One of my bridesmaids got this ad in her gmail in the course of a message thread on . . . well, it speaks for itself:

1. Where does foreign aid go?

2. The hardest logic puzzle ever posed?

3. The science of free-throw shooting.

4. Tony Judt on girls, sex, and marriage.

5. Old post by me, cited today by Brad DeLong.

6. Does pragmatism improve our lives?

7. Measuring the influence of Hayek.

8. German scholars preparing first critical edition of the Koran.

9. European mummies in the Chinese desert.

Ezra Klein has posted a graphic from the Commonwealth fund showing that if we just assume that prior health care plans had reduced costs by exactly as much as they claimed they were going to, costs would be lower. The post is titled . . . 


If only we'd listened to Nixon, Carter or Clinton
Over the course of the health-care reform discussion, we've gotten pretty good at talking about the insufficient benefits of reform. It doesn't cut costs as much as we'd like, and it doesn't cover all of the uninsured, and it doesn't have a public option, and so on. But one of the hardest things to convey is the terrible cost of inaction, which is much higher, both in human and economic terms, than many realize. 

The big player on the cost side is that even small benefits compound over the years. Slowing the system's spending growth by 1.5 percentage points -- so the rate of spending inflation will be six percent, rather than 7.5 percent, in a year -- doesn't seem like a terribly impressive outcome. That still has the system growing faster than GDP, or inflation, or Europe's health-care systems. 

But over time, the benefits would be enormous. The Commonwealth Fund, in a very smart piece, tries to show this by tallying the savings if we'd instituted the Nixon, Carter and Clinton reforms and they'd worked to slow spending by the aforementioned 1.5 percentage points.

Okay, it's not exactly earth-shaking news that if you assume that things would have fallen, then you can produce a graph showing that they would have fallen.  This tells us absolutely nothing about what would have actually happened.  If the growth projections of various plans had been wrong--if they'd acted more like Medicare--I can get a very different graph (smoothed because I don't have proper time to find the data and type it in):

That's just a tiny increase in the rate of health care cost inflation--just 50 basis points a year.  
Boy, it sure looks like we dodged a bullet, doesn't it?  Every year you delay is more money saved!
But this is trivial:  we can assume whatever we want!  Health care proponents will point to other countries.  Opponents will point to the history of programs like Medicare.  Who's right?  Obviously, I have my opinions, but I can't prove the counterfactual.  Neither can anyone else.
All these sorts of graphs are is a pretty way to prove that if you were right, you'd be right!  Which is true, but  not interesting. 

I am by no means an expert on the Catholic Church, or Protestant ones.  But what I know about the latter makes me curious about the sex scandals at the former.  In the media, they're generally written about as a product of one of two factors: priestly celibacy and the authority structure of the church.
But as I understand it, Protestant churches also have these problems.  And the problems get hushed up just the way they did in the Catholic Church -- or at any rate, as effectively.  The difference is that rather than a central authority moving them around, the same effect is achieved in a thoroughly decentralized, emergent, spontaneous-order kind of way.  A pastor (frequently a youth pastor) is accused of something terrible by one of his young charges.  The congregation has no appetite for a scandal, which would expose parents and child to terrible public airing of their grievances.  And anyway, these sorts of things are difficult to prove, particularly since predators often pick on troubled children.  So the thing is hushed up, and the pastor is told to resign.  He does . . . and gets a job at another church.  After all, telling the other congregation why the pastor left could expose you to a lawsuit.
It's the clerical version of the "dance of the lemons" that is well-chronicled in urban school districts, where principals write good recommendations for bad teachers rather than go to the trouble of trying to get them fired.
It seems at least possible that the real reason the Catholic Church scandals are so bad is that the Catholic Church is one central institution that you can complain about.  Thousands of Lutheran, Baptist, Methodist, Presbyterian, etc churches across the country could have the same number of constituents, and the same number of abusers, but it wouldn't register as a central problem.
Just to be clear, I'm not saying that this is true -- I've been looking, but found no decent statistics on general clerical child predation.  I just wonder if it isn't possible.  Is there really something pathological about the Catholic church?  Or are pedophiles attracted to professions where they have access to children?

Yup, real baby babies, not non-real grown-up babies:

Scottish Opera is attempting to reach beyond its normal audiences of middle-aged music buffs by launching a series of concerts aimed at infants, aged between six and 18 months.

The experimental performances, to be staged at venues across the country, will feature no lyrics, narrative or plot. Instead, classically trained singers will create baby-friendly noises, such as Wellington boots splashing in puddles, buzzing bees, quacking ducks and the fluttering of feathers.

The audience will also be encouraged to gurgle along to the score and to crawl over a furry garden set, featuring hand puppets and a range of themed props.

There are many quote-worthy paragraphs in the article.  Like this:

“We were advised that when you are seven months old you are still not focusing very well [TC: I doubt this] so we have created a tactile garden set.”

Davidson said test performances had confounded expectations. “We expected it to be quite noisy, but we were delighted when we saw the happy expressions on their wee faces,” she said.

Or this:

“When I first mentioned the idea of opera for babies, some people looked at me as though I was demented. People would roll their eyes and say, ‘You can’t expect a six-month-old child to sit through a performance of Wagner,’ ” said Davidson.

“Of course, that was never going to happen, but some people still have fixed opinions of what they perceive opera to be. We believe this project will show just how robust and flexible an art form it is.”

I've signed on as a writer for DailyFinance and just published my first column, "Do Oil Price Moves Signal Trouble Ahead for the U.S. Economy?" which details an interesting relationship between oil prices and the economy. As the following graph illustrates, moves in the one appear to set the stage for changes in the other:

Click here to read the article.

A post by Edward Harrison.

I was talking to a friend of mine who does emerging market investing for a living and I asked him what he made of recent China-bullish comments by Stephen Roach. 

The Morgan Stanley Asia head was in Germany speaking to German business daily Handelsblatt last week. The guys from Handelsblatt wrote up a piece called “In China bildet sich keine Blase an den Märkten” which translates “China is not creating a market bubble.” Unfortunately, the story is behind a pay wall (and it’s in German anyway). But Gwen Robinson of the FT got the inside scoop and posted “Roach: Pooh-pooh to Chinese bubbles” at FT Alphaville. She writes:

As Roach notes, the Shanghai A-share composite index soared 3.5 times in the year ending October 2007 before plunging more than 70 per cent in the ensuing 12 months.

And every China watcher knows about the surge in nonperforming bank loans that required a major recapitalization of a nascent Chinese banking system less than 10 years ago.

But these problems were mere bumps in the road, in retrospect. Roach explains (our emphasis):

That’s because Beijing was vigilant in preventing asset and credit bubbles from spilling over into the real side of the Chinese economy. This was very different from the Japan endgame of the late 1980s, where the confluence of equity and property bubbles led to a massive overhang of excess capacity.

What’s more, he adds, it stands in sharp contrast to the more recent US experience, where property and credit bubbles pushed up homebuilding and personal consumption to nearly 80 per cent of US GDP prior to the bursting of the subprime bubble.

Of course, China is “hardly the poster child of macro stability” – with exports and fixed investment surging to nearly 75 per cent of Chinese GDP and private consumption at 35 per cent and still falling, China’s macro imbalances are in a league of their own.

But in Roach’s view, these distortions are less of an outgrowth of asset and credit bubbles and more a by-product of a conscious strategy of externally-oriented economic development.

While China can hardly avoid bubbles, he notes, it has been successful in preventing them from destabilising the real economy.

Because of the spate of China currency manipulation/protectionism stories hitting the wires (see my links post), I had been thinking about 1931 a lot recently – more on that later. But when I asked my friend what he thought of Roach’s comments, he said: “I think China is indeed Japan in 89/90, but potentially magnified.”

Let me explain. Contrary to current folklore, the reign of Paul Volcker was not one of extreme inflation hawkishness and anti-bubble moral suasion. In fact, there were serious animal spirits building in the U.S. in part due to a September 1985 Plaza Accord, in which the major countries all agreed to depreciate the US dollar. The exchange rate plunged a fantastic 51% before the carnage was done. And as anyone will tell you, currency depreciation is inflationary – either for consumer prices or asset prices or both.

By February 1987, the U.S. Government was alarmed at the speed of the U.S. dollar’s depreciation and looked to reverse it at the Louvre Accord. The problem, however, was that the U.S. wanted Japan to continue a stimulative monetary policy. Here’s what the accord actually said:

The Government of Japan will follow monetary and fiscal policies which will help to expand domestic demand and thereby contribute to reducing the external surplus. The comprehensive tax reform, now before the Diet, will give additional stimulus to the vitality of the Japanese economy. Every effort will be made to get the 1987 budget approved by the Diet so that its early implementation be ensured. A comprehensive economic program will be prepared after the approval of the 1987 budget by the Diet, so as to stimulate domestic demand, with the prevailing economic situation duly taken into account. The Bank of Japan announced that it will reduce its discount rate by one half percent on February 23.

The Plaza Accord may have helped correct imbalances, but it also put the Japanese economy into a blow off bubble top that sent the Nikkei into the stratosphere above 38,000. The result was a spectacular bust from which Japan has still not recovered.

So, now that we see the Chinese, with their $600 billion stimulus package and massive increase in credit, causing serious malinvestment, one wonders whether we are seeing a repeat of the 1989/90 excess in Japan.

I have repeatedly pointed to enormous levels of malinvestment in China. Here are a few posts of that ilk.

• Hugh Hendry: China – The Emperor has no clothes Jul 2009
• China’s empty city: the emperor really has no clothes Nov 2009
• The Chinese bubble economy Jan 2010
• Construction in China’s Ghost Towns Jan 2010
• Jim Chanos still bearish on China, talks malinvestment Feb 2010

Yet, we see Stephen Roach’s cogent defence of what is going on in China. He is not known as a perma-bull – - quite the contrary.

So what gives? Is China experiencing a massive bubble or not? If so, will the bubble’s inevitable pop spill over into the real economy in a nasty way as it has done in the U.S. and elsewhere?

These are important questions given the central role China plays in the world economy. My own point of reference has been the 1920s and the 1930s more than the 1980s and 1990s. In the 1920s, Great Britain played the role now played by the United States: military power, declining economic power, anchor global currency, and largest debtor nation. The United States played the role now played by China: rising economic and military power and ‘alpha creditor,’ a phrase our Yves Smith coined. (The key difference is that the U.S. was more advanced relative to Great Britain than China relative to the U.S.)

The section in Charles Kindelberger’s seminal book, “The World in Depression 1929-1939″ on French accumulation of sterling also bears noting. Sterling was weak and the French had been accumulating huge amounts of British pound foreign reserves in 1926. This created a problem for the British because the French could threaten to redeem those pounds for gold under the gold standard then in operation. Kindelberger says:

this accumulation put [French central banker] Moreau in a strong position and [British central banker] Norman in a weak one. As an opening gambit, the bank of France began to convert sterling into gold…

There were threats of further conversions of sterling into gold.

Eventually, the French and British reached a compromise which involved the Federal Reserve Bank of New York lowering interest rates to help the British (and the Germans who had just had their travails with hyperinflation).  The result of this easy money was a blow-off top to the U.S. stock market and credit bubble that had almost collapsed after the Florida real estate boom went off the rails.

When I first posted this yesterday at Credit Writedowns, I failed to mention how I see China [and Japan] as the modern-day reserves accumulator. China is effectively doing what France did by accumulating reserves despite fears of currency depreciation. I think this reserve policy is significant because this is what is behind all of the talk of protectionism and currency pegging. The Chinese are afraid that the U.S. are actively looking to devalue the currency while the U.S. are fed up with the peg and the resultant imbalances.

How this gets resolved, I don’t know. Roach, at a minimum, usually points to increasing Chinese domestic demand (especially via increasing income security by expanding the social safety net). This parallels the situation in Europe where the Germans could increase spending to reduce intra-Eurozone imbalances, something France’s finance minister is on to. As for the Chinese, if they don’t do this, we are headed for some serious protectionist escalation in my view. And, as Ambrose Evans-Pritchard points out, the surplus countries take it on the chin in such a scenario, something we saw in Japan and Germany in 2008.

Clearly, the U.S. role of easy money global saviour in the late 1920’s was played by Japan in the late 1980’s and by China in the late 2000’s. Each time, the speculative mania which the easy money fuelled ended in disaster. 

Eventually, the whole system broke down in the 1930s, with the U.S. playing the protectionist card and precipitating collapse.

I have trouble believing this time is any different. If any of you have a different take on these events -especially in regards to protectionism, please respond in the comments.

Sources

Statement of the G6 Finance Ministers and Central Bank Governors (Louvre Accord) – University of Toronto G8 Information Centre

Charles Kindelberger – The World in Depression

That's the new Gary Gorton book and the subtitle is The Panic of 2007.  It brings together Gorton's writings on the crisis in one convenient place but it serves up a fascinating afterword in which he asks how people will view this crisis one hundred years from now.

We've already covered Gorton's writings here.  As I've already mentioned, for anyone interested in the crisis, or in banking and finance more generally, this is absolutely essential reading.  I also take his analysis to suggest (here this is my gloss, not his words) that there is no way to avoid crises since "bank run-like phenomena" can pop up in many different ways in any economy with significant liquidity transformation.

Chris, a loyal MR reader, asks:

I'd like to see you list the top 10 books which have influenced your view of the world.

I'll go with the "gut list," rather than the "I've thought about this for a long time list."  I'll also stress that books are by no means the only source of influence.  The books are in no intended order, although the list came out in a broadly chronological stream:

1. Plato, Dialogues.  I read these very early in life and they taught me about trying to think philosophically and also about meta-rationality.

2. The Incredible Bread Machine, by Susan Love Brown, et.al.  This was the first book I ever read on economics and it got me excited about the topic.

3. Capitalism: The Unknown Ideal, by Ayn Rand.  This got me excited about the idea that production is what matters and that producers must have the freedom and incentives to operate.

4. Friedrich A. Hayek, Individualism and Economic Order.  The market as a discovery procedure and why socialist calculation will not succeed.  (By the way, I'll toss a chiding tsk-tsk the way of Wolfers and Thoma.)

5. John Maynard Keynes: The General Theory of Employment, Interest, and Money.  Keynes is one of the greatest thinkers of economics and there are new ideas on virtually every page.

6. John Stuart Mill, Autobiography.  This got me thinking about how one's ideas change, and should change, over the course of a lifetime.  Plus Mill is a brilliant thinker and writer more generally.

7. Willard van Orman Quine, Word and Object.  This is actually a book about how to arrive at a deeper understanding than the one you already have, although I suspect few people read it that way.

8. Reasons and Persons, by Derek Parfit.  This convinced me that a strictly individualistic approach to ethics will not in general succeed and introduced me to new ways of reasoning and new ways to plumb for depth.

9. Camille Paglia, Sexual Personae.  I don't think the ideas in this book have influenced me very much, but reading it was, for whatever reason, the impetus to start writing about the economics of culture and also to give a broader focus to what I write.  Alex, by the way, was the one who recommended it to me.

10. Marcel Proust, Remembrance of Things Past.  This is still the best book on interiority.

I'd also like to mention the two books by Fischer Black, although a) I cannot easily elevate one over the other, and b) I capped the list at ten.  La Rochefoucauld's Maxims also deserves honorary mention, on self-deception and related issues.  Plus there is Shakespeare -- also for thinking with depth -- although I cannot point to a single book above the others.  Harold Bloom's The Western Canon comes to mind as well.

I would encourage other bloggers to offer similar lists.

Let’s Sex Up this Economic Reporting Financial News Express

Final destination Iran? Herald Scotland (hat tip readers Crocodile Chuck and Scott). Seriously Not Good, and timing peculiar given the current official unhappiness with Israel intransigence (as in a move like this undermines US criticism, or simply shows it to be a sham).

CO2 at new highs despite economic slowdown Scientific American (hat tip reader John D)

Big Bailout Banks Slashed Lending In January Huffington Post

Wall Street Dominance of Swaps Clearing Must End, Brokers Say Bloomberg

Strategic default: In come the waves again Ed Harrison

Lawmakers press for action on China currency Reuters (hat tip reader Phil S)

Brazil to Break Patents on U.S. Films, Books, Drugs Reuters (hat tip reader John D)

Letter to the Editor: Stovepiping To Persia Chris Floyd

Memo to Moody’s: It’s Accounting 101, Not Economics Marshall Auerback, NewDeal 2.0

At Lehman, Watchdogs Saw It All Andrew Ross Sorkin, New York Times. In case you had any doubts….and this begs the further question: not only did they choose to ignore Lehman’s bogus accounting, how could they miss all the CDS exposures leading to AIG?

China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part I The Daily Capitalist

We need explicit rules for bail-outs Lorenzo Bini Smaghi Financial Times. There was a wee blogosphere spat on this topic recently…

Our Next Economic Plague: Japan Disease Andy Xie, Cajing (hat tip Crocodile Chuck)

An important item from last week I managed to miss: The End of an Era in Finance Dani Rodrik, Project Syndicate

Survey: Readers don’t want to pay for news online Associated Press (hat tip reader John D)

The problems with the Schäuble proposal Wolfgang Munchau. He reads it as a road map for Eurozone exit. Will that ultimately prove to be a formula for breakup, or shrinkage to a more economically homogeneous membership?

Antidote du jour:

Should regulation be dumb?  In one sense yes, in others, no.  It really depends on how well the regulators understand the risks involved, and how much they can encourage professionalism among profit center heads and risk managers.  As those two increase, regulation can be smart.  “Follow these detailed rules to calculate the capital you need to be solvent 99% of the time.”

But when either of those two aren’t true, dumb regulation may be in order:

• Strict leverage limits, reflecting the worst outcome from underwriting poor quality loans.
• Disallowing risky types of lending, regardless of capital level.
• Disallowing liabilities that can run easily.
• Disallowing products that commonly deceive buyers.
• Disallowing certain types of contracts that fuddle accounting.
• Those regulated may not choose their regulator.  The highest regulator assigns a regulator to you.  The highest regulator must evaluate the jobs that lower regulators are doing, and eliminate/lessen regulators that do not use the powers they have been granted, and get co-opted by those that they regulate.

If everyone were smart, things could be different.  Deceiving people would not take place, and managements would not take undue risks.  Limits could be looser, and products would be designed for discriminating buyers.

But, face it, we are dumber than we think, myself included.  Consumer choice is a good thing, though it implies that some will be deceived, no matter where one places the line of demarcation.  Along with that, some bank will not fit the rules and go insolvent, though it previously passed the solvency tests.

Dumb Regulation: Insurance in the US

My poster child for relatively good dumb regulation is the insurance industry in the US.  The industry is far less free-wheeling than the banking industry, and under most circumstances, the solvency margins are set high enough to have few insolvencies.  There is room for improvement, though:

• Make risk based capital charges countercyclical.  Perhaps tinkering with the Asset Valuation Reserve would do that.
• Have some sort of rigorous testing for capital relief from reinsurance treaties.
• Ban surplus notes in related party transactions.
• Ban all forms of capital stacking, especially where the transactions go both ways.  I.e., subsidiaries can’t own securities of any companies in their corporate family.  All subsidiaries must be owned by the holding company.
• More rigorous testing for deferred tax assets.
• Assets as risky as equities, including limited partnerships, should be a deduction from capital.
• Securitized bonds that are not “last loss” should have higher RBC charges than comparable rated corporates, because loss severities are potentially higher, and assets that are originated to securitize are always lower quality than those held on balance sheet.
• A standardized summary of cash flow testing results should be revealed.

As for the banks, they need to do that and more:

• Insurance companies list all of their assets.  Banks should as well.
• Intangible assets should be written to zero for regulatory capital purposes.
• Risk-based capital standards need to be tightened to at least the level of insurance companies, if not tighter.
• Some sorts of lending to consumers should be banned.  I am talking about complex agreements, that individuals with IQs less than 120 can’t understand.  Insurance policies have to be Flesch-tested.  Bank lending agreements should be the same.  If some argue that the poor need access to credit, I will say this: the poor need to get off of credit.  Credit is for the upper-middle-class and rich.  Poor people should not go into debt.
• Standardized summaries of terms and fees must be created for consumer lending, with large, friendly letters, and simple language that all can read.

What I am saying is that accounting has to be more conservative, and that regulators have to require larger amounts of capital to support their business, particularly at the banks.  Financial products must be made simpler for consumers to understand.  More transparency is needed everywhere, and if the financial companies complain, tell them that they will all be in the same goldfish bowl, so no one will gain an unfair advantage.

Preventing Too Big to Fail

As part of preventing too big to fail, the Risk based capital [RBC] percentage should rise with the amount of risk-based capital.  Say, when RBC gets over $10 billion, the percentage of capital needed for RBC grades up to 50% higher than the level needed at $10 billion by the time RBC gets up to $50 billion.

Here is my example of how it would work:

Equity [RBC]

Assets

E/A Ratio

Marginal E/A Ratio

Marginal Income

Income

ROE

Marginal ROE

10.00 100.00

10.00%

10.00%

2.00

2.00

20.00%

20.00%

26.25 200.00

13.13%

16.25%

1.90

3.90

14.86%

11.69%

42.50 300.00

14.17%

16.25%

1.80

5.70

13.41%

11.08%

58.75 400.00

14.69%

16.25%

1.70

7.40

12.60%

10.46%

75.00 500.00

15.00%

16.25%

1.60

9.00

12.00%

9.85%

I have assumed that firms undertake their highest ROE projects first, and do progressively lower ROE projects later.  Now, by raising capital requirements on bigger firms, a common response is, “Well, then they will just take on riskier loans to compensate.”  Sorry, but that dog don’t hunt.  If they take on riskier loans, their RBC goes up even more rapidly, because loan quality is reflected (or, should be reflected) in RBC formulas prior to adjustment for bank size.

More Dumb Regulation

Dumb regulation bars certain lending practices, and raises capital levels higher than is needed over the long run.  So be it.  Smart regulation is far more flexible, and trusting that companies and consumers know what they are doing.  Unfortunately, when financial firms fail, there are often larger repercussions.  It is better to limit regulated financial companies to businesses where the risks are well-understood.  Let the less understood risks be borne by those outside the safety net, and bar those inside the safety net from holding any assets in those companies.

That brings me to the Volcker Rule, which is a good example of dumb regulation.  My preferred way would be to do something similar through adjusting the risk-based capital formulas — Equity-like risks should be funded through a 100% allocation of equity. Few banks would take on that level of speculation at that level of capital used.

If you need proof, look at the life insurance industry. Companies used to hold a lot more equities prior to the tightening of RBC rules. Now they hold little, except at a few mutual companies that are flush with capital.

That also has preserved the insurance business in this crisis, leaving aside mortgage and financial risks, where the state regulators still have no idea what they are doing — that a proper reserve level would leave most of the companies insolvent today, but had it been implemented ten years ago, would have preserved the companies, but eliminated much of their profits.

At the Treasury meeting with bloggers in November 2009, I commented that the insurers were better regulated for solvency than the banks.  One of the reasons for that is that they do harder stress tests, and they look longer-term. Life and P&C insurers survive the process because of better RBC standards, and “scaredy cat” state regulators. What a great system, which prior to the crisis, was criticized as behind the times.  (I suspect that if we ever get a national regulator of insurance, there will be a big boom and bust, much as in banking at present. It is easier to corrupt one regulator than fifty.)  The more state involvement in bank regulation, the dumber (better) bank regulation will be.

What to Do

So, if one is trying to regulate banks for solvency, there are seven things to do:

• Set risk-based capital formulas so that few institutions fail.
• Make it even less likely that larger institutions fail.
• Limit the ability of financial institutions to invest in other financial institutions.
• Regulators must benchmark the underwriting culture, and raise red flags when underwriting is poor.
• Insure that equity is truly equity.
• Institute a code of ethics for risk managers.
• Make sure that balance sheets fairly reflect derivatives.

It is almost always initially profitable to borrow short and lend long.  That said, it is a noisy trade.  Who can be sure that short rates will remain below the rates at which one invested long?  Another component of a good risk-based capital formula is that there is no investing in assets that are longer than the liabilities that fund the financial institution.  (For wonks only: regulated financial institutions should be matching assets versus liabilities as their most aggressive posture.  Unregulated financials can do what they want.  And no investing in unregulated financials by regulated financials.)

One of the great subsidies banks get is the cheap source of funds through deposits.  It is only cheap because depositors know the FDIC is there.  The FDIC should raise its fees to absorb that subsidy back to the taxpayer.  Keep raising it until you see banks begin to shift to repo and other short-term sources of funding.

As a clever old boss of mine once said, “A banks liabilities are its assets, and its assets are its liabilities.”  The idea is this — banks that focus on their deposit franchises have something of real value — that is hard to replicate.  But any bank can invest their funds aggressively, which will lead to defaults with higher frequency.  It is true of insurers as well, most financials die from bad investing policies, and short-term liabilities that require complacent funding markets.

That’s why there has to be a focus on liabilities in regulating solvency.  Financial institutions, even simple ones, are opaque.  Most die from the deadly combo of illiquid assets and liquid liabilities.  Those that have funded the bank in the short run refuse to roll over the loans at any price.  Assets can’t be liquidated to meet the call on cash, and insolvency ensues.  Those that have read me for a long time know that I don’t buy the malarkey that some managements will trot out, “We’re not insolvent; we merely have a liquidity crisis.”  Hogwash.  You took too much risk, because the first priority of risk control is liquidity management.  Assets are only worth what you can sell them for, or, what cash flows they can generate.  If assets can’t generate cash flows or sale proceeds adequate to service liabilities, then you are insolvent, not merely illiquid.

Cash flow testing for banks should focus on the ability of the bank to finance itself without recourse to selling assets.  To the extent that selling assets is allowed in modeling, they must be Treasury quality assets.

The essence of a good risk-based capital formula is that it forces intelligent diversification, and forces adequate liquidity.  No assets should be bought that the liability structure of the bank cannot hold until maturity.  There should be no concentration of assets by class, subclass, or credit, that would be adequate to lead to failure.

My view is that a proper risk-based capital regime would start with asset subclasses, and double the capital held on the largest subclass, and 1.5X the capital on the second largest subclass.  After that, within each subclass, the top 10 credits get twice the level of capital, the next 10 1.5x the level of capital.  Having managed assets in a framework like this, I can tell you that it creates diversification.

Beyond that, no modeling of asset correlations would be brought into the modeling because risky asset correlations go to one in a crisis. Any advantage derived from diversification should be accepted as earned, and not capitalized as planned for.

Securitization deserves special treatment: risk based capital should higher for securitized assets versus unsecuritized assets in a given ratings class, because of potentially higher loss severities, and assets that are originated to securitize are always lower quality than those held on balance sheet.  Capital charges should be raised until banks don’t want to securitize as a matter of common practice.

Eliminating Contagion

In order to avoid systemic risk and contagion, banks should not lend to or own other financial firms.  That would end contagion.  At least that should be limited to a percentage of assets, or through the RBC formula. Think of it this way, financials owning financials is a form of capital stacking across the country as a whole.  In a stress situation it raises the odds of a deep crisis.  Setting a limit on the ability of financials to own the assets of financials is the single most important step to avoid contagion.  I would set the limit at 5% for equity, and 20% for debt.

Regulating Underwriting

Most of the real risks came from badly underwritten home mortgage debt, whether conventional, Alt-A and Jumbo, or subprime.  Underwriting standards slipped everywhere.  Commercial mortgage lending hasn’t yet left its marks — there is a lot of hope that banks can extend maturing loans rather than foreclose and take losses.

For much but not all of this crisis, it was not a failure of laws but a failure of regulators to do their jobs faithfully.  Regulators should have looked at indicators of loan quality, and raised red flags when they saw standards deteriorating.  Where I worked, 2003-2007, we saw the deterioration, and were amazed that the regulators had been neutered.

Let Equity Be Equity

Beyond that, there was a dearth of true equity, and a surfeit of preferred stock, junior debt, trust preferreds, and particularly, goodwill.  Equity has to reflect assets that are high quality and that are not needed to support short-term obligations from the cash flow tests.

Code of Ethics for Risk Managers

One reason the banking industry is worse off than insurance, is that they don’t have many actuaries.  Actuaries have a code of ethics.  They tend to be “straight arrows” telling it like it is.  Bank risk managers need the same thing, together with the rigorous education that actuaries receive.  Accept no substitutes: CFAs and CERAs are no match for FSAs.

Reflect Derivatives Properly

Derivatives must come onto the balance sheet for regulatory purposes, revealing leverage increases/decreases, counterparty risk, overall sensitivity to the factors underlying the contracts.  Any instrument that can cause cash to flow at the regulated entity should be on the regulatory balance sheet.

Other Issues

I would not create a prospective guarantee fund. The insurance industry has a retrospective fund that has worked fairly well.   Do you really know what it would take to create a macro-FDIC, big enough to deal with a large systemic risk crisis like this one?  (The FDIC, much as it is pointed out be an example, is woefully small compared to the losses it faces, and it is not even taking on the large banks.)  It would cost a ton to implement, and I think that large financial services firms would dig in their heels to fight that.  Also, there would be moral hazard implications — insured behavior is almost always more risky than uninsured behavior.

Though it is not bank reform, we need to end the Greenspan/Bernanke Put.  The Fed encouraged risk-taking by the banks by not allowing recessions to damage them.  They tightened too late, and loosened too early, and that pushed us into a liquidity trap. Monetary policy that is too loose creates perverse incentives for the solvency of financial institutions in the long run.

Bonuses to executives skew incentives.  Bonusing a financial executive on current earnings creates perverse incentives.  It is a form of asset/liability mismanagement, because cash flows in the short run, while the value of the institution is a long-run issue. Far better to incent using long dated restricted common stock.  The only trouble is, it doesn’t incent as well as cash.  Tough, sorry, but that is a loss that must be accepted for the good of the system as a whole.

Summary

Dumb regulation is good regulation.  Regulators should be risk-averse, and take actions that limit ROEs for banks in order to promote solvency, and reduce the likelihood of liquidity crises.  The remedies that I have proposed here will do just that.  May we use them to regulate our financial sector better, for the good of all in our nation.

Just because people aren't eating out as much as they used to doesn't mean they have lost their appetites. Based on the following reports, it appears that a growing number of Americans are developing a taste for do-it-yourself culinary delights:

"Home Cooking on the Rise, Spurred by Economic Downturn" (Kansas City infoZine News)

Washington, D.C. - The unsettled economic outlook is sending Americans into the kitchen, according to a new survey commissioned by the American Institute for Cancer Research (AICR). Forty percent of Americans say they are cooking at home more often as a result of the current economic situation.

In the same survey, Americans report making other changes linked to better health and lower risk for cancer and other chronic diseases. Nearly half of Americans (48 percent) report eating fast food less often than they did before.

Many Americans say the current economic situation has motivated them to eat more vegetables and fruit, consume less red meat and to exercise more than they did in the past.

"We don’t recommend an economic recession as a health-booster," says AICR Registered Dietitian, Alice Bender, "but it appears Americans are looking for ways to take better care of themselves."

"Home Use" (Supermarket News)

Supermarkets posted strong sales in cookware/bakeware during the recession; now the challenge is to keep the cook-at-home momentum going

Value, convenience and product uniqueness are familiar criteria for supermarket buyers scanning the exhibit floor for new products during the final days this week of the 2010 International Housewares Show in Chicago.

This year, however, such buying criteria for housewares takes on added meaning given expectations that consumers' shopping habits may have permanently changed due to the severity of the recession that began in 2007 and its lingering effects.

"It's a Bumper Crop of First-Time Food Gardeners" (The Daily Breeze)

One of the healthiest by-products of the recession has been a nationwide bumper crop of first-time food gardeners.

According to the country's leading seed company, W. Atlee Burpee & Co., there were 7.7 million new gardeners trying their hand at growing vegetables in 2009. They were spurred to action by a desire to save money, as well as health and food safety concerns and possibly the widely publicized White House vegetable garden.

George Ball, Burpee's chairman, predicts that 2010 will be another banner year for homegrown vegetables, due to a renewed interest in gourmet cooking and the introduction of exotic new varieties.

For the second year in a row we are hosting a NCAA bracket competition with Adam Warmer of the Daily Options Report.  This year we are pleased to announce that this year it is occurring under the aegis of StockTwits who have generously donated a nifty prize package for the winners.  To be specific:

1st Place:   a 3 month subscription to a StockTwits premium service of your choice;
2nd Place: signed copies of Brian Shannon and Adam Warner’s books;
3rd Place:  a StockTwits shwag pack.

You can sign up for our pool over at CBS Sports.  You will need a CBS Sports account and the password:  “lenny” to complete the process.  The deadline is, of course, tip-off of the first game on Thursday.

For those with a quantitative bent there are some resources available to help guide your selections.  The two main sources of quantitative rankings for NCAA basket come from Ken Pomeroy and Jeff Sagarin.

Erich Doerr at The Wages of Wins Journal uses both of these models to predict the tournament winner.  In one case Kansas came out on top, in the other Duke won.

Wayne Winston at mathletics uses the Sagarin ratings to compute the odds of winning for each team.  Again Kansas and Duke come out as the two top contenders.

David Letscher has his own prediction model and provided some tips a few years ago in the New York Times on how to avoid the crowds in picking your brackets.

The LRMC Model maintained by a handful of professors at Georgia Tech is also worth a look.  In their model Kansas again comes out the champion.  We found this model in an article by Sarah Lorge Butler at CBS Moneywatch on how to win your bracket competition.

We hope you enjoy the Madness.  That is of course if your national champion doesn’t get knocked out in the first round…

I am in receipt of an email from my gym, urging me to vote for it in the City Paper's annual Best of DC contest.  I like my gym.  But unfortunately, this is not my only consideration.  After all, if my gym gets ranked "Best in DC", presumably more people will join.  Then it will be more crowded.  That will make me worse off.
On the other hand, presumably they'll also have money for fancy new equipment, which would make me better off.  And don't I have an obligation to my fellow citizens of DC?  Don't I want a stronger, healthier America?
My current solution is to vote to one of the gyms that my friends belong to and enthusiastically recommend.  But I'm afraid that then I won't have any friends who will recommend gyms to me. So I'm open to other ideas.

I am in receipt of an email from my gym, urging me to vote for it in the City Paper's annual Best of DC contest.  I like my gym.  But unfortunately, this is not my only consideration.  After all, if my gym gets ranked "Best in DC", presumably more people will join.  Then it will be more crowded.  That will make me worse off.
On the other hand, presumably they'll also have money for fancy new equipment, which would make me better off.  And don't I have an obligation to my fellow citizens of DC?  Don't I want a stronger, healthier America?
My current solution is to vote to one of the gyms that my friends belong to and enthusiastically recommend.  But I'm afraid that then I won't have any friends who will recommend gyms to me. So I'm open to other ideas.

By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City who writes at New Economic Perspectives

Just when you thought that nothing could stink more than Timothy Geithner’s handling of the AIG bailout, a new report details how Geithner’s New York Fed allowed Lehman Brothers to use an accounting gimmick to hide debt. The report, which runs to 2200 pages, was released by Anton Valukas, the court-appointed examiner. It actually makes the AIG bailout look tame by comparison. It is now crystal clear why Geithner’s Treasury as well as Bernanke’s Fed refuse to allow any light to shine on the massive cover-up underway.

Recall that the New York Fed arranged for AIG to pay one hundred cents on the dollar on bad debts to its counterparties—benefiting Goldman Sachs and a handful of other favored Wall Street firms. The purported reason is that Geithner so feared any negative repercussions resulting from debt write-downs that he wanted Uncle Sam to make sure that Wall Street banks could not lose on bad bets. Now we find that Geithner’s NYFed supported Lehman’s efforts to conceal the extent of its problems. Not only did the NYFed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better. Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent.

Geithner told Congress that he has never been a regulator. That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NYFed. Apparently, Geithner has never met an accounting gimmick that he does not like, if it appears to improve the reported finances of a Wall Street firm. We will leave to the side his own checkered past as a taxpayer, although one might question the wisdom of appointing someone who is apparently insufficiently skilled to file accurate tax returns to a position as our nation’s chief tax collector. What is far more troubling is that he now heads the Treasury—which means that he is not only responsible for managing two regulatory units (the FDIC and OCC), but also that he has got hold of the government’s purse strings. How many more billions or trillions will he commit to a futile effort to help Wall Street avoid its losses?

Geithner has denied that he played any direct role in the AIG bail-out—a somewhat implausible claim given that he was the President of the NYFed and given that this was a monumental and unprecedented action to funnel government funds to AIG’s counterparties. He may try to deny involvement in the Lehman deals. (Again, this is implausible. Lehman executives claimed they “gave full and complete financial information to government agencies”, and that the government never raised significant objections or directed that Lehman take any corrective action. In fairness, the SEC also overlooked any problems at Lehman. But here is what is so astounding about the gimmicks: Lehman used “Repo 105” to temporarily move liabilities off its balance sheet—essentially pretending to sell them although it promised to immediately buy them back. The abuse was so flagrant that no US law firm would sign off on the practice, fearing that creditors and stockholders would have grounds for lawsuits on the basis that this caused a “material misrepresentation” of Lehman’s financial statements. The court-appointed examiner hired to look into the failure of Lehman found “materially misleading” accounting and “actionable balance sheet manipulation.” (here) But just as Arthur Andersen had signed off on Enron’s scams, Ernst & Young found no problem with Lehman.

In short, this was an Enron-style, go directly to jail and do not pass go, sort of fraud. Lehman’s had been using this trick since 2001. It looked fine to Timmy’s Fed, which extended loans allowing Lehman to flip bad assets onto the Fed’s balance sheet to keep the fraud going.

More generally, this revelation drives home three related points. First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable. He must determine what did Geithner know, and when did he know it. All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released. Further, Obama must ask what has Geithner done to favor his clients on Wall Street? It now looks like even the Fed BOG, not just the NYFed, is involved in the cover-up. It is in the interest of the Obama administration to come clean. It is hard to believe that it does not already have sufficient cause to fire Geithner. In terms of dollar costs to the government, this is surely the biggest scandal in US history. It terms of sheer sleaze does it rank with Watergate? I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.

What did Timmy know, and when did he know it?

Point number two. Lehman used an innovation, “Repo 105” to hide debt. The whole Greek debt fiasco was caused by Goldman, et. al., who helped hide government debt. Whether legal or illegal, Wall Street has for many years been producing financial instruments designed to mislead shareholders, creditors, and regulators about the true financial position of its clients. Note that Lehman’s counterparties in this fraud included JP Morgan and Citigroup (who actually precipitated Lehman’s final failure when they finally called in their loans). It always takes at least three to tango: the firm that wants to hide debt, the counterparty that temporarily takes it off their books, and the accounting firm that provides the kiss of approval.

Worse, after aiding and abetting such deception, Goldman and other Wall Street institutions then place bets (using another nefarious innovation, credit default swaps) against their clients, wagering that they will not be able to service the debts—which are greater than the market believes them to be. Does that sound something like insider trading? How can regulators permit such actions?

What did Timmy know, and when did he know it?

Third point. To the extent that debt is hidden, financial institution balance sheets present an overly rosy picture—of course, that is the purpose of the financial “innovations”. Enron did it; AIG did it; Lehman did it. What about Bank of America, Citi, JP Morgan, Wells Fargo and Goldman? We now know that the New York Fed subjected Lehman to three wimpy “stress tests”, all of which it failed. Timmy’s Fed then allowed Lehman to construct its own sure-to-pass “stress” test. (We know, of course, that the test was absolutely meaningless because, well, Lehman passed the test and then immediately failed spectacularly. Timmy then let the biggest banks run their own stress tests, which they (surprise, surprise) managed to pass.

What did Timmy know, and when did he know it?

As our all-time favorite Fed Chairman Alan Greenspan liked to put it, “history shows” that when financial institutions pass their own stress tests, they are actually massively insolvent. There is no reason to believe that this time will be different. Mike Konczal reports that there is every reason to believe the biggest banks are hiding huge losses on second liens. These are second mortgages or home equity loans that amount to about $1 trillion of which almost half are held by the top four banks. Since the first principal of a mortgage is paid first, it is likely that much of the second liens are worthless. Yet banks are carrying these on their books at 86 to 87 percent of face value—which was necessary to allow them to pass the stress tests. Konczal shows that at a more reasonable loss rate of 40% to 60%, the four largest banks would have “an extra $150 billion hole in the balance sheet”. I won’t go into the policy conundrum implied for President Obama’s plan for principal reduction to help homeowners (the banks will not allow renegotiation of underwater mortgages because that would force them to recognize losses on the second liens).

Of greater importance is the recognition that all of the big banks are probably insolvent. Another financial crisis is nearly certain to hit in coming months—probably before summer. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking. In the bigger scheme of things, this is only 1931. We have a long way to go before bank assets (and nonbank debts) are written down sufficiently to allow a real recovery. In other words, a Minsky-Fisher debt deflation is still in the cards.

Read it.  On my side, I am still wondering what is Krugman's international social welfare function.

Addendum: Ryan Avent piles on.

By Washington.

Upton Sinclair said:

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

Bestselling financial writer Michael Lewis is now saying the same thing. In an interview with 60 Minutes, Lewis said:

Wall Street is able to delude itself because it’s paid to delude itself. That’s one of the lessons of this story. People see what they’re incentivized to see. If you pay someone not to see the truth, they won’t see the truth.

As Lewis makes clear, the broken incentive system causes the heads of the Wall Street giants to act in ways which are not only destructive to the economy as a whole and to American jobs, but to the long-term health of their own companies.

If the broken incentive system were fixed, Wall Street big shots could suddenly be able to “see” the destructive effects of fraudulent and risky behavior. That would take politicians getting out of bed with Wall Street for a couple of minutes, which is unlikely, given how warm and cozy it is Unfortunately, that’s probably not politically feasible.

Of course, executive compensation should be linked to performance, in the sense of creating sustainable wealth for shareholders and the economy as a whole. But if the companies and politicians are too spineless to do that, at least ill-gotten gains could be taken away after the fact when executives are found to have committed fraud or driven their companies into the ground.

For example, as I wrote last April:

[William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri ] provided the historical background to the PCA [The Prompt Corrective Action Law (PCA)] in a little-noticed essay last month:

… PCA also recognized that failing bankers had perverse incentives to “live large” and cause larger losses to the FDIC and taxpayers. PCA’s answer was to mandate that the regulators stop these abuses by, for example, strictly limiting executive compensation and forbidding payments on subordinated debt.

As I wrote last June:

Because the current incentive for high-level corporate people is to commit fraud. Even if they are caught and go to jail, they’ll be rich when they get out.

Hitting the crooks in the wallet is the only thing which will motivate people not to rip off their shareholders, the taxpayers and the American treasury.

As Paul Volcker says, the incentive systems at financial firms are broken.

Hitting wrongdoers with big fines will help fix them.

***

And Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the reasons for financial meltdowns:

Financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer [co-author and himself a leading expert on economic growth] said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

If enough people … are hit with [large] fines for fraud, future losses will not be somebody else’s problems, but their own.

That would make the game of financial fraud a lot less profitable, and so undermine much of the motivation of corporate big-wigs to commit fraud. And – given that Black says that massive fraud is what caused the economic crisis – that in turn would save the taxpayers from having to fund many billions in bailouts . . .

The incentives should – of course – be on the front end, so that Wall Street folks are dissuaded from committing fraud in the first place.

At the very least, they should be at the back end, so that any profits made by fraud are recouped and put back in the government coffers.

Of course, some people simply cannot help themselves.

That’s one reason I like James Kwak’s novel approach:

As Kwak writes:

Why not say that all bank compensation above a baseline amount – say, $150,000 in annual salary – has to be paid in toxic assets off the bank’s balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. . . . That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there – at the value that they insist they are worth . . . think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations.

Of course, there’s an argument that the executives’ base salary should be paid in toxic assets as well. Since these fatcats don’t seem to be motivated to run their companies well so as to save the economy and the people, maybe having their own salaries on the line will motivate them. But if you believe that is too harsh, at least demand that their bonuses be paid in this way.

… Apparently, Credit Suisse is already doing this.

I can't make heads or tails of the various whip counts floating around. Friends who report on politics assure me that Nancy Pelosi still has plenty of leverage to twist arms . . . but what? It doesn't seem all that likely that Ms. Pelosi is going to be in charge after November, so what exactly does she have to hand out to wavering members? And if this thing passes on some controversial procedural maneuver, the Republicans in the Senate will go into full meltdown mode, meaning that there isn't going to be any more legislation to take home to your constituents anyway. (How much pork can you cram into one financial reform bill?) 
Democratic Congressional Campaign Committee money for their campaigns, of course . . . but if you're in a district that hates the health care bill this hardly seems likely to save you. 
Meanwhile, Pelosi and the leadership have to sound 100% absolutely sure of themselves . . . because if there's any question of this thing not passing, their members will stampede for the exits. So their confidence isn't really a sign of anything. On the other hand, the conservatives claiming it's nearly impossible have equal and opposite motives. My sense is that it's at a tipping point--at this point, many of the waverers are simply holding out for more goodies, but if she loses a couple more members, the thing becomes effectively impossible. 
But I have nothing in particular to back that up . . . and as far as I can tell, neither does anyone else. 
So now I'm thinking about another political problem. Assume this passes; what happens afterward? I don't think that many people believe that the answer is "Nothing: the bill becomes law, and we sing happy smurf songs all the way to the longest life expectancy in the Western world!" Even the bill's proponents expect it will need some follow-up work. But what will that follow-up work look like? 
 Worst case scenario for Democrats: a wave of public outrage like the one that followed Cat Care, aka The Medicare Catastrophic Coverage Act of 1988 (and its step-child, the Medicare Catastrophic Coverage Repeal Act of 1989). This strikes me as quite likely, actually. If this passes, yes, you will have AARP support and a wave of positive coverage from 90% liberal media. These things did not save Cat Care from a wave of angry public protest. I mean, really angry. Who knew senior citizens could be that spry?



That's Representative Dan Rostenkowski being attacked at a town-hall meeting with his constituents. Afterwards, he plaintively asked his press officer how long it would be before the media foofaraw  blew over. "Let me put it this way," the flack is said to have replied. "When you die, they will play that clip."

As you can imagine, congress hastened to repeal the thing. But they didn't repeal it all the way; some of the provisions remained.

My nightmare is that they repeal everything except the really popular thing, which is to say the ban on rescission and exclusions for pre-existing conditions. These are basically free, and they're by far the most popular part of the legislation, as far as I can tell.

I'm not exactly a fan of rescission, and to the extent that it is being abused by insurance companies, they deserve whatever regulatory penalties they get. But without rescission, the natural thing to do is to wait until you get sick, and then lie on your insurance application. Like bans on pre-existing conditions, this leads to the classic "insurance death spiral" where the only people who want to buy the insurance are the people who expect to need more care than the cost of the premiums, causing the pool to shrink and the prices to rise.

That's why RomneyCare actually improved premiums briefly, before they resumed their upward march: Massachusetts already had guaranteed issue and community rating, which was pushing premiums sky high. Now that they have RomneyCare . . . well, individual premiums have dropped to only the second most expensive in the country, behind New York, which still has community rating/guaranteed issue, but no mandate.

In other words, while the proponents of ObamaCare are wrong that an individual mandate actually solves all the problems with guaranteed issue and community rating, it does seem to slightly mitigate the disaster.

That seems like the not-unlikely follow up, either from terrified Dems or a brand-spanking new Republican Congress. Would Obama dare veto it? When there's no longer an unpopular Democratic Congress to hide behind? One hopes, for the good of the country. But while so far the president has been enthusiastically urging members to lean into the strike zone and take one for the team, I've seen little indication that he's willing to risk his own job.

I can't make heads or tails of the various whip counts floating around. Friends who report on politics assure me that Nancy Pelosi still has plenty of leverage to twist arms . . . but what? It doesn't seem all that likely that Ms. Pelosi is going to be in charge after November, so what exactly does she have to hand out to wavering members? And if this thing passes on some controversial procedural maneuver, the Republicans in the Senate will go into full meltdown mode, meaning that there isn't going to be any more legislation to take home to your constituents anyway. (How much pork can you cram into one financial reform bill?) 
Democratic Congressional Campaign Committee money for their campaigns, of course . . . but if you're in a district that hates the health care bill this hardly seems likely to save you. 
Meanwhile, Pelosi and the leadership have to sound 100% absolutely sure of themselves . . . because if there's any question of this thing not passing, their members will stampede for the exits. So their confidence isn't really a sign of anything. On the other hand, the conservatives claiming it's nearly impossible have equal and opposite motives. My sense is that it's at a tipping point--at this point, many of the waverers are simply holding out for more goodies, but if she loses a couple more members, the thing becomes effectively impossible. 
But I have nothing in particular to back that up . . . and as far as I can tell, neither does anyone else. 
So now I'm thinking about another political problem. Assume this passes; what happens afterward? I don't think that many people believe that the answer is "Nothing: the bill becomes law, and we sing happy smurf songs all the way to the longest life expectancy in the Western world!" Even the bill's proponents expect it will need some follow-up work. But what will that follow-up work look like? 
 Worst case scenario for Democrats: a wave of public outrage like the one that followed Cat Care, aka The Medicare Catastrophic Coverage Act of 1988 (and its step-child, the Medicare Catastrophic Coverage Repeal Act of 1989). This strikes me as quite likely, actually. If this passes, yes, you will have AARP support and a wave of positive coverage from 90% liberal media. These things did not save Cat Care from a wave of angry public protest. I mean, really angry. Who knew senior citizens could be that spry?

That's Representative Dan Rostenkowski being attacked at a town-hall meeting with his constituents. Afterwards, he plaintively asked his press officer how long it would be before the media foofaraw  blew over. "Let me put it this way," the flack is said to have replied. "When you die, they will play that clip."

As you can imagine, congress hastened to repeal the thing. But they didn't repeal it all the way; some of the provisions remained.

My nightmare is that they repeal everything except the really popular thing, which is to say the ban on rescission and exclusions for pre-existing conditions. These are basically free, and they're by far the most popular part of the legislation, as far as I can tell.

I'm not exactly a fan of rescission, and to the extent that it is being abused by insurance companies, they deserve whatever regulatory penalties they get. But without rescission, the natural thing to do is to wait until you get sick, and then lie on your insurance application. Like bans on pre-existing conditions, this leads to the classic "insurance death spiral" where the only people who want to buy the insurance are the people who expect to need more care than the cost of the premiums, causing the pool to shrink and the prices to rise.

That's why RomneyCare actually improved premiums briefly, before they resumed their upward march: Massachusetts already had guaranteed issue and community rating, which was pushing premiums sky high. Now that they have RomneyCare . . . well, individual premiums have dropped to only the second most expensive in the country, behind New York, which still has community rating/guaranteed issue, but no mandate.

In other words, while the proponents of ObamaCare are wrong that an individual mandate actually solves all the problems with guaranteed issue and community rating, it does seem to slightly mitigate the disaster.

That seems like the not-unlikely follow up, either from terrified Dems or a brand-spanking new Republican Congress. Would Obama dare veto it? When there's no longer an unpopular Democratic Congress to hide behind? One hopes, for the good of the country. But while so far the president has been enthusiastically urging members to lean into the strike zone and take one for the team, I've seen little indication that he's willing to risk his own job.