With 2009 coming to a close and the stock market having rebounded from its March low, “Wall Street is ready to pat itself on the back for its huge gains with big bonuses.” Despite the brouhaha caused by bonuses in the last year — and the role that perverse pay incentives played in bringing about Wall Street’s collapse — large financial institutions have been setting aside billions for bonus payments, and in 2009 may eclipse the record compensation levels of 2007.

This makes Steven Brill’s upcoming New York Times Magazine article (already available online), which examines Special Master for Compensation Kenneth Feinberg’s quest to craft pay packages for firms receiving extraordinary government help, particularly timely. Brill focuses especially on AIG, and Feinberg’s struggle to not only assuage public anger over the AIG bonus pool, but to keep at bay a variety of government players intent on influencing his final decision.

Feinberg wanted to ensure that AIG’s compensation correlated to the long-term strength of the firm by tying it to the company’s stock performance. However, Brill wrote that “Feinberg’s push for long-term accountability was met with what Feinberg calls ‘intense pressure’ from officials at the Treasury Department and from the Federal Reserve Bank of New York”:

Officials at Treasury weighed in on A.I.G.’s side, according to Feinberg. Herbert M. Allison, the assistant secretary for financial stability, and the official to whom Feinberg reported day to day, confirms pressing Feinberg to consider, he recalls, “the fact that we were dealing with a highly volatile stock that seemed to the employees to have a less than reliable value”…Those at the Fed were even more insistent that Feinberg make exceptions for A.I.G.

Feinberg subsequently allowed some employees at AIG to receive up to $1.5 million in cash bonuses.

Of course, both AIG and its government allies argued that huge pay packages are necessary for AIG to rebound to profitability and pay back the government. However, a new study highlighted by the Huffington Post’s Grace Kiser refutes that very notion. In fact, Raghavendra Rau and Huseyin Gulen of Purdue University and Michael Cooper of the University of Utah found that, between 1994 and 2006, “the 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term.”

“Overall, our results show a strong negative relation between pay and future returns,” the researchers wrote, adding that highly-compensated CEOs tend to become overconfident, engaging in “wasteful capital expenditures and empire building.” So it would appear that Treasury and the Fed’s pressure was based on an entirely faulty premise, but some AIG executives will still end the year with a huge payday because of it.

Recently, the Obama administration has increased its verbal assault on banks and mortgage lenders that are failing to get troubled borrowers into sustainable modified mortgages. The banks have been firing back that borrowers themselves are to blame for the lack of progress, with the favorite claim being that borrowers aren’t doing their part in getting the appropriate documents together.

New York City is one of a handful of states and cities that force lenders to come to court and meet with borrowers before finalizing a foreclosure. And according to one court official helping to oversee the program, it’s not the borrowers who come to the mediation sessions lacking sufficient documentation, but the lenders:

Leonard N. Florio, a court-appointed referee, oversees such sessions in that dusty room in Queens. He is a chatty man and punctilious about not taking sides. But as he watched Mr. Ali, the Ozone Park homeowner, load his piles of bills and receipts back into his shopping bags, he could not help noting a pattern. “I have yet to see an attorney for a servicer cut a deal,” he said. “Update this, update that. I mean, what’s the holdup?”

This fits with a new study from The Center for New York City Neighborhoods (CNYCN), which found that lenders, not borrowers, routinely show up for mediation sessions woefully unprepared. In fact, “in spite of the law’s explicit obligation that attorneys for the lenders attend conferences with appropriate documentation and authorization to negotiate, lenders frequently send attorneys who know little about the case, have little or no documentation pertaining to its history or status, and lack authority to reach a deal on the lender’s behalf.” Here are some of CNYCN’s findings regarding the lenders’ efforts:

- Only 3% of the time was a copy of an offer already made by the homeowner actually in the attorney’s file;

- The attorney knew the status of an offer with the lender a mere 6% of the time;

-In only 13% of the conferences did the attorney have a phone number to call to reach a person with actual authority to settle.

And of course, “court orders to penalize lack of compliance with the law are scarce.”

As with many foreclosure prevention efforts, this one is suffering from a lack of real consequences for a bank that violates the law, and there’s no mechanism for holding lenders accountable for their inaction. Mediation programs like the one with which New York City is experimenting have been successful elsewhere, but only when the lenders take them seriously. Lenders in New York seem to be blowing off the program, and with foreclosures piling up, a stick with which to prod them needs to be created, sooner rather than later.

As Congress prepares to pass the final health care reform legislation early next year, health care lobbyists are mobilizing legislatures in approximately 14 states to ratify constitutional amendments that would repeal all or parts of the new measure. “The states where the amendment has been introduced are also places where the health care industry has spent heavily on political contributions,” the New York Times notes:

Over the last six years, health care interests have spent $394 million on contributions in states around the country; about $73 million of that went to those 14 states. Of that, health insurance companies spent $18.2 million.

Overall, at least 21 states have indicated a desire to opt out of federal health care reform or block fundamental features of the reform bill, including mandatory health coverage. While Arizona, is the only state legislature to place an opt-out measure on the 2010 ballot, a significant number of gubernatorial and state legislature candidates across the country have also said that they are strongly “leaning towards” opting out of reform.

Lawmakers in Wyoming, New Mexico, Montana, Kansas, Texas, Pennsylvania, Utah, Virginia, Arizona, Alabama, Michigan, Missouri, Ohio, West Virginia, Louisiana, Alaska, Minnesota, North Dakota, Georgia Illinois and Florida have introduced ballot measures to protect their states from reform legislation or promised to spearhead such efforts if reform is enacted.

While it’s unlikely that conservatives and their health care industry allies could repeal health care reform, (they are more likely to water-down certain elements of reform), a successful challenge would devastate the populations suffering from the most pronounced health care crisis. A back-of-the envelope analysis conducted by ThinkProgress suggests that on average, the repealing states have experienced very substantial premium increases, high rates of uninsurance and annual percent growth in health care expenditures and higher insurance market concentration:

- 42% (9 of 21): have an uninsurance rate higher than the national average of 15.4%.

- 62% (13 of 21): have an average annual percent growth in health care expenditures that his higher than the national average of 6.7%.

- 62% (13 of 21): experienced premium increases of more than 75% between 2000 and 2007.

- 90% (19 of 21): are dominated by two insurers that control more than 50% of the health insurance market.

The effort to repeal health care reform “began at the conservative Goldwater Institute in Arizona” and was latter “picked up by the American Legislative Exchange Council [ALEC], a business-friendly conservative group that coordinates activity among statehouses.” As the New York Times points out, “five of the 24 members of its ‘free enterprise board’ are executives of drug companies and its health care ‘task force’ is overseen in part by a four-member panel composed of government-relations officials for the Blue Cross and Blue Shield Association of insurers, the medical company Johnson & Johnson and the drug makers Bayer and Hoffmann-La Roche.”

Earlier this month, Lee Fang reported that Joan Gardner, executive director of state services with the BCBS Association’s Office of Policy and Representation and a member of ALEC’s ‘task force’ “played a pivotal role in crafting this anti-health reform states’ rights initiative.”

In the New York Times today, Nobel Prize-winning economist Paul Krugman writes in defense of the Senate health care bill. “[F]or all its flaws and limitations, it’s a great achievement,” he says. “It will provide real, concrete help to tens of millions of Americans and greater security to everyone.” But the health insurance industry and business lobbyists weren’t quite as joyous in their reaction.

The Hill writes, “the health insurance industry expressed disappointed opposition…and big-business groups slammed the bill.” The Indianapolis Star adds, “The big losers, at the moment, seem to be insurers.” Here’s a sampling of their reactions:

– The health insurance lobby, America’s Health Insurance Plans (AHIP), criticized the Senate health care bill, arguing it would “increase, rather than decrease, health care costs; reduce coverage options; and disrupt existing coverage for families, seniors and small businesses.”

– The health insurance company Aetna complained that the bill “has not done enough on addressing costs,” and is lobbying for greater subsidies that — in the absence of a public plan — would help pay for more expensive private coverage.

– Bruce Josten, the executive vice president of the U.S. Chamber of Commerce, also criticized the bill, calling it “counterproductive” and argued “it is not reform.”

The Wall Street Journal reports that health-care stocks “fell after the Senate’s approval of the health bill.” Insurance giants “WellPoint, Humana and Aetna were among the health-care sector’s decliners Thursday. WellPoint dropped 1.3%, while Humana fell 1% and Aetna was also off 1%.”

Yesterday, the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) released their latest home mortgage data, which covers the third quarter of 2009. The OCC and the OTS compile data on mortgages held by national banks and thrifts, which account for about 65 percent of mortgages nationwide, and the numbers show just how ugly the housing crisis still is:

[T]he percentage of current and performing mortgages dropped for the sixth consecutive quarter to 87 percent of the servicing portfolio, serious delinquencies rose to 6.2 percent, and foreclosures in process surpassed 1 million mortgages…Of particular note was the deterioration among prime mortgages, the largest category of mortgages. Serious delinquencies at the end of the third quarter increased to 3.6 percent of prime mortgages, up almost 20 percent from the previous quarter and more than double a year ago.

This is the first time ever that more than 1 million mortgages held by national financial institutions have been in foreclosure in a single quarter. But the point about the foreclosure plague spreading even further into prime mortgages is perhaps the most disheartening, as the foreclosure prevention programs that have been put in place so far by Congress and the administration aren’t meant to handle these sorts of problems.

The growth in prime mortgage foreclosures confirms that unemployment — not subprime lending — is now the factor driving most foreclosures. Indeed, the OCC/OTS data is making the TARP Congressional Oversight Panel’s October report on the administration’s foreclosure prevention plans seem spot-on:

[The Home Affordable Modification Program] was not designed to address foreclosures caused by unemployment, which now appears to be a central cause of nonpayment…The foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.

So as Daily Finance’s Lita Epstein pointed out, “the elephant in the room…is how to help the millions of people who have lost their jobs stay in their homes.” Included in the regulatory reform bill passed by the House last week was a $3 billion program for providing loans to borrowers who have “lost their jobs but who have a reasonable prospect that they will be able to resume full mortgage payments.” This is a decent enough start, but it can’t be the end, unless Congress and the administration want to rely on programs that aren’t really up to the task.

Despite a flurry of opposition from financial services lobbyists and Congressional representatives from trading centers, the push to implement a financial transactions tax has not yet been shelved, according to House Democrats. “There is considerable support for it,” Rep. George Miller (D-CA) said, adding that the tax is “very much” on the table for deficit reduction next year.

The revenue potential for such a tax is not insignificant, as a new report from the Center for Economic and Policy Research (CEPR) shows. According to CEPR, a .5 percent tax transactions tax would raise about $353 billion annually. Of course, the tax would discourage some of the excessive speculation and high-frequency trading that currently occur, but even assuming a 25 percent reduction in trading volume, the tax would still generate about $265 billion per year.

“Clearly [the tax proposal] is gaining support, but there’s tremendous push-back from Wall Street,” said Rep. Peter DeFazio (D-OR). Indeed, the financial services lobby is trying to portray the tax as an assault on ordinary investors. “As we read it, it’s clear it’s going to be a tax on Main Street,” said Paul Stevens, president of the Investment Company Institute, a trade group for mutual funds. However, under the current plans, savings, health care, and retirement accounts would be exempted from the tax.

Plus, the levy will be placed on activity that has only been gotten cheaper, due to technological advances, so a .25 percent tax “would only raise trading costs back to the level of the 1970s or 1980s.” “The US already had a vibrant, well-developed capital market in these decades, so there is no reason to believe that raising trading costs back to earlier levels would prevent these markets from performing their economic function,” wrote Dean Baker, one of the chief proponents of a transactions tax.

As Sen. Tom Harkin (D-IA) said, “I don’t look upon it as any kind of way of punishment or anything like that. I mean, we’re just looking for revenue. We’re looking for ways of getting out of this hole we’re in.” And with limited revenue options available, and balancing the budget on the spending side alone totally unrealistic, the transactions tax makes a lot of sense.

In today’s Washington Post, Binyam Applebaum and David Cho took a long look at the Federal Reserve’s complete failure to take note of the subprime housing bubble. “The Fed’s failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking,” they wrote. “[R]ather than looking for warning signs, the Fed had joined — and at times defined — the mainstream consensus among policymakers that financial innovations had made banking safer.”

Of course, much of the focus — and the blame — falls to current Federal Reserve Chairman Ben Bernanke, and Applebaum and Cho rightly remind readers of Bernanke’s 2007 declaration that “we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market.”

And it’s not like there was a shortage of warnings given directly to the Fed regarding the housing market’s problems. In one of many such instances, National City bank’s chief economist told the Fed in January 2005 that “an increasingly overvalued housing market posed a threat to the broader economy.” But “the message wasn’t well received” :

One board member expressed particular skepticism — Ben Bernanke. “Where do you think it will be the worst?” Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists. “I would have to say California,” said the economist, Richard Dekaser. “They have been saying that about California since I bought my first house in 1979,” Bernanke replied.

As it turns out, nine of the top 10 subprime lenders were based in California, “including all of the top five — Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp., First Franklin Corp., and Long Beach Mortgage Co.”

This cuts right to the heart of whether the Fed should continue to retain its responsibilities over consumer protection. After all, there were plenty of people out there — both in and out of the government — who saw what was going on.

In 2001, then Treasury official and current FDIC Chair Sheila Bair tried, without success, to get subprime lenders to adopt a code of best practices and allow outside monitors to verify compliance. In 2002, Freddie Mac stopped purchasing some varieties of subprime loans, in an effort to discourage predatory lending.

In 2004, the Greenlining Institute (from California, incidentally) told the Fed that “unscrupulous” lending practices were spreading. Finally, in 2005, Federal Reserve Board governor Edward Gramlich tried to warned his colleagues “of the decline of lending standards and the dangers that this posed.”

All of which signals that the Fed is an institution biased toward the banks that it regulates and unwilling to take action against those banks, even when the financial safety of consumers is at stake. It was by no means the Fed alone that dropped this ball, but it certainly bears a good portion of the burden, which should be remembered as the Senate heads toward a vote regarding whether or not to confirm Bernanke for a second term.

After regulatory reform garnered a grand total of zero Republican votes in the House, attention moved to the Senate, and in particular the Senate Banking Committee, where Chairman Chris Dodd (D-CT) has organized several working groups of one Republican and one Democrat to mull over specific issues. The goal is to try getting GOP members on board as the bill takes shape, to avoid some of the more acrimonious moments that occurred during the heath care debate.

According to the Boston Globe “one of the key figures to a potential compromise” is Sen. Judd Gregg (R-NH). And here’s what Gregg thinks of the bill that the House passed:

Gregg said in an interview that the House measure on financial regulation is among the worst he has seen. He called elements of the House bill wacky and socialist, citing provisions that would enable the government to break up companies deemed too big to fail, and to create a Consumer Financial Protection Agency. “The House bill is irrelevant to what we are doing in the Senate,’’ Gregg said. “It is an entirely different approach in the Senate.’’

If this is the attitude for a key compromise figure, things are not looking very good. After all, Gregg is outright dismissing two of the more important pieces of the House bill: the CFPA and a provision — included by Rep. Paul Kanjorski (D-PA) — allowing the government to dismantle financial institutions that pose a threat to the wider economy.

Of course, Gregg has already made it clear that he doesn’t understand the Kanjorski provision. He likes to say that it would allow the government to break up Coca-Cola and Wal Mart, when the actual language clearly shows that only financial institutions can be affected, and only after they have been subjected to stricter oversight and capital standards.

Creating the CFPA was always destined to be a long, hard slog in the Senate, and last week, Sen. Richard Shelby (R-AL) came right out and said that his opposition to the new agency arose because safety and soundness of banks “should be number one.” Gregg seems to believe the same, and has decided that having an agency within the regulatory framework that is primarily focused on consumers — as opposed to banks — is “socialist.”

As it originally stood, Dodd’s regulatory reform discussion draft was more ambitious than its House counterpart. The GOP slamming the House effort as socialist and irrelevant doesn’t seem to bode well for Dodd’s chances of finding Republican support for his version.

Since the Obama administration came into office, Republicans have been hypocritically trying to pin it with responsibility for long-term budget deficits, despite the fact that it was the GOP that turned a surplus into record deficits while setting the economy up for a crash (necessitating deficit spending as a response).

But writing on The Hill’s Congress Blog, Rep. Tom Price (R-GA) took this to a new level, claiming that the American Recovery and Reinvestment Act (i.e. the economic stimulus package) is somehow responsible for our long-term deficits:

The deficits created by the stimulus are not only unsustainable in the long-term, but have grown so large they threaten economic stability today. As the big-government approach has predictably let Americans down, it’s time for a new approach. That’s why, working with my Republican colleagues, I have introduced a pair of measures that would pull the plug on the ill-fated stimulus.

Economic stimulus is, by definition, short-term, so Price’s notion really makes no sense. But if Price is honestly interested in where the long-term deficits come from, he should take a look at this report from the Center on Budget and Policy Priorities (CBPP). CBPP wrote that “some commentators blame recent legislation — the stimulus bill and the financial rescues — for today’s record deficits. But those costs pale next to other policies enacted since 2001 that have swollen the deficit,” including the wars in Iraq and Afghanistan and the Bush tax cuts (which are the largest culprit). Here’s a nice chart that CBPP prepared:

Notice how little of the 2012-2019 deficits are due to the stimulus. Price wasn’t around to vote on the Bush tax cuts or the wars, but would he have exhibited such concern about deficits then?

And since we’re on the subject, the stimulus isn’t even primarily responsible for this year’s increase in spending. As Michael Linden pointed out, only 18 percent of the spending increase from 2008 to 2009 is due to the stimulus. The rest is mostly TARP, the rescues of Fannie Mae and Freddie Mac, and increased spending on unemployment benefits and entitlements. Again, the report comes complete with a handy chart (at right).

As Steve Benen wrote, “this isn’t just about pointing fingers for self-satisfaction or partisan vanity. It’s important for the public to realize who’s responsible, in large part because it’s important for the public to weigh policymakers’ credibility. If GOP lawmakers embraced policies that are almost entirely responsible for the deficit those same lawmakers are now complaining about, it’s a relevant detail.” And maybe The Hill should start fact-checking these pieces before publishing them.

Bank of America has been getting a lot of grief recently (some of it from me and my colleague Andrew Jakabovics) for its shoddy performance on the Home Affordable Modification Program (HAMP). BofA has consistently trailed behind the other major banks in its progress getting borrowers into the program, and in eight months has completed fewer than 100 permanent modifications.

The bank has taken to blaming its lackluster stats on its borrowers’ inability to file documents, which made me ask if the bank thinks its borrowers are somehow more irresponsible than those at other large institutions. This week, the bank organized a conference call, and the answer to my question is evidently yes, BofA does think it has a worse set of borrowers:

[Bank of America] defended its performance in the federal foreclosure relief program, saying that far fewer of its customers are eligible for the plan than government estimates indicate…Only about 340,000 of the 1 million delinquent borrowers identified by Treasury are likely to survive the qualification process, Jack Schakett, Bank of America’s credit loss mitigation strategies executive, said….”We’re being [judged] as below average, and we really aren’t when you look at the numbers,” he said. “On average we have more customers that fail the eligibility requirements than competitors.”

But let’s think about this for a second. Even if we grant BofA’s pulled-out-of-thin-air assertion that two-thirds of the borrowers Treasury deems eligible for the program somehow aren’t, that leaves 340,000 perfectly eligible borrowers, only 98 of whom have received permanent modifications. That’s still a wildly unacceptable .03 percent of eligible borrowers having their mortgage modified permanently.

And then there are reports like this one today in McClatchy, where Kevin Hall took a look at some borrowers who should qualify for HAMP, but are still having their homes sold out from under them. And guess which bank pops up:

In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year…The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home. Armed with what he thought was “a permanent modification,” Smith returned a notarized copy of the agreement and made subsequent payments on time. In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.

Back in October, I wrote that the fatal flaw in HAMP would be trying to incentivize banks into completing modifications, without any consequences for failure. Stories like the one above only confirm that thesis.

Yesterday, I wrote that if Federal Reserve Chairman Ben Bernanke really wants to earn Person of the Year honors, he needs to do more to fight unemployment. Contrary to Alan Greenspan’s assertions, the Fed does have some more unemployment fighting tools in its arsenal (and a legal mandate to maximize employment, in addition to assuring price stability).

Via Matthew Yglesias and Free Exchange, the Wall Street Journal posted responses to questions Sen. David Vitter (R-LA) collected and sent to Bernanke. And Bernanke’s answer to an inquiry from Brad DeLong shows that he is well aware that he could do more to boost employment, but he isn’t planning to:

The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed.

As Free Exchange put it, “I can’t imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”

Bernanke’s nomination for a second term was approved by the Senate Banking committee today on a 16-7 vote, with six Republicans and Sen. Jeff Merkley (D-OR) voting against. While most of the rhetoric coming from those voting “no” had to do with the Fed’s lack of transparency or roll in the housing crash (both legitimate concerns), Merkley couched his criticism in terms of unemployment and a complacency towards Main Street. “Following our economic collapse, it is also apparent that [Bernanke] has not changed his overall approach to prioritizing Wall Street over American families,” Merkley said. Sen. Sherrod Brown (D-OH) made many of the same points as Merkley, but still voted for Bernanke.

As Yglesias put it, “unemployment is high in large part because the policymakers with primary responsibility for achieving full employment don’t want to use the tools at their disposal to achieve that goal.” Bernanke really needs to be pressed on why that is.

Today, Senate Banking Committee Chairman Chris Dodd (D-CT) and ranking member Richard Shelby (R-AL) said that, while they still have “a number of issues to resolve,” negotiations regarding financial regulatory reform are “going great.” “My hope is when we get back in January, that we’ll — depending on how the progress is moving — schedule a markup in the committee,” Dodd said.

Shelby added, “I think we have an opportunity between now and January, over the holidays, to come closer together. I hope we will in a bipartisan way.” But one of the sticking points in the regulatory reform effort continues to be the Consumer Financial Protection Agency (CFPA) which Republicans and many conservative Democrats are standing against. Shelby has previously called the CFPA “folly and dangerous,” and today he provided some insight into his reasoning:

”From the beginning I’ve always thought that we should not create a stand-alone consumer financial authority,” Shelby said this week. ”Safety and soundness (of banks) should be number one.”

So like Rep. Jeb Hensarling (R-TX), Shelby seems to believe that banks ought to trump consumers. But his alternative — leaving responsibilities for consumer protection with the existing bank regulators — essentially condones the status quo.

Shelby’s stance is especially interesting considering his vote today against confirming Federal Reserve Chairman Ben Bernanke for a second term. Under the GOP’s regulatory reform plan — which simply tells the regulators to get their act together and protect consumers — the Federal Reserve, of which Shelby seems to think so little, will not have any of its consumer protection powers removed.

As I’ve pointed out before, there’s a tension between the safety and soundness of a financial institution and consumer protection, because the same actions that are best for a banks bottom line are often the worst for consumers. Would predatory lending be a problem if it weren’t profitable? A new agency that is focused on consumers and can stand on equal footing with the bank regulators is a vital part of the regulatory reform effort.

On a grander scale, though, Shelby’s statement is emblematic of the GOP’s attitude toward regulatory reform. The financial crisis occurred barely more than a year ago, and yet no Republican voted for the House’s reform bill, and Dodd’s ambitious initial legislation is being pared back. And all because banks “should always be number one.”

Earlier this month, Sen. Jon Kyl (R-AZ) warned that Democrats would be in for a “rude shock” when they tried to extend the estate tax, which due to a Bush budget gimmick is scheduled to disappear in 2010. The House has already passed a permanent extension at the 2009 level, which is 45 percent with a $3.5 million exemption ($7 million for a couple), and the Senate, led by Sen. Max Baucus (D-MT), tried yesterday to put in place a temporary extension at the same level.

But Senate Minority Leader Mitch McConnell (R-KY) and Sen. Jon Kyl (R-AZ), in their zeal to cut taxes for the very wealthiest Americans, blocked the extension, and pushed for repealing the estate tax entirely. Watch it:

So at the same time that they’re decrying the deficits and debt (that they largely caused) and demanding the creation of an inevitably ineffectual budget commission, Republicans saw fit to push for a tax cut for the very wealthiest Americans. And make no mistake: despite all of the GOP’s references to “small businesses” and “family farms,” trying to cut the estate tax is flacking for the heirs of the very largest estates in the country, the Paris Hiltons of the world.

99.8 percent of estates in the U.S. are exempt from the estate tax at 2009 levels, and as Chuck Marr of the Center on Budget and Policy Priorities pointed out, “many more farm and business estates of people who die in 2010 will face tax increases than tax cuts if Congress allows the estate tax to expire.” “Under current law, many of these people pay no estate tax, and their capital gains taxes on that appreciated value are forgiven at death. But if the tax expires, their heirs could face capital gains taxes on the increase in the value of assets they may have acquired years or even decades ago,” Marr wrote.

Kyl actually said that the problem with the estate tax “doesn’t have to exist if [Democrats] will just leave the existing law alone.” Well, under the existing law, the estate tax is scheduled to return in 2011 at a 55 percent rate, with a $1 million exemption. So is Kyl endorsing that? Were it coming down the pike, I suspect Kyl would be right back on the floor, railing against leaving the existing law alone and pushing for more tax cuts for the mega-rich.

Today, Sens. John McCain (R-AZ) and Maria Cantwell (D-WA) introduced legislation reinstating the Glass-Steagall Act, the Depression-era law separating investment and deposit banking that was repealed by 1999′s Gramm-Leach-Bliley Act.

The law would give financial conglomerates like JP Morgan Chase and Bank of America one year to decide if they want to be investment banks or depository institutions, and formally bar investment banks from engaging in insurance activities. Goldman Sachs would officially lose its status as a bank holding company and Citigroup would be forced to ditch its non-bank affiliates.

“Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes,” Cantwell said. “The first step is this bill.” McCain — whose inclusion in this effort is interesting given his closeness to Phil Gramm, the man most responsible for removing Glass-Steagall — added that “if big Wall Street institutions want to take part in risky transactions, fine. But we should not allow them to do so with federally insured deposits.”

McCain and Cantwell’s announcement comes one day after House Majority Leader Steny Hoyer (D-MD) said that House Democrats are considering reinstating Glass-Steagall. But as Sam Stein reported, “the idea hasn’t gotten any attention from the Obama administration, which does not attribute the current crisis to the law’s repeal.” In fact, one Treasury official summed things up this way:

Obama administration officials have dismissed the idea that the financial sector should or can be changed in more fundamental ways than they are now proposing. You can’t turn back the clock, they say, and the new requirements they plan to impose on big banks to hold more capital in reserve, put up $150 billion for a rainy-day rescue fund, and disclose more of their risky trades should be enough to keep the financial sector from imploding again…“I think going back to Glass-Steagall would be like going back to the Walkman,” says one senior Treasury official.

But there are plenty of economists who see things differently, among them the administration’s own Paul Volcker. “People say I’m old-fashioned and banks can no longer be separated from non-bank activity,” Volcker has said. “That argument brought us to where we are today.” The former CEO of Citibank who led the lobbying effort to repeal Glass-Steagall acknowledged a few months ago that “some kind of separation…makes sense.”

Now, the repeal of Glass-Steagall was not entirely responsible for the financial crisis. Its retention wouldn’t have saved Lehman Bros., Bear Stearns, or AIG, for instance. And the resolution authority included in the regulatory reform bill passed by the House last week will go a long way toward ensuring that any financial behemoth can be unwound without damaging the wider economy.

That said, the administration’s refusal to treat a policy separating investment and depository banking seriously on the merits is quite maddening. Sure, it wouldn’t have saved Lehman. Does that mean it’s a bad idea? Joe Stiglitz pointed out that, as a result of Glass-Steagall’s repeal, “the culture of investment banks was conveyed to commercial banks and everyone got involved in the high-risk gambling mentality. That mentality was core to the problem that we’re facing now.” Why shouldn’t we honestly consider whether or not that problem can be addressed?

Today, Time Magazine announced that its 2009 Person of the Year is Federal Reserve Chairman Ben Bernanke. Time justified the decision because Bernanke “is the most important player guiding the world’s most important economy”:

His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future. The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.

Time’s decision makes sense, insofar as Bernanke played a huge role in the worst recession since the Great Depression and will greatly influence the U.S. recovery going forward. And this is a critical time for Bernanke, as his nomination for a second term faces a vote in the Senate Banking committee tomorrow, and his nomination is being held by both Sen. Bernie Sanders (I-VT) and Sen. Jim DeMint (R-SC).

But with so much at stake, Time was too gentle on Bernanke, though it did note that he “was as clueless as Greenspan about the coming storm.” Time gave Bernanke a pass on the sloppiness of the various rescues of financial behemoths, including AIG, by saying “now that the fire is out, it’s easy to attack the firefighters for getting the furniture wet or holding their hoses improperly.”

More importantly, Time didn’t address Bernanke’s current refusal to address unemployment. As Paul Krugman wrote, “both the Fed’s actions, as measured by its expansion of credit, and Mr. Bernanke’s words suggest that the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism.” Indeed, the Fed has a legal mandate to maximize employment and estimates that unemployment will be high for several years, but as Time reported, Bernanke “implicitly makes a case for doing nothing” more and won’t advocate for more fiscal stimulus.

The common retort is that the Fed now needs to worry about inflation, with all the money it has pumped into the economy, but Bernanke admitted in a letter made public yesterday that inflation is unlikely to become a problem. He also said during his confirmation hearing two weeks ago that unemployment is “the most difficult problem that we face right now.”

So to do nothing more to fight unemployment, while not pushing for more stimulus, would be unacceptable. Peterson Institute economist and former Federal Reserve staffer Joe Gagnon has released a plan calling for $2 trillion more in Fed easing, which would “boost GDP 3 percent or more over the next eight quarters and to reduce unemployment rates by between 1 and 3 percentage points.” U.C. Berkeley economist Brad DeLong wrote that Gagnon has “a coherent plan based on a coherent, and in my view likely to be accurate, view of the world,” which can’t be said for Bernanke.

A new poll by the Progressive Change Campaign Committee found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, compared to just 20 percent holding the opposite view. Bernanke has the tools available to change that perception, and really earn himself the title of Person of the Year.

Yesterday, the House of Representatives discussed a resolution recognizing the 70th anniversary of the retirement of U.S. Supreme Court Justice Louis Brandeis. Talk eventually wound its way to Brandeis’ famed characterization of states as the laboratories of democracy, and Rep. Steve Cohen (D-TN) pointed to California’s legalization of medical marijuana, which has since spread to 13 states, as a prime example of that approach.

Rep. Dan Lungren (R-CA), however, wanted to choose another example, and said that California’s Proposition 13 should be a guiding light for the nation:

Yes, [Brandeis] did believe in states being the laboratories of democracy. And I enjoy the gentleman’s comments, reference to my state of California and I might say, rather than choose the subject he chose, as an example of California being one of those laboratories, I would suggest Proposition 13 or perhaps “three strikes and you’re out” as guiding lights to the rest of the nation as to how we ought to organize ourselves.

Watch it:

Back in reality, 1978′s Prop. 13 — which requires that a two-thirds majority of the state legislature approve any tax increase — lies “at the root of California’s misery” and its complete budget dysfunction. It has rendered California completely incapable of doing anything to bring its budget into balance that doesn’t involve slashing social services, closing prisons, and laying off record numbers of public employees. Even though they make up just one-third of the state legislature, Prop. 13 has enabled conservatives to block even moderate tax increases, including rejecting an increase in the tobacco tax 14 times.

But Lungren’s idealizing of Prop. 13 fits into the wider GOP mantra of the moment, which is to promise never to raise taxes at any time, for any reason, ever. Rep. Eric Cantor (R-VA), for instance, thinks a simple point of bipartisan agreement should be that no taxes on anybody will increase until unemployment falls below 5 percent. So even if unemployment fell by half, clearly signaling that the economy had recovered from its 2008 shock, that still would not be enough for Cantor to approve a tax increase for even the wealthiest Americans.

But it’s a simple fact that the country’s long-term budget can’t be balanced on spending cuts alone. As Michael Linden and Michael Ettlinger pointed out, exempting interest on the debt, Social Security, Medicare, and defense spending (which Republicans never agree to cut), “the rest of the budget needs to be cut by 51 percent to have a balanced budget in 2014.” That’s half of everything — Food Stamps, Pell Grants, Title I education funding, Medicaid, low-income energy assistance, etc. Even if defense spending is thrown into the mix, it takes a 35 percent cut to achieve balance.

As Paul Krugman told me, reducing long-term deficits is not hard economically, but is “politically impossible right now.” Indeed, by reveling in the “guiding light” of Prop. 13 Lungren reveals that he — like the rest of the GOP — is simply not serious about addressing America’s long-term fiscal position.

Our guest bloggers are Lawrence Korb, Senior Fellow, and Jacob Stokes, a national security intern, at the Center for American Progress Action Fund.

Last Sunday on Meet the Press, former Massachusetts governor Mitt Romney blamed American economic woes on what he sees as excessive salaries and benefits for public sector workers:

[T]he real threat right here… is that if we don’t take action to rein in the scale of government and the growth of government spending and the compensation levels of government workers — you saw government workers, average government workers, are now making $30,000 a year more than the average private sector worker. These kinds of excesses and the massive deficits that, that, that government is putting in place, over a trillion dollars a year for these coming several years, this threatens our long-term viability, because it, it, it suggests that we could have runaway inflation.

The $30,000 number is a convenient statistic for someone like Romney, who has an ideological drive to slash the public sector for the sake of slashing it. And he’s hitting on an issue that has become something of a hobby horse for the wider conservative-libertarian movement. USA Today even ran an article on the subject on Dec. 11, with only a one-sentence defense for the other side buried deep in the piece.

But the problem with this statistic — as this post from Amherst economics professor Nancy Folbre points out — is that in many important ways, it compares apples to oranges. And in doing so, it ends up being completely misleading.

Although technically true — the average public sector worker made $71,206 in 2008, compared with $40,331 in the private sector — those numbers mask important factors about the public workforce that must be taking into account when making comparisons to the whole of the private workforce.

Most importantly, a much higher proportion of private workers — 43 percent — work in jobs that earn less than $25,000 a year. Most public sector employees fall into the $25,000-$75,000 range. Why the pay disparity? Overall, federal employees have more education than private employees. Forty-five percent of public sector workers hold a college degree or higher; only 29 percent of private sector workers can say the same. It’s hardly surprising that a population with significantly more education would make more money. That’s the same way in the private sector.

Figuring out how public sector pays stacks up against private sector pay for comparable jobs would offer a much more insightful look into whether the public sector is bloated with overpaid bureaucrats. Lucky for us, Harvard economist George Borjas has done just that (hat tip, Folbre). He found that at the high end of the spectrum — where so many of those free-riding government lifers reside — public sector workers are paid comparably less than their private sector brethren. And this makes sense: why do so many senior officials leave to take lucrative positions at private firms if not for the money?

The level of intellectual rigor practiced by Romney is, unfortunately, par for the course for many people on these shows. But the public should demand more from a probable 2012 GOP presidential candidate.

Bloomberg reported today that former Federal Reserve Chairman Paul Volcker, who currently heads President Obama’s Economic Recovery Advisory Board, “visited nine cities in five countries in the past eight weeks to warn that bankers and regulators ‘have not come anywhere close to responding with necessary vigor’ to the worst economic crisis in 70 years.”

In particular, Volcker has slammed the notion that financial regulation will stifle innovation by saying that the greatest banking innovation in the last 20 years was the ATM. “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” Volcker said at a banker’s conference in England.

However, “there’s little evidence that policy makers are heeding Volcker”:

Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net

While Bloomberg is technically correct that “automatic dismantling” is not being considered, the report leaves out that Great Britain is taking apart the mega-banks that are still under government control, while the financial regulatory reform package passed by the U.S. House of Representatives last week included an amendment from Rep. Paul Kanjorski (D-PA) that would allow regulators to dismantle systemically risky firms.

Plus, House Majority Leader Steny Hoyer (D-MD) said today that House Democrats are “considering reinstituting the Depression-era Glass-Steagall Act,” which placed a regulatory wall between depository institutions and investment banks, preventing financial conglomerations like Citigroup from coming into being “As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer said.

So while it’s true that Volcker’s voice hasn’t been amplified enough — and the administration is counting way too much on public admonishments to influence bank behavior — there are at least some steps being taken to more actively rein in the biggest banks on both sides of the Atlantic.

Volcker’s argument about the role of innovation, though, is spot-on, and hasn’t been adequately discussed. As Dean Baker pointed out, “financial industry profits now account for more than 31.5% of all corporate profits,” which is “a higher share than at any point during the housing bubble years.” One financial engineer actually told Volcker that financial innovation does nothing to help the economy, but “it’s a lot of intellectual fun.”

Do we need a financial system that swallows up almost one-third of corporate profits by passing paper back and forth? I don’t think we do. And hopefully lawmakers will realize that Volcker is beating this drum and listen up.

Back in July, when a scheduled increase in the minimum wage from $6.55 to $7.25 per hour was about to take place, Fox News ran a segment examining how “the hike will hurt,” joining a media chorus about the supposed detrimental effect the increase would have on business hiring.

Now, with its Republican-inspired “Where are the jobs?” campaign in full swing, Fox has gone “on the job hunt” with a “new” idea for increasing employment: cutting the minimum wage. Jumping off from an op-ed by Washington Post editorial board member Charles Lane, Fox yesterday ran a handful of segments on the same basic premise — cutting the minimum wage may be the answer to the jobs dilemma. Watch a compilation:

Fox’s anchors seemed very pleased to have stumbled onto this line of thought. Of course, none of the anchors mention that almost all of the economic research on the subject shows that the minimum wage has little to no effect on employment. The most well known researchers on the subject — David Card and Alan Krueger — examined a minimum wage increase in New Jersey, and found that “employment actually expanded in New Jersey relative to Pennsylvania, where the minimum wage was constant.”

Fox’s “brand new information,” meanwhile, is a study published last year by David Neumark of the University of California and William Wascher of the Federal Reserve that found that increasing the minimum wage may affect, by Neumark’s own admission, a “small number” of workers.

Of course, some employers would inevitably jump at the opportunity to hire workers dirt cheap and pay less than a minimum wage that already doesn’t lift a family of three out of poverty. It would actually take a minimum wage of $9.92 per hour to match the buying power of the minimum in 1968, as “in today’s dollars, the 1968 hourly minimum wage adds up to $20,634 a year working full time. The new federal minimum wage of $7.25 comes to just $15,080.” That’s a total of $5,554 in lost wages.

And, if the minimum wage were decreased, how many employers would simply cut the wages of their current workers, at a time when consumer demand is already low? There are plenty of job creation ideas being bounced around these days, but you can count on Fox News to seize on one that would mean less money and a lower standard of living for workers.

Cross-posted on ThinkProgress.

Over the weekend, an email popped up in my inbox announcing that “the Senate Democratic Policy Committee (DPC) will hold an important hearing on jobs creation” on Wednesday. “This is a terrific opportunity to learn more about the job creation legislation as it is developed, and to hear competing policy recommendations from top experts from both Democratic and Republican administrations,” the email said.

Earlier this month, House Republicans held a similar economic roundtable, and I pointed out that the GOP was counting on a slew of former Bush administration and McCain staffers for advice on job creation. House Democrats evidently agreed that such a lineup was worth disparaging.

So then why are Senate Democrats calling on two of the same people: Bush tax cut architect Larry Lindsey and deficit double-talker Douglas Holtz-Eakin? These two will be balanced, supposedly, by Gene Sperling, a counselor to Treasury Secretary Tim Geithner, and Martin Baily of the Brookings Institution.

The inclusion of Holtz-Eakin is especially disheartening, as at the GOP event, he said that the single best jobs policy would be ending “crippling regulation” and “intrusive government expansion”:

The single best jobs action that President Obama could take would be to reverse course on a dangerous agenda of debt-financed spending, crippling regulation, expensive mandates, and intrusive government expansion.

Is that a call for repealing the stimulus? After spending the McCain campaign ludicrously asserting that McCain’s economic plans would lead to a balanced budget and mischaracterizing McCain’s tax plan, Holtz-Eakin has of late been championing the idea that repealing the estate tax will somehow spur job creation, despite the fact that exceedingly few small businesses are affected by it.

So on one hand, it’s great to see the Senate acknowledging that a new jobs bill needs to be looked at, and holding a hearing to flesh out ideas of what should make its way into the legislation. But why the reliance on the same old crew of tired economists pushing solutions that aren’t viable? There are some conservative minded economists out there (Bruce Bartlett jumps to mind) who, though I disagree with their policy prescriptions regarding job creation, are at least approaching the problem without sounding like RNC Chairman Michael Steele.