In Which We Ridicule Too-Big-To-Fail

Meet the new boss
Same as the old boss
- The Who
Over the next few weeks, the Strawman Blogger is going to try to bury the hatchet when it comes to healthcare reform. The headlines have moved on, and the Strawman Blogger doesn't want to get left behind. Frankly, we need the page hits.

Instead, we're going to transition back into the world of finance. No more individual mandate in this blog; the SMB is all about leverage limits and the crisis in Greece. Get with the times, people.

To kick it all off, we're going to talk about the thing that's on everyone's mind: Too-big-to-fail. These are the bailout banks, the institutions large enough that, when the financial crisis rolled around, the government stepped in to keep them afloat. No one likes them very much, but they're here to stay.

So today we'll talk about the common solutions for the too-big-to-fail problem. We'll discuss their merits and we'll tell you what needs to be done.

Solutions you can use. That's what were about at the SMB.

The Contenders

There are quite a few suggestions to the too-big-too-fail problem, but they mostly fall into three discrete themes. Let's jump right in:

The first theme, as the old quote goes, is that too-big-too-fail is too big to exist. Got a big bank? Break 'em up. Either redraw the old line between investment banks and commercial deposit-takers or find another way to take them to pieces. But they gotta go.

We have sympathy for this position.

The second theme - championed by the likes of Paul Krugman - is that too big to fail isn't the problem. Or at least, not the problem worth focusing on. Krugman in particular has commented that a widespread series of small bank failures would pose the same risk to the financial system as the collapse of one or two large institutions. In his mind, it's the resolution powers of the FDIC that protect us from this risk. When a small bank collapses, the FDIC steps in to mop up the mess. Deposits are protected, assets are stripped and sold.

There is no similar protection for large institutions that have significant operations in the shadow banking sector, relying heavily on short-term borrowing. As these uninsured operations fall outside the purview of the FDIC, there is no mechanism that allows for an orderly collapse.

In this school of thought, something similar to the FDIC is needed for the shadow too-big-to-fail banks. If a capable resolution authority is able to dismantle big firms, protect their deposits, and impoverish their shareholders, the problem goes away. The too-big-to-fail fails.

Thirdly and lastly, there's the package of financial reforms preferred by the administration and congress. They don't do much more than nod in the direction of the too big to fail phenomena. Instead, they believe that a better regulatory structure - in particular, investing the Federal Reserve with oversight of important financial firms, bringing over-the-counter financial products like derivatives onto traded exchanges, and (maybe) creating a consumer protection board will prevent those nefarious and negligent practices that so nearly destroyed the world economy.

That's it. Better regulators? Consider us under-fucking-whelmed. In case you haven't noticed, our current crop of barely competent, functionally handicapped, practically illiterate regulators managed to miss the biggest financial crisis in the last eighty years until it was steamrollering over their fucking legs. It is unclear how they can be trusted to catch the next one.

Not that they would bother to look in the first place. Most regulators are too busy maneuvering for cushy exit jobs in the same companies they're supposed to be policing. Enforcing cuts in your future employer's leverage ratio is unlikely to endear you to Human Resources. It's called regulatory capture: See examples here and here. And here.

But honestly? All of that doesn't even matter. Here's the dirty little secret of the Great Recession: They didn't see it coming. There was no small army of brave regulators railroaded by the power of the Street. There was no corrupt cabal of crooked public servants, turning a blind eye to excess in return for their thirty pieces of silver. No one was outgunned or corrupt. They were just stupid. They drank the Kool-Aid, same as everyone else, and they thought the good times would last and last.

So the next time a financial crisis rolls around, new rules won't help. Caution is temporary. Stupidity is forever.

Our Estimable Opinion

So where does that leave us? Should we break up the big banks, create a resolution authority, or just cross our fingers and hope for the best?

Far be it for us to disagree with a Nobel Laureate, but we think Krugman has it wrong. Or at least, he's right in the wrong way. See, we weren't entirely fair to Congress in the description above. Chris Dodd's bill does include a resolution authority, and it forces big firms to pay into an insurance fund for that purpose. Congress has even bandied about the idea of strict leverage limits. The truth is muddled between our extremes. We lied to you. We're very sorry.

But we did it for a reason. There's a problem with resolving a big, failed firm. No one's ever done it before. Big firms fails during big crisis, and a big crisis is an unlikely time to grow a pair of testicles. We're unconvinced that, faced with a climate like that of September '08, the Federal Reserve would take a cool look around, let out a whistle, and take the axe to a bank like Citigroup. That requires a supreme level of cold badass. Cold badass is not what public servants are known for.

So we take a resolution authority with a grain of salt, for the same reasons we don't believe in better regulation. They both take someone smart, capable, and ballsy in the drivers seat. That combination doesn't come around too often.

Our Estimable Solutions

Break them up. So Krugman disagrees with us. Who cares? Cordon off investment banks from commercial deposit takers, impose strict leverage limits, impose capital ceilings, and then hell, regulate whatever's left if it makes you feel better.

We think this for two reasons. First, the collapse of many small firms can endanger the financial sector, but that's ok. The collapse of a broad number of small firms tends to happen because of a market failure, and market failures may just be unpreventable.

The failure of single-institutions, on the other hand, can be an isolated phenomenon. Long-Term Capital Management didn't fail because the broader economy stopped functioning. It just made a spectacularly ill-timed arbitrage and watched the world play hell with its spreads while its capital drained away. But because it was large enough, and interconnected enough, LCTM was saved anyway.

We don't actually mind saving banks during a market failure. We do mind having to clean up the mess of the rich kids during the not-so-bad times. Too-big-to-exist clears this up nicely.

And lastly, we'll level with you. Why do we really want to break up Wall Street and the big banks? Because we can. Because it's not clear that Wall Street isn't just full of rent-seekers who add nothing to productive society. Because it's not clear that Wall Street today is any more efficient at allocating capital than they were forty years ago. Because there are no real efficiencies of scale for a bank that holds ten percent of America's deposited assets, and a hell of a lot of drawbacks. Because together they drain talent from areas of American industry that could actually use it. Because. We. Bloody. Well. Can.

Maybe, as Krugman says, there will be market failures and global panics and financial catastrophes long after the big banks are dead and buried. Why not? There were before. But given a choice between a world of panics with big banks and panics without, we'll opt for the latter. We'd rather spend our money on people we like.

The Heritage Foundation Loves Healthcare Reform! The Heritage Foundation Hates Healthcare Reform!

There's nothing more blissfully entertaining than watching the ongoing contortions of the educated right as they attempt to rationalize why they loved healthcare back when it was Mitt Romney's conservative reform bill, but hate it now that it's Obama's, virtually identical, reform bill.

ThinkProgress has the goods.

– Heritage On Romney’s Individual Mandate: “Not an unreasonable position, and one that is clearly consistent with conservative values.” [Heritage, 1/28/06]

– Heritage On President Obama’s Individual Mandate: “Both unprecedented and unconstitutional.” [Heritage, 12/9/09]

– Heritage On Romney’s Insurance Exchange: An “innovative mechanism to promote real consumer choice.” [Heritage, 4/20/06]

– Heritage On President Obama’s Insurance Exchange: Creates a “de facto public option” by “grow[ing]” government control over healthcare.” [Heritage, 3/30/10]

– Heritage On Romney’s Medicaid Expansion: Reduced “the total cost to taxpayers” by taking people out of the “uncompensated care pool.” [Heritage, 1/28/06]

– Heritage On President Obama’s Medicaid Expansion: Expands a “broken entitlement program,” providing a “low-quality, poorly functioning program.” [Heritage, 3/30/10]

- Lee Fang

Poor Heritage Foundation's a-hurt! An about face like that is liable to give you whiplash.

But then, that's the trouble with this debate. Obama compromised so sharply on this bill that there's really no standing room to his right. You can criticize this bill for not being liberal enough. You could contend that it's not big enough. You could probably argue that it's not necessary, but inasmuch as that involves shackling yourself to the bloated monstrous landfill that is our current healthcare system, conservatives have been understandably reluctant to embrace this form of ritual suicide.

Which pretty much leaves lying like hell. Here's hoping no one notices.

Fun With The Budget #3

With a great sense of unease, we're going to quote a conservative.

This brings us no pleasure at all:

I appeared on Larry Kudlow’s show last night and we had a bit of a tussle about how much deficit reduction could be achieved by cutting federal salaries. Larry argued that a 5-10% pay cut for federal civilian employees like that imposed by Ireland could have a major impact on the federal budget deficit.

...

The total annual cost of all federal civilian pay and benefits can be estimated at about $260 billion. A 5% across the board pay cut would save no more than $13 billion , and in fact much less: remember, federal pay is unusually benefits-heavy. To put it another way: even if we fired every single federal civil servant and shuttered the entire non-defense federal government, three-fourths of the budget deficit would still be with us.

- David Frum

Well done, Frum! Well done, intelligent conservatism! For he makes an excellent point. As nice as it would be to balance the budget on the backs of these greedy bastards, it's not going to work.

But what would? The Big Three: Medicare, Social Security, and Defense. As Paul Krugman so delightfully puts it, it's best to think of the federal government as a huge insurance company with an army.

Fun With The Budget #2

As the old saying goes: Check it to wreck it.

Very often, the Strawman Blogger is treated to lengthy speeches about how easy it would be to bring our budget under control, if only we could cut out all of that nasty government waste.

And well we should! The Strawman Blogger is no fan of waste. But when we think about shrinking the government down to size, we like to think of the Parable of The Flatscreen.

The Parable of The Flatscreen

Once, a friend of the SMB was serving in the military. And yeah, it came to pass that his unit commander was sad. He was under budget for the year. And he was filled with great foreboding, for coming in under budget is an invitation to have your budget cut.

And there was a great wailing and gnashing of teeth! But then the unit commander alighted on an idea. Why not spend that money on a new TV for the break room? For all men need breaks, lest they decide that careerism is not all it's cracked up to be, and seeks well-remunerated jobs in the private security sector. The bastards.

And yeah, he did, and he became happy, and the men became happy. But some among them were full of wroth, for they understood that this was Manifest Government Waste.

The Lesson

When we hear stories like this, we like perform the following thought-exercise:

Cost of flatscreen TV: $3,000.
Men in unit: 50.
Average Salary: $35,000.
Total unit salary: $1,750,000.
Waste as percentage of salary costs: 0.17%.

Of course, none of these numbers are real (The story is, unfortunately. We've heard it fifteen bloody times). But it's a useful trick.

We hate waste because it's visible, and visible things make us angry. But lurking in the background is an ocean of government spending that doesn't bothered us at all. Hell. Who doesn't like paying soldiers?

Outside of this narrow parallel, it's best to remember that isolated, even shocking, incidents of waste are likely to a very small component of a larger system.

Fun With The Budget #1

We never tire of this, you know:



The blue bars in the graph above represents the popularity of various budget cuts. The red bar indicates how much of the budget those items take up.

Reduce the deficit! you say. Shrink the government! But not through Social Security. Or Medicare. Or defense. Daddy likes his aircraft carriers.

Pretty much the only thing polite society can agree on is that we should spend less money on those dirty cheating filthy foreigners. Total savings? Somewhat less than 1% of our budget.

In Which We Discuss The Vagaries Of Climate Modeling

There are many things the Strawman Blogger enjoys about the blogging life. The freedom. The wealth. The perfectly chilled Brut served to us daily by our Peruvian housemaid.

But arguing with various irritable conservatives isn't all fun. Especially when that conservative is our father.

Now, if the SMB has one talent, it's trading pointed verbal barbs with our eminent paterfamilias. But sometimes our conversations are just plain stressful. Yesterday's was a case in point:

"Look at all this rain," he said. "Global warming in action?"

"Well," we reply mildly, "It was a very warm winter."

"Yes," he shot back. "But wasn't it cold in DC?"

Next time, we will take a cab.

Now, the Strawman Blogger doesn't claim to be an expert on climate modeling¹. But we feel there's a lesson in this particular argument. So let's follow it to a hypothetical extreme. My father names a city that enjoyed an unusually cold winter. I name a city that had a very warm one. He names another, and I reply.

Given enough time, we'd exhaust all of America's largest municipalities. What then? Perhaps we'll go international. What was Paris like last February? Perhaps ocean currents hold the key - drop a few sensors in the Atlantic and we'll clear that up nicely. And so on and so forth.

Eventually, we'd have a more or less complete set of datapoints of temperature changes across the globe. Sound familiar? It's called a climate model. Scientists have been making them for quite awhile. And, in a not-unexpected victory for our world-view, they overwhelming support the concept of man-made global warming.

We've lost count of the number of times a cold snap has discredited the entire science of climate change. But no one has properly explained how a single data point is more relevant than half a century of research. So do us a favor! Stop trying. Or we really will have to call for a taxi.

¹Who the hell cares? Seriously. If you can't be an irreverent jackass with a poor grasp of actual issues, than frankly there's just no point in blogging at all.

The Idiocy Of The Common Man

If you are something
don't ask for nothing!
If you are nothing,
don't ask for something!
- Arcade Fire, Neighborhood
As regular readers of this blog will note, the SMB has always tried to be the voice of reason in the noisy debate about the American deficit.

We're very fond of this role. It's not terribly difficult, doesn't involve a great deal of strenous research, and allows us frequent use of the term "dangerous idiots" along with plenty of time to drink red wine.

So we found this survey interesting. Follow along as we quote Ryan Avent, quoting Matthew Yglesias, paraphrasing the survey in question:

In this economy, voters are wary of raising taxes, even if the revenue raised goes to something they deem important, like paying down the deficit. A majority (51 percent) say that even though the deficit is a big problem, we should not raise taxes to bring it down, while only 43 percent say that we might have to raise taxes to reduce the deficit. This rejection is even more acute among the least educated and lowest income voters, who are being disproportionately hurt by the recession and as such are even more strident in their rejection of a new tax to pay down the deficit.

And by an even wider 2:1 margin, voters reject cuts in Social Security, Medicare or defense spending to bring the deficit down (61 to 30 percent). With nearly three-quarters of the federal budget devoted to these items, exempting them from cuts leaves little room to make realistic progress on deficit reduction...

Nearly half of voters think the deficit can be reduced without real cost to entitlements, with 48 percent believing there is enough waste and inefficiency in government spending for the deficit to be reduced through spending cuts while keeping health care, Social Security, unemployment benefits and other services from being hurt.

SweetfancyfuckingMoses. Pull yourselves together, people. Even in a country with the level of taste necessary to embrace James Patterson, William Kristol, and the musical stylings of Wham!, this is embarrassing. You can raise taxes. You can cut entitlement programs. But you cannot tightly shut your eyes, click your heels together, and wish aloud for the Magical Government Waste Fairy to alight on the CBO Projections with the gift of $1.4 trillion dollars of government waste a year.

Grow. Up.