• Speaking food to power.

• At the end of the day, it's all about employment.

• What the hell happened in Japan?

• Can the Taliban attack DC? Should they use the internet if they do?

• The Treasury Department seems to be ignoring Elizabeth Warren.

This post taught me a bit about the Geithner plan and a lot about why I don't want to play poker against Tom Edsall. Not sure, all things considered, which piece of information will prove most useful in the long-term.

I don't think I have strong enough opinions on the optimal societal birth rate to intercede in this debate between Matt and Ross. But I do want to point folks to this old Dean Baker article entitled "Stagnation Celebration" if they're looking for a provocative take on the upside of labor shortages.

Apparently, up to 60% of consumers who see an antioxidant claim on a product label will buy it for that reason. Despite lack of evidence that additional antioxidants make people healthier (and may actually do some harm), these claims are so popular that food companies introduced nearly 300 new antioxidant-labeled products into U.S. supermarkets last year. I’ve been collecting choice examples: breakfast cereals, of course (they are always at the leading edge of nutritional marketing), but also jelly beans. The marketing has become so competitive that unprocessed fruits and vegetables have to get into the act. I’ve seen ads for blueberries, tomatoes, and artichokes advertising their high antioxidant content. Of course they have antioxidants. All fruits and vegetables contain antioxidants.

But the reconciliation argument has a Mobius strip quality: Democrats promise reconciliation won't be used unless the cooperative spirit and constructive process collapses. Republicans swear that if reconciliation is used, the cooperative spirit and constructive process will collapse. That's undoubtedly correct. But it's not really a threat, and it's in the wrong order.

If Republicans don't want Democrats to use the reconciliation process, then there's a very simple answer: Cooperate to write and pass a health reform bill. If that cooperation never breaks down, then reconciliation will never be used. But if that cooperation breaks to the point that Democrats can't find three Republican votes to overcome the filibuster, then saying reconciliation will break it further isn't a particularly compelling threat.

At the end of the day, the Republican argument over reconciliation isn't about how Democrats should handle a process in which Republicans are willing to cooperate, but how they should handle a process in which Republicans cease to be willing to cooperate. In that event, Republicans would like Democrats to admit total failure while Democrats would like to pass a bill. But once we're at that juncture, the supposed downside of reconciliation -- an end to Republican cooperation -- will already have happened. And in reality, it's Mike Enzi who has the power to avert that outcome, not Kathleen Sebelius.

This is bad news: Last year, the Pension Benefit Guaranty Corporation -- the federal agency that guarantees private pensions -- decided to take its $64 billion and move it from bonds to stocks. Better returns that way. And then, of course, the market bottomed out.

No one is quite sure what the total losses are, but this sort of thing was predicted. Peter Orszag, then director of the Congressional Budget Office, warned that the PBGC was "investing a greater share of its assets in risky securities," which would make it "more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans." This is that time, and thus this is the nightmare scenario. As far as I can tell, Paul Krugman is wrong to say that this could cost taxpayers hundreds of billions -- the maximum would seem to be tens of billions -- but the Corporation's total liabilities if giants like Chrysler or GM go down could quickly swell into the hundreds of billions. And it was, as Krugman said, proof of the crazy faith we had in the eternal advance of the stock market that we rested a countercyclical agency on a decidedly cyclical investment.

Also, Peter Orszag is a prophet.

On a related note, I'm surprised that no progressive think tank has yet run the numbers on one of the Social Security privatization schemes to estimate what would have happened to pensions if the plan had been fully implemented by last year. Seems like an easy point to score. Not, of course, that I support engaging in such behavior.

If you feel like scaring yourself a bit this afternoon, read James Hamilton's post arguing that the conditions are increasingly appropriate for hyperinflation. "To my knowledge," Hamilton writes, "every hyperinflation in history has had two key ingredients: (1) budget deficits that could not be resolved politically, and (2) a central bank that assumed the obligations that the fiscal authority could not."

Hyperinflation may, as some of Hamilton's commenters argue, be a bit of an exaggeration, but inflation isn't. To put this a bit more simply, think of it this way: The government has relied on the autonomy of the Federal Reserve to inject much more liquidity into the system than Congress has been willing to appropriate through the legislative process. That liquidity will eventually need to be sucked back: The debt will have to be brought under control and the money supply will have to be constrained. The Federal Reserve can do some of that, but not all that much. But if you think Congress is unwilling to assume responsibility for the relatively popular task of spending money, what reason is there to think it will take responsibility for the much more unpopular task of recapturing that money?

I'm not going to try and argue with the case Bibi Netanyahu laid out to Jeffrey Goldberg. Netanyahu and I are not engaged in a dialogue. What i think doesn't matter. What Netanyahu thinks does matter. So the important thing is that people read Netanyahu in full. Goldberg, to his credit, goes deep on Iran, and that gives Netanyahu plenty of room to outline a fully-realized argument for why Israel should unilaterally attack Tehran. This is a man who has convinced himself of his position in all its particulars. Those who bet that Netanyahu was playing the hawk so he could emerge a centrist should probably not lay any more money on the table.

Congressional expert Norm Ornstein's has a nice article arguing that the Senate is an increasingly broken and incapable institution. It's anchored by this graph tracking the rise in filibusters over time.

If you want to understand why the earth is likely to heat and why comprehensive health reform is unlikely to pass and why the government is increasingly letting the Federal Reserve govern its response to the financial crisis, that graph basically tells the story.

I'd take issue with Ornstein on one point: He argues that "the problems here are less the rules and more the culture. And that is not going to change anytime soon." But that's fatalism. Imagine a classroom in which all the children are polite and they can talk whenever they wish. Now imagine that order breaks down, the children grow rude and combative, and the classroom devolves into cacophony. You wouldn't say that we need to wait for the children to be polite again. You'd say we need to change the rules so they're responsive to the behavior of the participants.

So too with the filibuster. As Ornstein says, the culture has changed such that formal methods of obstruction have become common tactics of the minority. The answer is not to wait until the culture reverts. it's to recognize that the rules are no longer suitable to the institution.

McCain's body language was tense and confrontational, his voice tight and angry. All questions were framed in the form of a condescending dismissal and most replies were sharply interrupted. His demeanor was reminiscent of nothing so much as a lovelorn teenager's barely controlled confrontation with their crush's new girlfriend. It wasn't so much a conversation as a failed attempt at humiliation. Much of their exchange centered around the role of the employer in the health care system. But the back-and-forth was animated by McCain's efforts to relitigate the final months of the presidential campaign.

"Would you agree," McCain asked, that executives of firms receive more lavish health benefits than their employees?

"Well Senator," replied Sebelius, "I certainly agree that in the marketplace that the self employed or small employers are often priced out. There's no question that employer based health insurance is the backbone --"

"My question," interrupted McCain, "is do you agree or disagree that employer based health insurance is much more generous to upper level management?"

"I'm not familiar with the differentials in the health insurance system," Sebelius relied. "In a state employees system or a manufacturing operation workers have good benefits and they don't differ from the benefits of the executives in those systems."

"Would you support removing the tax exclusion and substituting a removable tax credit of, say, $5,000 for families so they could go out and purchase their own health insurance in a policy of their choice?"

"Well, Senator, I support what the President has articulated an--"

"You know," McCain sharply interrupted, "we are asking for your views."

"I support what the President has proposed," Sebelius icily replied. "That if Americans have health insurance that they like they should be able to keep it. Dismantling the current employer based system to me is not the most effective strategy for reaching full coverage given how many Americans currently rely on it."

McCain's next round of questions played out much the same way: "Do you support a government-run health system," he demanded. Sebelius disputed the premise. McCain asked again. Sebelius asked him to clarify. McCain interrupted a third time. Finally, Sebelius ended the questioning. "If the question is do I support a public insurance option side by side in an insurance exchange with private options," she replied icily. "Then yes. I do."

By enmeshing the White House so deeply into G.M., Obama has increased the odds that March’s menacing threat will lead to June’s wobbly wiggle-out. The Obama administration and the Democratic Party are now completely implicated in the coming G.M. wreck. Over the next few months, the White House will be subject to a gigantic lobbying barrage. The Midwestern delegations, swing states all, will pull out all the stops to prevent plant foreclosures. Unions will be furious if the Obama-run company rips up the union contract. Is the White House ready for the headline “Obama to Middle America: Drop Dead”? It would take a party with a political death wish to see this through.

Brooks goes on to argue that the likeliest outcome "is some semiserious restructuring plan, with or without court involvement, to be followed by long-term government intervention and backdoor subsidies forever. That will amount to the world’s most expensive jobs program." I seriously doubt that last bit. The virtue of the G.M. bailouts is that, in the current economic climate, they're actually a very cheap jobs program. The jobs already exist. The buildings already exist. The managers are already in place. The workers are already trained. Amidst the absent demand of a recession, preserving existing jobs is almost always much cheaper than creating new ones. And that probably goes double for preserving jobs at an employer of such economic and psychological consequences as G.M. In the short-term, it's probably much easier to G.M.'s employees -- and the other companies and businesses that depend on them -- in place then try to find and develop new work for all of them.

But the recession won't last forever. And then Brooks's question regains its force: If G.M. can never sustain itself, will we ever be able to let it unwind?

Former Republican Senate Leader Bob Dole is introducing Kathleen Sebelius before the HELP Committee. The beginning was much as you'd expect: Kind words about the nominee and sorrowful words about the missed opportunities of the past. He vene extolled bipartisanship. But not in the manner you'd expect.

"Look at the numbers," said Dole. "Look at the numbers. There's really no need to talk about bipartisanship. The Democrats have the numbers."

He went on to argue that the process should be bipartisan. That a bipartisan process is a healthier process. But Dole's words were a warning to the Republicans: It doesn't have to be bipartisan. If Franken is seated, a unified Democratic Caucus would only need to flip one Republican to break a filibuster. If even that proves impossible, the relevant actors have clearly signaled their willingness to crack through minority obstruction by loading health reform onto the reconciliation process. Observing that health reform should be bipartisan is often understood as a plea to the majority party. But sometimes it's really an instruction to the minority party.

Today, the Senate Committee on Health, Education, Labor, and Pensions is holding a hearing on Kathleen Sebelius's confirmation. But not the hearing. As Senator Mike Enzi, the ranking Republican on HELP, just noted, primary jurisdiction for this nomination lies with the Finance Committee. But because the Secretary of Health and Human Services has responsibility for health-oriented agencies like CDC and FDA as well as Medicare and Medicaid, tradition holds that the HELP Committee gets a crack at the nominee, too. But it's more an informational hearing than a decisive examination.

Sebelius's opening statement follows the jump.

Chairman Kennedy, Senator Enzi, members of the Committee, thank you for inviting me here today to discuss my nomination to be the Secretary of Health and Human Services.

I am honored that President Obama has asked me to fill this critical role at such an important time.

The Department of Health and Human Services strives for a simple goal: protecting our nation’s health and providing essential human services. Among its many initiatives, the Department supports genomics research to find cures for debilitating diseases that afflict millions of Americans and challenge their families; provides children the health care, early education, and child care they need to enter school ready to learn; and protects the health and well-being of seniors through Medicare. The Department is also charged with sustaining our public health system and promoting safe food, clean water and sanitation, and healthy lifestyles.

Working in concert with scientific advances, medical breakthroughs, and an ever-evolving understanding of the human condition, the Department’s efforts have made a difference. People born in 2000 can expect to live nearly three decades longer than those born in 1900. Since 1900, infant mortality has dropped by 95 percent and maternal mortality by 99 percent. Diseases like polio have been eradicated.

Yet, at the beginning of the 21st century, we face new and equally daunting challenges. We face an obesity epidemic that threatens to make our children the first generation of American children to face life expectancies shorter than our own. Globalization has made a flu strain in a remote country a potential threat to America’s largest cities. We now must guard against manmade as well as natural disasters, as disease has become a weapon. Perhaps most importantly, we face a health system that burdens families, businesses, and government budgets with sky-rocketing costs. Action is not a choice. It is a necessity.

Work on Improving the Health of Kansans

I’m excited to join the President in taking on these challenges. Many are the same challenges I’ve addressed as Governor, as Insurance Commissioner, and as a State Legislator. I’m proud to have worked for more than 20 years to improve Kansans’ access to affordable, quality health care; to expand access to high-quality child care and early childhood education; to assist seniors with Medicare challenges; to work to expand the pipeline of health care providers; and to ensure access to vital health services in our most rural areas. In Kansas, affordable health care for children, seniors, and small businesses has been a special priority for me.

I was asked by my predecessor, Republican Governor Bill Graves, to lead the team to design and implement the Children’s Health Insurance Program. Our separate insurance initiative called Health Wave is modeled on the state employee program. Its enrollment started at 15,000 in the first year; today, it covers over 51,000 children. And the Legislature just voted to support my recommendation that our CHIP program be expanded.

I have also worked to make life-saving medications affordable. I established counseling programs to help seniors navigate the complicated Medicare prescription drug benefit plan. When seniors started falling through the cracks of the new drug program, I directed the State to pay their prescription costs to Kansas pharmacies to prevent the loss of coverage. During this period, we filled 45,000 prescriptions for Medicare-eligible seniors.

These efforts have yielded results. The uninsured rate in Kansas is lower than the national average. Our health statistics are improved. And Kansas has been ranked first for health care affordability for employers and received a five-star rating for holding down health care costs.

I have also been a health care purchaser, directing the state employee health benefits program as well as overseeing the operation of health services in our correctional institutions and Medicaid and CHIP programs, and coordinating with local partners on health agencies across Kansas. I took these jobs seriously. In November 2005, we successfully negotiated a new health insurance contract to reduce premium costs with no loss of benefits for thousands of state employees. At a time when health costs were skyrocketing, I worked with the Legislature to streamline the health care bureaucracy, and leverage our purchasing power within state government. I signed legislation to create a new independent state agency, the Kansas Health Policy Authority, to manage nearly all of the state’s spending on health care, simplify the process of obtaining health care, and use the State’s buying power to reduce costs. We have launched focused prevention and wellness efforts, in collaboration with schools, communities, employers, and senior centers. Our health IT work has been nationally recognized, and we are the first state in the country to use a “smart card” for our Medicaid population. As Insurance Commissioner, I created a Fraud Squad that worked with the Attorney General’s Office to aggressively pursue fraud and abuse, and recovered millions of dollars during my tenure.

In these roles, I know first-hand the challenge of standing up to the special interests to protect consumer interests. As Insurance Commissioner, I made a patient-protection bill the centerpiece of a 2000 legislative proposal. In 2002, I took the then-unprecedented step of blocking the sale of Blue Cross and Blue Shield of Kansas to the health care holding company of Anthem of Indiana. I did so because all evidence suggested that premiums for Kansans insured by Blue Cross would have increased too much, and providers would have been adversely impacted. I was the first State Insurance Commissioner to block such a deal, although others have followed.

Health Reform

I hope you give me the opportunity to apply my experience as a Governor and Insurance Commissioner to the challenges of advancing the health of the nation. These challenges are significant.

Health care costs are crushing families, businesses, and government budgets. Since 2000, health insurance premiums have almost doubled and an additional 9 million Americans have become uninsured. Since 2004, the number of “under-insured” families – those who pay for coverage but are unprotected against high costs – rose by 60 percent. Just last month, a survey found over half of all Americans (53 percent), insured and uninsured, cut back on health care in the last year due to cost.

The statistics are compelling, as are the stories. During the transition, the President encouraged Americans to share their personal experiences and stories through Health Care Community Discussions. Over 30,000 people engaged in these discussions. In Manhattan, Kansas, a parent told the story of a 27-year-old son who was working at a convenience store. Although he was offered insurance, he thought it was too expensive. A bicycle accident sent him to the emergency room and generated a hospital bill of more than $10,000, which he and his parents are struggling to pay off.

In Pittsburg, Kansas, a health care provider shared that during the last three years, three women in similar situations had been identified with breast cancer. One woman received care, as she had insurance, and had a good health outcome. Two women had to wait for a pre-existing condition time delay on their health insurance to lapse; both ended up with their cancers advancing, and neither received care. Heartbreakingly, both women died within the year.

And, in Houston, Texas, the challenges health costs pose to businesses were discussed. One participant asked, “How can you go out on a limb and start a new business when health care is a noose around your neck?”

We have by far the most expensive health system in the world. We spend 50 percent more per person than the next most costly nation. Americans spend more on health care than housing or food. General Motors spends more on health care than steel.

This cost crisis in health care is worsening. The United States spent about $2.2 trillion on health care in 2007; $1 trillion more than what was spent in 1997, and half as much as is projected for 2018.

High and rising health costs have certainly contributed to the current economic crisis. A recent study found nearly half of Americans with homes in foreclosure named medical problems as a cause. Rising health costs also represent the greatest threat to our long-term economic stability. If rapid health cost growth persists, the Congressional Budget Office estimates that by 2025, 25 percent of our economic output will be tied up in the health system, limiting other investments and priorities.

This is paralleled in federal and state budgets. Rapid projected growth in Medicare and Medicaid accounts for most of the long-term federal fiscal deficit. And, at the state and local levels, policy makers are increasingly put between the “rock” of health care costs and the “hard place” of other priorities, like public education and public safety.

American jobs are also at stake. “Old-line” industries are striving to maintain both coverage and competitiveness – locally and globally. New industries and businesses are struggling to offer coverage in the first place. Both workers and their employers are concerned about the future of employer-sponsored health insurance. Currently, there’s no relief in sight.

This is why I share the President’s conviction that “health care reform cannot wait, it must not wait, and it will not wait another year.” Inaction is not an option. The status quo is unacceptable, and unsustainable.

Within days of taking office, the President signed into law the reauthorization of the Children’s Health Insurance Program. This program’s success in covering millions of uninsured children is a hallmark of the bipartisanship and public-private partnerships we envision for health reform. Implementing this program in partnership with the states will be one of my highest priorities.

President Obama has also worked to enact and implement the American Recovery and Reinvestment Act in partnership with governors, mayors, Congress, and private partners. This legislation includes essential policies to prevent a surge in the number of uninsured Americans. It also will help an estimated 7 million people affected by unemployment keep their health insurance through COBRA (i.e., continuation coverage for certain workers leaving their jobs). There is essential additional aid to states providing health benefits, making sure that people with disabilities and low-income Americans who rely on Medicaid benefits don’t lose coverage as states try to balance their budgets. The Recovery Act prevents an already-bleak health-coverage situation from getting worse.

The Recovery Act also makes positive investments now that will yield health and economic dividends later. Through health information technology, it lays the foundation for a 21st-century system to reduce medical errors, lower health care costs, and empower health consumers. In the next five years, HHS will set the standards for privacy and interoperability, test models and certify the technology, and offer incentives for hospitals and doctors to adopt it. The goal is to provide every American with a safe, secure electronic health record by 2014.

The Recovery Act supports vital information gathering as well as information technology. It invests $1.1 billion in comparative effectiveness research to provide information on the relative strengths and weaknesses of alternative medical interventions to health providers and consumers.

The Recovery Act also makes an historic investment in prevention. We cannot achieve our ultimate goal – a healthier nation – unless we shift away from a sick-care system. We pay for emergencies, not the care that prevents them, with little emphasis on the responsibility each of us has in keeping ourselves and our families well. The $1 billion for prevention in the Recovery Act will empower every American through immunizations, chronic disease prevention, and education.

The President’s budget submitted in February continues the work begun in the Recovery Act. It dedicates $634 billion over 10 years to reforming the health care system. Its specific proposals would align payment incentives with quality, promote accountability and efficiency, and encourage shared responsibility. The President recognizes that while a major commitment, the reserve fund is not sufficient to fully fund comprehensive reform. He is committed to working with Congress to find additional resources to devote to health care reform.

The President is also committed to hearing from Americans across the nation. In March, he held a White House health care forum and several regional forums in places like Iowa, Vermont, and North Carolina. There, bipartisan forums brought together people from all perspectives – across the political spectrum and representing all people with a stake in the system – to focus on solutions.

We appreciate the tremendous leadership of this committee to address this urgent challenge. The leadership in Congress is getting to work to solve this great challenge for our nation, and we hope to see action in the coming months.

Should I be confirmed, health reform would be my mission – as it is the President’s – along with the tremendous responsibility of running this critical Department. And so, I would like to highlight a few of the opportunities and challenges currently facing the Department.

Centers for Disease Control and Prevention

The Centers for Disease Control and Prevention (CDC) is critical to forging a 21st-century health system that prioritizes prevention. Its mission is to create the expertise, information, and tools that people and communities need to protect their health. For example, thanks in part to CDC immunization programs, most childhood vaccine-preventable diseases have been reduced by 95 percent from pre-vaccine levels. For each birth cohort vaccinated, society saves $33.4 billion in indirect costs; direct health care costs are reduced by $9.9 billion; approximately 33,000 lives are saved; and 14 million cases of disease are prevented. In addition, today, heart disease rates have declined by half, in no small measure because of the role of community-based prevention.

If confirmed, I will continue proven strategies for success as well as revitalize CDC for its heightened role in a reformed health system. I will work to strengthen its ability to detect and investigate health problems, conduct research to enhance prevention, develop and advocate sound public health policies, implement prevention strategies, promote health behaviors, and foster safe and healthful environments. CDC could also focus on ensuring effective coordination between public and private resources at the national, state, and community levels to promote wellness throughout the lifespan, and ensure healthy communities. Through executive actions, partnership, and health reform, CDC can play a vital role in reducing the impact of childhood diseases, chronic diseases, and diseases that target the aging population. Moreover, CDC will play a crucial role in health reform since strong and effective disease prevention and health promotion go hand in hand with the President’s goal of providing affordable, quality health coverage to all Americans.

Food and Drug Administration

As Americans focus more on prevention and leading healthier lifestyles, HHS must live up to its responsibility to protect the public from health risks. It is a core responsibility of HHS, through the FDA, to ensure the food we eat and the medications we take are safe. The FDA is responsible for the safety of thousands of items Americans depend upon every day, from toothpaste to fruits and vegetables to the extraordinary drugs, vaccines, and medical devices that save our lives. The agency regulates goods that account for 25 percent of all consumer spending – more than $1 trillion. Unfortunately, there is growing concern that the FDA may no longer have the confidence of the public and Congress. Nearly two-thirds of Americans do not trust the FDA’s ability to ensure the safety and effectiveness of pharmaceuticals.

If confirmed as Secretary, I will work to restore trust in the FDA as the leading science-based regulatory agency in the world. I will do so by working to strengthen the FDA’s ability to meet the pressing scientific and global challenges of the 21st century, and by sending a clear message from the top that the President and I expect key decisions at the FDA to be made on the basis of science – period.

National Institutes of Health

As important as it is to protect people by regulating drugs, it is equally important that we support efforts to discover new drugs and treatments that can prevent, treat, and cure disease. The National Institutes of Health (NIH) provides that critical support, and has funded a range of discoveries that have enabled us to live longer and more healthful lives. In many areas – for example, what we are learning from the human genome project – we are on the verge of even more exciting and promising scientific discoveries.

The mission of NIH is science in pursuit of knowledge about the nature and behavior of living systems, and the application of that knowledge to extend healthy life, combat illness, and ease the burden of disability. It is well documented that investment at NIH reaps significant rewards, not only for the health of our citizens, but for the strength of our economy. Yet funding in the previous administration slowed considerably. We have seen a sharp fall in the success rates for grant applicants, now as low as 10 percent for many NIH Institutes. This has come at a time when the economic downturn has hurt the ability of businesses, universities, and charities to serve as alternative sources of research support. NIH has also suffered from some instances of people putting politics before science.

If confirmed, I will work to strengthen NIH, with leadership that focuses on the dual objectives of addressing the health care challenges of our people and maintaining America’s economic edge through innovation. We will ensure that the agency has the support to capture the opportunities of biomedical research that are core Department’s mission of improving the quality and length of our lives.

Conclusion

Leading the Department of Health and Human Services and working with the President to reform the health system won’t be easy. If it were, as the President has noted, our problems would have been solved a century ago. But the status quo cannot be sustained, and is unacceptable both for our economic prosperity and the health and wellness of the American people. Previous opponents of health care reform are now demanding it, putting the common interest in an affordable, quality system of care for all ahead of special interests. And policy makers like you are reaching across party and ideological lines to accomplish this urgent task. I hope I have the opportunity to join you, and I look forward to your questions.

While writing the last post, I ran across an interesting paper published by Simon Johnson, Todd Gorley, and Changyong Rhee. "Do Crises Weaken Vested Interests? The Illustrative Case of Korean Corporate Bonds," looks at the Korean financial crisis and the mix of firms that secured access to the bond markets amidst the chaos. The authors were looking to see whether the crisis diminished the capacity of major firms to muscle to the front of the line. It didn't:

Using a unique dataset of publicly placed corporate bonds in Korea, this paper assesses a bond market's ability to provide financing during a severe bank crisis. Evidence from Korea after the 1997-98 crisis confirms that bond markets can develop quickly in bank-dominated economies. However, access was feasible only for the largest firms and, as with bank loans before the crisis, bonds were not allocated well. Large firms with weaker pre-crisis corporate governance were no less likely to obtain bond financing, and default risk was not priced by investors. This evidence suggests that while bond markets can develop quickly in a crisis-hit, bank-dominated economy, they may fail to allocate resources well in the absence of reliable credit rating agencies and when 'too large to fail' beliefs persist among investors. In terms of access to capital during the crisis, the largest firms did best and the financial playing field tilted further in their direction.

But Stiglitz's Nation cover story outlining "a better bank bailout" hasn't received half the rapturous reception (including from this blog) that's accrued to Simon Johnson's upcoming article in The Atlantic. Indeed, Simon Johnson's rapid emergence as a key liberal voice on the financial crisis has been a bit of an unexpected phenomenon. Dani Rodrik, a Harvard economist who long battled the IMF's austerity policies, is certainly confused. "I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters," he writes. "The same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals."

To be fair, Johnson has emphasized the IMF's experience with political economy more than their austerity packages. His popularity is in part due to the fact that he's an impeccably credentialed neoliberal calling for nationalization and in part due to the fact that he's an impeccably credentialed neoliberal arguing that the problem is partly due to concentrations of political power. (It's also in part due to the fact that he's a fantastic -- and, unlike Stiglitz, frequent -- blogger and communicator.) That liberals traditionally mistrust the IMF has, in practice, made Johnson more valuable to them. A lot of folks are laundering their ideas through his establishment credibility.

That said, Johnson will remain prominent next year, too. And there may be a lot in his vision for how to suck the eventual inflationary pressures from the economy that liberals haven't noticed and won't find congenial. This is one of those quickie marriages where everyone seems wonderfully happy and well-suited even as you wonder how much they really know about one another, and how well they'll get along in a few years.

• The Fed's new balance sheet.

• Where is Gaza's Gandhi?

• George Scialabba on The New Criterion.

• Betsy McCaughey will never go away. Never never never.

James Besser asks why the major Jewish groups have responded to J Street with so much more fury and fear than, say, the formation of Americans for Peace Now, or the Israeli Policy Forum. One Jewish leader, speaking off the record, confides to Besser that he feels "Israel is particularly vulnerable and isolated at this time and therefore needs a unified American Jewish community as a critical element in its security."

For reasons I don't totally understand, Besser discounts this reply. But I don't. The amendment I'd offer is that a more accurate articulation of the concern may be that major Jewish groups feel vulnerable and isolated at this time, and so are particularly fearful of competition. But the fact that I -- and many of the young Jews I know -- think that there's such a stark distinction between the interests of Jews, Jewish groups, and Israel, is part of the reason for J Street's quick fame and similarly rapid infamy.

My sense of the situation -- and this is substantially informed, and thus biased, by the reaction to my commentary -- is that there's a lot of generational anxiety in the Jewish community. The experience of Jewishness for older Jews -- the generation of Jews that endured the Holocaust, or was directly descended from that generation -- is substantially different from my generation's experience of Jewishness. The sense of continued threat and acute vulnerability that is the abiding companion of older Jews is increasingly absent from younger Jews. The reason is fairly simple: To use Karen Brodkin's terminology, not only are American Jews white, but in general, they're privileged.

Being a privileged member of the majority in the most powerful country the world has ever known is a fairly unique experience for Jews. Israel, though hated and vulenrable to terrorist threat, is nevertheless the dominant military power in the Middle East. A history defined by agonizing persecution has given way to a present defined by relative power. But that has, inevitably, changed the relationship young Jews have to both Judaism and Israel. And that's created substantial concern among older Jews, who sense that the younger generation's connection to Israel is either slipping or, at the least, becoming something less visceral and recognizable. Just ask my grandfather. J Street -- which has always sold itself as a net-oriented enterprise for the Obama generation -- inflames that anxiety. My hunch is an examination of AIPAC's demographics -- and even more so its active membership -- wouldn't bar the organization from membership in AARP.

I'd also suggest that the influence of Walt and Mearsheimer's The Israel Lobby has played a serious role. J Street emerged at a moment when the political activity of major Jewish groups was receiving sustained scrutiny for the first time in memory. And that scrutiny kickstarted an overdue process of polarizing Jewish opinion over the generally right wing political approach favored by AIPAC. J Street, in other words, emerged as an alternative to AIPAC at the exact moment that a certain number of center-left and liberal Jews began wondering whether AIPAC remained a suitable representative for their beliefs. In a way, J Street is the concrete manifestation of AIPAC's -- and the Jewish groups that associate with it -- organizational anxieties, and that's led AIPAC and their associates to treat J Street as a threat rather than an annoyance. That, in turn, has made J Street more of a threat than an annoyance.

You might guess (correctly) that I was referring to the fact that contrarians are not the real problem – it is the vested interests who take advantage of the existence of contrarians.

There is nothing wrong with having contrarian views, even from those who have little relevant expertise – indeed, good science continually questions assumptions and conclusions. But the government needs to get its advice from the most authoritative sources, not from magazine articles. In the United States the most authoritative source of information would be the National Academy of Sciences.

There are two climate change discussions that occur basically simultaneously. The first asks how to get the information we want. The second asks what to do with the information we have. The first is a scientific discussion while the second is a policy discussion. Contrarians like Dyson have a more obvious role in the first discussion. The scientific consensus should probably dominate the second discussion. But, in practice, the two have gotten mixed up. The media gives a disproportionate amount of coverage to the intellectual dissenters in the policy process, and that has, in turn, spurred the climate change community to spent a lot of time emphasizing and defending the degree of consensus in the scientific process. It's bad for everyone.

The role the contrarians are playing in the policy process is not the role they play in the scientific process. As Hanson says, honest contrarians are being elevated out of convenience: Convenience for the media, who hungers for conflict, and convenience for vested interests, who encourage paralysis by promoting uncertainty. And so they end up being attacked, and their defenders cry that good science demands frequent dissent, and so we go. Scientists like Hanson, of course, recognize the role of independent thinkers in the scientific process. The argument is over the disproportionate, and generally cynical, attention they receive in the policy process.

There's been a lot of talk in recent days about the possibility of limiting the size of banks. Felix Salmon, however, is the first writer I've seen willing to commit to some specifics:

I think that maybe $300 billion in assets would be a reasonable cap on bank size -- there's very little evidence that banks get any economies of scale beyond that in any case. If they want to be part of a global or even a national network that would be fine -- I'm sure such networks would spring up quite naturally, much as they have in the airline industry. After all, the United States managed to go 200 years without any nationwide banks, it's unclear why it desperately needs them now.

At the same time, the cap on the balance sheet of broker-dealers should be smaller still: the more interconnected you are, the lower the cap, to the point at which companies like the CME, which are far too interconnected to fail no matter how small their balance sheet, should be barred from issuing any liabilities at all.

I'm not really qualified to comment on the outcome of Obama's Afghanistan/Pakistan policy review, but Steve Coll is, and he seems to like it.

Justin Fox offers an elegant plea for the various participants in the nationalization debate to start making a bit more sense:

Krugman, Simon Johnson and a lot of other people think the government should be moving a lot more quickly and decisively to take over the most troubled banks and clean up their balance sheets. The Treasury approach appears to be to do some work on the balance sheets—through efforts to modify mortgages and buy up toxic assets—and then figure out what to do with the most troubled banking companies. As I've written before, this is really a debate about tactics, not basic questions of finance and economics. The debate involving basic questions of finance and economics is the one that's just getting started about how we regulate the financial sector.

They're not totally unconnected, of course: Johnson has an article in the May Atlantic arguing that a recalcitrant financial oligarchy is standing in the way of solutions on both fronts. But I don't get why we keep having this misleading back and forth on whether to nationalize the banks or not. I don't get why the Obamanites keep using that we're-not-Sweden line, and I don't get why the Krugmanites are so unwilling to see any of the administration's moves as laying the groundwork for possible future nationalizations.

I think you can actually sympathize with the Obama team's motivations. If you're willing to eventually nationalize, but you want to avoid that route if at all possible, you don't want to spend three months hinting at it and keeping the markets in a state of perpetual uncertainty. None of your other reforms can possibly work amidst such confusion. But among the universe of possible replies, the "we're not Sweden" thing seems particularly ill-chosen. We may well have to become Sweden, and if that happens, it would probably have been better to talk down the need for nationalization rather than the capability to successfully carry it out.

There's something to Alex Massie's shot at me here: Progressives sure seem a lot less enthused by Europe's contrariness on stimulus than they did when Europe was resisting the Iraq War. "Once upon a time - and not so long ago neither - Democrats thought it was important for friends to speak candidly to friends and stand up for what they thought was right," writes Massie. "Now? Not so much."

But Massie is conflating two arguments here. There was one argument about whether Europe was right abut the Iraq War. Progressives thought they were and were pleased to see them standing against America's charge. And there was another argument about how to handle European disagreement. Conservatives thought there should be diplomatic reprisals and a general chilling of the Atlantic partnership. Progressives disagreed.

I know a lot of progressives concerned that Germany is making a dangerous mistake in refusing to increase its stimulus spending. But I don't know a lot of progressives who think we should boycott sauerkraut as a result. Unlike in the Iraq War, the question of America's relationship with Germany and America's views on Germans fiscal response are, or at least should be, separable.

As such, the end of Alex's post gets a bit odd. "What if the Americans are right?" He asks. "Well, maybe they are. But what if they're wrong? Is it really necessary for every country to adopt identical responses to the current difficulties? How likely is it that there can be a global one-size-fits-all answer?" Seems pretty likely to me: The banks, after all, are global, as is the problem. A simply national response doesn't make a whole lot more sense than telling each state to worry about this on their own. Others might disagree. Either way, it's a question that requires an answer. And brushing it aside, as Alex does here, is an answer of sorts -- or at least, it's the functional equivalent of one. Choosing not to coordinate globally, or not to pressure Germany into increasing their fiscal response, is choosing one policy response over another policy response. And these choices will have consequences. Friends should speak candidly. But they should speak candidly in pursuit of accurate conclusions.

You can sympathize with consumers aching for some simplification. The problem is that the food industry is pretty good at gaming our rudimentary nutritional knowledge. A friend likes to tell of the time she saw an avocado advertised as "low-carb." Organic Oreos, I fear, are a real thing. Many more foods now advertise the absence of trans fats than ever had trans fats in them in the first place. Consumers are semi-informed. Marketers are very informed about the precise gaps in consumer information and the best research on consumer decision-making. The asymmetry presents some obvious problems.

At the end of the day, the best information a consumer has is always the price of a good. And we hope that prices include the relevant information. That's been the goal of the environmental movement's effort to build the cost of carbon emissions into the price of goods. Rather than asking each consumer to act as a climate scientist when wandering through Costco, the climate change community is trying to let them act as a consumer. The point of cap and trade is to align the decisions we know how to make with the information we have about the long-term impacts of carbon emissions. It will help consumers make good decisions using the tools they have rather than asking them to acquire a whole new skill set.

I'm increasingly coming to the view that the food movement, if indeed such a discrete campaign emerges, should work towards a similar goal. We currently funnel massive subsidies to corn, to meat, to soy products. (Before you leave a comment saying that government intervention into food prices is socialism, please read that last sentence again.) If that mix changed such that the subsidies were now directed at making whole foods cheaper -- if we built the information we have about the long-term externalities of food into the initial price, in other words -- we'd be aligning consumption decisions with nutritional information, which is an altogether wiser approach than asking consumers to pretend they're nutritionists.

"The Costs of Inaction" paper released by the White House is sort of a retread of arguments you've heard before: Absent reform, health care costs will continue to grow, the ranks of the uninsured will continue to swell, the toll of chronic conditions will continue to worsen, and things will generally be quite crappy. The Center for American Progress's Ben Furnas, however, did a rather better job with this argument a few months ago. His graphs are prettier, too.

The HealthReform.gov folks have also released a very nice report on the White House Health Reform Summit. If you weren't there, or missed the instant coverage, it's definitely the best summary available.

Also, why is the HealthReform.gov site so ugly? The other sites in the WhiteHouse.gov family are, in general, pretty handsome.

Current offers a (cartoon) guide for the perplexed.

(Via Mark Bittman's Twitter feed, of course.)

The central thesis is that America's financial crisis is as much a problem of political power as of economics. Ridding the banks of toxic assets without ridding the political system of the bank's influence will prove, in the long-run, insufficient. What's so depressing about Johnson's article is that his insights come because he's examining America in much the same way he'd examine a banana republic. As a former IMF troubleshooter, he's used to assessing the financial problems of small economies and delivering unwelcome news. In most cases that news is uniquely unwelcome to the elites who birthed the problem and must now be displaced. "The biggest obstacle to recovery," he says, "is almost invariably the politics of countries in crisis." Different countries, of course, protect their elites in different ways. And the American system has developed a process of power transmission that is particularly subtle, and will likely prove particularly difficult to undermine:

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

We let the financial sector have free rein of our political system because we believed they deserved it. To paraphrase Calvin Coolidge, the prevailing sentiment held that what's good for investment banks was good for America. And in some ways, the current crisis has only emphasized that belief: What's been bad for investment banks has, after all, been very bad for America.

The implicit mission of the Treasury Department has been to restore the financial sector, not replace it. Christina Romer explained that "private firms that are kind of doing us a favor...coming into this market to help us buy these toxic assets off banks' balance sheets," and Geithner spoke of the "financial expertise" needed to price the assets that the financial system originally mispriced. We're angry at the financial sector, but it's not clear that our government has actually lost faith in it. On Friday, in fact, Obama held a summit with 15 of the nation's top bankers where Bank of America CEO Ken Lewis explained that "at some point you have to stop focusing on the past, and focus on the present." Robert Kelly, CEO of Bank of New York Mellon, agreed. "Our interests are very much aligned with the administration's," he said.

What makes this crisis different, Johnson argues in his article, is not that the economic fundamentals are different, but that the political fundamentals are. Smaller economies needed the IMF. By the time they came to Johnson, they were in a position where they had no choice but to make difficult decisions and upend their existing political economies. The U.S., by contrast, "is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering." No one can make us do anything.

Depressing stuff. But don't take my word for it. Some banks are too big to fail and some articles are too good to blog. Read the whole thing.

Where long lines of unemployed people are the indelible image from the Great Depression in the United States, it is the wheelbarrows of worthless currency during the hyperinflation of the 1920s that preoccupies Germans. Mrs. Merkel has exerted discreet but stubborn leadership in Europe to prevent the kind of overspending that could lead to inflationary pressure on the euro.

It is not, she pointed out, simply a philosophical difference. Borrow and spend today, repay down the road, is a particularly difficult proposition for a country with a shrinking population, she said.

“Over the next decade we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America,” Mrs. Merkel said.

That's not, on the face of it, an absurd objection. But it's a better argument for loosening Germany's immigration policy than for letting the world's economy collapse. Indeed, elsewhere in The New York Times today, Krugman writes that "one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate."

Everyone surely had good reasons then, too.

Jon Cohn has the details on the Obama administration's auto bailout. This post details the underlying thinking and this one gets into the specifics (the short version seems to be that they're trying to save GM but largely throwing Chrysler overboard).

One more tidbit from Senator Conrad's conference call. According to Conrad, the reconciliation process is structured such that if you included instructions on more than one priority -- say, both cap and trade and health reform, or cap and trade and health reform and education -- "you'd have to write the legislation as one bill." The Committee reports assigned by the reconciliation instructions would be returned to the Budget Committee, stapled together into an omnibus package, and go to the floor of the Senate as a single entity. And if you think health reform will be hard, imagine piling it on top of cap and trade and education.

Speaking of Budget Committee Chairman Kent Conrad and the reconciliation process, I was just on a conference call with Conrad where he was notably unwilling to disavow the need for a 50-vote process.

Asked by a reporter whether Senate Democrats would just adopt reconciliation instructions from House Democrats -- more on that strategy here -- he replied first with the standard caveats. "I don't want to do the negotiation of the Conference Committee through the media," he said. "I've been as clear as I can be, publicly and privately, that I don't think reconciliation is the right way to write health reform legislation. It wasn't designed for that purpose. It was designed for deficit reduction. Using it creates a lot of technical issues."

All that, incidentally, is true. But Kent Conrad's normative judgment on reconciliation is less important than whether he will actually obstruct its usage. And his next comment made it unusually clear that he hasn't ruled the process out.

"One thing I've said to colleagues is the Budget Act contemplates a second budget resolution with only 10 hours [of debate] on the floor," Conrad continued. "If it proved absolutely essential, if there was no Republican cooperation on writing major health reform, you could write a second resolution. It would only take a day on the floor and you could include reconciliation instructions there."

That's rare moment of insight into the backroom strategy sessions Conrad is conducting with his Democratic colleagues. Not only are they discussing reconciliation, but Conrad is developing a variety of parliamentary plays that could reintroduce it into the process. There's not only the option of importing reconciliation instructions from House Democrats, but also adopting a second budget that allows Senate Democrats to write the rules themselves. Moreover, Conrad's comments echo the Democratic Caucus's consensus fairly perfectly: He doesn't want to use reconciliation, but if Republicans won't cooperate on health reform, he'll be left with no choice.

In other words, don't make Kent Conrad angry. You wouldn't like him when he's angry.

In response, a reporter asked why his language wasn't stronger. It sounded, she said, like Conrad was ready to support reconciliation if it emerged in Conference Committee. The calculated passivity of Conrad's response was notable. "I'm Scandinavian," he laughed. "What can I tell you?" Then his voice lowered again. "I don't control the outcome of the conference. I'm a participant, but I don't control the outcome. I've stated my preference not to have reconciliation. I will argue that in conference. But I can't control the outcome."

Related: A reconciliation primer.

I'm very much in agreement with the spirit of Jon Chait's latest article. Kent Conrad's insistence on farm subsidies and tax breaks stands in mocking contradiction to his emphasis on deficit reduction. Ben Nelson's affection for the Nebraska-based middlemen in the student loans program will cost taxpayers $4 billion even as Nelson cries over the debt. The rules of the Senate and the incentives of obstruction render decent governance a touching impossibility.

But Chait uses these examples to argue that "Democrats are especially susceptible to the dysfunction of the Senate." This is something of a familiar argument. Republicans, we're frequently told, are a well-oiled congressional machine. They put party before person. They show due deference to their elected leader. They deal viciously with strays and traitors. They merrily ram legislation through the reconciliation process and strong-arm their members to ensure cooperation. And that may all be true. But my sense is that Democrats are more certain of Republican unity than Republicans are.

Chait casts the Bush record as a fairly clear procession of legislative victories. "Bush managed to enact several rounds of tax cuts that substantially exceeded those in his campaign platform, along with two war resolutions, a Medicare prescription drug benefit designed to maximize profits for the health care industry, energy legislation, education reform, and sundry other items," he writes. "Whatever the substantive merits of this agenda, its passage represented an impressive feat of political leverage, accomplished through near-total partisan discipline." It's hard, of course, to match Obama's few months against Bush's eight years. But even so, I'm not sure Bush's eight years lend themselves to such a clean history.

The original tax cuts, for instance, traveled through a Democratic Senate and found their key partisans on the opposite side of the aisle. Max Baucus stood behind President George W. Bush at the signing ceremony. The second round, which came after the 2002 midterms, ran through a Republican-chamber, but here told a story more familiar to stimulus-watchers: A group of moderate Senate Republicans, led by the then-heterodox John McCain, partnered with centrist Democrats and halved the size of Bush's tax cuts.

Other Bush accomplishments followed similar paths. No Child Left Behind was a compromise bill built with the cooperation of Ted Kennedy and George Miller. George Voinovich and Bob Bennett opposed the legislation. Medicare Part D began as a bipartisan effort (again with Kennedy) and only became a war after Bill Thomas and the House Republicans warped it in conference committee -- which they did because they could barely pass it through the partisans in the lower chamber. In the Senate, Orrin Hatch, Trent Lott, John Sununu, Judd Gregg, and a handful of other Republicans voted against the final bill.

In all these cases, Republicans evinced the exact same frustrations with their moderates, and the compromises they forced, that you hear from today's Democrats.

Similarly, Chait is right that Republicans routinely took to the reconciliation process to pass legislation. But it's not clear, as of yet, that Democrats won't do much the same. And in any case, Republicans never passed anything of the size of health care or cap and trade through the process. Early on, they wanted to use the reconciliation process to pass Medicare Part D. Those plans were eventually scrapped. And because of that, the bill, at the end of the day, is a massive entitlement that is much more substantively offensive to conservatives than liberals.

Which isn't really to argue with the substance of Jon's article: The Senate is a broken branch. If we don't properly respond to the financial crisis or avert the crushing blow of rising health costs or slow the advance of catastrophic climate change, it will be because the institution is no longer capable of governance. But that is not, as Chait would have it, a purely Democratic problem. It's an institutional issue. The local obsessions that Chait attaches to Conrad and Nelson are similarly prevalent among Republican Senators. The tremendous power of swing senators is as undeniable and capricious when Republicans rule as when Democrats hold power. The allure of obstruction is an compelling to minority Democrats as minority Republicans (the early Bush accomplishments were actually more bipartisan than Obama's, though that was because Democrats controlled the chamber rather than because Bush was the gracious and cooperative type).

I don't argue this point to be churlish. You can understand the problems of the Senate in two ways. The first is that it's a problem of party discipline. The second is that it's a problem of rules. If you think it's the first, the answer is to put resources and effort into mounting a primary challenge against Ben Nelson. If you think it's the second, then the answer may be to put time and energy into repealing the Byrd Rule, or lowering the filibuster limit, or making it easier to replace chairman, or otherwise transforming the structural incentives that makes legislative success such a delicate and unlikely outcome and thus allows individual Senators to exert so much control over it. Moreover, if you think it's the second, you can actually make something of a bipartisan argument, rather than a purely partisan one. The Senate, as currently composed, doesn't work for Republicans any better than it works for Democrats. And it really doesn't work for the country. And that's probably an easier argument than trying to convince Nebraskans that Ben Nelson's incredible power isn't good for them.

• Abetted by safety net, Europe resists stimulus.

• How the financial system captures governments.

• Can medical homes transform health care?

• The EPA option.

Max Baucus took some time to speechify to the good people of CAP on health reform today. He didn't say much that readers of this blog haven't heard, but this was important, coming on the heels of the new deficit projections:

Last week, CBO released its estimate of the President’s budget. Included in that estimate was a projection of future budget deficits that we face as a nation.

The picture is bleak. Deficits are higher and continue longer than we had expected.

The economic conditions facing our country are severe. Unemployment is rising. Families are struggling to make ends meet. Many are losing their homes.

But this economic uncertainty does not dampen the urgency of health care reform. Indeed, the economic downturn contributes to the urgency for health care reform.

Not a surprise, but a useful restatement of principle. On the other hand, he'll probably take some heat for telling Karen Tumulty that he views the public plan as little more than a bargaining chip to keep the insurers scared and cooperative. I guess you can't fault the guy for being honest, but it's the sort of honesty that seems both likely to cause him problems and to reduce the effectiveness of his strategy.

Baucus's full remarks follow the jump.

Remarks of Senator Max Baucus (D-Mont.)

Before the Center for American Progress Action Fund

(as prepared for delivery)

Thank you for inviting me here today to talk about a cause that has become a calling — health care reform.

The title of this event — “Now is the Time for Action” — could not be better. I firmly believe that it’s true. We must act this year to reform our health care system. If we don’t act, the costs are just too high.

To solve the problem, everyone will have to give and take. Nothing can be off the table. I’m asking everyone to suspend judgment, until we can figure out how we can work this out together.

Everything in health care is related. We cannot address it piecemeal. We need comprehensive health care reform for America.

And we have to craft an American solution. We are not Europe. We are not Canada. We need a uniquely American solution. It has to be a partnership of public and private players.

I’ve served in the Senate for 30 years. Frankly, this is the hardest legislative challenge of my lifetime.

But I relish it. This is fun. This is the kind of work for which I signed on. This is the kind of job that made me ask the people of Montana to hire me in the first place. I’m glad to be doing it.

That’s because we all have a moral obligation to leave this world a better place than we found it. We have a moral obligation to leave the system better for our kids and our grandkids.

So, Congress must do its job. We must move forward.

Last week, Senator Grassley and I laid out a schedule to markup health care reform in June. It’s an ambitious schedule. But it’s necessarily so.

And last week, CBO released its estimate of the President’s budget. Included in that estimate was a projection of future budget deficits that we face as a nation.

The picture is bleak. Deficits are higher and continue longer than we had expected.

The economic conditions facing our country are severe. Unemployment is rising. Families are struggling to make ends meet. Many are losing their homes.

But this economic uncertainty does not dampen the urgency of health care reform. Indeed, the economic downturn contributes to the urgency for health care reform.

More than three out of five people believe that it’s now more important than ever to take on health reform. And to those who think that we cannot afford to address health reform, I say: We cannot afford to wait.

Why? Because health care reform is not just a moral imperative. It is also an economic imperative.

The consequences of not enacting comprehensive health care would be dire. The costs would be unsustainable for individuals, families, employers, and state and Federal governments alike. The costs of not acting are high.

Between 2000 and 2007, average premiums rose nearly 80 percent. At the same time, average wages rose just 15 percent. How can a family keep up?

Last year, the average household spent more than a quarter of its income on health insurance premiums. If we don’t act to reduce the rate of health spending, then in seven years — before the end of President Obama’s second term — most American households will spend nearly half of their income on health insurance.

If we don’t act, increasing costs will result in more and more individuals and families without health insurance.

According to the Kaiser Family Foundation, 160 million Americans get their health benefits through an employer. That means that when people lose their job, they often lose their coverage.

This month, the unemployment rate rose to eight point one percent. Work done here at the Center for American Progress shows that — every day — 14,000 more people lose their health insurance coverage.

Think how devastating that is for a mom with a sick child. Think how devastating that is for someone fighting against cancer. Think how devastating that is for someone who has the misfortune to be in an accident.

As more people lose their jobs, more people will be forced to buy health insurance on their own. And they will have to buy that insurance in the dysfunctional and increasingly unaffordable individual insurance market.

Anthem Blue Cross in California just notified most of its individual policyholders that they face double-digit premium increases — many more than 30 percent. Blue Cross of Michigan is seeking approval for an increase in premiums of nearly 60 percent.

That means that if we don’t act, then workers who lose their jobs will not be able to afford coverage. It means that many of those purchasing coverage in the individual market will be forced to drop their coverage.

We need to make this market workable and affordable. It will require action at the Federal level. A few states have taken action to address this market. But in the vast majority of states, the individual market is like the Wild West.

We must see that insurers are competing on price and quality, and not on their ability to cherry-pick the healthiest individuals. We need to eliminate the ability of insurers to discriminate against sick people, to discriminate based on gender, or to discriminate based on where you work.

Even the insurance industry has accepted that “business as usual” is no longer acceptable. They recently sent a letter supporting the changes that I’m proposing, if done with an individual obligation to purchase insurance. And once coverage is accessible, affordable, and meaningful, people should have a responsibility to get insurance.

An individual obligation to get health coverage is essential for several reasons. It is the only way to stop the cost-shifting related to uncompensated care. Today, the costs of care for 46 million Americans without health insurance are largely borne by those with insurance.

Getting all Americans covered will also make insurance markets function properly. Insurance works because policyholders pay into their plans when they are healthy. And they get their medical bills paid when they are sick.

If a significant portion of Americans don’t buy insurance until they get sick, then premiums will increase for all who do buy insurance. And the problem of unaffordable costs will only get worse.

As well, covering all Americans is essential to effective prevention and wellness efforts. And it’s important to managing chronic illnesses.

Efforts to guard against and better manage illness are an effective tool to contain costs. But without every American in the system, those efforts will fall far short of their potential.

And what about the costs to business?

We also need to make health care more affordable for businesses. Americans are losing jobs because health care costs put American businesses at a competitive disadvantage.

The manufacturing industry is facing stiff international competition. American manufacturers pay $2.38 an hour for health benefits. What do you suppose America’s major trading partners pay? 96 cents. Talk about an uneven playing field.

American manufacturers spend nearly three times as much on health benefits as our major trading partners. If we don’t act, then that gap will continue to widen.

And what about the costs to taxpayers?

And if we don’t act, then the burden on taxpayers will continue to grow. In 2009, Medicare spending is projected to be nearly $500 billion. By 2018, it will be almost double that.

If we don’t act, then in the next 10 years, spending for both Medicaid and Medicare will more than double. Meanwhile, our economy will grow by just 64 percent.

What should action on health reform look like?

It has to be comprehensive. The time for incremental change has passed. It is increasingly harder to fix the system one step at a time.

The CHIP reauthorization bill that we enacted last month was a significant victory. After kids, however, it starts getting harder to expand health coverage for segments of the uninsured based on public sympathy.

Covering all Americans will come at a cost. But the cost of that coverage will be less if we also address rising health care costs. That means that comprehensive health reform has to be more than just universal coverage. It means that we must address rising costs. And it means that we must improve quality.

We cannot simply add 46 million uninsured people to a broken system. That would increase costs without addressing the underlying, fundamental problems in our system. And the projected costs of that path might well confirm the fears of those who believe that we cannot afford to tackle health reform.

Already, we spend twice as much on health care as any other industrialized nation. And yet our outcomes are poorer.

In eight years, we will have more than 58 million uninsured Americans. And we will spend four point three trillion dollars a year on health care.

The $787 billion economic recovery act that we just enacted was a big bill. But compare the cost of that to four point three trillion dollars in health care spending each and every year.

Part of the reason that health care costs so much is that we do not have a health care system. There are a few exceptions and pockets of success. But generally, we don’t have a health care system. We have a health care free-for-all.

Bending the growth curve of spending will be a challenge. We must change the way that care is delivered.

The way that we pay providers contributes to higher health costs. Existing payment systems reward the use of specialty care and high tech equipment.

We pay more to a hospital whose patients experience a readmission after being discharged. And we pay less to a hospital that does the job right the first time and avoids a second hospital visit.

Spending and utilization varies widely from one part of the country to another. But those who are spending more are not getting more for their money.

In many parts of the country, providers have answered the siren call of the payment systems. They order more tests. They schedule more visits. They do more procedures. They perform more imaging services. And they prescribe more medications.

Due to a lack of electronic records, services are duplicated. And due to a lack of comparative effectiveness research, providers lack information about what treatments work best.

We need to change that. We need to pay on the basis of higher quality and better outcomes. Where possible, we should create pathways to integrated, efficient systems of care delivery.

We made some progress in the economic recovery act. We made a significant investment in electronic health systems. We made changes in payment systems to reward providers that use these systems. And we made a down payment of more than one billion dollars toward comparative effectiveness research.

But we still have much of the heavy lifting ahead of us. Over the coming weeks, we will continue working on ways to promote value and improve quality through our payment systems. Rewarding quality will improve quality. And higher quality will also lower costs.

We are on a path to reform. And I am doing everything that I can to keep pushing, along with my good friend and partner Ted Kennedy. Together, we have sketched out a path to get a bill through the Senate.

That path necessarily involves bipartisan support. Why? Because in the end, in the Senate, a bill needs 60 votes. Attempts to circumvent this requirement using reconciliation would also require trade-offs.

The barriers to getting a bill done are real. Our economic circumstances and the deficit present a considerable challenge. The pressure to offset new spending is greater than ever.

The calendar also presents a challenge. We must act this year. And that means that we have to act fast. To meet that deadline, the House and Senate need to pass legislation before the August recess.

If we do not act this year, then we won’t have another opportunity for another decade. Next year, we’ll be in the midst of Congressional elections. The following year, we’ll be in a Presidential cycle. We have to act now.

Fortunately, President Obama is committed to reforming our health care system this year. The opportunity is before us. And we must act.

Now is the time. Now is the time for action. Let us work together to make it happen.

Thank you again for the invitation to discuss the urgency of health reform. Before I yield for questions, let me just say that I am particularly pleased to share a stage with Judy Feder. Judy is one of the most capable and well-versed health policy experts in Washington. She has a long history of working on ways to improve our health system. And so, let’s begin the discussion.

Hilarious Republican infighting about the budget aside, the promise now is that we'll have a number-laden budget from the House Republicans sometime next week. And who knows? Maybe this was all a brilliant effort to lower expectations. Next week's budget will have some numbers, and those numbers will certainly be different than Obama's numbers, and House Republicans will declare victory. And no one will care. It'll be a budget that won't pass, that won't be scored, and that won't be remembered in three months.

Sometimes, you wonder if most of what goes on in Washington isn't just a full employment plan for political journalists.

My line of work means I end up attending a lot of speeches by prominent economists. That's good, because I like economics and economists are, as a general rule, much funnier than health policy experts. (The exception is Uwe Reinhardt, who's an economist specializing in health care, and really improbably funny). But it's now de rigeur at these things for the economist standing at the front of the room -- and they're usually a pretty prominent member of the discipline -- to talk about the "revolution" overwhelming their industry as "human behavior" begins to enter their measurements.

I always find that a bit unsettling. It's one thing to have trouble modeling how actual humans behave in real world circumstances. It's another to ignore it. But that, until recently, has been the prevailing approach. All this, incidentally, is a long way of linking to Matt Yglesias's review of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. It's a good book by two of the most prominent behavioral economists -- Peter Orszag, in fact, is reading it -- and Matt's review is a good introduction.

James Kwak suggests we imagine what would have happened if Alan Greenspan had been a more empowered regulator in 2005. That, of course, is when he said “we don’t perceive that there is a national bubble”, just “a little froth.” In March 2007, Bernanke said “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” Given regulatory authority over Citibank's leverage, how likely do you think it is that Greenspan would have used that authority?

It's nice, in other words, to have a systemic risk regulator, as Geithner suggested in his testimony. But it's not an obvious solution. The tendency is for the regulator to be least effective when he's most necessary. Think too about how much money, and thus political power, a "too big to fail" company possesses. "It's best," says Kwak, "to minimize the chances of systemic risk getting big in the first place." Better than empowering regulators to examine companies that are "too big to fail" would be keeping the companies from becoming "too big to fail" in the first place.

"Size can definitely go away," argues Kwak, "simply by setting a cap on the volume of assets any institution is allowed to hold (and doing something about off-balance sheet entities). And if a highly interconnected, highly complex but small financial institution fails, the system as a whole would be fine." I imagine there are a lot of options for regulating size. And I imagine there would be a lot of arguments about how to determine the cap. But this is the right way to think about the regulatory changes. It's a policy that prevents our reliance on omniscient regulators rather than a policy that depends on their existence and independence. In that way, it's actually a relatively conservative -- or at least public choice-oriented -- way of looking at the problem, though I doubt it'll gain much bipartisan support.

Most interesting to me is his section on regulating systemic risk -- which is to say, regulating the companies that are "too big to fail."

First, we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.

Second, we need to establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.

Third, we should require that leveraged private investment funds with assets under management over a certain threshold register with the SEC to provide greater capacity for protecting investors and market integrity.

Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the OTC derivatives market, moving the standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.

Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.

And sixth, we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.

To put this in terms people are more familiar with: The first principle empowers a single regulator of major firms, the second principle governs leverage, the fourth regulates derivatives and probably puts them on an exchange-trading basis, and the sixth is about the authority to nationalize.

Geithner's full testimony is after the jump.

Introduction
Thank you Chairman Frank, Ranking Member Bachus, and other members of the Committee. I appreciate the opportunity to testify about the critical topic of financial regulatory reform.

Over the past 18 months, we have faced the most severe global financial crisis in generations. Some of the world’s largest financial institutions have failed. Equity and real estate prices have fallen sharply, eroding the value of our savings. The supply of credit has tightened dramatically. Confidence in the overall financial system, in the protections it is supposed to afford for investors and consumers, has eroded. These financial pressures have intensified the recession now underway around the world.

And as in any financial crisis, the damage falls on Main Street. It affects the vulnerable. It affects those who were conservative and responsible, not just those who took too much risk.

Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function. Financial institutions and markets transform the earnings and savings of American workers into the loans that finance a home, a new car or a college education. They exist to allocate savings and investment to their most productive uses.

Our financial system does this better than any other financial system in the world, but our system failed in basic fundamental ways. The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real estate markets and in credit, followed by busts and contraction. Innovation and complexity overwhelmed the checks and balances in the system. Compensation practices rewarded short-term profits over long-term return. We saw huge gains in increased access to credit for large parts of the American economy, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations they did not understand and could not sustain. The huge apparent returns to financial activity attracted fraud on a dramatic scale. Large amounts of leverage and risk were created both within and outside the regulated part of the financial system.

These failures have caused a great loss of confidence in the basic fabric of our financial system, a system that over time has been a tremendous asset for the American economy.

To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.

On February 25, after meeting with the banking and financial services leadership from Congress, President Obama directed his economic team to develop recommendations for financial regulatory reform and to begin the process of working with the Congress on 1
new legislation. The Treasury Department has been working with the President’s Working Group on Financial Markets (PWG) to develop a comprehensive plan of reform. This effort has been and will be guided by principles the President set forth earlier this year and in his speech as a candidate at Cooper Union in March 2008.

Financial institutions and markets that are critical to the functioning of the financial system and that could pose serious risks to the stability of the financial system need to be subject to strong oversight by the government. Our financial system and the major centralized markets must be strong and resilient enough to withstand very severe shocks and the failure of one or more large institutions. We need much stronger standards for openness, transparency, and plain, common sense language throughout the financial system. And we need strong and uniform supervision for all financial products marketed to consumers and investors, and tough enforcement of the rules to ensure full accountability for those who violate the public trust.

Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take. We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.

And we need to recognize that risk does not respect national borders. We need to prevent national competition to reduce standards and encourage a race to higher standards. Markets are global and high standards at home need to be complemented by strong international standards enforced more evenly and fairly. These are global markets and challenges. Building on these principles, we want to work with Congress to put in place fundamental reforms that create a stronger, more stable system, with much stronger protections for consumers and investors, and a more streamlined, consolidated, and simple oversight framework.

I want to begin that process today by focusing on proposals that are essential to creating a more stable system, with stronger tools to prevent and manage future crises. In this context, my objective is to concentrate on the substance of the reform agenda, rather than the complex and sensitive questions of who should be responsible for what.

Over the next few weeks we will outline proposals in the areas of consumer and investor protection and for reform of regulatory oversight arrangements.

We start with systemic risk, not just because of its obvious importance to our future economic performance, but also because these issues require more cooperation globally, and they will be at the center of the agenda at the upcoming Leaders’ Summit of the G-20 in London on April 2.

These proposals reflect a range of complex and consequential policy choices. They will require careful work and drafting. It is important that we get this right. We recognize there will be many alternative models put forth to achieve the objective we all share of creating a more stable system. And we look forward to working with the Federal Reserve, with the agencies that make up the President’s Working Group on Financial Markets, and with the Congress on a package of reforms that we can all support.

The Crisis and Its Fundamental Causes
The current crisis had many causes.

Two decades of sustained economic growth bred widespread complacency among financial intermediaries and investors, lowering borrowing costs and weakening lending standards.

A global boom in savings resulted in large flows of capital into the United States and other markets, pushing down long-term interest rates and pushing up asset prices. The rising market hid Ponzi schemes and other flagrant abuses that should have been detected and eliminated.

In that environment, institutions and investors looked for higher returns by taking on greater exposure to the risk of infrequent but severe losses.

A long period of home price appreciation encouraged borrowers, lenders, and investors to make choices that could only succeed if home prices continued to appreciate. We had a system under which firms encouraged people to take unwise risks on complicated products, with ruinous results for them and for our financial system.

Market discipline failed to constrain dangerous levels of risk-taking throughout the financial system. New financial products were created to meet demand from investors, and the complexity outmatched the risk-management capabilities of even the most sophisticated financial institutions. Financial activity migrated outside the banking system, relying on the assumption that liquidity would always be available.

Regulated institutions held too little capital relative to the risks to which they were exposed. And the combined effects of the requirements for capital, reserves and liquidity amplified rather than dampened financial cycles. This worked to intensify the boom and magnify the bust.

Supervision and regulation failed to prevent these problems. There were failures where regulation was extensive and failures where it was absent.

Regulators were aware that a large share of loans made by banks and other lenders were being originated for distribution to investors through securitizations, but they did not identify the risks caused by explosive growth in complex products based on these products.

Investment banks, large insurance companies, finance companies, and the GSEs were subject to only limited oversight on a consolidated basis, despite the fact that many of those companies owned federally insured depository institutions or had other access to explicit or implicit forms of support from the government. Federal law allowed many institutions to choose among regulatory regimes for consolidated supervision and, not surprisingly, they avoided the stronger regulatory authority applicable to bank holding companies. Those companies and others were highly leveraged or used short-term borrowing to buy long-term assets, yet lacked strong federal prudential regulation and routine access to central bank liquidity.

And while supervision and regulation failed to constrain the build up of leverage and risk, the United States came into this crisis without adequate tools to manage it effectively. Until the Housing and Economic Recovery Act and the Emergency Economic Stabilization Act were passed in the summer and fall of 2008, the executive branch had effectively no ability to provide the capital or guarantees necessary to contain the damage caused by the crisis.

And as I discussed before this committee on Tuesday, U.S. law left regulators without good options for managing failures of systemically important non-bank financial institutions.

Regulation of a financial system as complex and dynamic as our system is inherently difficult and challenging. But that difficulty has been compounded by a U.S. regulatory structure that is unnecessarily complex and fragmented. The complexity has sometimes resulted in a failure to assign clear responsibility for achievement of some public policy objectives, notably for financial stability.

Toward a More Stable and Resilient Financial System
Our comprehensive framework for regulatory reform will cover four broad areas: systemic risk, consumer and investor protection, eliminating gaps in our regulatory structure; and international coordination.

In the coming weeks, I will present detailed frameworks for each of these areas. Today, I will discuss in greater detail the need to create tools to identify and mitigate systemic risk, including tools to protect the financial system from the failure of systemically important financial institutions.

Second, weaknesses in our consumer and investor protections harm individuals, undermine trust in our financial system, and can contribute to systemic crises that shake the very foundations of our financial system. The choice of what home mortgage to get or how to save for retirement are some of the most important financial decisions that households make. It is crucial that when households make choices we have clear rules of the road that prevent manipulation and abuse. We must restore integrity to our financial system and strengthen these protections. Consumer and investor protection is a critical component of the President’s regulatory reform plan. We are developing a strong, comprehensive plan for consumer and investor regulation to simplify financial decisions for households and to protect people from unfair and deceptive practices.

We must end the practice of allowing banks and other financial companies to choose their regulator simply by changing their charters; regulators must choose who to regulate. Moreover, our regulatory system must be comprehensive and eliminate gaps in coverage. Our regulatory structure must assign clear regulatory authority, resources, and accountability for each of the key regulatory functions. We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people.

To match the increasing global markets, we must ensure that global standards for financial regulation are consistent with the high standards we will be implementing in the United States.

The Financial Stability Forum (FSF) has played an essential role in the effort, working with the world’s standard - setting bodies to study the underlying causes of the crises and address these weaknesses. Much progress is being made to enhance sound regulation, strengthen transparency, and reinforce international collaboration.

We have begun to work with international colleagues to reform and strengthen the FSF so that it can play a more effective role alongside the original Bretton Woods institutions in strengthening the financial system. We have already gotten agreement to expand the membership to include all G-20 countries, giving it a stronger mandate for promoting more robust standards consistent with the principles above, and working with the IMF and the World Bank to monitor the implementation of those standards.

In addition, we will launch a new, initiative to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions. President Obama will underscore in London on April 2 at the Leaders’ Summit the imperative of raising standards across the globe and encouraging a race to the top rather than a race to the bottom.

Reducing Systemic Risk
The crisis of the past 18 months has exposed critical gaps and weaknesses in our regulatory system. As risks built up, internal risk management systems, rating agencies and regulators simply did not understand or address critical behaviors until they had already resulted in catastrophic losses.

This crisis has made clear that certain large, interconnected firms and markets need to be under a more consistent, and more conservative regulatory regime. These standards cannot simply address the soundness of individual institutions, but must also ensure the stability of the system itself. We need to strengthen our system of prudential supervision across the financial sector. We must require that firms build up capital during good economic times so that they have a more robust protection against losses in down times – and can continue to lend to America’s households and businesses big and small. We need to examine our accounting rules to see whether, consistent with investor protection, we can require firms to build up loan loss reserves that look forward and account for losses in downturns. 5

In addition, regulators must issue standards for executive compensation practices across all financial firms. These guidelines should encourage prudent risk-taking, incent a focus on long-term performance of the firm rather than short-term profits, and should not otherwise create incentives that overwhelm risk management frameworks.

The key elements of our plan to address systemic risk are:

First, we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.

Second, we need to establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.

Third, we should require that leveraged private investment funds with assets under management over a certain threshold register with the SEC to provide greater capacity for protecting investors and market integrity.

Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the OTC derivatives market, moving the standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.

Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.

And sixth, we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.

Systemically Important Financial Firms and Markets
To ensure appropriate focus and accountability for financial stability we need to establish a single entity with responsibility for consolidated supervision of systemically important firms and for systemically important payment and settlement systems and activities.

We can no longer allow major financial institutions to choose among consolidated supervision regimes and regulators or to avoid consolidated supervision entirely. That means we must create higher standards for all systemically important financial firms regardless of whether they own a depository institution, to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms, sets objectives and principles for their oversight, and assigns responsibility for regulating these firms.

In identifying systemically important firms, we believe that the characteristics to be considered should include: the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, and the firm’s the importance of the firm as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.

In general, the design and degree of conservatism of the prudential requirements applicable to such firms should take into account the inherent inability of regulators to predict future outcomes.

Capital requirements for these firms must be sufficiently robust to be effective farther into the tails of potential outcomes than capital requirements for other financial firms. And they must be less pro-cyclical, requiring firms to build up substantial capital buffers in good economic times so that they can avoid deleveraging in cyclical downturns.

The single systemic regulator will also need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms. For instance, supervisors should apply more demanding liquidity constraints; and require that these firms are able to aggregate counterparty risk exposures on an enterprise basis within a matter of hours.

The regulator of these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the FDIC with respect to its covered agencies.

Payment and Settlement Activities
Weaknesses in the settlement systems for key funding and risk transfer markets, notably overnight and short-term lending markets (such as those for tri-party repurchase agreements) and OTC derivatives, have been highlighted as a key mechanism that could spread financial distress between institutions and across borders. While some progress was made in the markets for CDS and other OTC derivatives while I was at the New York Fed, federal authority over such arrangements is incomplete and fragmented, and we have been forced to rely heavily on moral suasion to encourage market participants to strengthen these markets.

We need to give a single entity broad and clear authority over systemically important payment and settlement systems and activities. Where such systems or their participants are already federally regulated, the authority of those federal regulators should be preserved and the single entity should consult and coordinate with those regulators.

Hedge Funds and Other Private Pools of Capital
U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the CFTC and many funds register voluntarily with the SEC. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. However, in the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.

Accordingly, we recommend that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) with assets under management over a certain threshold be required to register with the SEC. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements. The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability. The SEC should share the reports that it receives from the funds with the entity responsible for oversight of systemically important firms, which would then determine whether any hedge funds could pose a systemic threat and should be subjected to the prudential standards outlined above.

Credit Default Swaps and Other OTC Derivatives
The current financial crisis has been amplified by excessive risk-taking by certain insurance companies and poor counterparty credit risk management by many banks trading Credit Default Swaps (CDS) on asset-backed securities. These complex instruments were poorly understood by counterparties, and the implication that they could threaten the entire financial system or bring down a company of the size and scope of AIG was not identified by regulators, in part because the CDS markets lacked transparency.

Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end.

In our proposed regulatory system, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time.

We will subject all dealers in OTC derivative markets and any other firms whose activities in those markets pose a systemic threat to a strong regulatory and supervisory regime as systemically important firms.

We will force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties (CCPs). We will also encourage greater use of exchange-traded instruments.

The CCPs will be subject to comprehensive settlement systems supervision and oversight, consistent with the authority outlined above.

We will require that all non-standardized derivatives contracts be reported to trade repositories and be subject to robust standards for documentation and confirmation of trades, netting, collateral and margin practices, and close-out practices.

We will bring unparalleled transparency to the OTC derivatives markets by requiring CCPs and trade repositories to make aggregate data on trading volumes and positions available to the public and make individual counterparty trade and position data available on a confidential basis to federal regulators, including those with responsibilities for market integrity.

Finally, we will strengthen participant eligibility requirements and, where appropriate, introduce disclosure or suitability requirements, and we will require all market participants to meet recordkeeping and reporting requirements.

Money Market Mutual Funds (MMFs)
In the wake of Lehman Brothers’ bankruptcy, we learned that even one of the most stable and least risky investment vehicles - money market mutual funds - was not safe from the failure of a systemically important institution. These funds are subject to strict regulation by the SEC and are billed as having a stable asset value - a dollar invested will always return the same amount. But when a major prime MMF “broke the buck” - lost money - the event sparked sharp withdrawals across the entire prime MMF industry. Those withdrawals resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-financial companies that relied significantly on MMFs for funding. The vulnerability of MMFs to breaking the buck and the susceptibility of the entire prime MMF industry to sharp withdrawals in such circumstances remains a significant source of systemic risk.

We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole is less susceptible to runs.

Resolution Authority
As I discussed on Tuesday, we must create a resolution regime that provides authority to avoid the disorderly liquidation of any nonbank financial firm whose disorderly liquidation would have serious adverse effects on the financial system or the U.S. economy.

Please note that the draft resolution legislation we have submitted is a first step intended to address a significant void in today’s regulatory structure. This mechanism is intended to be a permanent authority and therefore, will also be a critical element of Treasury’s broader regulatory reform proposals. As we move forward on those proposals, we will need to align the draft legislation with the broader regulatory reform effort as it develops. At this point, however, I will focus on how the authority and mechanism would work within our current regulatory framework.

We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC. This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy.

Before any of the emergency measures specified could be taken, the Secretary of the Treasury, upon the positive recommendations of both the Federal Reserve Board and the FDIC and in consultation with the President, would have to make a triggering determination that (1) the financial institution in question is in danger of becoming insolvent; (2) its insolvency would have serious adverse effects on economic conditions or financial stability in the United States; and (3) taking emergency action as provided for in the law would avoid or mitigate those adverse effects.

The Treasury and the FDIC would decide whether to provide financial assistance to the institution or to put it into conservatorship/receivership. This decision will be informed by the recommendations of the Federal Reserve Board and the appropriate federal regulatory agency (if different from the FDIC). The U.S. government would be permitted to utilize a number of different forms of financial assistance in order to stabilize the institution in question. These include making loans to the financial institution in question, purchasing its obligations or assets, assuming or guaranteeing its liabilities, and purchasing an equity interest in the institution.

This authority is modeled on the resolution authority that the FDIC has under current law with respect to banks and that the Federal Housing Finance Agency has with regard to the GSEs. Here, conservatorships or receiverships aim to minimize the impact of the potential failure of the financial institution on the financial system and consumers as a whole, rather than simply addressing the rights of the institution’s creditors as in bankruptcy.

Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution’s contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to fundamentally restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution’s creditors or other stakeholders.

The proposed legislation would create an appropriate mechanism to fund the appropriately limited exercise of the resolution authorities it confers. This could take the form of a mandatory appropriation to the FDIC out of the general fund of the Treasury (subject to all the restrictions on the use of appropriated funds, including apportionments under the Anti-Deficiency Act), and/or through a scheme of assessments, ex ante or ex 10 11

post, on the financial institutions covered by the legislation. The government would also receive repayment from the redemption of any loans made to the financial institution in question, and from the ultimate sale of any equity interest taken by the government in the institution. The Deposit Insurance Fund will not be used to fund such assistance.

Conclusion
The President has made clear that we will do what is necessary to stabilize the financial system and restore the conditions for economic growth. Working closely with the Congress, we have moved quickly and with forceful action to help get people back to work and the economy growing again. With your help we are also moving to repair the financial system so that it works for, rather than against, recovery.

Comprehensive regulatory reform is critical to these efforts. In the coming days and weeks, we will continue to lay out the steps we must take to protect against systemic risk. We will also lay out a detailed framework for stronger rules to protect consumers and investors against fraud and abuse.

Next week I will join President Obama in London for the G-20 leaders meeting to build support - with the help of other interested nations and strengthened international bodies -for higher global standards for financial regulation.

We are a strong and resilient country. We came into the current crisis without the authority and tools we needed to contain the damage to the economy from the financial crisis. We are moving to ensure that we are equipped with both in the future, and in the process, that we modernize our 20th century regulatory system meet 21st century financial challenges.

Senator Bernie Sanders is introducing single payer legislation into the Senate today. Physicians for a National Health Care Plan has a write-up here. The bill can be downloaded here. There's no summary of provisions or similar analysis on Sanders web site so it's hard to say too much about the legislation right now, but I'd sure like to see it scored by CBO.

I don't think there's a whole lot to James Webb's much-touted legislation to form a blue-ribbon commission on prison reform. But I think there's a whole lot to the fact that James Webb is touting legislation on prison reform. I think it's important that Webb has created a whole new section on his Senate web site to cover the issue and I think it's encouraging that his staff is blasting out e-mails about Webb's focus on the issue. The political economy on crime and prison reform has been pretty bad: Lots of politicians make their name being anti-crime, which has come to mean pro-punishment. Few make their name being pro-prison reform. Here -- from the charts and graphs section of Webb's site -- is what that's given us:

Webb has decided to do something fairly rare for a politician; leverage his credibility to make a positive intervention on an issue. Plenty of politicians with Webb's unique blessings -- a tough record and a tough demeanor that assures him total inoculation against being painted as weak -- held them in reserve for a future campaign that never comes. Webb is actually attempting to use his position to affect an important issue. And by publicly signaling that he means to be the go-to guy on prison reform, he's ensuring that the advocacy community will begin providing intellectual support and the academics will begin talking to his staff and the former prisoners will send along their experiences and the interested senators will come by his office and his blue-ribbon panel will give him further ideas and his next piece of legislation will, after all that, be able to do rather more than call for a commission.

His floor speech supporting the bill is below the fold. It's really quite good.

I am pleased today to introduce a piece of legislation designed to establish a National Criminal Justice Commission. I do so with, at the moment, twelve cosponsors, including our Majority Leader, the Chairman and the Ranking Republican on the Senate Judiciary Committee, the Chairman and the Ranking Member of the Judiciary Subcommittee on Crime and Drugs and other members of our leadership.

I introduce this bill after more than two years of effort here in the Senate and with prior conferral with Supreme Court Justice Kennedy and having discussed this matter with the President and the Attorney General, both of whom I think are strongly supportive of this concept.

Our goal in this legislation is to create a national commission with an 18-month timeline not to simply talk about the problems that we have in our criminal justice system, but to actually to look at all of the elements in this system, how they are interrelated in terms of the difficulties that we have in remedying issues of criminal justice in this country and to deliver us from a situation that has evolved over time where we are putting far too many of the wrong people into prison and we are still not feeling safer in our neighborhoods, we're still not putting in prison or bringing to justice those people who are perpetrating violence and criminality as a way of life.

I would like to say that I come to this issue - although I’m not on the Judiciary Committee - as someone who first became interested in criminal justice issues through serving on a number of courts-martial and thinking about the interrelationship between discipline and fairness, and then after that from having spent time as an attorney, at one point representing pro bono a young former Marine who had been convicted of murder in Vietnam. I represented him for six years pro bono. He took his life halfway through this process. I cleared his name three years later but having become painfully aware of how sometimes inequities infect our process.

Prior to joining the Senate, I spent time as a journalist, including a stint 25 years ago as the first American journalist to have been inside the Japanese prison system where I became aware of the systematic difficulties and challenges that we have. At that time, Japan with half our population had only 40,000 sentenced prisoners in jail and we had 580,000 and today we have 2.3 million prisoners in our criminal justice system and another five million involved in the process either due to probation or parole situations.

This is a situation that is very much in need of the right sort of overarching examination. I’m gratified that the Senior Senator from Pennsylvania has joined me as the lead Republican on this measure. I look forward to hearing from him as soon as I am finished with my remarks.

The third thing that I would like to say at the outset, I believe very strongly even though we are a federal body, that there is a compelling national interest for us to examine this issue and reshape and reform our criminal justice system at the federal, state, and local levels. I believe the commission that I am going to present will provide us with that opportunity.

Let's start with a premise that I don't think a lot of Americans are aware of. We have 5% of the world's population; we have 25% of the world's known prison population. We have an incarceration rate in the United States, the world's greatest democracy, that is five times as high as the average incarceration rate of the rest of the world. There are only two possibilities here: either we have the most evil people on earth living in the United States; or we are doing something dramatically wrong in terms of how we approach the issue of criminal justice.

I would ask my fellow senators and my fellow citizens to think about the challenges that attend these kinds of numbers when we are looking at people who have been released from prison and are reentering American society. We have hundreds and hundreds of thousands of people who are reentering American society without the transition necessary to allow them to again become productive citizens.

I think we need to look at this in terms of our own recent history. This is a chart that shows our incarceration rate from 1925 until today. Beginning in about 1980 our incarceration rate started to skyrocket. What has happened since 1980 is not reflective of where our own history has been on this issue and it is another reason why we need to examine it.

We are also, for a complex set of reasons, warehousing the mentally ill in our prisons. With four times as many mentally ill in our prisons opposed to institutions, the main point for all of us to consider is that these people who are in prison are not receiving the kind of treatment they would need in order to remedy the disabilities that have brought them to that situation.

The elephant in the bedroom in many discussions on the criminal justice system is the sharp increase in drug incarceration over the past three decades. In 1980, we had 41,000 drug offenders in prison; today we have more than 500,000, an increase of 1,200%. The blue disks represent the numbers in 1980; the red disks represent the numbers in 2007 and a significant percentage of those incarcerated are for possession or nonviolent offenses stemming from drug addiction and those sorts of related behavioral issues.

I want to emphasize to my colleagues and to others that the issues that we face with respect to criminal justice are not overall racial issues. In many cases these issues involve people’s ability to have proper counsel and other issues, but there are stunning statistics with respect to drugs that we all must come to terms with. African-Americans are about 12% of our population; contrary to a lot of thought and rhetoric, their drug use rate in terms of frequent drug use rate is about the same as all other elements of our society, about 14%. But they end up being 37% of those arrested on drug charges, 59% of those convicted, and 74% of those sentenced to prison by the numbers that have been provided by us.

At the same time, when I say we're putting too many of the wrong people in prison, we're not solving the problems that will bring safety to our communities. Gangs are a hot issue today. I am on the Armed Services Committee, I’m on the Foreign Affairs Committee and there has been a lot of back and forth in recent months about the transnational gangs that are emanating from across the Mexican border. Approximately a million gang members are counted in our country today. I want to emphasize that this is not an issue that simply exists along the Mexican border. This is issue that affects every community in the United States and it is not simply an issue of the Mexican cartels although theirs is the most violent and most visible today. The Mexican drug cartels are operating in 230 American cities, not simply along the border. The incidents on the border illuminate the largeness of this problem and this challenge. Gangs in some areas commit 80% of the crimes and are heavily involved in drug distribution but other violent activities, as well.

There's been some talk over the past few days about how our position toward drugs and our gun policies feed this problem. I would ask my colleagues to think very hard about that. Drugs are a demand problem in the United States. There is no question about that. And there are a lot of weapons going back and forth across the border. But we should remember that the Mexican drug cartels are capable of a very sophisticated level of quasi-military violence. Many of the members in the cartels are former Mexican military, some trained by our own Special Forces and the weapons that they use are not the kind of weapons you buy at a gun show. You don't get automatic weapons, r.p.g.'s and grenades at a gun show.

We have to realize the these cartels have a lot of money. By some indications they make profit levels of about $25 billion a year. They can buy the weapons they want. We have to get on top of this as a national priority. Again, it's not simply the transnational gangs that come out of Mexico. Many of them are Central American. Here in Northern Virginia we have thousands of members right across the Potomac River, who belong to the MS-13 gangs separating from Central America and there are also Asian gangs. We have to get our arms around this problem as we address mass incarceration in the United States.

Another piece of this issue that I hope we will address with this National Criminal Justice Commission is what happens inside our prisons. When I was looking at the Japanese system many years ago, their model in terms of prison administration was basically designed after a traditional military model. You could not be a warden in a Japanese jail unless you started as a turnkey. They had national examinations, a year of preparation, and training in psychology and counseling techniques, before an individual was allowed to be a turnkey in a jail. The promotion systems were internal just like the United States military. It provided a quality career path. And it brought highly trained people in at the very beginning. We don't have that in America. Prisons vary warden to warden. They vary locality to locality. We need to examine a better way to do that in our country.

We also have a situation in this country with respect to prison violence and sexual victimization that is off the charts and we must get our arms around this problem. We also have many people in our prisons who are among what are called the criminally ill, many suffering from hepatitis and HIV who are not getting the sorts of treatment they deserve. I started once I arrived in the Senate working on this issue.

I was pleased to be working with Senator Schumer on the Joint Economic Committee. He allowed me to chair hearings to try to get our arms around this problem and see what sort of legislative approach might help. I chaired a hearing on mass incarceration in October of 2007 and I chaired another hearing last year on the overall impact of illegal drugs from point of origin through the criminal justice system; how does this work in terms of the underground business environment; how does it work in terms of the disparity in terms in treatment of those incarcerated; what are the costs associated with it. I was able to work with the George Mason University Law Center to put together a forum bringing people in from across the country to talk about our overall drug policy.

Once we started talking about this particularly over the last year we started being contacted from people all across the country -- people from every different aspect of the political and the philosophical areas that come into play when we talk about incarceration. It is a very emotional issue. I heard from Justice Kennedy of the Supreme Court, from prosecutors, judges, defense lawyers, former offenders, people in prison, and police on the street. All of them are saying we have a mess here - a mess - that we have to get a holistic view of how to solve it.

There are many good pieces of legislation introduced in the Congress to address different pieces of this but after going through this process over the past year, I’ve come to the conclusion that the way we should address this is with a national commission that will examine all of these pieces together and make specific findings so we can turn it around. These are just examples of some of the editorial support that we have received. I have written a piece for "Parade” magazine, which will be out this weekend. I hope our fellow citizens will take a look at it. I did as best I can to summarize the challenges that we have.

Now, as to the design of this legislation, we are looking for two things. One is to shape a commission with bipartisan balance – the President nominating the Leader; the Majority Leader and Minority Leaders of both houses of Congress, in concert with the Judiciary Committees; each being able to appoint two members, and then the National Governors Association, Republican and Democratic, each getting one member.

And the idea, again, is not to have a group of people who are going to sit around and simply remonstrate about the problem, it is to get a group of people with credibility in our country, wide expertise, to examine specific findings and to come up with policy recommendations in an 18-month time period.

The issues that we have put into the legislation are:

What are the reasons in our own history that we've seen this incredible increase in incarceration?

What do other countries do, particularly other countries that have the same basic governmental systems that we do, how do they handle comparable types of crime?

What should we do about prison administration policies and prison management?

How can we bring more quality, stability, and predictability in terms of the prison environment itself?

What are the costs of the current incarceration policies; not only in terms of the billions of dollars that we spend on building prisons or the billions of dollars we spend on housing people in prisons, but in terms of lost opportunities with our post-prison systems and how we can better manage that area?

Also what is the impact of gang activities, including these transnational gangs?

How should we approach that issue, not simply in terms of incarceration, but as a nation that is under duress from not being able to respond properly to these gang activities?

Importantly, what are we going to do about drug policy - the whole area of drug policy in this country?

And how does that affect sentencing procedures and other alternatives that we might look at?

We need to examine the policies as they relate to the mentally ill.

We should look at the historical role of the military when it comes to how we are approaching these cross-border situations, particularly on the Mexican border.

And, importantly -- I want to say this to all of my colleagues -- any other area that the Commission deems relevant.

This is our best effort, after two years, at coming up with a universe that needs to be examined. There are many people, including the Senior Senator from Pennsylvania here on the floor, who have worked on these areas for a number of years, and if they have specific findings that they believe the Commission should review, we are very happy to accommodate that.

The first step for the Commission would be to give us factual findings, and from those findings, the second step would be to give us recommendations for policy changes. The same areas that I was just addressing in terms of the findings apply in terms of the policy recommendations: how we can refocus our incarceration policies, work toward properly reducing the incarceration rate in fair, cost-effective ways that still protect our communities; how we should address the issue of prison violence in all forms; how we can improve prison administration; how we can establish meaningful re-entry programs.

I believe that with the high volume of people who are coming out of prisons, we must, on a national level, assist local and state communities in figuring out a way to transition these people so that those former offenders who are not going to become recidivists will have a true pathway to get away from the stigma of incarceration and move into a productive future.

Again, importantly, the last category: any other aspect of the system that the Commission or the people participating in it determine necessary. This is our approach. I am very gratified to have had as initial cosponsors on this legislation six members of the Senate Judiciary Committee, including, as I mentioned, the Chairman, Senator Leahy; the Ranking Republican, Senator Specter; the Chairman of the Subcommittee on Crime and Drugs, Senator Durbin; the Ranking Republican on that Subcommittee, Senator Graham; and a number of others, including our key Democratic leadership, most importantly our Leader. I would hope that we can get this legislation done this year. This is an issue that doesn't percolate up in the same way. It doesn't have a programmatic element to it, in many cases, but it is an issue that threatens every community in the United States and begs for the notion of fairness.

With that, I see that the Senior Senator from Pennsylvania is on the Floor. I want to say how greatly I admire the work that he has done in this area over many, many years and how much I appreciate his support on this endeavor.

I would like to express my appreciation to the Senior Senator from Pennsylvania for joining me on this legislation and in this endeavor, because it will be an endeavor, as the Senator knows, well beyond the legislative approval of the Commission. I would think this is going to take years. But I would like to express my appreciation for that, for his comments today and for all the work he's done in this field.

………………………..

I would just like to emphasize a couple of things in reaction to what the Senator [Arlen Specter] mentioned. I do believe we can meaningfully address this problem. A solution is perhaps a more elusive word but we can certainly meaningfully address this problem. I think it's very important to say that it is in the interest of every American that we do so. There are a lot of people who will look at this and talk about specific elements of who has committed a crime and whether you should do the time and these sorts of things, but we really need to sort it out.

When we have 5% of the world's population and 25% of the world's prison population, there are better ways. When we still have public safety issues in every community because of gang violence, and particularly transnational gang violence at this moment, there are better ways. That is the purpose of having a commission, getting the greatest minds in this area in the country together with a specific timeline to bring us specific findings and recommendations for the entire gamut of criminal justice in this country. Not simply incarceration, not simply gang violence, not simply reentry, but all of those and others together so that we can have a much-needed and long overdue restructuring of how we address the issue of crime in this country.

James Surowiecki's column on why Europe is refusing to intervene more aggressively in the financial crisis is quite good. He writes, correctly, that Europeans are haunted by the specter of hyperinflation (which is the sort of thing that follows massive stimulus), that the European social safety net means that "a recession has a less dramatic impact on people’s daily lives," and that Europeans believe America will carry much of the load and that they can free ride on our largesse.

That last point is sadly true. America, after all, has no choice but to intervene aggressively. The absence of a robust social safety net means year-to-year growth is the only way to avoid prolonged economic misery. "The U.S. economy, much more than Europe’s, is like the proverbial shark," writes Surowiecki. "If it doesn’t keep moving forward, it dies (or at least creates a lot of misery). In some sense, we need economic growth more than Europe does. It’s not surprising that we’re going to be the ones who end up paying for it."

Europe, though, may come to regret this stance. The increasing size of the Eurozone and the fall of the Soviet Union means they're much more dependent on both nearby economies and the global economy. If Poland falls -- and Poland, along with much of the post-Soviet bloc, may well fall -- Germany and England and France will pay. That's probably why the German Finance Minister has already said that Germany would bail out any European country that was on the brink of collapse. "Don't underestimate the importance of that claim," Martin Wolf warned at a dinner panel earlier this week.

And don't underestimate the importance of Germany. People are saying that "Europe" is reluctant to act, but it's really Germany holding tight to the reins. They live in constant fear of the hyperinflation that birthed the Weimar Republic and they're extremely loathe to take a leadership role in European economy. "They will act," predicted Wolf, "bur only on the doorstep of Armageddon. Not a second before."

Paul Krugman's column today begins with a shot at Larry Summers but quickly turns into one of Krugman's best. In it, he gracefully tracks the recent growth of the financial sector, tracing its transformation from "a staid, even boring business" that accounted for less than four percent of GDP in the 1960s to a monstrously lucrative and risky industry that was more than eight percent of the GDP of the world's largest economy. How you understand the regulatory implications of that growth, Krugman says, is crucial to how you understand Geithner's plan:

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

That's exactly right. I've been thinking about this in more radical terms. To be more specific, I've been thinking about this in terms of antitrust law.

In its simplest terms, antitrust law addresses the dangers of size. In general, the danger it addresses is anticompetitive behavior, which usually takes the form of monopoly power, but can also take the form of collusion. In both cases, the effect is fairly simple: An economic threat to a functioning market.

The "too big to fail" problem, which is a problem unique to the massive financial sector that has emerged in modern times, is also, fundamentally, a problem of size. A firm grows too large and the simple fact of its size poses a threat to the continued health and survival of the market. The dangerous mechanism here is not, to be sure, anticompetitive behavior so much as dangerous levels of interconnection. In that way, it's harder to speak of it in the moral terms that undergird antitrust law. But it is no less dangerous, and no less intrinsic to size.

Which is all to say that I fall with Krugman on this: The financial sector should be smaller and regulated more tightly to curb the incentives that encourage wild risk. And more to the point, the individual actors should be smaller. There is no solution to the "too big to fail" problem save for breaking up firms that cant be allowed to fail, or preventing them from reaching that size in the first place.

It's a good analogy. And a good article. In particular, it does something fairly few articles have done thus far: Attach numbers to the various parts of the plan.

The first portion, where the FDIC insures investors buying bad loans, is looking at a knowable pool of toxic loans that's around $230 billion. That's the piece of the plan that's gotten the most attention.

The second piece focuses on a particular group of securities: Residential-backed mortgage bonds that were once AAA but have been downgraded. Right now, there's about $153 billion of these suckers. It's hard to say whether that's very close, or very far, from the number that has to move off the bank books and back into the market. The Treasury Department doesn't know either: This portion of the plan was fairly vague and the financing offered by the Treasury is much less attractive. That suggests they're unsure of what's needed and worried about losing too much taxpayer money.

Then there are the commercial mortgage-backed securities and other asset-backed securities that were AAA-rated but have since been downgraded. Time calculates there's about $37 billion of these.

All in all, we're looking at $420 billion in toxic assets and loans that the government wants to get off of bank sheets and into the market. The theory of the plan, of course, is that these are probably worth quite a lot more than $420 billion, and so saying that's the pool isn't necessarily saying that's what we'll spend. If it was, this would be fairly easy.

• Geithner's bank plan: Now with numbers!

• What the IMF would tell the United States, if it could?

• Private equity nonsense.

• The world's dumbest deliberative body.

• In defense of the jelly bean.

Ouch. And Norah O'Donnell fillets Mike Pence.

The Center for American Progress's paper advocating a public insurance option inadvertently does a good explaining my doubts about this debate's importance to health reform. But first, it's worth quickly explaining what a public insurance option is a separating the three types of public insurance plans that are being used in conversation:

What Is a Public Insurance Option? The buzzword in health reform is "choice." Every plan under serious consideration offers Americans a choice of private insurers operating under government regulation. So you'll be able to compare the benefit packages, prices, networks, and satisfaction ratings of various health insurers and decide which makes the most sense for your family. A public insurance option would simply mean that one of these choices is a government-run insurer. It's not single payer. It's public-private competition. You like the private offerings better? Choose them. Prefer that your insurer isn't driven by profit? Go public. It's up to you.

But a public insurance option can be structured in a number of ways. And the structure matters. The three most common proposals are:

• Single-Payer Lite. This was the rationale you heard during the primary campaign. A public insurance plan able to use Medicare's bargaining power to secure deep discounts for its customers and ensure the maximum possible network would be cheaper and more efficient than private insurers. Over time, this increased efficiency would make the plan more attractive because it could offer more coverage for less money. As consumers recognized this fact, they would increasingly migrate towards the plan, and the public insurer would become, if not a de facto single payer system, something close to it. The public insurer, in this scenario, is a game changer. But it's a game-changer because it's a form of single payer using a mild version of monopsony buying power.

• The Level Playing Field Plan. Insurers, predictably, howled that a public insurer with access to Medicare's market power would put them out of business. (Generally speaking, liberals agreed with that.) The messaging they settled on was conceptually odd but has proven pretty effective. A public insurer, they argued, would not be competing on a "level playing field." This might have caused someone to wonder when, exactly, the market had ever cared about "fair." But instead, this frame has been widely adopted, with Obama telling Chuck Grassley, "I recognize that there's that concern. I think it's a serious one and a real one. And we'll make sure that it gets addressed." In answer to this, Len Nichols proposed a public insurance plan that doesn't have access to Medicare's bargaining power, and this is the policy that CAP's paper advocates. This is not single-payer lite. It's just an insurer without shareholders or highly-paid executives. (I should note that some, like Harold Pollack, believe you could begin with this plan and end with the single-payer lite plan. I'm not convinced, but its possible.)

• The Catch-All. I've heard that the insurance industry and some advocates are interested in a compromise that looks a lot like Medicaid choice. Here, you'd have a public insurance option, but only for people making under a certain income level. It's a way of folding Medicaid into the new system.

The single payer lite version is worth fighting for. But it will face much the same political problems of, well, single payer. Republicans may not be very good at writing budgets, but they're not stupid. The Left isn't going to open Medicare without anyone noticing. So there seems, in recent weeks, to be a strategy to redefine success as the level-playing field plan. Len Nichols' proposal is getting a lot of pick-up, and more tellingly, the Center for American Progress embraces the neutered version of the public plan in their latest paper. It's true that the plan described in those proposals would still, technically, be "public," but it wouldn't be able to do the thing that public insurance does well: Bargain. Instead, it would try and eke out efficiencies by being a particularly good insurance citizen, and while that may work, it won't revolutionize the system by any means.

If some liberals want to define success in terms of a true, relatively unrestrained, public plan, that makes sense. But the compromise measure, though it may be good policy on its own terms, does not rise to the level of game changer or deal breaker. It would be a brutal fight for what amounts to a particularly gentle non-profit insurer. There are a number of industry concessions that would be more powerful than a neutered public insurer, including systemwide integration or comparative effectiveness that could be used in purchasing decisions.

Not to geek out too much, but this transcript of Obama talking to the Commander of the International Space Station is pretty cool. The kid in me was pretty thrilled to hear that Commander Fincke say, "we go around the planet once every 90 minutes. It's quite a thrill, and it is very fast, and we see 16 sunrises and 16 sunsets every day."

Transcript after the jump.

THE PRESIDENT: Hello, Commander, can you hear us?

COMMANDER FINCKE: Welcome aboard the International Space Station, where we're joined with our international crew from the Space Shuttle Discovery. Welcome aboard. Glad to hear your voice. We hear you loud and clear, sir.

THE PRESIDENT: Well, thank you so much for taking the time to speak with us. We've got a crew of wonderful schoolchildren here who are all interested in space, and we've got some members of Congress who are like big kids when it comes to talking to astronauts.

I'm told that you're cruising at about 17,000 miles per hour, so we're glad that you are using the hands-free phone. (Laughter.)

COMMANDER FINCKE: Mr. President, we go around the planet once every 90 minutes. It's quite a thrill, and it is very fast, and we see 16 sunrises and 16 sunsets every day.

THE PRESIDENT: That is unbelievable. Well, the first thing we want to do is just let you know how proud we are of you. I've got to say especially, once I found out that you're from Bellwood, Illinois --

MISSION SPECIALIST MAGNUS: Mr. President, it was a beautiful place to grow up, and I have a lot of roots that are still there.

THE PRESIDENT: Well, that's great. We are really excited about the project that you're doing. My understanding is, is that you are installing some additional solar panels on the space station, and that's actually going to increase the number of people that can work out of the space station, is that correct?

MISSION SPECIALIST PHILLIPS: Sir, that's correct. We've roughly doubled the amount of solar power available for experimentation and for supporting a larger crew, and we hope to go to a crew of six and a more aggressive experimental program this year.

THE PRESIDENT: Well, this is really exciting, because we're investing back here on the ground a whole array of solar and other renewable energy projects, and so to find out that you're doing this up at the space station is particularly exciting.

Can I ask, how exactly do you end up installing these solar panels? What's involved? Somebody want to give us a rundown on how you go about doing it?

MISSION SPECIALIST SWANSON: Yes, sir. First it comes up on a truss segment, about five feet long. We use a robotic arm to attach it to the -- into another truss segment. And then once that's attached and bolted on through spacewalks, then we'll go ahead and unfurl or actually deploy the solar rays in a position so that we can unfurl from inside during the commanding with new software.

THE PRESIDENT: About how long does it take?

MISSION SPECIALIST SWANSON: It takes about, to put it all together, about six hours, but you actually do the commanding to actually deploy them out to their full length -- it takes about two hours.

THE PRESIDENT: Well, obviously we're really proud about the extraordinary work that our American astronauts are doing. You are representative of the dedication and sense of adventure and discovery that we're so proud of. But one of the things that's wonderful about this is that it is an international space station. And I know that we have our Japanese and Russian counterparts on board, as well. We'd love to say hello to them -- and hope that this is an example of the kind of spirit of cooperation that we can apply not just in space but here on the ground, as well.

MISSION SPECIALIST WAKATA: It's an honor to have a chance to talk with you, Mr. President. We have a Russian crew member, American crew members, and I'm from Japan. And we have 50 countries working together in this wonderful international space station, as well as on the ground, in space. And this really symbolizes the future of the scientific development of the world. And I'm just happy to be part of this.

THE PRESIDENT: That's wonderful.

MISSION SPECIALIST LONCHKOV: Mr. President, we work together to do everything. It's really, really important for us. And the American, Russian, Japanese, everybody, people, all people, work together.

THE PRESIDENT: Now, I notice you're bouncing around quite a bit there, guys. Are you wearing something to strap you down, or are you about to float away?

COMMANDER FINCKE: Mr. President, we're just holding on with our toes on to some handrails below us, and at any moment we could all just easily float up. And that's one of the fun things about flying in space; we get a chance to talk to a lot of kids and show them all the adventures that we have, flying around. It's also -- it's not just a lot of fun, it's a little bit tough on our bodies; you have to exercise. And so we get a chance to talk to a lot of schools while we're up here, schools all over the planet to help inspire the next generation.

THE PRESIDENT: Yes, I hear that you're going to be talking to my alma mater, Punahou School, when you fly over Hawaii.

COMMANDER FINCKE: We're looking forward to that, sir.

THE PRESIDENT: All right, well, you tell them aloha.

Listen, we've got a bunch of young people here. I want to see if any of them have some questions.

Anybody have a question over here? Okay, this -- hold on, we've got a young lady right here who's got a question.

Q As a astronaut, what do you eat?

THE PRESIDENT: Did you hear that question? They want to know what you guys are eating up there.

MISSION SPECIALIST ARNOLD: We're eating really well. We eat a lot of -- it's prepared at NASA, but it's kind of like the backpacking food. It's dehydrated, re-rehydrated, and warm it up. We also use -- have food similar to Meals Ready to Eat that they use for the military and that a few of us ate last year when the hurricane came through Houston.

THE PRESIDENT: Do you guys still drink Tang up there? (Laughter.) I've got Bill Nelson here, and he says that's been taken off the menu. (Laughter.) That's, by the way, before the time of you young people. We used to drink Tang. (Laughter.)

We've got a young man right here. Hold on one second.

Q Can you play videogames in space?

THE PRESIDENT: Can you play videogames in space?

MISSION SPECIALIST PHILLIPS: We can, in fact. And in fact, a few years when I was up here for six months I had a videogame that I used to play in my spare time -- although, fortunately, we don't have much spare time. So we can; we have a lot of laptop computers. But for the most part we stay real busy doing our real work.

THE PRESIDENT: So the -- tell us what kind of experiments are you doing? Once you got the panel up, what kinds of other activities are you doing? Is it mostly just maintaining the craft, or are there certain experiments or projects that you're engaged in, as well?

MISSION SPECIALIST MAGNUS: Well, sir, we have experiments already up here that we've been doing for many years and we'll be able to double that with the addition of the full array that our shuttle friends brought up.

We do a lot of experiments on combustion, understanding materials, understanding how -- you know, we're guinea pigs -- so understanding how people's bodies change in space, and all this is in preparation for long-duration missions to the moon and Mars.

And the exciting thing about doing science up here is we really don't know what we don't know, and that that gives you the greatest potential for learning. And we've had a lot of cases where people have set up experiments, and we've conducted them here on the space station, only to find out that we've learned something new, something more about the fundamentals of the processes and the science. So it's a really great place to learn a lot.

THE PRESIDENT: Outstanding.

Any of the young people have another question? This young man right here? Hold on one second.

Q Have you found any life forms or any plants out in space?

THE PRESIDENT: That's a good question. Any life forms out there other than you guys?

MISSION SPECIALIST MAGNUS: We're actually doing an experiment on this mission to take a swab or a sample of the surface of the EVA, the spacewalker's gloves both before and after the space walk. And that's a -- that was sort of a demonstration of the type of technology that we'll be able to use on the moon and Mars for the same purpose, to try and see if we can determine what sort of bacteria or micro-organisms are living in the various environments we're going to encounter.

We unfortunately haven't really found anything here. I think we'll have much more success at finding new types of life and different structures when we go to places like the moon and Mars and moons of Titan and these other types of environments.

THE PRESIDENT: Excellent question. All right, I've got a young man back here.

Q What things did you have to study to be a astronaut?

THE PRESIDENT: All right, that's a good question. You guys are all extraordinarily trained. What -- if we've got some budding astronauts over here, what should they be doing? I'm assuming they better hit the books on science and math.

PILOT ANTONELLI: You got it just right. The -- one of the beautiful things about getting to work here is you can study just about anything that you're really interested in -- science and math being a big part of it. But we have medical doctors, geologists, engineers, and physicists in the group here with us. So it's pretty much anything in the math and science field. We've got a couple of schoolteachers here with us studying education, as well as the math and science.

But there really is room up here for everybody. The important part, though, is to work really hard and do well in school. It will make a difference in your future.

THE PRESIDENT: And what about -- what about fitness requirements these days? Some of us remember watching The Right Stuff, where -- that's pretty impressive. (Laughter.) Is there a particular requirement --

COMMANDER ARCHAMBAULT: Well, Mr. President, the fitness requirements are still --

THE PRESIDENT: Go ahead, I'm sorry.

COMMANDER ARCHAMBAULT: Mr. President, the fitness requirements are still there. As a matter of fact, the International Space Station just recently incorporated a new fitness machine. It's a very, very fancy workout machine seen in a gym, but it's called the ARED, and we can do a lot of good exercises on it, the leg -- strength training for your legs, as well as your upper body. So, particularly for the long duration folks, it's very important to maintain your muscles in good tone and to help you readapt when you get back on planet Earth.

THE PRESIDENT: Excellent. Okay, there's -- a young lady back here had a question.

Q When you say you "exercise," what do you do?

MISSION SPECIALIST ACABA: Well, we have a couple of different exercise machines up here. On the space shuttle we brought up a -- it looks like a -- the bicycle that you would find in a gymnasium. So we can use that. And they have one here on the space station.

And the other machine, you can do all kinds of stuff. You can do squats, you can do curls. We have a lot we can do. We also have a treadmill, so you can go ahead and run up here in space.

THE PRESIDENT: Okay, we've got another question from a young man. Hold on.

Q Do you know how many stars there are in space?

THE PRESIDENT: Asking how many stars in space. I'll be interested in hearing the answer to this one. (Laughter.)

COMMANDER FINCKE: Aboard the International Space Station, we can look down and see our beautiful planet Earth, and we can also look up and see the rest of the cosmos. And we can see that there are so many stars out there that it's very hard to count them all. And we can see that our Earth is a very small -- very small planet in such a big universe. And it's just really amazing, because it gives us a deep perspective of -- we have to really take good care of our own planet -- and that our own planet is just a -- is a small place, and we have the whole rest of the universe to work together in an international sense and go explore this whole universe that's in front of us, and all the discoveries that we'll make together.

So maybe we'll someday be able to count how many stars that we have, because we're starting to go to -- go to the stars as human beings together. And that's what's really exciting about serving aboard the International Space Station and flying up and down on space shuttles, is that we're part of that great adventure.

And we need you kids to study hard, because we can't do it all by ourselves. We really need you guys to work hard, and do whatever you're supposed to do, and do it well, like Tony said, because there's a whole universe in front of us.

THE PRESIDENT: I had a quick question. Does weightlessness have an impact in terms of your ability to sleep?

MISSION SPECIALIST ARNOLD: Sir, we just arrived here, just a few days ago, and it's taken a while to get used to -- for me, personally, missing a pillow. You're used to laying down on a mattress and having a place to rest your head. So it's taken a while to get used to that.

THE PRESIDENT: Well, I know the kids got a chance to ask some questions. I want to make sure that if there are any members of Congress who've got some questions that they're interested in, that they've got a chance, too.

Okay, hold on. This is Kay Bailey Hutchison from Texas.

SENATOR HUTCHISON: I understand that you are doing experiments on salmonella, and watching those organisms, and how they react and grow. And we've had some salmonella problems here on Earth. What do you think you will be able to learn from the environment in space that maybe you couldn't learn here on Earth?

MISSION SPECIALIST PHILLIPS: I'm actually going to have a bit of a hard time answering that question. We do, indeed, have an experiment called the National Laboratory Program experiment, in which salmonella are -- in which certain micro-organisms are exposed to salmonella. My job as an astronaut was basically to turn the crank and activate the experiment. Then after about four or five days, I turn the crank again and deactivate it.

I'm not exactly sure what the scientists are going to do with the data back at home or with the samples. We are returning, however, eight big vials of samples of these cultures of micro-organisms and salmonella, and let the scientists go to work.

THE PRESIDENT: Does Bill Nelson -- he knows a little something about this stuff.

SENATOR NELSON: Hey, guys, I wish I were up there with you. You are just getting to the point where it's really looking like a full-up national laboratory where we can really do the experimentation. When will you have it full-up, ready to go, where we can then reap the results of that $100 billion investment?

COMMANDER FINCKE: It's nice to hear you again, sir. The International Space Station has already been delivering some of the science we've promised. Where are now is -- and Expedition 18, our crew, is we're making the turn from three people to six people. The next crew that comes after us, a few months after we get replaced will have six people onboard the International Space Station. So that's why we needed the solar power, that's why we needed the second toilet and other things, so that we'd have room and facilities for six people.

And once we have six people, we'll have enough time and energy -- solar power, I mean -- to run all the experiments that we can. And then it's just a matter of getting enough experiments up and down from the space station to really reap on that science. We've already been delivering and we've got a lot more to come. And like Sandy said, there's a lot of things we don't know, so there's some really interesting discoveries out in front of us.

THE PRESIDENT: Do any of the young people have any more questions? Hold on one second, we've got one here.

Q Do you love doing your job?

THE PRESIDENT: They asked if you love doing your job.

MISSION SPECIALIST WAKATA: Yes, it's wonderful to work in space. Ever since I saw Apollo VII, the lunar landing, when I was five years old, I always longed for going to space and work. And here the dream came true. I had to study hard and worked hard, but I'm so happy to be here and I'm loving living here and working with so many wonderful people here.

THE PRESIDENT: Just a couple of logistical questions. How long did it take -- from the time of launch, how long does it take to get to the space station?

COMMANDER ARCHAMBAULT: Well, Mr. President, let me answer that in two ways. First of all, it takes up about eight and a half minutes to get to orbit, and at that time we're going 17,500 miles an hour. But we're in a bit of a tail chase with the space station, and it's approximately about a day and a half to two days later that we actually rejoin with the space station.

THE PRESIDENT: Okay, so eight minutes just to get into orbit, but then you've got to basically try to catch up with the space station and match up so that you can lock in.

COMMANDER ARCHAMBAULT: Sir, that's exactly right.

THE PRESIDENT: Okay.

Anybody have any more questions? Hold on one second.

Q What's your favorite or the most interesting experiment you're working on up at the space station?

THE PRESIDENT: Okay, do you guys have a favorite experiment right now?

MISSION SPECIALIST MAGNUS: That's a really tough question, because they're all interesting in different ways. Mike and I were doing a flame experiment where we're trying to help the scientists on the ground understand how fire behaves up here -- there's all kinds of reason for that. So that was interesting because it's sort of an unusual environment to intentionally put a fire.

I think one of the ones I like the most is an experiment that we're doing on ourselves to try and understand how our nutritional state changes and our biochemistry changes, and that will help us design food and understand a little bit more about the processes that the human body undergoes. That's probably my favorite one. But there's all kinds of interesting things in all of the experiments.

THE PRESIDENT: Now, can I ask you a question? Were you tempted to cut your hair shorter while you were up there, or do you -- is it fun in weightlessness? (Laughter.)

MISSION SPECIALIST MAGNUS: Well, that's a really good question, because it is a little bit of -- to take care of long hair in here. I think ideally a short haircut is the way to go, but quite frankly, on me it wouldn't be so nice, so I kept it long.

THE PRESIDENT: I think it's a real fashion statement. (Laughter.)

Hold on one second, we've got another young man back here.

Q How much spare time do you have on the day -- in the day?

THE PRESIDENT: How much spare time do you have? It sounds like you guys are pretty busy.

MISSION SPECIALIST ACABA: They do keep us pretty busy up here and we have a very tight schedule that starts from the moment you wake up until the moment you go to sleep. But they give us a little bit of time in the morning to get yourself ready, get yourself cleaned up, have some breakfast. And the same in the evening. So we can use that time to either call down to our family and friends, or maybe even check our email and see how things are going back on Earth.

THE PRESIDENT: Now, that's interesting. Does email work pretty much the same between the space station and computers here on Earth?

COMMANDER FINCKE: Mr. President, as just about everybody on the planet knows, is that email is a pretty important way for us to keep in touch with each other. Even though we're really far away and traveling really fast, we still use email also. Unfortunately, we only synchronize our email once or twice a day, sometimes three times a day. So it's not as fast and instantaneous as we are used to on the ground, but even so, it's a really useful way to get in touch with other people.

In addition, we have kind of an Internet -- voice-over Internet protocol telephone, so it's really nice that we can get the a chance to talk to our families -- not 24/7, but when we do have good satellite coverage we do get the chance to call home. And that's -- for those of us who stay up for a long time, that's really important to us.

THE PRESIDENT: Excellent. All right, well, I know that you guys probably have a whole bunch of stuff to do, but I think that we may have one more question from a member of Congress. Hold on one second.

REPRESENTATIVE KOSMAS: Thank you very much. My name is Suzanne Kosmas, and I actually represent central Florida, the area that includes the Kennedy Space Center. So I want to first thank you on behalf of all Americans for your service to us and for what you represent in terms of America and our supremacy in space exploration, along with our international partners, and for what you're doing there at the International Space Station.

I had the honor of being at the Kennedy Space Center last week when you took off and it was a fabulous, absolutely fantastic launch. And we -- so I wished you adieu from there, and now I'm wishing you hello from here.

I want to thank you again for your service, and tell you how excited I am to be representing the Kennedy Space Station and that area, but also for what you do that inspires people to be interested in the science and technology that has led us to this pioneering place where you are. And the things that we anticipate that we will be able to reap from your service I'm very thrilled about, particularly the idea, as the President has said, of alternative energy and the fact that you're using solar panels in space -- what we're hoping in the long run that you will be able to, from space, use solar energy to come back to Earth.

And again, I'm thrilled to be here and very excited to have the opportunity to talk to you. And thank you so much for your service to our country.

THE PRESIDENT: Well, I think that all of us echo --

COMMANDER ARCHAMBAULT: Thank you, ma'am, we appreciate that. And each one of us here is very lucky and honored to be right where we're at here today, so the honor is all ours. We're honored to be here doing this great work.

THE PRESIDENT: Well, I think all of us echo the sentiment. We are extraordinarily proud of you. We're so grateful that you took the time to speak to all of us. I know these young people are pretty excited to be on a direct link with astronauts in space.

So does everybody want to say good-bye?

AUDIENCE: Good-bye --

THE PRESIDENT: All right. They're all beaming. And we appreciate you guys -- so look forward to seeing you when you're back on the ground. God bless you.

COMMANDER ARCHAMBAULT: Thank you, Mr. President. And on behalf of the Space Shuttle Discovery crew here in the dark blue shirts, I want to say we're very honored that you spent some time with us today. It meant a lot to us. We thank you very much.

And from one Chicago guy to another, I wish you well, sir. And for closing comments, I'll pass the microphone off to Commander Mike Fincke, Commander of the International Space Station.

THE PRESIDENT: Thank you.

COMMANDER FINCKE: Mr. President, I'm not from Chicago -- I'm sorry about that. But my crew and I are really happy to have a chance to talk to you and share our adventure with even more people. It's pretty impressive what human beings can do when we work together constructively, and not destructively. And that's the mission of the International Space Station.

So thanks for joining us. Thanks for flying with us at 17,500 miles an hour today. We're glad to have a chance to share it with you and the distinguished members from Congress, as well as all the kids out there.

So, everybody, thanks again for joining us.

THE PRESIDENT: Thank you, guys. Bye-bye. (Applause.)

John Rogers:

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

Bush, famously, described his first budget by saying, "It's clearly a budget. It's got a lot of numbers in it." Indeed it was, and did. This isn't. There are no numbers. Let me repeat that: The Republican budget proposal does not say how much money they would raise, or spend. The Oxford English Dictionary defines a "budget" as "an estimate of income and expenditure for a set period of time." This is not a budget. It talks about balancing the budget but doesn't explain how. It advocates tax cuts but doesn't estimate their costs. It promises to cut programs but doesn't name them. The threat going around the Capitol is that some impish Democratic chairman will ask the CBO to try and score the Republican proposal.

The health care section, for instance, says that Democrats propose "nearly $1 trillion" in health care spending as a "downpayment" on reform. The actual number is $634 billion, which someone who's more familiar with, you know, numbers, might have characterized as "more than $600 billion," or, alternately, "$634 billion." The Republicans say that "the prime focus of [the Democrats] agenda is the establishment of a government-run health insurance plan," a policy idea that doesn't appear in the President's budget. They say that the Lewin Group has analyzed this policy that doesn't exist and found that it will force three out of four Americans onto government-run health care (the Lewin Group analyzed the Economic Policy Institute's proposal, which is not the President's budget). And so on, and so forth.

The Republican proposal, as you might expect, doesn't actually have a health care plan. But it does have this: "Republicans will be on the side of quality versus mediocrity, affordability versus unsustainable debt, and freedom of care versus bureaucrats in control. And we will be on the side of patients, doctors, and the American people." They are also in favor of good things rather than bad things, moving forward rather than going backwards, the hobbits rather than the orcs, and always twirling, twirling, twirling towards freedom. That said, the GOP does understand that some voters might be looking for specificity on their health plan. So they included this graphic:

It's like someone showed them a flowchart. Once. And only for a few seconds. And refused to explain it. My editor Ann Friedman just walked into the room. "It looks like they're building a budget molecule," she said.

A budget molecule. Maybe that's what they were doing.

Steve Waldman has some further thoughts on James Surowiecki's argument that the FDIC's protection of private investors in the Geithner plan will work like the FDIC's long-time role protecting private depositors (and thus, banks). Waldman doesn't buy it. But particularly interesting are his insights on how the FDIC's depository insurance changed in recent years. Two decades ago, he suggests, the FDIC's role in guaranteeing bank capital did not look like the Geithner plan. In 2006, it did.

Ed Henry, beaming with pride . . . at self. He's an "amazing" "provocative" "gambling" "quarterback" who "pounced"

Obama's jab is even more cutting in context of Henrys comically self-congratulatory column today. You might ask, for instance, why Henry decided to ask abut A.I.G., rather than about, say, the Geithner bailout plan. henry takes us through his thinking: "The pressure was on now because the president had called on me. Someone handed me a microphone, millions were watching, and it's scary to think about changing topic in a split second because you might get flustered and screw up. But it's fun to gamble and like any good quarterback (though I was never athletic enough to actually play the position), I decided to call an audible."

An audible. Alrighty. But more interesting than Ed Henry's high opinion of Ed Henry is the strategy that he took into the press conference.

At the first presser in February, I was about the 10th reporter the president called on. The economy had been chewed over so I went with a "sidebar" question about whether Obama, given his push for transparency, would overturn the policy at Dover Air Force Base preventing media coverage of coffins returning from Iraq and Afghanistan.

It was a surprise line of inquiry. The president made news by saying the policy was under review -- and a few weeks later he overturned it.

I was heading into this event with the same strategy: make news on something unexpected (I won't tell you which topics I was working on cause it would ruin the surprise for a future presser or interview with the president).

"Make news" is an interesting formulation for a reporter. I'm pretty sure the J School graduates are taught to "report" news, or maybe "explain" news. But creating news is rather a different goal. Inserting himself into the story, however, is well-aligned with Ed Henry's incentives. A lot more people know Ed Henry's name today than did a week ago. Henry can now write a column congratulating himself for standing tall in the face of the President's ire. It's similarly well-aligned with his industry's incentives. Though the American people might appreciate seeing the President offer a substantive explanation of his policy ideas -- 32 million of them, after all, watched the press conference for exactly that -- it's not the sort of thing that the cable channels can replay in bite-sized chunks. They're better off "making" a new news story that can lead tomorrow's Situation Room.

In some ways, the primary divide over the Geithner plan seems to be a question of political prediction: Do you believe, as Paul Krugman and Martin Wolf do, that if the Geithner plan fails, it will make the American people less likely to support a more aggressive recapitalization policy down the road? Or do you think, as the administration appears to, that if the Geithner plan fails, it will prove they have exhausted all possible options and convince the market that private measures cannot solve this crisis, thus easing the way for more aggressive interventions?

It also implies a debate that I don't think has emerged quite so clearly: What will Congress allow right now? The choice might not be between Geithner and nationalization, but Geithner and a different, and similarly insufficient, compromise.

One of Laura Tyson's interesting remarks last night came in reply to a questioner who faulted the White House for insufficient ambition. Her response had nothing to do with policy or economics. It was abut Congress. "They accomplish what they can accomplish within the realities of the Congress," she shot back. "And the Democratic coalition is breaking already." Critics, she said, need to stop focusing on the White House and begin focusing on Congress. Tyson is pretty plugged in. It's a safe bet that if congressional obstruction has colonized her thinking on this matter, and Brad DeLong's thinking on this matter, then it's probably what's obsessing the administration, too.

Nick Kristof wants some. He also runs through some of the psychological evidence suggesting we vastly overrate the predictive value of expertise. It's a good column.

"Think of this from the perspective of individual citizens," she said. "We're the ones who are going to see a huge increase in homelessness, in people without health care, in people without unemployment benefits, and in people not getting the education they need. The Europeans are right to say that they have strong automatic stabilizers in effect. From the perspective of Americans, it's worse for them. They're undercapitalized, overleveraged, and they don't have a serious safety net protecting the key things they need to worry about."

This might, she implied, help explain why America has been so much more aggressive about countering the crisis. They are much more vulnerable to recession than the Europeans. As evidence, she brought up every economist's favorite bugaboo: Japan's lost decade. It was bad for growth, she argued, but not particularly devastating to individuals. "The Japanese households, in the last decade and a half, they never experienced the economy the way economists experienced it," she said. "The economist saw the economy as in dire shape. You asked the average Japanese person if they were in dire shape, they didn't see it that way."

You could argue, on the one hand, that this serves the American system well. We're not insulated from emergency and so we respond swiftly and, relative to the Europeans, decisively. But it also worsens crises by further slackening economic demand. A consumer afraid of losing her health care and her child's college education and her income will pull much further back than a consumer who feels the fundamentals of her existence are secure.

At dinner last night, Tyson spoke of the downward multiplier that crises of confidence can inflict: The economic impact of Lehman's collapse, she says, was multiplied because it devastated the financial system's confidence in its own survival. The analogy holds to our safety net, where consumer reactions to fiscal instability are multiplied because they can't be certain of their economic survival.

Americans tend to begin their narrative at the subprime housing crisis. Wolf doesn't. He begins his narrative in the flight of emerging market capital. In recent years, he argues, emerging countries began to view current account deficits as inescapably tied to currency crises. They turned to surpluses as the answer. The currency reserves of developing economies shot from $1.5 trillion to $7 trillion. That money had to go somewhere. And their bank, essentially, was our country.

But creating the level of demand necessary to absorb that amount of money is actually dangerous for an economy. Wolf argues that recent bubbles were not accidental. "The biggest stock market and housing bubble in history were both in the last decade," he said. "And both were supported by monetary authorities. Their purpose was to sustain demand."

Tyson offered another version of Wolf's story. In broad outlines, it was quite the same: Global pressure forces the United States to generate much more demand than it can actually sustain. But she identifies a different causal trigger.

"Living standards," she said, "are decided by the supply side, not the demand side." She invoked Harvard economist Richard Freeman's argument that in the 1990s, "China, India, and the ex-Soviet bloc joined the global economy and the entire world came together into a single economic world based on capitalism and markets. This change greatly increased the size of the global labor pool from approximately 1.46 billion workers to 2.93 billion workers." He calls this "the Great Doubling."

Tyson recalled it in her remarks. "As the supply side increased," she said, "we supported the demand side in an unsustainable way." American workers were making less but consuming more. They funded this with credit, with borrowing, and with bubbles.

If the cause was global, than it follows that the consequences were global. "Lehman's failure was the game-changing event," explained Soros. It proved that a financial system could fail. The United States responded with an implicit guarantee that they would not allow any other banks too fall. Our country had the credibility to offer that assurance. Others didn't.

"Countries at the periphery of the system couldn't guarantee against failure in the way America could," Soros continued. "So capital fled their markets for our market. When our dollar strengthened, Eastern Europe and Brazil went into crisis." We were able to respond so aggressively, and borrow the necessary funds at such low rates, because capital has fled the peripheral economies and sought haven at the U.S. Treasury. But that implies a certain responsibility to those peripheral economies. "The emerging countries cannot print money," concluded Soros, "so relief needs to be provided so they can protect their banking system and spend countercyclically."

The problem, of course, is that America would have trouble finding the funds to backstop a national financial crisis. Ending a global financial crisis may be beyond even our capacity. But it is, of course, the preferred outcome for every other country, particularly the European economies that might otherwise be expected to contribute aggressively. "No one will help America if America's willing to run these debts," said Wolf. "The rest of the world wants to free ride."

This cartoon showing a jackbooted Zionist rolling over Gaza might be offensive, or unfair, but it doesn't strike me as particularly anti-Semitic. Abe Foxman, somewhat predictably, disagrees. "Pat Oliphant's outlandish and offensive use of the Star of David in combination with Nazi-like imagery is hideously anti-Semitic," he railed. "It employs Nazi imagery by portraying Israel as a jack-booted, goose-stepping headless apparition. The implication is of an Israeli policy without a head or a heart."

But implying that Israeli policy lacks head and heart is not anti-Semitic. It's not an assertion of an intrinsically Jewish trait. Jack boots and goose steps are not traditional anti-Semitic tropes. Foxman appears to be confusing anti-Semitism with criticism -- even extreme and offensive criticism -- of the Israeli government. And it's really not a good thing to be forcing critics of Israel to decide whether they are also anti-Semites. In some cases, you'll intimidate the critic into silence. And in others, you'll normalize anti-Semitism.

Related thoughts here.

Warning: I'll be keeping an eye on this comment thread. Keep it civil.

• Why Tim Geithner fears nationalization.

• Why Nouriel Roubini likes Geithner's plan.

• Why this guy quit A.I.G.

• Why the public insurance option is controversial.

• Why you should make certain you're reading Brian Beutler at TPM DC.

In six minutes of clicking, I have learned the following things: You should not rinse chicken before you eat it. You should not eat pizza that sat out overnight. I should probably pick up the pace on my salt-packed anchovies. And you can refrigerate canned food in the original can. Thats six minutes of knowledge that will last me a lifetime.

(Image from here.)

That's a bit of a weird line to draw. Dean's health reforms in Vermont did not include a public insurance option. His health reform plan in the 2004 campaign did not include a public insurance option. As a matter of policy, I should say that I strongly favor a public insurance option. But it's hardly the main determinant of real reform: It's more the most politically controversial element of reform. And though I'm glad to see progressives fighting for it, it shouldn't become the be-all end-all determinant of success. You could imagine a very poor health reform that includes a public option and a pretty good health system with no public option at all. At the end of the day, things like subsidies, Medicare's negotiating power, delivery system reform, comparative effectiveness, and system-wide integration are probably much more important than a public insurance option. Making that the sole effort of your campaign looks to me like going where the controversy is rather than where the policy needs to be.

One aspect of the nationalization debate that gets insufficient attention is that the federal government already nationalized a bank: They took over IndyMac Bank in July. Estimates were that cleaning its balance sheet and selling it back to the private market would cost between $4 billion and $8 billion.

So how'd that turn out? Last Thursday, the FDIC completed the sale of IndyMac. Taxpayers sustained a $10.7 billion loss, not including the $2 billion in shareholder wealth that was wiped out. Ryan Grim has the whole story. It's true, of course, that the sophisticated advocates of nationalization hold that nationalization would be less expensive for taxpayers, not inexpensive for taxpayers. But it's worth preparing for a world in which even that will feel awful and look bad. This is one of those situations where even if the liberals see their favored policy adopted, there will be few winners and no sense of triumph.

One of the themes of my health care coverage is that so far as interest groups go, it's actually a lot easier to see how you get the insurers to buy into health reform than, say, the medical device companies. As evidence, over the past few months, the insurers have slowly been moving towards supporting the structure that basically undergirds the Democratic consensus: An individual mandate mixed with guaranteed issue (insurers can't deny you coverage) and community rating (insurers have to offer everyone the same price regardless of past health history).

A month or two ago, AHIP -- the insurers' trade association -- came out in support of guaranteed issue and an individual mandate. This was largely laughed at. It was an admission that if everyone had to buy health insurance, they'd sell it at some price or another. But today, they've come out in favor of community rating, too. And not just community rating, but "more aggressive regulation of...benefits, underwriting practices and other activities."

The devil, of course, is in the details on this sort of thing. And you could still see AHIP bolting into opposition against the inclusion of a public plan. But they've thus far evinced a willingness to find compromises, which is a strategy in contrast to the device and pharmaceutical companies, who went absolutely nuts at the first sign of comparative effectiveness. That's not really a surprise. You could imagine a pretty efficient universal health care system in which the insurance companies did just fine. Indeed, competing on price and quality in a universal system should actually be a better proposition than competing on risk shifting in a system where 47 million people -- and two million more every year -- can't afford their product. It's a more sustainable business model. The opposite, however, is true for device and pharmaceutical companies in a more efficient system. Given that estimates suggest 30 percent or so of care is wasted, an efficient system would support less, rather than more, of their products.

Related: Jon Cohn -- you've heard of him, right? -- has a nice post on Pharma's early positioning.

The trailer for Where the Wild Things Are.

Jon Cohn and friends have been having a good debate on the Massachusetts health reform experience over at The Treatment. Cohn gives the plan a qualified pass. "The big success," he says, "is the expansion of insurance coverage," and he's right about that. Diane Archer is less impressed.

But the post worth reading closely is Jon Gruber's. Gruber, an economist at MIT, helped design the legislation. He argues, rightly, that attacking its absence of cost control is like attacking this post for containing insufficient insight on early period Silver Surfer comics. The original Massachusetts legislation didn't seek to control costs and this post isn't about Silver Surfer. But that doesn't close Gruber's story. The Massachusetts coverage reforms, he argues, reshuffled the political incentives to render cost control a more pressing issue than it had previously been:

Nevertheless, the Massachusetts law explicitly did not take on the fundamental determinants of medical cost growth--and this is, in my mind, the genius of the approach. For decades, efforts to move towards universal coverage have always floundered on the shoals of cost control. For thirty years we have seen growing numbers of uninsured for one reason: because well-meaning reformers have tried to fit the square PEG (pun intended) of cost control into the round hole that is political viability. And when they lose, they take the uninsured with them.

What is particularly frustrating is that Archer and others miss the fact that doing coverage first is the single most important thing we can do to get to cost control. To see this once again we need look no further than our experience in Massachusetts.

We have one of the strongest and most effective advocacy groups for health care for the poor in the country, Health Care for All (whose former director and key architect of the Massachusetts law, John McDonough, is now directing the efforts for national reform at the Senate Health, Education, Labor, and Pensions Committee). After playing such an important role in passing our law, this group suddenly realized that their hard won gains may be lost if we didn’t eventually figure out a way to control health care costs. The result was an intense and broad-reaching campaign that resulted in the most significant cost-control legislation we have seen in Massachusetts in at least fifteen years. This includes the appointment of a commission that will revisit exactly the type of provider payment disparities that Archer highlights in her response.

This legislation, and commission, would simply not have happened without our reform law motivating concerted action to preserve the gains we have made for the uninsured. Whether this commission can make headway in a state so dominated by the health care sector is uncertain, but at least more progress is being made than had been made in recent years.

The lesson in Massachusetts, in other words, is not that it didn't control costs after not trying to control costs, but that there's an embedded political logic to doing coverage first. If you let health reform fail because you can't gore enough oxen to control costs up front, then you end up with neither cost control nor coverage expansion. Costs are then controlled in the ad hoc way they've been controlled for decades now: individuals are thrown onto the uninsured rolls.

But if you expand the system and create an entitlement of sorts, the political system's incentives shift and they need to protect the popular entitlement and figure out how to make it sustainable. Cost control becomes an administrative necessity -- rather like passing a budget or keeping Social Security solvent.

Related: A limited health care success in Massachusetts.

This is a useful distinction from Noam Scheiber:

At the very least, it's important to distinguish between two classes of people who often get lumped together under the heading "Wall Street." The first are people who mostly work at hedge funds and private equity firms. These people tend to be a little younger on average, a little more heterodox in their thinking, maybe a little more liberal in their politics. The second group frequently resides at larger corporate entities like big commercial banks--often big investment banks, too (though the distinction is disappearing these days). These people tend to be a little stodgier in their thinking and a little more conservative in their politics. (These characterizations aren't universally true, of course--my two-category classification is still pretty crude. But it's a decent place to start.)

These are, in general, the folks Obama's staffers are talking to, and they are sympathetic to them: A Democratic-leaning high-achieving Ivy League economics major who decided to seek political success relates more intuitively to a Democratic-leaning high-achieving Ivy League economics major who decided to become very rich than he is to someone who isn't a high achieving Ivy League economics major with the ambition to excel in a high profile industry. I'm not sure how to correct for it or what the precise impact is, but there's a class sympathy that's been evident in the response to this crisis -- oh, don't take their bonuses, they did nothing wrong -- and will continue to affect the federal response.

On a related note, William Cohan had a nice rant on how the extreme incomes offered to college graduates perverted workforce incentives, and why we should look forward to that ending.

I've uploaded the official Summary of the Chairman's Mark here. Particularly worth noticing is the degree to which Conrad's rhetoric echoes the Obama administration's preferred messaging -- the title is literally "Laying Foundation for Long-Term Economic Security With Investments in Energy, Education, and Health Care, Cutting Deficit in Half by 2012 and by Two-Thirds by 2014" -- and the final page, where he explains his decision to return to the five-year spending window.

As part of its effort to increase transparency, the Obama administration returned to the practice of presenting a 10-year budget this year. However, the economic volatility we are experiencing has significantly increased the level of uncertainty surrounding current economic forecasts. The Chairman’s Mark, therefore, follows the more common practice – and the statutory requirement – of presenting a five-year budget plan.

The reality is we simply don’t know how long the current downturn will last and how severe it will be. And the uncertainty surrounding our near-term economic projections makes long-term projections even more uncertain than they normally are.

Okay, he didn't say that. But it would have been cool if he did, right? And he's certainly the most likely of the administration's officials accidentally revert to 1337 speak.

What he did say, on a conference call a few minutes ago, is that "we are very pleased that the House and Senate budget committees are considering proposals that are 98 percent the same as the budget proposal the President sent out in February." He said that "out of 18 discretionary spending categories, 13 are exactly the same in the Senate and 12 are the same in the House."

The biggest change, he admitted, is the removal of the Making Work Pay tax cut, which passed for two years in the stimulus act and which the administration wanted to make permanent in the budget. That's out. Orszag emphasized that the tax cut exists for the next two years and the White House would continue working to etch it into the lawbooks more permanently. He also got off a sly riposte in response to the critique that the administration is raising taxes on the richest Americans and will thus impede their dynamism and our growth.

"I reject the notion that they key to future prosperity is the top marginal tax rate," he shot back. It's a good line, and conceptually, an important statement of what separates the Obama administration's economic philosophy from the Bush administration's. If you think the drivers of growth are in the top one percent, and that top one percent is exquisitely sensitive to small changes in marginal tax rates, your policy proposals will be rather different than if you think prosperity and security for the broad middle is a more sustainable approach to growth.

Felix Salmon, James Kwak, Brad DeLong, and Mark Thoma had a group chat about the Geithner plan last night which is worth a read. During it, James Kwak asked, "What do you think is the benefit of using private sector as opposed to just the government. The amount of $ is small. Is it the expertise that we are missing? Or political cover? Or something else?"

I've increasingly come to the conclusion that we're paying the private market to launder both our current and eventual policies: To ensure that our prices don't carry the taint of government and our eventual judgment of insolvency, if indeed it proves necessary, does not seem the overreach of some bureaucrat. As I've written before, I've few firm conclusions on whether nationalization is necessary. But I'm increasingly convinced that even if it is, we're not ready for it yet. The success of the policy will depend on the technical competence of the regulators and the specific construction of the takeover, but also on the psychological reaction of first the market and then the electorate and then the political system. Priming them is as important as granting the FDIC legal authority.

I don't think they're primed. So long as the banks are continuing to assert their solvency and the private investors oppose receivership and the Republicans are advocating absurd policies like spending freezes, it's hard to imagine a swift nationalization being greeted with resigned consensus rather than furious opposition from moneyed interests. And the last thing you want in the immediate aftermath of nationalization is uncertainty about the level of political support and market forbearance.

Kwak is right that the pricing function of the market is smaller than the government is suggesting and being compensated at a level that's simply galling. But if the Geithner plan effectively co-opts the market for the next step by using their credibility to set prices and their inability to buy the assets to prove insolvency, then that might prove to have been a good investment indeed. And it's not a wild supposition. This week, the Obama administration will send legislation to Congress asking for the legal authority to nationalize. They may not want to use that authority, but they are certainly readying themselves for a world in which more aggressive intervention is required. The Geithner plan, whether intentionally or unintentionally, fits neatly into such preparations.

Take the $634 billion reserve fund that was supposed to partially pay for health reform. In Conrad's budget, which is to say the Senate's first draft of a budget, there will be no $634 billion reserve fund for health reform. But there will be space for a health reform reserve fund. Conrad deleted the President's specific revenue streams, cost-cutting proposals, and ending number. He says that health reform must be fully paid for in the budget. That means that rather than $634 billion, Congress will need, as they always would eventually, to find the whole of the estimated trillion or so needed to pay for health reform over 10 years.

Oh, right. The 10 years thing. Conrad offered a huge concession to reformers. He's pulling the budget's spending window back to a five-year perspective. That hides the size of the 10-year budget. But he's allowing health care to be scored under an 10-year time frame so that initial investments in system reform have time to pay themselves off. The system, in other words, doesn't have to be deficit neutral over five years, which will see bulk of the upfront investments, but over 10, when those investments should begin paying their dividends. To give you an idea of how important this is, Max Baucus's immediate response was “I’m very happy that health care reform does not have to be paid for in the first five years. We could not do meaningful healthcare reform [otherwise].”

The next question is why Conrad deleted the President's specific revenue streams. The $300 billion that came from limiting itemized deductions for the rich, for instance, is gone. As is the proposal to squeeze Medicare's overpayments to private insurers. Some argue that that's actually a good thing: Watching the itemized deduction proposal get batted around in recent weeks was an important lesson. You can't let pieces of the bill -- particularly the hard financing pieces -- stand alone. It's easier to oppose a tax hike than universal health care. It has to be built, and then argued, in its totality.

On the other hand, the Senate must now find north of $1 trillion for health reform over 10 years rather than $500 billion or so. That's a heavier lift.

Lastly, Conrad's decision not to include reconciliation is both less meaningful and more politically savvy than it might initially seem. The key here is that the House budget will include reconciliation. And the two budgets must merge in conference committee. The Senate can still import reconciliation instructions from the House budget at a later date. What Conrad has just done, in other words, is undercut the Senate Republicans' ability to justify non-cooperation on grounds of reconciliation. Senate Democrats can now claim, credibly, that they are not considering the reconciliation process. Which means the balls is back in the Senate Republicans' court: They now have their opportunity to prove that this can be a constructive process conducted through the normal procedures of the Senate. If that proves impossible, Senate Democrats can sigh deeply and gravely lament the obstruction of their colleagues and return to reconciliation after conference committee.

Related: Jon Cohn has more. And don't you feel like reading a longer explication of the reconciliation process?

Without getting too far into the particulars of Amanda's argument about Ross Douthat, I'd suggest that Brad DeLong's lament that his post on Ross Douthat and sex got more comments than his post on the Treasury Plan is fundamentally misguided: The number of comments a post gets is not, in any way, analogous to the importance attached to the post by commenters. As example, a post I wrote yesterday on the DMV -- in which I unwisely made a glib joke about Kafka -- amassed 50 comments. A post I wrote summarizing an interview with the Swedish Finance Minister who ran his country's nationalization effort got exactly zero comments. Comments are not a reflection of how much your audience cares about a topic. They are a reflection of how much they have to say on it.

As a blogger, I think that actually exerts a subtly pernicious influence on my writing. The posts I write that get the least comments are those with actual reporting in them: Congress did this, or an administration official explained that. The second worst are wonky posts. It's easy enough to understand why those pieces end with single digit comment sections: There's less to say about a fact than about an argument. But since I, like many bloggers, use the vibrancy of my comment sections as a way to not feel like a crazy person ranting in cyberspace, too many low comment posts in a row and I itch to write some pieces that generate a bit of discussion and prove that my cyberfriends are still out there. I'm not sure that's always the best impulse.

I managed to miss it, but the transcript suggests that there wasn't a single question about the massive plan to risk a trillion dollars in taxpayer money to save the banking system. But The Washington Times managed to ask about stem cells. WTF, press?

I've danced around this point a bit, but a friend made an observation to me last night that I found fairly clarifying. I'm paraphrasing from conversation, but the problem with assessing the bailout plans, he said, is that this really is very complicated, and the only people who understand it have substantial Wall Street experience. But those people are so socially and professionally intertwined with Wall Street that they can't possibly be objective about their friends or the system. If only Wall Street knows enough to fix Wall Street, then you can hardly be surprised when Wall Street's interests come out fairly well in the bargain. That's not a matter of corruption so much as perspective: Wall Street, as it once stood, is firmly embedded in the architecture of their mental economic model. That goes, of course, double for the actual bankers the Obama administration has invited into the regulatory process.

Saying that our regulators are captured is not the same thing as saying that their answers are wrong. The direct problem it presents is credibility, which creates a secondary problem of analysis. Only the government has access to the full data set -- the stress tests and the FDIC's self-assessment of capabilities and the bank books and the Federal Reserve information and all the rest. A lot comes down to how much you trust that the government is analyzing that information correctly and using it wisely and presenting it to people who are equipped to assess it objectively. It's part of why I find it hard to come to a firm conclusion on what should be done. Not only are the issues complicated, but so too are the players, and their biases.

• "Can conservatism properly push back against a popular culture that it doesn’t really understand?"

• Rating agencies discredited.

• Is a food revolution now in season?

• Paul Krugman, Brad DeLong, Mark Thoma, and Simon Johnson debate the Geithner plan.

Joe Stiglitz is pretty hard on Geithner's plan here, calling it nothing short of "robbery of the American people." I think that may be going a bit far: The robbery came when Wall Street made countless bad bets that the taxpayer now needs to cover. The losses that Stiglitz fears will apportion to the taxpayer whether we use Geithner's approach or Krugman's ideas. The question is how much potential upside the Congress sees.

I'll also echo Matt Yglesias, who says, "the most distressing thing about the criticism from folks like Krugman and Stiglitz is what you can infer reading between the lines from how ferocious it is. They, and other leading critics, are acting like people who’ve been totally shut out of the consultation/communication loop. And it’s distressing to see people of their stature and expertise getting shut out while the administration works harder on kissing Wall Street’s ass to try to persuade the finance class to avoid deliberately sabotaging the economy."

You could argue, I guess, that Stiglitz and Krugman have uniquely bad personal relationships with the administration, and so their experience shouldn't be generalized. (Stiglitz has a longtime feud with Summers and Krugman's war with the Obama team dates back to the primary, when they stupidly tried to release an attack document discrediting the good professor.) But it would be nice if some prominent expert dissenter were being given the access and respect that's apportioned to, say, David Brooks. I'd really like to read the ultimate conclusions of a knowledgeable skeptic who'd been able to test his arguments against the Obama administration's thinking on these questions. But instead it's just been a lot of opaque briefings that misrepresent the points of the critics. Which in turn pisses the critics off. Which in turn seems to compel the White House to freeze them out further. Which in turn...

For some time, Specter was the sole Republican supporting card check in the Senate. Now, facing a primary challenge from Pat Toomey and a lot of corporate money and pressure, he's folded. Hot Air reports:

According to Americans for Tax Reform, Senator Arlen Specter has committed to voting against cloture and passage of the Employee Free Choice Act, better known as Card Check. In a message to a conservative listserv, ATR announced Specter’s opposition, a switch from his declared position in previous sessions of Congress.

Meanwhile, I'll just add that I'm shocked -- shocked! -- to learn that some conservatives also use e-mail lists to communicate.

I have sought recognition to state my position on a bill known as the Employee Free Choice Act, also known as card check. My vote on this bill is very difficult for many reasons. First, on the merits, it is a close call and has been the most heavily lobbied issue I can recall. Second, it is a very emotional issue with Labor looking to this legislation to reverse the steep decline in union membership and business expressing great concern about added costs which would drive more companies out of business or overseas. Perhaps, most of all, it is very hard to disappoint many friends who have supported me over the years, on either side, who are urging me to vote their way.

In voting for cloture - that, is to cut off debate - in June 2007, I emphasized in my floor statement and in a law review article that I was not supporting the bill on the merits, but only to take up the issue of labor law reform. Hearings had shown that the NLRB was dysfunctional and badly politicized. When Republicans controlled the Board, the decisions were for business. With Democrats in control, the decisions were for labor. Some cases took as long as eleven years to decide. The remedies were ineffective.

Regrettably, there has been widespread intimidation on both sides. Testimony shows union officials visit workers’ homes with strong-arm tactics and refuse to leave until cards are signed. Similarly, employees have complained about being captives in employers’ meetings with threats of being fired and other strong-arm tactics.

On the merits, the issue which has emerged at the top of the list for me is the elimination of the secret ballot which is the cornerstone of how contests are decided in a democratic society. The bill’s requirement for compulsory arbitration if an agreement is not reached within 120 days may subject the employer to a deal he or she cannot live with. Such arbitration runs contrary to the basic tenet of the Wagner Act for collective bargaining which makes the employer liable only for a deal he or she agrees to. The arbitration provision could be substantially improved by the last best offer procedure which would limit the arbitrator’s discretion and prompt the parties to move to more reasonable positions.

In seeking more union membership and negotiating leverage, Labor has a valid point that they have suffered greatly from outsourcing of jobs to foreign countries and losses in pension and health benefits. President Obama has pressed Labor’s argument that the middle class needs to be strengthened through more power to unions in their negotiations with business. The better way to expand labor’s clout in collective bargaining is through amendments to the NLRA rather than on eliminating the secret ballot and mandatory arbitration. Some of the possible provisions for such remedial legislation are set forth in an appendix to this statement.

In June 2007, the vote on the Employee Free Choice Act was virtually monolithic: 50 Senators, Democrats, voted for cloture and 48 Republicans against. I was the only Republican to vote for cloture. The prospects for the next cloture vote are virtually the same. No Democratic Senator has spoken out against cloture. Republican Senators are outspoken in favor of a filibuster. With the prospects of a Democratic win in Minnesota, yet uncertain, it appears that 59 Democrats will vote to proceed with 40 Republicans in opposition. If so, the decisive vote would be mine. In a highly polarized Senate, many decisive votes are left to a small group who are willing to listen, reject ideological dogmatism, disagree with the party line and make an independent judgment. It is an anguishing position, but we play the cards we are dealt.

The emphasis on bipartisanship is, I think, misplaced. There is no special virtue in having some Republicans and some Democrats take similar positions. The desired value, really, is independent thought and an objective judgment. It obviously can’t be that all Democrats come to one conclusion and all Republicans come to the opposite conclusion by expressing their individual objective judgments. Senators’ sentiments expressed in the cloakroom frequently differ dramatically from their votes in the well of the Senate. The nation would be better served, in my opinion, with public policy determined by independent, objective legislators’ judgments.

The problems of the recession make this a particularly bad time to enact Employees Free Choice legislation. Employers understandably complain that adding a burden would result in further job losses. If efforts are unsuccessful to give Labor sufficient bargaining power through amendments to the NLRA, then I would be willing to reconsider Employees’ Free Choice legislation when the economy returns to normalcy.

I am announcing my decision now because I have consulted with a very large number of interested parties on both sides and I have made up my mind. Knowing that I will not support cloture on this bill, Senators may choose to move on and amend the NRLA as I have suggested or otherwise. This announcement should end the rumor mill that I have made some deal for my political advantage. I have not traded my vote in the past and I would not do so now.

For one thing, the FDIC insurance is an explicit deal: Banks are covered in return for immense regulatory transparency and constraints. The risks they can take with our money are, or at least have been until recent years, sharply circumscribed. The hedge funds and investment entities likely to participate in this auction will not be subject to the same federal oversight or behavioral modification. The risks they can take with our money will not be unlimited in the sense that the FDIC will pre-assess the loans to decide leverage, but nor will a particularly strict regulatory regime precede the insurance.

The second objection is that even if the rules were exactly similar it's not obvious the markets would behave analogously. The FDIC-insured banking market deals with lots of small loans within a fairly staid and settled business model. The asset auctions, by contrast, are a wholly new market opportunity relying on massive individual investments that carry tremendous potential upside amidst a moment of historic uncertainty. Not only is the structure of the market different, but it's subject to a lot more animal spirits right now, and we're not even sure which animals are represented.

The Mayor of Castro Street: The Life and Times of Harvey Milk

Little in American life gets described as "Kafka-esque" with quite the regularity of the DMV. That's possibly a sign that fairly few people have read Kafka (updating your registration isn't really like turning into a cockroach), possibly a sign that Americans are used to pretty impressive amounts of bureaucratic efficiency, and definitely a sign that folks don't like the DMV very much.

For instance: My registration and inspection expired at the same time. In order to renew my registration, I need to pass inspection. But in order to enter inspection, I need to present my registration. The DMV's answer, of course, is a five-day temporary registration that can only be obtained at their service locations. Thus an extra trip to everyone's least favorite bureaucracy.

To put it slightly more succinctly: Wah. Blogger is mildly inconvenienced. But I'm interested in the why of it. There's no point of more regular contact between bureaucracy and individuals. There's no more culturally recognized irritant. It's the governmental equivalent of the dog shit problem. And it has the advantage of being concrete: School investments that improve retention a decade in the future don't assure reelection. But voters would know who to thank if they ceased dreading the DMV. As such, you'd imagine that every big city mayor would make streamlining the DMV his first order of business and talking about how he streamlined the DMV his second. The political incentives are pretty clear. And the potential political reward, when compared to the required investments, are striking.

And to be fair, it sometimes happens: On February 3rd, 20009, Mayor Fenty announced that the DMV would begin issuing renewal alerts over that new e-mail technology that the kids are so enamored with. Good on ya, Mayor. But Fenty has been in office for years. He just got the DMV to adopt e-mail?

Kevin Drum thinks it through:

Three things, at least: (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way.

The solvency question will be settled -- depending on who you ask -- by the stress tests or the banks proving unable to sell assets at a price investors can accept.

As for the legal authority, The Washington Post reports that the administration plans to send legislation to Capitol Hill this week that would "give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document."

Conversations with administration officials have left little doubt that the administration hopes the Geithner plan will fix the banking system, or at least go a long way towards doing so. But they've also emphasized that the Geithner plan is the next step in an evolving process -- it simply spends down preexisting TARP money, after all -- rather than the administration's endpoint. And this legislation giving Obama the authority to nationalize is part of that cautious. The White House hopes the Geithner plan will work. But they're making contingency plans for what to do if it doesn't.

Benjamin Sarlin interviews Bo Lundgren, the Swedish Finance Minister who conceived and implemented the nationalization strategy in the 1990s. Lundgren is positive about the Swedish experience, but far from dismissive of concerns that it wouldn't work in the United States.

Last weekend, my best friend, an aid worker in Sierra Leone, was in a motorcycle crash. Injuries were serious but not life threatening. The worst of it were three breaks in his leg: Two clean, one less so. After a couple days in a Sierra Leone emergency room, his evacuation insurance kicked in and he was flown to a small town in Germany (no one quite knows why) to receive treatment.

My friend does not speak German. He does not know anyone in Germany. He wants to come home and receive his care in the states. He wants a doctor he can communicate with and nurses who can understand his requests and friends who can speak to him and calls that aren't subject to international fees. But his insurance is refusing the request. Medical treatment, they're arguing, is simply too expensive in America.

As a matter of economics, they're not wrong. In their seminal paper, "It's the Prices, Stupid," Uwe Reinhardt and Gerard Anderson marshal an impressive array of evidence to prove that the cost problem afflicting American health care is a per unit problem: It's not that we use more care, or use more technologically advanced care, but that we pay much more money for any given unit of care. They write:

A study by the McKinsey Global Institute followed that more in-depth approach. The research team, which was advised by a number of prominent health economists, based its analysis on four tracer diseases: diabetes, cholelithiasis (gall stones), breast cancer, and lung cancer. Using PPP-adjusted U.S. dollars as the common yardstick, the McKinsey researchers found that in the study year of 1990 Americans spent about $1,000 (66 percent) more per capita on health care than Germans did. The researchers estimated that Americans paid 40 percent more per capita than Germans did but received 15 percent fewer real health care resources. A similar comparison revealed that the U.S. system used about 30 percent more inputs per capita than was used in the British system and spent about 75 percent more per capita on higher prices.

The best available evidence on how salt consumption affects our health comes from observational studies, in which groups of subjects are investigated to identify any correlations between usual sodium intake and subsequent heart attacks and strokes. Nine such studies, looking at a total of more than 100,000 participants who consume as much sodium as New Yorkers do, have had mixed results. In four of them, reduced dietary salt was associated with an increased incidence of death and disability from heart attacks and strokes. In one that focused on obese people, more salt was associated with increased cardiovascular mortality. And in the remaining four, no association between salt and health was seen.[...]

Only one...rigorous clinical trial on salt intake has been reported so far, and it focused on patients with fairly advanced heart problems. As it turned out, the group that adhered to a lower sodium diet actually suffered significantly more cardiovascular deaths and hospitalizations than did the one assigned to the higher sodium diet.

It's also important to distinguish between table salt and preservative salt. The majority of salt in our diets comes not from the crystals we shake onto pasta but from processed foods that use sodium for its preservative effects. Often, these foods don't even taste particularly salty, but can deliver more than 50 percent of your daily sodium requirements.

Already, various models have emerged for gaming the Treasury plan. Karl Denniger posts one scenario where an institution has $100 billion in toxic assets with a current value of 30 cents on the dollar. That institution -- call them Screw Bank -- bids on its own assets at 75 cents on the dollar. Screw Bank provides 5% of the equity, with the rest covered by Treasury, The Fed and the FDIC via guaranteed bond issuance. The loan, save for Screw Bank's bit of equity, is non-recourse, so they can lose 5% of the total portfolio purchased, but nothing more.

If the assets bust in that scenario, Screw Bank loses 5% of $75 billion, or $3.75 billion. The taxpayer gets hit for the remaining $71.25 billion dollars.

Or imagine a hedge fund buys a pool of assets for 50 cents on the dollar. They also buy a credit default swap against the pool proving worthless. If the pool jumps in value, they make money. If the pool busts, they walk away from the original loan and collect money on the CDS contract.

There are ways, of course, to protect against some of this. But this is what Wall Street is good at: Arbitraging markets and coming up with inventive ways to make short-term cash. And it's not hard to imagine Wall Street being better at coming up with these schemes than the Treasury Department will be at protecting against them.

Political Wire brings us some odd donor data:

Jon Hunstman, Sr., a businessman who is the namesake father of the Republican governor of Utah, last month gave the maximum $30,400 to the National Republican Senatorial Committee and the Democratic Senatorial Campaign Committee. His wife Karen also gave the maximum amount to both Senate campaign committees, which are partisan rivals in the 36 Senate contests that are on 2010 ballots.

The Wall Street Journal has a long piece this morning detailing how the Obama administration learned to stop worrying and love Wall Street. After an apparent initial burst of apathy, the White House began trying to make friends in February. They held pizza parties with traders to talk about the mortgage plan! Obama began referring to the CEO of JP Morgan as "Jamie!" But Wall Street, of course, isn't anyone's friend. And when it came time to build the banking plan, the traders decided to apply some leverage:

Bankers were shell-shocked, especially when Congress moved to heavily tax bonuses. When administration officials began calling them to talk about the next phase of the bailout, the bankers turned the tables. They used the calls to lobby against the antibonus legislation, Wall Street executives say. Several big firms called Treasury and White House officials to urge a more reasonable approach, both sides say. The banks' message: If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses.

But I guess that's Wall Street for you. They'll let you do 90 percent of the work a project, makes sure you'll take the blame if it fails, but will also be right there to take the credit if it succeeds. And they'll call that a favor.

Commenter Cynic reads the bios of the new Treasury appointments and notices a pattern:

What's interesting about the announcement is that the vetting process appears to be driving the selection of new personnel. Wolin is the only one plucked from a private-sector gig, and he was fully vetted and installed in the White House counsel's office two months ago. (He was also working for The Hartford, as opposed to a Wall Street firm, which would have been stickier.) Levey was already in place; if he has issues, we'd know about them. And Brainard comes from a think-tank, and was being vetted for USTR anyway, so the legwork was already done.

I'm not saying this is a bad thing. But there's no one in the top tier of Treasury who's ever spent a day working on Wall Street. That's amazing. It seems that although Obama's vetting procedures and conflict-of-interest policies may have been intended to screen out lobbyists and to place his appointees above reproach, their indirect effect is to make private-sector experience more of a hindrance than a help, and consequently, to make academics and civil servants look more attractive.

Sometimes, it's the unintended consequences that have the greatest impact.

From the inbox:

President Barack Obama today announced his intent to nominate Neal S. Wolin to be Deputy Secretary of the Treasury and Lael Brainard to be Under Secretary of the Treasury for International Affairs. In addition, the President announced that Stuart A. Levey, the current Under Secretary for Terrorism and Financial Intelligence, will remain in that position. The appointments announced today fill three of the four most senior Senate-confirmed Treasury Department positions beneath Secretary Geithner.

Neal S. Wolin, Nominee for Deputy Secretary of the Treasury

Wolin is a Treasury Department veteran who served as General Counsel at Treasury from 1999- 2001, and as Deputy General Counsel from 1995-1999. He served briefly in the Obama White House as Deputy Counsel to the President for Economic Policy and Deputy Assistant to the President before being asked to rejoin Treasury. Wolin formerly served as President and Chief Operating Officer for Property and Casualty Operations at The Hartford Financial Services Group. Earlier in his career, he served in the Clinton Administration as Executive Assistant to the National Security Advisor and Deputy National Security Advisor; and as Deputy Legal Advisor to the National Security Council. He also served as Special Assistant to Central Intelligence Directors Gates, Webster, and Woolsey. Before that, he worked in private law practice at Wilmer, Cutler & Pickering in Washington, DC. Wolin is a graduate of Yale College (B.A., History, summa cum laude); the University of Oxford (M.Sc., Development Economics); and Yale Law School. Wolin was a Law Clerk for U.S. District Judge Eugene Nickerson, Eastern District of New York. He has served as an Adjunct Lecturer in Public Policy at the John F. Kennedy School of Government at Harvard; a Visiting Fellow in Economic Studies at the Brookings Institution; a member of the President’s Advisory Commission on Holocaust Assets in the United States; and as an Adjunct Professor of Law at Brooklyn Law School.

Lael Brainard, Nominee for Under Secretary of the Treasury for International Affairs

Brainard is Vice President and Founding Director of the Global Economy and Development Program at the Brookings Institution. She also holds the Bernard L. Schwartz Chair and is Director of the Brookings Initiative on Competitiveness. Brainard served as Deputy National Economic Adviser and Deputy Assistant to the President for International Economics during the Clinton Administration, addressing challenges such as the Asian financial crisis and China’s role in the global economy. She also served as the U.S. Sherpa to the G8. Previously, Brainard served as Associate Professor of Applied Economics at MIT Sloan School, where her research addressed the relationship between offshore production, trade, and jobs and structural and cyclical unemployment in the US economy. Brainard has also worked at McKinsey & Co. advising corporate clients on strategic challenges. She has also worked on microfinance in West Africa. Brainard received masters and doctoral degrees in Economics from Harvard University, where she was a National Science Foundation Fellow. She graduated with highest honors from Wesleyan University. She is the recipient of a White House Fellowship and a Council on Foreign Relations International Affairs Fellowship.

President Obama also made the following announcement today:

Stuart A. Levey, Under Secretary for Terrorism and Financial Intelligence
Levey was confirmed by the Senate on July 21, 2004 as the first Under Secretary of the Treasury for Terrorism and Financial Intelligence (TFI). (His appointment does not require reconfirmation.) As Under Secretary, he leads an office which marshals the Treasury Department's policy, enforcement, regulatory, and intelligence functions to sever the lines of financial support to international terrorists, WMD proliferators, narcotics traffickers, and other threats to our national security. In this capacity he oversees the Office of Terrorist Finance and Financial Crime (TFFC), the Office of Intelligence and Analysis (OIA), the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the Treasury Executive Office of Asset Forfeiture (TEOAF). In furtherance of the Treasury Department’s national security mission, Levey has guided the development and implementation of financial strategies and authorities aimed at countering threats to U.S. national security and protecting the international financial system from abuse. Levey is responsible for the Department’s efforts to disrupt and dismantle the financial networks supporting terrorist organizations. He has also overseen the development and implementation of financial measures against proliferators of weapons of mass destruction. Levey has played a central role in efforts to combat North Korea’s and Iran’s illicit conduct in the international financial system. Prior to his nomination to his current post, Levey served as the Principal Associate Deputy Attorney General at the U.S. Department of Justice. In that capacity, he was the Deputy Attorney General’s primary staff member with responsibility for coordinating the Justice Department’s varied counterterrorism activities, including investigations, intelligence collection and prosecutions. Prior to assuming that position, he served as an Associate Deputy Attorney General and also as the Deputy Attorney General’s Chief of Staff. Prior to joining the Justice Department in 2001, Levey spent 11 years in private practice at the Washington law firm Miller, Cassidy, Larroca & Lewin LLP. He had a litigation practice with a special emphasis on white collar criminal defense. He also clerked for Judge Laurence Silberman on the U.S. Court of Appeals for the D.C. Circuit from 1989 through 1990. Mr. Levey graduated from Harvard College, summa cum laude, in 1986 and from Harvard Law School, magna cum laude, in 1989.

Felix Salmon wonders:

[B]idders for the banks' toxic assets don't care particularly about the idiosyncratic risks of any given loan portfolio or CDO. Instead, they're worried overwhelmingly about systemic risks associated with the ongoing financial crisis.

Essentially, we are not living in a world where investment prowess is repaid, and the fate of the private-sector participants in Geithner's public-private partnerships is pretty much out of their hands. Either all of these assets are going to appreciate in value, or all of them are going to decline in value. And that's largely a function of what happens to international financial markets and to the global economy as a whole. The potential buyers of these assets can do all the homework they like, trying to bid on slightly better assets rather than slightly worse ones, but the big risks -- to both the downside and the upside -- are systemic

In other words, the private participants in the Treasury plan aren't really adding value, they're just gambling that things are more likely to get better than they are to get worse. For this we need to pay them much more of the profits than their share of the total investment?

Eventually, if things get better, then this kind of plan might make sense: correlations will come back down from 1, where they are presently, and private investors will be able to play a useful role in separating the wheat from the chaff when it comes to those legacy assets. For the time being, however, the days for such sifting remain far in the future. And it's not at all clear why it pays to bring private investors in at this stage.

I agree with everything that Salmon says. But I can also think of a couple other reasons Geithner would want private investors in the market.

First, it gives the prices outside credibility. If the banks really are insolvent, better that be the judgment of the market than the decision of the government. Senator Nelson can argue with Geithner's estimation of the banks. It's harder to argue with outside investors.

Second, they will manage the investments. This seems a job Treasury and the FDIC really want to avoid.

Third, getting private investors to buy-in to this stage of the recovery plan might make it easier to ensure their cooperation with later stages. It may effectively co-opt the participants. Nationalization is one example. If TIAA-CREF vouches for insolvency, the market is likelier to think nationalization an act economic necessity than political capriciousness.

Fourth, the private investors aren't putting up much equity. But they are putting up some equity. Without knowing the FDIC's leveraging decisions in advance, it's hard to pin down a number, but looking at the plans, something between 15 percent and 30 percent seems reasonable. And given that Geithner is trying to stretch every existing dollar to avoid asking Congress for more funds, that might be more important than we give it credit for.

Fifth, they could simply be afraid of the market. More so even than they fear pundits. Though plenty of folks talk about the need to ignore the daily whips of the Dow, Geithner certainly took a lot of damage from the market's reaction to his initial announcement, and you could argue that the administration economic hand remains weakened as a consequence of that damage. Maybe they feared a repeat and so built a bill they knew the market would like.

You could probably think up more reasons than this. And it's not clear to me that any of them justify the amount we're paying private investors to involve themselves. But it's possible that the pricing function that's being sold as the primary reason for private involvement is not, in fact, the primary reason for private involvement. After all, the government looks to be doing a lot of the pricing itself.

This morning, Secretary Geithner held a pen-and-pad briefing with reporters. The White House's transcription elves just sent out the Q&A, and it's a worthwhile read. I wouldn't say it's a particularly compelling defense of the plan: Geithner seems reluctant to engage the critiques directly, but because of that, he's never quite able to layout the virtues of this plan versus other plans. Both Brad DeLong and Noam Scheiber are more convincing on the merits of Geithner's approach.

But Geithner's briefing is a useful look into the messaging that the White House is putting behind the plan. The most notable aspect of that is probably their decision to argue against nationalization in terms of risk. For instance:

Another alternative is to have the government come in and purchase directly these assets and hold those, manage them, and sell them over time. That would involve the government assuming much more risk than under this program; create much greater challenges for managing these things sensibly over time; and again leave, in our judgment, the government more exposed, assuming more risk than it should, more exposed to loss over time, and in our judgment not a plausible, effective alternative.

As it is, Geithner's plan sees the government assuming up to 95 percent of the risk (in an investment where the government is maximally leveraged and the asset busts) but it can only reap 50 percent of the potential profit. A move to a strategy wherein the government bought assets on its lonesome would involve a relatively larger increase in opportunity than risk.

You can argue that that's better and you can argue that that's worse. And even if you think that's a better deal were all else equal, there are still other reasons you might oppose nationalization, ranging from fear of market reaction to concerns about federal competence. But it's not clear to me how far Geithner is going to get by misrepresenting the concerns of his critics.

Anyway, full briefing follows the jumps.

SECRETARY GEITHNER: Thanks for coming. Nice to see you. Obviously we're announcing this morning the next stage of our broad plan to help repair the financial system. But I want to start by stepping back, putting this in broader context.

Just to state again the start proposition that to get this economy back on track we need to get this very powerful stimulus program in place as quickly as possible. It will help get millions of Americans back to work, help support and stimulate private investment. But for that to work, we need to move very aggressively to get our financial system back to the point where it's providing the credit necessary for recovery.

That agenda, the financial agenda, which is such a critical complement of recovery, has several critical parts. And let me just walk through these first before I get to the details of today's announcement.

First, we have put in place a series of very powerful targeted programs to help address the housing crisis, to help catalyze small business lending. We are moving to start a –- you saw last week –- a broad-based program to get the secondary markets working again, too. Those markets, as you know, are very critical to the capacity of auto financed markets to work, muni markets, student lending markets, consumer credit markets, also small business markets. And you saw last week that in the first stage of this new fed Treasury program $9 billion in issuance, four times the level of -- more than the last four months alone. And that will make a material difference in bringing interest rates down.

We announced as the first step in our broad framework a plan to make sure that banks have enough capital to survive a deeper recession. We're going through this very carefully designed capital assessment process, that's designed to bring a more consistent, more conservative, more forward-looking view of the scale of losses banks may face in a deeper recession. But the critical part of that program is to make it clear that they will be able to raise capital from the government if they can't raise in the markets so that they can get through a deeper recession. That will help reduce the odds of a deeper recession, help make sure, again, they can provide a level of lending that will be necessary to support recovery.

I just want to start with those three things before I go into today's announcement again, and go through them again to make you understand how important they are.

First, targeted programs to help address the housing crisis which have already helped bring interest rates down, will help millions of Americans be able to refinance, take advantage of lower rates, reduce monthly payments, help reduce foreclosure risk. Targeted program directly at the constraints on small business lending; very strong broad-based program that will help get securitization in markets going again. You saw its first initial launch last week. And a program of insurance -- you could call it capital insurance for the banking system so that banks have the cushion of capital necessary to lend and expand even if the economy goes through a broader -- a deeper recession.

Now, today -- today we're announcing a innovative plan for helping to provide a market for the legacy assets that are a core of this basic problem in our financial system. Right now, you know, banks are still holding on to a large amount of loans that were made before the recession, during the four years in the run-up to the peak of the boom.

Because there's no financing available to the markets, because there's huge uncertainty about the path of the recession, because there's a lot of uncertainty about how to value these assets, these markets are stuck. And to help unfreeze these markets, provide a mechanism for working through these problems, we're announcing today a two-part program.

One piece is a financing mechanism to allow banks to sell pools of loans. One piece is a financing mechanism for investors to sell and purchase securities. Structures are similar, and let me walk through the basic parts of the structures. In each case we're going to put capital alongside capital from private investors with financing from the government. So private investors will share the risk alongside with the taxpayer, and the taxpayer will share returns alongside private investors.

Used as a market mechanism for establishing pricing and value, that will help protect the government from overpaying for these assets and taking risks greater than we should. And it will help bring professional management to these things, and again, all with the objective of reducing risk to the taxpayer, improving our capacity –- have the market work with us to help get out of this.

As you see in the proposals, we expect to put enough capital on the table initially to help leverage or generate between 500 and perhaps up to a million of purchasing power for these programs.

Now, if you think about this alongside the capital program, this will help banks clean up their balance sheets; it will make it easier for them to help raise private capital; it will help provide a market for these legacy assets that will help reduce these liquidity risk premium markets, help reduce the risk that people see further downward spirals in these asset prices, and overall, help increase the lending capacity of the financial system and reduce credit spreads and lending rates.

Now, like any plan, you've got to consider them against the alternatives. One alternative is just to let this dynamic we now see across the system continue. Our judgment is that would result in the risk of greater deleveraging, a deeper credit crunch, greater headwinds for the economy going forward, and a longer, deeper recession.

Another alternative is to have the government come in and purchase directly these assets and hold those, manage them, and sell them over time. That would involve the government assuming much more risk than under this program; create much greater challenges for managing these things sensibly over time; and again leave, in our judgment, the government more exposed, assuming more risk than it should, more exposed to loss over time, and in our judgment not a plausible, effective alternative.

Now, we're the United States of America. We are not Sweden. We have a very complicated financial system. Getting through this requires banks being strong enough again they can lend comfortably through a deep recession, but that's not enough. We have to complement this program to help strengthen the banking system with a range of approaches to help get these securities markets back to the point where they're working again.

So that again the basic mechanics that are so important to small business lending, large business borrowing, consumer borrowing, auto finance, student loans, et cetera -- that entire framework of mechanism is back to the point where it's working better for recovery. So our approach is designed to do both those two things.

Now, we are going through a very challenging environment now. There is deep skepticism across the country, deep anger and outrage, frustration about the point -- about the place we are in as a country, where people that were careful and prudent in their financial decisions, businesses that were conservative in how they chose how much leverage they took on, are facing substantial damage because of the actions of a range of institutions that took too much risk and brought our financial system and our economy to the point where we're facing such an acute, deep recession.

That anger and outrage is perfectly understandable and if we are going to get through this we have to engender more confidence in the American people that we're going to use taxpayer's money effectively and wisely to, again, help get credit flowing again, help reduce borrowing costs. And we want to make sure that our assistance is not going to reward failure, to benefit people who got us into this mess -- and that is critically important.

But as the President said, we also need to make it clear that our actions need to be guided by the basic objective of doing what is necessary to help get recovery back more quickly. And that requires that we have a better functioning financial system, where people are willing to come in and take risk.

The great risk we face now is that after a long period of irresponsibility and excessive risk-taking, that the system will not take enough risk now. And for these programs to work, investors have to be prepared to take risk. And for them to take risk, they have to be more confident than they are today that there's going to be a clear set of rules of the game applied consistently and enforced fairly going forward.

I'm happy to take any questions. Yes.

Q Sir, you mentioned the municipal market. Chairman Frank and about 25 other members of Congress sent you and Chairman Bernanke a letter to provide temporary relief to the short-term municipal debt market. I'm wondering if that's been considered by Treasury, if that's a possibility at all?

SECRETARY GEITHNER: We're taking a careful look at it.

Q Could you repeat the question?

SECRETARY GEITHNER: The question is -- I believe is, a number of members of Congress, governors, elected officials across the country, have encouraged us to explore ways to help bring about further improvements in the muni market. There has been some improvement in the muni market and we are looking at a range of options to see if we help reinforce those improvements, including the specific measures that Chairman Frank and others are considering.

Yes.

Q Tim, obviously you set out the structure and framework today, but for good reasons you haven't delved into the pricing. The pricing on which you make finance available to the private sector will obviously be crucial for understanding how this is likely to affect asset prices and, indeed, then the stock prices and capital needs of banks. Can you at least give us in conceptual terms some indication of what will guide the pricing decisions here on the loans?

SECRETARY GEITHNER: All right, two basic pricing things are at issue here. One is how the price for the assets is established. And the principal -- a principal virtue of this mechanism is to use the financial interests of investors to help set the price. Because they have money at risk, they're going to make better judgments about how to set the price of these assets than the government could hope to make.

There's a second issue about the terms of the financing the government makes available, and let me just establish a basic principle there too. As you see across the range of things that the Federal Reserve has done over the past two years, one basic principle that's important is to say that you establish the pricing so that as conditions normalize, the market will no longer want to or find it economic to rely on financing from the government.

Basic principle underpin all the things the Fed has done and that's why you see in some parts of the Fed programs, the Fed balance sheet is shrinking even though we have a financial system so under acute pressure.

Yes.

Q Have you gotten any interest from the private sector in getting involved in this program?

SECRETARY GEITHNER: We have seen and I expect to see a lot of interest from the private sector.

Q Can you give us any names?

SECRETARY GEITHNER: But, you know, just to say -- just to make a point. You're going to have people -- this is true of any financial crisis -- who want the government to take on much more risk. So there are people who say that we'd like the government to take more risk or a greater share of the losses than this program identifies or anticipates. But I think you're going to see a fair amount of interest in this.

Yes.

Q Yes, on the executive pay parts of this, the plan is to have passive investors not subject to that. But what about the asset managers? Will they be subject to any pay restrictions?

SECRETARY GEITHNER: I'm going to answer this carefully. The basic answer is no. If you're already an institution that's received TARP assistance, then you would be covered by the conditions -- the range of conditions that will apply to people who receive capital from the government.

But these programs are different programs. These are generally available programs. They're designed -- like our housing plan, like the small business plan -- to get these broader markets working again. And for those reasons the comp conditions will not apply to the asset managers and investors in the program.

Q Are you concerned about a backlash from AIG in making that decision?

SECRETARY GEITHNER: No, this was a judgment that -- that broad strategy approach has been at the core of our strategy from the beginning. It was clear in the proposals the President laid out on February 4th. It underpins the subsequent comp conditions that were passed as part of recovery too, and I think there's really broad support for that judgment.

Yes.

Q Thank you. What happens if you go to all this trouble to figure out how much the FDIC is going to offer, in terms of leverage, and get all this together, have the auction, the price comes in, and the bank says, we don't like that price, we don't want to hand over?

SECRETARY GEITHNER: Well, again, you can't know for sure how much participation you're going to get, and people get a chance to sort of assess what the balance is for them. And the incentives banks face are very -- you know, right now, again, you don't really have a viable market in which to unload and sell these assets. But because you're holding on to them, it is harder for banks to generate greater confidence among their creditors and their investors; it's harder for them to raise capital privately.

So they face a balance. This will make it easier for them to raise capital privately because they'll have a cleaner balance sheet; there will be more confidence in the -- externally, people's capacity to evaluate their risk in that context. And that will help induce participation, as well.

But as I said, you know, in financial crises, people always want the government to take more risk, or try to put more of the losses on the balance sheet of the government. And we're trying to find a balance that's better for the taxpayer.

Q How long do you think it'll take to get these things up and running? I mean, it seems like there's a lot of evaluation required by the FDIC and by the banks and by the investors before you could have an auction like this.

SECRETARY GEITHNER: Well, again, the full -- all the financial agencies that are relevant to this are going to work very hard to put it in place as quickly as possible.

One of the great virtues of this is it builds off an established mechanism. The FDIC has a lot of experience in operating and running, and they're optimistic that they can move quite quickly on this front, and we think we also moved quite quickly on the securities front, as well.

I've been going left. I want to go right.

Q What happens if you sent some of the assets they sell, they sell for a low price, and then some of the banks have to write down what they have and some of the new banks become insolvent?

SECRETARY GEITHNER: Well, I don't think you should be particularly worried about that risk in the way this is designed, this program is designed. Because, just to step back a little bit and look at the bank piece of it -- again, banks have a right to sell a pool of loans to a dedicated fund which will bring in private capital with government financing for that purpose, and that helps reduce that risk again.

But again, you should think about this in the context of a broader program where the government is going to provide a facility, in the form of capital, as insurance against the risk of a deeper recession. So you should think about these as complementary things.

In any case, you're going to see the -- remember, the government is -- what we're basically saying is we will make sure that there is sufficient capital in the system for these institutions to manage through -- comfortably manage through a deeper recession. The virtue of that, of course, is that with that confidence, you're going to have a greater lending capacity in the system, reduce risk of sort of progressive cycles of deleveraging, and that'll make it more likely that you get recovery back on track more quickly.

Yes.

Q On the -- Dr. Romer was making the rounds this morning on the program on the networks. And she said that across the programs on the issue of leverage net/net, she estimated that private investors would end up putting about seven to eight cents on the dollar into the programs across all of them at the end of the day. Can you comment on that, and if so, how do you get to that number?

SECRETARY GEITHNER: Well, without looking into exactly what they said, I don't want to comment on her particular thing, so let me just do the basic objectives and design thing.

Again, dollar of capital from the Treasury alongside dollar of capital from a private investor, there's financing available from the government on top of that. For that financing to be at risk, the private investor has to lose all its equity. Okay?

Now, again, you have to look at the structure against the alternatives. And the alternative structures all involve the government taking on much more risk with much less protection against the, you know, endemic problem that governments have in this context of overpaying adverse selection, getting stuck with a range of risks they don't understand and can't manage. So that's what this is designed against. But you're --

Q Do you have a ballpark number on -- at the end of the day, rough estimate where private investors be at risk, or generally maybe --

SECRETARY GEITHNER: The key thing is their capital would be at risk. That's the key thing. So that's the important benefit in that context. So rather than having the government assume all the risk in an asset purchase scheme, you're having substantial risk borne by private investors in this context, and that -- you know, we're not doing that for their benefit. We're doing it because we think that's the most effective way to get these markets working again, to get risk premium down, borrowing costs down, in ways that leave the taxpayer less exposed.

Q But the government will be taking the majority of the risk here once the -- if you're doing one-for-one losses --

SECRETARY GEITHNER: Look, there is no doubt the government is taking risk. You cannot solve a financial crisis without the government assuming risk. The only question is, how best to do it, and what's the best way to do it; what's the way to do it where you get the incentives better and you're maximizing the impact of a marginal dollar of taxpayer assistance. And that's what this is designed to do. And I am very confident this scheme dominates all the alternatives for trying to find that balance.

Yes.

Q The FDIC obviously is very involved here. I talked to individual investors, smaller investors, over the weekend, and some of the stuff that they're worried about is exactly what's going on with the FDIC: one, that the FDIC needed to get that $100 billion credit line; two, are they going to extend the size of deposit insurance, because people are worried about should I buy a $250,000 CD if the insurance is going to expire at the end of the year; and third, what about money markets? Does that -- does the money market insurance program need to expand past April -- the end of April?

SECRETARY GEITHNER: Well, I want to step back one sec, because this is a very important issue. Americans can be fully confident that their deposits in the banking system are fully safe and protected. The FDIC has proposed -- and we are very supportive of this -- a range of different measures to give them a little greater flexibility for managing through this, including, temporarily, through a larger credit line from the government than the Treasury. And I think that's a prudent, necessary step; we're perfectly comfortable about that -- perfectly supportive of that.

Now, it's also important that the FDIC has extended their temporary guarantee program for an additional surcharge, for -- that allows banks and bank holding companies to issue debt at longer maturities. And we've made it very clear that we want to make sure that the banking system has the ability to meet its broader commitments as we go through this challenging period, because that's important to make sure that we allow -- well, it's sort of -- it's just basically central to trying to make sure that, again, there's going to be enough credit and rates come down. So those things are all very important.

Money market guarantee fund is another complement to that. And again, very important for the American people to understand, that we're going to do what's necessary to protect the system, to prevent the kind of catastrophic failure that could cause greater damage to recovery and the financial fabric of the system as we work through this challenging period.

Q It's a very tough question. I mean, one of my friends asked me, should I be thinking about pulling my money out of the money market, you know, when we get to -- when we get to the middle of April?

SECRETARY GEITHNER: Absolutely not. And you see -- again, if you look at, across the system, about the basic response of investors and depositors, I think you see a appropriate degree of confidence that those resources are safe and comfortable.

Yes.

Q Looking at this program, it seems as if you're talking about the TALF, talking about the FDIC -- all of this seems to be designed without having to ask for additional congressional appropriations. Do you anticipate a scenario in which more funding would need to be allocated and appropriated?

SECRETARY GEITHNER: We have substantial resources already provided by the Congress that we're going to put to work in support of this broad program.

In the President's budget, we put a reserve fund in the budget against the possibility that we would judge that additional resources would be required to do this on a scale that would, again, help us get out of this more quickly, at least ultimate cost to the taxpayer. And we will work with the Congress to try to make sure that there are enough resources over time to do this right.

But the judgment about, you know, what's going to be required is a judgment that we don't need to make at this time and are not prepared to make at this time.

But the basic point I want to underscore is that we have substantial resources that we're going to deploy in support of these programs now, and we will work with the Congress over time to try to make sure that we're doing this in a way that has maximum impact on trying to get recovery established more quickly than would otherwise be the case.

And again, the basic lesson -- I'm sorry, you guys, just give me one sec -- basic lesson of financial crises is that you get -- recessions are shorter, they cause less damage, you get lower future deficits, you solve the crisis at least cost to the taxpayer, if you move more forcefully earlier.

Yes.

Q Sir, you need to win back the confidence of the markets and support for your program. You also need the confidence and support from your international partners. Would you say that after Horsham, after the meeting in Horsham, you've moved closer to that goal? And have you heard anything at Horsham that you really liked and thought useful and that you should implement?

SECRETARY GEITHNER: Horsham being, for those of you that don't know, where the U.K. government hosted the last meeting of G7 finance ministers and central bank governors. Am I right, that's what you're referring to? Okay.

Well, as I said, I think you saw very broad-based support around the table in that room among the world's major economies. Those people -- countries in the room represent I think roughly 85 percent of GDP across the globe. You saw very broad support for the basic strategy that you need to have strong, sustained, macroeconomic stimulus; aggressive efforts to help recapitalize, strengthen financial systems; very substantial support for the international financial institutions so that they can -- they can help counteract, respond to this big withdrawal of capital flows from emerging market economies. We want them to be able to deploy a larger amount of resources more quickly in targeted ways to help affect the countries -- to help the countries most affected by the crisis, all in a framework where we're all committing to avoid protectionist measures and reaffirm our commitment to openness to trade and investment.

And alongside that, of course, we want to shape a strong consensus on reform of the architecture of the financial system to help make sure a crisis like this doesn't happen again. And there is very broad support, very broad consensus, across those countries -- countries with very diverse conditions, very diverse financial systems -- on the core elements of a very ambitious set of financial reforms.

So, as I said after that meeting, I think there is a very broad-based consensus, very strong support about those -- about that basic strategy. And I think you see the world really moving with us on this, and I think that will continue, because I think there's broad appreciation across the -- across the world as a whole about the scale of the challenges this crisis presents.

Q Are you saying there is support, there is agreement around American program, that there are no disagreements, the reports about disagreements were incorrect?

SECRETARY GEITHNER: Well, there are -- you know, we all have slightly different financial systems, so the precise mix of tools that we're going to employ domestically will differ. In our system, as I said, you know, banks are a critical role of our system, but we have a very complicated capital market that complements our banking system, and so to get our system through this, we're going to have to do things that other countries don't need to do.

But if you look at the core elements of the program, they all involve a mix of guarantees, funding assurances, capital from the government so you're recapitalizing parts of the system that need to be recapitalized, and where it's necessary, targeted programs. You're seeing many countries follow the lead of the United States in this context -- in the U.K., in Japan, and even other countries -- to provide direct supports for the credit markets as a complement for interventions in the banking system.

So in the precise mix of plans countries will adopt, will vary, of course, as it should, because our systems are different, but on the basic premise that you want to move aggressively, alongside fiscal stimulus to make sure financial systems are working better, there's broad support for that.

Yes.

Q On the pricing question again, sir, you've said the (inaudible) securities are the core of the problem, and moving them is --

SECRETARY GEITHNER: Loans and securities.

Q Loans and securities, critical. Can you tell us just a little bit about the lack of clarity? Is it because -- on the pricing -- is it because you haven't quite --

SECRETARY GEITHNER: You mean the features of what the exact price is?

Q Well, the --

SECRETARY GEITHNER: We're using a -- let's just step back for a sec. What we're using is a market mechanism to establish the price. So people will have to compete for the ability to take advantage of the financing program and the capital in order to do that.

So, you know, until you see that process work, you won't know where the market will clear.

Q The point is, they -- the potential investors -- can't tell how much it's going to cost them from the documents you've put out because the terms of the loans are still not --

SECRETARY GEITHNER: We're using a established framework we used for laying out all these programs, where we put out broad details of terms, people have a chance to react, those evolve so we figure out what's the best mix for the interests of the taxpayer. We're using the same basic approach.

And the mechanism here, again, on the loan side is based on an established mechanism. The FDIC has a lot of experience in operating and running auctions in these process. And I think that, you know, again, you're going to find a lot of people who will say that we'd like the government taking on more risk, or they'd like us to provide -- put more risk on the table in this context.

But I think that this is a -- you know, we're laying out enough details on broad terms that we can get this process to the point where we're operational relatively quickly.

Q Just to follow up. So what you're saying is you have enough detail in hand to do these deals on a case-by-case basis, is that it, rather than having a full set of terms that you roll out for everybody to look at all at once, is that it?

SECRETARY GEITHNER: No, we're laying out enough detail on terms that we can get to the point where we can make these operational quickly. But, you know, you have to lay out a framework so you can have a little bit of iteration and flexibility, just as -- I mean, again, just to use other models, just as the FDIC does when it runs its basic programs; just as the Fed does when it designs its basic programs; just like we did on the term asset-backed securities lending facility that was launched last week. You know, there's just a -- there has to be a bit of iteration on terms to make sure that we're getting the balance basically right.

Yes.

Q Mr. Secretary, how will you know this is working, on the loans and securities? And more importantly, how will the taxpayers know it is working? What's the metrics you've developed here or all developing?

SECRETARY GEITHNER: The best metric is to watch what happens to the capacity of people to borrow, and the price of credit and the price of these assets. That's the ultimate test.

You won't be able to fully judge from participation because the existence of these facilities will affect behavior and incentives. You know, in some sense it operates like a backstop. So you can have a backstop facility have big effects on behavior and on the basic dynamics and markets, even if there's relatively limited use. The best thing to watch, again, is what's happening to issuance of securities -- just like you saw last week with the first funding of the TALF. Look what happened -- overall issuance -- look what's happening to risk -- credit risk in markets. That will be the ultimate test.

Q Do you have a goal --

SECRETARY GEITHNER: More important than me doing a target for what happens to credit -- no. I think again, if you -- you want to look at the overall pattern of availability, credit borrowing and in some ways the price -- it'll be the best measure. And, you know, there's some markets where you've seen very substantial changes -- best example is the mortgage markets now, where interest rates have come down very dramatically, you're seeing refinancing rates really surge. But other parts of the credit markets, too, you're seeing issuance start to increase and spreads start to come down. That's the best measure.

Yes.

Q Looking at the example you give in the fact sheet -- the first program -- you start with talking about $100 in bank loans, but the private investor only has to kick in $6 for -- seems to be on the hook for $6 at the end of the day, and the FDIC guarantees between there and whatever was paid for the bad loan.

Do you think a person outside this room, outside the Beltway, looking at that would feel like that's a -- you know, you've gotten a good deal by getting someone to kick in $6 for a loan that is valued at a $100, that's being purchased for $84.

SECRETARY GEITHNER: I'm very confident you and your colleagues will do a good job of framing this thing -- (laughter) -- but let me just come back to the basic point. Okay? The point is, relative to what? What our job is, is to try to fix this problem in our financial system at least cost to the taxpayer and ways to get the incentives right so we can have private capital come in and not have the government do all of it.

And the alternative strategies would have the government either taking on all that risk ourselves, having all those losses on our balance sheet -- or, sitting back and letting this process of deleveraging continue to weigh on the American economy, pushing viable businesses closer to the edge, where they have to shrink their businesses to get through this. And that's not an alternative we're prepared to support.

The key thing is, again, that you -- people have to compete for the right to get access to financing in this context and they have to put money at risk for it to work.

Yes.

Q Can you clarify under both plans who is actually holding the assets at the end of the day, and explain to taxpayers what the upside is to all of that? How are they going to share in the upside of this program?

SECRETARY GEITHNER: These funds -- purchase assets -- they're managed by professionals who know how to do this for a living. If there is a return to these over time, which we expect there will be, taxpayers will share in that return. So taxpayers are getting to take the benefits of providing this financing to the market. Now, of course investors will share, too, in that return, as you would expect. That's the simplest way to describe it I think.

Q Mr. Secretary, can I ask you, how concerned are you that if the AIG bonus tax passes Congress that it will deter private investors from participating because they'll fear rules can be changed retroactively? And would you advise the President not to sign the legislation, should it come to his desk?

SECRETARY GEITHNER: Let me just repeat what the President said. You know, we're going to have to work through this and find the right balance.

It is very important that we do things that ensure and raise confidence in the American people that compensation practice are not rewarding failure, that taxpayers' money is not being used to reward people who should not be rewarded, and that the resources we're providing are going to benefit the overall economy and the financial system by, again, getting credit flowing again and getting interest rates down.

We need to balance that basic objective that we not reward failure against the hugely important imperative that we get the financial system doing what it needs to do for recovery. And we'll find that balance. We'll get that balance. We'll work with Congress carefully to make sure we get to a point where we have an appropriate balance. I'm very confident that we'll work through this.

Q And on this specific legislation?

SECRETARY GEITHNER: And on the specific legislation, like on any, we're going to look carefully at how this works through the Congress and try to make sure that we get this balance right.

Q And your advice to the President?

SECRETARY GEITHNER: I have advice for the President on lots of things, but I'm not going to share that with you now.

Q But just a follow-up on that, are you concerned that the private investor, seeing what's going on with AIG, with the potential to make very large returns under this program, multiples of the TALF, that there's capital appreciation, are going to be concerned that they're going to be hauled up before Congress and seen to be taking too large of a return for the risk they're taking?

SECRETARY GEITHNER: Again, the risk we face for the economy as a whole is after a period where there was just much too much risk-taking that right now the system is not going to be prepared to take enough risk to get through this. And so we have to find programs that make it possible for investors to take the risks they need that we get out of this sooner. And that will require confidence among investors that there's clearly established rules of the game consistently enforced going forward. And as I said, I'm confident we're going to work through this in a way that gets the right balance.

Nice to see you guys. Thank you very much.

The theory of this plan seems to be that we need need need the private sector to price these assets. But the guts of the proposal belie that. Indeed, as I wrote earlier, it almost looks as if the government is laundering its own price through the private sector -- and the private sector is taking a hefty cut to participate.

There are at least two points where the government engages in fairly extensive pre-pricing before the private investors ever set foot in the room. The first is in setting up the subsidies. By limiting the private investor's downside risk and magnifying their potential profits, the Treasury Department changes the frame of reference that private investors use to decide how much they'll pay for a given bundle of assets. Under the details of the plan, an investment where the government provides a 6:1 debt match sees the private sector sharing 50 percent of the profit but absorbing seven percent of the losses. Those numbers will be plugged into the private investor's valuation equation and the price they offer will thus be much different -- indeed, much higher -- than the price they would offer if they were simply assessing how likely the asset was to increase or decrease in value. By building the program this way, the Treasury begins by biasing the prices sharply upwards.

The second point, as Foreign Policy's Annie Lowrey pointed out to me, comes when the government decides how much leverage to offer private investors. To quote from the fact sheet, "To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee." Only then will the private investors get involved -- and they will make their decision based on how much guaranteed debt the FDIC offers them (the more debt the better the deal). The FDIC's assessment is a risk assessment: It's judging how likely, or unlikely, the asset is to increase or decrease in value. It's fundamentally the work of pricing, it's just not being called that.

The question, at some point, becomes what value the private investors are adding. Some, to be sure. They're also going to manage the investments. But you have to ask: How much is it worth to say that the price of the asset is a "private price" after Treasury has systematically biased the pricing in a particular direction -- which explicitly suggests they don't trust the private market's natural pricing mechanism -- and the FDIC has assessed the asset's integrity and decided on the leverage offer that will further influence the private investor's pricing decision? Is it really worth giving up fully half the profit the taxpayer could otherwise expect and subsidizing most of the debt?

Intellectually, I'm of the crowd that thinks the A.I.G. bonuses don't deserve the continued focus of the political system. One tenth of one percent of the money we've given to one company should not obsess us. But whenever it comes up in conversation, I'm shocked at the depth of my own fury. And here's why: Not to sound naive about this, but the absence of patriotism that galls. The lack of responsibility is sickening. These bankers delivered an almost mortal wound to the American economy. Their actions threw millions out of work and wrecked the retirement savings of tens of millions more. It is no exaggeration to say that they will cost us more than 9/11. This is what R'as al Ghul tried to do to Gotham, at least before Thomas Wayne's monorail unexpectedly -- and frankly, improbably -- disrupted his scheme.

They should be begging for a shot at redemption. They should work without pay, without sleep, without credit. They should wear sackcloth and ashes. But more than that, they should be trying to help. The damage they wrought might have been unintentional, but that doesn't absolve them of responsibility for the aftermath. What we've got, however, is an economic hit-and-run, with one wrinkle: The collar-popper peeking out of the bloodied Porsche is willing to stick around if we pay him for his time. Give him a bonus and he'll dirty his hands with CPR.

That we even need a new raft of compensation regulations strains the boundaries of credulity. It makes you question the values of your countrymen. They were the principle beneficiaries of a decade-long bubble that they inflated. These Ivy League bundles of privilege were given every possible advantage and then took yet more than that. They took the advantages of high school seniors applying to college this year or entering the workforce next year. They took the advantages of seniors who had saved for retirement and parents who had invested to build their own business. And now they're refusing to help defuse the bomb at the center of our economy unless we pay them retention bonuses. Worse, they're threatening to flee the scene of the crime and make money off the carnage. That, it's been argued, is why we need to keep paying meeting their demands: Because we need them working for us rather than against us. It's chutzpah as the Yiddish define it: A child who kills his parents and then begs for lenience because he's a pitiable orphan. It's shameful.

There. That's better.

The President stopped by the briefing room this morning to say a few words on Geithner's plan:

[T]his morning, Secretary Geithner announced the latest element in this multi-pronged approach, and that is a mechanism that he, in close consultation with the Federal Reserve and the FDIC, has initiated in order to allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn't just obligate taxpayers to buy at whatever price they're willing to sell these assets; instead, involves a public-private partnership that allows market participants who have every interest in making a profit to accurately price these assets so that the taxpayers share in the upside as well as the downside.

Anyway, Obama's full remarks follow the fold.

THE PRESIDENT: Well, good morning. As all of you know, we have been busy on a whole host of fronts over the last several weeks, with the primary purpose of stabilizing the financial system so banks are lending again, so that the secondary markets are working again, in order to make sure that families can get basic consumer loans, auto loans, student loans; that small businesses are able to finance themselves and we can start getting this economy moving again.

As I've said before, there are a number of legs in the stool in the economic recovery. Step one is making sure that we had a stimulus package that was robust enough to fill the huge gap in demand that was created by the recession. Step two was making sure that we had a effective homeowners' plan to try to keep people in their homes and to stabilize the housing market. Because of the work that's already been done, you are starting to see glimmers of hope in the housing market that stabilization may be taking place. Mortgage rates are at a very, very low level, and you're starting to see some activity in the housing market.

We then took a series of steps to improve liquidity in what had been secondary markets that had been completely frozen. And we are now seeing activity in student loans and auto loans. We announced last week a small-business initiative that ensures that we have more activity and you start seeing small businesses being able to get credit again in order to sell products and services and make payroll.

And this morning, Secretary Geithner announced the latest element in this multi-pronged approach, and that is a mechanism that he, in close consultation with the Federal Reserve and the FDIC, has initiated in order to allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn't just obligate taxpayers to buy at whatever price they're willing to sell these assets; instead, involves a public-private partnership that allows market participants who have every interest in making a profit to accurately price these assets so that the taxpayers share in the upside as well as the downside.

And we believe that this is one more element that is going to be absolutely critical in getting credit flowing again. It's not going to happen overnight. There's still great fragility in the financial systems. But we think that we are moving in the right direction. And we are very confident that, in coordination with the Federal Reserve and the FDIC, other relevant institutions, that we are going to be able to not only start unlocking these credit markets, but we're also going to be in a position to design the regulatory authorities that are necessary to prevent this kind of systemic crisis from happening again.

And I'm looking forward to traveling to the G20 so that we ensure that the activities that we're doing here in the United States are effectively matched with comparable action in other countries. And Secretary Geithner has already traveled and met with the finance ministers of the G20 states so that we can make sure that we're all moving on the same page.

So the good news is that we have one more critical element in our recovery. But we've still got a long way to go, and we've got a lot of work to do. But I'm very confident that, with the team that we've got assembled, we're going to be able to make it happen.

All right. Thank you guys.

Q Can you offer any assurances to taxpayers who are skeptical?

THE PRESIDENT: You know, I'll have a full press conference tomorrow night, and you guys are going to be able to go at it.

Thank you, guys.

One of the big topics last week was the prospect of pushing health reform and cap-and-trade through the reconciliation process. The rec process, as you may know, short-circuits the filibuster and creates a 50-vote Senate. But it also plays havoc with the language and text of your bill. I have a piece today explaining the process and its constraints, and concluding, in part:

Taken as a whole, the uncertainty of the reconciliation process transforms it into a game of chicken: If Republicans refuse to cooperate with health reform and force Democrats to resort to reconciliation, no one knows what will emerge out of the other end. Republicans might have no input, but Democrats will be at the mercy of an obscure bureaucrat's interpretation of an undefined Senate rule. It's the legislative equivalent of deciding a bill on penalty kicks.

This feels like the sort of question I should be asking Tyler Cowen, but let's throw it open here. What fiction is most appropriate, and illuminating, in this moment? I'm looking for the culture of Wall Street, of riches, of wealth. The world and specifics of finance. Great Gatsby has to be on there, if only for literary context. American Psycho and Bonfire of the Vanities, too. Some have argued that Martin Amis's Money, deserves a spot, but I hold that it explores a culture of West Coast excess that's actually quite far removed. What else?

And all she got was this lousy blog post.

(Okay, it's actually a very good blog post.)

The Treasury Department's fact sheet on the "Public Private Investment Program" -- which I hope will now be pronounced "pip" -- can be downloaded here. The white paper can be downloaded here.

Karen Tumulty twitters, "GOP Congressman Connie Mack is on CNN calling on Geithner to resign. Message undercut by screentag showing Dow up 288 pts."

I'm no Connie Mack fan, but I'm not comfortable letting the Dow's reaction stand as the arbiter of success or failure. Dean Baker wrote a prescient post on this subject last night:

Suppose Timothy Geithner announced a new program that would tax every family $10,000 dollars and give the money to Wall Street banks and hedge funds. (Any resemblance between this hypothetical program and real world programs is purely coincidental.)

We would expect the stock of Wall Street banks and other financial sector firms to rally based on the anticipation of higher profits. Is this good for the economy? It's not in any obvious way. After all, we can always tax people more to raise profits for Wall Street, but that doesn't help the economy.

Reporters should remember this when assessing Wall Street's response to the plan proposed by Geithner for buying bad assets from banks. The larger the subsidy, the better the news for Wall Street. It's not clear that most of the public should be happy about seeing more of their tax dollars going to Wall Street.

There's much that enters into a stock market rally, but little is more directly correlated to enthusiastic trading than the prospect of making money. And no one doubts that this plan offers private investors an almost historic opportunity to make money. It may be that the plan is also the correct salve for the economy, or it may be that the plan is a good opportunity for investors that will fail the broader economy. But when you're offering this direct of a subsidy to Wall Street, I don't know that you can intuit much from Wall Street's reaction besides the fact that they're thrilled with the subsidy.

That's Paul Krugman's view. In his column today, he writes that, "if this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place."

I'm not sure about this on two levels. The first is the implication is that Congress would now be willing to offer the funds and legislative authority required for nationalization. I see little evidence for that view. The sums involved in nationalization will be eye popping. The howl from the markets, the bankers, and the GOP would deafen. It is, of course, true that the politics might be different if Obama had spent the last three months prepping the country. With Alan Greenspan and Doug Holtz-Eakin both supporting nationalization, you could certainly imagine a scenario in which the White House threw its considerable muscle behind the idea that this was now the consensus position. But either way, it's not an obvious political winner.

Fast forward a year. The auctions don't worl because the banks can't sell the assets at a price that doesn't leave them insolvent. Geithner's plan fails, and he's eased out of the administration. He's the Rumsfeld of the financial crisis. Paul Volcker is installed as Treasury Secretary. Unemployment is in the double digits and the banks are in worse shape than ever. Incumbent Democrats can see the midterm elections in the distance and predict their fate if the economy doesn't improve. We are out of options save for nationalization. Krugman's contention would be that in this scenario the political system is more resistant to nationalization even as the intellectual case and the visceral need are both more compelling. I'm not sure that's right. As the old saying goes, you can always trust Americans to do what's right -- after they've exhausted the other options.

That is not, mind you, an argument against nationalizing now. A year of economic misery is a year of terrible suffering. But Krugman is correct that the case for the Geithner plan is much weaker if it forestalls more severe action later. But I'm not sure it does.

The administration is arguing that the private sector's risk aversion will ensure accurate pricing. As Geithner said at this morning's pen and pad briefing, "we're going to use the financial incentives of investors to help set the price." The problem is that what we normally think of as "the financial incentives of investors" includes aversion to loss. If this auction does not include aversion to loss, or radically blunts it, it is impossible to imagine how we end up with accurate pricing. Wall Street, after all, is not objectively valuing the assets. They are assessing the likelihood that their profits on the assets will outweigh their losses. If the Treasury's plan artificially changes that calculation, then it artificially changes the prices, too. James Kwak runs a scenario -- and in this scenario, "Bebchuk's example" is similar to Geithner's plan -- that explains what happens to a banker's risk calculation when someone else is covering the losses.

Let’s say that I’m a fund manager, and without government money I’m willing to pay 30 cents for some asset. That means that when I run my valuation models, there is some chance I will be able to sell it for more than 30 cents, and some chance that I will have to sell it for less, and those distributions balance each other. Government money doesn’t change that distribution of outcomes; it just changes the share of the gains or losses that I incur. In Bebchuk’s example, out of those 30 cents, only 1.5 cents (5%) are mine, so I don’t have to worry about the risk of the price falling below 28.5 cents. But I still get all of the upside. You can see how that shifts my expected outcome in my favor. Because my losses are capped at 5% of my purchase price, I might be willing to pay 40 cents instead of 30 cents: even though my chances of making money are small (the distribution of eventual sale prices hasn’t changed), my losses are capped at 2 cents (5% of 40 cents), so I don’t need a lot of upside to compensate for my limited downside.

In short, the larger the proportion of government funding, the higher my willingness-to-pay.

Brad DeLong, I think, would argue that the private sector's risk aversion is currently magnified beyond all reason, and so a plan that artificially corrects for some of that risk aversion is likely to approximate something closer to the actual price of the assets than a plan that does not correct for that risk aversion. But this is not the market at work. It is the Treasury Department at work. The government is basically guessing at the price of these assets and laundering their guess through private investors who are in turn demanding a huge payoff to participate.

"Many of the critics," one official sighed to me, "are underestimating the difficulty of their counterfactuals." Ben Bernanke does not appear to think the administration has the legal authority to forcibly take investment banks into receivership. What happens if a legal challenge disrupts the process?

Virtually no one thinks that Congress is willing to quickly offer either the legislation authorizing such an action nor the massive upfront money that receivership would require. Will Ben nelson and George Voinovich vote to take control of the banks? And what happens to the market while Congress is debating? And to Congress if the market dives?

No one knows if the Treasury Department has the technical capacity or simple competence to swiftly assume control of much of the United States banking sector. If Treasury seems unable to simply build out a banking plan and claw back bonuses, what makes anyone think they can run the banking sector?

No one knows how bad the downside is if you botch receivership, or if receivership doesn't work. It is easier to abstractly argue the virtues of successful nationalization than contemplate the consequences of unsuccessful nationalization. As such, it should be the absolute last resort. And this plan preserves it as such. There is a non-trivial chance, after all, that the banks will not sell to the private investors because the private investors will not buy the assets at a price that makes the banks solvent. If the private market determines the assets are worth 30 cents on the dollar but the banks will collapse if they're not bought for 45 cents on the dollar, then the auctions will reveal insolvent banks that cannot be rendered whole through market measures. In that scenario, nationalization will become a consensus strategy, and as such, lose much of its downside.

So the Geithner plan is really two bets in one. The first is that this is not the worst case scenario and does not require the fixes developed for the worst case scenario. The second is that if this turns out to be the worst case scenario, then we still have those fixes available to us, and the need is clarified among the actors -- like Congress and the market -- whose reaction in the absence of consensus could scotch the whole thing.

There are two main problems with this, I think. The problem of pricing and the problem of politics. But I'll get to those in subsequent posts.

Brad DeLong's explanation of the Geithner plan -- which is what everyone appears to be agreeing to call it -- is really a must-read. It's a much better explanation of the plan than, say Timothy Geithner's explanation on the plan, which more asserts the plan's goodness than explains it. Brad DeLong's explanation also has the virtue of a comments section, which includes this scary riposte from Robert Waldmann:

Geithner's argument and yours is based on the claim that there are assets whose market price is far below their hold to maturity value. Why isn't Warren Buffet buying these assets ? Because he is terrified by the Zeitgeist ? Because he isn't patient enough to hold to maturity ? Preferred stock in Goldman Sachs yes, CDO's no. Do you think you understand how to make money by combining contrarianism and patience better than he does ?

I mean he has a track record, he has tons of money and he is not buying CDOs.

The plan