Relevant and even prescient commentary on news, politics and the economy.

Why Marco Rubio Reminds Me of Sarah Palin*

*This is a slightly edited version of a post I posted here yesterday afternoon and have removed.  There’s also an addendum about an op-ed piece by Martin O’Malley in today’s Washington Post.


Okay, so all you politics obsessives probably heard about a comment Martin O’Malley made to NPR’s Morning Edition host Steve Innskeep during an interview earlier this week, in response to a question about Marco Rubio’s claims about “active government.” Here’s the exchange:

Inskeep: “[Rubio] argues that an active government actually keeps people frozen at their economic status because if you are well off, if you can afford a lawyer, if you can deal with regulations, you can maneuver through government and stay prosperous. And if you are not so well off, it’s harder to work the system. Is there some truth to that? You were a big city mayor; you know how government works.”

O’Malley: “No, I don’t think there’s any truth to that.  It is not true that regulation holds poor people down or regulation keeps the middle class from advancing. That’s kind of patently bulls—.”

Well, at least we know that O’Malley knows how to get news media attention, so big points for that.  And we also know that he’s ready, willing and able to respond appropriately and effectively to the incessant, generic big-gummint-is-the-problem trance-inducing mantra.  Even bigger points for that.

But while Innskeep wasn’t actually quoting Rubio and was instead paraphrasing, the exchange highlighted a notable, but not widely noticed, hallmark of Rubio as politician: He routinely says things that are incoherent or that are flatly false as a matter of underlying fact.

Such as that Iran, a Shiite society, and ISIS, a Sunni terrorist group, are in cahoots and Obama doesn’t want to stop Iran from developing a nuclear military capability because Obama doesn’t really want ISIS defeated.  (Something like that; I can’t remember the specifics from earlier this year, but that was the gist of it.)

And such as his federal-budget proposal that will cut, but (unlike the other presidential-nomination contestants’ proposals) won’t completely gut, programs that assist low-income families and individuals; that will significantly increase defense spending; that will eliminate the estate tax; that will lower capital gains and corporate taxes; that will impose no new or higher tax rates at all; and that will balance the budget in 10 years.  (President Houdini!)

And such as that an active government keeps people frozen at their economic status because if you are well off, if you can afford a lawyer, if you can deal with regulations, you can maneuver through government and stay prosperous. And if you are not so well off, it’s harder to work the system.

Yep.  It’s the EPA, the SEC, and the National Labor Relations Act that are keeping all those minimum-wage workers and their families from moving up the socioeconomic ladder!  Rubio, a son of blue-collar employees, succeeded despite having been forced by the federal government to go to public rather than private universities and to pay his tuition using the student loans he applied for at gunpoint. So it can be done, even in the face of active government.  It’s just much harder.  And more dangerous.

One thing I remember fondly about the nervous reactions of some conservative pundits during the fall 2008 campaign season when it became clear that Sarah Palin was not a wise choice as McCain’s running mate was a comment by a dismayed Peggy Noonan, a longtime Republican pundit who was George H.W. Bush’s chief speechwriter.  Noonan wrote about Palin (I believe these were her exact words): “She just … says things.”  (Ellipses Noonan’s.)

Rubio, too, just … says things.  He sort of … babbles.  He seems to have no filter—for coherence, for accuracy, for plausibility—through which he passes his thoughts before expressing them.

Yup.  Be sure to click that “for coherence” link.  The auto-industry bailout kept those auto-industry workers and their families from advancing because they couldn’t hire lawyers to help them navigate their continued employment in their auto-industry jobs.  Got it.

When I read about O’Malley’s response to Innskeep a couple days ago, and therefore also read Innskeep’s question to O’Malley, I wondered whatspecifically (assuming that Innskeep’s paraphrase or summary of Rubio’s statements were accurate reflections of those statements), Rubio was referring to.  What in heaven’s name is he talking about?  What federal statutes and regulations are keeping people who can’t afford fancy lawyers—or any lawyer at all—frozen at their economic status because they can’t maneuver through federal government regulations?

Well, I now have my answer, albeit not from Rubio.  By chance, I happened upon a three-day-old commentary this morning in the Los Angeles by winger columnist Jonah Goldberg, written in reaction to O’Malley’s comments to Innskeep, in which Goldberg purports to speak for Rubio. The column is titled “Martin O’Malley’s modern-day know-nothingness,” and its first several paragraphs recite the history of President Millard Fillmore’s party, the Know-Nothings.”  (Goldberg doesn’t mention Fillmore, but I happen to know that his party was the Know-Nothing Party.)  He throws in some stuff about the history of the original federal minimum-wage law, which he thinks kept people frozen at their economic status because they couldn’t afford lawyers to help them navigate the intricacies of that statute.  (Something like that.)

But then he gets down to brass tacks.  The tacks being that O’Malley is too ignorant to know that some professional and trade licensure education requirements unjustly and unjustifiably  keep lower-income people from entering those professions and trades and that even the application forms are obnoxiously long, complex and burdensome.  And that O’Malley is blind to the fact that small banks, which are the traditional lenders to small local businesses, are disappearing en masse, and that this is because of … huge Dodd-Frank compliance costs.

Well, at least the second of the two—the banking one—involves federal laws.  Of course, the real reason that small banks no longer are competitive with, say, JP Morgan Chase, Citibank, Bank of America and Wells Fargo is the deregulation of the finance industry, mainly the repeal in the 1990s of the Glass-Steagall Act of 1934 that prohibited commercial, federally insured banks from engaging in investment banking and other securities trading—including in derivatives.  Goldberg and Rubio may not have noticed, but the en masse demise of so much of the community banking industry began back then and continued as a result of the financial collapse of 2008-10.*  Y’know, the financial collapse precipitated by financial-industry deregulation and, regarding derivatives, no-regulation.  The financial collapse that caused the economy and, consequently, many, many, many small businesses to collapse.

Yeah, that one.  Some people who lost their jobs and therefore no longer could pay their nonsubprime mortgages (including to community banks), and many small-business owners whose businesses failed because of the crash of the economy no longer could repay their business loans. To community banks.

As for the first of Goldberg’s two big-gummint complaints—that some professional and trade licensure education requirements unjustly and unjustifiably  keep lower-income people from entering those professions and trades and that even the application forms are obnoxiously long, complex and burdensome—he’s spot-on that it’s an outrage.  He just needs to explain why, since these are state and local licensure requirements and applications, and are unrelated in any respect to federal regulation—and Rubio’s running for president, not state or local office—he thinks it’s O’Malley rather than, say, he who is a Know-Nothing.  Here’s betting that O’Malley, unlike Goldberg, does know that professional and trade licensure education requirements and applications are determined and administered not by the federal government but by state and local ones.

And here’s also betting that O’Malley knows that since the very purpose of these inappropriate bars to jump over and hoops to jump through is to keep competition in these professions to a minimum.  And that he knows that the obvious agitators for these mandated regulatory hoops are the beneficiaries of minimal competition—i.e., those already in these professions or trades or in ones that compete with the unduly restricted ones—and that Democratic officeholders are no more likely that Republican ones to push for these laws and regulations.  He  might have suggested to Goldberg that, before Goldberg demonstrated his ignorance, he check out who’s giving campaign contributions to whom.

But it’s Rubio, not Goldberg, who’s running for president.  So the next time that Rubio argues that an active government actually keeps people frozen at their economic status because if you are well off, if you can afford a lawyer, if you can deal with regulations, you can maneuver through government and stay prosperous–and if you are not so well off, it’s harder to work the system—he’s asked for, say, specifics.  As in: What in heaven’s name is he talking about? Maybe he’ll just refer the questioner to Sarah Palin for details. Or to Mitt Romney.


NOTE: O’Malley has a terrific op-ed piece in today’s Washington Post about the student-loan issue, in which he discusses the broader effects of the current situation on the economy and on American society and advocates for the solutions that Elizabeth Warren has been proposing. He also details his own actions as Maryland government regarding that state’s public university and community college costs.

What to Do When a High-Profile U.Chicago Economist Says the Airline, Telephone and Package-Shipping Industries Prohibit Use by Preexisting Flyers, Callers and Shippers: If you’re a liberal, take this ball and run with it!

There’s no question that the Affordable Care Act’s rollout has been “rocky,” to borrow the common parlance of the Beltway. The Web site troubles and shifting health coverage for some Americans, despite over-assurances from President Obama during the 2010 political debate, have naturally turned off some people. A much-ballyhooed poll from CNN yesterday shows that support for “Obamacare” has dropped to an all-time low.

But conservatives toasting the apparent turn in public opinion ought to look a little closer at the polling data. It’s true that only 35 percent of Americans favor the law, while 43 percent oppose it. But there’s a crucial third group: 15 percent oppose the ACA because it’s “not liberal enough.” That means that 50 percent of Americans either support the law or want policy changes that shift leftward.

Should Democrats press the public option?, George Zornick, The Plum Line, Washington Post, Dec. 24

Wow.  A man after my own heart.  It’s a recognition that, with the single exception of the disastrous rollout of, which is purely a technology issue, the high-profile issues concerning Obamacare since Oct. 1 highlight not generic problems with government involvement in healthcare insurance but instead the problems of a system that piggybacks on the for-profit private insurance industry and neo-federalism-structured federal programs that rely heavily or entirely upon cooperation of state governments.

“Fear and Loathing” of Wall Street, 2012

by Jeff McCord of The Investor Advocate

“Fear and Loathing” of Wall Street, 2012

To-date, the presidential primaries have studiously avoided reference to the unfolding catastrophe brought to the American public just four years ago by the financial services industry. The political issues contested thus far bring to mind Hunter Thompson’s reporting of the 1972 election campaign:
“This may be the year when we finally come face to face with ourselves; finally just lay back and say it — that we are really just a nation of 220 million used car salesmen with all the money we need to buy guns . . .”
(See: “Fear and Loathing: On the Campaign Trail, 1972,” By Hunter S. Thompson)

Off the campaign trail, however, Stanford University scholar Lindsey Owens writes to tell us:

“Animosity toward banks, financial institutions, and Wall Street has been an important part of the public discourse since the bank bailouts of 2008. Indeed, Americans’ confidence in all three institutions has plummeted accordingly in the years since.

[W] hile changes in the business cycle have an effect on public opinion in this domain, it is the economic contractions that correspond to major scandals in the financial sector that motivate the largest shifts in confidence and provoke the most public outrage.”

Self-Loathing on Wall Street?

Professor Owens’ study of public opinion of Wall Street over the past 30 years suggests that even writer Hunter Thompson’s common man understands the difference between normal changes in the business cycle and financial industry scandals that actually contract real economic activity. Some of the geniuses on Wall Street also get it. In a recent poll by a corporate public relations firm (and long-time defender of financial services companies), a majority of Wall Street marketing executives admitted their industry’s own behavior caused its PR problems. Interestingly, 74 percent said “that increased regulation of the financial services industry will help their firms improve reputations and trust with customers.”

In a similar vein, consider the “cry in the wilderness” of the Goldman Sachs derivatives salesman who publicly resigned via the New York Times over the firm’s routine “ripping off of clients”:

“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all. It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets.’ “

Feds Deny Wall Street Execs the Expiation of More Regulation

Sadly, if guilt-riddled Streeters truly want more regulation and reform, this year may mark the rare non-event of Wall Street not getting what it wants from government. Indeed, enactment of the so-called JOBS legislation – a bill with massive bi-partisan Congressional support eagerly signed by the President – may prove the antipathy of what financial marketing executives desire. Here’s what SEC Commissioner Luis Aguilar said in a March 26 statement about the “Jumpstart our Business Start-ups Act”:

“I  share the concerns expressed by many that [the JOBS bill]. . . would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult. Currently, the SEC and other regulators may be put on notice of potential frauds by advertisements and Internet sites promoting “investment opportunities.” H.R. 3606 would put an end to that tool. Moreover, since it is easier to establish a violation of the registration and prospectus requirements of the Securities Act than it is to prove fraud, such scams can often be shut down relatively quickly. H.R. 3606 would make it almost impossible to do so before the damage has been done and the money lost.”

Fear of Wall Street at Regulatory Agencies?

Loathing and self-loathing of Wall Street hasn’t gotten us very far. This is, in part, because of fear of Wall Street – fear that it may not continue to dish out the $14 million plus given to Congressional candidates in the election cylce ending June 30, 2011, and fear that it may take legal action should government bite the hand that feeds it. It is the latter fear that apparently makes regulators timid about implementing even the modest reforms of the Dodd-Frank Act, which requires new rules to reign-in the wild derivatives market, among other changes.

First, a New York Times editorial on March 24 summarized the problem with derivatives:

If there is one lesson from the financial crisis that should be indelible, it is that unregulated derivatives are prone to catastrophic failure. And yet, nearly four years after the crash, and nearly two years since the passage of the Dodd-Frank law, the multitrillion-dollar derivatives market is still dominated by a handful of big banks, and regulation is a slow work in progress. That means Americans, and the economy, remain at risk. . . . Unreformed, [derivatives] will cause havoc again.
Secondly, numerous media explained why neither the Times nor honest Wall Streeters will get the regulation they crave. Underwriters and marketers of derivatives have evidently filed frivolous lawsuits against the feds, making regulatory personnel fearful of writing new rules required by law.

 Here’s how Reuters reported it on March 8:

Some U.S. regulators are “paralyzed” by the threat of lawsuits from Wall Street firms seeking to slow or stop the rollout of rules that would crimp their bottom line . . . Bart Chilton, a commissioner at the Commodity Futures Trading Commissioner, said if regulators live in fear of a lawsuit alleging they failed to consider sufficiently the costs and benefits of a rule, rulemaking slows or halts and opponents have succeeded. Regulators, already months behind in implementing rules from the Dodd-Frank financial reform law passed in 2010, are bracing for additional legal challenges as more regulations are completed.

Turns out, the International Swaps and Derivatives Association, Inc. and the Securities Industry and Financial Markets Association have already filed two lawsuits on behalf of JP Morgan Chase, Goldman Sachs and Morgan Stanley alleging the CFTC did not adequately consider the costs to industry of new regulations on speculative derivatives based upon oil, gas and other commodities. For more, see Bloomberg.

Fear and Loathing of Wall Street: Private Investors Pick-up Slack

Fortunately, as timid federal regulators move at a snail’s pace, private investors led by pension funds are actually taking action against the underwriters of spurious derivative products, misrepresented sub-prime mortgage backed securities products and other hooligans along with their professional enablers.

Interestingly, although the number of resolved securities class action lawsuits alleging fraud and other wrongdoing (typically led by institutional investors) declined overall in 2011 to 65 from 86 in 2010, settlements by underwriter defendants in such lawsuits matched an all-time high of 26 percent of the total (of all securities class action settlements) reached in 2010. And, $1.36 billion was recovered for investors through all securities class action settlements approved by federal courts in 2011.

Last year’s largest legal victory for shareholders was the $208.5 million won from the officers, directors, the underwriter and auditor of Washington Mutual bank, the first and largest bank to fail in the then unfolding sub-prime mortgage and derivative catastrophe.
Read more here.

SEC Two Months Late in Fulfilling Dodd-Frank Obligation

Unfortunately, the Supreme Court decisions eliminating private accountability for those who knowingly enable securities fraud (Central Bank and Stoneridge) and immunizing from liability in America foreign based fraudsters who prey upon US investors (Morrison) continue to limit the ability of private actions to enforce securities laws and protect the public.

And, speaking of Morrison and foot dragging on implementing the lawful reforms of the Dodd-Frank Act, as of March 19, the SEC was two months late in issuing a report to Congress on whether or not the anti-US investor Morrison decision should be overturned.

Apparently, federal regulators cannot fully decide just whose side they are on: the American people they are empowered to protect or the financial services firms they are empowered to regulate?
Fear and loathing of Wall Street may be universal sentiments among the public, thoughtful financial executives and the federal government during this election year.

A little OWS, a little 99%, a little history

So today I read at the Yahoo Finance (it’s my home page because I can look at the stock numbers on the left and read the headline on the right for a guaranteed laugh) that  John Mauldin thinks the OWS would be better off if they occupiedCongress:
Mauldin believes America still has time to figure out a path out of what he says is the big problem worldwide: “We’ve over committed public monies and we don’t have them.” While some what sympathetic to the protestors’ frustrations, Mauldin says their anger is misdirected.
“My message to the ‘Occupy Wall Street’ guys: if they really want to If  they really want to go after the source of the problem, they should go occupy Congress,”
Instead of focusing on Wall Street,Washington and the protests should be focusing on reducing regulation and making it easier for new businesses to start, Mauldin says. To that end, he offers a new slogan I somehow doubt will showup at any Occupy Wall Street protest anytime soon: “Up with Entrepreneurs”
As I understand it, OWS is about economic equality. President Roosevelt referred to it as the economic royalty. I just don’t see how one can stop, look and listen to OWS and think “go tell congress to further deregulation”. John Boy can’t be this much of an idiot, can he?
My sweetheart gets home from the dentist. $4000 dollars worth of bridge work is down the drain because a tooth of the bridge went bad. 

For those who don’t know, we are the “Entrepreneurs” John Boy is referring to, thus we are paying for our health insurance, no dental. But, she was offered a payment plan. Has a nice dental name at 14.5% interest! This bit of private market solution to paying for health care is brought to you by GE Financial. Yes, the GE of Jeffrey Immelt, Obama’s job creating adviser. Hey Obama? Did you read my state of the union?  Obviously not or Jeffrey baby would not be your man.
Did you hear that JP Morgan was all blowed up? Yes, I’m not lying. People got pissed at Wall Street and blew up JP:
“During this period anarchists and socialists held protests on Wall Street out of a similar sense of frustration and rage at the banking system. The movement culminated in what was known as the greatest act of terrorism on American soil: the 1920 bombing outside J.P. Morgan and Company
Thirty eight people were killed when the horse and wagon bomb went off at noon on Sept 16, 1920. The perpetrators, thought to be anarchists, were never caught, but their exploits and the aftermath were captured by photographers.”
Check out the pictures here. 
Why do we not hear about this history considering the present times? I know, stupid question. To ask it is to give purpose to OWS. Though one sector of this nation seems to remember a portions of this history or we would not be hearing the pejoratives being slung a the 99%’ers. You know Anarchists, socialists, communists out to destroy the American Way (A catchy phrase brought to you by the National Association of Manufacturers via General Food’s CEO, the US Chamber of Commerce and AT & T’s monopoly is good all via Madison Ave, Time Magazine 9/28/1936) .
Which brings me to my original question since the shit hit the fan: HOW MANY TIMES DO WE HAVE TO DO THIS? HOW MANY FREAKIN’ TIMES DO WE HAVE TO LEARN THE LESSON?
Obviously from the above 3 subtopics, quite a few more times as we seem to have not learned the definition of Rat Race yet: A rat race is a term used for an endless, self-defeating or pointless pursuit…
I think I know what is wrong with US today. When I typed in Deja Vu at youtube,  amazingly this tune did not even come up in the suggestion list. 

No, I had to actually know that CSNY wrote what I consider the true musical capture of the concept of deja vu…the song that is most appropriate for the application of the concept today. I say this because they intentionally wrote the song so that it does not repeat any one section (heard years ago in an interview).

Get it?
(I haven’t forgotten the tax tables. It’s a coming.)

Telling the Right Story, or Economists Catching Up Round One

Anyone who was in the MBS market and not working for a primary originator can tell you that the MBS securitization market ended around Halloween 2006. (Those of us who were at places with origination go a few more months, but had no flow by February.)

Only economists were fooled by what I’ve been calling a Xmas Miracle, and even they (via Mark Thoma) are starting to wise up:

The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure. In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure.
Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007.

You can sustain a bubble as long as more funds are coming into the system. Sell the 1BR on the West Side, reinvest the profits on the 2BR in Park Slope while that seller reinvests in 2,600 square feet in Summit or Hasting-on-Hudson who…

Until the incomes stop moving—transaction costs slow the margin, generally just after a few of the easier lenders demonstrate the flaws of their “business model” and the infrastructures have been built up at other firms based on those chimeric profits, when fixed costs and narrowing margins make better and better firms look worse and worse.

Economics has caught up with finance. What will they think of next?

Note: Subtitle added as I realized this may become a series. – klh, 10 June 2011

Some People Call Me Mau-rice

It’s not that the data is different; it’s the interpretation.

For instance, Brad DeLong’s What Obama Needs to Do is three(or four) fine suggestions, one point (2) that hasn’t worked yet but bears repeating, and a moment (5) of hope that really does required Congressional action, as Stan Collender noted today.

But the three good points are things several of us have been saying for years now, and the chance that the Obama Administration is rational enough to do them has only increased by the degree to which Larry Summers is no longer there. I want a pony, too.

So when I suggested a few days ago that Buce was Much Too Generous to Maurice (“Hank”) Greenberg here, it’s not that I believe Greenberg was an absolute failure. He built AIG into what it is today—well, what it was before he lead it to what it became, which is (again) about what it is today.

And there’s the rub, if not all of The Real Story. So this will be a Very Long Post, with Muliple Sidebars and Anecdotes. Feel free to skim; it’s below the fold.

In the deep, dark past, bankers were respected members of the community. I mean real bankers: the guys the investment bankers refer to as 9-6-3s: they lend at 9%, they take in deposits at 6%, and they’re on the golf course at 3:00. It wasn’t that they were the only game in town—though often enough they were—but it was a good, straightforward, relatively easy business. As long as you didn’t make a big mess (and there were very few chances to do so) and kept your personal life reasonably under control, you got and maintained a great reputation.

The equivalent of that, in the days before demutualisation, was runnning an insurance company. You took near-term premia, had long-term obligations at a rate below what the market would pay (on average, in most cases), and you just had to, again, manage your personal relationships and your acquisition of clients. (As with derivatives, a small variation in the fourth decimal place means a lot of money.) Get ones who are marginally healthier, where the same payout is made one year later, and you’re a superstar.

After demutualization, having the stronger balance sheet going in means you’re in a better position to acquire weaker competitors. AIG:Insurance::MannyHanny*:Banks

All with a AAA balance sheet. Safe, stable investment. At least until the Noughts.

Sidebar: In the distant past, I traded for a AAA-rated bank. (You can read all about the bank here. Note that the 2003 subtitle has been replaced in the paperback editions by a more accurate one.)

The thing about working for a AAA is that people come to you. I went to a party with former coworkers—mostly people who are both smarter and more driven than I am, and whose c.v.s have Rather Famous Names, both Before and After—and the department head (who does not fall into either of those categories, but is a sociopath) was talking about how they were planning to schedule meetings with firms such as Coca-Cola and Annheuser-Busch.

I had done a large, complicated deal with Annheuser-Busch that morning. And it wasn’t my firm’s U.S. marketing skills or special product knowledge that got us the deal. It was the AAA rating.

Once they lost, that…well, Gillian Tett can tell you the rest better than I (who left before that happened).

So when people tell me that Maurice Greenberg was incredibly detail-oriented and carefully managed every aspect of AIG and would have gotten it through the crisis, I’m naturally suspicious.

That’s partially because I know someone who fits that description perfectly: Warren Spector. He tracked the errors, he knew when the departments were not producing well, he pulled plugs, and he checked risk positions with the best of them. William Cohan’s sources may not have told him this, but Warren Spector probably could have saved Bear Stearns.

And if there had been a few more people like me speaking with Cohan, House of Cards would have turned out more like Fatal Risk than Indecent Exposure as if it were told from Begelman’s perspective.

Don’t get me wrong; I speak with people at AIG, and there are those there who firmly believe that Maurice “Not the Baseball Player” Greenberg could have saved them, Jack Aubrey-like, from all that followed his reign. But that’s faith, not evidence.

Part of the reason, one suspects, that Cohan marginalizes Spector while Boyd totemizes Greenberg is the AIG Board of Directors ousted Maurice Greenberg at virtually the same time the firm lost its AAA rating. Make no mistake: the Fall happened on Greenberg’s watch, his legendary attention to detail notwithstanding the balance-sheet distortions that were harbingers of Things to Come.

Even if we ignore that his direct “competitors” in the early Noughts notably included his two sons, Greenberg-as-CIO was always the man with the advantage. He never ran the firm when it had to compete with others in a relatively-level playing field.

Credit where due: he found a flaw in the insurance market, and he built a company around it. So did many others, Mike Milken most obviously among them. Building a firm is an accomplishment; running it is not necessarily the same skillset.

Similarly, running a AAA firm is relatively easy. Running a AA or below firm—the firm Maurice Greenberg left his firm in the hands of Martin J. Sullivan, who was (per Wikipedia) his selection—is often a different matter.

It was Sullivan—a UK native—who had to run the AA firm, and on whose watch the AIG Financial Products group under Joseph Cassano went from the operation that compromised AIG’s AAA rating to the area that took the firm down.

Would Greenberg have stopped this? There is scant evidence in favor of such an argument. Greenberg’s objections in 2008 were to the Board’s attempt to save the firm by selling-off “non-core assets.” Similarly, none of his back-benching—dangerous back-benching, arguably, given that his holdings in the company make him more visible than the member from Clan Agnew—from 2005 to 2008 was never about the risk that the Financial Products area was expanding too quickly.

Maurice Greenberg remained, iirc, the largest shareholder of AIG even after his ouster. In his frequent interviews, he made no secret that he was in contact with multiple board members. His rather hand-picked successor shepherded the firm into disaster, a disaster architected with pick-up sticks by workers in and from his native land.

Could Maurice Greenberg have saved AIG? It’s nice to think so, but nothing in his actions, statements, or post-crisis recommendations makes that a likely story.

Maurice Greenberg never ran AIG when it was not The Firm With Which People Wanted to Deal. He built an impressive edifice, but so did the Sons of Noah—and Buce knows how that ended.**

So the story that gets told is a man who was Always On Top. And we forget that this is also the man who put his firm into the position where his successors would never have the same opportunity he did.

But Buce knows better: hubris is always followed by ate. The tale of Maurice “Hank” Greenberg is the tale of A Man Who Had It All, and who left it to be destroyed by his hand-picked successor and his successors.***

That’s not the Success Story we want to tell, but its a lot closer to The Real Story, even ignoring the familial nature of the charges that began this whole discussion.

So Buce’s conclusion is, I believe, accurate: Eliot Spitzer did not destroy AIG. I can make a much better case that Maurice Greenberg did, but can live with the story as it is currently told, where Greenberg led the firm until it entered uncharted waters, and then was forced to turn the rudder over to his First Mate.

*They may have gone by Chase, but the takeovers were run by the old Manufacturers Hanover team, up to and including J. P. Morgan.

**Genesis 11:1-9 for the rest of you.

***And Ed Liddy, who was a ridiculous choice even by Tim Geithner standards.

The Effects of Airline Deregulation: What’s The Counterfactual?

by Tom Bozzo

Crossposted with Marginal Utility.

Matt Welch at the Reason blog takes credit for airline deregulation on behalf of libertarianism:

The “worldview” of libertarianism suggested, back in the early 1970s, that if you got the government out of the business of setting all airline ticket prices and composing all in-flight menus, then just maybe Americans who were not rich could soon enjoy air travel. At the time, people with much more imagination and pull than Gabriel Winant has now dismissed the idea as unrealistic, out-of-touch fantasia. They were wrong then, they continue to be wrong now about a thousand similar things, and history does not judge them harsh enough.

Mark Kleiman observes that transportation deregulation was more directly the progeny of 1970s Brookings-esque neoliberalism (though I’d grant Welch that libertarians got there first), though Kleiman doesn’t take issue with the basic claim that deregulating prices and service offerings “was, on balance, a good thing.” This argument ultimately rests on the declines in airfares and resulting democratization of air travel that Welch cites; indeed that’s what the Brookings-esque neoliberals I know cite when they’re defending the deregulatory record.

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era. (This, FWIW, is one of Robert W. Fogel’s central insights into what makes economic history economic history.) If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble. Since a regulator could have promoted adoption of the cost-saving technologies and passed the resulting productivity improvements and input cost decreases through to fare-payers using elementary regulatory technologies, deregulation must have produced substantial fare reductions relative to the late CAB era to have a claim to constituting a true improvement.

One of the airline industry’s problems is that it isn’t “revenue adequate” or able to recover its total costs including a normal return to investors. If you thought airlines were incurring costs efficiently, then moving towards revenue adequacy would require more revenues and hence higher average fares. On the face of things, that wouldn’t look good for a regulated alternative providing more secure revenues to the industry. However, there are dynamic efficiency counterbalances to the apparent static inefficiency under regulation: revenue adequacy implies having money for efficiency-improving investments. For instance, U.S. legacy airlines have somewhat notoriously kept relatively aged fleets in the air. Partly, that was a deliberate strategy that blew up when the Goldilocks conditions of the late-90s ended, and partly they don’t have the money to turn over their fleets as fast as they arguably should.

The formerly regulated transportation industries shared, to one extent or another, cost structures under which an efficient carrier would go broke under econ 101 perfect competition with prices driven down to marginal costs. So the question isn’t so much whether carriers will exercise such market power as they have in order to survive, but how. Real firms might or might not do that better than a real regulator. I do think there’s a good case to be made for some degree of pricing and service liberalization with regulatory policing of “excessive” use of market power; that’s a one-sentence version of the Staggers Act’s approach to the (very successful) freight rail industry.

Added: Good comments at Economist’s View, too, particularly a long one from Bruce Wilder expanding on the cost structure issue, discussing pricing strategies, and opining on the sources of apparent gains from deregulation.