Piketty: U.S. sold its middle class birthright for a mess of Reaganite pottage

The main thesis of Thomas Piketty's Capital in the Twenty-First Century is that the accumulation of wealth in the hands of a few is subject to a kind of gravitational pull. That's what the long-term data tells Piketty. But there's a second core thesis: that gravitational pull can be countered by social policy. Markets, he asserts, are a social construct: prices and wages do not magically align themselves with intrinsic worth.

In practice, the invisible hand does not exist, any more than “pure and perfect” competition does, and the market is always embodied in specific institutions such as corporate hierarchies and compensation committees (p. 332).

In Chapter 8, Piketty traces "the explosion of inequality in the U.S. after 1980." In Chapter 9, he homes in on the explosion in compensation of top executives in the U.S. -- mirrored to a somewhat lesser extent, throughout the Anglosphere, and to a lesser but still pronounced degree, through Continental Europe, Japan, and emerging economies:

The central fact is that in all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990– 2010, while the average person’s purchasing power stagnated (p. 320).

Even Simon Johnson is surprised, if not satisfied, by the FinReg bill

The FinReg bill is good news for the many who have argued that the financial sector is bloated, absorbing too high a share of the nation's profits, attracting a disproportionate share of talent and wielding dangerous influence over public policy. The Wall Street Journal's Randall Smith:

The Senate version of financial regulation hits Wall Street harder than expected, with some analysts estimating it could cut the profits of major financial institutions by roughly 20%...

Goldman analysts recently tried to quantify the impact of the changes likeliest to survive, including already adopted caps on fees for checking accounts and credit cards, as well as restrictions in the Senate bill on proprietary trading with the banks' own money and the House curbs on derivatives. Those elements alone could shave 17% off bank earnings, Goldman said. Less-likely changes could boost the hit to 23%.

Glenn Schorr, an analyst at UBS AG who follows financial stocks, said Wall Street could recoup some of the lost profit through higher volumes or by keeping pay below historical levels. A derivatives-trading spinoff could free up capital for redeployment elsewhere.

The degree to which the legislation curbs current banking practices has stimulated a kind of wonder, even in that most trenchant of regulatory Cassandras, Simon Johnson.

The Senate gets into the swing of bankwhacking

Some months ago, as health care reform languished and the Senate ground nearly to a halt, one read frequent laments that the moment for sweeping financial reform was being wasted -- that by the time the Senate got around to full consideration, memories would have faded, rage against the banks cooled, and lobbyists' hooks sunk ever deeper. 

Reasonable worries, perhaps. But those who despaired of strong reform did not reckon on HCR passage changing the dynamic in Congress; or on the pressure that would be generated by bringing the bill to the floor just as election season heated up; or on the fresh spur to rage afforded by an SEC suit (and criminal investigation) against the nation's most lucrative financial institution.

Just nine days ago, Jonathan Chait was marvelling at the strength of the Dodd ill as it came to the floor. Now, the WSJ reports, a tide of amendments is bidding to restrict financial institutions' activity far more radically:

Sens. Ted Kaufman (D., Del.) and Sherrod Brown (D., Ohio) plan an amendment that would prohibit any bank from ever holding more than 10% of the country's deposits and put strict caps on the debt banks issue.

Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) have worked on an amendment that would force commercial banks to separate from investment banks—revisiting the Glass-Steagall Act of the 1930s.

Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) plan a provision to forbid banks with federally insured deposits from certain trading activities.

Frank Rich wrote his column too early this week

Credit Frank Rich with warning Obama early and often to get "in front of the anger roiling a country where high unemployment remains unchecked and spiraling foreclosures are demolishing the bedrock American dream of home ownership," as he puts it in today's column. He's been sounding this note since last spring. The event has proved him right. He may be our most astute reader of media memes, popular mood, and political posturing.

Today he's at it again. But he seems to have written his column before Obama proposed his "Volcker rule" banning proprietary trading and internal hedge funds - and then gone back and just inserted a brief allusion to it after the event, without at least partially recasting the column as the Thursday event required.


Here's Rich's brief acknowledgement of the turn to Volcker:

Obama needs more independent economists like Paul Volcker, who was hastily retrieved from exile last week after the Massachusetts massacre prompted the White House to tardily embrace his strictures on big banks.

Bad call of the month

WSJ, 1/15/2010

Volcker Voices his Views in a Vacum

Paul Volcker is talking. But is anyone listening? [snip]

The two speeches highlighted Mr. Volcker's predicament. Having been viewed as a crucial supporter of Mr. Obama during his presidential run, he appears to have diminishing influence in the White House. And while revered by Wall Street critics on the left and right, his most deeply held views are having limited influence among policy makers.

"It's clear that the ideas Paul Volcker is pushing now are not shared by the administration," said Douglas Elliott, an economic studies fellow at the Brookings Institution, a public-policy organization. Given the difficulty of hiving off bank-lending units from their trading operations, adds Mr. Elliott, "I agree with the administration on that one."

Obama, 1/21:

... I’m proposing a simple and common- sense reform, which we’re calling the Volcker rule, after this tall guy behind me. Banks will no longer be allowed to own, invest or sponsor hedge funds, private-equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.

Actually, the Journal had a story  a few weeks ago which, while noting that Volcker's main ideas had not become Administration policy, also reported that Volcker was methodically, patiently building support for them. But WSJ online l has so eviscerated its search engine in the Murdoch era (and ditto for Factiva as offered through the Journal subscription) that I can't find it.

A tailor's yard for cutting megabanks to size

Ever wonder how a regulatory regime with a mandate to break up banks that are "too big to fail" would operate?  Every article I recall reading on the subject treats the question structurally -- that is, by addressing what activities a single financial entity should not be allowed to engage in simultaneously. For example, Paul Volcker recently recommended forbidding deposit-taking banks from engaging in proprietary trading. John Gapper has proposed.separating the functions of retail banks, investment banks and asset managers.

But leaving aside function-based restrictions, how would a regulator determine how big is too big -- literally, from the standpoint of creating systemic risk?  Peter Boone and Simon Johnson, posting on The Baseline Scenario, provide a legislative update, an analogy, a guideline, and a recommendation:

The Kanjorski amendment recognizes that the systemic and societal danger posed by banks can be hard to recognize, and it proposes a number of potential objective criteria that could be used by the Financial Services Oversight Council (to be created by legislation in progress) to determine when banks need to be broken up, including the “scope, scale, exposure, leverage, interconnectedness of financial activities, as well as size of the financial company.”

The Kanjorski amendment does not impose a hard size cap on banks, but lawmakers in the House are discussing amendments that would do so.

There is, of course, a strong precedent for capping the size of an individual bank: The United States already has a long-standing rule that no bank can have more than 10 percent of total national retail deposits.

House on fire: Hillary opens a new front

After weeks of 'kitchen sink' attacks (and some defense) on matters of identity and character, Hillary Clinton made a strong bid today to shift the nomination battle to ground that plays to her strengths.

She delivered an economics speech that focuses almost entirely on the housing crisis -- from the homeowners' point of view. The speech isn't elegant, and may leave Hillary vulnerable on several policy points. But it may nonetheless give increased traction to her claims that she's ready with solutions to our most pressing problems.

The speech's rhetorical frame: Hillary casts the prospect of mass foreclosure as the the crisis threatening the middle class today. The Bush Administration is fiddling while home is burning, but Hillary will act as vigorously to protect Main Street as Bush has to protect Wall Street:

Last week when it became clear Wall Street was on the brink of a financial melt down, the Fed and the administration sprang into action. The Fed extended a $30 billion lifeline to prevent Bear Stearns from imploding and took unprecedented action to provide tens of billions of dollars in credit for other struggling investment banks as well. Homeowners, on the other hand, have received next to no assistance. Well, let's be clear. When families are losing their homes, that's also a financial crisis. When people’s greatest source of wealth is losing its worth, as college costs and health care costs and food and gas prices shoot up, that’s a financial crisis too. When "for sale" signs line streets across our country, when cities and towns are struggling with the costs of foreclosed properties, that is also a financial crisis.

The policy thrust is to move on multiple fronts to forestall foreclosures, guarantee loans, and create incentives and conditions under which lenders will renegotiate loans to keep people in their houses. In effect, bail out everyone: homeowners, with guaranteed renegotiated loans and/or with interest freezes; states, with money to buy foreclosed properties; mortgage companies, with protection against lawsuits by securities holders if they renegotiate loans. And of course, create another commission: an Emergency Working Group on Foreclosures, calling on Greenspan, Rubin, Volcker and presumably other ghosts of Christmas Past.

The political thrust: I've been out early and often on this issue. I've called for urgent action for a year, and I've got a comprehensive plan. I'm the one to get it done:

Now, a year ago in March 2007 I called for immediate action to address abuses in the subprime market, and I laid out detailed concrete proposals for how to do so. I warned this administration that the problems in subprime mortgages would soon spill over into regular mortgages.....I called for immediate action and laid out concrete proposals to prevent foreclosures and help states hard hit by this crisis.I also called for tighter regulation of the housing market....I also called for greater regulation of mortgage lenders...I’ve also proposed that we amend the bankruptcy code to give judges the discretion to write down the value of struggling families' homes.

Obama has not been slow on this issue, or short on proposals for easing the pressure on homeowners. But Hillary is upping the ante, putting the crisis and a web of proposed legislation to cope with it front and center. This marks a shift in the center of gravity on bread-and-butter Democratic economic issues. Obama will have to engage her in a sustained way if she keeps this up.

Mind you, there's plenty to engage. Hillary's plan can be hit from more than one direction. First, a blanket rate freeze on adjustable mortgages is a radical retroactive price control that would give a free lunch to lots of people who went into ARMS with eyes open. Second, another blue-ribbon commission will sound to some like another can kicked down the road. And to put forward Greenspan as Wise Man No. 1 is an eye-popper -- there's something like consensus, even among Greenspan admirers, that he bears considerable responsibility for blowing up the housing bubble -- by leaving interest rates too low too long, and by refusing to regulate mortgage lenders more vigorously when warned of excesses. To pair him with Rubin recalls what many Democrats regard as the Clinton Administration's excessive friendliness to business and acquiescence to Republican-driven bank deregulation.

Hillary may get caught between two stools -- advocating almost socialist price control on mortgages on one hand, and showing deference to yesterday's deregulators on the other. But Obama will have to pivot.

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