- Promote “fair trade” not “free trade”
- Require banks to focus on lending, rather than gambling or parking funds in Treasuries
- Rein in health care and college tuition costs
- Reform the tax code
Congress’ Job Approval Rating Worst in Gallup History – Americans’ assessment of Congress has hit a new low, with 13% saying they approve of the way Congress is handling its job. The 83% disapproval rating is also the worst Gallup has measured in more than 30 years of tracking congressional job performance. The prior low approval rating for Congress was 14% in July 2008 when the United States was dealing with record-high gas prices and the economy was in recession. The current results are based on a Dec. 10-12 Gallup poll, conducted as Congress is finishing work on an important lame-duck session. The session has been highlighted by the agreement on taxes forged last week by President Obama and Republicans in Congress. The tax deal preserves the 2001 and 2003 income tax rates for all Americans for two years, revises the estate tax, extends unemployment benefits for the long-term unemployed for a year, and reduces payroll taxes for American workers. It is expected to pass despite vocal opposition from some lawmakers. Americans are generally more positive than negative toward the deal, but many Democrats in Congress oppose it.
SEC Bracing To Lose Funds, Scaling Back Investigations – As lawmakers in Washington attempt to slash the budget, Wall Street regulation could be on the chopping block. The Securities and Exchange commission has already scaled back its investigations of potential wrongdoing, anticipating that it may lose a portion of its funding when Republicans take over the House of Representatives next year, the Wall Street Journal reports. During this critical time for the SEC, as it helps write the rules for a wave of new financial regulations, and as it tries to determine whether Wall Street firms committed wrongdoing of potentially epic proportions, the agency is paring down. To achieve its growing list of goals, the SEC had planned to increase its staff by 11 percent next year, counting on a budget increase of 12 percent, proposed by President Obama, the WSJ notes. It’s unclear at this point whether that increase will be approved. The agency, worried that the newly Republican House will push for austerity, has already cut back.
Why Are Bankers So Rich? – Tyler Cowen has a big piece about income inequality in The American Interest that’s well worth reading. However, it’s not really about the growth of inequality. It’s about Wall Street. In particular, it’s about this question: why do financial professionals make so damn much money? The answer, of course, is that they work in an industry that’s become ungodly profitable. But how? Tyler attributes it to the practice of "going short on volatility." That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen). But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. So how can you make money doing this? Answer: find someone who doesn’t know much
Cowen’s Counsel of Despair – Tyler Cowen’s essay in the latest American Interest is nominally about income inequality, but really it’s about the pernicious role that big finance plays in modern political economy. Cowen isn’t worried about inequality per se, but he is worried about the forces that give rise to it, and specifically the boom-bust cycle of Wall Street investment — and more specifically still, the way the “bust” part of the cycle tends to make taxpayers suffer more than the Wall Street investors themselves, thus incentivizing further recklessness and still worse crack-ups down the road: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets … The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices.The problem, he argues, is that it’s hard to see how anything can be done about this:There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections
Doom and the Big Banks – Tyler Cowen has an interesting essay that’s ostensibly about income inequality but in practice presents a very gloomy portrait of modern finance as both utterly dysfunctional and also irredeemably so. Ross Douthat responds by invoking a conservative version of the “break up the big banks” agenda whereby bank smashing is paired with balancing the budget. I think this actually misses the full force of Cowen’s saga of doom, which doesn’t say that we won’t restrain the financial sector because it’s too politically powerful. It says we won’t restrain the financial sector because we actually can’t. For one starters, I think everyone should read Tim Fernholz on the myth of “too big to fail” where he persuasively argues that the basic logic of bailouts has very little to do with institution size. But I would also note that even though Cowen ends up dwelling on bailouts a bit in his piece, fundamentally the problem he highlights exists independently of bailout issues
Tyler Cowen on Inequality and the Financial Sector.– Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments. 1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States? It’s one thing if the financial sector drinks our milkshake a bit; it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident. 2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk. As Kevin Drum mentions someone is on the other side of that bet. And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens? One thing to call it is “insurance.”