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Thursday, July 15, 2010

it's not all bad news

So Financial Regulation passed and they stopped the oil leak... not a bad day!

I've got more of this and that for you....

NYT profiles Paul Volcker, a key architect of "Reaganomics" who in recent years has become a staunch advocate for financial reform. He gives the Financial bill a "B." He doesn't think it goes far enough, but acknowledges it's probably the best thing that could get through the Senate.

Matt Yglesias:

We’ve tended to focus much more on what’s not in the bill than on what is in the bill. What is in the bill is a consumer protection setup that would be considered a major progressive win as a standalone item. What is in the bill is a “resolution authority” that will let future regulators avoid the bailout-or-crisis dynamic that plagued us in 2008. What is in the bill are regulatory tools that even Simon Johnson likes. The bill clarifies lines of regulatory authority and responsibility and should cut down on abusive “competitive regulation.” I don’t think the bill means we’ll never see an asset price bubble or a banking crisis again, but I also don’t think it’s possible to achieve that goal. It should, however, make crises less likely and make cleaning them up easier.

My hope is that we won’t just leave things alone here. There are a lot of loose threads left hanging here regarding, on the one hand, America’s housing policy and on the other hand hand the role of Wall Street in American society. What’s more, this regulatory setup, like all regulatory setups, only works if the regulators want it to work and that only happens if politicians want the regulators to want it to work. So nothing is over.

More reactions to the FinReg bill

Greg Sargent:

The financial regulatory reform bill that will pass into law is, paradoxically enough, tougher than most expected. But it does not fundamentally transform Wall Street or our economy into something unrecognizable.

Once Obama signs financial reform into law next week, he will have not only passed a stimulus package that helped pull the economy back from the brink; he will have also begun reshaping two major chunks of our economy: Health care and Wall Street. As many have noted already, he's probably done more than any president since FDR to transform our country.

And the sky will continue to remain in place.

The White House is deeply frustrated that this larger narrative arc has not sunk in with the public. Fair or not, the awful state of the economy -- and the Federal government's failure to act on unemployment -- have effectively blotted out this larger story.

The economy, and the wrangling in Congress over jobs-related measures, have left the public deeply skeptical about the Federal government's ability to solve our most pressing problems. That skepticism, it's fair to assume, colors the public's views of just about everything about Obama -- including his accomplishments.

As a result, for all their achievements, Obama and Dems may well lose the larger argument in the short term.

Public skepticism about government's efficacy in the face of our economic doldrums has made the public receptive to the Republican case that Dems are overreaching and overspending, with nothing to show for it. The oil spill, by continuing to gush, buttresses this case, undermining faith in the competence of Obama and the Federal government. Dems may sustain large losses in the midterms, and perhaps their travails will continue beyond then.

But more broadly, it's fair to imagine that that the more accomplishments Dems rack up -- energy reform is next, though its prospects are in doubt -- the easier it will be for them to tell the larger story they're trying to tell. The picture of Dems succeeding at what they've set out to do will make it easier for Dems to argue: We're getting things done, and none of the worst case scenarios foreseen by critics are coming to pass.

Success could build upon success, reinforcing a picture of Dem effectiveness that drowns out the Beltway white noise and begins to persuade the public that Dems are on the right side of the larger argument. That's a very tall order, and it may take awhile -- far beyond 2010 or even 2012. But that's how the larger story could end up playing out.


The imminent passage of financial reform, just a couple months after the passage of comprehensive health care, should decisively end the narrative that President Obama represents a Jimmy Carter-style case of naïve hope crushed by the inability to master Washington.

Yet the mystery remains: Having moved swiftly toward achieving the very policy objectives he promised voters as a candidate, Obama is still widely perceived as flirting with a failed presidency.

Eric Alterman, in a column that drew wide notice, wrote in The Nation that most liberals think the president is a “big disappointment.” House Democrats are in near-insurrection after White House press secretary Robert Gibbs stated the obvious — that the party has a chance of losing the House under Obama’s watch. And independent voters have turned decisively against the man they helped elect 21 months ago — a trend unlikely to be reversed before November.

This is an odd reversal of expectations. When he came into office, the assumption even among some Democrats was that he was a dazzling politician and communicator who might prove too unseasoned at governance to win substantive achievements.

The reality is the opposite. You can argue over whether Obama’s achievements are good or bad on the merits. But especially after Thursday’s vote you can’t argue that Obama is not getting things done. To the contrary, he has, as promised, covered the uninsured, tightened regulations, started to wind down the war in Iraq and shifted focus and resources to Afghanistan, injected more competition into the education system and edged closer to a big energy bill.

The problem is that he and his West Wing turn out to be not especially good at politics, or communications — in other words, largely ineffective at the very things on which their campaign reputation was built.

Obama is swimming up Niagara until joblessness improves. But, even while Obama doesn’t directly control the economy, he has not been a disciplined or effective communicator about the state of the economy and his prescriptions for it. People will tolerate a weak economy if they feel there is an upward trajectory. But Obama has not managed to instill that confidence.

“The economy is off the charts on what people care about — nothing is a close second,” one of the advisers said.

The unemployment rate is expected to remain near 9.5 percent through the election, which is a big reason that some White House officials are even more pessimistic than Gibbs about the chances of keeping control of the House.

It doesn’t matter that Republicans such as Sen. Judd Gregg (R-N.H.) say Obama’s policies helped avert a worse economic calamity than most Americans will ever realize — or that the federal government is turning a profit on some of the investments it made in bailing out companies in 2009.

No politician can escape the gravitational pull of bad employment numbers and economic figures in real-time.

Obama is spending his time these days earnestly paddling up Niagara:

President Barack Obama travels to Western Michigan on Thursday to promote his stimulus plan in a community awash in stimulus dollars but where many residents, like a majority of U.S. voters, are skeptical his economic program is working.

The trip, part of a campaign dubbed "Recovery Summer" by the White House, is intended to reassure Americans the U.S. economy is returning to a sound footing in advance of the fall elections.

Doubt among voters in more conservative parts of Michigan reflects a wider concern over the president's plans.

Holland, Mich., where Mr. Obama visits Thursday, has seen a big infusion of cash from the president's economic stimulus plan: hundreds of millions of dollars for new automotive battery plants, tens of millions for schools, as well as millions more for housing, small businesses, university research and transportation.

Yet many in the region of 260,000 people, struggling with 12% unemployment, are skeptical the federal spending has made an impact.

"I wish he'd save his money and not come to Western Michigan," said Becky DeWind, co-owner of a company that received nearly $95,000 in stimulus money to neutralize radioactive contamination in groundwater—her only U.S. business in a year. "They were just swiping a Chinese charge card for it anyway, and my kid's got to pick up the tab."

Holland's congressman, Republican Pete Hoekstra, is running for governor against the president's stimulus program, saying the city wants Washington off its back and not in its job market.

The superintendent of Holland schools, Brian Davis, said skepticism among parents was deep, even though stimulus money has saved 14 teaching positions—5% of the total—and bankrolled a $700,000 laptop program. "The unpopular piece is, we've created all this debt, and somebody's got to pay for it," Mr. Davis said.

The White House is trying to change those opinions by building the case for Mr. Obama's economic policies.

Eighteen months after passage of the $862 billion Recovery Act, money is now flowing: $116 billion from April to June, compared to $108 billion in the first three months of the year and $80 billion in the last quarter of 2009.

Government outlays for infrastructure projects, clean energy and communications technology jumped by about 50% between the first and second quarters of this year.

On Wednesday, the White House released new data saying a surge in Recovery Act funding had raised economic growth in the second quarter of 2010 by as much as 3.2% and boosted employment by as many as 3.6 million jobs, compared to estimated levels in the absence of the stimulus.

On Thursday, Mr. Obama will attend a groundbreaking ceremony at Compact Power Inc., the last of nine new advanced battery factories under construction nationwide with $2.4 billion in stimulus money, and the second in the city of Holland, population 34,076.

"This is one instance where you can see job creating coming from it, but what cost?" said Republican Jay Riemersma, a former pro-football player who is running for Mr. Hoekstra's House seat. "People don't want government stimulus and government spending...In their mind we're mortgaging their future and their grandchildren's future."

Faced with such opinions, the White House and Democrats say they must keep pressing their points—one town and one project at a time.

"Sometimes you go into a conversation knowing someone's going to come out with a certain perspective, no matter what you put before them," Gov. Granholm said, expressing frustration. "You're not going to be able to resolve that in one session."

Corporate America has money, but isn't hiring:

Corporate America is hoarding a massive pile of cash. It just doesn't want to spend it hiring anyone.

Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms' coffers.

Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?

The answer to that question has become a political flash point between the White House and big business groups such as the U.S. Chamber of Commerce, which held a jobs summit Wednesday and accused the Obama administration of dumping onerous regulations on businesses. That has created an environment of "uncertainty," which is causing firms to hold back on hiring as the unemployment rate has hovered near 10 percent, the Chamber said.

The White House countered that companies are wary of hiring not because of new regulations but because they're still waiting for consumer demand to return.

The Obama admin says the stimulus "saved or created about three million jobs and is on track to save an additional 500,000 by the end of the year," but Greg Mankiw is skeptical. Basically there's no way to really know how many jobs were created/saved, so they had to rely on mathematical models based on past stimulus efforts. Their results conform to other estimates, which means their model is similar to other economists, but still these models are just best-guess attempts.

Raghuram Rajan argues income inequality is partly to blame for the current economic crisis. He says that as lower/middle class wages stalled it became popular to give them more credit so they would continue to spend money, but all that debt caught up with us.

Harry Reid plans another unemployment extension vote for Tuesday, by when Sen. Byrd's successor should be appointed.

Ezra Klein argues that, judging them by their past actions and not their rhetoric, Conservatives don't care about the deficit, but Democrats do.

David Wessel tries to think of ways to stimulate the economy that might have a chance of getting through Congress:

The fundamental problem is clear. After a borrowing binge, the U.S., particularly consumers and financial firms, are trying to reduce their debts. The question is how fast to let that happen. The cold-turkey approach, a rapid deleveraging, means a very weak economy. Government policy has been aimed at slowing the pace of deleveraging by increasing government borrowing to offset shrinking private borrowing. Now that is no longer politically feasible.

"At a time when many people are trying to cut back in their personal lives, it is difficult to persuade the public that driving up the deficit is a good idea—even though it actually is a good idea, especially if combined with a clearer plan for long-term consolidation," Goldman Sachs economist Jan Hatzius wrote recently.

If more deficit-widening stimulus is a non-starter, then what? Look for more politically palatable alternatives to gain favor if the economy deteriorates. The weaker the economy, for instance, the more likely Congress will be to renew the Bush tax cuts for a year despite the deficit talk, to avoid the braking effect of letting taxes rise in 2011.

There's talk in Washington about a federal highway and surface transportation bill, the one form of spending about which some deficit-phobes are enthusiastic. Or perhaps a public-private infrastructure fund of some sort that would leverage taxpayer money and draw some cash out of corporate coffers, and might help beleaguered state governments at the same time. Or, with BP replacing Goldman Sachs as the corporate villain of the month, perhaps there will be a move to raise taxes on oil companies (which might become a stealth gasoline tax) and use that money to cut other taxes to encourage hiring or business investment—a "deficit-neutral" way to spur growth.

Or perhaps there will be quiet talks with bank regulators about not moving too rapidly to implement new rules for banks being negotiated at Basel. Or perhaps there will be talk—never advertised, of course—of the administration backing away from tightening some regulations that, though popular with Democratic voters, may be more economically costly than proponents admit.

Dani Rodrik on "the market confidence bugaboo:"

If you want to keep borrowing money, you need to convince your lender that you can repay. That much is clear. But in times of crisis, market confidence takes on a life of its own. It becomes an ethereal concept devoid of much real economic content. It turns into what philosophers call a “social construction” – something that is real only because we believe it to be.
Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it.

Today, they worry about spineless governments unable to take the tough actions needed to deal with the crisis. Perhaps tomorrow they will lose sleep over the mass demonstrations and social conflicts that tough economic policies have spawned.

Few can predict which way market sentiment will move, least of all market participants themselves. Even with hindsight, it is sometimes not clear why markets go one way and not the other. Similar policies will produce different market reactions depending on the prevailing story, or fad of the moment. That is why steering the economy by the dictates of market confidence is a fool’s errand.

The silver lining in all this is that, unlike economists and politicians, markets have no ideology. As long as they make money they do not care if they have to eat their words. They simply want whatever “works”—whatever will produce a stable, healthy economic environment conducive to debt repayment. When circumstances become dire enough, they will even condone debt restructuring—if the alternative is chaos and the prospect of a greater loss.

This opens up some room for governments to maneuver. It permits self-confident political leaders to take charge of their own future. It allows them to shape the narrative that underpins market confidence, rather than play catch-up.

But to make good use of this maneuvering room, policymakers need to articulate a coherent, consistent, and credible account of what they are doing, based on both good economics and good politics. They have to say: “we are doing this not because the markets demand it, but because it is good for us and here is why.”

Their storyline needs to convince their electorates as well as the markets. If they succeed, they can pursue their own priorities and maintain market confidence at the same time.

Politico reports on the negotiations behind the climate bill. More here.

David Roberts warns about a bad trade-off:

A deal to exempt utilities from new Clean Air Act rules in exchange for their support for a utility-only cap-and-trade system would be a terrible deal. Terrible. I've resisted the repeated tendency of greens to say this or that compromise renders the climate bill "worse than nothing," but this deal really would do that: it would make the bill worse than nothing. It would be a step backward, on both climate and health grounds. Any environmental group that supports such a deal should be scorned by progressives and cut off by progressive funders. (I'm extremely gratified to hear Samuelsohn report that green groups are, so far, holding firm on this.)

Why would it be so bad? Because the new Clean Air Act regulations are going to have bigger, faster, and more substantial effects on the power sector than any watered-down utility-only cap-and-trade system. Those regulations will eliminate more pollution, shut down more dirty coal plants, and avoid more greenhouse gases than a utility-only cap-and-trade system.

The power sector is terrified. After putting off needed investments in new, cleaner generation for years and years -- aided and abetted by simpatico regulators in D.C. -- all the sudden they're going to have to start making those investments. And quickly! They might have to scramble, and innovate, and maybe even change their business models! Some of them might even have to ... gasp ... raise rates (which have been artificially suppressed for years)!

Utilities are extremely accustomed to their moldy old business models and practically allergic to innovation, so they're reacting to the coming regulations with the same strategy they've always used: whining to politicians. They're telling politicians that the regulations will force coal plant shutdowns faster than replacement generation can be found. There will be reliability issues. Brownouts! Puppies will freeze! Grandma will bake!

It's bull -- the same bull they've been peddling for years. If they get away with it, it will mark the true devolution of the climate bill into farce.

Well, dear readers, this blog sure has been a good way to avoid doing work that I actually need to do, but I'm heading back to Florida, where there are even better ways to waste time, so you might not hear from me for a bit. Thanks for reading!

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