Congratulations to My Progressive Friends

You have succeeded in remaking the United States. Now nothing substantial stands between you and a total nationalization of health care. We can agree that America will never be the same again; you may cheer, we may mourn. But it is a done thing.

There'll be a lot of political brouhaha for the rest of the year and your party will likely lose some power in Washington; perhaps even majorities in the House or the Senate. But you know—and we know—that these short-term swings don't really matter. In the long run, you will have turned a large part of the population into your clients, depending on your favor for their health. They'll vote accordingly. In the long run, you'll be stronger than ever for it.

Sometimes I wish that you didn't listen so well to my advice to you less than two months ago when things seemed the darkest for you. Or, at least, that there was a place one could escape you.

Hey, Sequoia Fund!

In yesterday's commentary on Mr. Lowenstein's blovitations in the New York Times, we inexcusably neglected to mention the funniest tidbit in the entire piece, one which he rightly saved for last:

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine

So here's our proposition for the Sequoia Fund: We'll perform Mr. Lowenstein's duties as outside director for half of what you compensate him right now. Also, we know what a lot of those finance-y words actually mean, so we promise not to get that dazed-and-confused slowly-turning-to-anger look that old Rodge always gets whenever you mention one of those concepts.

Deal? Contact us at the e-mail address on this site!

Who Needs Roger Lowenstein?

The New York Times, despite being headquartered in one the world's principal financial centers, once again delivers itself of a lecture [to] the public on sciences which he has still the very alphabet to learn, to wit finance and its purpose. Today's lecturer is Roger Lowenstein and his subject is Who Needs Wall Street?

The piece opens unpromisingly enough:

Mike Mayo is a veteran of six Wall Street banks. In the wake of the street’s disaster, he found refuge at a boutique brokerage and has lately taken to startling his peers with the question "What part of Goldman Sachs is good for the country?"

How Mr. Mayo's serial unemployment qualifies him to ask that question, much less to implicitly answer it in the negative, is not explained. Nor is it why any private person or enterprise should be under an obligation to explain its right to live and work to the satisfaction of the populace or the New York Times. Perhaps Mr. Mayo's peers—he is not mentioned again—would be equally startled should he query them as to why Batman always sells pink ice cream. But let's pass over that.

Because some people have savings and others need capital, some unifying force must bring the two together. Royalty once taxed its citizens and chartered corporations.

Mr. Lowenstein in turn might be startled to learn the meaning of chartered and how little it involved taking tax payers funds out of the royal purse and giving it to corporations. The investors have always been with us.

Goldman, which, from its founding in 1869 through recent decades, epitomized, with only rare slip-ups, the best of American finance. Serving the client was its lodestar, and its bankers were pillars of society, more conversant in literature than in the vagaries of, say, mortgage securities.

One hopes that Mr. Lowenstein employs a different standard for what "epitomizes ... the best of American" medicine. Or perhaps, he would consider the physician who can quote baseball statistics with abandon—fine achievement that though may be—superior to one familiar with the vagaries of his trade—organs and grubby stuff like that.

Most famous was the trading that stemmed from complex derivatives (like mortgages) with only a remote connection to the underlying product.

At the point at which the author refers to "mortgages" as "complex derivatives", it would behoove any sentient being to conclude that Mr. Lowenstein knows not whereof he speaks and stops reading. We recommend the same to you, in particular as we did not and offer a few more amusing highlights.

Among the crimes and misdemeanors confessed to by the new evil Goldman is:

"In our market-making function, we are a principal. We represent the other side of what people want to do." He went on to say that when Goldman sells a security that subsequently goes up (i.e., on which the other party makes money), "we wish we hadn’t sold it."

One can only hope that all securities Mr. Lowenstein ever bought subsequently fell in price and all he ever sold rose. Otherwise he very much ought to be as ashamed of himself as he thinks Goldman should be of itself.

Modern markets are more likely afflicted with too much trading. Think of oil and its dizzying fluctuations. As the volume from speculators and momentum traders dwarfs that of long-term investors, prices gyrate further from fundamental value.

It seems hard to believe, but Mr. Lowenstein seems to be unaware of the very first law of speculation: A speculator who buys high and sells low will not remain a speculator long. The only way to speculate successfully is to buy low, thereby increasing low prices, and selling high, thereby decreasing high prices. In other words, the only way to make money speculating is to dampen swings. If Mr. Lowenstein is looking for a scapegoat for volatility, he better look elsewhere.

The casino charge is most plausibly leveled at credit-default swaps, the bête noire of A.I.G., Greece and others.

The charge that the CDSs are at the root of the Greek crises, raised by the New York Times here not for the first time, has been refuted too often to need it done another time here. The only rational explanation for its repetition is that New York Times financial writers cannot tell the difference between currency swaps (which the Greek government did use to hide its corrupt public finances) and credit default swaps (which could not have caused the crises but did help in uncovering it).

Such swaps let traders bet on the odds of default (of a corporate or, indeed, a sovereign bond). If swaps traded in Las Vegas — if bets against, say, Goldman’s bonds swamped the casino, causing Goldman’s lenders to refuse it credit — an uproar would ensue. This actually happened to banks in 2008.

Of course trading in Goldman CDS is perfectly legal and doubtlessly does occur without any uproar. The reason it has not made the papers is that—to damn with faint praise—Goldman management is more honest, ethical and trustworthy than that of the Greek state.

The social utility of credit-default swaps is ostensibly the insurance function. (Fear that a bond will default? Buy a swap that pays out in the event.) But most traders do not own the bond, and they have nothing to "insure." Like the fellow who takes a policy on his neighbor’s house, they are simply betting on disaster.

No, the purpose of the market in CDS is to attract and summarize the best available information on the riskiness of a bond. The only way to do that is to allow anybody in the possession of such knowledge (and sufficient capital to back their bet) to trade CDS. That managements, corporate or governmental, would rather not have this information leak out is a reason to encourage the trading of naked CDS, not to outlaw it.

Swaps are used by banks as a hedge against risky loans, but the effect is problematic. The danger of hypertrading is that it affords an illusion of a continuously available exit; investors feel less need to scrutinize their assets. So it is with bankers. If every loan can be traded away, why worry about risk? Thanks to swaps, banks write more suspect loans and, over all, society is more exposed.

Yes, this is doubtlessly the effect that would occur if all investment managers, entrusted by their clients with billions of dollars in capital, thought as shallowly as New York Times finance columnists and, also, every CDS had only one side. Neither of these being the case, the conclusion does not follow. As long as somebody else has to buy the risk somebody else sells and the price of that transfer reflects the magnitude of that risk, the concern over a debt's risk has not disappeared; it has merely shifted.

The question is whether the social balance would improve if Wall Street were less devoted to games of chance.

Certainly—if you believe that investment should be abolished or put into the hand of central planners. But as long as individuals can reach their own conclusion about the likelihood of outcomes in the uncertain future and back their conclusions with their own money, we'll have Wall Street, uncertainty, and chance.

Sincere Advice to Progressives

If you are a smart progressive and think long term, listen to Krugman, listen to Yglesias: Pressure your leaders to pass ObamaCare now! Pass the senate bill, pass the house bill, pass it with or without a reconciliation side-car, pass anything—as long as the effect will be to push the already tottering private system over into a state of complete dysfunction (and any of the bills will do for that), you will have won an enormous long-run victory.

Do not delude yourself that this achievement will be without short-run pain. Probably it will increase Democratic losses in the 2010 elections.¹ But permanently putting health-care on an branch-less path towards total state control will be more than worth the price to you. Henceforth, any deficiency in health care will be blamed on stingy Republicans who refuse to fund it adequately; large and powerful constituencies like health care workers, including doctors, will accrete to your base as well as that of your union allies; private health care will become like private primary and secondary education—a luxury good with a few percent market share used only by those rich enough or motivated enough to pay for the public version at the tax office and once more for their private version.

You and your successors will reap these benefits of these shifts for decades and generations when the outcome of the 2010 mid-terms will be a bit of trivia unremembered by any but the most devoted election geeks.

Needless to say, this author views this outcome with as much horror as you should view it with glee. If a similar opportunity had arisen in reverse—that is, permanently reforming the health care sector on a consumer-driven competitive-market basis in return for a temporary loss of political majorities—the author would have gone hoarse urging all who would listen to grasp it with both hands. So he is puzzled that progressives are letting victory slip from their hands so easily.

¹ Of course, most of the losers will blue dogs, moderates, and other weak sisters, so don't shed too many tears for them. Most of your favorites will not lose their seats. You may even retain a small, but more ideologically homogeneous majority in both houses of Congress.

Salt Passage Research: The State of the Art

The always-interesting and almost-always-correct Prof. Landsburg links to a very amusing social science pastiche.

Monstrous Fukuyama

Bryan Caplan catches Francis Fukuyama at his most monstrous:

I thought about the Horror File when Ron Bailey's Liberation Biology quoted Frank Fukuyama:

Life extension seems to me a perfect example of something that is a negative externality, meaning that it is individually rational and desirable for any given individual, but it has costs for society that can be negative.

I couldn't believe my eyes. Did Frank Fukuyama actually mean that when a person has another year of healthy life, the net effect on other people is negative? If so, why do people cry at funerals, instead of celebrating?

There is little to add to Caplan's evisceration of Fukuyama's attempt to justify this conclusion on the basis that death is necessary for progress, except to wonder why the advocates of the wisdom of disgust and horror so frequently feel free to make arguments which us worshipers of cold reason and rationality would reject out of hand as morally monstrous. The author of this blog—chosen pseudonym notwithstanding—is about as rationalist and—at least as far as economic, scientific, and technical matters are concerned—about as homo neophilus as it is possible to get. But even he would blanch at the price if it was causing (or even wishing for) the death of his parents, grandparents, and all other elders.

On Comity Between New England States

Some years ago, I participated in a D.C. Circuit case which involved, among other issues, the question of whether individual New England states could be counted on to voluntarily build reserve electric generation capacity or whether they'd ignore such obligations and just lean on the excess capacity of their neighboring states in times of shortage.¹ The telegenic Attorney General of one state assured that the former would most definitely be the case:

Suppliers, PJM, and ISO-NE attempt to resurrect an argument that … states may not be permitted to set individual resource adequacy requirements because they will act parochially, in their own self-interests to “free-ride” on the reserves of other states in the region. … In fact, the New England states' self-interest dictates the same type of cooperation that has produced regional reserve levels in New England for decades[.]

Joint Reply Brief for Intervenors Richard Blumenthal, Attorney General for the State of Connecticut, et al. at 8, Conn. Dep't of Pub. Util. Control v. FERC (D.C. Cir. 2008).

One can imagine my surprise upon now reading the following pronouncement by the same telegenic Attorney General:

Blumenthal to Maine company: Hire Connecticut workers

…

“Workers and businesses in Connecticut need and deserve the benefit of jobs and revenue from this massive construction project, which must move forward as quickly as possible,” Blumenthal said.

“Amtrak's contract award may be final, but its practical effect may be improved by insisting that subcontractors and workers come from Connecticut.”

…

“I am deeply disappointed that Amtrak awarded this huge contract - one of the largest federal stimulus projects in Connecticut - to an out-of-state company,” Blumenthal said. “I will seek assurances that Cianbro will hire Connecticut workers and contractors, and ensure fair wages and equitable working conditions.”

…

“This federal taxpayer-funded project is designed to benefit Connecticut workers and businesses and kick-start the state's economy,” Blumenthal said. “Sending vital stimulus dollars out of state is unacceptable and unconscionable. I urge the company to keep in Connecticut as many stimulus dollars as possible - as Congress and the President intended.”

(emphasis added) Legal NewsLine, Blumenthal to Maine company: Hire Connecticut workers (Jan. 25, 2010).

Claims of comity and willingness to act for the general good rather than parochial interests may serve to attempt to bamboozle federal courts, but one could hardly expect an on-the-make politician to take such things seriously.

¹The upshot of course being that all states would engage in this beggar-thy-neighbor strategy, nobody would buy reserve capacity, and in times of shortage the lights would go out all over New England, Tragedy-of-the-Commons style.

A Note on Pseudonymity

This blog is blatantly and openly pseudonymous. Blatant because it is published and written under a name obviously different than the author's legal name. Open because anybody with even a smidgen of Internet know-how (and many without) can figure out the legal name of the author with a few minutes snooping at most.

So why bother with this semi-anonymity?

• Truly pseudonymous blogging can and has been done, but is far more trouble than it is worth to the author. Ever increasing precautions against discovery by ever more sophisticated methods would in this case be a symptom of either paranoia or delusions of grandeur. The author tries to avoid both.
• The author, while glad to defend his writings here to anybody interested, would just as soon not impose his boring obsessions on anybody who just innocently googles his name.
• Finally, the author has used the same pseudonym more or less consistently all over the net and elsewhere for a decade or two and is loathe to part with it entirely.

Hence, Sub Specie Æternitatis lives.

Standard Talking Points Against Citizens United Are Legally Lightweight

The two standard talking points against the Supreme Court's decision in Citizens United—(1) Money isn't Speech! (2) Corporations Have No Rights!—are so easily refuted at even the most rudimentary level of legal analysis that their frequent, thoughtless repetition is little more than an indication that the speaker has been living in an echo chamber unexposed to any critical thought.

1. Money isn't speech? Indeed it isn't. Yet, regulation of money can restrict or even strangle the exercise of constitutional rights and thereby violate the Constitution, as it was found to do in Citizens United.

   If you find this difficult to understand, look at constitutional rights against which you are not currently at war, such as the right to counsel or the right to abortion. Laws which banned criminal defendants from paying lawyers or pregnant women seeking abortions from paying abortionists would undoubtedly be found unconstitutional. I shudder to think that any law school graduate would consider “Money isn't Counsel!” (or “Money isn't Abortion!”) to be killer arguments to the contrary.

2. Corporations Have No Rights? Really? Anybody outraged at the thought that corporations can bring claims under the First Amendment must have been boiling over for quite some time.

   One notorious corporation controlled by a secretive ultra-wealthy family with a ideological agenda to change this country has been hiding its machinations behind the First Amendment for decades! What's worse, this powerful ideology-driven corporation has been bamboozling the Supreme Court to grant its schemes constitutional protection again and again.

   I am referring of course to the New York Times Corporation. In New York Times Co. v. Sullivan, 376 U.S. 254 (1964), the Supreme Court granted this corporation (and others like it) a privilege to violate long-standing and democratically enacted libel laws based on its alleged “First Amendment” rights. In New York Times Co. v. United States, 403 U.S. 713 (1971) , the Supreme Court again invoking these imaginary “Corporate First Amendment Rights” held that the corporation could freely violate the democratically enacted Espionage Act of 1917 to publish the classified so-called “Pentagon Papers.”

   I'm sure you are as outraged about these judicial usurpations on behalf of corporations as you are about Citizens United (though strangely most of you have managed to contain their outrage for the last forty, fifty years or so). Or perhaps not.

   Seriously, if you believe that there would have been a First Amendment issue if the Republican Congress had passed a law requiring all New York Times editorials to be pre-approved by Dick Cheney, you believe that corporations can bring valid First Amendment claims. Don't embarrass yourself by embracing the silly talking point to the contrary.

Left-wing Hate Speech

Thomas Frank delivers himself of the usual progressive advice to Barack Obama in the pages of the WSJ:

What you need to do now is pick a fight, preferably one that forces the obstructionists of the right to take the side of privilege. You need a battle that will expose their populism and their protest for the pretenses they are. Your target is obvious: the financial industry, from Wall Street to the credit card companies. Yes, taking them on will cost you campaign contributions for 2012, but take Wall Street down a few pegs and Americans might start to remember what it was their grandparents loved about Democrats all those years ago.

In all my years of reading right-wing punditry I have never heard any of the groups conventionally deemed to be the go-to scapegoats of the right (ethnic minorities, gays and lesbians, welfare recipients) or even Al-Qaeda denounced as readily and unashamedly as progressives gleefully demagogue banks and the rich. Much less have I read in any respectable publication that the soundest strategic counsel to the Right would be to focus public scorn on a particular despised minority and ride the wave of hatred to electoral success.

Yet, progressives like Mr. Frank do so shamelessly and will at the same time claim the mantle of dispassionate reason and adopt an attitude of vast superiority to the slavering Republican-voting hordes with their hate-filled minds.

How does that work?

Thaler on Mortgages: Sentiment over the Liberal Order

Richard Thaler, of Libertarian Paternalism fame, has a generally sensible piece in the New York Times, Will More Borrowers Walk Away From Their Mortgages.

Two points however bear refuting:

[The] norm [to keep paying a mortgage even on underwater property] might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.

That is in equal parts sentimental and pernicious. If it is ok to exercise the put option to Morgan Stanley, it is also ok to do it with the local banker. You, I, Morgan Stanley, and the local banker are all equally responsible under the law for our promises and the contracts we enter. That there should be one law for favored in-groups, like the local banker you may run across in the grocery store, and another, lesser law for outsiders and strangers, like Morgan Stanley, is profoundly subversive to continued existence of the liberal order. That we have largely overcome such distinctions in the law is a fundamental pillar of a commercial republic. Throwing it overboard would be dangerous and wrong.

Eric Posner, a law professor, and Luigi Zingales, an economist, both from the University of Chicago, have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices—if there is one—when the house is eventually sold.

This is equally ruinous to the rule of law. If such a modification was to the advantage of both sides, there should be nothing to prevent it from happening now. That this is not happening shows that it is not in the interest of at least one side. That it is eagerly embraced by the politically attuned suggests that the large and politically powerful group—homeowners—who would benefit at the expense of a small and despised minority—Wall Street banks and their investors.

So, shorn of rhetorical pretense, the Posner/Zingales proposal is no more than a expropriation of property held by the politically powerless for the benefit of the politically powerful. It is disappointing that distinguished economists such as they should need to be reminded that such proposals—even if they are not enacted!—undermine the rule of law and push nations along the road to ruin.

So much gloating, so little time

Also: ObamaCare and AirAmerica are dead.

To Hear the Lamentations of the Campaign Finance "Reformers"

It has been said:

Mongol General: What is best in life?

Conan: To crush your enemies, see them driven before you, and to hear the lamentation of their women.

Mongol General: That is good! That is good.

That is why, on days like this, I like to visit these sites. And for special bonus points, How depressed are you? SCOTUS decision, Brown, etc.

Update: More, more! Destructive Decision Turns Back Clock to 19th Century; Supreme Court Decision Creates Political Crisis.

A Motto for this Blog

Until further notice, I pick my oft-repeated observation that We are ruled by children … malicious children.

Needless to say, this motto was itself inspired by the observation that giving money and power to government is like giving whiskey and car keys to teenage boys. P.J. O'Rourke, Parliament of Whores: A Lone Humorist Attempts to Explain the Entire U.S. Government xxiv (ed. 2003) (1991).

Princess Brides in D.C. Circuit Briefs

While on the subject of literary allusions in legal briefs, here is my favorite from a D.C. Circuit brief I filed in a FERC case a couple years ago:

[T]he Coalition claims that only a 'a structurally competitive market' qualifies. Id. (emphasis added); accord id. at 11, 22, 23, 24, 28.^2
2 '[They] keep using that word. I don’t think it means what [they] think it does.' William Goldman, The Princess Bride 114 (Harcourt 2007) (1973).

Brief of Supplier Intervenors at 8, Public Service Electric & Gas Co. v. FERC (D.C. Cir. 2008).

Underpants Gnomes in FERC Briefs

From a brief I filed with the Federal Energy Regulatory Commission on Monday:

However, this still leaves an Underpants Gnome-sized chasm³ at the core at the center of the California Parties’ argument: The California Parties completely failed to establish any causal connection between propositions 1 and 2.

³ The industrious underpants-stealing gnomes were introduced to the world by the television program “South Park.” Famously, their business plan consists, in its entirety, of three stages: “Phase 1: Collect Underpants. Phase 2: ? Phase 3: Profit.” Wikipedia, Gnomes (South Park), http://en.wikipedia.org/wiki/Gnomes_(South_Park) (last modified Jan. 2, 2010). The gnomes’ business plan have since become a byword for theories with large logical gaps of which their expositors appear to be blissfully unaware. See, e.g., Editorial, Obama and the ‘South Park’ Gnomes, The Wall Street Journal at A16 (May 26, 2009) (postulating that the television episode may “surpass[] Milton Friedman’s ‘Free to Choose’ as the classic defense of capitalism”); Ezra Klein, The Underpants Gnomes Theory of Single-Payer, The Washington Post Blog (June 26, 2009), http://voices.washingtonpost.com/ezra-klein/2009/06/the_underpants_gnomes_theory_o.html. So too here: The California Parties proceed, as if blissfully unaware, to propound a theory in this case that totally lacks any causal connection—or even any attempt to draw a causal connection—between the successive steps of argument. In actuality, of course, the California Parties are keenly aware of these fatal flaws but apparently have no choice other than to pretend that they simply are not there.

Id. at 8.

Update on July 12, 2010: FERC adopted the position argued in the brief and dismissed all claims by California against my client and even went on to quote the underpants gnomes. Initial Decision on Motions for Summary Disposition at P 221.

A "Financial Crisis Responsibility Fee" on sub-prime borrowers

The administration proposes to impose a punitive ex-post-facto tax "Financial Crisis Responsibility Fee" on banks who received TARP bailouts--regardless of whether they wanted, needed, or have repaid the funds. Wall St. Weighs a Challenge to a Proposed Tax, New York Times at B1 (Jan. 17, 2010). Of course, bailout recipients with sufficient links to the Democratic Party, such as the union-owned automakers and retired-politico-operated Fannie Mae and Freddie Mac, are exempt.

But haven't we been told that the financial crisis was caused by all those irresponsible sub-prime mortgages? So, surely, sub-prime borrowers should not escape their share of the blame. So let's make them pay another percent or two of interest on their mortgages, regardless on whether they are current on their mortgages, have repaid them, or discharged them in bankruptcy. That is not the deal they signed up for? Well, no, but then neither is it the one the TARP recipients signed up for.