What can Canada teach us about banking regulation?

By Marc Seltzer and Leslie Schreiber; originally published as “Northern Light” on June 19, 2009, in Commonweal Magazine and at Commonwealmagazine.org.

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Canadian Prime Minster Stephan Harper told world leaders to follow the Canadian model for financial regulation yesterday at a gathering in Davos, Switzerland.  I have written about the Canadian structure of financial regulation and how it helped Canada avoid the financial crisis endured by so many developed nations.  An overview of the Canadian approach is provided in the article below.

Amid the greatest worldwide financial meltdown since the Great Depression, there have been few examples of sound financial management and regulation. Public authorities have had to provide billions of dollars to support ailing institutions and have acknowledged far-reaching gaps in public oversight. Responding to the disastrous bubble and bust, the Obama administration is calling for comprehensive reform. International leaders have even gone so far as to call for the creation of a world financial regulator.

U.S. Treasury Secretary Timothy Geithner, while not going that far, is asking Congress to grant the Treasury broad oversight authority for virtually all financial institutions, and a mandate to monitor systemic risk. Additional proposals seek to insure that financial instruments, such as credit-default swaps, are subject to federal regulation. While Congress will ultimately be responsible for crafting legislation, Geithner’s proposals provide a road map for a new financial order, in his words-“not modest repairs at the margin, but new rules of the game.”

The economic crisis has tested the stability of financial systems across the international community. The results differ widely, from Iceland’s near-bankruptcy to Canada’s remarkable financial health and insulation from risk. Beyond the private gains and losses, the crisis has revealed strengths and weaknesses of different regulatory environments. Remarkably, not a single major Canadian financial institution has needed a bailout. In March, the International Monetary Fund praised Canada’s banks for their “remarkable stability amid the global turbulence.” Howard Kaplow, an investment executive and director of financial services in Montreal, noted that Canadians “tend to be more conservative, but we also have a more restrictive financial authority with tougher rules to follow.” The IMF agrees, commending Canada’s “strong regulatory and supervisory framework.”

In this light one may ask how Secretary Geithner’s proposals for regulatory reform measure up against the Canadian model. Are the Obama administration’s efforts to monitor systemic risk and regulate all substantial financial entities and instruments in line with the Canadian approach?

In contrast to Canada’s conservatism, the U.S. system has gone through a period of “irrational exuberance.” Over the past twenty years, Congress deregulated financial industries in order to maximize business opportunity. New financial instruments, markets, and conglomerates were unleashed without oversight. In a recent debate over the causes of the crisis, New York University Professor Nouriel Roubini (nicknamed “Dr. Doom” for having predicted the current crisis) argued that, “deregulation occurred too fast and in ways that did not provide prudential regulation for provision of the financial system.”

The dominant political ethos was trust in free markets, competition, and modest regulation-even self-regulation. Where regulators did act, they followed a framework that called for distinct regulators in compartmentalized markets. The FDIC has been highly praised for its success at handling the closing of failed banks, but neither the FDIC nor the Federal Reserve had authority to intervene when an investment bank or insurer acted unwisely or teetered on the brink of bankruptcy.

In the end, the failures were systemic and pervasive. They could not be limited to one sector of the financial system, nor were they detected by any existing regulatory agency. In warning that the problems would not respond to a quick fix, President Barack Obama observed that the crisis “didn’t result from any one action or decision. It took many years and many failures to lead us here.”

New regulations were contemplated long before Secretary Geithner was confirmed. Former Treasury Secretary Henry Paulson and the General Accounting Office oversaw substantial groundwork in 2008, but it now falls to Geithner to finish the job. While Geithner is promoting a more comprehensive regulatory regime, the proposals have been developed by financial and market experts and insiders who believe in free-market capitalism. They do not wish to stifle financial innovation. Instead, the aim is to protect the overall system while allowing risk-taking activity to continue. This approach is in line with the Canadian system, where, despite strong regulatory authority, the financial sector has prospered. Today, five of the country’s banks are among the top fifty banks in the world. Ten years ago none of them was.

The lead financial regulatory authority in Canada is the Office of the Superintendent of Financial Institutions (OSFI), currently headed by Julie Dickson. She chairs the Financial Institutions Supervisory Committee, which has broad authority to monitor systemic risk and, for that purpose, brings together regulators who oversee market stability, risk-management, and business practices from across the financial economy. The OSFI mandate covers “all banks, along with federally regulated property, casualty, and life insurers, and trust and loan companies, plus about 10 percent of private pension plans” according to OSFI spokesman Jean Paul Duval. If any of the institutions “raise a red flag, the OSFI can implement a range of disciplinary measures, affecting everything from bank capitalization to controlling assets, and even getting directly involved in business planning.” Indirectly, this also includes securities firms, which are 70-percent bank-owned in Canada (for example, RBC Dominion Securities is part of the Royal Bank of Canada). The OSFI oversees 450 banks and insurers, and approximately 1,350 private pension plans. Its authority, while not reaching all financial institutions (hedge funds are not regulated by the OSFI), is fairly comprehensive and is foundational for the soundness of the Canadian system.

Secretary Geithner told Congress in March that the oversight he was proposing “would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk” (emphasis added). Not every financial entity reaches the size and significance to affect systemic risk, but Geithner wants to avoid a system where the legal form of an entity can be used to shield it from regulation. A key component of meaningful oversight is the ability of the regulator to set standards for institutional risk management. Geithner is asking Congress for authority to increase capital requirements, to restrict leverage ratios, and to enact additional prudential rules.

In Canada, the OSFI has substantial experience with such oversight. According to Duval, since its creation in 1987, the OSFI “has always been vigilant in the development of its risk-management practices.” Capital requirements for Canadian banks have been held at 7 percent, while the global average is closer to 4 percent. Similarly, Canada’s bank-leverage ratio has been kept under twenty-to-one, while international bank leverage ratios were thirty-to-one and even forty-to-one. OSFI Superintendent Dickson remarked in November 2008, “We have seen how strong capital cushions in Canada have paid off to the benefit of our institutions and overall financial system.”

Canadian institutions were not free from risk-taking or even from exposure to subprime loans from the United States, but strong capital and leverage standards kept the damage from overwhelming Canada’s banks, let alone destabilizing the economy. In addition, Canadian banks generally still maintain the mortgage portfolios of loans they originate, retaining direct knowledge and responsibility for their management. These conservative practices reinforce sound regulation, and vice versa.

Canadian regulators give special attention to larger, “too big to fail” organizations. Duval explains that “OSFI utilizes a risk-based methodology, where institutions that we believe are operating in a riskier manner are subject to increased supervision. That said, the larger institutions will be operating in larger parts of the market, so [they] would naturally receive greater attention…and can be subject to different supervisory requirements.”

Similarly, the U.S. federal regulator proposed by Geithner will have the power to step in and manage problems when institutions fail to meet prudential standards or find themselves in financial difficulty. Special consideration would be given to entities deemed “too big to fail.” Geithner is asking Congress for the flexibility to intervene where there is risk to the wider economy. He has already intervened with a few of the big banks. Recent “stress tests” resulted in some banks being required to raise capital, although banks could choose whether to seek private or public funds.

Critics have called for regulations that would cap the size or restrict the legal structure of financial institutions. However, noting that other countries have allowed hybrid entities such as Canada’s banking and securities conglomerates, Geithner appears to trust that oversight will protect the system, and that private decision making should be allowed as much leeway as possible. The changes he proposes will require legislation. Under his lead, the Obama administration should be pushing hard for a substantial increase in federal regulatory authority. What might have been politically impossible before the crisis is now high on the legislative agenda. In addition, the chairman of the Federal Reserve, Ben Bernanke, has spoken in concert with the administration. While Congress will take a significant role in designing new regulation and is not likely to rubber-stamp the administration’s proposals, momentum is strong for the creation of comprehensive financial reform. The success of the regulatory system across the border should inspire both humility and hope.

Recruiting Ex-Presidents

By Marc Seltzer; originally published on July 13, 2009, at politicsunlocked.com

(Written prior to the earthquake of 2010, but relevant)

It’s an odd life for American heads of state. After learning and practicing the lessons of leadership at the highest level and serving their country for, at most, eight years, they are termed-out and must retire to fundraising, public speaking, and unofficial political influence. Is leadership really in such great supply that there are no official duties for the likes of Bill Clinton and George W. Bush?

In our hemisphere, no less

Take a look at Haiti, a nation whose corrupt, unstable institutions have hampered its development as much as frequent natural disasters and the desperate poverty of its citizens. Haiti is the recipient of American foreign aid, diplomatic missions, and numerous visits by well-meaning politicians — everyone from Clinton to Jimmy Carter. Yet poverty, unemployment, corruption, and lack of infrastructure remain facts of daily life for huge segments of the Haitian populace. What Haiti really needs is good leadership in the form of a powerful world leader.

Bill Clinton, stopping by Port-au-Prince on a recent charitable visit, noted that his 1994 restoration of Jean-Bertrand Aristide, the twice-deposed former president of Haiti, was the beginning of something good. Why not follow through and give the Greater Antilles nation the leadership it so sorely needs? If Bill Clinton became the chief executive of Haiti, for example, his leadership could set the country on a path to recovery that René Préval, the divisive current president, may not be able to realize. Simply by virtue of who he is, Clinton enjoys a higher level of worldwide political capital than Préval, and would probably be able to command the attention of other world leaders in a way that Préval can’t.

What at first seems impossible should not. Haiti is not a rival; its goals are not likely to conflict with American policy. But just to be sure that he is not put in a position with a national conflict of interest, Bill Clinton would not have responsibility for foreign policy among his duties — hence the “chief executive” title. His service to Haiti, far from somehow compromising his loyalty to the United States, would benefit both nations, as a troubled state would gain a measure of stability and prosperity, adding security in the hemisphere and the world’s political goodwill would be reflected back upon Clinton and the U.S.

And just across the border

Mexico, meanwhile, is currently struggling with drug enforcement. President Filipe Calderon has stepped up enforcement efforts and the violence in border cities such as Juarez has skyrocketed.  The violent turf battles have been especially difficult to stop in part because of bribery and corruption within public institutions, from the police up to the courts.

Mexico’s drug and violence problems will probably require more government intervention, not less: more organization, more control, and more authority for law enforcement. This is an area in which former president Bush has more than suitable experience. President Bush oversaw the buildup of the largest intelligence and security network in history. While his programs were highly controversial in the United States for the way they prioritized intelligence and security issues over civil liberties, it may be what Mexico needs in order to successfully fight its internal drug war. Bush could be the Mexican drug czar and help that government assert greater authority in the fight against bloodshed and drug trafficking.

Bush concentrated power in the executive branch and conducted national security initiatives in secret.   While this approach nearly caused a Constitutional crisis in the United States, Bush would work at the discretion of the Mexican President Calderon.  The Mexicans would have to make their own decision about the proper balance of civil liberties and law enforcement.  In Mexico, it has not been easy to find politicians to oversee the enforecement of drug laws who are not themselves tainted by connections with the cartels.

Would developing nations ever want a former American head of state to take command? Not likely, given the current global climate of suspicion and uncertainty. It’s true that in a certain light, the idea bears a resemblance to the colonial practices of an earlier era. But that’s the wrong way to think about it. What is being proposed here is more about leadership. A politician’s strengths need not pass into obsolescence after a certain number of years, not if international political leadership became a professionalized industry. The demand for experienced leaders is unquestionable; what’s needed now is the supply. The route is uncertain and new rules will surely have to be devised, but this is still an experiment worth making.

Military Tribunal or Civilian Courts for Terrorists?

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By Marc Seltzer; originally published on January 6, 2009, at care2.com

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The recent decision to treat the perpetrator of the December 25, 2008, terrorist attack on a commercial airline flight as a criminal defendant, rather than as an enemy combatant, again raises questions about the use of civilian courts for terrorists.

A foreign national enemy soldier in U.S. federal court, will not, in fact, receive all the constitutional rights of U.S. citizens.  Still they will receive more substantial legal protections than likely to be provided in a military tribunal.  Why then provide all the rights and process of U.S. civilian courts, rather than simply relying on military courts and justice?

The answer relates more to the failure of the Bush administration to effectively establish and use military tribunals than to the appropriateness of federal court for terrorists.  The Bush administration created secret prisons and harsh interrogation techniques but no workable process for judging enemy prisoners.  Under the circumstances, Republican criticism of the Obama administration decision to prosecute Abdulmutallab in civilian court is hypocritical.

This case is different in key ways from the case of the five Guantánamo detainees, who will be tried in federal court.  For example, the government will seek the death penalty for the five Guantánamo detainees.  After the damage to the government’s reputation because of treatment of prisoners at Abu Ghraib, and questions about interrogation and legal authority for detention without trial at Guantánamo, the execution of these detainees without a traditional civilian trial would have aroused international outrage and significant domestic criticism.

However, the December 25th attempt to destroy a plane as it descended towards Detroit failed, and no injuries resulted.  Thus, the government will likely seek incarceration, not the death penalty.  Moreover, Defendant Abdulmutallab has not been interrogated using enhanced techniques and his detention will be at the hands of the Obama administration, which has disallowed torture.  Therefore, there is not the same need to demonstrate the legitimacy of the process as there was with the Gauntanamo detainees.

The Bush administration proposed to deal with detainees outside of the civilian legal process, but parts of its plans were rejected by Congress and the courts.   After scandals at Abu Ghraib and questions about the administration’s treatment of prisoners and judgment in reviewing detainee cases without judicial oversight, the Bush administration lost some credibility in its role as authority over detainees.  This also cost the executive branch authority to use what should have been an ordinary process in time of war, the military tribunal.

The Obama administration has asserted that it will use tribunals in some cases.  For example, where evidence against a detainee is not sufficient to achieve a conviction in a civilian court, the administration will still seek to incarcerate people it believes are a threat, using a military tribunal.  Similarly, if a large number of foreign soldiers needed to be tried, it would overwhelm a civilian court, but be easily accommodated in the more flexible rules of a tribunal.

It makes no sense to try every enemy soldier in a civilian court. But the Obama administration will have to pick up where the Bush administration failed.  It will have to demonstrate to Congress and the courts that it can conduct military tribunals with the right mix of prosecutorial judgment and judicial process.

For now, the December 25, bomb attempt left an obvious trail of evidence and only one defendant.  This is an easy case for a federal court to handle.  Moreover, the defendant started providing information to the law enforcement officials immediately upon his arrest.  CIA or military intelligence officials could have been called in, but the defendant cooperated and provided detail immediately, according to the administration.  Under these circumstances, the administration’s decision to prosecute Abdulmutallab in civilian court was sound, although the greater challenge will come as the administration tries to prosecute some of the remaining Guantánamo detainees in military courts.

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January 6th, 2009, UPDATE:  In depth discussions on foreign policy and detentions on C-Span; President Obama discussing security issues.

Combining the House and Senate Health Care Bills

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By Marc Seltzer; originally published on December 29, 2009, at care2.com

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While the House and Senate health care reform bills are nearly identical, they differ in a couple of important ways — and this can potentially make the final bill much better than what has so far been contemplated.  Comparisons:  Bloomberg & New York Times.

The just-passed Senate bill partially funds health care insurance for those who cannot afford it by taxing luxurious insurance plans.  (I see it as ending a subsidy, not a tax at all — as I explain here)  This is not only a source of revenue, but crucially the tax will create an incentive for insurance companies to create cost-savings plans, “bending the cost curve,” of the entire system by reducing excess health care services.  Decreasing the unneccessary care lowers demand, cutting prices for insurers and eventually for businesses and individuals.  See Atul Gawande, New Yorker, Dec. 14 — a must-read on costs (and also June 1, New Yorker).

However, the House bill takes a different tack.  It raises taxes on high-income Americans, under the theory that they can afford to pay more without cutting into food, shelter or health care.  At some point, increasing taxes on wealthy Americans does lower their overall investment in new businesses — a drag on the economy — but such taxes are at a relative low point and the proposed tax is not so dramatic as to significantly damage investment potential.

The conventional wisdom is that the Conference Committee, which will meet in the new year to create one final health care bill, will choose between House and Senate options.  On many provisions, the Senate bill will prevail, because it is more cost-conscious, as already noted, and there is less support for the House provisions in the Senate, where the Democrats have no margin of error on the final vote.  Senate legislation has already been CBO (Congressional Budget Office) scored to reduce the deficit at ten- and twenty-year projections.  This does require doctors to take less payment from Medicare patients than they have in the past and requires individuals to buy insurance or pay a fine, which will be unpopular for some people who neither have insurance nor want to pay for it.  On the other hand, projected cost savings of the Senate legislation do not entirely factor in other cost-containment approaches, which are being tested, from malpractice reform to replacing the fee for service model, and which will likely bear fruit over the next decade.

Deficit Reduction and Health Care Cost Containment

The conference committee should take both the Senate tax on high value insurance plans and the House tax on wealth in the final form of the bill.  This would lower the deficit even further.  It might upset a moderate Democrat or two and it might not induce any Republicans to vote for health care reform, so Harry Reid needs to shepherd his flock and ask Olympia Snowe and Susan Collins where they stand on the idea, but it has the distinct advantage of creating universal health care legislation that is strongly positive on deficit reduction and still stepping in the right direction by changing health care incentives.

Currently incentives in the profit-driven system reward over-testing and overuse of resources by those who have, and tolerate underuse by those who have not. The Senate legislation, as it stands, gives the have-nots a chance to participate in the health-care marketplace.  While taxing wealth must be done cautiously so as not to damage investment and new business potential, here the benefit of lowering the deficit in the process of providing the opportunity for basic health care for all Americans is a worthy purpose for a moderate wealth tax.  Control of the deficit will return rewards to many who pay the tax by improving confidence in the economy and raising prospects for investments.  This could be a win-win in the long run, provided that the economy was emerging from the current recession before tax increases were imposed.

The Senate’s health care legislation is a monumental accomplishment in the direction of universal coverage. It also begins to tackle cost issues by taxing luxurious insurance plans and pointing towards other models of care that will lower demand and drive down costs.  We could add substantial deficit reduction to the legislation — an unplanned bonus — by including the House’s moderate tax on wealth in addition to the Senate bill’s revenue measures.

What are your priorities?  If this sounds appealing, please spread the word.

Listen to care2.com blogger Jessica Pieklo and I discuss health care and more on our weekly podcasts.

January 4, 2009 UPDATE:  Hendrik Hertzberg at the New Yorker on support and opposition to the health care bill.  An outspoken liberal, Mr. Hertzberg is in favor of the current legislation.

On the White House blog, a comparison of President Obama’s Transition period positions on health care reform compared with the near final product.

January 11, 2009, UPDATE:  PBS Newshour hosted a good discussion on whether it was better to adopt Senate or House approaches, but there was no mention of taking both.  Why not?

President Obama Achieving the Possible

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By Marc Seltzer; originally published on December 20, 2009, at care2.com

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I, for one, would like to see a re-energized Republican party.  I don’t think its good for America when one party has lost its way and we have to rely, at least temporarily, on the leadership of only one political team.

I rather like medical malpractice reform, a piece of the current Republican puzzle.  If Republicans could coalesce around a message of discipline and sacrifice for the common good on post-recession budgets — and maybe cleaning up the terrible problem in states that elect judges without asking them to recuse themselves when they preside over the cases of their campaign donors, they could have the beginning of a party platform.

Instead, I had to read in the NY Times today that the Republican response to President Obama’s efforts to reach reasonable and practical agreements to reduce international pollution and to the President’s leadership on health care — again seeking compromise in order to achieve what is possible — is that the President should only be working on the economy.

As if it weren’t bad enough that the Republicans have opposed serious efforts at health care reform — including opposing the current reform package that takes significant steps at cost control, while providing health care to those priced out of the system.  (The New York Times reported “the $871 billion cost of the bill would be more than offset by the new revenues and cuts in spending, so that it would reduce future federal budget deficits by $132 billion between 2010 and 2019″ per the CBO.)

As if denying that environmental pollution could have a global impact, and claiming that serious scientists doing their best to understand and report climate change were balanced by a far smaller number of skeptics, many of whom represent polluting interests, wasn’t holding America back.

Now the Republican message is that the President of the United States should not do more than one thing at a time.  No matter that the nation is at war, that China presents capitalist competition at a whole new level, that environmental damage is not bound by borders and China, India, Brazil and the like are industrializing fast, that regulation of our private financial system needs obvious overhall and that the great gains in productivity and commerce of recent years got absorbed into rising health care costs rather than making our products more competitive on the international market or our workers better paid and businesses more profitable.  The Republicans want the President to address no more than the economy.  And on the economy, they want unregulated markets, without government action.  In other words, laissez faire, and let the chips fall where they may.

This President is tackling real problems in the economy, health care, and national security, and laying the groundwork for longer-term progress on environmental protection, education, and financial regulation.  His administration is developing new partnerships in international cooperation in keeping with changes in the dynamic power and nature of world nations.

Take for example, the health care compromise aiming to garner 60 votes in the Senate.  It will be picked on mercilessly by those who wanted something more or something less.  Some will say it does nothing and others will say it remakes the American economy into a socialist order.  But read the basics of what it achieves and think.  It offers an estimated 30 million people, who were rejected from or priced out of health insurance, the opportunity to obtain coverage.  It subsidizes low income wage earners and it taxes enough of those parts of the health care industry that are subsidized and overused to achieve significant cost-cutting.  It has features which draw the praise of economists like Paul Krugman. See his recent NY Times op-ed “Pass the Bill.”

The fact that Mr. Obama speaks well and that he uses expressions, such as “don’t let the perfect be the enemy of the good,” which turn out to perfectly capture the political dynamic, is a mighty bonus.  The President has clear insight into what realistic progress looks like.  Those who criticize compromise do not, although they may have a point that in the future progress can go beyond what we agree to today.  But we have to start from where we are, and sometimes getting started is the hardest part.  Once we move in the direction of cleaner energy, we can invest our education, creativity, entrepreneurial spirit and regulatory know-how to take us farther than we can now imagine.  Or more dire circumstances may force us to take other measures.  But this is still the beginning.  We are not lacking leadership at the top.  Let’s take advantage of where we are and get started.

To hear my conversation with care2.com blogger Jessica Pieklo on Copenhagen hopes and Health Care votes follow this link and click on the “December 15, 2009 podcast, Copenhagen’s Promise and Health Care Reform Politics.”

The Vice President’s Op-ed is also worth reading:  Joe Biden in the NY Times.

December 21, 2009 UPDATE: NY Times Editorial in favor of the Senate bill.

Sacrificing the Public Option, Expanding Medicare and Universal Coverage

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By Marc Seltzer; originally published on December 13, 2009, at care2.com

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How does the latest health-care proposal in the U.S. Senate measure up on Progressive principles?

The Progressive movement has rallied behind single payer and public option reform proposals in the belief that not only is universal coverage a fundamental right, but not-for-profit medicine is a better way to get quality health care at a reasonable price.

Unlike most developed nations, the United States has a sizeable part of its population that goes without health insurance.  President Obama took up the cause of greatly expanding coverage in his presidential campaign. He also spoken firmly of reform in terms of bending the cost-curve, making insurance and medical care more affordable to individuals and to the nation, in light of fast-rising health-industry costs.  However, Mr. Obama stopped short of embracing single payer, leaving in question what type of structural changes would be used to achieve reform goals.

The political reality is that both the House of Representatives and Senate are split among those who want to change the system towards government-run health insurance and those intent on maintaining a mostly private system.  In the House of Representatives, the Democratic majority was able to pass legislation substantially expanding coverage and including a limited public option, a small government-run insurance program for those not insured through their employer.  The vote was fairly close and may have reflected inclusion of a controversial abortion-funding restriction, such that the exact count of Representatives who would support a public option if the anti-abortion funding provision were not part of the final bill is uncertain.

In the Senate, Democrats need sixty votes to close debate and move forward.  They have close to, but not quite, that many, who will accept some form of a public option.  Thus, negotiations have continued to explore what types of limited government insurance programs would be acceptable to at least a few conservative Democrats, independents or moderate Republicans.

This week a Senate group reached a compromise that attempts to replace the public option with a public/private non-profit insurance program like that which is currently offered to Congressional legislators and federal employees.  The compromise proposal did not stop there, however.   It also included a provision to significantly expand Medicare, by lowering the age of participation from 65 to 55.

How should Progressives look on this proposal?

All the proposals under consideration push towards universal coverage.  It is really the structure that makes them different.  The use of a public/private program is not equivalent to the public option, or government-run program.  However, the federal authority sets rates, controls profits, and guides provision of health care.  It is a strong control on profit-driven insurance.

Moreover, expanding Medicare is a major step in the direction of single payer.  The Medicare program is single payer for its participants.  Private insurance does not participate except in supplemental programs.  There are approximately 35 million additional Americans who would be eligible to participate, if the age requirement was lowered — more than 10% of the population.  Those under fifty-five would remain in their current employer-provided plans and a small number would participate in the new public/private plan.

Given that there is not political power to create a nationwide single-payer program, the expansion of Medicare to include 35 million additional participants and the coverage of uninsured by a public/private program is much more than could have been achieved by the limited public option as it was contemplated.  The small public option is replaced by a public/private plan, which covers those currently uninsured.  The vast expansion of Medicare offers many more Americans a single payer model of insurance.  Whether this shifts the political equation in the Senate or House is the big question, and this should become known in coming days.

Care2.com/causes blogger Jessica Pieklo and I discussed the new proposal as soon as we got word.  You can hear our conversation by following this link and clicking the December 11, 2009, podcast, and more information should become available as soon as the Congressional Budget Office provides “scoring” or budget estimates.

December 14, 2009, UPDATE: First responses — Senator Lieberman

Job Creation or Deficit Reduction — How Should We Spend Your Money?

By Marc Seltzer; originally published on December 9, 2009, at care2.com

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Should the unused TARP funds go to support middle class job creation or be used to pay down the deficit?

The question has arisen recently after the Treasury reported that its losses on the 350 billion dollars that Congress provided for the administration’s Troubled Assets Relief Program (TARP) are expected to be much lower than originally predicted.

The President and Democratic leaders are calling for a portion of the remaining funds (as much as $200 billiion) to be used for job creation programs.  The President has outlined several ideas that the administration believes could help bring unemployment rates down faster than at the current rate of economic recovery:

1. Small business financial assistance and tax breaks
2. Unemployment benefits, cobra subsidies, and emergency assistence to seniors
3. Additional infrastructure and incentives for home energy conservation

However, this money could alternatively be used to pay down the deficit and Republicans are calling for committing all of the funds to deficit reduction.

The PBS Newshour recently featured a brief debate between Princeton Professor and Nobel Laureat economist Paul Krugman and columnist and former Treasury official and Reagan administration advisor Bruce Bartlett on whether President Obama should direct unused TARP funds towards creating jobs or paying down the deficit.

Krugman called for action on the basis that the unemployment rate was devastating and unacceptable.  He noted that unemployment was expected to remain far higher than normal in the next two years.  Extended unemployment would cause lasting harm to people who were forced to use up their savings and cause long-term damage to future employment prospects, he argued.

Bartlett cautioned that Congress had appropriated the money specifically to help financial institutions under TARP and that it should not be rerouted without congressional approval.  While he said he was “agnostic” about the President’s ideas for job creation, he did not support action now because Congress had already enacted substantial stimulus legislation.

Paul Krugman:  “And we have what is really an ongoing economic emergency. I mean, this — it’s not just that we’re not creating jobs. The level of unemployment we have got is doing enormous damage. So, I think the president is justified in reaching for whatever mechanism he can.

If — if he can say — you know, it really doesn’t make a difference in terms of the economics, where it’s funded from. If he can say, look, what we’re doing is redirecting funds, and make it happen, then he needs to do it, because, ultimately, what we have is a jobs crisis. Action must be taken. I think the paperwork is relatively less important at this point.”

BRUCE BARTLETT:  “Well, I thought, if we were facing the kind of crisis situation that we were when TARP and the original stimulus were enacted, that would be one thing.  But I don’t think we’re facing that. I think we have — we did enact the stimulus. The money is — there’s a lot of money still to come from that in the pipeline. I think we have only spent about a fourth of it so far.

The unemployment rate is coming down. I think that there’s a case for, let’s wait a little while. Why not wait until after the president submits his budget in February? Why rush to act this minute?”

With high deficits and high unemployment there are strong competing interests for the money.  What do you think is the most important priority at this time?

For a podcast conversation on jobs stimulus between care2.com blogger Jessica Pieklo and myself, follow this link and click on the December 9, 2009, podcast.

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Bailout Losses Smaller Than Expected

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By Marc Seltzer; originally published on December 6, 2009, at care2.com

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The good news is that the losses from the government bailout are far less than many feared.  The New York Times reported yesterday that the Treasury currently counts losses of only 42 billion dollars out of its several hundred-billion-dollar rescue program.

Of course, 42 billion is still beyond comprehension.  It is bad news to lose those public funds, and there are other funds still at risk.  Nonetheless, it’s better than the hundreds of billions that were in doubt.

In fact, for those who feel that the government bailed out Wall Street at the expense of Main Street, the facts may prove otherwise.  It turns out, for example, that the banks are rapidly repaying much of what was given to them.  The financial industry still has TARP funds that may cause public losses over time — no final accounting is available — but the largest share of the current estimated losses, 30 billion, come from the bailout of automobile giants G.M. and Chrysler.

The bailout of the Detroit automobile companies was designed to protect Main Street, not Wall Street.   Middle class workers at the big factories and at the auto-parts supplyers would have lost their jobs without government intervention.  The U.S. was losing more than 500,000 jobs a month at that point.  Adding auto factory closures, that number might have hit a million a month, and who knows what else might have collapsed?

I am still haunted by Thomas Friedman’s New York Times Op-ed saying that giving money to G.M. and Chrysler might stop smaller, greener, entrepreneurial auto innovators from inventing the wonder cars of the future because the competition from a subsidized G.M. was too great to overcome.  Be that as it may.  Main Street jobs and an entire industry were saved at a point when the economy was very vulnerable.

The bailout of the banks, though ostensibly done to save the financial system, gave the government rescue a bad name as it appeared to protect Wall Street over Main Street.  It certainly saved financial industry shareholders and employees from their share of losses.  It turned even uglier when it created windfalls in compensation for the already rich.  However, if the bulk of the money lost went to saving middle class jobs and helping the car companies retain some value in the bankruptcy reorganization process, we may need to rethink who we say was bailed out and why.

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December 7th, 2009 UPDATE:  Food for thought in Newsweek’s take on the jobs data.

December 9th, 2009 UPDATE: A NYT article on the congressionally mandated review of TARP’s effectiveness.

Employment Poised to Turn Positive

Job losses Reported Through November 2009

By Marc Seltzer; originally published on December 4, 2009, at  care2.com.

. .

Despite doom and gloom in Republican talking circles, the overall jobs data is right on track in reflecting a rebound in economic activity.  Just released unemployment numbers show the lowest number of monthly job losses in two years, down to 11,000.

When Republicans handed over the Presidency to Barack Obama in January 2009, the monthly losses were 741,000.  If the automobile companies had folded, as they would have in the Spring without government support, another  million-plus people would have been thrown out of work, sending the monthly number over 1,000,000 for several months in a row.

It would have been preferable if private business activity had caused employment to improve.  But the financial freeze robbed businesses of their confidence and their financial capital, so businesses have shedded jobs, delayed plans, and closed down.

The government rescue gave money to states to stop layoffs at schools and police departments.  In other ways, from the Fed’s low interest rates to funds for infrastructure, education grants, promoting green technology and the like, the government injected money into the economy.  Job losses in September of this year were down to 139,000 and in October, 111,000.  The stimulus is working, despite Representative Boehner’s (R-Oh) claims of failure.

Jobs are a lagging indicator, which means that new business planning, funding and activity happens first, and then the hiring of employees occurs many months later after confidence improves, and opportunities require new staffing.  The growth rate for the economy as a whole was around three percent for the quarter ending in September, in line with the positive growth rates that the U.S. hopes to sustain for long-range growth, although more is desired now to make up for negative growth during the recession.

The goal is for employment to come roaring back and for private business to take over for public support of the economy. However, businesses large and small are still shell-shocked by the financial freeze and destruction of wealth that it wrought.  They must also adjust to lower spending as consumers behave more responsibly and unemployment remains significantly elevated. Fortunately, there is still a lot of stimulus money left to power infrastructure projects before the handoff to the private sector takes place.

The government has done the lion’s share.  It still needs to implement sound financial reform legislation, giving the public and financial industries confidence in a sound and fair system.  In addition, health care reform in the public and private sectors could free up wasted money for productivity in other areas that serve American business, such as exports.

Insurance regulation and universal coverage, already contained in proposed legislation, will spread the burden of costs more equally.  However, systemic overspending in health care robs families of wages and businesses of profits that could be put to better use.  Following evidence-based medicine rather than custom and practice and market-driven medicine could go a long way to giving us more for our money.  Malpractice reform, consistent with evidence-based medicine, would also eliminate waste.

Look for December or January employment numbers to finally turn positive and fourth quarter growth to remain healthy.  This will be welcome news to the unemployed and businesses, and should give the country more confidence that we are, in fact, on the road to recovery.

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December 8, 2009 UPDATE:  Bloomberg Economics podcast of Dec. 7, 2009.  Tom Keen’s interview with Steven Wieting, Managing Director of Economics and Market Analysis reflects on the jobs data and recovery.   It’s technical, but provides some thoughtful observations.

(The original publication of this story contained an older employment graphic; this version has been updated).

Federal Reserve Independence Under Threat

http://www.flickr.com/photos/iagoarchangel/3569137626/sizes/m/

By Marc Seltzer; originally published on December 1, 2009, at care2.com

. . .

Readers of this website have a healthy skepticism of government. They see that well-heeled special interests assert too much power in Congress.  Our representatives in Washington should devote themselves to the public interest, but too often appear to serve lobbyists and work for campaign contributions, instead. This view is held by Democrats and Republicans alike, one of few shared beliefs.

Unfortunately, this bipartisan, anti-government nexus has led to legislation to audit the Federal Reserve, the powerful financial stewards of the economy.

This is likely a bad idea and one that suckers good activist public energy down the wrong path.  The reason that the Federal Reserve is unelected and insulated from political manipulation is that its powers would be very tempting to misuse for political gain.  If Congress or the President could, for example, force the Federal Reserve to lower interest rates and stimulate the economy when unemployment goes up, they would do so.  However, the Federal Reserve manages long-term monetary policy to obtain stability and growth in light of concerns over inflation, exchange rates, and productivity.  This may include inflicting a certain amount of household suffering on the American economy to fight inflation or deal with crises where sacrifice today insures wealth and stability tomorrow.  If politicians could interfere, this would never happen.

The audit legislation responds to anguish about the failure of the government to regulate financial activity and risk in the lead-up to the current crisis. It also channels anger over the solutions to the crisis that the Fed has created.

Those who are against corporate greed and excessive wealth could better use the tax code to force corporations to pay their fair share.  Moreover, the proper response to failures of deregulation is increased regulation forcing private institutions to have higher capital reserves, lower leverage ratios and more significant safeguards and oversight than existed since Clinton-era deregulation.  No one is claiming that government got it all right.  But remember, it was political and financial interests that led to the current crisis.  And note that politicians have proposed everything from doing nothing to nearly twice the stimulus that was passed in response to the crisis.

The Federal Reserve is made up of professional economists and financial experts fulfilling a public service.  It is not immune to mistakes, but the Federal Reserve has, with specific limited exceptions, maintained a healthy independence from political authority.

Sacrificing that independence when the Fed makes mistakes or when we don’t like its decisions — which is what this legislation is really about — is not the answer.  Once the Federal Reserve is damaged, political and financial interests will use the Fed to serve current political goals at the expense of the long term financial health of the nation.

We know what that scenario looks like in practice because we have the example of Congress.  Congress never cuts expenses because our representatives are beholden for their jobs to special interests served by that government spending. One of the great examples of cost-cutting in government was done by the Base-Closings Commission, an independent panel appointed for the purpose of solving a problem that congress could not otherwise solve.

What we need is more fiscal responsibility, not less.