issue: Regulatory Reform

Financial Regulation Is Good — But Consumer Financial Protection Is Better

Posted on by The Progressive Policy Institute

Paul Volcker, vanquisher of inflation in the early ’80s as chairman of the Federal Reserve System and now the chairman of President Obama’s Economic Recovery Advisory Board, said, “[T]he most important financial innovation that I have seen the past 20 years is the automatic teller machine.” While he qualified the comment as a “wiseacre remark,” he stood by it, going on to say, “Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs.”

Our friend Bob Litan has a new report out from the Brookings Institution on the benefits from financial innovation over the past thirty years. The report is worth reading in full, but a quick summary of his findings is found in a chart at the beginning of the paper (condensed into one image by Kevin Drum):

Given attitudes like Volcker’s, it might be surprising to see so many “+”s, connoting relative benefits, relative to “-“s, connoting developments that did not improve that part of the economy. (“0” indicates the innovation was a wash.) But that is the reality of innovative financial instruments — they are, by and large, designed to be beneficial, but unmonitored can cause more harm than good. Innovations like credit scoring, collateralized debt obligations (CDOs), and inflation-protected Treasury bonds (TIPS) — all were developed since Volcker was Fed chair. But the benefits from these innovations (increased access to credit, which allows for consumption smoothing) can also lead to abuses of the system (crushing credit card debt, NINA mortgages, balloon payment mortgages) and asset bubbles. These abuses can be swept under the rug if the underlying assets in a CDO are not transparent, and that CDO is sold to an unsuspecting client by an investment bank trading desk.

The status quo is unsustainable, but attempts to ban some of these activities are problematic as well. Proclamations like the Volcker rule — limiting the scope of bank activity — are either too tightly defined to be effective or are so broad they throw out the above benefits with the bathwater. What would be better is to provide transparency in these activities — through clearing credit default swaps (CDS) and other derivatives on exchanges, providing credit terms in an easily understood manner upfront, and eliminating hidden fees — so that all involved know what they are getting into.

Litan also points out one key fact at the end of his paper: we’re not done with financial innovation. He argues that despite the headlines, not all innovation is bad, and there is more to come. He cites the work of Robert Schiller, the Yale professor who has pioneered work in housing price markets — designed to give homeowners protection they currently don’t have against a fall in the value of their home — and counter-cyclical tax policy, as an obvious source of financial innovation that is for the good.

But Litan concludes by noting that the market — not government — will continue to drive innovation, but “policymakers must be better prepared in the future than they were before the financial crisis to step in — first with disclosure standards and possibly later with more prescriptive rules” to prevent crises like the most recent one from happening again. The one area where he sees a more active government role is in consumer finance, an area in which a robust Consumer Financial Protection Agency will be key.

Bayh: Filibuster Must Be Reformed

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Last week, Evan Bayh came under fire from some progressives for leaving the Senate and likely handing his seat to a Republican in conservative Indiana. But this weekend, some of those same critics have some kinder words for the Indiana senator.

Bayh wrote a lengthy op-ed for the New York Times taking on a subject that’s been very much on the minds of Democrats these days: the filibuster. After offering some suggestions to improve cross-party relations, he presents some concrete proposals to end the abuse of filibusters:

For this reason, filibusters should require 35 senators to sign a public petition and make a commitment to continually debate an issue in reality, not just in theory. Those who obstruct the Senate should pay a price in public notoriety and physical exhaustion. That would lead to a significant decline in frivolous filibusters.

Filibusters should also be limited to no more than one for any piece of legislation. Currently, the decision to begin debate on a bill can be filibustered, followed by another filibuster on each amendment, followed by yet another filibuster before a final vote. This leads to multiple legislative delays and effectively grinds the Senate to a halt.

What’s more, the number of votes needed to overcome a filibuster should be reduced to 55 from 60. During my father’s era, filibusters were commonly used to block civil rights legislation and, in 1975, the requisite number of votes was reduced to 60 from 67. The challenges facing the country today are so substantial that further delay imperils the Republic and warrants another reduction in the supermajority requirement.

These are good ideas. Having sat in the Senate for 11 years now, Bayh has had a courtside view of the transformation of the filibuster into a tool for obstructing routine business by a minority party determined to grind government to a halt. As the chart below (from Norm Ornstein) demonstrates, the number of cloture motions to end filibusters took a dramatic jump in the 110th Congress:

Keep in mind: that chart only goes up to the end of the previous Congress. Updated through this one, it won’t look much better.

When Bayh announced his retirement, there was some skepticism about his stated reason for leaving, which he said was an increasingly dysfunctional Senate that prevented public problems from being solved. If you care so much, some said (with justification), why don’t you stay there and fix it? Well, it seems Bayh was, in fact, serious about his concerns. And now, it looks like he’s using the attention that his retirement has attracted to shine a spotlight on a procedural tactic that’s impeding our government’s ability to govern. If he keeps up the pressure and builds momentum toward an enduring fix of the filibuster, then that’ll be quite the twist to this drama: Evan Bayh had to leave the Senate to save it.

The World Without Obama

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If you’ve been watching the cult TV show “Lost,” then you’re familiar with the concept of parallel universes. That is, alternate realities in which history turned out differently, because people made different decisions.

It’s a useful concept when it comes to thinking about President Obama’s current predicament. On a variety of fronts, the Obama administration is suffering from an inability to show Americans the parallel universe in which its past policies were not enacted — and the future that will result if its current proposals bite the dust.

That’s most obviously true with the early, fateful decisions to continue TARP and bail out the auto companies. They arguably averted the collapse of the global financial system, the virtual extinction of consumer and business credit, and 1930s levels of unemployment (especially hard-hit would have been the upper Midwest). Nevertheless, no matter how often the president tells us his actions kept a deep recession from developing into a Great Depression, it remains an abstract proposition for the people who are currently unemployed. The same is true for the 2009 economic stimulus package, which virtually all experts, public and private, credit with saving about two million jobs. The continued job losses reported each month make it hard to claim that one has succeeded by avoiding even greater unemployment.

The problem of “proving a negative” is even more daunting when it comes to prospective policy proposals. Critics savage Obama for a health care plan that doesn’t do enough to limit costs. Obama responds that health care costs are going up anyway, without a plan. But it’s not easy to convince people that the status quo is riskier than a large and complicated series of changes in how Americans obtain health insurance. That’s why the White House has made such a big deal out of Anthem Blue Cross’s gargantuan premium increases for individual policyholders in California. It is, they argue, a sign of where the status quo is headed absent reform. They do not, unfortunately, have such a convenient example that will help them explain the need for climate-change legislation, as conservatives, stupidly but effectively, cite this winter’s heavy snowstorms as disproof for the scientific consensus about global warming trends.

There is one way to deal with Obama’s dilemma. Although it’s difficult to prove that American life under the president’s policies is better than life without them, it should be easier to point to another parallel universe: life under Republican policies. But such an effort requires a basic strategic decision. Should Democrats point back to the reality of life under George W. Bush, which most people remember pretty vividly, and simply say today’s GOP wants to “turn the clock back”? Or should they focus on current Republican proposals, such as they are, which in many respects make Bush policies look pretty responsible? It’s hard to take both tacks simultaneously, since the extremism of contemporary Republican politics is in no small part motivated by a determination to separate the GOP and the conservative movement from association with that incompetent big spender, Bush, who failed because he “betrayed conservative principles.”

It appears the White House is increasingly inclined to take the second, forward-looking approach to highlighting the GOP’s desired alternate reality, rather than the first, backward-looking one. As much as some Democrats wail about the “bipartisanship” rhetoric that surrounds Obama’s outreach to Republicans, which he’s employed while challenging them to direct debate over health reform and economic recovery, the president’s main intention is clear. He wants to force the opposition to help him present voters with a choice between two specific courses of action — or simply admit that their strategy is one of pure gridlock, obstruction, and paralysis (which, as my colleage J.P. Green has pointed out, spells “G.O.P”).

The stake that Obama and the Democrats have in convincing Americans to consider these parallel universes couldn’t be much higher. This November, if voters remain fixated on the current reality, rather than the terrible alternatives, then the midterm elections really will be a referendum on the status quo and its Democratic caretakers. Explaining life as it would be without Obama, and as it could be under Republican management, is not easy. But Democrats must do it or face catastrophe at the polls.

This item is cross-posted at The Democratic Strategist.

A Proposed Compromise on the Filibuster

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Ezra Klein links to a Slate article by Ben Eidelson that, I think, is quietly devastating to the idea that the Senate filibuster has somehow destroyed the democratic process. Eidelson shows that from 1991 to 2008, in the typical successful filibuster, the senators behind the filibuster (i.e., opposing the cloture motion) represented states comprising 46 percent of the U.S. population. If filibustering Senators represented 51 percent of the population, then we would conclude that the typical successful filibuster was supported by senators representing a majority of Americans. In that case, at least by small-r republican principles, the filibuster would protect the will of the majority.

Forty-six percent is not 51 percent, of course. But here’s another way of thinking about the effect of the filibuster. It could be argued that, to account for the fact that most Americans’ views on most issues are only weakly held, we should have a higher threshold for legislation passing than support by a simple majority of senators, or even support by enough senators to represent a simple majority of Americans. Instead, for legislation to pass, we might decide that enough senators representing 55 percent of Americans should support the legislation. If that were the procedural guideline, then on average, the way the filibuster has worked has been consistent with that guideline.

For the practice of the filibuster when Republicans have been in the minority to be consistent with a procedural guideline, the rule would have to be that enough senators to represent 60 percent of Americans should support the legislation (see Eidelson’s table). Interestingly, however, despite the greater use of the filibuster among Republicans, in Eidelson’s data Republican minorities had an average of 20 successful filibusters per Congress, compared with 16.6 successful filibusters per Congress by Democratic minorities. That’s a fairly small difference, although the current Congress is not included in these figures.

Unlike most progressive bloggers, I remain ambivalent about the filibuster. Eidelson’s data shows that Republican filibusters are much more likely to be anti-majoritarian than Democratic filibusters (even if they are not dramatically anti-majoritarian). He proposes as a compromise, replacing the 60-vote rule for cloture votes with a 55-vote rule, which historically would have eliminated most successful Republican filibusters while retaining most successful Democratic ones. Another compromise that’s consistent with small-r republicanism and small-d democracy that might be more palatable to Republicans would be to implement instead something like a 55-percent-of-the-population rule for cloture votes (while still requiring a majority of senators too). This would set a higher threshold for support than simple majority-senator-rule, would ensure that small-state senators could not thwart the preferences of senators representing a solid majority of Americans, and would not have such dramatically partisan consequences compared with a 55-vote rule (meaning it would have a better chance of being implemented).

Obama’s Regulatory Accomplishments

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Office of Information and Regulatory Affairs Administrator Cass Sunstein

While virtually all national attention has been focused on the difficult straits of the higher-visibility items of the Obama administration’s legislative agenda (and even there, according to the Brookings Institution’s Thomas Mann, his record has been vastly underappreciated), on the domestic matters that a president actually has some control over, the federal government’s regulatory apparatus, the administration has quietly undone many years of Republican mischief.

That’s the message of an important piece by John Judis that appeared in The New Republic earlier this week.

Judis places Obama’s accomplishments on the regulatory front into three main categories. First he’s appointed (where Republicans in the Senate have allowed him) officials who actually believe in the missions of the agencies they work for, and are qualified for their jobs.

Given the habits of Republican administrations, that’s no small thing:

Reagan chose Thorne Auchter, the vice president of a construction firm, to head OSHA. Bush appointed a mining company executive to head the Mine Safety and Health Administration and a trucking company executive to head the Federal Motor Carrier Safety Administration. To lead OSHA, he named Edwin G. Foulke Jr., a longtime foe of the agency who had advised companies on how to block union organization. Some of the Republican appointees weren’t business types, but ideologues or hacks who were utterly unqualified for their positions. Anne Gorsuch, whom Reagan nominated to head the EPA, was a rising member of the Colorado House of Representatives, where she was part of a conservative group known as the “House crazies.” Michael Brown, whom Bush appointed to run the Federal Emergency Management Agency (FEMA), had previously been commissioner of the International Arabian Horse Association.

Obama’s approach, says Judis, couldn’t be more different:

[T]he flow of expertise into the federal bureaucracy over the past year has been reminiscent of what took place at the start of the New Deal. For instance, as a replacement for Foulke at OSHA, Obama chose David Michaels, a professor of occupational and environmental health at George Washington University. In 2008, Michaels published a book, Doubt is Their Product: How Industry’s Assault on Science Threatens Your Health, detailing how businesses had delayed regulations by “manufacturing uncertainty” about scientific findings.

To manage the EPA, Obama appointed a slew of highly experienced state environmental officials. (As Bill Becker of the National Association of Clean Air Agencies explains, state officials are ideally suited for the EPA because they have firsthand experience in how regulations are enforced and how they work.) Obama’s choice to run the agency was Lisa Jackson, a chemical engineer who led the New Jersey Department of Environmental Protection. Her deputies include the former secretary of the environment in Maryland, as well as the former heads of the Connecticut Department of Environmental Protection, the Massachusetts Bureau of Resource Protection, and the Arizona Department of Environmental Quality.

Meanwhile, Obama chose as his Food and Drug Administration (FDA) chief Margaret Hamburg, who achieved renown during the 1990s as health commissioner of New York City, where she developed a program for controlling tuberculosis that led to a sharp decline in the disease. Her number two is a former Baltimore health commissioner who, in 2008, was named a public official of the year by Governing magazine.

Second, says Judis, Obama has decisively reversed the Reagan-Bush 43 habit of undermining regulatory agencies by starving them of administrative funds and personnel:

Even in the face of the recession, he proposed and got funding increases for numerous regulatory agencies–some of them dramatic. He asked for $10.5 billion for the EPA for 2010–a 34 percent jump over 2009, and the first time in eight years that the budget had increased. He also requested a 19 percent increase in the FDA’s budget, the largest in its history; a 10 percent increase for OSHA, which will allow it to hire 130 new inspectors; and increases of 5 percent, 7 percent, and 9 percent for the Federal Trade Commission, the SEC, and the Commodity Futures Trading Commission.

Finally, Obama has ended the application by Republican administrations of a skewed approach to cost-benefit analysis of proposed regulations that makes short-term costs to businesses an overriding consideration. His most important step was probably appointing progressive law professor Cass Sunstein to head up the White House “super-agency” that reviews federal regulations, which under Bush became a major obstacle to the ability of regulatory agencies to do their work.

Judis warns that continued progress on this front is one of the little-appreciated stakes involved in this November’s elections:

In 1993, Clinton, too, attempted to revive the regulatory agencies by appointing well-qualified personnel and increasing funding. But, after Republicans took control of Congress in 1994, they managed to cut Clinton’s budget proposals and delay or block the implementation of regulations. If Democrats lose Congress this November, the same thing could happen again.

That’s something for progressives “de-energized” by the events of the last year, and inclined to sit on their hands this election cycle, to keep in mind.

Obama’s Budget: Recognizing the Link Between Food Systems and Jobs

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President Obama’s 2011 budget contains a few notable things for progressives to cheer. One of the items that jumped out at us was its support for an intertwined effort to boost healthy foods and food jobs – an idea that we championed in a December policy paper.

The budget includes $400 million for the Departments of Agriculture, Health and Human Services, and Treasury to finance community development institutions, nonprofits, public agencies, and businesses with strategies for tackling the healthy food needs of communities. Funds will also be available for expanding retail outlets and increasing availability of local foods.

But even more impressive is the language that the administration uses to describe its food initiatives. In summary after summary, the link between food and jobs keeps popping up.

From the “Spur Job Creation and Revitalize Rural America” fact sheet:

The Budget helps lay the foundation for job creation and expanded economic opportunities throughout rural America by…[n]urturing local and regional food systems and expanding access to healthy foods for low-income Americans in rural and urban food deserts.

From an OMB paper on job creation:

First, to support the Rural Innovation Initiative, the Department of Agriculture (USDA) plans to set aside funding to foster rural revitalization through a competitive grant program. Second, the Budget supports local and regional food systems through many USDA programs including the Business and Industry guaranteed loan program and the Federal State Marketing Improvement Program.

From an OMB summary of the USDA budget:

Promotes economic and job creation opportunities for rural America by focusing on five core areas: access to broadband services, innovative local and regional food systems, renewable energy programs, climate change, and rural recreation.

Taken together, these spending decisions on food systems and job creation reveal an administration in tune with the idea of a holistic approach to our economic, social, and health problems. Following a glum January for progressives, the budget offers compelling reminders of the progressive governance that we expected from the administration.

State of the Union: A Litany of Solid, Progressive Proposals

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Facing almost as much uncertainty about the economy one year into his mandate as he did at the outset, President Obama gave his State of the Union address the way we’ve come to expect him to – sticking to his guns with cool determination while acknowledging that not everyone agrees with him. His speech highlighted what he has accomplished and promised to the American people, but didn’t propose any sweeping new changes.

With unemployment at 10 percent and Wall Street banks handing out record bonuses (Goldman Sachs’ bonuses are reported to match 2007’s record levels), and pundits reading doom for the administration in the tea leaves of the Massachusetts election, the political temptation to go populist would be strong. But Obama decided instead to reassert his progressive program for addressing the economy. Obama highlighted not grand industrial policy, but accomplishments that have helped the American people face a truly global recession. The stimulus bill helped us avoid falling off the economic precipice, and unemployment protection and COBRA extensions make a meaningful difference to people looking for work in a changing economy.

Obama’s call to Democrats to not “run for the hills” on issues such as health care suggests that the talk of that reform’s demise was premature. The embrace of centrist – and even Republican – proposals on energy, including nuclear power and offshore drilling, might offer some hope on a climate change bill making it’s way through the Senate. But until politicians spell out what sacrifices will come with addressing climate change, it may be a campaign promise that remains unfulfilled.

Disappointingly, the president soft-pedalled trade and immigration priorities. While they were mentioned, it’s notable that the president didn’t call on Congress to pass free trade agreements with South Korea, Panama and Colombia. And the reference to the Doha global trade round and immigration reform were pro forma at best, not promising any results.

Obama was laying the foundation for significant payoff from his education initiatives, however. Student loan subsidies to banks are an easily overlooked handout to Wall Street that the president was smart to put an end to. The investment in K-12 education reform, community colleges, and Pell grants will help prepare the next generation of Americans for the 21st-century economy. Incentives for debt forgiveness for public sector workers will mean that our best and brightest — who go to very expensive colleges and graduate schools — can now afford to look at public service, and can be used to limit some of the demand for a revolving door between the public and private sectors.

The president didn’t break new ground, or lay out a visionary mandate for change. But he reassured us that he was going to govern as he was elected, looking for progressive solutions to the challenges the country faces.

One last point — at last week’s “banking limits” announcement, beltway Kremlinologists were reading volumes into the fact that Treasury Secretary Tim Geithner was off to one side, while presidential economic adviser Paul Volcker was front and center. (Simon Johnson said: “Where you stand at major White House announcements is never an accident.”) Last night was Geithner’s chance to stand front-and-center — shoulder to shoulder with Bob Gates. With Larry Summers way off to the right — and I didn’t see Volcker in the audience — the handshake the president gave Geithner on his way in would seem to be sending the message that the secretary continues to be the president’s man.

We Shouldn’t Negotiate with the Taliban’s Top Leaders

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The notion of integrating top Taliban commanders into the Afghan government is gaining traction among influential members of the Obama administration. Joe Biden likes the idea, as apparently does Richard Holbrooke, while Gen. Stanley McChrystal has indicated he could see a role for Taliban members in government.

On the surface, it’s an attractive solution. The administration is rightly skeptical of the election-stealing Afghan President Karzai, who continues to rule a corrupt regime. “(Sigh.) Fine. Let the Taliban into government,” you can almost hear war-weary NSC officials dejectedly admit, “at least it’ll help get us the #@*% out of there.”

Unfortunately, it’s a short-sighted solution that will ultimately undermine NATO’s many hard-won victories in Afghanistan over the last eight-plus years.

Before digging into the why, it’s important to clarify exactly what’s under consideration. Today, the WaPo reported that in an effort “energize the peace process,” the U.N. has lifted sanctions against five former Taliban officials who are prepared to renounce violence. These converts fall in a different category than what the White House is currently debating. While reconciliation with the likes of hard-core top Taliban elements like Mullah Omar is out of the question, an administration official conceded that the White House was discussing “above low- and mid-level fighters.”

Stop right there: Those low- and mid-level fighters are far enough. Above that pay-grade, the Taliban’s mid-tier officers are in it not just for the paycheck, but for steadfast ideological convictions that are much harder to genuinely convert.
And that ideology fundamentally rejects the pillars supporting government in Kabul. As Barbara Elias writes in a hard-hitting essay for Foreign Affairs, governing within an even partially Westernized democracy is out of the question:

Their [the Taliban’s] legitimacy rests not on their governing skills, popular support, or territorial control, but on their claim to represent what they perceive as sharia rule. This means upholding the image that they are guided entirely by Islamic principles; as such, they cannot make concessions to, or earnestly negotiate with, secular states.

In other words, we should be highly suspicious when the likes of Taliban leader Mullah Omar makes overtures about playing “our role in peace and stability of the region,” as he did in the fall. It’s a trap – the Taliban’s leaders want to join government to overthrow what it sees as a traitorous regime supported by infidel Western tyrants, not to act as a constructive governing partner. Once sharing power, the Taliban’s ideological resolve will only harden as its members refuse to accommodate otherwise constructive solutions forwarded by their more secular domestic or international partners.

It is far more constructive to remove the ideologues’ foot soldiers, which is precisely the aim of a potential $1 billion program for jobs and education for the Taliban’s grunts. Depriving the Taliban of its army is critical to removing its ability to peddle fear and repression outside of power. Integrating its non-contrite higher-ranking officers into the government just gives them a different kind of army.

That’s why it is yet again gut check time for the White House. Working with the most vile members of the Taliban is a great temptation, but will prove a fool’s errand.

In Massachusetts, Race to the Top Spurs Reform

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The Massachusetts state House and Senate yesterday passed a major education overhaul bill, considered to be the most sweeping school legislation in the state in more than 15 years.

The bill calls for doubling the number of charter schools in districts that are in the lowest 10 percent of state assessment scores and grants new powers to superintendents, making it easier for them to dismiss teachers and lengthen school days (a policy that PPI supports).

The story might seem like a state matter, but it actually has broader relevance. Here’s the telling passage from the Boston Globe:

The bill represents a cornerstone of Patrick’s education agenda, which slightly more than a year ago appeared to be all but on hold as the state confronted ever-worsening budget woes.

But the effort was reignited last year at the prospect of receiving $250 million from President Obama’s Race to the Top competition, reserved for states aggressively pursuing overhauls of failing schools and expansions of charter schools.

Now state education officials are racing to meet a Tuesday deadline to submit their funding proposal, including a copy of the approved bill. They will send the hundreds of pages by express carrier, while a state official who will be in Washington Tuesday has agreed to drop off a backup copy.

Massachusetts students are typically among the top-performing students in the country. But when broken down along socio-economic lines, the results actually vary greatly, with black, Latino, and low-income students all lagging behind. By lifting the cap on charter schools, the bill allows charter schools with proven track records to replicate their methods and try to revitalize long moribund school districts.

With Race to the Top, the Obama administration made a bet that dangling financial incentives for states would prompt them to enact reforms that for years have been stuck in sclerotic legislatures. By combining money with reformist guidelines — for instance, Race to the Top’s insistence on a favorable policy toward charters — the administration is getting states and districts to consider and pass bold education policies without imposing onerous top-down orders. The Massachusetts education bill is a victory for the reform in the state, but it also augurs well for the national education reform landscape.

A Push For Regional Primaries

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A recent report from a “Democratic Change Commission” authorized by the last national convention to look at the presidential nominating system mainly got attention for its predictable recommendation that “superdelegates” lose their independent voting power. The “supers” will still get convention seats and votes, but said votes will be allocated according to primary or caucus results in their home states (which could make the DC primary of greater-than-usual interest).

A second Change Commission recommendation got a bit of attention: another in a long series of efforts to reduce “front-loading” of the nominating process by pushing the “windows” for allowable primaries and caucuses forward a month (the Commission did not, however, tamper with the two-tiered process by which four states—IA, NV, NH and SC—get their own early “window”).

But virtually no one was aware of a third recommendation, until yesterday, when 538.com’s Tom Schaller interviewed Change Commission member (and 2008 “delegate guru” for the Obama campaign) Jeff Berman. According to Berman, the commission is encouraging the party to award bonus convention delegates to states that agree to cooperate in regional primary/caucus “clusters.” Regional primaries, long a favorite idea of critics of the current system, are relatively efficient ways of enabling candidates to compete for significant delegate counts, particularly when contrasted with the high costs and sheer madness of big, scattered national “clusters” like Super Tuesday, or the inefficiency of dozens of individual contests.

The big questions, of course, are (1) whether the party chooses to make the “bonuses” large enough to actually encourage states to participate in regional primaries, and (2) whether there’s a parallel movement by Republicans, since many states require both parties to hold nominating events on the same day. On this latter point, it’s probably an ideal time for Democrats to make changes in the nominating system, as nobody much expects a challenge to President Obama in 2012. But with Republicans anticipating a wide-open nomination contest, any changes in the system will be scrutinized minutely for their possible impact on particular candidates.

I would argue that a direct assault on the “right” of states to control the presidential nominating process is the only way to ensure major reforms. But barring that, the carrots-and-sticks approach of the Change Commission is perhaps the best available avenue for reform. And there’s no time like the present to undertake it.

An Interesting Idea for Senate Reform

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The possibility of Democrats losing their 60th Senate seat in Massachusetts next week, slim as it is, should concentrate minds once again on the travesty of the 60-vote threshold for enacting legislation in the Senate. The Senate being what it is, of course, prospects for a major change in rules governing filibusters are not that good, unless some new dynamic is introduced.

At the American Prospect, Mark Schmitt may have identified an avenue for Senate reform: link rules restricting filibusters to rules tightening up the use of the budget reconciliation process.

He predicts, quite plausibly, that if Republicans continue to gum up the works in the Senate by voting en bloc against cloture motions, needing just one Democrat (at present) to hold up action, Democrats will increasingly resort to the reconciliation process, which fast-tracks legislation and prevents filibusters. But that’s hardly an ideal scenario:

[B]ecause budget reconciliation was designed for a completely different purpose it makes an awkward fit for big policy initiatives. It’s like entering a house through the pet door instead of the front door — you might fit, if you twist just the right way, but it will be painful. Provisions that don’t directly affect the budget can’t be included, so, for example, much of the fine detail of health-insurance regulation in the current bill would likely have been lost if pushed through reconciliation. If Congress chose reconciliation as the means to pass a jobs bill, it could include tax credits for job creation but probably not many of the infrastructure-spending initiatives that would directly create jobs.

Still, what choice does any majority party in the Senate have if the minority party chooses to block all major legislation? The experience with health reform is all but certain to create momentum among Democrats for using reconciliation whenever possible. And thus the dilemma, says Schmitt:

So what we have in the Senate are two extremes: the rigid, partisan system of near-total stasis created by the filibuster, on the one hand, and the merciless, closed-door, majority-controlled arcane process of budget reconciliation on the other. A solution might be found in reforming both: Loosen the stranglehold of the filibuster…. And in return, offer the minority party a reform of the power of budget reconciliation that currently cuts them out entirely. Start by permanently limiting reconciliation to measures that actually reduce the deficit (a rule the Democrats adopted in this Congress) and then look at reforms that open up the process to longer debate and a wider range of amendments.

Schmitt cites a number of feasible filibuster reforms, including Sen. Tom Harkin’s proposal to gradually lower the votes needed for cloture after repeated efforts to move legislation are thwarted, along with the very popular idea of requiring actual stemwinding filibusters instead of paper threats. But what’s important is Schmitt’s notion of packaging together reforms attractive to both majority and minority parties. The big question is whether Republicans are interested in any reforms, if only because they hope someday to return to majority status in the Senate. Maybe a bill or two whipped through the Senate via reconciliation would bring them around.

This item is cross-posted at The Democratic Strategist.

Some Unanswered Questions on Financial Reform

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The Rep. Barney Frank (D-MA)-authored Wall Street Reform and Consumer Protection Act passed the House Financial Services Committee last Wednesday, and could come to a floor vote in the House as soon as this week. Through legislative jujitsu on Frank’s part, the bill will have a lead on Sen. Chris Dodd’s (D-CT) efforts in the Senate.

The day after the committee passed the legislation, I saw Rep. Ed Perlmutter (D-CO) talk about it at an event hosted by the National Journal and got to exchange a few words with him on the subject. He was positive about the bill and its chances in the House (it will likely pass easily), and gave positive marks to the administration’s handling of the crisis in its first year in office.

But while Perlmutter said he felt the House has done its part to address regulatory reforms, I thought some of the accomplishments he touted leave unanswered fundamental questions raised by the financial crisis.

He spoke about the legislation’s planned Financial Stability Council, that would provide a forum for regulators like the Fed to address systemic risk. But the Financial Stability Council, instead of facilitating coordination among regulators, won’t live up to expectations — much like what happened with the Director of National Intelligence (DNI) that was supposed to facilitate information-sharing in the intelligence sector, but has had limited effectiveness in getting different agencies to talk to each other. The weak mandate of a Financial Stability Council would lead to regulator shopping by financial institutions, a temptation that can lead to problems similar to those seen in the case of under-regulated AIG. Moreover, the resolution authority that the council would have is useful only after the fact — it would not preemptively deal with the Too Big To Fail problem we still face.

Fixing Mark-to-Market Requirements

More generally, however, Perlmutter mentioned two ideas the House is considering that could actually contain the seeds of our next crisis.

One idea is extending the Financial Accounting Standards Board’s (FASB) loosening of mark-to-market requirements for financial institutions to value their securities. Perlmutter wants to suspend mark-to-market and make permanent the FASB’s contentious April decision to ease mark-to-market rules.

The rule would let the Financial Stability Council order FASB to suspend mark-to-market in cases where there is no market in a security or securities are being sold in a “fire sale” or distressed environment. More worrisome, however, is that banks get to declare whether the market in the securities they are holding is distressed or not. Banks can drive a truckload of bad investment decisions through this loophole without having to disclose them on their bottom line or affecting capital requirements. Under this new rule, banks will have no incentive to conduct diligent analysis of the securities they hold — anything that turns out to be worthless (like bonds backed by subprime loans) can just be called “distressed.” This would decrease transparency and not restore confidence to the system.

But mark-to-market does have the bad consequence of increasing volatility in bank balance sheets. During crises like last year’s, banks can even perversely see mark-to-market improve their bottom line the closer they get to bankruptcy.

A better idea than the one Perlmutter mentioned has been put forward by PPI contributor Robert Pozen in his new book, Too Big To Save. Pozen suggests delinking banking capital regulations from accounting mark-to-market rules by effectively recognizing all securities as being “held for sale” (an accounting distinction) for regulatory purposes. This would allow us to continue to keep the transparency in assets that mark-to-market allows, while avoiding the bottom line volatility that banks would like to avoid.

What to Do About Sarbanes-Oxley

The second idea is exempting firms from some Sarbanes-Oxley (SOX) reporting requirements. Passed in the wake of Enron, SOX was designed to hold companies and their executives accountable for their auditing, and eliminate some glaring conflicts of interest in financial auditing.

SOX does two good things. It makes a publicly held company have legitimate auditors, and ensures that those same auditors aren’t also advising the company on how to prepare the books for auditing (thereby basically handing over the answer key before a test). SOX also made sure that companies had proper controls that minimized the risk of errors in financial statements and of people either using company money inappropriately (as Enron did in off-balance-sheet shell companies) and of people embezzling money. Exempting firms from this would eventually lead to the same bad behavior happening again.

That said, SOX isn’t without flaws. Many in the auditing industry perceive it as very manpower intensive and, as a result, a significant burden to publicly listed companies, especially smaller ones (with income under $100 million). The SEC has responded by annually exempting small companies from some reporting requirements, but the exemption is not going to be extended past next year.

The solution to this problem is to streamline SOX to make it less burdensome to companies, not gutting it and letting new Enrons bubble up. Instead of providing an internal control report with each annual filing to the SEC — which can require up to three percent of a small company’s income — the SEC and Congress should encourage accounting oversight boards to spell out further guidelines and best practices to adopt. This streamlined SOX could even be extended to non-public financial institutions, as a key part of what allowed Bernie Madoff to steal people’s money for so long was having a small one-man upstate auditor keep tabs on his multi-billion dollar Ponzi scheme.

Popular Dissent “From the Left” On Health Reform

Posted on by The Progressive Policy Institute

Nate Silver has a post up at 538.com that is sure to get a lot of attention. Looking closely at an IPSOS/McClatchey poll that asks supporters and opponents of health care reform their underlying concerns, Nate notices that about one-fourth of those opposing current proposals think they “don’t go far enough to reform health care,” and suggests there’s a little-discussed segment of the electorate that might either grow if reform is further compromised, and/or might eventually come around if and when legislation is on the president’s desk.

This is an argument that Jonathan Chait made a couple of weeks ago at TNR, based on earlier polling.

Both articles are important refutations of the common assumption of conservatives that there is monolithic majority opposition to health care reform, and also a monolithic majority of Americans happy with the status quo in health care.

Beyond that, of course, this argument will be catnip to those progressives who are searching for ways to convince the White House and the congressional Democratic leadership to abandon or greatly toughen its endless negotiations with Senate “centrists” and the odd Republican, particularly over the public option. A majority of Americans, they will argue, either likes the current bill or wants something with more and more generous coverage, and a stronger public option. This is, of course, a subset of the ancient debate among Democrats between the strategy of seeking a majority coalition by peeling off “centrist” independents, or by solidifying and energizing the presumably liberal party “base” (along with “populist” independents).

There are, however, two problems with excessive reliance on the “progressive majority” analysis on health care reform. The first is that the polling numbers are based on some pretty vague ideas about what would constitute “doing more” on the health care front; it’s not entirely clear “more” means “more” of what progressive opinion-leaders want. And the second problem, more to the immediate point, is that in a Senate with a sixty-vote threshold for enactment of major legislation, a handful of Democratic and Republican senators, who represent not the nation as a whole but their own states, have the whip hand on the details of health care reform. I don’t think many progressives would want to abandon health care reform if a durable majority did, in fact, favor the status quo; this is a complex issue that’s not exactly good material for a plebiscite.

The more useful observation about the existence of a “dissent from the left” on health reform involves the wrath that Republicans (and obstructionist Democrats) may well inherit if nothing happens this year, and health care premiums, along with insurance industry abuses, continue to get steadily worse. We will then be talking not about a constantly shifting and poorly understood thing called “Obamacare,” but about one party that sees a major national challenge and wants to do something about it, and another that’s fine with an increasingly untenable status quo.

The diversity of opinion among those unhappy with the present legislation is, to be clear, an excellent argument for increasing the frequency and volume of claims that said legislation really will accomplish a great deal, if not everything it should or could achieve. All the news that’s been made about compromises on health reform over the last few months, along with reform advocates’ efforts to reassure seniors and others that they won’t lose anything worth caring about, have undoubtedly “undersold” the extent of change that even a “weakened” bill would make happen. A reform effort that’s marketed as a tepid bowl of porridge won’t satisfy much of anybody.

Too Big to Run

Posted on by The Progressive Policy Institute

In discussions about the dismal state of the economy, the existence of “too big to fail” institutions has emerged as a recurring cause for concern. In particular, Bank of America and Citigroup (the first and third largest banks in the country, respectively) are firms whose size makes them an “existential threat” to the well-being of the economy.

(Bank #2 in size is JPMorgan, whose chief, Jamie Dimon, has been going around saying that we can end “too big to fail” without capping the size of financial institutions by providing regulators with resolution authority over banks — the ability to wind them down in an orderly fashion. While resolution authority can help in cases — like Lehman’s — where banks become insolvent, these after-the-fact measures would not prevent the liquidity crisis that selling against a too-big-to-fail institution would cause.)

While Citigroup has made efforts to break itself up, including selling off its half of the Smith Barney joint venture with Morgan Stanley, Bank of America under Ken Lewis has been resistant to downsizing, adamant that clients benefit from its size. But with the embattled Lewis having announced he will step down at the end of the year, the bank is looking for a new chief.

And that search has run up against a problem — not only are these firms seen as “too big to fail,” they’re also too big to run:

At least two candidates for the top job at Bank of America Corp. told directors that the giant bank should consider breaking itself up… [One candidate, former Bank of Hawaii CEO Michael O’Neill] recently told the Bank of America search committee that the bank’s risk-adjusted capital wasn’t being used productively. He added that the company should become simpler and less prone to volatility

How big is Bank of America? With over $2.25 trillion in assets, it has a pervasive presence in our economy. The numbers from the Wall Street Journal are staggering:

Bank of America is the largest U.S. bank by assets and has 6,000 branches, 18,000 automated-teller machines and relationships with 53 million households, or roughly one out of every two households in the U.S.

Whereas the mantra “bigger is better” was applied to the financial industry over the past 20 years, there is now a reassessment of that idea. But instead of providing clear guidance on how to get financial institutions to a more reasonable size (and, indeed, what that size is), the government is sending unclear signals, with conflicting announcements on which companies it is willing to bail out and tepid additional reporting requirements that won’t rein in outsized firms.

Rather than add to the uncertainty, the administration should come out with guidelines on how it proposes to solve the “too big to fail” problem. Whether through voluntary break-up of banks it has a stake in, anti-trust measures, or by instituting a too-big-to-fail tax, the administration should lay out clear rules for banks to follow. This will allow big banks to stop chasing their tails on executive decisions — like Bank of America is doing — and get back to business.

The Need for Progressives to Make Tough Choices on Security

Posted on by The Progressive Policy Institute

Michael Cohen at Democracy Arsenal responded to my post from last week on the strategic deliberations in Afghanistan. See here for his initial post and here for my response.

While there’s much in Michael’s post I disagree with on a substantive level (like his odd suggestion that “we want al Qaeda in Afghanistan.” Really?), my main beef is on a macro level, when he states that your friends here at the PPI continue “to reflect a perspective that has driven some dangerous foreign policy thinking in the Democratic Party in recent years…. Aren’t the days of ‘Democrats need to be as militaristic as the Republicans’ behind us?”

Michael is implying that I am mindlessly supporting President Obama’s reported escalation in Afghanistan out of a fear that Democrats will look weak on matters of national security.

Nothing could be further from the truth. In no way am I “as militaristic as the Republicans,” nor am I engaging in militarism for militarism’s sake. That’s ridiculous. My position boils down to what I think is essential to keeping the country safe. (On that note, Michael will no doubt re-raise the pre-invasion debate on Iraq, which I’m happy to deal with in a separate post.)

Here’s what it comes down to: Democrats can’t shirk the responsibility of making difficult choices on national security because of political expediency. It is easy to say, “We’re sick of being in Afghanistan, we’re sick of American soldiers dying, we have been al Qaeda-free since 2001, and all the poll numbers say Americans want out, so why don’t we just pack it in?”

But based on my analysis of the existing evidence, I firmly believe that America has ongoing national security interests in Af-Pak, and what the president will announce tonight offers the best possibility (of many imperfect choices) to permanently secure the country against a patient and resilient adversary. That might not be the popular or easy choice, but it’s the necessary one.

Michael would likely argue that he sees little compelling evidence to suggest an ongoing national security interest, or that there may be one, but it can be contained with a significantly smaller military footprint.

I’d disagree, of course, and so would President Obama, who has had far superior information on the subject than either of us, and whose campaign and governance to date hardly suggest a leader intent on duping the country into more unneeded military misadventures.

Welcome to Progressive Fix!

Posted on by The Progressive Policy Institute

I am pleased to announce the launch of Progressivefix.com, the place for independent-minded progressives and progressive-minded independents.

Here’s what you will find at our address: Lively political commentary informed by rigorous analysis and evidence. Inspired wonkery – a constant stream of bold ideas for solving big public problems. And a distinctly progressive point of view grounded in a spirit of radical pragmatism.

ProgressiveFix.com is the new face of an outfit that’s been around for two decades: the Progressive Policy Institute. Younger readers may not know that PPI was the main purveyor of policy innovations to Bill Clinton’s New Democrats – break-the-mold ideas that also migrated to Britain and other democratic countries around the world under the rubric of the “third way.”

Those ideas are now woven into America’s civic fabric: national service; a social policy that expects and rewards work; a “shared responsibility” model for universal health care now embraced by President Obama; performance-based and fiscally responsible government; a “second generation” of environmental policies that move beyond command-and-control regulation; public charter schools and accountability in education; and a tough-minded progressive internationalism that harnesses America’s strength to defend liberal democracy.

Getting Real About Governing

But that was then. What now?

PPI’s mission, modernizing progressive politics, hasn’t changed. What has is the political context in which we operate. At our founding in 1989, progressives were in the political wilderness. Now we’re in power. In fact, we may even be present at the creation of a new progressive majority in America — but only if we govern effectively.

Given our ultra-partisan, polarized and paralyzed politics, that won’t be easy. Taking our cue from Woodrow Wilson, Franklin Roosevelt and Bill Clinton, progressives must make our democracy work again. That’s different from winning elections. It requires tempering passion with pragmatism, expanding, not narrowing, our appeal to the electorate, and standing up to special interests, even on our own side.

In practical terms, President Obama has to manage a heterogeneous party that includes moderates and liberals, and even a significant smattering of conservatives. Republicans may march in lockstep — and have certainly suffered for it — but Democrats can’t afford to indulge demands for ideological purity.

We don’t have much use for the self-appointed political commissars who have commandeered the blogosphere and cable TV. You can sputter all you want against, say, Sen. Ben Nelson of Nebraska, but the fact is Ben Nelson is a Democrat in a state that’s comprised of people who might have different views than the average liberal blogger. If you think a Nebraska Democrat should always vote the same way as a Vermont Democrat, then you probably don’t know much about politics and even less about building a progressive majority.

We’re struck by a paradox: The web has given millions of Americans a new way to participate directly in political discourse. That’s great. At the same time, however, the online conversation often seems hobbled by a stifling intellectual conformity. People flock to sites that validate their political preconceptions and prejudices, rather than encourage them to think for themselves.

Enriching the Progressive Debate

That’s where P-Fix comes in. This will be an intellectual free-fire zone that expands the boundaries for what is “permissible” for progressives to think and debate. We won’t hunt for heretics, nor will we allow partisan cant to trump intellectual honesty. We are determined to be a force for counter-polarization. Our arguments will be addressed not just to committed liberals, but also to progressive independents and open-minded moderates who hold the balance of U.S. politics. Without them, progressives can’t govern or build a durable majority.

But our distaste for the doctrinaire doesn’t make us mushy moderates. P-Fix believes that our country’s founding ideals are deeply radical. The history of progressive reform in America is the story of recurrent cycles of political upheaval, as reformers seek to reconcile those ideals with new economic and social realities. We urgently need a new burst of such “creedal passion,” in Samuel Huntington’s phrase, to cope with a new set of challenges to America’s democratic experiment.

Unlike some on the left, who look to European social democracy for inspiration, we favor a homegrown progressivism steeped in the classically liberal precepts of the American creed: individualism; social egalitarianism; equal opportunity, not results, within a system of competitive enterprise; a healthy skepticism toward central authority; civic self-reliance; and the conviction that America must be a beacon of liberty and democracy in the world.

In more specific policy terms, look to P-Fix for concrete ideas about how progressives can put security first and nurture liberal democracy abroad; spur entrepreneurship and economic innovation, wherein lies America’s comparative advantage in global competition; rebuild the middle class by building a modern energy and transport infrastructure for our country; restore fiscal responsibility in Washington, so that we don’t mortgage America’s future to foreign lenders; radically redesign our public schools – the great equalizer in American life — around principles of choice, autonomy, rigorous standards and customized learning; and promote ideas for political reform and transparent government to repair the public’s trust in our democracy.

Finally, P-Fix isn’t just about us. It’s an online home for a wider community of people who generally share our outlook. We will aggregate the best in pragmatic-progressive thought and research, not just from our network of contributors but from like-minded think tanks and publications as well. On P-Fix, you’ll find a wide variety of intriguing and insightful content – blog posts, policy memos, reports, book reviews, discussions, and podcasts – from an eclectic collection of established names and rising stars in the progressive community.

More than anything, P-Fix is about you. Give us your reactions, your criticisms, your own best ideas. Send us a check! But let us hear from you.