Defusing the Culture Wars

Ruy Teixeira proposes that rather than ignoring or counter-attacking when attacked on “culture war” issues the Democrats the Democrats should take some “commonsense steps”. I am excerpting his steps.

Here’s common-sense proposition #1: Police misconduct and brutality against people of any race is wrong and we need to reform police conduct and recruitment. However, more and better policing is needed to get criminals off the streets and secure public safety. That cannot be provided by “defunding the police”.

Here’s common-sense proposition #2: America benefits from the presence of immigrants and no immigrant, even if illegal, should be mistreated. But border security is hugely important, as is an enforceable system that fairly decides who can enter the country.

Common-sense proposition #3: Equality of opportunity is a fundamental American principle; equality of outcome is not.

Common-sense proposition #4: Racial achievement gaps are bad and we should seek to close them. However, they are not due just to racism and standards of high achievement should be maintained for people of all races.

Common-sense proposition #5: No one is completely without bias but calling all white people racists who benefit from white privilege and American society a white supremacist society is not right or fair.

Common-sense proposition #6: People who want to live as a gender different from their biological sex should have that right. However, biological sex is real and spaces limited to biological women in areas like sports and prisons should be preserved. Medical treatments like drugs and surgery are serious interventions that should not be available on demand, especially for children.

I agree with all of those and I suspect that the majority of people who vote Democratic do as well but I think there’s something Mr. Teixeira is missing. The sources that contribute to Democratic campaigns and people who work on campaigns don’t agree with those views.

We’re seeing that work out in the Chicago mayoral run-off right now. Both of the candidates are Democrats and have been all of their lives. One candidate receives almost all of his campaign contributions from labor unions; he has stated pretty unequivocally that he considers defunding the police a political goal (he’s trying to walk that back). He derives his support mostly from blacks (he’s black) and lakeshore liberals. He’s been endorsed by Toni Preckwinkle and Chuy Garcia among others. The other candidate is derives most of his contributions from individuals and is running on law and order. He derives most of his support from the Northwest Side which is primarily white but he’s receiving badly needed endorsements from key black leaders, e.g. Jesse White, Bobby Rush.

The election probably won’t tell us whether most Chicagoans are progressives but it will tell us whether safety is more important to black Chicago voters than having a black mayor.


The Moral Hazard Administration

The editors of the Washington Post have expressed their views on the tack the Biden Administration is taking on the incipient banking crisis and their views are closely aligned to those of the editors of the Wall Street Journal—the administration is erring and introducing serious moral hazard:

President Biden has long positioned himself as a champion of the middle class, but his administration’s bank bailouts have the potential to become a generous gift to the rich. The most controversial aspect of the emergency rescue of Silicon Valley Bank and Signature Bank was the decision to fully compensate all depositors of those banks, even sophisticated millionaires and billionaires who presumably were fully aware that the amounts they were holding in their accounts were well above the usual $250,000 limit that the government insures.

Now other bank executives are understandably asking: Are all their customers’ deposits fully insured as well? Treasury Secretary Janet L. Yellen pretty much said yes this week when she told the American Bankers Association that it is “our resolute commitment to take the necessary steps to ensure that deposits’ savings and the banking system remain safe” and that “similar actions could be warranted” if other institutions face runs like Silicon Valley Bank did.

A blanket government backing of all deposits in the United States would be a mistake. It would encourage risk-taking at banks because they know the government would step in if they faltered. Even worse, such sweeping action would protect wealthy Americans — and would be funded through fees that banks pay to the Federal Deposit Insurance Corporation, which means, indirectly, by anyone with a bank account.

They have their own proposal:

There is a better approach. The goal should be to protect the savings of the middle-class bank customers and of the small and midsize businesses that are key to economic dynamism and growth. These are the people and firms for whom the FDIC’s safety net was designed during the Great Depression, when thousands of banks failed, leaving their customers stranded. They do not have the financial sophistication, or the armies of financial analysts, to assess bank balance sheets and suss out the likelihood that a bank is going to fail.

To achieve this goal, the FDIC should continue to insure accounts up to $250,000 and add an emergency provision to fully back all “transaction accounts” that businesses use to make payroll and cover other basic needs. In so doing, it would protect the vast majority of U.S. deposits. It would also stabilize the banking system. This is exactly the approach that the FDIC took during the 2007-2009 financial crisis to help buttress the system during a more extreme crisis. Though such a move would require increasing the fees that banks pay to the FDIC, it would be manageable, especially if the coverage is temporary.

That will almost undoubtedly require an act of Congress.

As I see it there are several strategies that might be used:

  • Cover all deposits regardless of size by having the Treasury underwrite them. Not only is that at odds with controlling inflation, it is probably illegal and will disproportionately help rich depositors.
  • Cover all deposits regardless of size through the FDIC, increasing the FDIC levy to cover it, either via special levy or permanently. That appears to be the WaPo’s proposal using a special levy. That will bring a host of unforeseen secondary effects including driving some banks out of business (because depositors flee due to the increased cost), increase the number of the unbanked, and disproportionately help rich depositors.
  • Cover all deposits regardless of size through the FDIC, increasing the FDIC levy using a graduated scale to ensure progressivity. That alleviates some but not all of the problems listed above.
  • Let the FDIC cover deposits up to $250,000. Caveat emptor. Some companies may go out of business.
  • Let the FDIC cover deposits up to $250,000. Provide assistance to companies to allow them to meet payroll on a case-by-case basis. That seems to be the approach proposed by the editors of the WSJ.

If the last alternative is selected I think it absolutely, positively needs to be covered by either a) an increase in taxes or b) a reduction in other spending in the amount of the assistance. Anything else is inflationary.

Regardless of which strategy is adopted, there should be investigations, not just by the FDIC and the Federal Reserve but by the Congress as well.

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Guaranteed Profits for Banks?

The editors of the Wall Street Journal are pretty upset about the direction of the Biden Administration’s strategy in dealing with the banks:

Financial regulators have ignored their post-2008 rule book to contain the latest banking panic. And on Tuesday Treasury Secretary Janet Yellen tore it up by announcing a de facto guarantee of all $17.6 trillion in U.S. bank deposits. Regional bank stocks rallied, but it’s important to understand what this moment means: the end of market discipline in U.S. banking.

“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen told the American Bankers Association convention. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Translation: Depositors needn’t worry about the safety and soundness of banks. Uncle Sam will make sure you don’t lose money.

This isn’t an explicit guarantee, but it’s close enough for government work.

They characterize it as “the end of market discipline”:

The Administration is presenting its intervention as a one-off. But once regulators do something, they create the market expectation that they will do it again. And if they don’t, the ensuing market panic will invariably impel them. Biden officials are crossing a Rubicon here, and they’re doing it essentially by fiat without approval by Congress.

Regulators have become all too accustomed to doing anything they want during a market panic, reaching for extraordinary power even in non-emergencies. Ms. Yellen may have shored up confidence in midsize banks, but the cost of her guarantee will be a less sound and safe U.S. banking system.

IMO there are only a couple of viable ways to handle the situation.

  1. All commercial banks could be nationalized and all deposits covered.
  2. The FDIC’s insurance rates could be raised to cover all deposits. That alone would probably drive some depositors away and cause some banks to close.
  3. Only insured deposits should be covered; businesses that can’t meet payroll because they had too much in uninsured deposits in the wrong banks should be thrown a lifeline; the Congress should act to change the law consistent with all of this.

My preference is C. We don’t appear to be doing any of those but, as the WSJ editors point out, are encouraging banks (and companies!) to take greater risks.


They’re All Wrong!

James K. Galbraith expresses his thoughts on the incipient banking crisis in a piece at The Nation. The TRL;DR version of his piece is that progressives are wrong about it:

The problem was not (as Larry Summers declared) that a bank should not convert short deposits into long loans and investments. That is—more or less—what banks do. Loans and bonds are their business. It was also not (as Elizabeth Warren declared, along with other progressives fighting the last war) that the bank took on too much risk. Its loans were risky—because it specialized in start-ups, which are inherently risky. But they were not failing. Its investments, in bonds, were not risky in the usual sense—they were not in danger of default.

In the same vein as Warren, Paul Krugman declared that tougher regulation (of loans) and larger capital requirements or liquidity cushions might have saved the day. Again, fighting the last war. SVB’s loans were all right so far. SVB’s bonds, of course, are liquid! Treasuries and high-quality mortgage-backed securities can be readily sold. SVB’s capital and liquidity would have passed tests until a few days before the crash. This is characteristic of bank failures: Capital looks ample until it disappears. In SVB’s case, the run drained $42 billion in one day—and that was that. The idea that capital requirements provide safety is an economists’ illusion.

This observation is interesting:

The business model of SVB consisted of an attractive return on deposits, adventurous loans mainly to young companies in the tech sector, perks for big clients to keep their funds in the bank, and large investments in government bonds and mortgage-backed securities. The safety of the bonds worked to offset the risk of the loans, while the bonds’ return covered the cost of deposits—which grew rapidly as client companies and some cash-rich individuals parked their funds at the bank.

He blames SVB’s problems on the Federal Reserve and, consistent with that, he thinks that the Fed’s actions to fight inflation are a fool’s errand. Basically, he still belongs to Team Transitory:

So why did the Federal Reserve invert the yield curve? To fight inflation? To kill jobs and stall wages? If so, the stupidity—or the economistic groupthink—is shocking. Most price increases have already faded from the economy (for now). Though job growth is strong, wage increases lag prices: Real wages have fallen. The Fed obviously operates in total disregard of its full-employment mandate—nothing new in that—and indifference even to the textbook logic of labor markets. Why is that? Among specialists, opinions differ on how smart top officers of the Federal Reserve actually are. Personally, I vote for dishonest over stupid.

He also predicts instability in the global banking system.


Bottles or Cans?

It’s been a long time since I’ve had a beer which is pretty odd for a guy who grew up in a town and at a time in which beer was considered completely acceptable to feed to babies. I honestly don’t know whether I was given any as an infant and there’s no one I can ask any more but I wouldn’t be surprised if I was. Here’s a report at the American Chemical Society about a study that investigated whether cans or glass bottles were better ways of storing amber ale and India Pale Ale:

Cans and brown bottles of amber ale and IPA were chilled for a month and then kept at room temperature for five months to mimic typical storage conditions. Every two weeks, the researchers analyzed the metabolites in newly opened containers. Throughout this time, the concentration of certain metabolites in amber ale — including some amino acids and esters — differed significantly depending on whether it was packaged in a bottle or can. IPA, however, was much less sensitive to packaging type, possibly because of its higher concentration of polyphenols from hops. These compounds not only prevent oxidation but also bind to amino acids, thus retaining them in the beer rather than allowing them to get stuck to the inside of a container.

The researchers also found that the metabolic profile of both amber ale and IPA changed over time, whether packaged in a can or bottle. However, amber ale in cans showed the greatest variation during aging.

meanwhile this article by Jared Corbett is pretty insistent that lager beer fares better in cans:

The verdict on taste: as long as you are not a can-sniffer, cans win out on taste. However, you should really be pouring your beer into a glass. Beers poured from a bottle or a can into a glass taste equally good, as long as they haven’t been skunked. Around here, we believe a Sprecher pint glass provides the best taste experience of all. But there’s more to the equation than taste.

When I was working in Germany the Germans were pretty confident that beer did not travel well. I don’t know what the situation is now but back then there were only two brands sold all over Germany: Löwenbräu and the beer brewed in the small town in northwest Germany in which I was working which had the reputation of being the worst beer in Germany. It was pretty awful. Since they didn’t ship beer over distances just about every tavern served different beer, brewed locally, There wasn’t much controversy about cans vs. bottles because it was all straight out of the keg.


Speaking of Jobs…

I’m not sure what word to use for something that’s simultaneously infuriating and enlightening but that was my reaction to this observation by Hirsh Chitkara at Tablet:

In speeches, Biden said the CHIPS Act would produce 1 million construction jobs. It wasn’t until The Washington Post challenged this assertion that the White House admitted its mistake. The correct estimate, even when calculated by industry-backed research groups, was closer to 6,200 jobs — not exactly great bang for your 50 billion bucks. Workers without high school degrees can expect to earn around $48,000 from semiconductor manufacturers — only $8,000 above the median across all industries, and certainly not enough to afford the lifestyle of postwar factory workers. Ironically, the bill has probably been most effective as a jobs program for DC lobbyists, who received a tidy $100 million sum that will undoubtedly do wonders for Georgetown’s cupcake economy.

While reshoring advanced chip manufacturing is a security necessity, it’s not going to facilitate rebuilding the American economy from the middle out. What will?

Laissez-faire won’t do it. What that will do is create more minimum and sub-minimum wage jobs while further enriching those who are already prosperous. I’ve made my view pretty clear. I think we need to produce a lot more of what we consume than we are at present and reduce the pull factors on immigration with tough labor laws that are strictly enforced. What’s your preferred alternative?


About Those Job Listings…

It was gratifying to me to see this article in the Wall Street Journal by Te-Ping Chen. Guess what? Just as I’ve been saying around here for some time, a lot of the job listings are phonies:

A mystery permeates the job market: You apply for a job and hear nothing, but the ad stays online for months. If you inquire, the company tells you it isn’t really hiring.

Not all job ads are attached to actual jobs, it turns out. The labor market remains robust, with 10.8 million job openings in January, according to the Labor Department. At the same time, companies are feeling budgetary strains and some are pulling back on hiring. Though businesses are keeping job postings up, many roles aren’t being filled, recruiters say.

Hiring managers acknowledge as much. In a survey of more than 1,000 hiring managers last summer, 27% reported having job postings up for more than four months. Among those who said they advertised job postings that they weren’t actively trying to fill, close to half said they kept the ads up to give the impression the company was growing, according to Clarify Capital, a small-business-loan provider behind the study. One-third of the managers who said they advertised jobs they weren’t trying to fill said they kept the listings up to placate overworked employees.

Other reasons for keeping jobs up, the hiring managers said: Stocking a pool of ready applicants if an employee quits, or just in case an “irresistible” candidate applied.

I don’t know how to disaggregate the various reasons that companies post phony job listings which include they’re fishing, they’re trying to placate their own employees, they’re making a care for H1-Bs, and they’re trying to convince investors they’re growing faster than they actually are. But the message is clear: don’t believe them.


Investigate the Bank Failures

I want to concur with Luigi Zingales’s obseraations at City Journal that there needs to be an investigation of the bank failures:

Resilient institutions cannot be brought down by the failure of just one individual, even the CEO. In fact, banks have a number of important gatekeepers. The failure of these banks suggests that all these gatekeepers failed together. If we want to restore trust in the system, we need to understand why. Only an authoritative presidential commission can do so.

The first gatekeepers to be investigated are the boards of SVB and Signature Bank, which are responsible for ensuring that bank risks are properly managed. They were not. In June 2019, Delaware’s supreme court held that the board members of Blue Bell Creameries should be personally liable for losses the company suffered following a deadly listeria outbreak because they did not create a board-level process to oversee mission-critical risks for the company. Why should the same not happen to bank board members when the bank they supervise fails to adopt such basic risk-management techniques as hedging interest-rate risk?

The second gatekeeper to be investigated should be the auditors. On February 24, KPMG signed the audit report of Silicon Valley Bank. On March 1, it signed the audit report for Signature Bank. By law, auditors must state whether they have any doubt about a company’s ability to survive over the next year. In both cases, KPMG expressed no doubts. Within two weeks, both banks failed. If auditors are unable to detect fraud or risk, what are they paid for?

The last and most important gatekeeper to be investigated is the Fed. The knee-jerk reaction of many liberal commentators was to blame former president Donald Trump for these bank failures. Under Trump’s administration, midsize banks like SVB were exempted from the duty to conduct a stress test. If this relaxation did not occur, the claim goes, SVB’s risk would have been identified much sooner. This claim is false, however. As Nobel laureate Douglas Diamond clearly stated in the latest episode of Capitalisn’t, a podcast that I co-host, SVB would have passed the stress test with flying colors. The 2022 stress test did not evaluate banks’ exposure to the possibility of significant interest-rate increases. If the Fed did not fail in its role as regulator for lack of instruments, then why did it fail?

to which Aaron Klein at Brookings adds:

I count at least four classic red flags of the bank’s conduct that should have sent the alarm bells ringing, which the Fed appears to have slept through.

  1. Explosive asset growth.…
  2. Hyper reliance on uninsured deposits.…
  3. Huge interest rate risk. …
  4. Dash for cash to the Federal Home Loan Bank.…

Each of these red flags should have triggered greater scrutiny from the Federal Reserve. Combined, they become a red laser beam screaming for greater scrutiny. After all, SVB is not a Main Street bank and never was. Regional banks of its size ($200B) have around 1,000 branches: SVB had 16. This does not even include more potential red flags about the relationship between SVB’s venture capital arm and the bank’s customer base, a potential red flag the Fed’s regulation of the bank holding company should have analyzed.

He characterizes the Fed as “asleep at the switch”. That seems to be happening a lot lately. Allowing the Federal Reserve to investigate itself is insufficient. There needs to be a Congressional if not White House level investigation.

Not only is it important that the interests and responsibilities of bank management, boards of directors, the banks’ auditors, and the Federal Reserve need to be consistent and aligned, so do the interests and responsibilities of shareholders and stockholders in the banks.

There’s a sort of Spiderman rule here: with great covering of uninsured deposits comes great oversight.



This quote from Emma Sky, founding director of Yale University’s International Leadership Center, who served as political adviser to the Commanding General of U.S. Forces in Iraq, is the kernel of Tom O’Connor’s retrospective in Newsweek on the U. S. invasion of Iraq which began 20 years ago today:

“The Iraq War undermined the rules-based international order,” Sky said, “and America’s reputation as the standard bearer of democracy.”

I recommend reading the piece in full.

I have seen an enormous amount of historical revision connected with the U. S. invasion of Iraq over the last several days. Suffice it to say that IMO the only way you can characterize Iraq as freer today than it was 20 years ago is to define Islamism as freedom. That would make Saudi Arabia and Iran among the freest countries in the world which certainly goes against any Western idea of freedom let alone an American idea of it.


What’s With Roku?

While we’re on the subject can someone explain Roku’s behavior to me? Why are they holding a whole year’s worth of operating revenue as a deposit in the late Silicon Valley Bank? Unless there’s some sort of ploy going on that sounds like corporate mismanagement to me. Roku management appears to be assuming that even uninsured deposits will be covered by the federal government, a clear instance of moral hazard, while not scrutinizing the risks as is its fiduciary responsibility to do.

So, we’ve got the bank not scrutinizing its risk profile, corporate management not scrutinizing the bank, shareholders scrutinizing neither the bank nor the corporations, and the Federal Reserve failing to scrutinize the banks.

That’s not how it works. That’s not how any of this works.

And I haven’t even touched on the reality that every single public/private hybrid, “parastatals”, on which we’ve been depending has been a flop in the U. S. They’ve become a method for avoiding accountability, either to the voters or under the law.