The Hearing

A New Format

Tue, 11 Aug 2009 07:00:00 -0500

Simon Johnson and James Kwak will be presenting their perspectives on U.S. economic policy in a new weekly online column. We think that this format will allow more in-depth analysis of key policy issues than the blog format of The Hearing. Simon and James will no longer be posting to The Hearing; however, all previous posts will remain accessible here. Today's column discusses the current debate over health-care reform, focusing on why many Americans feel comfortable with their current health care coverage -- and why they probably shouldn't.

Dividing the Loot from Cap and Trade

Tue, 04 Aug 2009 14:00:09 -0500

Now that the Senate Finance Committee has finished doing whatever it did to health-care reform, it is turning to cap and trade with this morning's hearing on "allowance and revenue distribution." This sounds like a boringly technical topic, but in fact it's one of the most important aspects of climate change legislation. A brief review: A cap-and-trade system to regulate carbon emissions is one in which, to emit a ton of carbon, you have to have a permit - these are the "allowances." Those permits can be traded on an open market. The point is that because the allowances have a market price, they create an incentive for firms to emit less carbon. Say I emit 100 tons of carbon, I have 100 permits, and permits trade at $20 each; if I can reduce my emissions by 10 tons, I can sell those permits and make $200; so if I

Making Financial Regulation Work: The Supreme Court's Role

Mon, 03 Aug 2009 06:38:37 -0500

This is part of a series on The Hearing called "Making Financial Regulation Work." This guest post was filed by University of Pennsylvania professor David Zaring. While Congress and the administration consider various proposals for financial reform, it is worth considering what the third branch of government could contribute. Will the Supreme Court have anything to say about what a systemic risk regulator should look like? I think it could. The reason is a case called Free Enterprise Fund v. PCAOB, which the court will decide next term. Free Enterprise Fund could determine just how “independent,” or free from presidential control, an independent financial regulator can be. This matters because a systemic risk regulator could either be very much under the president’s control or be very independent, depending on how Congress writes the legislation.

Against Physician Pay-for-Performance

Thu, 30 Jul 2009 13:42:44 -0500

This guest post is from Sylvia Brandt, an assistant professor at the University of Massachusetts, Amherst. During the Great Health Care Debate, a great deal of attention has been focused on the issue of physician incentives. Atul Gawande's article in the New Yorker on discrepancies in per-insured Medicare spending, which President Obama made required reading in the White House, highlighted the economic incentives that physicians have to order additional tests and procedures - especially when they can order those services from for-profit companies of which they are owners. One proposed solution, reportedly favored by Peter Orszag and Obama, is to shift toward paying physicians for performance. The basic concept is simple: physicians' compensation would be linked to their patients' health outcomes, and therefore they would have the incentive to do what is most likely to produce a successful outcome at a reasonable cost. This idea seems obvious to many economists

Attention Shifts Back to the Foreclosure Crisis

Tue, 28 Jul 2009 15:14:36 -0500

The recent financial crisis began at least in part as a housing crisis. The toxic assets that initially threatened to bring down the global financial system were largely based on subprime residential mortgages; as borrowers began defaulting on those mortgages, whole classes of complex securities began plummeting in value. The other side of banks losing money on their risky investments, of course, is homeowners losing their houses through foreclosure. In the dark months of September to February, it was common to say that the financial crisis would not end until the foreclosure crisis ended. Recently, however, as major banks have reported death-defying profits, one hears that sentiment less often; perhaps the financial sector can recover even as the foreclosure wave continues to crash down on communities across the country. Today the Joint Economic Committee held a hearing on the foreclosure crisis, featuring a new report by the Government Accountability Office.

Make Haste Slowly

Fri, 24 Jul 2009 08:15:00 -0500

This guest post is from Martin Baily, Charles Taylor and Peter Wallison of the Pew Financial Reform Project. The patchwork of federal agencies that was charged with overseeing the financial system failed to protect us from crisis last year, and everyone in Washington agrees that it needs fixing. However, the regulatory reform debate is proceeding piecemeal and at breakneck speed -- an unnecessarily risky strategy given the stakes involved. The regulatory infrastructure that will be implemented will affect the U.S. and global financial sector for decades to come. A fact-based, bipartisan approach is a much more certain path to get us to where we need to go – toward the creation of a competitive, fair and stable financial system for the 21st century. There is time to be methodical about reform. It will be a while before financial institutions resume significant credit expansion: The danger of excessive credit

The "Other" Health Care Issue

Thu, 23 Jul 2009 11:21:00 -0500

President Obama took to the airwaves last night to argue for comprehensive health-care reform in the face of increasing obstruction from Republicans and skepticism from "moderate" Democrats. There has been tremendous public debate over every dimension of health-care reform. Currently the key issues seem to be about cost - how much the bill itself will cost over the next 10 years, and whether it will succeed in reducing health-care costs in the long term. Long-term care costs are important. As the refrain goes, if we fail to do anything, Medicare (and to a lesser extent Medicaid) will consume all of the federal budget at some point in the next few decades. And the administration has good ideas on this score, such as the Independent Medicare Advisory Council, which would have the power to modify reimbursement rates to create the incentives that lead to better patient outcomes at reduced costs.

Auctions Bill Is on Agenda for TARP Warrant Hearing

Wed, 22 Jul 2009 07:00:00 -0500

The $700 billion bailout bill required the Treasury Department to obtain warrants from bailout recipients. The warrants give the owner the right to buy stock by some future date at a preset price. One of the overseers of the Troubled Asset Relief Program, Harvard professor Elizabeth Warren, alleges that the U.S. Treasury has been selling the taxpayers’ warrants back to the banks at 66 cents on the dollar. Not many people would like it if their Uncle Sam sold their $300,000 house for $200,000. Yet, that is what the July 2009 Congressional Oversight (COP) Panel Report alleges that Treasury is doing with the taxpayers’ warrants. This report has many of the House Financial Services subcommittee on oversight and investigations members ready to take matters into their own hands. Democratic subcommittee members Mary Jo Kilroy (Ohio), Alan Grayson (Fla.), and Jackie Speier (Calif.) have introduced legislation to force the U.S. Treasury

Right to Rent: A Non-Bureaucratic Solution to the Foreclosure Crisis

Mon, 20 Jul 2009 12:28:15 -0500

This guest post is from Dean Baker, co-director of the Center for Economic and Policy Research. RealtyTrac released data last week showing that the foreclosure rate in the second quarter hit yet another record high, 11 percent above the first-quarter pace. Foreclosures are now running at a rate of close to 2 million a year. It has been almost two years since the foreclosure crisis first became headline news. In this period, President Bush, Congress and most recently President Obama have put forward a variety of programs. None of them has had much impact on stemming the tide of foreclosures. It is time to try a different tack. There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in

Protecting Consumers Against Another Failure of Government

Thu, 16 Jul 2009 17:26:21 -0500

Nick Schulz, a fellow at the American Enterprise Institute, filed this guest post. The House Financial Services Committee today held a hearing on consumer protection as part of a financial regulatory overhaul. In particular, the committee explored the creation of a dedicated agency called the Consumer Financial Protection Agency. But before Congress creates a new entity that adds to the alphabet soup of regulatory bodies in Washington, it should take a good, long look in the mirror. Federal government policy and regulation played a sizable role in the generation of the housing bubble, and the subsequent bust that sent financial markets into a tailspin. Congress can best protect consumers by undoing many of the harmful policies that fueled the crisis in the first place. For Congress to do that, it must rethink its steadfast promotion of homeownership, which has long been a bipartisan goal. The Democratic chairman of the committee,

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Thu, 16 Jul 2009 17:26:21 -0500

The Fed's Risk-Taking

Wed, 15 Jul 2009 09:07:39 -0500

This guest post is from the Economic Policy Institute's Nancy Cleeland. Much has been said about the Federal Reserve’s exploding balance sheet, which jumped from about $800 billion to more than $2 trillion in the wake of the Lehman Bros. collapse as the Fed pumped money into credit markets to prevent further failures. Less appreciated is the amount of risk suddenly taken on by the central bank, which has a long history of holding only Treasury securities, gold and other super-safe assets. Using calculations contained in a working paper by IMF economist Peter Stella, we at the Economic Policy Institute charted the growth of risk in the balance sheet, as shown below. This risk-taking is an indication and an outcome of the Federal Reserve’s expanded role as credit market intermediary, and is among reasons many are calling for greater transparency from the notoriously secretive central bank. This morning starting at

Why Banks Aren't Modifying Enough Mortgages

Mon, 13 Jul 2009 11:15:44 -0500

Apparently Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan are planning a sit-down with the top 25 mortgage servicers on July 28. The issue is that the banks have been slow to modify mortgages in danger of default and foreclosure, despite the administration's Making Home Affordable plan, which was supposed to give servicers incentives to make those modifications. The failure of servicers to make modifications in the volumes expected by the administration probably has one of two causes. First, it could be that they don't have the systems and processes in place, although the appropriate response to that excuse is: "Why not?" Second, and more likely in my opinion, it could be that the incentives just aren't big enough.

In Defense of the Fed's Independence

Fri, 10 Jul 2009 06:05:46 -0500

This guest post was filed by David Zaring, University of Pennsylvania professor and a blogger at The Conglomerate. Yesterday, Federal Reserve Vice Chairman Donald L. Kohn testified before Congress on the independence of the Fed, heretofore the most independent of all federal agencies and the one least subject to congressional oversight. Might that independence be altered by the coming financial reform legislation? There are two challenges before Congress to Federal Reserve independence, and it will be tricky for the Fed to manage them both in a way that preserves its independence, even though that independence has, for the most part, been a good thing. Why is the Fed so independent? Part is statutory – the Fed has a great deal of flexibility in setting monetary policy, and Congress wrote its governing legislation to give it that flexibility. Part of it lies in the controversial (for a whiff of the controversy,

Next Shock Coming: Commercial Real Estate

Thu, 09 Jul 2009 10:00:09 -0500

The Joint Economic Committee holds a hearing this morning on worsening conditions in commercial real estate – falling rents, fewer tenants, and defaults on debt down the road. This seems to be the first hearing on Capitol Hill to focus on these issues and what can be done. “Not much” seems to be the reasonable answer. The written testimony from Jon Greenlee, of the Federal Reserve, is particularly disheartening. There is currently about $3.5 trillion of debt associated with commercial real estate, about half of which is on the books of banks. He suggests that the Fed has been following this situation closely and has stayed on top of banks’ exposures to the sector. He also has some rhetoric about the recent stress tests. Why do I not find this reassuring? James Helsel, on behalf of the National Association of Realtors, is even more negative. He argues that this sector

The Taboo Against Government Intervention

Tue, 07 Jul 2009 11:11:02 -0500

Following in Chrysler's wake, GM seems to be on the fast track toward a successful bankruptcy exit -- "successful," that is, in the sense that GM and the Treasury Department get what they wanted, and the company does not melt down into liquid. (One remaining hurdle is the appeal lodged by Steve Jakubowski of bankruptcy blogging fame, which seeks to force the "New GM" to accept liability for injuries already suffered by people due to GM cars.) Predictably, of course, the government is repeating that it has no intention to intervene in the operations of GM, despite its 61% ownership share. Here's the way the issue is framed in the Post story: