The 2012 White House Budget Proposal. Who Will Survive In America?

Sigh. This is truly depressing.

You can get a full look at the White House’s 2012 Budget proposal here. Usually we put it on Scribd, but their site is broken. Besides, it’s a 216 pager. Not exactly light reading.

In lieu of the doc, we’ve given you a handy data viz for the spending allocations. It’s illuminating.

So what’s the big deal? We reprint Jon Cohn in full…..

President Obama on Monday will release his budget request for the 2012 fiscal year. As you read commentary on it—or, if you’re as nerdy as I am, as you read the document itself—keep in mind that this is the first budget request he’ll be producing since the Republicans took over one house of Congress. It’s a huge difference and not merely in the obvious ways.

Obama’s previous budgets were the president’s way of signaling, to members of his own party, what initiatives he intended to pursue and roughly what resources he expected Congress to give him. He could expect some negotiation and pushback, from liberals on some issues and from centrists on others. But mostly he could count upon Congress, which Democrats controlled, to follow him. 

The Republican House, of course, will do no such thing. They have their own, very different priorities and their own, very different ideas about how to pay for them. Accordingly, Obama’s budget is more of an opening bid in a tough, rancorous negotiation. That means you should evaluate the document as a signal of political strategy, not simply a statement of policy priorities. And that makes it tougher to judge.

Between the administration’s recent statements and a series of calculated leaks, we have a pretty good idea of what Obama is trying to do. He’s going to call for spending more money on education and other public investments, but he’ll also endorse enough cuts to keep overall non-defense discretionary spending at last year’s levels. Elementary and secondary school education, for example, should get a boost. But Pell Grants, for low-income college students, are going to take a hit, albeit a carefully crafted one.* There will be more money for building high-speed rail but less for helping low-income families pay their heating bills.

Is this a good thing? In absolute terms, clearly, the answer is no. The demand for Pell Grants is unusually high right now; among other things, cash-strapped states are raising tuitions at state schools just as cash-strapped students and families have fewer resources to pay them. Energy costs for next winter, when the cut in heating assistance would take effect, are likely to be higher than at any time since 2008. Unless the economic recovery quickens very suddenly, plenty of people will struggle to pay those heating bills. And those are just two examples of program reductions that will leave needy Americans even more needy. 

But everything is relative, and that means judging these cuts alongside both the modest increases you’ll find elsewhere in this budget and the much larger increases you saw in previous ones. Robert Greenstein, director of the Center on Budget and Policy Priorities, will spend the next few days dissecting the Obama spending request and, as he does, he will likely find plenty not to like. But, during an interview, he also put disappointments in context:

I think [Obama’s] record is very strong — major expansions in refundable tax credits for the working poor, major expansion of student financial aid for low-income students so that more of them can go to and complete college, and of course, major health reform that will extend coverage to 32 million uninsured people. This is the most impressive record of any president since LBJ.

Obama’s spending request looks even better when you consider what the Republicans would do if left to their own devices. They haven’t committed themselves to a 2012 budget just yet. But they’ve said they want a far deeper freeze than Obama’s, reducing non-defense discretionary spending to what it was in 2008. On Friday, they offered a preview of that vision when they announced their proposal for how to finance government for the remainder of the current fiscal year.

They want far more severe cuts to Pell Grants and home heating assistance, plus reductions to such essential services as food inspections and the elimination of programs like Americorps. They also want to reduce spending on the Special Supplemental Nutrition Program for Women, Infant, and Children. That initiative, known as WIC, provides nutritional assistance to expectant mothers and newborns. As Paul Krugman notes, that cut will hurt today and tomorrow, since kids who grow up malnourished are more likely to have problems later in life.

The most important question about Obama’s budget, then, is how well it positions him and his allies in the coming debate over these sorts of priorities.  

You could make a case that, by embracing the Republican narrative on the size of government and calling for a five-year budget freeze at present levels, Obama has effectively bid too low in the negotiation over federal spending—that he’s committed himself, and the country, to less government than it needs. (It’s happened before!) Or you could make the case that, by making “tough” proposals to cut programs he supports, he’s establishing the credibility with voters that he needs in order to marginalize the Republicans and to preserve more spending than might otherwise be possible. (It’s happened before!)

I really don’t know which argument is right. I’m not a political strategist and, besides, not even the political strategists can be sure about this sort of thing. But I know I’ll be hoping that Obama prevails in the coming standoff with House Republicans, even though a victory would still leave the government perilously underfunded.

*The details of Obama’s Pell Grant proposal are complicated and worth an item of their own, which I’ll try to write shortly.

The Financial Crisis Inquiry Commission Final Report

……came out yesterday. Klein gives the crux of the findings:

The Financial Crisis Inquiry Commission has released its final report, which looks to “determine what happened and how it happened so that we could understand why it happened.” The full document — including the dissents from four of the Republicans on the panel — can be downloaded here. The transcripts of the hearings the committee conducted can be found here. If the thousands of pages in those two links seem like a bit much to you, the FCIC’s conclusions are here (pdf). This, I think, is the key takeaway:

We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: Financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines?

We have the full doc up on Scribd. Unfortunately, Tumblr is jacked up right now, we can’t do direct coding and put it on the post as we usually do. Once it’s back to normal, we’ll add. It’s a beast. 700+ pgs. But they 19 days of hearings, thousands of pages of subpoena’d docs. Remarkable effort. Worth your time to at least glance over.

#GREATMOMENTSINBANKINGHISTORY #theyarewhowethoughttheywere #50hotones #godswork

Financial Crisis Inquiry Commission Final Report

The Leverage Debate Revisited, aka GREAT MOMENTS IN BANKING HISTORY

This being Christmas (at least for those who didn’t get coal in their stockings), it seemed like a fine time to revisit the leverage debate. We here at The Scrambler thought this was just the moment to return to our occasional series/tongue in cheek hashtag, GREAT MOMENTS IN BANKING HISTORY.

The Baseline Scenario had a great piece a little while back by Anat Admati (she teaches Finance I, among other things at the Stanford GSB). She responds to a long NYTMag article on Jamie Dimon and his assertion that JPMorgan should continue to grow. She also dismantles the larger issue of the cost of capital for the street. It’s riveting. Basically, her argument is that debt financing has made it too cheap for the banks to operate (ie, they don’t fully internalize their costs to society and risk to investors alike due to their heavy reliance on leverage/debt financing). If they moved more towards equity, we’d all be better off (or at least, less likely to suffer another cataclysmic meltdown). Excerpt from the piece below. Click the link here for the full Baseline Scenario. Her article is based on a longer working paper put out last October (the full paper is Scribd below). Print this one out and enjoy with your lunch. If you took a low blow (or some long-dated shares) last week, you could use it to wipe away your tears. But it’s really fascinating. Read it before turning it into Kleenex…

What Jamie Dimon Won’t Tell You: His Big Bank Would Be Dangerously Leveraged

By Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business.  To see her explain these issues in person, watch this Bloomberg interview.  This is a long post, about 3,500 words.

The debate is raging about banks and their size, financial regulation, and the international capital standards known as “Basel”.  Jamie Dimon of JP Morgan Chase, in his New York Times magazine profile, expresses admiration for the Basel committee and says,

“… they are asking the questions that, in theory, bankers ask of themselves: how much capital do banks need to withstand the inevitable downturn, and what is an acceptable level of risk?”

There is one problem, however. Basel may have asked the right question, but it did not come up with the right answers, mainly because it allows banks to remain dangerously leveraged, setting equity requirements way too low. This fact is not understood because the debate on capital regulation has been mired with a cloud of confusion, and filled with un-substantiated assertions by bankers and others. As a result, the issues appear much more mysterious and complicated than they actually are.

After a massive and incredibly costly financial crisis, we seem to have financial system that is a more consolidated, more powerful, more profitable and, yes, as fragile and dangerous as we had before the crisis. How did this happen and what can we do?

Here are some questions on which the confusion is staggering.

(i) Is “too big” the same as “too big to fail?”

(ii) Do capital requirements force banks to “set capital aside for a rainy day” and not use it to help the economy grow?

(iii) Are banks different than non-banks in that high leverage is essential to banks’ ability to function?

(iv) Would terrible things happen if capital requirements were to increase dramatically?  

The first order of business is to clear the fog and focus on the right things. I will try to explain. With the basics in place, answers will begin to emerge, or at least the right questions to ask.

By the way, I answer an emphatic NO to each of the above questions.

RP2065R&86

How The Recession Changed Us

Great Piece/Chart Series from The Atlantic.

Click image for full screen view

What a Difference 2 Years Makes.

Officially, the Great Recession lasted from December 2007 to June 2009. A mere 18 months- about average, as recessions go. Yet if the trauma this time feels deep and lasting, that may be because, as the figures on these pages show, so many disruptions have upened national life at once. 

Millions of Americans have lost their jobs, nearly every state faces a budget shortfall, and hundreds of banks have shut their doors. The young are unemployed, living at home, and playing video games. The ranks of thrid party candidates have swolen, militias have proliferated, and national leaders of both parties have seen their support decline. Of course, times of flux are often times of anxiety and unrest. But as the economy begins its slow and stuttering recovery, the vast changes wrought by this recession will continue to reverberate for many years- in ways predictable and otherwise.