Americans Still Don’t Understand the Debt Ceiling

October 1, 2013Danny Vinik 2 Comments

I don’t mean understand it in terms of what it actually is (though I don’t think they understand that either). They don’t understand the consequences of it. Breaching the debt ceiling would be catastrophic, causing irreversible long-term effects on our debt and economy. That’s not hyperbole. The market doesn’t believe that we will breach the debt ceiling, because it would be too idiotic for John Boehner to allow that to happen. The current government shutdown is a drag on our economy and harms many different aspects of people’s daily lives. But a default is many orders of magnitude worse. Yet, a new Quinnipiac Poll today suggests that Americans are a bit confused about which is more dangerous: breaching the debt ceiling or a government shutdown.

Raising the debt ceiling is non-negotiable.

The poll finds that by 72% to 22% margin, Americans do not want Congress to shut down the federal government over Obamacare. That’s good. However, a smaller margin (64% to 27%) do not want Congress to default over Obamacare. It’s good that in both cases Americans understand that it’s not acceptable to use a fiscal crisis as leverage to extort the opposite party. But these polls demonstrate that more Americans are OK with that extortion when the hostage is the debt ceiling than when it is government funding,

That’s backwards and needs to change. Part of the reason for this may be because this poll was conducted over the weekend, right before a government shutdown, while a possible default is still a few weeks away. Nevertheless, the media must do a better job explaining the consequences of a default to the American people. There should be no pretense that there will be negotiations over the debt ceiling. That’s not how this works. President Obama screwed up in 2011 by negotiating over it, but that was an outlier. It did not set a precedent.

Speaker Boehner will raise the debt ceiling, because if he doesn’t, it will go down as one of the single worst actions a legislator has done in the history of the United States. Once again, that’s not hyperbole. We need to stop treating this as a back-and-forth game, trying to guess what the speaker will do, and start calling it what it is: a foregone conclusion. Boehner will raise the debt ceiling, because it would be apocalyptic not to. The American people need to know that as well.

Why Jamie Dimon Should Be Indicted

September 30, 2013Danny Vinik 1 Comment

Salon’s Alex Pareene went on CNBC on Friday to debate whether JPMorgan CEO Jamie Dimon should keep his job after the megabank has found itself facing numerous investigations for alleged crimes it committed over the past couple of years. Wonkblog’s Neil Irwin summed up the entire situation well:

This is Mars vs. Venus stuff, in the sense that Pareene is coming from a different planet than Bartiromo and others who are creatures of the Wall Street world. The latter group sees Dimon as the most successful of the masters of the universe, as evidenced by the fact that he steered his bank around the calamities of 2008 and has kept it roaring ahead since. In this telling, some of the unpleasantness the bank has faced, like the $6 billion “London Whale” trading loss and potential $11 billion settlement being negotiated with the Justice Department as a fine for its involvement in shady deals for mortgage securities before the crisis, are just a cost of doing business.

On the planet inhabited Pareene (and some of his supporters among the commentariat, like Felix Salmon and Kevin Roose), the fact that JPMorgan has made gobs of money under Dimon, even after accounting for those losses, is almost irrelevant. JPMorgan had been one of the (allegedly) culpable parties in all sorts of chicanery (Tim Fernholz lists the investigations here), and the CEO must take responsibility for such broad problems.

The basic divide here isn’t about the merits of these individual cases, or any personal culpability that Dimon might have in bad behavior by the bank (some of which even took place in Bear Stearns and Washington Mutual, companies that JPMorgan acquired as they were on the brink of collapse during the crisis).

The question is what obligation a mega-bank like JPMorgan, and its CEO, have to society as a whole as opposed to just the shareholders who own it.

Irwin continues on to note the systemic value of JPMorgan and the benefits such megabanks receive due to their size. That means these banks have an obligation to the whole economy, not just to maximizing shareholder value that CNBC analysts singularly focus on. Irwin concludes:

In that sense, Jamie Dimon’s role at the helm of JPMorgan is not just one of satisfying the company’s shareholders, but one with broad responsibility to steward one of the important institutions that supports economic growth. The CNBC video is evidence of how little, five years after the crisis, that sense of broad responsibility has permeated the world of Wall Street.

This is the perfect summation of the entire exchange. The problem is that Wall Street is never going to learn and understand this. They still don’t understand that banks have a societal duty to operate prudently and legally. They haven’t learned and they aren’t going to learn.

The question, then, is how to align incentives so that operating prudently and legally is in the best interest of Jamie Dimon and JPMorgan. Pareene suggests breaking up the banks so that their failure wouldn’t cause a financial crisis and require a government bailout. But in the absence of Congressional support for such a policy, there is another way to align these incentives: make CEOs and other executives have skin in the game.

This isn’t easy to do and federal agencies don’t have enough resources as it is, but there has to at least be an effort to hold individuals responsible for their bank’s actions. It’s too easy for bank executives to commit crimes, attempt to cover them up and then avoid a trial. The bank may face an investigation and have to pay a huge fine, but bank executives are never at risk of going to jail. That’s inexcusable.

If those executives suddenly faced criminal charges, their conduct would change quickly. The industry would change quickly. Executives would still try to maximize shareholder value, but they would also be concerned that the bank was doing so legally. If not, they could soon find themselves locked away. That’s a good incentive to make sure your bank isn’t breaking the law.

Best of all, this doesn’t require prosecuting every small thing that banks do wrong. It just requires prosecuting enough executives so that all of them are aware that if their bank commits a major crime, they will likely face charges.

You know where would be a good place to start? Prosecuting the leader of the bank that is about to pay the largest financial settlement in history.

That man? Jamie Dimon.

It’s Time for Pelosi and House Dems to Support Boehner

September 30, 2013Danny Vinik 6 Comments

The one thing that is severely limiting John Boehner’s ability to negotiate and compromise with Senate Democrats over the budget and pass a clean debt ceiling increase is the threat of losing his speakership. Hard-line conservatives refuse to accept the political reality that Obamacare is the law of the land and are rejecting any budget deal that does not either defund or delay it. It’s an absurd negotiating position and President Obama will never agree to it. That puts us at a stalemate.

There is likely sufficient Democratic support in the House to pass a clean continuing resolution while keeping the sequester if Boehner chooses to bring such a bill to the floor. It probably would break the Hastert Rule (meaning it would not receive majority Republican support), but it would also prevent a government shutdown. However, if Boehner does that, his speakership would almost certainly be over. Here’s Buzzfeed’s Kate Nocera reporting:

“The House needs to completely defund Obamacare, not one penny to Obamacare. If so groups would reluctantly live with a one year no funding deal, but has to fully defund all aspects of Obamacare. Delay without defund or if House funds it in any capacity, then all hell is going to break loose,” said a conservative strategist who was on the call.

The strategist said a one-year delay of funding was “as far as these groups are willing to go.”

…

“If the House does not stick to its guns on this, there will be a major problem with the conservative and tea party base,” the strategist said.

This gives Boehner no maneuvering room. His options are to either defy the tea party base and lose his speakership or shutdown the government.

But there is one way for Boehner to ensure that he keeps his speakership even if he passes a bill that causes a Tea Party revolt: Minority Leader Nancy Pelosi (D-CA) and House Democrats should publicly commit to supporting Boehner if he brings up a clean CR and his base challenges him. This gives Boehner political cover to avoid a government shutdown while also demonstrating an ability to work with House Democrats. The Tea Party would go absolutely nuts, but who cares? Congress isn’t going to accomplish anything until after 2014 anyways.

As for Boehner’s personal incentives, if he really is going to retire after 2014, then right now he is looking to improve his legacy. He is (wrongly) considered an ineffective speaker who has accomplished very little. A government shutdown would only make his resume look worse. But avoiding a government shutdown while keeping the sequester would be a Republican victory that he could be proud of. He would undoubtedly take pleasure in reducing the power of the Tea Party as well. Even if he isn’t planning on retiring, a government shutdown increases the odds that Democrats take back the House which would end Boehner’s speakership in 2014 anyways. Avoiding a shutdown is in his personal interest no matter his future plans.

The biggest issue here is that relying on Democratic support makes Boehner a lame-duck speaker. If he still wanted to accomplish anything during the rest of this Congress, he would face such animosity from his base that he would have to rely on Democratic support. That’s a big problem for him. A few weeks ago, I wrote that it was basically too big of a problem to make it worth betraying the Tea Party. Now, the math has changed. Immigration reform is on life-support and Tea Party opposition to any CR that doesn’t defund or delay Obamacare has left Boehner with no good options. Avoiding a government shutdown with a clean CR would be good politics for the Republican Party and also good for the economy. The challenge is to make it politically feasible for Boehner to do. Nancy Pelosi and House Democrats have the ability to do just that and it’s time they did so.

P.S. This would also ensure that we didn’t breach the debt ceiling as Pelosi and Boehner should make a similar deal over that. In fact, its much more important that Pelosi put her support behind Boehner in the debt ceiling standoff so that he feels safe raising the debt ceiling without any concessions from the president. That’s absolutely vital.