Democrats are Wrong, but Republicans are Wronger, and the Senate's Wrongest

There's nothing more fun in politics than pointing out the other side's hypocrisies. Although this does little to further intellectual inquiry, it makes for great political theater. In comparing healthcare and market reform, I will attempt to provide the facade of doing both.
I'm of the personal opinion that Chris Dodd's reform package is about the best you could expect of the Senate. While not perfect, it has some important components. The one component Republicans contend it lacks is eliminating the concept of 'Too Big to Fail.' What's interesting is that few (if any) Republicans are pushing for size restrictions. Rather, they clamor for a provision that says we will not bail out any financial institutions in the future - thus eliminating the moral hazard created by our rush to mollify AGI's asshattery as the sky's falling down.
This pie in the sky fancy is about as disingenuous as the healthcare budget numbers Democrats were peddling earlier this year. A quick recap of what's bothersome: the current tax exemption for health insurance means that, as a general rule, we have an incentive to overconsume health insurance. This is why you end up with the so-called 'gold-plated' health insurance policies. The Senate was too scared to tackle this issue today, and instead wrote in the bill that they would be taxed starting in the year 2018. This tax was then used to calculate the long-term budget impacts of the healthcare bill.
I call this disingenuous because it doesn't take a policy degree to guess the likely future. Come 2017, Congress will come under pressure to amend the legislation and prevent new taxes, it will, and the financial solvency touted by Obama will be thrown out the window.
The same applies with McConnell going to the Senate floor and screaming about the 'institutionalization of bailouts.' It really doesn't matter how much power you give regulators - when shit hits the fan, they'll be on Capitol Hill demanding the power to prevent Citigroup from going under, and (assuming the President has a lick of sense) it will be done. When faced with the prospect of disaster, policy will be amended (regardless of long-term consequences).
I may be giving McConnell too much credit here in pretending he's merely disingenuous - he's lying to advance his party's standing while hurting America. When you look at what happens under the Dodd bill, no institution is saved. The government may take it over and chop it up into little pieces, but it is an entirely different company in which the stockholders lose their shirts. And that's really the crux of the matter - when you understand you'll lose your investment if a company goes under, you'll either search for a safer investment or demand a greater rate of return. Which is what this bill does. Which makes McConnell wrong. Again. Upon review, nothing too earth-shattering in this paragraph.
I still contend derivatives trading contributes absolutely nothing to the economy.

Bling Bling

I dislike when people wade into subjects they almost passably understand and make definitive comment (think Peace Corps volunteers who know everything about fixing developing nations because they spent two years teaching English somewhere or TFA volunteers who could fix education if just given the reins). I'm also gonna do it right now; prepare to learn why hedging in the stock market is bull, and doesn't help America.

We open the prosecution by calling on Adam Smith. In his famous work The Wealth of Nations, he identifies land, labor, and capital as the three factors of production and the major contributors to a nation's wealth. The stock market hinges on liquidity, and isn't involved in rapid land transactions. It also doesn't deal labor (unconstitutional). Therefore, if we are to assume the body contributes to our national economy, it must be through an infusion of capital.

I buy this to an extent. When a corporation goes public, it allows investors to purchase a portion. The arrangement provides an infusion of cash, allows for the purchase of capital goods and becomes an economic driver. (A simplistic take, but generally correct.) What's problematic is when we treat subprime deals and subsequent betting with equal deference.

Two factors should determine how a loan is calculated: level of risk and transaction costs (operating costs of the lender captured here). Now in our system you can lower your level of risk by taking out insurance on the loan, effectively betting against it (when you're dishonest about it, Goldman Sachs can get in trouble). This decreases the cost of the loan, undervaluing the inherent level of risk. I don't think this is good for America.

An argument exists for supporting this hedging. Economic undertakings are risky, and demand an infusion of capital that isn't guaranteed to pay off. A business start-up that may never have gotten off the ground can be given the chance to flourish because, at the margin, hedging insurance makes the loan just cost-effective enough to work. We all profit as the next Berkshire Hathaway is born.

This fantasy of some economic boon facilitated by lending on the margins is fantasy. Loan fees should reflect the full risk of investment - if the risk of default is too great to grant without insurance, it's probably not a good loan to be making. There's an argument that when you bundle multiple loans and hedges, you can come out ahead (more loans are repaid than default) while capital is still generated. I say even more capital and profits are generated by encouraging safer loans.

The solution must consider who you want to shoulder the burden of the default. AIG obviously failed when everyone started going under and collecting their insurance payments. A bank forced to keep enough in reserves won't have this problem: you can eat the bankruptcy with your reserves! Of course, AIG could've also been forced to keep enough reserves to cover payouts, but not even China has that much money.

I actually wouldn't oppose the idea of hedging with insurance in moderation, much like I support acts of vigilantism on a limited basis. Unfortunately, we both know it's unrealistic to believe moderation would ever be observed if allowed. Limiting bank size is a smart, essential policy. Limiting market insurance of subprime lenders is even more important. At the minimum, it needs to get spread around more. A limit on market share or some other mechanism would be excellent. Would economies of scale make this unreasonable because smaller insurance companies can't shoulder bets on defaults? All the better. Our unemployment rate is still above 10%, and I graduate in less than a week without a job. If a trade-off must occur, you can bet I think growth should've been tempered in favor of sustainability.

You're Invited!

Dear President Barack Obama,

First, I would like to congratulate you on choosing the University of Michigan to provide the commencement address to the class of 2010. (You may think it odd for me to be congratulating you on this decision, but I believe all smart choices should be commended.) As a graduating Master of Public Policy Student at the Ford School of Public Policy, you should know that I'm totally stoked about your arrival - even if we do share our differences on both policy approaches and methods of governance.

As you are likely well aware, John F. Kennedy once used the stairs of the Michigan Student Union to outline his vision of the Peace Corps to the world. We boast a proud, progressive history here that captures the American Dream while ushering in bold new ideas to make this nation even greater. Commencement addresses can be an excellent platform to reveal grand visions that produce laudable fruition, e.g., the Marshall Plan, and high expectations are set for the plan you will provide to over 100,000 onlookers. *Spoiler Alert*: Does our potential to become America's Clean Energy Hub have a role in the inspiration you hope to instill in us?

Additionally, I would like to take this time to formerly extend an invitation to celebrate the graduation of the Class of 2010 at Das Pink Haus. The residence of 902 Brown is a mere two blocks from the stadium, greatly reducing your travel time. During our time together you will find the bathrooms clean, the furniture comfortable, and the space spacious. It is occupied by masters students at the Ford School of Public Policy, and includes many a loyal supporter. Drinks we be on the house, for your money will be no good here (unless, of course, you don't mind printing a little more to help out some guys graduating with pesky student loans). In return for your visit, we promise impartial feedback on the new plan you will introduce on May 1. Economic, statistical, cultural, and other analysis is assured from some of the best future minds in the business. A personal concentration in the nexus between the environment and energy systems enhances my personal excitement regarding your proposal for a new generation of sustainable energy systems (sorry if I'm dictating content too much here).

We'd like to keep the event low-key, so try to invite too many friends over; Carol Browner and a couple others are free to stop by, but they're gonna have to chip in $5 for a plastic cup. I know you're an extremely busy man responsible for fixing a legacy of problems caused by past and present forces, so you needn't respond immediately to this invite. However, an RSVP (including regrets) by April would be much appreciated so we can determine what to do with roommate Jason Arredondo (he's an entrenched member of the Chicago political machine, and would be no good to have around you). If you have any other questions, or need me to text presidential convoy instructions, please don't hesitate to contact me. My number is (785) 580-XXXX. It's easiest to reach me in the morning, but I can take a call in class as long as I don't miss too much lecture. Good luck putting GHG emissions back on the table, and I hope to hear from you soon.

Sincerely,

Dave Thoman

P.S. Tell Bob Gates he also drinks for free.

Headlines

Swine Flu Hits America: Combination of Funny Name and Almost 10 Unconfirmed Cases Inspires Media's Biggest Boner Since Lewinsky-Gate.

Obama Releases Torture Memos. America is Shocked That Something Bush Used was Used.

 Kim Jong Il Announces Book Deal With Penguin Press; Holding Your Breath: 101 Ways to Get Attention When Crying and Pounding the Floor Become Passe.

 Arlen Specter Plays Turncoat. Republicans Split Into Two Camps: Those Who Claimed Specter Eats Babies for Breakfast After He Voted for the Stimulus, Those Who Claimed Specter Eats Babies for Breakfast After He Voted for the Stimulus and Can't Believe He Took it Personally.

 Limbaugh Excited Over Potential for a 'Real Republican' Senator From Pennsylvania, Pops (Medically-Induced) Boner Bigger Than the Drive-Bys'.

 Britain Announces Pull-Out in Iraq. The Small Neighborhood Its Troops Patrolled Will Miss Them.

Chrysler Files for Raisins.

 Dave Gets First 'A' in Grad School.

The Midnight Run of Dave Thoman

(To celebrate 24 hours without a cast, a commemoration) Gather 'round dear children, for quite the harrowing tale; 'tis concerning one Dave Thoman, a hero tough as nails. Studying for Public Finance, he took a study break; whilst seeking finals relief, he suffered another break. Running the trails of the Arb, one late Wednesday night; he first took a spill, then experienced a great fright. Jogging downhill, covered in snow; a nasty patch of ice he went down - oh no! Now sliding downhill, riding an ankle turned round wrong; he knew he was in trouble, in a situation he didn't belong. Lying at the base, his ankle likely sprained; fears of spending the night there began filling his brain. He tried hopping uphill on his left foot; but the slope was so slick, he simply couldn't. His first thought of 'oh shit,' manifested to 'oh fuck;' "It's below freezing outside, am I out of luck?" Crawling out now, on hands and knee; 'twas a perilous situation, we all can agree. Finally reaching entrance, his hands painfully frozen; he waves down a pedestrian, to call a cab and save'em. Refusing a ride to ER, he hoped 'twas just a sprain; but couldn't sleep all night long, due to the intense pain. A morning visit to UHS revealed a minor break, and this was when he realized the extent of his mistake. But he bravely battled onward, a Public Finance final that afternoon; not having slept and high on codeine, whose combined effects made him swoon. Dave Is Awesome