles — who thinks all that matters is that the rich bankers are loaning to the rich corporations. What happens to the little people doesn’t matter.

On the other hand, there are some good films. Bob Balaban’s episode on Globalization is pretty good. It deals with the subject in about the only sensible way possible. Globalization isn’t going away. So we need to manage it so that it doesn’t cause so many problems and so much insecurity. It does manage to avoid saying something that is obvious: globalization may have created a lot of jobs overseas, but that didn’t cause the stagnation of wages here. Policy allowed all productivity growth for almost four decades to go just to the capitalists and not to workers.

By far, the best film is James Schamus’ episodes 6 and 7, which together constitute, “That Film About Money.” In one way, it isn’t really that informative on the issue of money — nothing more than you didn’t already learn from It’s a Wonderful Life. But it goes into the messed up way that the financial system is run — especially in the second episode. In fact, the second episode might make you very angry. And it includes some nice interviewed sections with Richard Wolff, who is both charming and brilliant, “If you understand that, you’ll understand why the banks have recovered, and nobody else has!”

This is my playlist combining the two films together. It is a total of 15 minutes long, so it is worth the time:

That sums up the last two decades, “I know what we’ll do: instead of paying you to buy what we produce, we’ll lend you the money!”

The problem with the series is that it is definitely made by and for the TED Talk crowd. It’s smart and well made. It takes pains to appear even handed, while tipping distinctly toward the viewpoint of the power elite. But inside that context, good things get done. And that was especially true of the film by James Schamus.

Republicans Can Always Find Economists to Justify Their Bad Ideas

Art LefferI’ve written before about the fiasco that’s been going on in Kansas, Art Laffer’s Toxic Prescription. Since the 1970s, Laffer has been selling the same old supply side snake oil. The idea is that cutting taxes will so stimulate the economy that it will actually bring more money into the government in the form of taxes. It isn’t true that there is no such thing as a free lunch, but this supply side myth is not one of those free lunches. Given our low level of taxation, it literally never works. But over three decades of failure has not stopped Laffer from continuing to push this idea.

Kansas is ground zero for this right now. Sam Brownback used Laffer’s ideas as an excuse to do what Republicans always want to do: cut taxes. This is not about economics. This is religious faith, which is why intellectual mediocrities like Art Laffer are held up as heroes on the right. But things have not worked out. The tax cuts have not spurred growth — unemployment is higher than it is in surrounding states. And the government has had huge deficits. The response from Brownback is that these things take time. Just keep waiting and eventually all will be well. Of course, the cuts to education are here today. And if the tax cuts were going to work, they would have worked by now.

But I learned something new about the Kansas story from an article by Mark Binelli in Rolling Stone, The Great Kansas Tea Party Disaster. He noted, “Back in 2011, Arthur Laffer, the Reagan-era godfather of supply-side economics, brought to Wichita by Brownback as a paid consultant…” Interesting. I knew that Laffer had consulted on how to destroy the Kansas economy, but I didn’t know it worked that way.

Here’s the thing. Since supply side economics is a religious faith, you don’t go hire an expert who will look at your options and decide on the best one. You decide what you are going to do and then you hire Art Laffer as a way to justify it. Laffer isn’t an economist; he’s a public relations device. So bringing him in to “consult” is picking your solution, because you know that Art Laffer has only ever had one idea (and it isn’t even his). So if you hire him, that’s the idea that you will get.

Many years ago, I was the head of software development at a high tech start-up. We did amazing work — arguably the best work I’ve ever been part of. But there was a shake-up among the owners and the brilliant founder of the company was pushed out. Suddenly, the company was controlled by a bunch of money guys who didn’t understand anything about technology. They hired a friend with a technological bent, but who was totally unqualified for the job. And he proceeded to destroy pretty much everything that was developed under the company’s founder. That was mostly on the hardware side. But at one point, they decided to hire a software consultant. This guy did work on web-based applications. So he studied what we were doing and — What a surprise! — he decided that we should convert the software to be a web-based application.

This is my experience with consultants. In general, they aren’t the generalists you would think. Instead, there is one thing they know and when hired, they always find that the best solution is that one thing they know. In the case of my clueless employers, I don’t think they understood what they were doing. They probably met the guy at a bar and that was good enough for them. But clearly Brownback knew what he was getting. Laffer was not going to surprise him.

The whole thing is remarkably disingenuous. We actually know pretty well what works in terms of economic policy. But there are always conservative economists around to tell conservatives whatever it is that they want to hear. Alberto Alesina is there to tell them that budget cuts in a recession will create a boom. Greg Mankiw will tell them that stimulus spending is good when a Republican is in the White House, and that it is bad when a Democrat is in the White House. Funny that. And Art Laffer, the one trick pony, will tell them tax cuts will pay for themselves. We would be dealing with more open-minded people if we were dealing with the Spanish Inquisition.

H/T: Ed Kilgore

One-Third Hope for a Democratic Senate

Sam WangAs you probably know, I’ve been paying pretty close attention to the race for control of the Senate. You can see the six main models listed on the sidebar on the right. And recently, things have not been going so well, as I discussed in, Democrats Are Sad Not Delusional. So I continue to focus on Nate Silver’s model — currently giving Democrats a 36% chance of holding the Senate — and using Sam Wang’s model to remain hopeful.

Right now, Wang’s model gives the Democrats a 45±15% chance of holding the Senate. But it has been as low as 25±15% just a couple of days ago. It isn’t this number that gives me hope. Wang provides a more interesting statistic: the meta-margin. This is how far off the polls would have to be for the election to be a toss-up (50% chance that Democrats would keep control of the Senate). Currently, the value is R+0.4%. That is: Republicans are up by 0.4 percentage points and if the polls are off by 0.4 percentage points in the Republicans favor it would be a toss-up.

Nate SilverThe reason this gives me hope is that polls usually are off by quite a lot more than that. Looking just at midterm elections (presidential election polling is better), the average magnitude of errors on elections since 1990 is 2.9%. Of course, that doesn’t mean that errors would be in the Republicans’ favor. In 1990, 1994, and 2002, the polls were off in the Democrats’ favor — meaning the Republicans did better than expected. But the last two midterms were off in the Republicans’ favor. And the last four elections total greatly favored the Republicans: +3.4%, +0.9%, -0.2%, +2.7%.

This doesn’t necessarily mean anything. The 1998 polls favored the Republicans by 4.9%. Then the 2000 polls favored the Republicans by 2.1%. But then it flipped and favored the Democrats by 4.0% in 2002. So maybe the polls are all making the Democrats look better than they will turn out to be. That would actually make sense, because the Democrats have been polling far better than anyone expected, given the fundamentals of this election. And if that’s the case, this could be a far worse election than I am expecting.

In the end, when I make my predictions going into the election, I’ll stick with the polls. But I hang onto the hope that the meta-margin provides. Of course, it is just a measure of the error that the models predict. Most of them claim that Democrats have about a one-in-three shot of keeping the Senate. And that means there is roughly a one-in-three chance that the Republicans will have a blow-out. So that’s not a lot to hold onto. But it’s something. As always, it will help if you vote.

Sarah Josepha Hale Had a Little Lamb

Sarah Josepha HaleBefore getting to the birthday, on this day in 1947, Walt Disney testified before the House Un-American Activities Committee (HUAC). Disney ratted on Herbert Sorrell, David Hilberman and William Pomerance. But maybe “ratted” is the wrong word, because he didn’t actually disclose any information. He just figured they were commies. And how did he know? They were part of the 1941 animators’ strike. Like most conservatives then and now, any liberal cause from workers’ rights to civil rights to environmental regulation must be a communist plot. There are many reasons why people generally have a bad opinion of Walt Disney today. This is one of them. But I mostly only care that his cartoon shorts sucked. Thank God for Warner Bros!

On this day in 1788, a truly remarkable woman was born: Sarah Josepha Hale. She was a prominent writer and editor, but I’ll get to that in a moment. Let’s start with the fact that she was born just after the US Constitution was ratified, and she lived until well after the Civil War and shortly before the Progressive Era. As Mr Rochester would have said, she was tenacious of life.

Her parents were very liberal and so they educated her the way that they would have educated a boy. Of course, she could not go off to college, so she was largely self-taught. She became a school teacher in her early twenties but married two years later. Over the next nine year, she had five children. And then her husband died. According to Wikipedia, she worn black the rest of her long life “as a sign of perpetual mourning.” I mention it only because I love stuff like that.

A year after her husband’s death, she published her first book of poetry, The Genius of Oblivion. And then, four years later she published her first novel, Northwood: Life North and South. Her politics were fairly conservative by modern standards, but for their time, she probably was as liberal as most Democrats — maybe even me. She was against slavery, but for sending the slaves to Liberia. That was in 1827, which probably made her more liberal than Lincoln some years later. But even though she lived to 1879, she never believed in women’s suffrage.

She is considered the most important person for making Thanksgiving a holiday. I’m not at all interested in that. But I am interested in a book she wrote in 1830, Poems for Our Children. It contained perhaps the most famous poem in America:

Mary had a little lamb,
Its fleece was white as snow;
And everywhere that Mary went
The lamb was sure to go.

It followed her to school one day,
Which was against the rule;
It made the children laugh and play
To see a lamb at school.

And so the teacher turned it out,
But still it lingered near,
And waited patiently about
Till Mary did appear.

Why does the lamb love Mary so?
The eager children cry;
Why, Mary loves the lamb, you know,
The teacher did reply.

Perhaps Hale’s greatest legacy is that she pushed early American publishing away from English writers. At the time, most American magazines contained mostly reprinted work from our recent captors. And you can easily see why. American artists of all kinds were generally of an inferior quality. We just hadn’t set up the kind of institutions that are necessary to help young artists to maximize their potential. But obviously, the only way to do that was to encourage the publication of American writers as Hale did.

In addition to her work with magazines, she managed to publish almost fifty books in her lifetime. She lived a remarkable life.

Happy birthday Sarah Josepha Hale!