Bill's Big Diamond Blog

Souter Speaks on How the Court Decides

Linda Greenhouse hopes that retired SC Justice David Souter will continue to share his thoughts in public as a guide to his thinking on the bench. His recent Harvard commencement address included the following statement on why the court does more than parse the Constitution for a "fair reading:"

The reasons that constitutional judging is not a mere combination of fair reading and simple facts extend way beyond the recognition that constitutions have to have a lot of general language in order to be useful over long stretches of time. Another reason is that the Constitution contains values that may well exist in tension with each other, not in harmony. Yet another reason is that the facts that determine whether a constitutional provision applies may be very different from facts like a person’s age or the amount of the grocery bill; constitutional facts may require judges to understand the meaning that the facts may bear before the judges can figure out what to make of them.

Bet Against the American Dream, Goldman Style

The way that Goldman Sachs got itself in front of the SEC, charged with fraud, is eerily similar to another deal that Pro Publica and NPR journalists detailed recently in their story on Magnetar, a CDO deal done to exploit the height of the housing bubble at the behest of a hedge fund that designed the CDO expressly to fail. Like arsonists buying insurance on a house they wanted to burn, the hedge fund bought Credit Default Swaps worth far more than their investment— looking not to make money on the mortgage security, but on the insurance when it went under. The story has played on a fascinating episode of NPR's This American Life and now is the subject of a Bloggingheads.tv dialogue. Read, watch and listen to understand how Wall Street gamed the bubble as you bought homes they knew would decline in value.

Hey, the story even has a song...sing along, let's, "Bet Against the American Dream."

Bet Against The American Dream from Planet Money on Vimeo.

C'Mon—Break it Up!

Readers interested in how to prevent another meltdown should check out Zephyr Teachout's great piece, "C'Mon— Break it Up!"  Teachout makes the case for putting reasonable size limits on the megabanks and limiting the conflicts of interest that accrue to their present status as financial supermarkets.

Deal on Derivatives?

This could be a big development. According to ABC News, Senator Dodd has accepted as a part of financial reform Senator Blanche Lincoln's proposed ban on banks owning derivatives operations; this is a provision that would force the big banks to spin off the businesses that led them into the 2008 meltdown.

Passage of such a proposal will be a major fight, but one that could well be worth it in terms of ensuring the safety of the marketplace— and limiting the damage that can be done by derivatives.

Basically, the megabanks would have to observe derivatives deals from across the street and would have no incentive to lure their clients into buying them, creating another watchdog on things like synthetic CDOs and some of the other wonderful financial products that now clog the garbage pails on Wall Street. Doing so would cost the banks a big slice of business, so expect a very angry response from the moguls.

To Regulate or to Break Up the Banks

Paul Krugman writes today about financial services reform and the debate among those who support it over whether "too big to fail" is the real issue. Krugman comes down on the side that TBTF isn't the issue, that the real problem is the lack of regulation. On the other hand, Krugman notes that former Fed Chairman Paul Volcker believes that the rise of megabanks has created the problems that led to the crisis of 2007-8.

Those who want to understand financial reform should read Simon Johnson and James Kwak's new book, 13 Bankers , which suggests that both issues need to be confronted. The rise of the megabanks evolved out of a constant loosening of bank regulation over the period from the mid 1970s onward, sped by the Reagan Revolution and a financial industry intelligentsia that believed in free markets as the answer to any question. These minds had the attention of the Reaganites, who wanted to unleash the power of the markets in all areas and hated regulation per se.

Out of this era, we got a constant drip of new products like derivatives and "innovative" mortgages, securitization of mortgages, eventually leading to "synthetic" securities, that related to the price of real securities based on real mortgages no longer held by the banks who lent the money originally. No one really tightened up on any banking activities, even after the savings and loan crash of the 1980's, when the regulatory agency that let the S&Ls run amok was replaced by another regulatory agency that let their successors run amok.

But then the whole banking industry changed even more since the 1990's, when the financial moguls were allowed to merge all of the operations of investment houses and old-fashioned retail banking into the megabanks. The combination of the companies we used to know in the United States into six enormous financial services giants has now been accomplished. What's more, their share of the economy has increased to the point where there is more activity around money than is healthy for a nation built on industry, not banking. It's not surprising that a sector that's become too large to serve the real economy has to create more and more complex products (like those that brought down the markets), in order to sell them to an economy that, relative to banking, isn't growing.

So, in a nutshell, Johnson, the former head economist at the IMF, and his colleague Kwak, an economist and former McKinsey and Company consultant, argue that both old-fashioned regulation and limiting bank size are necessary together. While Krugman would argue in favor of regulation alone, Johnson and Kwak point out that regulation works less and less well as the regulated industry grows bigger and more powerful. In our case, financial services fees actually fund the regulators, while companies have a choice as to which of the many agencies they'd like to be regulated by, making it nearly impossible for the agencies to get tough on their funders.

What's needed, Johnson and Kwak say, is a new turn in our economic and political belief system, similar to the one Teddy Roosevelt pushed a century ago, when he argued for breaking up the trusts. If the US moves towards a system of well-regulated and boring banking, like the kind we had for half a century in the post-depression economy, coupled with a willingness to limit the size of any banking institution to that which is less than "too big to fail," we may once again step back from the brink of bubble and bust economics.

The Healthcare Debate and Beyond

The House of Representatives finally passed the Senate's Christmas Eve version of Healthcare Reform, 219-212. This time, the legislation will go to the President and the Senate will take up a package of changes negotiated between the House and Senate. No doubt after some promised Republican Senatorial-haggling-over-parliamentary-procedure-to-come, the legislation will be signed into law. Healthcare reform, after a century of debate, will be enacted.

The floor debate in the House last night followed the tone of the argument in the country at large. On the Democratic side, there was a general pride in reaching out, finally, to the millions of Americans left uncovered by the current health system. There were members recalling civil rights struggles of the past to include all Americans in the franchise of voting and connecting health care as a right for all to stand alongside other basic freedoms we hold dear. On the Republican side, there were many exhortations about the end of liberty; members warned of losing a battle against tyranny and decried totalitarian tactics.

While both sides looked well beyond the facts to gin up an emotional basis for supporting their positions, it was hard to see the bill as the portent of tyranny promised by the opposition, when all it really does is to end the most tyrannical excesses of the insurance market by banning rescission and requiring coverage of all medical conditions, while also giving the insurers a sure pool of coverage that includes the healthy as well as the sick. One can't do the former without also doing the latter— and the Congress has additionally kept the insurers immensely healthy by making compromises to keep public competition out of their marketplace; there will be no public option in this bill.

The reform passed by the Congress, soon to be signed by President Obama, is essentially a moderate piece of legislation. Only in these United States would there be an outcry that it constitutes a government takeover of the healthcare system, when in fact it leaves the health insurance market entirely in private hands for those under the age of sixty-five and not indigent. But it is still intensely controversial, owing mainly to wild charges thrown at the bill claiming it will spawn death panels, cut assistance to Medicare consumers, and take away insurance from consumers currently happy with their coverage, none of which it actually does.

Republicans have allied themselves both with the most draconian policies of the insurance industry, like cutting off coverage from claimants who have become desperately ill after paying their premiums for years, and also with the most lunatic associations between this bill and socialism, communism, and with some racist free association done by the Tea Party movement, equating the healthcare bill with affirmative action programs. Both the concrete alliance with industry abuses and the more figurative conjuring of fear speech do the Republican Party long term harm in an effort to make election-year hay out of its opposition to reform.

Democrats, meanwhile, should take some pride in finally making good on a promise to reform the system, however imperfectly at the outset. The bill will make a difference in many lives, while still requiring years of tweaking to optimize its costs and extend its promise of coverage to all. The bill has gaps, just as Social Security did when first enacted in the 1930's. They must be addressed in the years to come. But at least the legislation finally moves the country from the Dark Ages of healthcare, when thousands of Americans currently die annually because they have inadequate access to the best medicine available, to a somewhat brighter tomorrow.

It would be callous, however, for Democrats to stop here in this time of great troubles for many Americans. The country needs both jobs and protection from a financial sector still unbound after leaving the nation mired in the wreckage of the worst meltdown since the Great Depression. The healthcare debate has sapped much strength from efforts to get people back to work and to protect us from the worst practices of Wall Street. Hopefully, a victory in healthcare will leave the Democrats and the President feeling empowered to take on the most critical job—making America whole again. If they don't, they will leave themselves open to exactly the kind of demagoguery they've been fighting so long on healthcare— and they will perhaps deserve it.

Reform in the Balance

Paul Krugman sums up the situation on health care reform nicely in his column today. It's decision-time. A few months back, we almost had an imperfect, but enormously significant reform which had passed both houses of Congress. Now, we might just get almost the same package passed, finally. It's up to a few members of Congress to step up.

The alternative, as Krugman points out, is more of the same bone-crunching cruelty that is health insurance today in America. People get thrown off the rolls when they become ill, are undercovered or not covered at all when they are well (or at least think they are), and are paying premiums without knowing whether they'll be honored when it counts.

This weekend should finally tell whether the United States joins the ranks of every other developed nation in providing for reasonably universal coverage, whether imperfectly or not.

One way or another, the fate of health care reform is going to be decided in the next few days. If House Democratic leaders find 216 votes, reform will almost immediately become the law of the land. If they don’t, reform may well be put off for many years — possibly a decade or more.

Regulating Derivatives

Anyone who has spent time trying to understand the financial meltdown of 2008 has learned about derivatives and credit default swaps. What the general public probably hasn't learned is that nothing has happened since the markets went haywire to make the complicated and opaque derivatives market safer. No new regulatory legislation has passed and the legislation that has been introduced has loopholes big enough to burst a bubble in.

Today's NY Times editorial sheds some additional light on why derivatives need to be regulated and how the financial lobby has worked to prevent effective regulation from getting in the way of their lucrative— and unsafe— market in exotic products:

A big part of the problem is that derivatives are traded as private one-on-one contracts. That means big profits for banks since clients can’t compare offerings. Private markets also lack the rules that prevail in regulated markets — like capital requirements, record keeping and disclosure — that are essential for regulators and investors to monitor and control risk...

The big banks claim that derivatives are used to hedge risk, not for excessive speculation. The best way to monitor that claim is to execute the transactions on fully regulated exchanges, pass rules and laws to ensure stability, and appoint and empower regulators with independence and good judgment to enforce compliance.

Without effective reform, the derivative-driven financial crisis in the United States that exploded in 2008, and the Greek debt crisis, circa 2010, will be mere way stations on the road to greater calamities.

The Selling of Democracy

American democracy has long been corrupted by the influence of corporate cash, lots and lots of it for all parties. It's led to an orgy of giveaways and an almost total lack of oversight, a belief in markets and their wisdom, and ultimately has resulted in the disastrous meltdown of 2008-9. We're enduring unemployment and foreclosures at Depression levels, lost retirements and lost hopes as a consequence. And yet, it seems, what we've endured so far is not the limit—not by a long shot.

Now, the Supreme Court, by the same one-vote majority that brought us Bush v. Gore, has struck down any limit on corporate spending to affect elections. Corporations are now people, in the important respect that they enjoy freedom of speech. The only electoral and speech difference between me and a corporation now is the corporation's ability to print their messages everywhere you look, to hire public relations consultants to massage them into your daily life and entertainment as you contemplate your votes, and to ensure that their messages get in front of you in every possible way, while my speech is confined to this blog— or a sandwich board if I prefer to wear one.

The only difference the five ruling members of the Supreme Court see between you and a corporation is that you have to go off to work every day, probably for a corporation, then pick up your kids, feed them, make sure they do their homework, pay the bills, put the children to bed, make their lunches for the next day, then get some sleep, while the corporation hires a team of lobbyists to spend their days and nights influencing the government to do their bidding. Whatever the superficial differences you may notice, the corporation is, in fact, a person, just like you, when it comes time to vote.

The only logical surprise is that the Supreme Court didn't actually give corporations the ballot. Since they define corporations as persons, why wouldn't they; why shouldn't the Court allow companies to vote, to spawn little corporations who grow up to vote when they're eighteen, and have ballots in their corporate-stamped hands on election day. But then, the majority of the Court apparently wasn't interested in logic or evenhandedness, they were interested in a result, just as they were in Bush v. Gore. The result is that there is no limit on the influence of corporate money in our political process. The Congress, brought to you by....(pick your corporate brand).

But the influence of corporate money won't be limited to the Congress, where it will be difficult to distinguish future Congresses from the one we have now, in which corporate cash calls more of the tune than the voter. No, now the influence of corporate money will be clear on the state, county, and local level too. Your City Council, brought to you by Your Local Bank. Your Zoning Board, brought to you by The Company That Wants a Variance. Your School Board, brought to you by The Company that Wants a Private For-Profit Education System.

Welcome to the brave new world of the right wing's very own Supreme Court. The first thing we'll be seeing as a result of Citizens United v. Federal Election Commission is a flood of money to defeat banking reform— and President Obama himself if he has the courage to stand behind it. Expect a congressional midterm election campaign like no other this year— brought to you by Wall Street.

Looking Towards November

The turn of an even-numbered year sets one to pondering what maneuvers the major parties are likely to engage in between now and November's elections. The Republican line is pretty well set around a strategy of not being responsible for anything that's happened since January 2009. Most observers expect the GOP to continue a policy of obstruction and protest against anything Democrats attempt to accomplish. For a few reasons, it's less clear what Democrats will attempt to do legislatively this year.

One reason that Democrats have a question mark over their election year theme is a lack of unanimity. With the troublesome parliamentary process in the Senate and a consistent Republican willingness to use the filibuster on every significant bill, Democrats have few issues on which they can muster a 60-vote supermajority. It takes only a Lieberman, a Ben Nelson, a Mary Landrieu, or another Democratic Senate holdout and, poof, there goes the legislation.

Another problem in predicting the Democrats is in reading the Obama White House's tea leaves. It's hard enough to pass major healthcare legislation without a serious amount of Presidential arm-twisting. Now, in proposing and sheparding bills that weren't the centerpiece of the President's campaign, legislators aren't sure what they might expect from the White House in terms of support and cover.

Finally, many Democratic lawmakers seem to be hunkering down in preparation for the midterm elections, hoping for a finished healthcare bill and some better prospects for the economy to put out for voters to chew on by November. There's a sense that specific legislation might give voters more reasons to disapprove of them. Lots of swing-seat Democrats, we hear, will not support more major legislation in 2010 unless it's clear that voters already back it.

I'd posit that this last position is exactly the kind of thinking that will send the Democrats down to a major defeat this election cycle. Here's why: a generalized anger in the country over the economy will fuel the voters in November. The last place a legislator wants to be when citizens get into the voting booths is anywhere between them and a way of expressing that anger. Democrats, like it or not, are now the government and will be held to account for the lack of jobs and security affecting so many. They may not have created the meltdown, but they have inherited its fallout.

It's clear that there will not be huge job gains between now and November. There may be signs of more recovery, some leveling off of unemployment, possibly even a bump in employment numbers. But there will be nothing like the kind of job gains that would make voters turn around and think that the meltdown of 2008 has given way to better times and a more stable economy. So the question for Democrats is whether they can survive the anger voters are feeling about the country's situation: whether they will give voters a reason to give them more time to fix our broken system.

So, given that Democrats haven't got the votes for a serious jobs program or for a second stimulus, what can they do to show they deserve another two years in office? Well, one thing Democrats could do is to get serious about reforming Wall Street. Over a year has passed since we all looked into the abyss of a financial collapse. The entire shadow banking system nearly went down. A real financial reform package, calculated to prevent the same abuses that led to the meltdown from occurring again, is overdue. Politically, reform would be a potential firewall for Democrats. If the Democrats were to crack down on unregulated derivatives and open up hedge fund transactions to greater transparency, they might convince the public that they aren't in Wall Street's pocket— and might also insulate the country against the creation of the next bubble at the same time.

From a political perspective, if Republicans are dead-set to torpedo every Democratic bill, going after financial reform will be the least attractive "no" vote their members could possibly take. There may be a few Republican defectors from the opposition if a financial reform package comes to the Senate floor without too many goodies for Wall Street in it. For Democrats, even losing such a vote on a close party-line call would make it clear who is for regulation— and who is still for an untrammeled Wall Street.

A hard-nosed effort insulate us from the financial casino that took us all to the edge, and has left too many stranded there, might make November look a bit less dark for the party that votes for reform. In addition, it might help us all sleep a little better too.