For Green Jobs, Cut Fossil-Fuel Subsidies

Paul Krugman has a post on the green jobs issue. He wonders why wind energy investments and jobs have not been growing as fast as many have hoped. He argues that the "right incentives" have not been put in place and one reason is that progress on environmental issues is stymied by opponents of government intervention, i.e.,  believers in the markets. Krugman then makes the case that opponents of environmental intervention actually lack faith in the potential of markets. Markets would go to work to solve environmental problems if the right incentives were in place. For example, a price on carbon would be such an incentive.

I commented that in the context of the current debt-ceiling debate, the most promising path ahead in the Congress - especially for independent Republicans - is to push hard to end subsidies for fossil fuels. 

This is not a pipe dream. Last year I attended a press conference in Washington of the Green Scissors campaign, a 15-year-old group led by three organizations concerned about the environment. The campaign has identified $200 billion in wasteful and environmentally harmful subsidies, such as subsidies for petroleum and ethanol. The press  conference was bipartisan, including independently minded Republicans like Rep. Tom Petri of Wisconsin, who spoke in favor of reducing these subsidies.

The debate over the deficit and the debt ceiling is an opportunity for advancing alternative energy and energy efficiency by ending subsidies for the production of fossil fuels and ethanol.

The Great Debt Ceiling Countdown,15 Days to Go, A Missed Chance for GOP

President Obama offered a $4 trillion deficit reduction package to Speaker Boehner, but Boehner could not sell it the House GOP majority, even though it was tilted 4 to 1 towards spending cuts rather than revenue increases and a NY Times analysis shows even Republicans in a Gallup survey say they require only a 3 to 1 ratio.

George Packer, writing in the July 25 New Yorker, depicts the President as embodying responsibility without conviction – sane but not inspiring. The republicans represent conviction without responsibility, which is to say they are “raving mad.” Either way, the unemployed no longer have a place at the table. 

Comment: If you don’t have a seat at the table, you may be on the menu. Economists may not agree on details of solving debt issues, but the GOP emphasis on cutting spending now is preempting the potential for further fiscal action to revive the economy.  President Obama was acting on a utilitarian calculus, the GOP on deontological principles. But if politics is the art of the possible, rejecting Obama’s proposal was politically crazy. If S&P despairs of rational debate and lowers its rating on U.S. long-term debt, one outcome is that spending on debt service is likely to rise sharply.

MUNI BONDS | Rigged Markets

July 16, 2011–An outraged Republican friend sent me a link from Jesse's Café Américain, commenting on SEC and other actions announced on July 7. The related SEC actions, from their announcements, are summarized below. My friend was distressed at the inadequacy of the penalties.

SEC Actions and Related Other Government Actions

The SEC charged J.P. Morgan Securities LLC (JPMS) with fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states. JPMS agreed to settle SEC complaints of violations of Section 15(c)(1)(A) of the Securities Exchange Act of 1934 by paying approximately $51 million, to be passed on to municipalities that were cheated.

JPMS and its affiliates also agreed to pay $177 million to settle related claims by the IRS and other federal and state authorities.

JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal 'last look' at competitors’ bids. Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits.–Robert Khuzami, Director of the SEC's Division of Enforcement.

When municipalities sell securities, they usually invest the proceeds of the sales until the money is needed. As part of its oversight of the tax-exempt market, the IRS requires that such proceeds be invested at fair market value, which is commonly done by utilizing a competitive bidding process. But the SEC claims that during the period 1997-2005 JPMS's fraudulent practices undermined this process. Municipalities paid more for reinvestment products than they should have. JPMS thereby jeopardized the tax-exempt status of billions of dollars in municipal securities. 

When powerful financial institutions like JPMS conspire with each other to intentionally violate regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted. Rather than playing by the rules, the rules got played. - Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit.

The SEC complaint filed in U.S. District Court for New Jersey says that JPMS acted as agent for JPMorgan Chase Bank, N.A and on certain occasions:

• Won bids by obtaining information ("last looks") from bidding agents about competing bids. I
• Won bids that were wired in advance for JPMS to win (“set-ups”). The bidding agent deliberately set up non-winning bids from other providers, for whom other bids were wired for them to win. 

The employees involved are no longer with JPMS.

Comment

The SEC gets great credit for nailing this one. The penalties may be inadequate, but it's good to see the SEC taking action. The financial markets in the United States need to have their credibility restored and the SEC has a crucial role in making it happen.

DEBT CEILING | 8 Proposals

Michael D. Shear, online July 15, 2011 (in the Saturday, July 16 NY Times), provides a “cheat sheet” on the various proposals for meeting the August 2 deadline for raising the debt ceiling. Comment: Not mentioned is the fact that Both Moody’s and S&P have threatened to lower their triple-A ratings on long-term U.S. debt if the deadline is not met, with S&P going further and expressing hawkish views about the terms of any compromise. The threat of a downgrade at least partly offsets the argument that cuts in spending now might bring on a double-dip recession. Here is an abbreviated summary of eight overlapping and evolving proposals, with a few additional facts from a Washington newsletter (W&J Washington Update, July 15) and other sources, and my comments:

1. The Obama-Boehner $4 Trillion Grand Bargain.The “big deal” worked on between President Obama and House Speaker John Boehner (R-OH) would add up to more than $4 trillion in deficit reductions over ten years, with $1 trillion of it from new tax revenue. But the tax revenue portion of this bargain made it unpalatable to Republicans. Boehner backed off from this last weekend but the President still likes this idea. Comment: S&P also likes this approach, saying that there is a 50 percent chance it will downgrade U.S. debt within 90 days, and suggesting that anything less than a $4 trillion deficit-reduction plan over ten years could trigger a downgrade.

2. The Biden Half-Bargain. House Majority Leader Eric Cantor (R-VA) revealed some details of VP Joe Biden's plan to cut $2 trillion. Health care would lose about $340 billion. Reducing the debt would save $300 billlion. The Biden plan included several hundred billion dollars of new revenues from sources such as owners of private jets, hedge-fund managers and large oil companies. Cantor said the new tax revenues were a nonstarter. Comment: This would add up to about the $2.4 trillion of the debt-ceiling increase; it would not meet the S&P $4 trillion standard.

3. Cantor’s $2.4 Trillion Cuts.Cantor proposed $2.4 trillion worth of spending cuts without revenue increases. The President responded that these cuts are too deep, and would affect middle-class programs - student loans, Veterans’ benefits, Medicare and Medicaid – and that the cuts should be offset at least in part by higher taxes on wealthy individuals. Comment: Focusing only on the spending side does not meet the test of fairness.

4. White House: Proposed $1.5+ Trillion Cuts. President Obama has proposed cuts of $1.5-$1.7 trillion. Cantor says this would not be enough. Comment: Even if these cuts were matched by $700-$900 billion in new taxes to get to the $2.4 trillion of the debt increase, the total is below the S&P standard.

5. Cantor’s Stepwise Debt Increases. Rep. Cantor has suggested votes that would increase the debt ceiling in steps, with each step allowing Republicans to call again for more spending cuts. President Obama is opposed, saying that he wants to deal with the long-term deficit problem now. Comment: The President is operating on the sound principle that painful adjustments are best made as part of a package that shows fairness in the bearing of sacrifices.

6. The “Balanced Budget” Amendment.  In the background, House conservatives are seeking to tie an increase in the debt ceiling to the passage of a constitutional amendment requiring Congress to balance the budget. Another proposal is a cap on federal spending as a share of GDP. Comment: Would such an amendment be ratified by two-thirds of the states? Unlikely. It would make Keynesian counter-cyclical fiscal policies more difficult, limiting the ability of future fiscal policymakers to respond to a recession or depression. (But on the plus side it might end the practice of financing wars with new debt.)

7. The McConnell Three-Step Option. Senate Minority Leader Mitch McConnell (R-KY) proposes allowing President Obama to raise the debt ceiling in three steps ($700 billion, $900 billion and $900 billion) between now and the end of 2012. Even if the Senate joins the House in voting against the debt-ceiling hikes, the President could veto their opposing legislation and go ahead. Comment: This would put the onus on the President but would also get past the deadline – it’s a better alternative than defaulting on debt payments, but does not address the long-term deficit concerns of the rating agencies.

8. The Hybrid Obama-McConnell. President Obama would be given the authority to raise the debt ceiling in return for the President’s commitment to the level of cuts that he proposed as a starting point. Then a base-closing-type commission would come up with additional deficit-reduction plans by the end of 2011 for an up-or-down vote. Comment: A well-thought-through package like this might conceivably be enough for the rating agencies, at least for this year.

Regulating Banks and Non-Banks: One Year Later

A year ago today I wrote about financial regulation . As the G20 meeting on April 2 approaches, the topic is more relevant than ever.

I argued last year that when the Glass-Steagall wall between banking and non-bank financial institutions was torn down in 1999, the law should have extended U.S. regulatory authority beyond banking to all the other institutions.

My views were shaped by research I did at the FDIC. I developed a state credit-quality indicator, based on bank examiners' classification of loan quality at insured banks. The indicator deducted 20 percent of the loan value classified as substandard, 50 percent of loans classified as doubtful, and 100 percent of loans classified as loss. The results were included in an article I wrote with Professor George Benston published in the Journal of Money, Credit and Banking, "Bank Examiners' Evaluation of Credit".

Whatever use a state credit-quality indicator might have had as an early warning system (e.g., of mortgage-quality problems in Arizona, California, Florida and Nevada) disappeared when mortgage loans were wrapped up into securitized packages that were beyond easy classification by bank examiners and were camouflaged by AAA ratings by rating agencies and insurance companies.

The Chairman of the UK Financial Service Authority (FSA), Lord Turner, on March 18 has highlighted for the G20 socially undesirable financial innovation as a key source of the global crisis. He recommends regulation of near-bank activities such as hedge funds and credit-rating agencies, with a Europe-wide financial body to set standards and supervise. The UK seems to have joined the hawkish German and French authorities.

While the United States has been considered a dove on financial regulatory issues, the Obama administration may surprise the G20. Stephen Labaton in the NY Times on Saturday says a plan is being prepared that would

regulate the shadow banking system, with heightened standards put in place after the economy began to rebound. A broad consensus has emerged that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission.

The U.S. plan will probably give the government greater authority over large troubled companies not now regulated by Washington. The Treasury secretary would have authority to seize a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board. The government now can seize only the banking unit that controls federally insured deposits of large troubled institutions.

NYC | In the Eye of the Storm, OMB's Mark Page

Ross Sandler (L) and Mark Page. All photos by JT Marlin. 

NY State's Gov. David Paterson has  agreed with legislative leaders to close a NY State budget gap for FY 2009 of $1.6 billion.

But now a monster gap of $13 billion is awaiting the Governor in ten days.

In some ways, NY City is better off than NY State, because the biggest part of NYC's tax base is the property tax.

NYC's annual property assessments are averaged over five years, creating a surge of revenue as the averages keep rising for two or three years after the beginning of a decline in property values.

When recovery starts, of course, NYC doesn't get as much revenue as it would if assessments were recognized more rapidly, but then the income-and-sales taxes are bouncing up and the City doesn't need the money as much.

However, when NY State catches a cold, NYC gets pneumonia because NYC depends on the State for aid.

Half the State’s revenues come from NYC, but something less than half comes back to NYC in aid. So a gap of $13 billion at the State level without raising taxes might mean $6 billion less aid for NY City.

That's another thorn in the side of Mark Page, the man who has been a steady hand on NYC's fiscal wheel as director of NYC’s Office of Management and Budget since Mayor Bloomberg took office in 2002. He was introduced not long ago by Mr. Ross Sandler of the New York Law School.

Mr. Page is a graduate of Harvard College and the NYU Law School and his responsibilities as OMB Director include

developing and implementing the city’s budget, monitoring and forecasting the revenues and expenses of the city, analyzing the economy, evaluating agency management improvement initiatives, and issuing bonds in the public capital markets in conjunction with the New York City comptroller.

Mr. Page joined OMB in 1978 as deputy counsel, was named general counsel in 1980 and had the title of deputy director added in 1982. He is reputed to hate giving speeches and is hard to locate at a podium other than responding to questions from members of the NY City Council. He's actually a pleasure to listen to as he speaks in perfectly formed sentences without any apparent reference to notes.

I had a chance to listen to him at New York Law School and took some photos and notes. I started reporting below what Mr. Page said, but midway I received word that a videotape of his comments had been posted online, at which point I decided I would stop typing up my notes. I have posted the link to the NYLS videotape at the end.

NYC OMB Director Mark Page.

REMARKS OF MR. MARK PAGE, DIRECTOR, NYC OMB

The banking industry has been engaged in in an extended use of vapors. Washington is engaged in a dramatic wielding of stimulus dollars.

Here in New York City, we are engaged in questions about the frequency of garbage collection, the number of workers in the parks during the summer, and high school class size, the daily oatmeal of government.

Government budgeting is not that complicated. It has to do with handling the fact that we want to get more services, like more frequent garbage collection, and pay less taxes... and preferably eliminate taxes.

Henry Stern.

It’s easy to do more and tax less when you’re getting more money out of existing tax rates. Economic expansion gives us more.

But then when you get in the inevitable reciprocal cycle, a given tax structure gives you less money to spend on services. 

As I have heard it said very loudly at MTA meetings, in a downturn you are likely to have to tax more for less services. This is not a very seductive premise, particularly as government is political.

To make this point, we have divided our spending into controllable and uncontrollable costs. In government there are some things that are very difficult to avoid paying for. For an individual, the analogy might be with mortgage payments.

Jonathan Gelber (L) and Roger Herz.

For New York City government, the stuff you are really stuck with paying starts with debt service and pension benefits.

We’ve done a lot over the last seven years with bringing the East River and Harlem River bridges up to standard. We’ve spent a lot on building and maintaining schools and roads. And we have the debt to show for it.

To hear how Mr. Page's speech proceeded, with questions from audience members like Jonathan Gelber, Roger Herz and Henry Stern (all shown in photos) go to the videotape here.