President Obama's Cleveland economy speech – detailed outline

President Obama's Cleveland economy speech – detailed outline

This is the second of two posts. Here is the first, a much shorter high-level version of the outline contained here.

This is my attempt to build a detailed outline of the economic speech President Obama gave in Cleveland yesterday (watch it).

I used his language in some parts, but in many parts these are his concepts expressed in my words, I hope to provide more clarity.

It won’t surprise regular readers that I disagree with much of this. I have tried not to let that cloud this summary.

Detailed outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big choice — two paths

A. Choice / two fundamentally different visions.
B. Choice and debate are not about whether we need to grow faster, but instead about how to:

1. Create strong, sustained growth;
2. Pay down our long-term debt;
3. Generate good, middle class jobs so people can have confidence that if they work hard, they can get ahead.

C. Big decisions. Not new challenges. Problems more than a decade in the making.

D. Being held back by a stalemate over two different paths for our country. Election should is about resolving this stalemate.

II. Define & blame Republican theory for bad stuff.

A. Long before 2008 the basic bargain had begun to erode
B. Define Republican theory: cut taxes, no regs, market solves everything
C. Results of Republican theory: worked well for the rich, but prosperity never trickled down to the middle class.

III. Be patient.

A. Not your normal recession.
B. It has typically taken countries up to 10 years to recover from financial crises of this magnitude.
C. We’re in better shape than Europe.

IV. Take credit for the good stuff

A. We acted fast. My policies are working.
B. We’re recovering from:

1. Financial crisis of 2008;
2. A decade of middle class falling behind;
3. Erosion of basic bargain over decade[s?]

V. Romney wants to repeat the failed experiment of the last decade.

A. We implemented Republican theory last decade:

1. Best way to grow the economy is from the top down;
2. Eliminate most regulations;
3. Cut taxes by trillions of dollars;
4. Strip down government to national security and a few other basic functions.

B. This failed theory created the fiscal problems we face now and the financial crisis that caused this weak economy.

C. Romney wants to return to and repeat this failed theory.

VI. Romney’s plan is bad for the middle class.

A. Keep Bush tax cuts in place and add another $5T in tax cuts on top of that.

1. 70% of those will go to >$200K/year, and >$1M/year will get an average tax cut of about 25%

B. Cut valuable government programs: student loans, Head Start, health research and scientific grants.
C. Eliminate health insurance for 33m (repeal ACA) + 19m more (Medicaid cuts).
D. Scale back or eliminate tax breaks that help middle class families: health care, college, retirement, homeownership.
E. Repeat of failed top-down growth theory.

VII. My plan is an economy built from a growing middle class. Race to the top.

A. Education;
B. Energy;
C. Innovation;
D. Investment;
E. Tax code based on American job creation and balanced deficit reduction.

VIII. I’m a centrist, look at my record.

A. I have cut taxes.
B. Fewer regulations than Bush in first three years.
C. Signed into law $2T of spending cuts.
D. Deficit reduction plan to slow health cost growth, not shift costs to seniors.
E. Domestic discretionary spending lowest share of GDP in nearly 60 years.

IX. I’m for keeping the American tradition of bipartisan government involvement in the economy.

A. Government is not the answer to all our problems, and I’m not proposing government run everything.
B. Romney and Republicans want to return us to no rules and unregulated market free-for-all.
C. America has succeeded not by telling everyone to fend for themselves, but by all of us pitching in, all of us pulling our own weight. That’s what I’m for.

I hope you find this useful.

(photo credit: Obama campaign)

President Obama's Cleveland economy speech – high-level outline

President Obama's Cleveland economy speech – high-level outline

This is the first of two posts.

Here is my attempt to outline the meaty 53 minute economic speech President Obama gave yesterday in Cleveland. I built this outline to help myself analyze the speech, then realized that others might find it useful. While it is true that little of the substance was new, this is nevertheless a serious policy speech that makes what the President and his advisors think is the economic part of their best case for reelection. I will take it seriously and recommend you do so as well — this isn’t just another blow-off stump speech. This is the theory of the economic case the way the President wants you to see it.

If you’re a student of economic policy I recommend you watch or read the whole speech. No summary or analysis can substitute for the candidate’s own words and presentation.

Here is my plan of attack: summarize first; then explain; then respond. Today is just the first step, the summary.

In some cases i use the President’s words, but I’m often using my own more colloquial language to express his arguments more clearly if I can. So in some cases these are his thoughts (I think) in my words. I have done my level best to capture his arguments in their most effective and convincing form, especially when I disagree with them. I will express my disagreements another time.

This post contains just the highest level outline. The next post contains a much more detailed outline. I recommend you skim this one, then read that one.

High level outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big and fundamental choice — two paths.

II. Define & blame Republican theory for bad stuff.

III. Be patient.

IV. Take credit for progress / the good stuff.

V. Romney wants to repeat the failed experiment of the last decade.

VI. Romney’s plan is bad for the middle class.

VII. My plan is an economy built from a growing middle class. Race to the top.

VIII. I’m a centrist, look at my record.

IX. I am for keeping the American tradition of bipartisan government involvement in the economy.

That’s the short, high-level outline. Here is the detailed version.

I hope you find this useful.

(photo credit: Obama campaign)

The President repeats the “blank check for autos” falsehood

The President repeats the “blank check for autos” falsehood

Kudos to the Washington Post’s Charles Lane for his column debunking the President’s recent false claim:

THE PRESIDENT:  In exchange for help — see, keep in mind, that the administration before us, they had been writing some checks to the auto industry with asking nothing in return.  It was just a bailout, straight — straightforward.  We said we’re going to do it differently.

In exchange for help, we also demanded responsibility from the auto industry.  We got the industry to retool and to restructure.  We got workers and management to get together, figure out how to make yourselves more efficient.

This “asking nothing in return … It was just a bailout, straightforward” claim is false.

A brief history of this false claim

President Obama’s former CEA Chair Austan Goolsbee first made this claim in June of 2009. The rebuttal I wrote then is the most detailed and specific debunking of this claim:  Dr. Goolsbee gets it wrong on the auto loans.  I’ll repeat the essential elements below.

President Obama’s former Chief of Staff Rahm Emanuel repeated the false claim one year later. I responded, and Politifact rated Mr. Emanuel’s claim as false.

In September 2010 President Obama made this same claim.  The Associated Press responded, demonstrating that the claim was wrong without explicitly labeling it as incorrect (wimps).

Both Politifact and the AP relied on my analysis, although their judgments are of course their own.

Now the President repeated this falsehood in his post-State of the Union tour this week and the Washington Post called him on it.  Here’s Mr. Lane:

But in campaigning for re-election on this aspect of his record, he has shown an unfortunate, and remarkably ungracious, tendency to distort the record of his predecessor.

… President George W. Bush never gave the companies an unconditional bailout. He reluctantly loaned them money in return for what The Detroit Free Press described as “deep concessions” — and he did so in part so that Obama would not have to take office amid a full-blown industrial meltdown.

… On page 42 of his book on the bailout, former Obama auto-czar Steven Rattner praised the “thoughtful” Bush approach, noting that its “conditions–as imperfect as they were–provided a baseline of expected sacrifices that paved the way for our demands for give-ups from the stakeholders.”

What actually happened

In December 2008, after Congress left town without addressing this issue, President Bush had two viable options.

  • He could allow market forces to work.  GM and Chrysler would run out of cash by early January and a supplier run would begin sometime soon thereafter. The firms would begin liquidating in January with an industry-wide job loss we estimated at about 1.1 M jobs.  This was during the late stages of the financial meltdown of 2008. In addition this choice would mean that about a month later President Obama would enter office facing not just a severely weakened economy and financial industry, but an in-progress collapse of the auto industry for which he would have no viable recourse.
  • Or President Bush could provide a three-month “bridge loan” to allow President Obama time to get his feet set and decide whether he wanted to provide a longer-term loan to the firms.

President Bush chose the second option. In the final days of December Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to President Obama’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals.

  1. repay the loan and any other government financing;
  2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
  3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
  4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
  5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could nevertheless still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:

  1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
  2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
  3. eliminate the jobs bank;
  4. develop work rules that are competitive with the transplants by 12/31/09; and
  5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by President Obama’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 7 liquidation process. We gave the President’s designee the authority to extend this process for 30 days.

The Bush-era loans were not a blank check, not a “straightforward bailout.” President Obama was wrong when he said they were.

(photo credit: paul bica)

PolitiFact rates WH COS Rahm Emanuel’s statement False.

PolitiFact rates WH COS Rahm Emanuel’s statement False.

PolitiFact.com looked into White House Chief of Staff Rahm Emanuel’s claim that President Bush gave the U.S. auto manufacturers a blank check, and at my response.

PolitiFact examined this key quote from the Chief of Staff:

In the case of General Motors, the prior administration wrote a check without asking for any conditions of change.

PolitiFact rated the White House Chief of Staff’s statement false and shows this “Truth-O-Meter.”

Here is PolitiFact’s concluding paragraph:

Emanuel’s statement — “In the case of General Motors, the (Bush) administration wrote a check without asking for any conditions of change” — implies that the Obama administration was tough while the Bush administration just threw money at the problem. Actually, the Bush administration detailed a number of conditions for change at General Motors, and Obama’s administration could have recalled the loans soon after taking office if officials felt the auto companies were not compliant. The Treasury Department documents and press reports contradict Emanuel’s claim, so we rate his statement False.

PolitiFact won a Pulitzer Prize in 2008 for their coverage of the 2008 election. ABC News relies on PolitiFact for fact-checking.

I hope someone from the White House press corps follows up.

Chief of Staff Rahm Emanuel's auto breakdown

Chief of Staff Rahm Emanuel's auto breakdown

This morning on ABC’s This Week, White House Chief of Staff Rahm Emanuel told Jake Tapper:

In the case of General Motors, the prior administration wrote a check without asking for any conditions of change. We said: Without a check from the American people, get yourself right. You’ve got to make fundamental change. They’ve made changes and now, as you know, General Motors is going to have an IPO. And most importantly, they’re going to keep open factories that they were planning on closing. So we’re righting an industry that was not doing itself, or the American people or its workers, the right thing. So it was a way of getting them to do the changes that they had postponed.

Mr. Emanuel’s claim that the Bush Administration “wrote a check without asking for any conditions of change” is provably incorrect. The Bush-era loans were conditioned on restructuring to become financially viable, with a precise definition of viability, specific restructuring goals, and quantitative targets.

Almost exactly a year ago I responded to a similar claim made by Council of Economic Advisers Member Austan Goolsbee. Here is an excerpt from that post:

In the last few days of December [2008], Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals. These goals came from the legislation we [the Bush team] negotiated with Frank, Pelosi, and Dodd:

  1. repay the loan and any other government financing;
  2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
  3. become viable: achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
  4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
  5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month [of December]:

  1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
  2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
  3. eliminate the jobs bank;
  4. develop work rules that are competitive with the transplants by 12/31/09; and
  5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process. We gave the President’s designee the authority to extend this process for 30 days.

I don’t see how the Chief of Staff can make the claim that he made to Mr. Tapper. The specific loan conditions are listed on pages 5 and 6 of this document.

In addition, the Obama Transition Team rejected (quiet) overtures made by the Bush Team to work with them to ensure a smooth handoff of the auto issue. For the full story of the auto loans, please see my post from June, 2009. Here are the summary points from that post:

  1. The Obama team declined to respond to the Bush team’s offer to work together to create a joint process that would have resulted in a resolution by March 1st or April 1st, rather than by June 1st for Chrysler and maybe September 1st for GM.
  2. We then worked with the Democratic majority to enact legislation that would have limited funds to be available only to firms that would become viable.
  3. After Congress left town for the holidays without having addressed the issue, President Bush was faced with a choice between providing loans and allowing these firms to liquidate in early January, which would have further exacerbated the economic situation for the incoming President. President Bush chose to provide the loans.
  4. We provided GM and Chrysler with sufficient funds to get to March 31st, not January 20th, and in those loans we gave the incoming Administration the ability to extend them for 30 more days.
  5. The loans were conditioned on restructuring to become viable, with a precise definition of viability, specific restructuring goals, and quantitative targets.
  6. The Obama Administration followed the restructuring process laid out in the Bush-era loans. They are now measuring that deal against the targets established in the Bush-era loans. The only changes the Obama team made were that they extended GM for 60 days rather than 30, and the Obama Administration directly inserted themselves into the negotiations as the pre-packager.

I hope someone from the White House press corps follows up on this. I have a feeling we will be hearing this claim frequently over the next few months.

(photo credit: cropped from an ABC News image)

Oil spill crisis as opportunity

Oil spill crisis as opportunity

Here is Rahm Emanuel’s famous quote, from November 19, 2008. You don’t need to watch more than the first minute.

The President’s Oval Office address last night suggests an implementation of this principle, as he tries to reconfigure the climate change / cap-and-trade debate into a new War on Fossil Fuels. It appears the President will attempt to use the oil spill crisis as an opportunity to enact cap-and-trade legislation which otherwise has almost no chance of becoming law.

In launching this war he is foregoing an opportunity for targeted legislation addressing only the risks of deepwater drilling. This alternative legislative path could give America and her President a quick, easy, bipartisan policy victory which I believe could rally and unify the nation when we sorely need it.

The War on Fossil Fuels

Let’s look at the words used by the President last night. We begin with his heavy use of military imagery:

… the battle we’re waging against an oil spill that is assaulting our shores and our citizens …

We will fight this spill …

I’d like to lay out for you what our battle plan is …

I’ve authorized the deployment of over 17,000 National Guard members along the coast. These servicemen and women …

I urge the governors in the affected states to activate these troops …

The same thing was said about our ability to produce enough planes and tanks in World War II.

We can see that fossil fuels are the enemy:

For decades, we’ve talked and talked about the need to end America’s century-long addiction to fossil fuels.

The transition away from fossil fuels is going to take some time …

… as long they seriously tackle our addiction to fossil fuels …

The use of “war” with “addiction to fossil fuels” suggests a closer communications parallel may be the “war on drugs.”

We can also see that climate change, cap-and-trade, global warming, and greenhouse gases are not the communications priority. The President referred once to “a strong and comprehensive energy and climate bill” passed by the House earlier this year. He did not say any of the other phrases, most notably not “cap-and-trade.” That language appears to be nearly dead. Then again, he did refer to “pricing carbon” one week ago.

Most importantly, the President defined the policy goal as “the need to end America’s century-long addiction to fossil fuels.” He reiterates this by saying,

So I’m happy to look at other ideas and approaches from either party – as long they seriously tackle our addiction to fossil fuels.

Q: How does the President reply if the minority party offers, ‘We will work with you in good faith on an answer to deepwater drilling safety, but will continue to disagree with you on broader questions of fossil fuels and specifically on cap-and-trade.” Does he take the partial win and solve the deepwater drilling problems? Or does he refuse and hold out for the rest of his energy/climate agenda?

One climate issue, two separable energy issues

If you are focused on carbon emissions, then oil, coal, and natural gas naturally group together as “fossil fuels” and are the combined source of the problem. If you are focused on energy, then oil is one issue (transportation), and coal and natural gas are another (electric power).

We use almost no oil to produce power in the U.S., and electricity powers only a tiny fraction of our transportation, despite recent increases in hybrid and natural gas vehicles. Yes, they’re growing at a rapid rate. But the overlap between oil as one type of energy source vs. coal and natural gas as another is vanishingly small. My favorite energy graph makes this clear. Look at the thin green lines that go from petroleum to supply residential and commercial power, and at the even thinner orange and turquoise lines that show how much our transportation is fueled by electric power and natural gas.

(Source: The University of California, Lawrence Livermore National Laboratory, and the Department of Energy)

Someday when battery technologies improve, the fuel and power worlds will blend in the U.S., and there will be strong and direct economic relationships between the production of electric power and the use of oil. Until that day, from an energy perspective, “fossil fuels” conflates oil with coal and natural gas in a way that is at best confusing and at worst misleading. Substituting biofuels for oil or making vehicles more fuel efficient has almost no effect on the amount of coal or natural gas we use. “Produc[ing] wind turbines,” “installing energy-efficient windows, and small businesses making solar panels” are quantitatively irrelevant to our use and production of oil. All the windmills and solar panels you could imagine will not reduce our dependence on oil as a transportation fuel.

The President’s gamble

The President risks overreaching by trying to use a crisis in one subset of domestic oil drilling to enact a policy agenda that applies to all types of oil drilling and imports, and to coal, and to natural gas. Were he to focus just on solving the deepwater drilling problem, he’d have a slam dunk. Instead he’s trying not to let this crisis go to waste, and to use it as an opportunity to enact indirectly related policies that are much more hotly disputed.

Two scenarios

Scenario 1 – Imagine that the President proposes new legislation targeted at the problem of engineering safety in deepwater drilling. Imagine his legislation contains five provisions:

  1. Require that all deepwater wells have a relief well in place before production begins.
  2. Mandate requirements for double piping and a list of other industry engineering best practices. The prior best practice for engineering safety becomes the legally mandated minimum.
  3. Mandate that each deepwater drilling operation be insured for at least $20 B of environmental damage before production can begin. Insurers will therefore require further engineering stringency to protect themselves.
  4. Raise the legal liability cap for any drilling platform to $50 B, just to be safe.
  5. All new wells must meet all of the above requirements, and all existing wells must cease production until they meet them. (The details here might need some work.)

With these requirements, some amount of deepwater drilling would cease because it wouldn’t be economical with the added costs. I’m confident that policymakers across the board would say, “Fine. If the added protection is not worth that extra cost, then don’t drill there. I want a belt, and suspenders, and Velcro too.”

I believe the legislation in scenario 1 would pass the House and Senate within a week or two, with overwhelming and possibly unanimous bipartisan majorities. The President could quickly unify the country and celebrate a wise bipartisan solution to preventing the recurrence of a painful problem. That would still leave the existing crisis, but the long-term policy issues would be solved.

Scenario 2 – The President pushes for enactment of cap-and-trade legislation which raises the cost of gasoline and diesel fuel, and of power produced from coal and natural gas. He insists that Congress include all the policies from scenario 1 in this bill.

Scenario 2 is a huge gamble. If the President succeeds, it will probably look like the health care fight. It will be a long, vigorous, largely partisan debate, overlaid with regional economic and energy interests. Legislation will become law only after squeaking out a 60th vote to overcome a filibuster.

The President knows he cannot enact cap-and-trade before November without a game changer. He assumes his legislative margin will be (much) smaller next year. He is rolling the dice to see if he can turn this crisis into a legislative opportunity, in what may be his last chance to enact a national carbon price.

My view

Sometimes it’s good to vigorously debate important policy issues. Sometimes America needs to make a huge directional change and only a strong President can lead us in a new direction. These directional shifts are painful for the country as we argue and fight, but if you agree with the new direction, that squabbling is worth it.

I think America is as deeply divided on climate change issues as it is on health care. I’d like us to change direction on energy, but I’m OK doing so gradually as technology allows us to do so without imposing enormous costs on our economy. This explains why I often support policies focused on energy technology research and development.

I think solving our deepwater drilling engineering safety problems is now a top national policy priority. I think our other top domestic policy priority needs to be near-term economic growth. I rank climate change lower on my list of policy problems.

The President could have a quick, clean, bipartisan win on legislation that would eliminate the risk of another spill like this one.

Instead he is rolling the dice again, gambling that he can leverage the problems with drilling for oil in deep water to get legislation that also raises costs for power production. He is also choosing a path that he knows will provoke partisan conflict. Maybe he sees an electoral benefit to having the fight.

I assume the President believes what he says, and he thinks that fossil fuels and the combined problems of environmental damage from deepwater drilling, the national security externalities and economic costs of our oil dependence, the pollution and climate change externalities from carbon emissions from all sources, all must be solved at once and immediately. He wants to change America’s direction sharply and suddenly, even if doing so is painful economically.

I respectfully disagree with sharply and suddenly, because the benefits are uncertain and the costs are significant. Also, the specific cap-and-trade bills being debated are a horrible mess of political bargaining and implementation nightmares.

The President’s War on Fossil Fuels will reinvigorate an intense policy debate on the future of energy and environmental policy in America. He may be successful in bending the Congress to his will, as he did with health care. He may fail.

I prefer another path that is simpler, faster, more unifying, and more targeted at the problem that is in the forefront of our consciousness this summer.

I think it would be good for America to unite and say, “We worked together to prevent that problem in the Gulf from happening again.” It is easy to do so, and I wish the President would choose that path instead.

(photo source: White House)

Cliff Notes: The President's Carnegie Mellon economic speech

Cliff Notes: The President's Carnegie Mellon economic speech

Last Wednesday the President spoke about the economy at Carnegie Mellon University. Administration officials billed this as a major economic address, the follow-up to his speech last April at Georgetown. I think the most accurate and fairest way to understand the views of an elected official begins with what he or she says. The problem is that this speech is more than 5,000 words, so almost no one will read the whole thing.

In summarizing it I still ended up at around 1,300 words. Think of it as getting 75% savings.

I will respond to the speech soon. For now, this is my attempt at a non-judgmental summary. Where you don’t see quotation marks I am paraphrasing him, fairly I hope.

The speech naturally breaks into three parts:

  • Part I: The Choice
  • Part II: The Foundation
  • Part III: The Laundry List

There are some obvious topical subdivisions which I have labeled.


Part I: The Choice

The oil spill is my top priority.

The macroeconomy

I inherited an extremely weak economy, “one of the worst economic storms in our history.”

I took bold and unpopular actions, and they worked. “These steps have succeeded in breaking the freefall.”

“We’re again moving in the right direction.”

“This economy is getting stronger by the day.”

[But] “It’s not going to be a real recovery until people can feel it in their own lives.”

“In the immediate future, this means doing whatever is necessary to keep the recovery going and to spur job growth.”

Why we need a new foundation

The last ten years were terrible economically for American families. “Some people have called the last 10 years ‘the lost decade.'”

There has been “a sense that the American Dream might slowly be slipping away.”

China and India and Europe are “building high-speed railroads and expanding broadband access.” They’re making serious investments in technology and clean energy because they want to win the competition for these jobs.

We can’t afford to return to the pre-crisis status quo. We can’t go back to an economy that was too dependent on bubbles and debt and financial speculation.”

“We have to build a new and stronger foundation for growth and prosperity … and that’s exactly what we’ve been doing for the last 16 months.

It’s a foundation based on investments in our people and their future; investments in the skills and education we need to compete; investments in a 21st century infrastructure for America, from high-speed railroads to high-speed Internet; investments in research and technology, like clean energy, that can lead to new jobs and new exports and new industries.

This new foundation is also based on reforms that will make our economy stronger and our businesses more competitive — reforms that will make health care cheaper, our financial system more secure, and our government less burdened with debt.”

International & Trade

“We have to keep working with the nations of the G20 to pursue more balanced growth.”

“We need to coordinate financial reform … so that we avoid a global race to the bottom.”

“We need to open new markets and meet the goal of my National Export Initiative: to double our exports over the next five years.”

“We need to ensure that our competitors play fair and our agreements are enforced.”

Republicans are partisan and for no government

Republicans keep saying no to everything we’re doing.

“And some of this, of course, is just politics.”

“But to be fair, a good deal of the other party’s opposition to our agenda has also been rooted in their sincere and fundamental belief about the role of government. It’s a belief that government has little or no role to play in helping this nation meet our collective challenges. It’s an agenda that basically offers two answers to every problem we face: more tax breaks for the wealthy and fewer rules for corporations.”

“The last administration called this recycled idea ‘The Ownership Society.’ But what it essentially means is that everyone is on their own. No matter how hard you work, if your paycheck isn’t enough to pay for college or health care or childcare, well, you’re on your own. If misfortune causes you to lose your job or your home, you’re on your own. And if you’re a Wall Street bank or an insurance company or an oil company, you pretty much get to play by your own rules, regardless of the consequences for everybody else.”

My philosophy of government is a middle ground, rejecting too much government

“Government cannot and should not replace businesses as the true engine of growth and job creation.”

“Too much government can deprive us of choice and burden us with debt.”

“But I also understand that throughout our nation’s history, we have balanced the threat of overreaching government against the dangers of an unfettered market.”

“[O]ne-third of the Recovery Act we designed was made up of tax cuts…”

“[D]espite calls for a single-payer, government-run health care plan, we passed reform that maintains our system of private health insurance.”

The choice

Republicans/Conservatives/Big Business have argued against many good things done by government: Social Security, Medicare, deposit insurance, seat belts, clean air and water.

“And all of these claims proved false. All of these reforms led to greater security and greater prosperity for our people and our economy. And what was true then is true today.”

“For much of the last 10 years we’ve tried it their way.”

“And now we have a choice as a nation. We can return to the failed economic policies of the past, or we can keep building a stronger future. We can go backward, or we can keep moving forward.”


Part II: The New Foundation

“The first step … has been to address the costs and risks that have made our economy less competitive — [1] outdated regulations, [2] crushing health care costs, and [3] a growing debt.”

Financial reform is good and “sweeping”

It “will help prevent another AIG”

“It will end taxpayer-funded bank bailouts.”

“It contains the strongest consumer protections in history.”

Health care reform

We did health care reform because “we can’t compete in a global economy if our citizens are forced to spend more and more of their income on medical bills; if our businesses are forced to choose between health care and hiring; if state and federal budgets are weighed down with skyrocketing health care costs.”

“The costs of health care are not going to come down overnight just because legislation passed, and in an ever-changing industry like health care, we’re going to continuously need to apply more cost-cutting measures as the years go by.”

Health care reform did good things.

“The other party has staked their claim this November on repealing these health insurance reforms instead of making them work. They want to go back. We need to move forward.”

Deficits and debt

Thanks to the Bush tax cuts and prescription drug benefit, I inherited a $1 trillion one-year deficit and projected deficits of $8 trillion over the next decade.

I inherited a severe recession “and the effects of the recession put a $3 trillion hole in our budget before I even walked through the door.” Additionally, the steps that we had to take to save the economy from depression temporarily added more to the deficit … about $1 trillion. Of course, if we had spiraled into a depression, our deficits and debt levels would be much worse.

“Now, the economy is still fragile, so we can’t put on the brakes too quickly. We have to do what it takes to ensure a strong recovery.”

We need to extend unemployment insurance.

We need to give more money to state and local governments so they don’t have to fire teachers.

“There are four key components to putting our budget on a sustainable path. Maintaining economic growth is number one. Health care reform is number two. The third component is the belt-tightening steps I’ve already outlined to reduce our deficit by $1 trillion. … The fourth component is [the Fiscal Commission.]“


Part III: The Laundry List

Education reform

  • Race to the Top
  • Replace guaranteed student loans with direct loans
  • “Revitalize our community colleges”

Infrastructure

  • High-speed rail
  • High-speed broadband
  • Clean energy subsidies

Energy

  • “I supported a careful plan of offshore oil production as one part of our overall energy strategy. … But … only if it’s safe, and only if it’s used as a short-term solution while we transition to a clean energy economy.”
  • “It means tapping into our natural gas reserves, and moving ahead with our play to expand our nation’s fleet of nuclear power plants.”
  • We need to “put a price on carbon pollution.”
  • We will get “a comprehensive energy and climate bill” done.

Research and innovation

  • Make the research and experimentation tax credit permanent.

“The role of government has never been to plan every detail or dictate every outcome. At its best, government has simply knocked away barriers to opportunity and laid the foundation for a better future. Our people — with all their drive and ingenuity — always end up building the rest. And if we can do that again — if we can continue building that foundation and making those hard decisions on behalf of the next generation — I have no doubt that we will leave our children the America that we all hope for.”

(photo credit: Obama Visits Carnegie Mellon IX. by Patrick Gage)

Not a blank check

Here’s the President on the Michael Smerconish radio show today:

THE PRESIDENT:  The auto interventions weren’t started by me — they were started by a conservative Republican administration.  The only thing that we did was rather than just write GM and Chrysler a blank check, we said, you know what, if you’re going to get any more taxpayer money, you’ve got to be accountable.

I’m going to cut-and-paste here from a post I wrote on June 7th.

Structure of the December loans to GM and Chrysler

In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals.  These goals came from the legislation we (the Bush team) negotiated with Rep. Frank, Rep. Pelosi, and Sen. Dodd:

  1. repay the loan and any other government financing;
  2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
  3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
  4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
  5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies.  There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable.  We took the targets from Senator Corker’s floor amendment earlier in the month:

  1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
  2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
  3. eliminate the jobs bank;
  4. develop work rules that are competitive with the transplants by 12/31/09; and
  5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called.  Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process.  We gave the President’s designee the authority to extend this process for 30 days.

That’s not “writ[ing] GM and Chrysler a blank check.”

The Financial Crisis Inquiry Commission

The Financial Crisis Inquiry Commission

Yesterday Senate Minority Leader Mitch McConnell (R-KY) appointed me to be a member of a new Financial Crisis Inquiry Commission. I thank the Leader for the appointment, and will do my best to contribute thoughtful, open-minded, rigorous and responsible analysis and inquiry.

The Commission was created by Public Law 111-21, the Fraud Enforcement and Recovery Act of 2009, signed into law by President Obama on May 20, 2009. The purpose of the Commission is “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

I am one of 10 members. Here is the full roster, along with the Congressional leader who appointed each:

  1. (Chairman) Phil Angelides (Pelosi, chosen as Chair by Pelosi and Reid
  2. (Vice Chairman) Former Rep. Bill Thomas (Boehner, chosen as Vice-Chair by Boehner and McConnell)
  3. Brooksley Born (Pelosi)
  4. Byron Georgiou (Reid)
  5. Former Senator Bob Graham (D-FL) (Reid)
  6. me: Keith Hennessey (McConnell)
  7. Doug Holtz-Eakin (McConnell)
  8. Heather Murren (Reid)
  9. John Thompson (Pelosi)
  10. Peter Wallison (Boehner)

The statute creating the Commission requires us to “submit on December 15, 2010 to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.”

Some in the press are comparing this commission to the 9-11 Commission and to the Pecora Commission during the Great Depression. I think it’s too early to draw any definitive parallels.

I expect to write on KeithHennessey.com about my work on the Commission over the next seventeen months. Those of you familiar with my blog should have a fairly good idea of what to expect.

For those who are new to this site, I also have a free mailing list tied to the blog. If you would like to track my work on the Commission, you can subscribe to the mailing list or the RSS feed, and/or visit the blog. I write about a wide range of economic policies, not just financial policies. So don’t be surprised when you see substance from me on anything from taxes and trade, to health care and social security, to energy and climate change, or to the broader macroeconomic and policy picture.

To get things rolling:

  1. I have assembled some background on the Commission. Most of this substance is in today’s papers, but I thought I’d lay out my structural description here for reference.
  2. I am seeking input. Please help educate me so I can do a good job on the Commission. Please use the contact information I provide below.
  3. I am building a preliminary reading list for myself and anyone else who might care. I will post a first draft when it’s solid.
  4. On the top horizontal menu bar you will see a list of subject categories. The “financial” category contains past posts and some of my White House work that is relevant, and it will contain all future posts related to my work on the Commission.

I anticipate that my work on the Commission will become a significant portion of the future content of this blog, so stay tuned. I enjoy solving problems, especially when they’re hard and important. I also like to explain complex and important stuff in a way that non-experts can understand. I hope you will let me try to do that as I gain new and different perspectives on the financial and economic crisis in the United States.

For today, though, let’s get some mechanics out of the way.


Background on the Financial Crisis Inquiry Commission

The Financial Crisis Inquiry Commission was created by Public Law 111-21 (formerly known as S. 386), signed into law by President Obama May 20, 2009.

(I will abbreviate the Commission as FCIC.)

P.L. 111-21 is the Fraud Enforcement and Recovery Act of 2009, a bill strengthening enforcement of various types of financial fraud crimes. The Commission was created by a bipartisan Senate amendment to that bill, offered by Senator Johnny Isakson (R-GA) and Senator Kent Conrad (D-ND). The amendment was adopted 92-4, a good sign of initial bipartisan support. The four Senators opposing were Bunning (R-KY), Grassley (R-IA), Kyl (R-AZ), and McCain (R-AZ).

Here is the text of Section 5 of the law creating the Commission. I will walk through it. This mechanical stuff may seem boring, but it’s important. If you find errors in the following description, I welcome corrections.

Establishment

The Commission is technically in the Legislative Branch. The purpose is “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.” We are required to issue a report to the President and to the Congress on December 15, 2010.

Membership

There are ten members, appointed by the “bicam[eral] / bipart[isan]” leaders. Speaker Pelosi and Senate Majority Leader Reid each get 3 appointments (since they’re in the majority). House Minority Leader Boehner and Senate Minority Leader McConnell each get 2 appointments. Each leader is required to consult “with relevant Committees,” meaning primarily the House Financial Services Committee and the Senate Banking Committee.

The Commission Members cannot be Members of Congress, nor government employees of any sort. They are supposed to be “prominent United States citizens with national recognition and significant depth of experience in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing.”

Speaker Pelosi and Leader Reid jointly chose the Chairman, Phil Angelides. Leaders Boehner and McConnell jointly chose the Vice Chairman, Bill Thomas.

Functions of the Commission

The Commission has five functions:

  1. “To examine the causes of the current financial and economic crisis in the United States.” A list of 22 specific items for us to review follows.
  2. “To examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury during the period beginning in August 2007 through April 2009.”
  3. To submit a report to the President and the Congress on December 15, 2010. That report should contain our findings and conclusions on the causes of the crisis. The Chairman can also include reports or specific findings on any particular financial institution that failed.
  4. To refer to the Attorney General and State AG’s as appropriate “any person that the Commission finds may have violated the laws of the United States in relation to such crisis”
  5. “To build upon the work of other entities, and avoid unnecessary duplication, by reviewing the record of” a host of existing bodies, including the House Financial Services and Senate Banking Committees, the GAO, and just about anybody else in government.

Here is the long list of 22 specific causes the Commission must investigate under function (1) above:

  1. fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;
  2. Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;
  3. the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;
  4. monetary policy and the availability and terms of credit;
  5. accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;
  6. tax treatment of financial products and investments;
  7. capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;
  8. credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;
  9. lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;
  10. affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;
  11. the concept that certain institutions are `too-big-to-fail’ and its impact on market expectations;
  12. corporate governance, including the impact of company conversions from partnerships to corporations;
  13. compensation structures;
  14. changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;
  15. the legal and regulatory structure of the United States housing market;
  16. derivatives and unregulated financial products and practices, including credit default swaps;
  17. short-selling;
  18. financial institution reliance on numerical models, including risk models and credit ratings;
  19. the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;
  20. the legal and regulatory structure governing investor and mortgagor protection;
  21. financial institutions and government-sponsored enterprises; and
  22. the quality of due diligence undertaken by financial institutions.

Major Powers of the Commission

  • The Commission may hold hearings, take testimony, receive evidence, and administer oaths.
  • The Commission can require “the attendance and testimony of witnesses and the production of books, records, correspondence, memoranda, papers, and documents.” If necessary, the Commission can issue subpoenas to achieve this goal.
  • Finally, the Commission can get “any information related to any inquiry of the Commission from any part of the government.”

I am seeking input

In an attempt to become a well-informed member of the Financial Crisis Inquiry Commission, I am seeking input. Please help educate me.

I am building a reading list for myself. I will post a first draft when it’s solid.

From whom I most need help

I will take help and input from anyone willing to provide it. There are some channels that I know can help me a lot.

In particular, I would value highly:

  1. original writing by individuals with substantive expertise in any of the areas covered by the commission; and
  2. information and insight from those who were involved, from any perspective.

I need the most help from those with direct experience working in the financial sector, especially over the last several years. I will take it from any level of the corporate org chart — those in the “C” suites, and the analysts, associates, and traders who work on the front lines.

I also could use help from the academic community. Please send me your papers or links to them.

I could use help and input from members of the press who have been covering this crisis.

I would greatly appreciate input from those based outside the U.S. We are supposed to “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Distance can give perspective, and a comparison with other nations can be enormously instructive.

How to provide input

If you have something you think I should see, please email it to me at: kbh [dot] fcic [at] gmail [dot] com

As part of your email, please include your name, profession, contact information, and relevant professional background. I will take anonymous input, but may weight it less heavily, depending on the apparent reason for the anonymity.

Shorter is better. If you send me a short email, I’ll read it. If it’s a 1-3 page memo, I’ll do my best to read it. If you send me a 100-page treatise, I expect I’ll skim it.

If your email includes the phrase “secret global conspiracy” or is in all caps, or contains more than three curses, you should assume that I’ll skip it.

Please assume that your input is basically one-way. In almost all cases, don’t expect a private email dialogue with me based on your input. You should anticipate that most of my feedback will come publicly through this blog. This is more efficient and transparent.

This is not a substitute for formal input to the commission

I assume there will be a formal process for submitting input to the Commission. This is not that process.

In particular, the Commission is supposed to refer to the Attorney General of the United States, or to State AG’s as appropriate, “any person that the Commission finds may have violated the laws of the United States in relation to such crisis.” Please provide any information you have with respect to this mission directly to the Commission, through official channels, and not directly to me through this channel.

This input channel is to help educate me to be a better member of the Commission, not to serve as a generic inbox for the commission, and especially not to serve as an inbox for accusations of criminal wrongdoing.

What we’re supposed to inquire about, learn, and figure out

I have a fairly strong knowledge base from my experience in the Bush White House from 2002 through 2009. There is more for me to learn, and I am directing my studies to match the formal mandate of the Commission. You can help me most by tailoring your input to fit some part of this mandate.

We are supposed to:

  • “examine the causes of the current financial and economic crisis in the United States;” and
  • “examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury during the period beginning in August 2007 through April 2009.”

In the future I may pose some specific questions where I need help and education. For now, if you want to provide input, please put yourself in my shoes. Help me achieve the above two goals, and in particular tell me into which of the 22 subject-matter buckets listed above your input falls.


A little bit about me

I imagine that with this post some readers are discovering this blog and mailing list for the first time. You can find my bio here. Here are a few facts salient to the FCIC:

Thanks for reading. If you’re new to this blog and mailing list, I hope you will subscribe and return.

(photo credit: All that’s left! by pfala)

Six month economic policy status update

Six month economic policy status update

We’re less than two weeks away from the six month mark of the Obama Administration. Here is a summary I would give to someone who had missed the past six months. I think the groupings are particularly important.

Good

  • The bank stress tests worked – regulators now have a common framework to evaluate the health of the 20 largest banks, and these banks are in the process of raising private capital.
  • Reports are that the Fed’s Term Asset-Backed Securities Loan Facility (TALF) is working, providing liquidity to certain markets that lacked it.
  • There has not been a sudden failure of a major financial institution since the President took office, in part due to significant new government efforts with AIG and Citigroup, and an ongoing flow of hundreds of billions of dollars to Fannie Mae and Freddie Mac.
  • As a result, the severe instability that plagued inter-bank lending markets and certain credit markets last fall and winter has largely receded.

Bad

  • As the Vice President said on Sunday, the Administration underestimated the severity of short-term macroeconomic decline.
  • The U.S. economy has lost 2.64 million jobs since the beginning of the Administration, and the unemployment rate is now 9.5%. Most private sector forecasters project economic growth will turn positive in the fourth quarter of this year, with job growth to resume sometime in 2010. The June job report was really bad. Watch the July report closely.
  • The stimulus was poorly designed by Congress, such that it is not now having any measurable economic effect, and the bulk of the GDP boost won’t come until 2010. When you combine this with the missed economic forecast, it means the next six months will be worse than they needed to be.
  • The President’s budget would result in massive increases in both deficits and taxes, driving by significant proposed spending increases, especially in health care. CBO projects deficits over the next decade equal to 5.2% of GDP, more than double the cumulative deficit projected under current law. Debt held by the public would rise from 57% of GDP in 2009 to 82% of GDP by 2019, while taxes would grow from 15.5% of GDP in 2009 to almost 20% by 2019.

Too soon to tell

  • Chrysler and General Motors are still operating. Chrysler has emerged from Chapter 11 bankruptcy, and GM is working through the bankruptcy process. It is good they have not failed, but it is unclear if they will survive in the long run. If either firm falters, will the Obama Administration give them even more cash? In addition, the Administration�s heavy-handed path to bankruptcy upended the traditional capital structure, increasing long-term political risk in the United States.
  • There is little apparent progress on the President’s foreclosure prevention plan. According to the Congressional Budget Office, as of [date], no funds had been spent on the program. (See footnote d on page 7 of this CBO report.) It takes time for mortgages to be restructured, so this may just be slow.

Non-existent

Uncertain and unlikely

Uncertain

  • Health care reform legislation will pass the House, probably in July. Prospects in the Senate are highly uncertain. If legislation moves in the Senate, it will not be until fall.
  • The fate of the President’s financial regulatory reform package is unclear. House Financial Services Committee Chairman Barney Frank is talking positively about moving at least part of the package this Fall. Senate Banking Committee Chairman Chris Dodd is busy with health care reform and his re-election campaign. I think it is unlikely legislation will be enacted this year. If something is enacted, it will only be a piece of the whole.

Observations

Each of the good items is a joint Treasury-Fed operation.

In my judgment, four initiatives that the Administration hyped heavily appear dead or nearly dead: PPIP, foreclosure prevention, small business lending, and climate change. I respect that others may disagree with this judgment.

There is almost complete radio silence from the Administration on international economic policy, while incremental protectionist measures quietly move into place.

I think that over the next 3-6 months, the President’s economic stewardship will be judged almost entirely on (1) how he deals with the worsening macro picture, and (2) whether he signs into law a health care reform bill that meets his goals. Both are fraught with peril.

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