A Short Review Of An Interesting Day


Just some quick thoughts on a fairly interesting day.

The Dodd Financial Reform Plan

It’s out, all 1,300 plus pages. That’s the Chris Dodd blueprint for financial peace in our time. Why oh why do these guys not embrace brevity. Could it be that there are some devils hiding in all of the details? There is a plethora of comment in the blogosphere so I’ll try and not add to a surfeit of opinion.

I do want to direct you to one rather brilliant thought that John Carney offered today. John recounts the serial Fed failures that occurred during the crisis. He goes on to point out that it makes little sense for that institution to be given expanded oversight of non-bank financial institutions given past performance. As he notes, about all we will accomplish is to spread bad policy further into the financial system.

Spreading the Fed’s authority risks making this problem of market homogenization even worse. Hedge funds and insurance companies escaped the financial crisis intact, largely because they weren’t subject to the same regulators whose views on prudence so damaged the banks. Subjecting a broader range of financial firms to the Fed’s market views will create more systemic risk, leaving more firms in vulnerable if the Fed gets it wrong again.

The new powers being proposed for the Fed would allow it to order financial firms to “reduce risk.” Which is to say, the Fed’s view of risk will even more directly control the financial system. The Fed will be able to impose its views of risk on a broader range of financial firms. But that is exactly what regulators thought they were doing when they incentivized banks to buy up mortgage backed securities through sliding-scale capital requirements.

In short, the regulators’ views of prudent banking got us into this mess. Allowing the Fed to fail upward is just a recipe for another—likely worse—crisis.

Carney is dead right. Let’s not bet the ranch on the Fed or any other regulator for that matter getting it right every time. One lesson to take away from all of this is that the technocratic class failed badly. Limiting their reach isn’t a bad idea at all.

Krugman Declares War On China

Paul Krugman let the Chinese have it with both barrels yesterday. He suggested – no, he did a bit more than suggest – that the time had come to call the Chinese to account over their management of the renminbi/dollar exchange rate. He didn’t mess around with his prescription for curing the problem if the Chinese don’t listen to us.

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

The guy has a point but  it seems to me that he has gone around the bend on this one. Yeah, we need to see an end to their game but now probably isn’t the time to be sending seismic shocks through a pretty fragile global economy. The problem isn’t going to yield to overnight solutions or draconian threats. It can be worked out if all involved maintain an even keel.

Why people continue to suggest that this loose cannon would be an appropriate candidate for Treasury Secretary or a position with the Fed is a mystery to me.

Real Estate

If you think that residential real estate is on the mend and the worst is behind us, here is a sobering slap in the face for you. Diana Olick points out that things are getting worse faster than the feds fixes can mend them. Check out her blog for a reality check (that’s a good but accidental pun on her blog — Realty Check).

And just to rub a little salt into the wound, Calculated Risk has these comments from Chris Thornburg on the $2.3 billion gift that Congress gave the home builders.

[Christopher Thornberg] said the net operating loss carryback extension and expansion will do nothing to mend the housing market.

“Of course not. They’re not building any homes; there’s still too many of them kicking around,” Christopher Thornberg, a principal at Beacon Economics in Los Angeles, told SNL. “Permits, starts are still flat; they’re still at a bottom. It’s a bailout. It’s a bailout for builders. It’s a bailout for Robert Toll. They’re bailing out Robert Toll. Repeat after me, they are bailing out Robert Toll. What’s wrong with this picture?”

When asked whether there were any positives to come out of the net operating loss carryback extension and expansion, Thornberg said, “No, no, no, no, no, no, no. No. Nothing. There’s nothing to build; there’s an oversupply. If anything, they’re making it worse because they’re encouraging construction when we need to burn off our existing supply first.”

There’s a lot more in the CR post. It will dispel any notion you may have that responsible responses to our problems have or will emanate from Washington.

Health Care

Finally, here’s Megan McArdle admitting that she has no idea which way the vote on ObamaCare is going to go, but that’s only the beginning of the beginning on this issue. She suggests that the fate of the bill will possibly be the same as the one that befell the Medicare Catastrophic Coverage Act of 1988. If you missed that one, the furor over it caused it to be repealed in 1989. She poses an interesting question as to what might transpire if things do proceed down that road.

That seems like the not-unlikely follow up, either from terrified Dems or a brand-spanking new Republican Congress. Would Obama dare veto it? When there’s no longer an unpopular Democratic Congress to hide behind? One hopes, for the good of the country. But while so far the president has been enthusiastically urging members to lean into the strike zone and take one for the team, I’ve seen little indication that he’s willing to risk his own job.

Let me know if you think we can get any of this sorted out properly. Believe it or not, I do, but I’ve been wrong about so much for the past couple of years that if I were you I wouldn’t put much faith at all in my opinion.

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