Medallions for Everyone

The more I think about this Yglesias tweet the more I like it:

There should be a hard cap on the number of cars allowed in the city with tradeable permits.

Let the market decide the balance of private vehicles vs rides-for-hire.

Paint tons of bus lanes and let normal people ride electric scooters. https://t.co/NRBlEFhjJN

— Matthew Yglesias (@mattyglesias) July 25, 2018

What this basically amounts to is extending the medallion concept from taxis to all cars (and presumably trucks, but excluding municipal vehicles). And I like it! You pick a number of cars that is suitable to the city's car infrastructure and you sell that many medallions.

There are certainly potential problems. For one, you might question whether it makes sense to treat all cars equally. A taxi is used intensively—time spent off the street is wasted opportunity to earn money—which is good in some ways but bad in others. A medallion system is insensitive to where, when, and how often cars are on the roads. This is arguably not ideal if the goal is to keep cars off the streets.

You could also argue that a simple car tax would make more sense. Conceptually, this would be similar to medallions that expire every year. Or you could argue for a tax that varies by location and time of day, perhaps facilitated by GPS data. A car trip from a residence to the hospital in an outer borough doesn't cause nearly as much damage as a car trip through Manhattan during rush hour. Maybe congestion pricing, even a fairly blunt variety, would be preferable to a policy that punishes those trips equally.

I also wonder how you would treat motorcycles. On the one hand, they take up less space than cars, and they are more energy-efficient. On the other hand, they pollute more, and if they were given favorable regulatory status I imagine they would proliferate rapidly.

And what about e-bikes? Right now e-bikes and motorcycles are fairly distinct categories, but if you put regulatory pressure on that distinction, I would expect it to deform. Already I see motorcycles and motor scooters (the kind where you sit down, like a small motorcycle) in the bike lane fairly often.

So anyway there are issues, but it doesn't strike me as a crazy idea at all.

[minor edit to fix typo]

Paul Ryan's Trade Policy

Paul Ryan is refusing to advance legislation that would curtail Trump's unilateral control over U.S. trade policy. His stated reason is that he's not going to push for legislation that Trump wouldn't sign anyway. Of course overriding a presidential veto is hardly unprecedented in U.S. politics, and Ryan might even have the votes for it, but in truth I am sympathetic to Ryan here. (To be clear, I despise him, but on this particular issue I can see why he is taking this stance.)

First, I just don't think trade is a very big deal. It's important to distinguish between the theoretical stakes and the actual stakes. The theoretical case for trade is very strong, and it is especially strong when it comes to rich, democratic allies like Canada. (I think it is also very strong for countries like China and Indonesia, but it is certainly more complicated in those cases.)

But the practical import of Trump's actions so far is negligible from a macroeconomic perspective. And that would be true even if the "trade war" escalated to several times its current magnitude. I am sympathetic to the people whose livelihoods are being ruined, but people's livelihoods are ruined every day by any number of government policies (and by random chance). Also, there is at least some possibility the status quo ante will be restored, in which case the soybean farmers will return to normal (though a few may have been wiped out in the meantime, and again, I really do feel bad for these people).

Now there is another consequence of the trade war, which is that it is a boon for lobbyists and the people within the administration who stand to benefit from their attention. When fortunes are made and lost on the president's whim, it becomes highly profitable to have influence within the administration. So for instance, after the steel tariffs went into effect, the manufacturers of beer kegs requested protection (they are squeezed because their foreign competitors are paying a low price for steel while they pay the new, elevated domestic price). The same story will unfold across hundreds of industries, and fortunes can be made by Trump's advisers.

But that's no concern of Ryan's. And frankly Trump's advisers were already profiting handsomely from his erratic administration.

Second, and more importantly, Paul Ryan's job at this point is to get as many Republicans elected to Congress as possible in November. He would not advance that goal by creating what amounts to a wedge issue in favor of the Democrats. (Technically it's not quite a wedge issue, because I assume quite a few Democrats would vote against the legislation, but they would do so to their own electoral advantage, whereas Republicans would generally be trapped between their ideology and Trump's popularity within their electorate.)

This gets to an important point that I think is underappreciated. Paul Ryan is not a popular man, and within the Republican Party's base Trump is hugely popular. In those circumstances blaming Ryan for failing to override Trump's veto is like blaming someone for the laws of physics.

Now I realize there's a complication here, which is that the Republican Party has cultivated a base of horrible people. This is part of why I despise Paul Ryan! So my defense of him is meant to be very narrow. At this juncture, I don't really think it would make any sense for him to oppose Trump on trade, and I think trade doesn't even make the top 100 list of Trump's threat to the U.S. To that extent, and that extent only, I think Ryan is exculpated.

Stein, Milgram, and Comity

There is a long-running vituperative fight between "liberals" and "leftists" about the Democratic agenda. Painting in broad strokes, leftists want to push the Democrats as far left as possible across the board, while liberals tend to be more idiosyncratic and more pro-market (for instance, some want to push the Democrats to the right on housing policy). However, I think it's a mistake to view the groups in ideological terms. The policy distance between them is not large and it is almost entirely irrelevant to today's national politics. (As I mentioned, on a local level there may be relevant differences.) Instead the fight comes down to disputes over tactics and, far more importantly, resentments over specific races, in particular the 2008 and 2016 Democratic primaries.

This is all very unfortunate inasmuch as it tends to get Democrats upset at each other and causes people to turn off their brains. (I'm using the term "Democrats" to refer to people who, broadly speaking, tend to vote for Democratic candidates or at least to support their policies. In fact many on the left despise the Democratic Party.) So for instance, I'm convinced that if he were fully briefed on the issue, Bernie Sanders might very well support congestion taxes to reduce car traffic and provide funding for the MTA. But in practice his "team" is part of a political coalition that opposes congestion taxes, and so when he came to New York he criticized congestion taxes because of the negative effect they would have on "working families and working people." My perhaps over-optimistic view is that if Democratic politics were less tribal, and if Sanders had a better command of the facts, he might be persuadable on this issue. (In truth, though, I'm not sure de Blasio would be any less of a schmuck if Democratic politics were more functional, and Sanders was weighing in on New York City transit policy at de Blasio's behest.)

Anyway one of the recent dustups has centered on how much blame people bear for voting for Jill Stein, or for not voting or whatever, in 2016. The way this sometimes comes up is that Trump will do something terrible like tearing babies from their mothers, and then someone will tweet something like, "Wow, thanks Jill Stein," and then a fight erupts. What should we make of this?

I have two answers. The first answer is that I'm not sure why Stein voters (or willful non-voters) are significantly less blameworthy than Trump voters. I want to emphasize some nuance here—maybe your view is that Trump voters are not very culpable. If that's your view, then you should probably conclude that Stein voters are also not very culpable, if at all. I don't see why it would be more blameworthy to vote for Stein than for Trump.

But my own view is that Trump voters are in fact quite culpable. This is not because they necessarily had a subjective desire to see families split apart or whatever. In fact, you'll sometimes see a story where a Trump voter will have her husband deported and she'll say something like, "Well I thought he was only going to go after the bad ones!" The reason I don't think people's subjective expectations are very exculpatory is that Trump made practically no effort to hide his animus against immigrants, black people, women, and so forth. If you concluded that you would not be personally affected, or you convinced yourself that Trump has a good heart or whatever, you are either engaged in "ethical localism" or you are culpably gullible.

Anyway that's my view. And I basically apply similar logic to Stein voters. They knew (or should have known) the stakes. They were basically placed into a real-life Milgram experiment and told to pull the lever to unleash hell on minorities. And they pulled the lever. I don't care if subjectively they thought they were preserving their moral purity by not voting for a Democrat or whatever. They shouldn't have pulled the lever.

My second answer is that part of being a grownup is not saying everything you believe. In particular, given how helpful the intra-left fights are to Trump and conservatives generally, I think it's generally best to be conciliatory. The problem, of course, is that a fair amount of the fight is carried out on social media, where the impulse to respond sharply is nearly irresistible. (And in fact I have generally not resisted it.) This is particularly so because Stein voters are often to this day convinced that pulling the Milgram lever was the right thing to do. This is very hard to take.

But anyway my view is simply that Stein voters are morally complicit in Trump's crimes, and for the sake of political cohesion we must not say so publicly. (This blog is sufficiently non-public that I don't see any problem being frank.) Maybe I will write something about the way this two-faced approach is subjectively unpleasant, but maybe that's obvious.

Can the Democrats Win Kansas By Moving Left?

Alexandria Ocasio-Cortez is an inspiring politician whose success has catapulted her to the front pages and sparked a conversation about how the Democratic Party should frame its agenda. In particular, some have suggested that the Democrats should openly embrace socialism in all of their races, while others have expressed skepticism that Ocasio-Cortez's messaging would work in districts that are further to the right than the (very safely Democratic) 14th congressional district of New York.

Ocasio-Cortez has weighed in on this debate with a beguiling argument.:

With respect to the Senator, strong, clear advocacy for working class Americans isn’t just for the Bronx.

Sen. Sanders won:
- Michigan
- Minnesota
- Kansas
- Nebraska
- Wisconsin
- Indiana

We then lost several of those states in the general. What’s the plan to prevent a repeat? https://t.co/99K08qr7SH

— Alexandria Ocasio-Cortez (@Ocasio2018) July 1, 2018

What is intriguing about this is the suggestion that if Sanders won the Democratic primary in a state, it means that the state is ripe for a Democratic general election victory, so long as the Democratic candidate openly embraces a left-wing economic message. And the logic seems pretty bulletproof. If a state isn't ready to embrace socialism in its general election, then how could a socialist candidate win its Democratic primary? That would seem to be a contradiction in terms, as absurd as the prospect of a conservative candidate winning the Republican nomination in a reliably Democratic state.

And it's hard to overstate how startling the 2016 Democratic primary map is when you look at it in this light. You can see a map of the 2016 primary results here. If Ocasio-Cortez is correct, Democrats could pick up essentially the entire northwest quadrant of the country by embracing socialism. Assuming they keep their losses elsewhere to a minimum, Democrats could run up a truly stunning margin in the Electoral College. (Also, Clinton won the primaries in Missouri and Kentucky by razor-thin margins. If you add those states to the Democratic tally, we're talking about an epic landslide in November.)

I only see one slight problem with the argument: I'm not 100% sure that it's true that a Sanders win in a Democratic primary necessarily implies that a socialist would win the general election. To cite one example, in West Virginia Sanders trounced Clinton, which according to our theory would indicate a strong taste for socialism in West Virginia. But according to NBC (link via Wikipedia), 39% of the Democrats pulling the lever for Sanders would vote for Trump in a Trump vs. Sanders general election. This might indicate that there is some missing nuance in argument implicit in Ocasio-Cortez's tweet. (In this case, part of the nuance is that a lot of conservative voters in West Virginia are registered Democrats for vestigial reasons, and they seem to have voted for Sanders out of antipathy toward Clinton, not out of support for socialism.)

The other point I would make, and I'm a little surprised Ocasio-Cortez didn't notice this, is that in many states the Democratic primary is not a surefire indicator of general election success for the simple reason that Republicans greatly outnumber Democrats. To put it another way, there will always be a Democratic primary winner in every state, even though there are states where Democrats stand no chance in the general election. The victory of the further-left candidate in those primaries might not constitute good evidence for the party's prospects in the general election.

To take an example cited by Ocasio-Cortez, in the Kansas Democratic caucuses, Bernie Sanders won 26,637 votes to Clinton's 12,593. Even if this indicates that Kansas contains 26,637 voters who will gladly pull the lever for socialism, that may not be quite enough to win a general election—in the 2016 general election, Trump got about 671,000 votes and Clinton got about 427,0000. Given those numbers, the ability of a self-avowed socialist to attract 26,637 votes in a partisan caucus may not indicate a path to victory.

So as much as I like Ocasio-Cortez, I feel she may have made an elementary mathematical error when she published the tweet I've embedded above. I look forward to the left wing of the party dropping this argument as its flaws become apparent.

The Customer Protection Rule and Too Big to Fail

I wrote a long post about the Customer Protection Rule (formally, Rule 15c3-3 under the Securities Exchange Act of 1934), and I realized no one would want to read it, so here's a slightly shorter post.

The key thing to recognize is that the Customer Protection Rule, which applies to U.S. broker-dealers, prevents the broker-dealers from using customer funds to finance themselves. To oversimplify a little, when a customer holds cash in a brokerage account, the broker-dealer can only do two things with it: (A) make margin loans to other customers, or (B) hold the cash in segregation. By "hold the cash in segregation" I mean hold it in a special account that is reserved for customer property and that can't be subject to a security interest in favor of the bank maintaining the account. (The broker-dealer can also invest the cash in U.S. Treasury securities, which must also be held in segregation.) The broker-dealer can't use the cash for any other purpose, and certainly it can't use the cash to pay its own creditors.

The purpose of the rule is to prevent broker-dealers from putting their customers at risk. A broker-dealer that is in compliance with the Customer Protection Rule should always be able to return customer cash and securities reasonably quickly without risk of loss. Of course nothing is perfect, and I don't want to exaggerate the degree of protection, but it's pretty good. (As an added layer of protection, insurance provided by the Securities Investor Protection Corporation automatically protects the first $500,000 of customer assets, except that it only protects up to $250,000 of cash.)

Two observations here. First, hedge funds generally want to borrow money to finance their trading activity. Some funds operate without leverage, but that's pretty rare. So typically a hedge fund, far from having cash in its brokerage account, will actually have a large debit in its account (that is, it will have a large margin loan payable to the broker).

Second, a broker-dealer should be largely indifferent to customer withdrawals, at least in terms of its own liquidity. Since the cash is segregated anyway, it's not as though it was ever available to the broker-dealer in a meaningful way. Sure, it can be a cheap way to finance margin loans, and it earns a modicum of interest in the special reserve account (or, if it is invested in Treasuries, it earns a small return that way), but to a close approximation a broker-dealer shouldn't care about customer withdrawals as such. (One little nuance here is that the broker-dealer generally run their computations for segregation once a week, so when customers withdraw cash it briefly reduces the broker-dealer's liquidity. But within a week its liquidity is restored as it draws a corresponding amount out of segregation, and I'm pretty sure a broker-dealer could always run the computation more frequently if it wanted. Not 100% sure about that.) Of course customer withdrawals of cash might signal a loss of confidence, which is quite serious, but by themselves they are not a big deal.

That's why I found the following passage from Too Big to Fail puzzling:

Apart from the new anxiety about money market funds and general nervousness about investment banks, he [John Mack, CEO of Morgan Stanley] was facing a more serious problem than anyone on the outside realized: At the beginning of the week, Morgan Stanley had had $178 billion in the tank—money available to fund operations and to lend to their major hedge fund clients. But in the past twenty-four hours, more than $20 billion of it had been withdrawn, as hedge fund clients demanded it back, in some cases closing their prime brokerage accounts entirely.

"The money's walking out the door," Chammah [co-president of Morgan Stanley] told Mack.

"Nobody gives a shit about loyalty," Mack railed. He had wanted to cut off the flow of funds, but up until now had been persuaded by Chammah to keep wiring the balances.

"To put the gates up," Chammah warned, "would be a sign of weakness."

The question was, how much more could they afford to let go? "We can't do this forever," Chammah said.

I really can't tell what's going on here. "Money available to fund operations and to lend to their major hedge fund clients" is only half right. Sure, you can use customer cash to fund margin loans, but you emphatically cannot use it to fund operations. That would be grossly illegal.

Also, hedge funds really shouldn't be holding that much cash at their brokerage. It's weird. Hedge funds usually want leverage, and sitting on cash is the last thing they want to do. (Admittedly the markets were weird at that point, and if you're net short you might be holding cash in your account as collateral for your short positions.)

But the big point here is the one I made earlier. This is presented as a loss of liquidity for Morgan Stanley. But the money was coming out of segregation, it was never a source of liquidity to begin with. Don't get me wrong, you never want to lose customers, but the last thing to worry about is returning their cash.

Also, it's true that Morgan Stanley can use customer cash to fund margin loans, but (A) at the margin most broker-dealers have lots of cash sitting in segregation, so they don't need to reduce their margin lending, and (B) anyway when a broker-dealer has to use alternative funding to finance a margin loan, it can take the borrower's securities out of segregation to obtain the financing on a secured basis.

As I said, it's puzzling. Maybe its customer reserve account was empty somehow and so a dollar of customer withdrawals meant a dollar of financing that it had to obtain in the market? And maybe Morgan Stanley was having trouble obtaining financing even on a secured basis? But that all seems very unlikely. I don't really get it.

[Oh, also, you can't refuse to give customers their cash! I guess you can slow-walk them, maybe, but the regulators would flip their shit if they knew you were intentionally holding on to customer cash when customers were trying to get it out.]

[Updated slightly for clarity.]

FAQ on Nancy Pelosi

Q: Isn't Nancy Pelosi Bad? For instance:

don’t like to get controversial on here, but h*ck i’m just gonna say it… it appears nancy pelosi may be bad https://t.co/yIWhvTf5NJ

— Ashley Feinberg (@ashleyfeinberg) June 27, 2018

A: That quotation is taken out of context. Here's the full video:



And here's the specific question and answer referred to in the tweet:



If you can't hear the question, it appears to be, "Republicans say that one of the things this [inaudible] shows is that democratic socialism is ascendant in your party. Are they right about that?"

Q: So why doesn't she just admit that democratic socialism is what the party stands for now?

A: First of all, that's not true. Democratic socialism is commonly understood to involve a much larger public sector than many Democrats support. Also, the term has been adopted by a faction of the left wing, and that faction is by no means representative of the Democratic caucus generally.

Q: I'm suspicious. Why would Republicans say it if it isn't true?

A: Republicans believe that if they frame the November elections as a referendum on socialism, it will improve their expected outcome. They do not feel beholden to the truth and haven't for a long time.

Q: What if they're wrong? What if the only thing preventing the Democrats from taking a huge majority is its refusal to embrace socialism?

A: That's certainly a theory put forward by the far left of the party. But it seems likely that left-wing policies (such as expanded access to health care and education) are more popular than the label "socialist," at least in the swing districts Pelosi is trying to win. Bear in mind also that "socialism" is a classic wedge issue, in the sense that the Republicans are united in opposition to it while Democrats are divided. And in general, it doesn't make a lot of sense to frame your ideas in the most provocative way possible, unless your goal is to win intra-party debates. But Pelosi is trying to beat the Republicans, and to that end she is wisely fending off maximalist rhetoric.

Actually, though, based on where things stand today, it appears it is to the Republicans' benefit to force high-stakes gambles. When you're behind, you want to increase randomness as much as possible. So for instance, imagine you are behind in a football game by 20 points. That's a large margin. If the rules permitted, you might propose a coin flip to the other team, with the winner getting 50 points. At that point your odds would go from very long to about 50/50. Of course there is no reason for the team that is up by 20 points to agree to such a proposal, and that is exactly what Pelosi is doing here—shooting down a proposed coin flip.

Q: Shouldn't Pelosi push socialism to shift the Overton window?

A: You're referring to the theory that by proposing an extreme policy, a political actor can reframe the discussion in a way that makes his original position seem moderate. Again, this is a theory that some would certainly embrace. But even if you accept that viewpoint (and it is far from obvious that it works that way in this context), Pelosi is ill-positioned to be the one saying these things, because her words can be pinned to Democrats in swing districts in a way that Ocasio-Cortez's words cannot. (Unless, that is, Pelosi takes the bait and admits that Ocasio-Cortez represents the party. Of course her refusal to do this is exactly why Ashley Feinberg called her "bad.")

Q: All right. But isn't it Bad to shit all over Ocasio-Cortez?

A: Pelosi didn't do that.

Q: Well, she said nice things about Joe Crowley. What the fuck?

A: Sure. She and Crowley are friendly. So what?

Q: You shouldn't say nice things about Republicans, even after they lose special elections.

A: Crowley is a Democrat. This was a primary, not a special election. And once the results were in he promptly endorsed Ocasio-Cortez and promised to campaign for her. He even sang "Born to Run" in her honor at what was supposed to be his victory party. He's served in Congress for nearly two decades, so it was quite a disappointing night for him, and yet he was very gracious in defeat.

Q: Okay, but he's still a conservative Democrat.

A: Try again.

Q: A moderate Democrat.

A: Try again.

Q: Well, maybe you shouldn't waste your interview time saying nice things about Democrats, no matter how liberal they are, when you could be praising Ocasio-Cortez.

A: Ocasio-Cortez doesn't need (or likely even want) Pelosi's praise. Actually it doesn't matter, since Ocasio-Cortez is guaranteed to win her election by dozens of points, but if anything Pelosi is doing her a favor by not praising her. Pelosi is unpopular with voters outside of her own district, and most Democrats would like the voters in their districts to forget all about her.

Ocasio-Cortez has been attacked by conservatives on Twitter for the reasons I outlined above. This raises people's ire and pushes them toward tribal, with-us-or-against-us feelings. Since Pelosi is not in a position where getting involved would be prudent, it can rub people the wrong way, but this is a function of her role within the party.

Q: Yeah, but also I just have really warm feelings about Ocasio-Cortez right now, and in her public statements Pelosi isn't making a big show of sharing those warm feelings. Out of context, her words would seem to indicate that she is trying to rain on my parade.

A: Yes, I suspect that is what is going on here.