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Neel Kashkari and the Minneapolis Plan to End Too Big to Fail

Neel Kashkari has been President of the Federal Reserve Bank of Minneapolis since January 1, 2016. Prior to that, he was brought over from Goldman Sachs to be Assistant Secretary of the Treasury for Stability from October 2008 to May 2009. His job was to hand out money to the banks as bailout.

I believe the first time first time he was mentioned at this blog was right after he was appointed to give away our money:

The bail-out will succeed only, repeat, only in the sense that the US succeeded in Iraq in 2003 and 2004 when Simone Ledeen and the rest of the Heritage interns were running around the country handing out trash bags full of money and giving Halliburton money for services it would never begin to render. There will be less yabbering of silly catchphrases like “but what about all the schools that were painted?” this time around, though, because the schools will be exploding when GW is no longer in office. To be extremely precise, this is what I think the success will look like: shady, undeserving characters will be enriched, young versions of the idiots who got us into the mess will launch successful careers (can you say “Kashkari”?), and the promised benefits to the American public, the schmucks footing the bill, will never materialize.

From memory, not only is that the first time I mentioned Mr. Kashkari, it is also the most complementary I have been toward him yet. But now, Mr. Kashkari is back with a new scheme to reduce the likelihood of a meltdown.

Kashkari provides this slide as a summary of his plan:

Figure 1 - The Minneapolis Plan

Figure 1  (click on the slide to embiggen)

Accompanying the slide is this platitude which also functions as a fly in the ointment:

We cannot make the risk zero, and safety isn’t free. Regulations can make the financial system safer, but they come with costs of potentially slower economic growth. Ultimately, the public has to decide how much safety they want in order to protect society from future financial crises and what price they are willing to pay for that safety.

Because Kashkari is a political creature who won’t speak clearly, to get an understanding of what the vegetables he wants us to eat taste like we go to the full plan:

We measure the cost of higher capital requirements in terms of lost GDP due to tighter lending conditions. This calculation requires a number of steps. We trace the impact of higher capital requirements to lower bank return on equity (ROE) and then to higher loan rates. Higher loan rates slow economic growth by restricting borrowing. As noted above, this approach closely follows the BIS.

And the banks agree:

The Financial Services Forum that represents U.S. financial services companies cautioned that implementing the recommendations would stymie the economy. “For those looking to accelerate economic growth and job creation, tripling bank capital levels — already double from pre-crisis levels — will make it much harder to meet those goals,” the forum’s spokeswoman, Laena Fallon, said by e-mail.

So, to summarize the negative side of this proposal: more stringent regulatory requirements –> higher interest rates –> less borrowing –> slower growth in GDP.

I recognize that this is gospel in the banking and regulatory community, and its been many moons since I thought of myself as an economist, but this seems pretty daft to me. Or rather, it seems like regulatory capture speaking. Consider for a moment this seemingly unrelated graph:

Figure 2 - The Fed Funds Rate and the Bank Prime Rate

Figure 2.

Note that the bank prime rate (orange line on the graph) is almost perfectly correlated with the fed funds rate (blue line on the graph) which is set by the Federal Reserve Bank. The difference between the two lines is shown in the gray bars. Do you see the large, sustained increase in that difference between the pre-Crisis period and the present that is due to the large increase in capital requirements we’ve already seen? No? Well, that’s because it didn’t happen. This notion that increased capital requirements raises the interest rates that banks charge their customers makes perfect sense in theory, but it stubbornly refuses to actually be true in the real world.

However, let’s assume this time things will be different. Let’s assume that unlike what we’ve seen so far, this time increased capital requirements do lead to a big sustained increase in the bank prime rate. Say for the sake of this post that the requirements effectively doubles the difference between the fed funds rate and the bank prime rate, permanently. What changes?

Well, if the Fed decided, at that point, that it wanted to raise or lower the interest rates charged by banks, it would do what it currently does in the same situation, namely change the federal funds rate. If anything changes at all, maybe, just maybe it will do so at the lower bound. And if there were some evidence that the Fed knows what its doing when the Fed Funds rate is near the lower bound, I admit that would be a concern.

So there’s no downside to this plan, at least as far as I can see.  Of course, the plan is just the tame one we’ve already enacted, but with a bit more in the way of a bite and, courtesy of Mr. Kashkari, a more extravagant soundtrack.  The Federal Reserve Bank of Minneapolis has a good sized research team. Kashkari could have asked any of them of to explain how the Fed Funds rate works, or about the relationship between the Fed Funds rate and the rates charged by banks. But failing upwards requires ignorance.  The higher up you are, the more ignorance is required. It is clear Mr. Kashkari has further to rise.

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T. Rex: Engineering Fantasies

Global warming? “It’s an engineering problem, and it has engineering solutions.”

According to Rex Tillerson, Donald Trump’s choice for Secretary of State, adapting to climate change is an engineering problem that has an engineering solution. A soundbite from a Council on Foreign Relations presentation by Tillerson has been widely reported. But it is worthwhile to consider his full answer and its context.

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Election Integrity

From the beginning of this election cycle President-Elect Trump claimed the system is rigged, millions of illegal voters voted, the dead have voted, etc. That is until he won and then it was I also won the popular vote as millions voted illegally for Clinton. Historically, voter fraud has hardly been an issue and it has been measured in the tens of thousands of 1%. What is claimed to be voter fraud is usually voting irregularities or issues with the procedures and process of voting. Even though there is no evidence of wide spread voter fraud, it has not stopped states from putting in place new laws to supposedly safe guard the vote and at the same time making it more difficult to vote. Amongst those states who have installed new requirements to vote or register are “9 of the 15 previously covered in whole or in part by Section 5 of the Voting Rights Act because of a state’s history of preventing minorities from voting.

The Electoral Integrity Project is an independent academic project at Harvard University and the University of Sydney. It is directed by Harvard University Professor Pippa Norris and governed by an International Advisory Board. Using 726 political scientists based in local universities in each state, the EIP evaluated the process and procedures of voting in each state using 49 core indicators which were then grouped into 11 ranking categories. The highest attainable ranking in any one category is 100 points. The project reviews the entire electoral cycle from the pre-election stage, the campaign itself, the actual polling day, and the aftermath. The results of the 2016 election and the corresponding state rankings are in Figure 1 (click on the picture for a larger version).

invisible hand

In speaking for the SCOTUS majority vote of 5, Chief Justice John Roberts repealed Section 5 of the Voting Rights Act claiming things had changed dramatically since the 1960s. Congress could no longer require states and counties to get the approval of the Department of Justice to change plans or put in place requirements for minorities to vote. The thought was the additional approval and supervision by the DOJ was no longer needed as these jurisdictions could be trusted to treat minorities fairly going forward.

State wide voting restrictions directed at minorities were viewed as a problem of the past when discrimination was blatant. With the passing of decades it was felt these States had outgrown past biases with minorities and could be allowed to govern voting rules and regulation on their own by SCOTUS. Evidence of such was not so positive and recent reviews show the states in the South had the weakest electoral performance overall in 2016. The newly passed North Carolina GOP State House laws to restrict the power of Democrat Governor Roy Cooper before he takes office suggest such thoughts of fairness were optimistic. The Rust Belt ‘Blue Wall’ states of Ohio, Michigan, Pennsylvania, and Wisconsin were also problematic. By contrast, the quality of elections in the Pacific West and New England were viewed positively.

Figure 2 shows the ranking of each state amongst the other states for “perceptions of Electoral Integrity” from the highest Election Integrity at 1 (Vermont) to the lowest Election Integrity (Arizona) at 51 (Click on the picture for a larger version).

invisible hand

Vote counting, the Voting Process, and the role of Electoral Authorities were shown to be less problematic than Congressional Voting District Boundary Delineation, State Electoral laws, Campaign Media, and Political Money in the Electoral process. North Carolina comes in at #1 followed by Wisconsin, Ohio, Pennsylvania, Michigan, Texas, and South Carolina for Congressional Voting District Delineation. The aggregate for Congressional Voting District Delineation is 33 and is the lowest of the 11 categories with Electoral Laws (Voting IDs, Early Voting, Provisional Ballots, etc) being next.

It is no secret, delineation of state Congressional Districts has led to additional Congressional Representatives of a political party being sent to Congress. As an example, Michigan has had a greater than 50% Democrat majority vote since 1992 and its Congressional delegation to the House has been less than 50% Democrats. This is the result of Congressional redistricting after every Census by a Republican majority in the state. As it now stands, changes to Congressional Districts will not happen until 2022 and only if the Democrats can take back state legislatures or if courts overrule the Congressional District delineation in place now or created in 2022 after the next Census. There is a far greater issue with Republican drawn districts than Democrat.

Other issues which need sunlight and additional discussion are Campaign Media, the lack of substantive Policy Discussion during the campaign, the False Equivalency Standards of Journalism, and the overwhelmingly Negative Tone of news coverage.

If one were to compare states by political control using this data, Democrat – Controlled states showed greater “Electoral Integrity than Republican – controlled states. Figure 3 shows in the aggregate assessments of each of the eleven stages during the electoral cycle compared with which party controlled the State House. With the exception of “Reporting Results” across all the remaining stages, “the gap was substantial and statistically significant on the issues of gerrymandered district boundaries, voter registration, electoral laws, and the performance of electoral officials.” Democrat controlled states out performed Republican controlled states in Electoral Integrity.

invisible hand

Taking into consideration the substantial gap and statistically significance issues of gerrymandered congressional district boundaries, voter registration, electoral laws, and the performance of electoral officials” (Figure 3), there was a clear tendency for Trump to also win more states (Figure 4) exhibiting these weaknesses. The evidence is not so clear as to state Trump won these states solely due to these issues; however, the correlation and direction pointed is clear. Perhaps as Trump claimed the election was rigged; but, it was not rigged in the manner he claimed.

There is little or no evidence there was voter fraud or votes cast illegally in 2016 as President – Elect Trump has claimed before, during, and after the election. However taking a broader vision of Election Integrity and with a review of this study, “one could arrive at the conclusion US elections suffer from several systematic and persistent problems. Donald Trump and the Republican party appear to have done well in states with the most problems.”

invisible hand

It is not only the 2016 election which has had its issues. As EIP and Professor Norris have shown in other studies, there have been issues with the 2012 and 2014 elections as well. When compared to other countries, the United States has scored the worst in Election Integrity amongst similar Western Countries given the culture and history the US represents. “The US also ranks 52nd out of all 153 countries worldwide in a cross-national Electoral Integrity survey. The comparison is even worse when the issue of Congressional District boundaries ate considered as the U.S. score is the second lowest in the world.


Why it’s Not About Election Fraud, Its Much Worse. Electoral Integrity Project; Pippa Norris, Holly Ann Garnett, Max Grömping

Study: Clinton-Trump Coverage was a Feast of False Equivalency, Erik Wemple

“North Carolina Is No Longer Classified as a Democracy”, Andrew Reynolds

The Truth About Voter Fraud”, Justin Levitt

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Should Black Voters Favor Democrats?

One of the memes that was circulated in some quarters during the last election is that Black people are excessively loyal to the Democrats. In this post I will examine whether that is true using real median incomes.

The figure below shows the Black Median Income as a Percentage of the Total (i.e., all ethnicities) Median Income, with Democratic Presidential administrations shaded in gray:

Black Median Income as a Pct of Total Median Income 20161224a

Black median income was 48.5% of total median income in 1948, and increased to 78.9% of total median income in 2015. In any given year, however, the ratio of Black median income tended to increase by 0.9% when a Democrat was President, and by only 0.2% when a Republican was President. But… the big increase under Democrat is due largely to two periods: the JFK/LBJ administrations and the Clinton administration. In fact, the ratio barely budged in the Truman years (for which data is available) and the Carter administration, and actually declined under Obama so far.

But of course, the ratio of median income for Black people to the total median income can increase while still making everyone worse off if the entire pie is decreasing. So here’s what real median income (total, and for Black people only) looks like since 1948:

Real Median Income 20161224a

Once again, the performance is better under Democrats than under Republicans. But if we drill down, once more it appears the difference is due entirely to the JFK/LBJ and Clinton years. In fact, during the Truman, Carter and Obama presidencies, the total real median income increase was about $130 a year (beating the Republican average), but the increase in real median income for Black people was only $8 a year, which was less than the Republican average.

So we can conclude… Black people have gotten a bigger share of a growing pie under Democrats than under Republicans, but this is only true because of the extraordinary performance of the JFK/LBJ and Clinton administrations. On the other hand, hapless and ineffective Presidents like Carter and Obama have not, on average, posted positive income outcomes for the Black community.

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NPR discusses Steve Bannon and his impact on Breitbart News.

I have written about left of center or centrist organizations writing in a manner which no longer reflects a liberal, progressive, or centrist view. NPR just went out on a limb with its recent conversation with Breitbart Senior Editor at Large Joel Pollak about newly elected Donald Trump’s selection of Steve Bannon as his administration’s Chief Strategist. It is not unusual to have this type of interview on Morning Edition; but, it did take a different direction then what I thought might happen.

NPR’s Steve Inskeep starts off;

Let’s hear a defense of Steve Bannon.”

Breitbart Senior Editor Joel Pollack glowingly describes Steve Bannon as “a national hero” adding;

“how great it will be to have someone in the White House who can remain so calm under pressure.”

Other evidence points to another Steve Bannon, a Bannon who has been accused of “domestic abuse, sexual harassment, and accused of being a verbally abusive bully who is prone to tirades” by former staffers.

When Steve Inskeep asks about Bannon’s efforts to turn “Breitbart into the Alt-Right program of choice,” Pollak distances the site from the Alt-Right diet of xenophobia, racism, sexism and anti-Semitism upon which Breitbart has been nurtured. He sidesteps the issue of various articles portrayed in Breitbart as being amongst thousands and do not necessarily tie Breitbart as a unifying force of the Alt-Right movement. Pollack also dismisses Steve Bannon’s point late last August of “Breitbart being the platform of the Alt-Right as simple journalism.” In no way does Pollack give credence to an association with the Alt-Right to Breitbart and Steve Bannon. It is here where Inskeep begins to miss the opportunity to strike back and challenge Pollack on these issues and Pollack’s answers.

What is different about the Breibart’s Editor Joel Pollack interview by NPR’s Steve Inskeep is not so much the topic as it is the seemingly lack of forceful challenges to Pollack’s statements. When there is a challenge, they are feeble. For example:

A Breitbart commentary about the Confederate flag “Hoist it High and Proud” is published two weeks after the Charleston massacre of nine black churchgoers. The story line encourages Alt-Right and other readers to proudly wave the Confederate flag as a symbol of the South the same what Dylann Roof is seen doing in countless photos. Here is where Inskeep could step forward and at least challenge the timing. Instead, it passes. Included in the Breitbart article is this passage:

“While your supporters are trashing the monuments and reputations of the forefathers of so many Americans; perhaps, you might want to remind us again which state of the Union, north or south, Barack’s ancestors resided in during the traumatic years 1861-1865? Or did Kenya not have a dog in that fight? The Confederacy was not a callous conspiracy to enforce slavery, but a patriotic and idealistic cause for which 490,000 men were killed, wounded or taken captive.”

Breitbart’s justification for the Confederate flag wave is focused on history and heritage rather than the flag of slaveholders, secessionists, and identificatists the flag has come to represent then and today in many cases. Huh? Where is Pollack taking us and why isn’t NPR’s Inskeep’s on top of this pulling it back to his agenda? Instead we get a feeble but factual rebuttal:

“Alexander Stevens, the vice president of the Confederacy, declared the Confederate cause was slavery.”

Answering the slavery part was a part of that battle, there is still the part of Barack Obama’s inclusion. Obama never had a dog in this fight that we know of today; however, where does President Obama’s heritage have a place in a discussion about Confederate flag waving by a mass murderer and a recommendation to others to take up a similar action of Confederate flag waving? Oh wait a minute, it doesn’t have a place in the dialogue and Inskeep misses an opportunity again to put Pollack and his deflection in its place. Pollack has just started to turn the discussion away from Bannon and Breitbart. At the least, Inskeep stomping on this might have given Pollack pause, kept the focus on the Alt-Right, Bannon, and Breitbart, and gain the NPR segment some credibility besides just a comment on what Confederate VP Steven’s had said.

Pollack does not stop there and proceeds to apply more of the strategy of “obfuscation and flipping” the script of totally justified accusations of bigotry, misogyny and anti-Semitism into reverse racism by the accuser. Take this standard complaint and deflection by the right.

NPR is taxpayer-funded (boy, this sounds familiar), and has an entire section of its programming and a regular feature called “Code Switch,” which from my perspective is a racist program by calling election results, ‘nostalgia for a whiter America.'” (Angry white America striking back at liberalism, sounds Star Warish as in “The Empire Strikes Back”) Some have called Breitbart’s “the history of the Confederate Flag program”racist, it is not racist and this was one opinion article in a 24-hour news website as compared to NPR’s Code Switch.

“’NPR has racial and racist programming I am required to pay for as a taxpayer (a white listener at that – my emphasis). You can read Breitbart, you can read something else — I don’t think talking about the history of the Confederate flag is racist. There are people who disagree with it as a symbol; but besides that issue, you’re picking on one opinion article to judge Breitbart and it is a 24-hour news website providing coverage from within a conservative worldview.”

It is here I have a major problem with liberals and progressives in general. We have an out right supporter of the Alt-Right who has reversed the tables on us and we can not ever find the words to kick some major butt here in rebuttal and in telling the truth. This is why we lost an election because we could not put two words together to call out Trump and his “rabid” supporters on their beliefs. Not even Bernie touched this hot poker.

Blue collar, middle class, and white America was left with the idea that what Trump has said, what Pollack is saying, what Breitbart has said and stands for is ok, and what Trump rode into the Presidency represents the truth. Guess what, it is not ok and it is not the truth. Our failure to come back at these statements has reaped something no one really likes.

Trump’s Chief of Staff Steve Bannon has worked hard to build Breitbart into an Alt-Right Sky Club for Alties looking for comradery, a glass of beer, and an ideology rest stop. It is “a loose coalition of white nationalists, “identitarians,” neo-Nazis, anti-Semites, racists, and misogynists who were ecstatic over Bannon’s appointment.” The point man for the Alt-Right and Breitbart, Joel Pollack took the NPR segment in a different direction to distance Steve Bannon from Breitbart and ” flipped the script to turn totally justified accusations of bigotry, misogyny and anti-Semitism into ‘reverse racism.”

Truth be told as detailed by Kali Holloway at AlterNet;”Bannon has spent four years ensuring that Breitbart contains all the Sky Club hors deourves and drinks the Alt-Right can feast on, from an entire section tagged ‘black crime’ to frequent contributions from Jason Richwine, whom the Daily Beast notes ‘resigned from the conservative Heritage Foundation when news broke that his Harvard dissertation argued in part that Hispanics have lower IQs than non-Hispanic whites.’ That, Pollak should be told, is actual racism. Textbook.” NPR and Steve Inskeep were just not up to the task of rebutting Joel Pollack or cornering him to keep him on the defensive. As Kali might say and I will say, we missed the chance to pin the tail on this donkey.

And Steve Bannon will be wandering the halls of the Whitehouse as Chief Strategist advising a man who has no experience as a legislator and is a poor leader.

Normalizing the Abnormal: NPR Begins Its Whitewashing of Breitbart’s Racism Kali Holloway, AlterNet, November 16, 2016

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