Sunday, April 19, 2015

Gary Gensler – Hillary Clinton’s Move to Placate Elizabeth Warren Democrats? What the Media Gets Wrong. Social Security is a Question Mark.

This past week, Bloomberg News reported that Hillary Clinton plans to hire former CFTC Chairman Gary Gensler as CFO of her presidential campaign. Gary Gensler has been praised for his tenure at the CFTC for being a tough regulator, and media comment generally interpreted Clinton’s move as a way to placate the Elizabeth Warren Democrats, who may view Clinton as too close to Wall Street. For example, Matthew Yglesias, writing for Vox, took this line in an article headlined “Elizabeth Warren Democrats should cheer Hillary Clinton's latest big hire.”

What most of the commentary gets wrong is that Gensler’s becoming a tough regulator was a dramatic evolution on his part. While many liberals were pleasantly surprised that Gary Gensler turned out to be a tough regulator, those of us who worked on financial regulatory issues for Gensler when he was an Assistant and then Under Secretary at the Treasury Department were not surprised. For example, I wrote in February 2009 two days after Gensler’s nomination hearing: “Gensler went to great lengths to reassure the Senators that he would be a tough regulator. I see no reason not to believe him. The OTC derivatives industry will also likely not be entirely comfortable with him at the CFTC, though it is not clear at this point what the extent of his authority and influence on OTC derivatives policy issues will be.” (If you read my post, you will find that I don’t agree with everything Gensler said at his nomination hearing, though I support strong supervision and regulation of financial institutions based on good analysis of actual and potential problems.)

While at Treasury, Gensler was actively involved in another issue, Social Security reform. I know less about his thoughts on this than I do about financial regulation, since this was not an issue I worked on. However, I would note that the Bill Clinton Administration flirted with private accounts, perhaps as some sort of add-on to Social Security, and with investing some of the Social Security trust funds in equities. A January 1999 Wall Street Journal article reports:

“Treasury Assistant Secretary Gary Gensler told Congress this week that the president's proposal envisions that the Social Security funds would be invested in a very broad market index, such as the Wilshire 5000, by private money managers who would be hired by a politically independent entity akin to the Federal Reserve Board. Treasury Secretary Robert Rubin, stumping for the Clinton plan Thursday on television’s ‘Good Morning America,’ said: ‘As long as the investment function and the portfolio are totally segregated from government function, then it seems to me that what you’ve done is you've completely ... insulated [investments] from the functions of government.’” 

One of the common explanations given that President Clinton’s Social Security proposals went nowhere is the Monica Lewinski affair. But President George W. Bush also tried, with no more success. The politics of Social Security are notoriously difficult by design. The New Dealers keep winning from the grave.

Now, the politics of Social Security have changed in the Democratic Party, with Senator Elizabeth Warren and other advocating expansion, not cutting, of the program. Republicans continue to want cuts.

Hillary Clinton’s current thoughts on Social Security have yet to be revealed. Political considerations argue that probably she at least will not favor cuts and may go for some expansion funded by an increase in Social Security taxes on high income taxpayers. Gary Gensler’s current thoughts and potential “evolution” on this subject are also not known, but he is likely to keep quiet about this during the campaign. Hillary Clinton will have to say something.

As is quite obvious, there are sometimes big gaps between what candidates say and what they do when they come into office. Social Security will be a difficult issue for a potential Clinton Administration, given the stark division between the Democrats and Republicans. Any effort to “triangulate” will be very difficult to accomplish if any part of a Hillary Clinton Administration proposal on Social Security is seen as cutting benefits, especially to those in the middle class. That would mean civil war in the Democratic Party.

Finally, one suspects Gary Gensler has ambitions beyond the campaign, perhaps Secretary of the Treasury should Clinton win. In this regard, the Matthew Yglesias Vox article contained a telling sentence: “Except the Obama-Gensler relationship was so bad, Obama can't point to Gensler as an example of anything.” Assuming this is correct – the author does not reveal his sources for this statement –  Gensler, if he assumes a major role in a Clinton Administration, would be well advised to work on having good relationships with his colleagues even when there are disagreements about issues such as Social Security. Interestingly, Yglesias reverses responsibility in his next sentence: “By rebuilding the relationship, Clinton now can.” Ultimately, though, Hillary Clinton will be boss should she win in November 2016.

Friday, February 27, 2015

Greece and the European Project

After tortuous and seemingly perilous negotiations, Greece and the Eurogroup appear to have managed to put off another eurozone crisis involving Greece for another four months. There are varying commentaries about who won, the Greeks or the Germans. The bigger question, though, is whether Europe won.
I have thought from the beginning of the euro that the establishment of a single currency was a mistake. Europe is not an optimum currency area. There is no strong central government establishing fiscal policy for the region; fiscal transfers, as we have seen vividly demonstrated, among the countries are far from automatic; and there are marked cultural and linguistic differences, which serve to limit labor mobility among the countries. (I previously wrote on this here.) In other words, establishing the euro was putting the cart before the horse; the Eurozone needs to be more integrated in some sort of federation to avoid careening from crisis to crisis during difficult economic times.
The establishment of the euro was propelled by the French, who reportedly made it a condition for supporting German reunification. The French were no doubt hoping to improve their role in the world while constraining Germany, which would be by far the largest country in the European Union after reunification. In other words, the euro’s creation was done more for political reasons than economic ones.
“The European project has clearly failed to achieve what French political leaders have wanted from the beginning. Instead of the amity and sense of purpose of which Monnet and Schuman dreamed, there is conflict and disarray. Europe’s international role is shrinking, with the old G-5 having evolved into the G-20. And, with German Chancellor Angela Merkel setting conditions for the eurozone, France’s ambition to dominate European policy has been thwarted.
“Even if most eurozone countries retain the single currency, it will be because abandoning the euro would be financially painful. Now that its weaknesses are clear, the euro will remain a source of trouble rather than a path to political power.”
What the Greek situation demonstrates is the Europeans’ failure to decide whether they want a deeper union. After the cold war ended, as observers noted, Europe was faced with a choice: a broader European Union or a deeper one. It has tried to have both by broadening its membership and introducing the euro. It’s not working.

Moreover, there is now a two tier Europe, with some EU countries using the euro and other not. In the UK, which in my view was correct in not joining the euro, there is a significant political movement advocating leaving altogether, with the current government planning a referendum on the subject should they win the next election (or perhaps sooner than that). The Cameron government wants to stay in the EU, but on renegotiated term that would make it sort of an associate member. (As an aside, permit me to observe that French President Charles de Gaulle had a point when he doubted the European credentials of Britain when he vetoed British membership in the European Common Market, which then only had six member states.)

Even though the euro was a mistake, this does not mean that the correct policy now is to get rid of it. The Europeans, or some subset of European countries, have to decide what sort of federation they want. But European politicians, reflecting the ambivalence of their constituencies, have not shown an ability to face up to the implications of having a common currency and the current crisis has been needlessly compounded by a German insistence on austerity, which is a mistake both from an economic and political standpoint.
Kicking cans down the road and imposing wrongheaded economic policies on the poorer, indebted countries of the EU cannot be a long-term strategy for success. At some point, the EU will have to face up to the underlying problems with the euro. 

Thursday, January 15, 2015

Antonio Weiss and Debt Management

One of the comments frequently made about Antonio Weiss and the job of Under Secretary of the Treasury for Domestic Finance is that position’s responsibility for managing the public debt. To read some of the comments, one would imagine the Under Secretary spending his time at his computer projecting cash inflows and outflow, running econometric models to decide on the most cost-effective way to borrow, and making daily decisions on debt issuance.
Of course, that is not the way it works. There is an entire office staffed by career employees dedicated to debt management and others who compile short-term forecasts of daily cash inflows and outflows. For the most part, the Under Secretary does not get involved in these decisions unless he or she wants to or desires to make a major change, such as to the maturity structure of the debt or to the type of securities issued (for example, inflation-indexed bonds or floating rate notes). Also, if there is a debt limit crisis, which has a large political aspect, the Under Secretary and the Secretary have to get involved, even though they would prefer to be doing something else.

During the Reagan and George H.W. Bush administrations, the Assistant Secretary or the Under Secretary sometimes became involved in debt management issues to fight off proposed changes they believed to be bad ideas. For example, during the Reagan Administration, there was a big fight over issues such as inflation-indexed bonds, making notes and bonds callable (in the case of 30-year bonds, shortening the call protection which at the time was 25 years), shortening the maturity structure of the debt, issuing bearer bonds abroad, and so on. In the George H.W. Bush Administration, inflation-indexed bonds were more or less summarily dismissed by the Assistant Secretary and the Under Secretary, but there was major pressure, which was successfully resisted, to sell bonds linked to the price of oil as a budget gimmick to finance additional oil purchases for the Strategic Petroleum Reserve. Also, Resolution Funding Corporation (“RefCorp”) bonds were issued, which was a budget gimmick to put $30 billion of the cost of the Savings and Loans cleanup off-budget.
One Under Secretary who had a strong interest in debt management was Peter Fisher of the George W. Bush Administration, perhaps not surprising since he had been in charge of open market operations at the New York Fed. He was very proud that he was able to shorten the time between the auction deadline for Treasury securities and the announcement of results. That, of course, was a worthy goal, but one has to wonder if it should have been a priority objective of an Under Secretary.  He also achieved notoriety for the botched announcement of the discontinuance of issuance of 30-year bonds, a decision that has since been reversed.

The truth about debt management is that, while there is a substantial amount of detail involved, it is not that interesting unless one is an active market participant with money riding on Treasury decisions. The Treasury can certainly make mistakes, but, as long as it does this task competently, it is usually little noticed. It is a necessary task, but it is not an area in which to achieve major social change.
Consequently, most Under Secretaries take the job with other agendas. It is not clear why Antonio Weiss wanted the position, and it would have been interesting to hear his answer to that question at a confirmation hearing.

As for his critics, I think they wasted political capital in successfully tanking his nomination, though not in preventing Weiss from taking another position to advise Secretary Lew. Absent a crisis, major initiatives from Domestic Finance look unlikely in the next two years. It is true that Treasury’s formal role in financial regulation has increased, and perhaps that was Senator Warren’s real concern. The problem though with financial regulation is at the front-line agencies – their turf fights, their looking out for “their companies,” and their susceptibility to regulatory capture, at least on some issues. Those problems should be addressed, but, in all likelihood, will not be in the current political climate.
In other words, I agree with the frequently made comment that this fight was not really about Weiss, who had the misfortune to find himself in the crossfire between different factions of the Democratic Party. It is hard to see, though, how this fight benefitted anybody, except providing some amusement to some Republican onlookers.

Sunday, January 11, 2015

A Comment about the Price of Oil and Futures Markets

Every time there is a big increase in the price of oil, people are quick to blame speculators in the futures markets. Funny, though, now that there has been a large and rapid fall in the oil price, I haven't seen anything blaming the speculators. At some point, though, the price of oil will increase. Look for speculators to be blamed.
A few things to remember about futures markets:

For every long position there is a short position. The futures markets are a zero sum game (except for things like commissions.) The gains and losses offset each other.
Very few futures contracts are held to maturity and result in delivery of the underlying commodity. It is the threat of delivery that causes the cash and futures prices to converge as maturity approaches.

To make the case that the futures market is affecting the cash market price, one has to make the case that some development in the futures market is affecting the underlying supply and demand conditions for the commodity in a way that would not happen if the futures market did not exist.
Despite the foregoing, I actually think that financial institutions are often not subject to enough regulation or supervision, resulting in imprudent risk taking that can ultimately cost the government and/or society. However, those in favor of better regulation should not use market developments that they know are unpopular (e.g., a stock market decline or an increase in the price of oil) to make the case for more regulation unless they have a good reason to believe that the development is due to lax regulation. Often, they do not have a good case, and this hurts their credibility with people who have some knowledge of the markets in question.

Friday, November 28, 2014

Some Interesting Items on the Web (November 28, 2014)

Financial Regulation and Related Matters:
“Secret Tapes Hint at Turmoil in New York Fed Team Monitoring JPMorgan.” Jake Bernstein of ProPublica.

“The Fed Needs Governors Who Aren’t Wall Street Insiders: With two vacancies to fill, Obama should pick nominees who will look out for Main Street, not the big banks.” Wall Street Journal op-ed by Senators Elizabeth Warren and Joe Manchin.

“George Painter, administrative law judge who criticized his own agency, dies at 87.” This is an article about a former CFTC administrative law judge who recently died. The CFTC had some serious problems with its ALJs in 2010. See my October 2010 posts about this.
“After Criticism, Fed Will Study Wall St. Oversight.” New York Times article.

“Enough Is Enough: The President's Latest Wall Street Nominee.” Senator Elizabeth Warren explains why she opposes the nomination of Antonio Weiss to be Under Secretary of the Treasury for Domestic Finance.
“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee.” Andrew Ross Sorkin of The New York Times doesn’t think much of Senator Warren’s opposition of Antonio Weiss. While having no opinion about Mr. Weiss, I don’t think much of Sorkin’s article. I do, though, agree with Sorkin that having worked for an investment bank should not be an immediate disqualification for the Treasury position. Mr. Weiss seems to be caught in the crossfire of a fight among Democrats as this New York Times article indicates: “Liberal Treasury Nominee’s Wall St. Prowess May Be a Vulnerability.” A blog post at the Center for Economic and Policy Research also criticizes Sorkin’s article – “It Would Take a Lot of Mismanagement to Raise the Cost of Treasury Debt by ‘Just’ 20 Basis Points.”

The Affordable Care Act:
“The Policy at the Heart of the Jonathan Gruber Controversy.” Neil Irwin of The New York Times.

“‘Grubergate’ Is Giving the Supreme Court Cover to Destroy Obamacare.” Brian Beutler of The New Republic.

“Obamacare’s biggest obstacle now may be its public image.” Catherine Rampell of The Washington Post.

“What Jon Gruber's Quotes Really Tell Us About Obamacare—and American Politics.” Jonathan Cohn of The New Republic.


“An Imperial President? Hardly. The smarter Republican response is to pass their own legislation, not howl in protest.” Jacob Weisberg of Slate.

“The GOP Reaction to Obama's Immigration Order Will Be Way More Damaging Than They Realize.” Noam Scheiber of The New Republic.

“Suffer Little Children.” Paul Krugman column on immigration in The New York Times.
CIA and NSA:

“Mark Udall to consider all options to reveal CIA torture report.” Denver Post article.

“Senate Torture Report Talks Break Down As Administration Pushes For Redactions.” Ryan Grimm and Ali Watkins of The Huffington Post.


“What Ferguson Means: The View From Abroad.” Huffington Post article.

“The law may have spoken but the Ferguson verdict is not justice.” Gary Younge writing for The Guardian: “The trouble is that the United States, for far longer than it has been a ‘nation of laws’, has been a nation of injustice. And in the absence of basic justice such laws can amount to little more than codified tyranny. When a white cop, Darren Wilson, shoots an unarmed black teenager, Michael Brown, dead and then is not indicted, the contradiction is glaring. For a world where it is not only legal for people to shoot you dead while you walk down the street, but where they can do so in the name of the law, is one in which some feel they have nothing to lose. And, in the words of James Baldwin: ‘There is nothing so dangerous as a man who has nothing to lose. You do not need 10 men. Only one will do.’”
“It’s Incredibly Rare For A Grand Jury To Do What Ferguson’s Just Did.” Ben Casselman of FveThirtyEight.

“How Not to Use a Grand Jury.” Jeffrey Toobin writing for The New Yorker.

“Chronicle of a Riot Foretold.” Jelani Cobb writing for The New Yorker.

“Ferguson: An American Dilemma.” John Cassidy of The New Yorker.
“America's Budding Police State.” Clive Crook writing for Bloomberg View.


“Behind the G.O.P.’s Misleading Shutdown Statements.” David Firestone of The New York Times.
“You’re Wrong, You’re Wrong, You’re Definitely Wrong, and I’m Probably Wrong, Too: What it was like to edit The New Republic at its most contentious.” Hendrik Hertzberg writing for The New Republic.

“Argentina’s Case Has No Victors, Many Losers.” Floyd Norris of The New York Times.

“United States: U.S. District Court Finds Transfers of Secured Debt by MERS Subject to Pennsylvania Recording Requirements.” Brian J. Levin article at the Mondaq website. Legal issues involving MERS and the separation of a mortgage from a promissory note continue to be considered by the courts.

“Wait! The right wants a new CBO director after all.” Lori Montgomery of The Washington Post.

“Keynes Is Slowly Winning.” Paul Krugman blog post.

“Counting Benghazi Blessings.” Gail Collins of The New York Times.
“Get Real, Boris Johnson!” Roger Cohen of The New York Times on the IRS problems of the mayor of London.

“Judge on the Spot.” Linda Greenhouse writing for The New York Times.

Tuesday, November 25, 2014

Andrew Ross Sorkin Opines on Elizabeth Warren and Antonio Weiss

In this morning’s New York Times, Andrew Ross Sorkin in his Dealbook column attacks Elizabeth Warren rather viciously for her opposition to President Obama’s nomination of Antonio Weiss for the position of Under Secretary of the Treasury for Domestic Finance (“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee”). The article is intemperate enough to make one wonder what it is doing on the New York Times’ news pages rather than in its opinion section because it is more advocacy than analysis.
I hasten to say that I have no opinion about whether Antonio Weiss would be a good Treasury Under Secretary having only been aware of him since his nomination was announced. Also, I agree with Mr. Sorkin that having worked for a financial firm should not operate as an immediate disqualification for this Treasury Under Secretary position. I do, though, take issue with the following paragraphs in Mr. Sorkin’s column:

“The role Mr. Weiss has been nominated for is largely responsible for managing the country’s $12.9 trillion debt at a time when the Federal Reserve is ending its stimulus. The job requires deep experience in the capital markets and global relationships. This is not a job for a local lawyer or research group executive.
“To put this in context, according to Politico, if the interest on the securities the Treasury sells was just 20 basis points higher for a year because of uncertainty or mismanagement, it would cost taxpayers $32 billion — more than it would cost to fund the Consumer Financial Protection Bureau for 50 years. The bureau was, of course, inspired by Ms. Warren.”
Bringing up the Consumer Financial Protection Bureau in this context is, of course, a cheap rhetorical trick that says more about Mr. Sorkin than it does Senator Warren, but the real problem with this paragraph is that it makes Treasury debt management seem more difficult than it actually is. Essentially, in its debt management decisions, Treasury needs to be aware of any shortfall between revenues and expenditures, the timing mismatch between when revenues are received and payments need to be made, and the need to refinance maturing debt. This is not that difficult. Usually, Treasury adds or subtracts from its current pattern of security issuance given the short-term forecasts of its cash needs.

In my experience at Treasury, most debt management decisions are not that important unless they come as a surprise to the market. I remember as a new Domestic Finance employee in the early 1980s wondering how Treasury was going to finance the huge increase in deficits that took place at the beginning of President Reagan’s administration. They had jumped from about $50 billion a year to around $200 billion, which were big numbers at the time. My career boss, Frank Cavanaugh, had a simple answer, “more.” He was absolutely right. There were some political appointees at Treasury who wanted to change debt management practices significantly and others who disagreed with the first group; for the most part, Secretary Don Regan did not accept the recommendations for changes.
During the Clinton and George W. Bush administrations, there was a conscious policy to shorten the average maturity of the public debt. The Obama administration has reversed this and has been lengthening the average maturity. While I did not and do not agree with the previous shortening decision, I also do not think it was that significant except for the decision to discontinue issuing 30-year bonds during the Bush administration. The announcement of this decision came as a surprise to the market and was botched in its execution (the news embargo was broken by a consultant who informed a client firm and Treasury posted the information on the web before the embargo expired). The decision itself was wrong and was reversed after the Under Secretary who made the decision, Peter Fisher, left the Treasury. What this episode demonstrates is that Treasury should not try to be too clever and try to outwit the market. As a Treasury Assistant Secretary for Domestic Finance in the George H.W. Bush administration, David Mullins, remarked with respect to Treasury debt management, “it’s tough for an elephant to dance.”

With respect to Mr. Weiss, I would be more concerned about his views on financial market and financial institution regulation, given Treasury’s enhanced role in this area, and also whether he is the sort of person one can trust to deal with a financial market emergency, should that happen. I also would want to have some idea about his management skills and whether he seems to be someone who understands the differences between the public and private sectors and can make the transition without too many problems.  
As for Mr. Sorkin, he may be right that Senator Warren is wrong to oppose Mr. Weiss. The way he makes his argument, though, reinforces the suspicion, which has been prevalent for some time, that he has been at least partially captured by Wall Street ever since he wrote Too Big to Fail. One should listen to people from Wall Street because they know their business, but one should always keep in mind that their expressed views may be colored by their self-interest.

Saturday, November 15, 2014

Some Interesting Items on the Web (November 15, 2014)

The Affordable Care Act:
“The Real Villains of the Obamacare Cases Aren't the Judges—They're the Lawyers.” New Republic article by Yishai Schwartz.

“Delay sought on health care at appeals court.” Lyle Denniston writing for Scotusblog.
“Symposium: It’s way too soon for ACA opponents to celebrate.” Brianne Gorod writing for Scotusblog.

“State Obamacare Strategies Take Shape as Court Case Looms.” Article by Alex Wayne for Bloomberg Businessweek.

“This Philly-Based Investment Adviser Has Become Obamacare's Digital Menace.” Sam Stein article for The Huffington Post about the man who is finding the Jonathan Gruber videos.
“Eight Reasons to Stop Freaking Out About the Supreme Court's Next Obamacare Case.” Brian Beutler article in The New Republic.

“Will GOP Govs Really Rescue Obamacare?” Michael Tomasky is doubtful if the plaintiffs win at the Supreme Court. Article in The Daily Beast.
“Law in the Raw.” Linda Greenhouse article for The New York Times.

“Four Reasons the Supreme Court Is Likely to Rule Against the Obama Administration in Burwell.” John Yoo writing for National Review Online. Linda Greenhouse refers to this article.
“Did the Author of Obamacare Admit It’s Evil?”  Jonathan Chait of New York magazine.

“Will Obamacare separate Scalia from his principles?” E.J. Dionne writing for The Washington Post.

“The mess Jonathan Gruber created.” Steve Benen writing for the MSNBC website.
“The Jonathan Gruber Controversy and Washington’s Dirty Little Secret.” Neil Irwin of The New York Times.

“The Jon Gruber controversy and what it means for Obamacare, explained.” Sarah Kliff of Vox.

“The Truth About Gruber-Gate.” Kate Pickert writing for the Time magazine website.

“CFTC Turns Toward Administrative Judges.” Wall Street Journal article. In 2010, the CFTC had problems with its administrative law judges. I wrote about it here, here, and here.                                
“In Cuba, Misadventures in Regime Change.” New York Times editorial.

“UK High Court court wades into Argentina’s debt crisis.” Financial Times article.

“The Governing Trap.” Advice for the Republicans from the editors of the National Review.
 “Don’t govern on fantasies.” E.J. Dionne comments on the National Review editorial in his Washington Post column.

“Wobbling on Climate Change.” New York Times op-ed by Piers J. Sellers, the acting director of earth science at NASA’s Goddard Space Flight Center.
“The Worst Voter Turnout in 72 Years.” New York Times editorial.

“Who Will Run CBO Next?” Damian Paletta speculates for The Wall Street Journal.
“GOP Plan to Block Immigration Action Could End in Government Shutdown.” Margaret Hartmann of New York magazine.

“Mexico’s Bold Move on Debt Restructuring Contracts.” New York Times article.

“Tim Geithner: The 3 Words That Saved The Euro Were Ad-Libbed.” Article by Ben Walsh in The Huffington Post.
“Why the Republicans Won.” Elizabeth Drew writing for The New York Review of Books’ blog.

“Congress Extends Itself.” Gail Collins writing about Congress and tax legislation. She comments:
“The current Ways and Means chairman, Dave Camp, is a tragic figure who actually attempted to do tax reform with an ambitious proposal that eliminated some temporary taxes and made the rest permanent. It included a 4 percent reduction in the top tax rate, because no matter how hard Camp struggled, he could not honestly get it lower.
“He might just as well have proposed a bill declaring God dead. The committee never even voted on it. John Boehner made fun of it. Camp was the political version of Justin Bieber, without the parties.”