The Volcker Rule Is Here
With the Volcker Rule poised to be finalized in what looks like a fairly tough version, it's perhaps time to step back and offer a bit of an overview of what this role is and what you need to know about it.
1. The rule's intent is to ban "proprietary trading" by banks that also have insured deposits: That's the plain English concept that Paul Volcker sold Barack Obama on, and that first legislators and now regulators have been trying to turn into legal language. When you put money into a bank account, the bank is going to want to do something with it. The traditional thing to do was to lend it out at a higher rate of interest than you pay to depositors. But other things are possible, including trading. The idea of the Volcker Rule is that banks shouldn't be using that money to trade derivatives.
2. It's not at all clear that proprietary trading is an unusually risky undertaking: It's absolutely true that a complicated derivatives deal could blow up in the face of traders, causing huge losses and risking bank failure and economic devastation. On the other hand, it's also totally possible for ordinary lending to blow up in this exact same way. And during the 2008 financial crisis, it looks like what went wrong was mostly just bad lending not some kind of particular problem with proprietary trading.
3. It's not at all clear that there's any social loss in banning proprietary trading: On the other hand, the banks' crocodile tears that they need a free hand to engage in trading in order to hedge risk doesn't seem very persuasive. For starters, the rule-as-written does allow for a fair amount of hedging. It simply tries to draw this exemption reasonably narrowly. More to the point, if we learned in 2008 that you don't need exotic trading products to drive your bank underwater during bad times we also learned that banks on a lending binge do not, in fact, hedge their risks with derivatives to avert failure.
4. The Volcker Rule is divide-and-conquer bank regulation: If you want to, in some sense, "shrink" the financial sector, you have a problem. The financial sector doesn't want to shrink! And no other sector wants to spend a lot of time lobbying for it to shrink. What you need to do is turn elements of finance against each other. The Volcker Rule harms some banks, by preventing them from doing something profitable, but plenty of banks never did much or any trading. So those banks are happy to see competitors handicapped. The Glass-Steagall Act had this exact same property, it was a somewhat arbitrary rule that nonetheless had a role to play in the political economy of financial repression.
5. There's an uneven legal playing field once the rule is written: The way the regulatory state works is that first congress writes a law, then regulators write a detailed rule, and then people who think the rule is unfair to them get to sue and get judges to throw the rule out. If you're some kind of bank regulation junky who thinks the rule is too kind to banks, you do not get to sue and get judges to make the rule stricter. This is one of a dozen of reasons why "judicial nominations" matter for more reasons than "the Supreme Court rules on abortion rights." There's an ongoing fight in Congress about appointees to the D.C. Circuit Court which is rich in regulatory implications, of which the Volcker Rule battle is one.
EXCLUSIVE: Embargo of Cuba Has Failed to End Communism
So Barack Obama shook hands with Raoul Castro at Nelson Mandela's funeral today.
In other news, last week I listened to a senior American official—a career guy who's served in important posts under the past four or five presidents—talk about the sanctions policy against Iran. He explained that for sanctions to be effective they have to be highly multilateral and narrowly targeted at an obtainable policy objective. This was his way of saying that it wouldn't make sense for the United States to reject an imperfect diplomatic arrangement with Iran in unilateral pursuit of a pie-in-the-sky deal the Iranians will never take. You always want to be pushing the Chinese and the Russians and the Turks toward doing more, but if you leave them in the dust you'll accomplish nothing.
So being a wiseass (and a Cuban-American!) I asked him how Cuba fits into the framework.
His view, basically, was that the Castro regime has never been really interested in doing a deal that would unwind the embargo so his sincere advice to anyone would be not to waste political capital on this topic. So, fair enough as far as that goes. Still, the fact remains that American policy toward Cuba is like a textbook example of something that doesn't work. It succeeds in making Cuba a bit poorer than it would otherwise be, and in marginally inconveniencing American citizens but it is pretty clearly not an effective tool for ending Communism. Indeed, Communism ended—more than 20 years ago!—in Eastern Europe without the Soviet Union and its European satellites being subjected to this kind of comprehensive trade embargo. In parallel, Communist regimes in China and Vietnam have altered their domestic economic policies of their own volition since it turns out that orthodox Marxist-Leninist economic management doesn't work very well.
People should be able to visit Cuba as tourists if they want to. Via direct flights from Miami and Newark and wherever else. And people should be able to go to a store and buy a Cuban cigar or some Cuban rum or whatever. If the Cuban government wants to prevent that, they should be the ones putting travel restrictions in place. They're the Communist dictatorship, after all. We're supposed to be the free country. Everyone knows this policy doesn't work, but nobody wants to admit it.
You Can't Talk Housing Costs Without Talking About Zoning
Annie Lowrey did an interesting piece yesterday about the increasingly dear price of rental housing for the large minority of Americans who are renters, backed up with statistics and with reporting from the Columbia Heights neighborhood in Washington, D.C. She even quotes my favorite private sector housing economist:
“Builders always are aiming at that higher end,” said Jed Kolko, the chief economist at Trulia. “And eventually, as those new units age, they trickle down to lower-income borrowers.”
But not now. With demand surging, inventories are shrinking, vacancy rates are falling and rents are rising at the low end.
Still, there are two questions unanswered by this. One: With demand surging, why doesn't construction surge enough to keep vacancy rates roughly stable. The other: If builders are always aiming at that high end, why are they building in Columbia Heights rather than in the traditionally fancier and more expensive neighborhoods west of Rock Creek Park.
The answers are "zoning" and "zoning."
After speaking to some local people over the past few months, I think that in my previous writing I've given unduly short shrift to the second aspect of this. Low income people in a gentrifying neighborhood see both new luxury construction and rising rents and it's difficult to persuade them that even more construction is the answer. But that's because we've so firmly shut the door on the idea of adding housing supply in the neighborhood that are already the priciest ones in town. Once the focus of the conversation settles narrowly on a handful of transitional neighborhoods, it's almost too late to have a sensible conversation. But you have a twofold limitation on supply. On the one hand, the total number of new units is capped so people only want to build luxury. On the other hand, new construction in the fancy neighborhoods is absolutely prohibited.
So you get an apparent invasion of luxury buildings into poor neighborhoods and even more vigorous efforts to restrict supply. We can do better than this.
We Lost $10 Billion Bailing Out GM and It Doesn't Really Matter
The Treasury Deparment sold the last of its shares in General Motors today, which concludes the auto bailout portion of TARP with something like a $10 billion loss. The bank bailouts, by contrast, made money. Some people feel this should have a big impact on our thinking:
For the record, government made money bailing out Wall Street, lost money bailing out car industry. But which industry does everyone hate?— Ben White (@morningmoneyben) December 9, 2013
It's a fair point, but I actually think folks are largely right to ignore the profit and loss issues. The basic reason is that due to the federal government's extraordinarily low borrowing costs, it's actually really really easy for the Treasury Department to make money as a value investor when it wants to. Treasury's paying 1.5 percent interest on a 5-year note right now, which is a joke. Anyone could make money with that cost of capital. Just buy a diverse portfolio of high-rated corporate bonds and watch the coupons roll in.
But nobody cares that this would work for the exact same reason that the government's cost of funds are so low: The government can print money!
That means neither the costs nor the benefits of the bailouts are well-summarized by looking at the government's finances. In both cases, action was taken during a panic to prevent firms from being liquidated. In both cases, anti-liquidation action was justified by the concern that liquidation would spill over to other firms (auto parts suppliers, bank counterparties) in a way that would further depress economy-wide demand and cause further losses. You don't need to buy that story in both or either cases (I have mixed feelings about it) but it's just not a story about financial costs. If there's a problem with the bailouts, it's precisely that saving the firms rather than letting them die and be replaced by something else is a problem. The money isn't the issue.
Private Transportation Largess Revealed
For reasons that are not entirely clear to me, Silicon Valley firms providing cushy corporate buses to ferry workers from San Francisco to their offices has become a potent symbol of inequality in America. Meanwhile, in the San Francisco metropolitan area, driving alone in a car remains a more popular commuting option than mass transit of any sort.
Indeed, driving alone is more popular than transit in every American metropolitan area outside of New York and Washington.
And all across America, companies are providing their car-driving employees with subsidized transportation in the form of parking. Either the company owns or leases the parking lot or parking structure outright and makes it available for employee use, or the company pays for employees to get free or discounted parking at a commercially operated garage. This kind of parking benefit is even subsidized by the federal tax code, which allows a parking subsidy to not be counted as income. Indeed, it's the tax deductibility of subsidized parking that help explain why it's such a ubiquitous perk.
Coding Is Great, but Maybe Everyone Should Learn to Read
The president has successfully reignited the conversation over whether in the digital age everyone should learn to code. I think the best way to think about this is as comparable to whether everyone should master Oliver Queen's salmon ladder routine. Which is to say, it'd be pretty awesome if we could all do that, but it's hardly the low-hanging fruit of physical fitness challenges.
According to the National Assessment of Adult Literacy, something like 14 percent of the adult population rates as "below basic" in their English-language prose literacy. Which is to say they can't read. Of those tens of millions of people, about 44 percent didn't speak English until they started school. So some fraction of the 44 percent is probably literate in some other language. Not an ideal situation, but more a consequence of immigration than of educational failure. But 56 percent of America's illiterate population did speak English at an early age. They just never learned to read. And note that the questions used to measure this are not very challenging.
One good reason it would be good if, in the future, we did a better job of teaching people how to read and write properly is that literacy is a good foundational tool for learning how to write computer software. It also helps you understand your credit-card bill. And to write your congressman about the need for political action on some subject useful to you. A lot of the conversation about education in this country seems to me to make this same mistake—ignoring how poorly the kids who are doing the worst are doing and how much good could be accomplished by bringing the worst performers up to par.
Stop Hurting America With Unnecessary Teaser Questions
It is often alleged that the top-performing charter schools in America are operating some kind of scam where they nudge the most problematic students out of their classes, creating an unobserved variable bias through which their demographics-adjusted performance looks great but is actually unimpressive. Whether or not this is actually true is thus of some interest:
And yet even though "There's no empirical evidence that charter schools 'push out' low-performing students" would have made a perfectly good tweet, we got it phrased as a question. Well, the answer is that there is no empirical evidence. Or at least that's the conclusion of the publication that's being teased. If you want more details, then by all means follow the link. But if you just want the headline, the answer is no.
The larger question, however, is are these kind of teasers hurting America and wasting valuable time? The answer is yes. Yes, they are. And I wish people would knock it off.
Why Do Newspaper Reporters Root For Deficit Reduction?
Democrats and Republicans have a very serious, largely unbridgeable gap in their ideas about what to do about long-term fiscal policy in the United States. At the same time, interest rates are currently low, and the budget deficit is falling fast and is projected to stay low in the medium-term. Under the circumstances it is very logical that Patty Murray, Paul Ryan, and other members of Congress are trying to hash out a budget deal that doesn't deal with the intractable budget conflict and instead focuses on reaching a narrower consensus about undoing some of the harm of sequestration and reducing the chance of a harmful government shutdown.
Except Lori Montgomery, who covers budget issues for the Washington Post, is covering this news like someone strangled her kitten:
The deal expected to be sealed this week on Capitol Hill would not significantly reduce the debt, now $17.3 trillion and rising. It would not close corporate tax loopholes or reform expensive health-care and retirement programs. It would not even fully replace sharp spending cuts known as the sequester, the negotiators’ primary target.
After more than two years of constant crisis, the emerging agreement amounts to little more than a cease-fire. Republicans and Democrats are abandoning their debt-reduction goals, laying down arms and, for the moment, trying to avoid another economy-damaging standoff.
The campaign to control the debt is ending “with a whimper, not a bang,” said Robert Bixby, executive director of the bipartisan Concord Coalition, which advocates debt reduction. “That this can be declared a victory is an indicator of how low the process has sunk. They haven’t really done anything except avoid another crisis.”
This reflects what has got to be the single strangest convention in political news today. Journalists who would never think of openly cheerleading for more people to get government-subsidized health insurance or for oil companies to secure a freer hand in drilling regard the goodness of deficit reduction as a kind of nonideological given. But it's not! The whole reason it's so hard for Congress to agree on a long-term fiscal deal is that everyone can agree that a long-term fiscal deal would be great if executed on their terms but not otherwise.
By contrast, there actually is reasonably broad agreement that another government shutdown would be bad for America. Having negotiators focus on an area where they might plausibly reach agreement is great news not a sign of the process sinking low.
Could Puerto Rico Be the Next Debt Crisis?
This is a little bit off people's radars, but something I've heard some quiet buzz about lately is the problematic debt situation in Puerto Rico. You can basically think of this as being a North American version of the story in Spain.
Bond buyers notice that the returns are higher than for lending to the U.S. proper but figure the risks aren't really higher. Local authorities enjoy the influx of cheap capital but don't really manage to spend it in ways that enhance the country's long-term growth prospects. Financial crisis hits, households and firms cut back on their sunny destination travel spending, so the economy takes a blow. Investors also realize that the politics aren't quite what they thought, and actually lending to Puerto Rico is quite a bit riskier than lending to the U.S. Now you enter a bit of a downward spiral, where to cover the costs of past borrowing you need to implement austerity measures that only hurt the growth outlook, and each blow to growth makes investors lose even more confidence. Meanwhile, other vacation destinations hit with a loss of investor confidence suffer currency depreciation, which causes problems of its own but at least makes them attractive places to visit. Now you're in a bit of a death spiral, where the bad economy makes the debt situation worse, and all efforts to cope with the debt situation further kill confidence in the economy.
So who cares? Well, Puerto Ricans for starters. But it's also interesting to wonder what will happen if Puerto Rico were to end up defaulting on its debt. American mutual funds will be exposed to some substantial losses, since some quirks of the tax status of Puerto Rican debt made them very attractive vehicles. But it's not such a big deal that you'd see a mass financial panic.
The real question is about contagion. No American state has ever gone bankrupt, in part because there is no provision in the bankruptcy code for a state to go bankrupt. But a number of states are in a pretty dire fiscal position. Illinois is de facto defaulting on its pension promises, following up on some earlier action in Rhode Island. Insofar as even these solidly blue states choose to stiff pensioners without making bondholders share in the pain, perhaps everything will be fine for holders of state debt everywhere. But honestly while the political and economic logic of pension cuts makes sense to me, the logic of strict bondholder priority does not. "Stiff retired cops and teachers so Wall Street can get paid" doesn't really sound like a sustainable long-term political agenda for me, especially because (unlike in the Spanish context) there's no sweetener in terms of a bailout from Washington. If Puerto Rico manages to make bondholders share the pain, I imagine you'll hear more talk of that option in some other debt-burdened jurisdictions. The market reaction to that would be pretty interesting, in a Chinese curse kind of way.
These Two Photos Show What a Disaster Microsoft Is Today
Steve Ballmer is chief executive officer of Microsoft. He's been in the job for some time, but he recently announced that he's stepping down. The fact that Ballmer's departure was announced without the simultaneous announcement of a successor is a good indication he was pushed out the door by the board of directors. And these photos taken Sunday around noon at the Fashion Centre at Pentagon City in Arlington, Va., show why.
Here's the Microsoft Store:
This is not a trick of the camera. There were zero shoppers in the store. At noon. On a Sunday in December at peak retail shopping season.
And here's the Apple Store:
It is crowded.
Of course Microsoft operated for many years as a fantastic company without any retail stores at all, so it's not as if the failure to build successful stores is the problem per se. The real issue is that there's nothing wrong with the store. It's a great place to shop. Much better than the Apple Store, really, because the Apple Store is crowded, and it's a little hard to get an employee's attention. At the Microsoft Store you get a very pleasant physical environment and a helpful staff. It's just that nobody wants to buy their stuff.
It's still a very profitable company thanks to its enormous strengths in the enterprise market. But enterprises are made of people. If nobody wants to buy Microsoft's stuff, that will trickle up into the enterprise.