OfflineThis article is found at: http://voices.washingtonpost.com/ezra-klein/2010/10/wonkbook_tarp_firms_...
On Sunday, I rewatched an old episode of the West Wing. "Enemies Foreign and Domestic," it was called, and one of the subplots involved a computer-chip manufacturer who'd just discovered a serious defect. The company was doing the right thing and recalling the product, but that left it, and its 90,000 workers, in jeopardy. Leo wants a bailout. President Bartlett doesn't. And though, for awhile, the arguments gets made in economic terms, eventually Bartlett rounds on Leo. "They were huge contributors!" He yells. "Huge!"
The company gets some government help, but it comes at a cost. You can never donate to me, or any other candidate, again, Bartlett tells the CEO. "You can vote, but that's it."
The Obama White House is probably wishing it had added a similar clause to TARP. Not only are the bailed-out companies giving significant amounts of money -- more than $1.4 million, at last count -- but they're giving most of it to Republicans. That leaves Democrats in an unhappy position: The voters blame them for the bailout (most Americans don't know TARP was conceived and signed by the Bush administration), and the bailed-out companies are funding the other guys. They've managed to end up on the wrong side of both the people and the powerful. What would Bartlett have done?
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Top Stories
Bailed out companies are giving considerable sums to midterm campaigns -- and mostly to Republicans, reports T.W. Farnham: "Senate Minority Leader Mitch McConnell (Ky.) was a fierce critic of the federal bailout of General Motors and Chrysler last year, saying he could not 'ask the American taxpayer to subsidize failure.' But GM doesn't seem to hold a grudge. The political action committee formed by the company, which is now largely owned by taxpayers, cut McConnell a $5,000 campaign check in September, a small piece of the $190,000 it donated to campaigns in the past month... Among companies with PACs, the 23 that received $1 billion or more in federal money through the Troubled Assets Relief Program gave a total of $1.4 million to candidates in September, up from $466,000 the month before. Most of those donations are going to Republican candidates."
The deficit commission will likely focus on tax deductions, reports Damian Paletta: "Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015...At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter. The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending."
Obama is being too hard on pomegranate juice? http://bit.ly/dqISko
Now is not the time for deficit cuts, writes Christina Romer: "The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. France’s recent plan to gradually raise its retirement age to 62 from 60 is a classic example of such 'backloaded' reduction. President Obama’s proposal to eliminate the Bush tax cuts on high incomes is another: it would raise revenue by only $30 billion in 2011, but by more than $600 billion over the next decade. History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect."
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The G-20 -- China included -- has agreed to try and even out currency imbalances, reports Howard Schneider: "The statement from the finance leaders of the Group of 20 nations was a carefully worded bargain across a range of issues. It put China on the record as seeking to bring down its massive trade surplus and let its exchange rate fluctuate more. It also hinted that any move by the U.S. Federal Reserve to further ease monetary policy would be measured so as not to disrupt currency values or capital flows in emerging market nations... The plan envisions a greater role for the International Monetary Fund in overseeing whether exchange rates and trade balances are moving as intended."
'90s power pop interlude: Matthew Sweet and John Hiatt play "Girlfriend".
Still to come: The top Republican on the House Financial Services Committee is chiding financial lobbyists for donating to Democrats; Business Week walks you through the foreclosure crisis; Britain imposes a carbon tax; some states moving towards unicameral legislatures; state health exchanges could vary wildly; and Sears caters to a new, undead clientele.
Economy/FinReg
The top Republican on the House Financial Services committee is attacking financial lobbyists for being too soft on financial regulation -- and donating too much to Democrats: "When Republican Rep. Spencer Bachus of Alabama stepped in front of 100 financial services lobbyists at the Capitol Hill Club last month, he asked for an equal chunk of their campaign cash — and made clear he was watching closely. It is hard to believe, he told the crowd, that some in their industry were still giving more to Democrats than Republicans after, he said, Democrats hammered them with over-reaching Wall Street reform legislation, people familiar with the presentation said."
Alice Rivlin's deficit group, however, is likely to go further: http://bit.ly/9fdO5J
Confused by the foreclosure crisis? Business Week's cover story is the most comprehensive overview I've seen: "Wall Street's unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD). J.P. Morgan predicts that bondholders will absorb most of the estimated $1.1 trillion loss—but may succeed in foisting about $55 billion on banks."
Thrifty homeowners are seeing generous refinancing packages: http://nyti.ms/c7URpv
Rick Wagoner did more to save GM than Steve Rattner, writes Malcolm Gladwell: "What Wagoner meant in his testimony before the Senate, in other words, was something like this: “At G.M., we are finally producing world-class cars. We have brought our costs, quality, and productivity into line with those of our competitors. We have finally disposed of the crippling burden of our legacy retiree costs. We have expanded into the world’s fastest-growing markets more effectively than any other company in the United States. But the effort required to bring about that transformation has left our balance sheet thin—and, at the very moment that we need a couple of years of normal economic activity to refill our coffers, auto sales have fallen off a cliff. Do you mind giving us a hand until things get back to normal?” This is not arrogance. It happens to be something very close to the truth. "
Obama's caution has discredited fiscal stimulus with voters, writes Paul Krugman: "What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act: the unemployment rate would probably be close to 12 percent right now if the administration hadn’t passed its plan. But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed. The tragedy here is that if voters do turn on Democrats, they will in effect be voting to make things even worse."
We should privatize the mortgage market, writes Dwight Jaffee: http://bit.ly/dqIAKc
We need a fiscal policy to match the Fed's monetary easing, writes Alan Blinder: "The two main thoughts that are probably going through Mr. Bernanke's head today are, first, 'I sure wish I could get some help from fiscal policy,' and second, 'I probably can't, so I'd better do whatever I can.' He's right on both counts. In a more rational world, it wouldn't be this way. Fiscal policy, which packs the power, would be doing the heavy lifting--by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don't live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that's the Federal Reserve. The fiscal army is AWOL."
Adorable animals acting like children interlude: Two cats play patty-cake.
Domestic Policy
How states set up health exchanges will have a major effect on coverage, reports Robert Pear: "Massachusetts and Utah provide a glimpse of the future, and they offer radically different models for other states. The battle over health care is shifting to the states, and the design of insurance exchanges will be one of the most pressing issues for state legislators when they convene early next year...The Utah Health Exchange organizes the market, allowing consumers to compare a wide variety of health plans sold by any insurers that want to participate. In the Massachusetts exchange, known as the Connector, the state serves as an active purchaser, soliciting bids from insurance companies and negotiating prices and benefits in an effort to secure the best value for state residents."
Health insurers have switched their campaign donations from Democrats to Republicans: http://wapo.st/9w4OGU
Some employers are adjusting health plans as health care reform takes effect, reports Ricardo Alonso-Zaldivar: "Two provisions in the new law are leading companies to look at their plans in a different light. One is a hefty tax on high-cost health insurance aimed at the most generous coverage. Although the 'Cadillac tax' doesn't hit until 2018, companies may have to disclose their exposure to investors well before that. Karen Forte, a Boeing spokeswoman, said concerns about the tax were partly behind a 50 percent increase in insurance deductibles the company just announced...Bigger questions loom over the new insurance markets that will be set up under the law."
Health care reform has failed to fix American health care's provider-pricing problem -- and thus its cost problem, writes Alec MacGillis: "Health-care providers in the United States have tremendous power to set prices. There is no government 'single payer' on the other side of the table, and consolidation by hospitals and doctors has left insurers and employers in weak negotiating positions. 'We spend fewer per capita days in the hospital compared with other advanced countries, we see the doctor less frequently, and we swallow fewer pills,' said Jon Kingsdale, who oversaw the implementation of Massachusetts's 2006 health-care law. 'We just pay a lot more for each of those units than other countries.' The 2010 law does little to address this. Its many cost-control provisions are geared toward reducing the amount of care we consume, not the price we pay."
A few states are considering moving to unicameral legislatures, reports Keith Johnson: "In Maine, members of the state's House of Representatives passed a bill last year that would shrink the legislature to one chamber from two. A Pennsylvania legislator introduced a bill this year to do the same. The speaker of the House in Kentucky also floated the idea. Over the past year, officials in half a dozen other states have discussed attacking the size of government by cutting the size of the legislature. The current election campaigns across the country have further fired the debate...At the height of the Depression, Nebraska decided to save money by getting rid of its second legislative chamber. It worked."
Secret campaign spending is incompatible with democracy, writes E.J. Dionne: http://wapo.st/bR0rC8
James Fallows worries that the Juan WIlliams imbroglio will harm NPR: "I have known and frequently worked a variety of people at National Public Radio, and I do want to say something about them. The worst aspect of the Williams-NPR imbroglio is that it has allowed Fox and its political allies to position NPR as something it is not, and in the process to jeopardize a part of American journalism we can't afford to lose...[NPR] has reporters at state houses and in war zones. At last count, it has something like 17 foreign bureaus and 16 domestic. In much of the country, especially away from the coasts, it's a major source of local information and news. It claims that its total audience is some 27 million people a week; with all allowances for counting differences, it reaches a lot more people than Fox does."
Niche marketing interlude: Sears' store for zombies.
Energy
The British government has quietly enacted a carbon tax: "The government today quietly imposed a £1B-per-year (US$1.58B) carbon tax on around 4,000 of the largest businesses and public sector bodies in the UK as part of its spending review. The move was not announced as part of chancellor George Osborne's (pictured at left) speech to parliament. Instead, it was left to a statement by the Department of Energy and Climate Change in which it detailed its spending review settlement and confirmed the Carbon Reduction Commitment (CRC) would be reformed so that the Treasury keeps revenue raised through the carbon pricing scheme."
New EPA regulations will force efficiency improvements for trucks, reports Ken Thomas: "The plan is expected to seek about a 20 percent reduction in greenhouse gas emissions and fuel consumption from longhaul trucks, according to people familiar with the plan. They spoke on condition of anonymity because they did not want to speak publicly before the official announcement, expected Monday. Overall, the proposal is expected to seek reductions of 10 percent to 20 percent in fuel consumption and emissions based on the vehicle's size. Large tractor-trailers tend to be driven up to 150,000 miles a year, making them ripe for improved miles per gallon."
Research funding and a carbon price are both effective emissions-reduction tools, writes David Leonhardt: "The debate between these two camps -- pro-research and pro-carbon price -- can often sound hostile. But there is actually a lot of agreement. Finding more money for clean-energy research is a crucial part of dealing with climate change. So is raising the cost of emitting carbon. My guess is that the policy that seems more like a free lunch -- research funds -- will need to come first and the harder stuff will, unfortunately, have to wait."
This article can be found at: http://voices.washingtonpost.com/ezra-klein/2010/10/wonkbook_tarp_makes_...
The $309 billion the government pumped into the banks and AIG has, so far, earned the government -- and taxpayers -- $25.2 billion. That's an 8.2 percent return over two years -- better than you would've gotten by investing in Treasury bills or money-market funds, though worse than you would've gotten from the stock market over the same period. And it kept the financial market from collapsing. Not bad, right?
That's not how the voters see it. TARP is among the least popular policies in recent memory. It has already lost some politicians -- like Utah's Sen. Bob Bennet -- their jobs, and will doubtless take more in November. Pollsters and politicians will tell you that part of the reason for the stimulus's unpopularity is that many voters confuse it with TARP. And yet, TARP may be the highest-return policy the government has implemented in decades. When you add up the benefits of the financial system not melting down, and then the direct returns to the investment, the bang-for-the-buck has been astounding. But good policy does not always make good politics.
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Top Stories
TARP is providing a better payoff for the government than Treasury bills, report Yalman Onaran and Alexis Leondis: "The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money-market funds and certificates of deposit. Investing in the stock market or gold would have paid off better...The $25 billion TARP return could fund the SEC for more than 20 years, based on the agency’s proposed 2011 fiscal year budget. It could pay for all farm subsidies in the U.S. for more than two years."
But focus groups suggest voters may not like that, either: http://bit.ly/cNqAsM
This Ben Smith article is still relevant: http://politi.co/ddoybE
Fidelity National Financial will withdraw support from mortgages with shoddy paperwork, report Zachary Goldfarb and Jia Lynn Yang: "If there proves to be any problem with the accuracy of a title because of shoddy paperwork, the lenders would be responsible for losses under Fidelity National's new policy...A major insurer, Old Republic National Title Insurance, said this month that it would not back homes foreclosed on by J.P. Morgan Chase, which halted seizures in some states after paperwork problems surfaced...In Washington, federal officials addressing problems posed by the flawed foreclosure process said Wednesday that they did not think it presented a grave danger to the financial system, though they had not completed their assessment."
The case for a foreclosure moratorium: http://wapo.st/dqelo0
The case against a foreclosure moratorium: http://wapo.st/c93Fgy
The new "Beige Book" report from the Fed predicts slow growth ahead, reports Neil Irwin: "The new survey gave little evidence that the job market is picking up, saying that 'hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness.' The latest report comes ahead of a Nov. 2-3 meeting of Fed policymakers, at which they are likely to approve new, unconventional efforts to stimulate growth. The findings in the beige book - a weak labor market, modest growth and few signs of inflation - offer support for these new steps, which would include major new purchases of bonds to pump more money into the economy."
Most economists are not hopeful about quantitative easing, writes Annie Lowrey: "From late 2008 through 2009, the Fed created about $1.7 trillion and used the funds to purchase debt in housing-finance firms like Fannie Mae, Treasury bonds, and a whole lot of mortgage-backed securities--tripling the size of its balance sheet to $2.3 trillion. That helped clean some bad assets from the banks' books and reassured spooked markets. But in 2009, the government was trading cash for mortgage-related assets nobody wanted. In 2010, it wants to try to trade cash for an asset that is essentially as safe as cash. If QE2 is to work, it will have to work differently than QE did--and probably won't work as well."
Peter Orszag says health-care reform doesn't go far enough on malpractice: "The traditional way to reform medical malpractice law has been to impose caps on liability — for example, by limiting punitive damages to something like $500,000. A far better strategy would be to provide safe harbor for doctors who follow evidence-based guidelines. Anyone who could demonstrate that he has followed the recommended course for treating a specific illness or condition could not be held liable."
"The health care reform act that Congress passed earlier this year included a modest set of state pilot projects, including one in Oregon that is intended to experiment with this approach. But these pilots are small; the project in Oregon, for example, has only $300,000 in financing. What’s needed is a much more aggressive national effort to protect doctors who follow evidence-based guidelines. That’s the only way that malpractice reform could broadly promote the adoption of best practices."
Got tips, additions, or comments? E-mail me.
Math-rock video interlude: Battles' "Atlas".
Still to come: Paul Ryan's roadmap would cut Social Security benefits by more than half for some beneficiaries; the next Congress will likely be highly skeptical of global warming; the White House is still fighting lobbyists over health care; Tennessee governor Phil Bredesen says health-care reform will unravel the employer-based market; and a vending machine that dispenses live crabs.
Economy/FinReg
Some Social Security beneficiaries will see more than half of their benefits cut under Republican Rep. Paul Ryan's plan, reports Lori Montgomery: "The plan, by Rep. Paul Ryan (R-Wis.), would reduce benefits by gradually raising the retirement age and gradually trimming benefits for the top 70 percent of earners. Together, the two provisions would slice initial benefits by about a quarter for middle-income Americans who turn 65 in 2050, according to the analysis. Wealthier retirees would see even deeper cuts, losing about a third of scheduled benefits in 2050 and more than half of scheduled benefits if they turn 65 in 2080."
A small activist group broke open the foreclosure scandal, reports Ariana Eunjung Cha: "In addition to trying to educate the public about the issue, the group had also been quietly passing along stacks of problematic documents to state and federal regulators, lawmakers, judges and law enforcement officials. They pointed out that document processors such as Stephan had admitted in sworn depositions that they had signed off on up to 10,000 foreclosure documents a month, even though they had not reviewed them as legally required. They also shed light on foreclosure cases in which the paperwork appeared to have been backdated, forged or improperly notarized."
Wells Fargo insists it's unaffected by the foreclosure mess: http://wapo.st/cWgRMu
Higher commodity prices are pushing retail prices upward, report John Shipman and Anjali Cordeiro: "Across corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb. The increases pose new hurdles to profits as consumers continue to resist increases...Corn is up 44%, milk is up 6.5%, hot rolled coil steel is up 4%, copper up 29%, and oil up 14% from a year ago. At this point it's difficult to quantify how broadly these price increases will affect future earnings. The big unknown is not only how much further commodity prices will rise, but how much of that added cost companies will be able to pass along in the form of higher prices."
Foreclosure defense is now a booming legal specialty: http://bit.ly/9TJWgu
New Basel III regulations will triple bank liquidity requirements, reports Howard Schneider: "The committee, based in Basel, Switzerland, wants governments to roughly triple the amount of capital banks set aside, to an amount equal to 7.5 percent of their deposits and other liabilities. That requirement and other measures proposed by the committee will be reviewed by finance ministers of the G-20 group of nations when they meet in South Korea this week and is expected to be endorsed by G-20 heads of state at a summit next month...U.S. officials plan to integrate the Basel proposals into the financial regulations approved earlier this year by Congress. Other countries are expected to follow suit, Cecchetti said, so that the new capital rules are in place by 2013 across major financial markets."
Seeking mortgage modifications shouldn't subject homeowners to scorn, writes Michelle Singletary: http://wapo.st/cr5yIM
Chinese capitalism interlude: A vending machine that dispenses live crabs.
Energy
Tea party candidates are highly skeptical of global warming science, reports John Broder: "Whatever the party composition of the next Congress, cap and trade is likely dead for the foreseeable future. If dozens of new Republican climate skeptics are swept into Congress, the prospects for assertive federal action to control global warming gases, including regulation by the Environmental Protection Agency, will grow dimmer than they already are...More than half of Tea Party supporters said that global warming would have no serious effect at any time in the future, while only 15 percent of other Americans share that view, the poll found."
GM will pay millions to clean up old plant sites: http://nyti.ms/aRZWoJ
We're on the cusp of a tidal energy boom, reports Elisabeth Rosenthal: "While previous test projects tended to be operated by small, boutique firms, the giants of hydropower, which have decades of experience drawing power from rivers, are now getting into the ocean business. Tides are particularly attractive sources of power because they are predictable, unlike sunshine and wind. Not surprisingly, countries with rough seas like Britain and Portugal are leading the way in exploring ocean power...The European Energy Association estimates that, globally, the oceans could yield more than 100.000 terawatt hours a year if the technology to harness that power can be perfected. That is more than five times the electricity the world uses in a year."
The United Steelworkers are upholding free market principles by challenging China on clean energy, writes Tim Fernholz: http://bit.ly/abGUpA
Biodiversity yields economic benefits, writes Thomas Lovejoy: "A major reason the biology of the planet is largely ignored in human affairs, is that its critical contributions to human wellbeing are not taken into account in the formal economy. The world’s poor, for example, derive 40 to 89 percent of their annual 'income' from nature, both directly through the goods it provides (e.g., food and fiber) and indirectly through its services...On a larger scale, the TEEB project reckons the annual value contributed by global wetlands at $3.4 billion. On land the project calculates the annual loss of natural capital from natural ecosystems like forests at $2 trillion to $4.5 trillion."
Thai street vending interlude: Extreme iced tea making.
Domestic Policy
A war over health care regulations is brewing, writes Jonathan Cohn: "The issue at hand is how insurance companies spend their money. All insurance carriers have what is known as the 'medical-loss ratio.' It refers to the amount of revenue that insurers eventually devote to actual patient care. Wall Street and the industry like that number to be as low as possible, because, among other things, a low MLR leaves more room for profits. Consumer advocates prefer the MLR to be as high as possible, because it rewards social responsibility and, to some extent, efficiency...Representatives for industry groups have been lobbying furiously to weaken the regulations. Potter, in his Huffington Post dispatch, says 'the insurance industry and other special interests are represented here by more than a thousand lobbyists'--compared to less than 30 on the consumer side."
Michelle Rhee may take over New Jersey schools: http://wapo.st/958XdL
The FCC wants to free up broadcast airwaves for mobile device use, reports Cecilia Kang: "Genachowski said he planned to introduce a proposal at the agency's Nov. 30 meeting that would lay the groundwork for broadcasters to voluntarily release airwaves for sale to mobile carriers, which have been struggling to keep up with consumer demand for Internet-capable wireless devices...Genachowski declined to comment on whether the meeting would include a vote on his controversial net-neutrality proposal, which would essentially require Internet service providers to treat all Web traffic equally...The agency has instead been focused on mobile broadband regulations."
Putting healthy foods in vending machines is a difficult engineering problem: http://bit.ly/cGv6Z2
Health care reform gives employers an incentive to drop coverage, writes Phil Bredesen: "Now that we've protected our employees, we'll also have to pay a federal penalty of $2,000 for each employee because we no longer offer health insurance; that's another $86 million. The total state cost is now about $200 million. But if we keep our existing insurance plan, our cost will be $346 million. We can reduce our annual costs by over $146 million using the legislated mechanics of health reform to transfer them to the federal government...The consequence of these generous subsidies will be that America's health reform may well drive many more people than projected out of employer-sponsored insurance and into the heavily subsidized federal system."
Frequent flyer systems could be adapted to promote preventative health care, writes Esther Dyson: http://bit.ly/ca6uMh
Republican anti-health care reform suits will backfire, writes Matt Miller: "Republicans used to understand these economics perfectly. That's why Bob Dole, Howard Baker, John Chaffee and Mitt Romney (among others) have all supported individual mandates. Are all these Republicans constitutional rogues? No one disputes that the federal government has the power to stop insurers from denying coverage based on preexisting conditions. Under the Constitution, the feds thus have the corresponding power to enact reasonable measures to assure that this reform actually works. For seven decades the Supreme Court's reading of the commerce clause has made this permissible."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams.