Thune to Food Safety: Drop Dead

Senator John Thune joined 24 fellow Republicans yesterday to vote against S. 510, the Food Safety Modernization Act. The New York Times maps the Senate votes:

U.S. Senate vote on S. 510, the Food Safety Modernization Act, 2010.11.30.
Source: New York Times.

Senator Thune cast his lot with the Confederates and cowboys who think we eating eggs with salmonella is a personal choice, not a matter for regulation. Senator Tim Johnson cast his lot with the hippies and liberals who want a little ovesight of their granola.

Some of my liberal friends have expressed concerns that federal food safety legislation could put small farmers and organic growers out of business. However, Senator Jon Tester from Montana succeeded in getting his amendment to protect small farms into the bill. Even food über-watchdogs Michael Pollan and Eric Schlosser think the Tester Amendment makes S. 510 good enough to support. Update 19:27 CST: South Dakota farmer and Dakota Rural Action member Zita Kwartek tells The Independent Local that the Tester-Hagan Amendment protects our small farmers.

But Senator Thune's nay on food safety shows that he'll put Tea Party cred above sensible public safety rules as we push on toward 2012.

Minnesota Seeks Denial of CAFO Permit for Habitual Polluter

The Minnesota Pollution Control Agency has 111 confined animal feeding operation (CAFO) permits pending. Over the next month, after the standard 30-day public comment period, MPCA intends to approve 110 of them. MPCA has announced its intent to deny reissuance of just one of those CAFO permits.

Who gets skunk eye from MPCA? The New Horizon Dairy LLP of Hoffman, Minnesota. MPCA has dealt with this dairy previously, fining New Horizon $17,400 in 2007 for over-application of manure and use of an unpermitted storage basin.

MPCA now looks at the record of New Horizon and the other dairies connected with its ownership and says they won't get fooled again. You see, New Horizon is another dairy managed by serial lawbreaker and polluter Richard Millner of Veblen, South Dakota.

Speculation: One might look at Millner's horrible, no-good, very bad month and conclude that the regulators, courts, and bankers are piling on. Perhaps they are. Millner has shown a willingness to hire lawyers and mount dogged if sometimes absurd

Say, the press loves a good bloodbath. It remains boggling to me that the South Dakota media have said nothing about the spectacular collapse of Millner's extensive dairy fiefdom. defenses to fend off legal challenges to his dirty business practices. Perhaps MPCA, DENR, AgStar, and everyone else to whom Millner has regularly flipped the litigious bird have been waiting for a moment when Millner's legal resources would be stretched to the limit. This year's bankruptcy proceedings appear to be doing that, and the regulators and others with skin in the game are moving in for a long-overdue kill.

Serial lawbreaker and polluter—that's not just blog hyperbole. That's the conclusion that MPCA supports with this summary of the persistent deception and CAFO permit violations committed at every major dairy Rick Millner has been involved with in the tri-state area. Let MPCA explain (with my occasional emphasis):

...In concurrence with its previous action in the Excel Dairy matter and in accordance with Minn. Stat. § 115.076, the MPCA has preliminarily determined that the applicant has a history of non-compliance with Minnesota rules, statues, and permit conditions. The applicant has a history of routinely modifying feedlot facilities without authorization from the MPCA, allowing discharges to waters of the state, violating the state ambient air quality standards, and noncompliance with permit and administrative order requirements. The MPCA is aware of the applicant’s involvement in seven dairy facilities, past and present, all of which have had various non-compliance issues....

New Horizon Dairy, Grant County, Minnesota:

...A subsequent July 28, 2005, site inspection revealed a discharge to a coulee was occurring during the land application of manure. The manure application rate was 20,000 gallons per acre and the same field had received 18,000 gallons per acre three weeks prior, resulting in over-application of manure nutrients.... Also during the inspection, it was observed that manure had been placed in an unpermitted manure storage structure at the facility as a means of storing excess manure....

Excel Dairy, Marshall County, Minnesota

...In January 2010, the Marshall County District Court issued an injunction against Excel Dairy because Excel Dairy had failed to remove the manure from its basin as its permit required. The injunction required Excel Dairy to remove the manure from the basin as soon as field conditions allowed in the spring of 2010. Excel Dairy has failed to comply with that injunction and has been held in contempt of court for that failure to comply with the injunction.

...When Excel Dairy applied for its 2007 permit, Excel Dairy submitted a narrative Air Emission Plan that stated that Excel Dairy would apply straw to the manure basins to establish and maintain a crust on the basins to control air emissions from the basins. When the MPCA called upon Excel Dairy to comply with the Air Emission Plan Excel Dairy had submitted, Excel Dairy indicated that it had submitted the plan “accidentally” and that it had never truly intended to crust its basins despite what the written plan stated.

...Excel Dairy represented to the MPCA that it would either house 1,104 mature dairy cattle over 1,000 pounds or house a hybrid cow that weighed less than 1,000 pounds so that the facility could stock a total of 1,545 cattle.... [Excel Dairy] instead chose to stock 1,545 cattle over 1,000 pounds at the facility. This would equate to 2,163 animal units, significantly more than allowed in any of the previous permits.

...Excel Dairy has violated Minnesota’s hydrogen sulfide standards hundreds of times since May 2008.... Excel Dairy’s violations have been so severe that the families that live near Excel Dairy have been rendered physically ill by the emissions and have been forced to flee their homes on numerous occasions because of the sickening emissions.

Unnamed Dairy, Roseau County, Minnesota

...Rick Millner operated this facility before abandoning it in 1997. In September 1997, the MPCA staff inspected the abandoned facility and observed manure stockpiles still remaining on site as well as two earthen manure storage structures that still contained manure and were not properly closed.

Lone Tree Dairy, Yellow Medicine County, Minnesota

...In August 2006, the MPCA staff inspected the facility and documented the basin manure level above the basin freeboard limit level and determined that unless immediate basin manure removal and land application occurred, the basin manure level was in danger of breaching the basin’s constructed berm. The MPCA staff also observed that loose soil had been dumped and spread on top of the southeast corner of the basin’s constructed berm in an apparent attempt to prevent basin manure from spilling out the basin’s southeast corner. The MPCA did not approve or issue a permit for this modification of the basin....

Five Star Dairy, Sargent County, North Dakota

In November 2006, the North Dakota Department of Health issued a notice of violation (NOV) to the facility and its managing partner Rick Millner. The NOV stated that Five Star Dairy failed to receive approval from the North Dakota Department of Health prior to constructing a new manure storage pond. Also, Five Star Dairy submitted records that indicated that the facility was stocked with more animals than its permitted capacity of 1,400 head prior to gaining the appropriate approvals....

...Five Star Dairy was once more inspected by the North Dakota Department of Health on October 27, 2009, and, during that inspection, it was observed that the manure storage basins did not have adequate freeboard remaining. Follow-up inspections on November 2 and November 10, 2009, found that the manure storage basins were still above the allowable operating level, and no manure had been removed. A November 19, 2009, site inspection did reveal that some manure had been removed, but the level of manure in the basins remained above the allowable operating level... [Minnesota Pollution Control Agency, Fact Sheet and Public Notice of Intent to Deny the Application for Reissuance of NPDES and SDS Permit for a CAFO Permit to New Horizon Dairy LLP, Hoffman, 2010.11.19]

MPCA also documents Millner's persistent violations of South Dakota environmental regulations and endangerment of the Whetstone Valley/Big Stone Lake watershed with his awful Veblen East and Veblen West dairies, as reported frequently here on the Madville Times.

Seven dairies. Seven dairies. Environmental violations at every one of them.

MPCA counts up the strikes and tells Rick Millner, "You're out!" It's about time. If a state issued a driver's license to a seven-time drunk driver, heads would roll. If a state issued a teaching certificate to a person convicted seven times of child neglect, heads would roll. That a serial offender like Millner has been able to stave off the law this long and pollute his communities for his own profit signals we need tougher enforcement of CAFO rules.

DENR to Vista: No Veblen Dairy Permits with Millner in Charge

The South Dakota Department of Environment and Natural Resources may be about to put one man out of business... permanently.

Richard Millner has managed the giant Veblen West and Veblen East feedlots in northeastern South Dakota for the last couple years. He has also managed dairy operations in North Dakota and Minnesota. His operations have spent most of this year in bankruptcy. His permit to operate Excel Dairy, his confined animal feeding operation near Thief River Falls, Minnesota, was revoked by the Minnesota Pollution Control Agency due to air quality violations so serious that the state advised neighbors of the dairy to evacuate their homes. Last April, the MPCA denied Millner a permit to resume operations at Excel Dairy.

Millner has been battling mightily to cobble together some creative financial plan to reorganize his two Veblen dairies. But operating a dairy with thousands of cows discharging tons of waste each day requires more than capital. It requires a permit from the Department of Environment and Natural Resources. Millner violated the conditions of his permits for both Veblen West and Veblen East in 2009. I checked with DENR and learned that Veblen East met the October 15 deadline for complying with DENR's cleanup order, but that Veblen West did not.

DENR appears to have had enough. In a November 10, 2010, letter, DENR tells Jorden Hill, agent for the "new" company formed by Millner and his partners, that if Millner is involved in any way with management of the reorganized Veblen dairies, they will get no manure permit:

According to legal documentation received from the Minnesota Pollution Control Agency, an NPDES permit issued to Rick Millner for Excel Dairy was revoked by the State of Minnesota because of environmental violations. South Dakota Codified Law 1-40-27 states that an applicant or any officer, director, partner, or resident general manager of a facility for which application has been made is unsuited or unqualified to perform the obligations of a permit holder if the applicant has had any permit revoked under the environmental law of any state or the United States. Therefore, Rick Millner at no point in form or substance can be an applicant, an officer, a director, or resident general manager of Vista Family Dairies and Veblen East Dairy. Rick Millner cannot be the decision maker responsible for compliance with the general permit. The organization chart and the duties and responsibilities of all officers, directors, and managers must reflect this [Jeanne Goodman, Administrator, Surface Water Quality Program, South Dakota Department of Environment and Natural Resources, letter to Jorden Hill, agent, Vista Family Dairies, 2010.11.10; as reproduced in Case 10-10071, Document 474, In re: Veblen West Dairy LLP, U.S. Bankruptcy Court, District of South Dakota, filed 2010.11.12].

The emphasis is in the original. When bureaucrats put things in bold, they mean it.

Millner had a permit revoked in Minnesota. SDCL 1-40-27, a nice little "bad actor" statute, makes the revocation grounds for DENR to deny Millner any environmental permit. As long as DENR believes Millner is the driving force behind the investors trying to retake control of the bankrupt Veblen dairies (and since he signed the disclosure/reorganization plan, that seems logical), DENR can withhold that permit.

Wow. Between DENR and the Department of Revenue, Millner may finally have met his match in South Dakota.
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Read an amended version of the court motion containing the DENR letter cited above.

Today's Farm Report: Messy, Messy, Messy...

Turning to today's agriculture report, here's the news the ag-industrial complex doesn't like to talk about:

• Remember the salmonella outbreak earlier this year caused by Jack DeCoster and his dirty Wright County Egg operation in Iowa? USDA had found all sorts of violations at the Galt, Iowa, facility prior to the outbreak but failed to report them, because "the conditions at the egg plant packing facilities were routine." Filthy, disease-ridden eggs—perfectly normal. Move along.
• Purple water came pouring from the A. J. Bos mega-dairy near Nora, Illinois, in October. Brown I can explain. But purple? An attorney for Bos says EPA has no authority to intervene.
  
• Bos is also opposing further testing of a site for a proposed dairy site near Galena, Illinois.
  
• Meanwhile, the Illinois Livestock Development Group thinks it shouldn't have to follow any regulations: "If I'm operating the way I'm supposed to, what do I need a permit for and why do you need to know who I am?" says ILDG spokesman Nic Anderson. Gee, I don't know, maybe because a single confined animal feeding operation can generate as much sewage as a small city?

The ag-industrial complex seems to think that producing food entitles them to exemption from the rules of civil society. Sorry, fellas: ag is just another business. Every other citizen has to dispose of waste properly: so do you.

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Related: The Independent Local reports that Senators Tester and Hagan are advancing an amendment to the Food Safety Modernization Act to protect small farms and folks who market directly to consumers in farmers markets from legislation that would check the abuses of the ag-industrial complex. Groups who back local food, like the Western Organization of Resource Councils and Dakota Rural Action, as well as the South Dakota Stockgrowers Association, are backing the Tester-Hagan amendment.

Volcker Identifies Shattered Illusion of Deregulation

Quote of the weekend comes from Paul Volcker, chairman of President Obama's Economic Recovery Advisory Board and former Fed Chairman. Volcker discusses his regret that he didn't more vocally oppose the deregulation of the financial markets that got us into our current mess:

“You had an intellectual conviction that you did not need much regulation — that the market could take care of itself.... I’m happy that illusion has been shattered” [Paul Volcker, quoted in Louis Uchitelle, "Volcker Pushes for Reform, Regretting Past Silence," New York Times, 2010.07.09].

Bonus conservative teasing: Uchitelle mentions that the financial reform bill is 2400 pages. Why haven't I heard the same outrage from the tea "party" over this hefty legislation that we heard last year when the town-hall shouters would indict the health insurance reform bill as obviously bad by mere dint of its comparable page count? Where are the misspelled-placard-waving patriots warning that Uncle Sam is trying to come between you and your banker? I guess financial reform is too good of an idea for the teabaggers to counterprogram with lies about death panels or some similar oversimplified propaganda.

Bang for the Buck: EPA Emissions Rule Gives 4000% ROI

I mentioned the EPA's new emissions regulation in a postscript yesterday. The new rule, revamped Bush-era rules strengthened and tweaked to pass muster with the courts, will substantially reduce sulfur dioxoide and nitrogen oxide emissions. It also will produce a spectacular return on investment:

The regulation’s price tag is an estimated $2.8 billion in 2014. But EPA officials say it would save between $120 billion and $290 billion in annual health and welfare benefits the same year and help prevent up to 36,000 deaths [Darren Goode, "EPA Issues New Rule to Reduce Emissions," The Hill: E² Wire, 2010.07.06].

The low-end estimate says we get a 4186% return on our investment in pure dollar terms, before counting in the pleasure of keeping 36,000 fellow Americans alive.

Spend $2.8 billion, save Americans $120 billion or more in health and welfare costs. Now that's money well spent!

Food Rules: Garden Guru Explains Need for Labels and Regulation

Political discussion erupted last Friday at the South Dakota Magazine Editor's Notebook. Bernie Hunhoff mentioned "brouhaha" over the new labeling rules for homemade food at farmers markets, and he got brouhaha in the comment section. Commenters went ape over "ridiculous rules" and "government growth" and "nitpicking."

Fortunately, committed gardener and local foods booster Rebecca Terk was available to discuss the issue in depth. In the comments at SDM and on her Flying Tomato Farms blog, she showed that the new rules are not some simple black-and-white issue for hot-button rhetoric about big government. Rather, House Bill 1222 is the product of conscientious and cooperative effort among producers, Dakota Rural Action, and state officials to find the proper balance between protecting consumers and promoting local commerce. Terk makes clear that local commerce can't run on the selfish "we should do whatever we want" fantasies of the armchair libertarians among us.

Saying that farmers markets should be entirely unregulated is kind of like saying that the little cafes in small towns should be unregulated–they’re only serving regulars, after all–everybody knows them.

But we all know that the little guys (and gals) in rural South Dakota have been a long time at the brink of drying up and blowing away–especially as our farms continue to swallow each other up and our rural populations continue to dwindle.

If we have an insular attitude about how we’re only going to do business with people we know–we’re only going to serve our “regulars,” we’re not going to grow–sustainably or otherwise–and we’re continually sitting on that ever-finer line between making it and not.

We need to be willing to step up and take responsibility for the safety of our products if we want to market to a broader audience. If you want to barter your homemade cheese for your neighbor’s homemade jelly, fine. If you want to walk out into the marketplace and sell to the public, that’s a different thing [Rebecca Terk, "In Defense of 1222," Flying Tomato Farms, 2010.07.02].

Commerce is about community. It requires responsibilities and clear rules. When government establishes clear rules, as South Dakota's Legislature is doing with HB 1222, it removes uncertainty from the marketplace and encourages businesses to invest and produce and sell, sell, sell. (Hmmm... just like how big utilities and other industries would create a green-jobs boom if the Senate would quit dinking around and pass climate change and energy security legislation!)

Deepwater Horizon Spill: Boost or Bane for Keystone XL?

Newly rechristened Great Plains Tar Sands Pipelines directs our attention to New York Times coverage on the Canadian tar sands and TransCanada's Keystone pipelines. The report notes that BP's Deepwater Horizon mess in the Gulf of Mexico could work both for and against TransCanada's plans.

On the pro side, Canadian officials are making the case that transporting their dirty oil across the Great Plains is safer than pumping oil out of the Gulf, since pipeline leaks would be "easier to detect and control." Now you might look at the 5,000 to 100,000 barrels of oil burbling out of the wrecked BP well each day, then look at the eventual 590,000 barrels of oil that will blast across East River each day in the Keystone pipeline each day, and think, "Holy crap!" But I can see the Canadians' point: if the Keystone pipeline were to explode near Britton or Carthage, TransCanada could probably shut down the flow at the last good pump station up-pipe. We wouldn't have oil pouring out for a whole month. We wouldn't end up with a ten-county oil slick like that depicted in Scott Meyer's nonetheless informative graphic in The Post yesterday.

On the con side, the BP explosion and spill highlight the need for stronger safety oversight over petroleum extraction and transport... and make TransCanada's requests for less safety and oversight look really, really bad. TransCanada wants to use thinner pipe on Keystone XL, just as it did on Keystone.

But Cesar de Leon, a former deputy administrator of the pipeline and safety administration who is now an independent pipeline safety engineer, said the thinner standard is appropriate only if pipelines are being aggressively monitored for deterioration. Although the safety administration required such monitoring in the Keystone permits, it “didn’t have the people to monitor compliance,” he said.

In a report in March on the agency’s broader permitting practices, the Transportation Department’s inspector general found that, in many cases, the agency had failed to check the safety records of permit applicants and had not checked to verify that permit terms were being followed.

Officials of the safety administration did not respond to interview requests. But in written testimony to a House committee in April, the agency’s new administrator, Cynthia L. Quarterman, acknowledged problems and promised to improve. “As you know,” she said, “we inherited a program that suffered from almost a decade of neglect and was seriously adrift.”

Senator Jon Tester, Democrat of Montana, said the whole situation was alarmingly reminiscent of the permit waivers that were routinely granted to offshore oil wells, including the BP well leaking in the gulf. “I think it is incumbent on myself as a policy maker to say ‘hold it,’ ” Mr. Tester said [Clifford Krauss and Elisabeth Rosenthal, "Reliance on Oil Sands Grows Despite Environmental Risks," New York Times, 2010.05.18].

Senator Jon Tester can connect the dots between Gulf oil rigs and the big pipeline that will run across his state. Why don't we hear that dot-connecting from South Dakota's Congressional delegation?

There are all sorts of reasons we should tell TransCanada to take a hike (bad business case, unneighborly behavior, genocide...). But if Keystone XL is inevitable and even preferable to oil from the sheiks and Chavez, we should at least learn our lessons about safety and regulation from the catastrophe off the Louisiana coast.

No More "Too Big to Fail": Cap Bank Assets at $100 Billion

Troy Jones, Bill Fleming, and I are working on building some consensus toward serious, effective financial reform. The Senate Ag Committee, community banks, and I maintain that regulating derivatives is a key part of that reform. And if, as finance professional Jones contends, derivatives are too complicated for most people to understand, that strikes me as all the more reason we should restore some stiff regulations on them.

But just like our Republican and Democratic counterparts in the Senate, Troy and I may be a lot closer to agreement on financial reform. Jones wants to break up the megabanks so no one is "too big to fail." I'm all about that idea. So is Robert Reich, who lists these three big things the pending financial reform bill really really needs to do:

1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “unique” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through.

2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.

3. Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit [Robert Reich, "A Short Citizen's Guide to Reforming Wall Street," blog, 2010.04.20].

Now if we can get Congress to listen to a bipartisan coalition of Troy Jones and Robert Reich, we've got a winner of a bill!

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Read more!

• Mr. Jones forwards this NYT article noting growing support among Dems and the GOP for breaking up banks. It also notes that, since the 2008 credit collapse, our policies have made the banks that are too big to fail even bigger. The six biggest banks—Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley—now have assets equal to 63% of the U.S. GDP, compared to 17% back in 1995.
• Jones also forwards this fruitful series of NYT essays from some folks with serious econ chops on what's missing from the financial reform bill.
• Robert Reich also notes that Senator Dodd's bill does go the wrong direction, giving big banks even more advantages over small banks. Let's fix that! Remember: community banks are the best place for your business!
  

Derivatives: Less Theory, More Facts... and More Capitalism, Please!

In response to my Monday post on derivatives reform, Troy Jones appears to assert that unregulated derivatives are good for the economy, providing "lubrication to the system's liquidity."

Lubrication, heating oil...

Sean Cota runs a family-owned heating oil business in Vermont. He says using derivatives purely to speculate on the price of oil has hurt his business and consumers' wallets.

SEAN COTA: We calculate that this unregulated market has encouraged speculative fervor that costs about a $1 per gallon.

[Brett Neely, "Businesses Differ on Derivatives Reform," Marketplace, 2010.04.20]

Neely's report pokes some other holes in the theoretical capitalist defense of unregulated derivatives, which seems about all the GOP can muster as it fights this latest really good idea from Democrats. Neely notes that derivatives were "boring and safe" for centuries. Deregulation happened only in 2000. Hmm... credit was plenty liquid in the twentieth century, wasn't it?

Neely also notes that, under deregulation, derivatives have operated in a distinctly uncapitalist fashion. Outside of exchanges, banks set prices, keep them private, and prevent buyers from getting information about the risk involved. Capitalism requires a free flow of information right alongside capital. But the big five banks that control most of the derivatives don't want us to get information and compare prices:

Because there's not efficient pricing [in the current system], these big five derivatives dealers can really charge through the roof for these derivatives products and that's one big reason why they've been so profitable [David Min, quoted in Neely, 2010].

Neely finds a good capitalist from the Chamber of Commerce to defend unregulated derivatives:

The whole point of the exercise is to transfer that risk somewhere else so that you can be in the business of producing beer or making widgets or whatever it is you do [David Hirschmann, quoted in Neely, 2010].

Hold on: transfer the risk?! I thought risk was an inherent and necessary part of being in business. You don't get to make beer or widgets without risk. If I choose to produce art or make speeches for a living, I don't get to transfer my risk to someone else. I assume the risk that people just won't buy enough of what I'm selling to keep me in paint and shiny shoes... right?

Perhaps I misunderstand capitalism. But the more I listen to conservative arguments against regulating derivatives, the more I hear a vague theoretical declarations that ignore the facts of what unregulated derivatives have wrought. In practice, unregulated derivatives look like an inherently anti-capitalist financial product, one that withholds the information buyers need to make good choices, removes the risk the market needs to check unwise actions, and threatens the stability of the free market economy.

"Boring and safe"—that's what derivatives regulation gets you. And after the excitement of seeing your mutual funds wiped out in the recession, couldn't you use some boring and safe?

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Update 17:02 CDT: Senator Grassley from Iowa joined 12 Dems on the Senate Ag committee in approving derivatives regulation today. Grassley is no Olympia Snowe; his vote may be a sign that Republicans see it's time to stop saying no to ideas that will be good for the economy.

Derivatives Reform: You Want This!

With health insurance reform now in the win column, Congress and the President are turning to financial reform. There will be a lot of moving parts to this legislation—you just can't govern the world's biggest economy on slogans and one-page bills. Among the essential moving parts: derivatives reform.

President Obama is vowing to veto any financial reform legislation that does not include regulation on deriviatives. His chief economic advisor, Christina Romer, backs him up:

What is needed is a new set of rules of the road for our financial system, greater accountability for Wall Street, and increased protections for consumers. Those rules include a comprehensive regulatory framework where capital and liquidity requirements control excessive risk-taking and where regulators consider risks to the system as a whole and not just to individual institutions. They involve putting complicated financial products such as derivatives onto exchanges and into clearinghouses so that risks are known and values are clear [Christina D. Romer, "Back to a Better Normal: Unemployment and Growth in the Wake of the Great Recession," address to the Woodrow Wilson School of Public and International Affairs, Princeton University, 2010.04.17].

Now before my conservative friends buy into the Senate Republicans' political line that regulation is bad, consider why derivatives matter. The collapse of credit default swaps, one flavor of derivatives, forced us to bail out AIG to the tune of $180 billion. That was arguably a greater intrusion on the free market than any specific regulation.

Five banks, including our friends at Citicorp, constitute "a kind of cartel that controls all the trading and information" on derivatives. That's not a free market when a handful of players with vested interests monopolize information.

Regulation of derivatives doesn't put anyone out of business. It simply puts this particular financial "product" on the same footing as stocks, which are traded quite happily and successfully on open, regulated exchanges. Regulation hasn't killed the stock market; it has made the market healthier and safer. Regulation would do the same for derivatives. Secretary Geithner explains:

Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system [Secretary of the Treasury Timothy Geithner, "How to Prevent America's Next Financial Crisis," Washington Post, 2010.04.13].

Regulating derivatives shifts risk back to where it belongs in the market: on informed investors who can cover their bets.

If you don't like bailouts, if you don't like recessions, if you don't like losing your job because Wall Street fat cats crashed the global economy, then you do like derivatives regulation and the full financial reform package working through Congress.

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To understand derivatives, try this explanation from Prof. Michael Greenberger. The professor notes that when AIG went bust, it had over 20 divisions. On September 16, 2008, AIG's regulated divisions were humming along nicely with $20 billion in reserves. AIG's one derivatives subdivision was not regulated, held no reserves, issued insurance policies worth double the company's value, and sunk the company.

New Credit Card Rules: The Personal Perspective

So what do the new credit card rules mean for me? I like to think of myself as a "good" credit cardholder. I've carried a balance once, for two months. For the last ten years, I've paid the full bill every month, with maybe two late payments due to sheer forgetfulness. Of course, "good" is in the eye of the beholder. Credit card companies call cardholders like me deadbeats, because I don't generate profits for them. Heck, with rebates and no annual fees, I'm costing Citigroup and Chase money. Who wants a customer like that?

There have been some suggestions in the news that credit card companies may nuke those cashback awards and other perks and impose more annual fees in order to recoup what they'll lose now that they'll be forced to play fair with borrowers. And if Citi does hit me with an annual fee, then I face the choice of eating that cost or cutting up my card and dinging my credit score. Ouch.

But you know, I've been having a free lunch for years. Citi has been providing me a service and losing money. Worse, I've been making money, in the form of cashback rebates, on the backs of folks carrying more debt and suffering from the very predatory, usurious practices of which I've been so critical. There's a bigger ouch.

Ezra Klein reminds us that there is no such thing as "good" and "bad" credit cardholders. Each of us is just a layoff or a car wreck or one lost envelope away from finding ourselves on the wrong end of the credit card companies' big guns. Why should I profit from folks just like me whose abuse at the hands of credit card corporations is triggered by nothing more than bad luck?

The new credit card regulations will give Citi a convenient excuse to jack up fees and cut benefits (but wait a minute: even before these new regs, was anyone getting letters from Citi et al. announcing lower rates and fees?). If Citi decides it can no longer afford to pay me for using its card, I won't like it. But I can live with it. Nobody should profit from deceptive business practices... not even me.

New Federal Credit Card Rules Won't Kill Jobs, Will Restore Fairness

So Bill Janklow, a Harvard prof, and the Madville Times walk into a bar....

The Credit Cardholders Bill of Rights, which is headed for the President's desk, may be a bigger deal than I thought. No, not because it will kill thousands of South Dakota usury jobs, but because it will restore fundamental fairness to the credit industry, and maybe even help the free market.

Former Governor Bill Janklow, the man who brought South Dakota the credit card boom, doesn't see any job losses coming. He apparently disagrees with current Governor Rounds's assertion that Premier BankCard et al. won't be able to compete without their current preadatory lending practices:

"I don't think the people in this state are going to have any trouble. Citibank is an honorable credit card company this mothership they have in Sioux Falls is the best in the world. The same thing is true with First Premier and First National in Yankton," Janklow said.

The former South Dakota Governor says this bill levels the playing field for all the companies across the country.

"So, as long as everybody in the NFL, everybody in Major League Baseball, or everybody in the credit card industry have to follow the exact same rules I don't think it makes any difference. It's when you have an un-level playing field where they give an advantage to one player, or one set of players over another, it becomes a problem" [Ben Dunsmoor, "Janklow: SD Credit Companies Will Adapt to Rules," KELOLand.com, 2009.05.20]

Speaking of a level playing field, Tony Amert rightly directs our attention to Elizabeth Warren. She's a Harvard law prof and overseer of the Troubled Assets Relief Program. She emphasized the need for a level playing field between lenders and borrowers in a Frontline interview in 2004:

[Question]: So the credit card industry says ... "We provide the credit, in many cases, for people to start businesses ... to buy more, to live a better life, to do things that they could never do any other way." So what's the problem?

[Warren]: There is no problem if they would do it on terms that are fair and if they would make their contracts transparent so that the person who's borrowing the money is borrowing it in a way that he or she understands and appreciates the risks.

I believe in free markets. I teach contract law; I believe that value is created when two people come together, and they understand a contract, and they say, "I think if I borrow this much money at this interest rate, I can do better than that; I can start a business; I can buy something I want to buy that's going to be important to me, and I can make money out of this proposition." That is a good use of credit. It's a use of credit we've had in the United States since colonial times.

What's changed is [that] when credit was deregulated in the early 1980s, the contracts began to shift. And what happens is that the big issuers, the credit card companies who have the team of lawyers, started writing contracts that effectively said, "Here are some of the terms, and the rest of the terms will be whatever we want them to be." And so they would loan to someone at 9.9 percent interest. That's what it said on the front of the envelope. But it was 9.9 percent interest ... unless you lost your job, or 9.9 percent interest unless you applied for a couple of other credit cards, or 9.9 percent interest unless you defaulted on some other obligation somewhere else that doesn't cost me a nickel. And at that moment, that 9.9 percent interest credit suddenly morphs to 24.9 percent interest, 29.9 percent interest, 36.9 percent interest. Well, you know, ... nobody signs contracts to buy things that say, "I'm going to pay you $1,200 for the big-screen TV unless you decide, in another month or two months, that it should really be $3,600 or $4,200 or $4,800." But that's precisely how credit card contracts are written today.

...But [the credit card companies] would say they're just making capital or money available to people in a convenient way.

Well, in a convenient way, and changing the price after people borrow it. You know, that's a heck of a deal. I don't know any merchant in America who can change the price after you've bought the item except a credit card company. After you have borrowed the $5,000, they can change the interest rate from 9.9 percent to 29.9 percent. I just don't know anyone else who can do that.

Contrary to the curmudgeonly (and implicitly self-righteous?) grumblings of various arch-conservatives, the new credit card rules aren't about giving handouts to irresponsible borrowers in the name of wimpy liberal "fairness." They're about making credit card companies play by the rules of the free market that we expect every other player to follow. Transparency and honest dealing—not so novel concepts.

(Tony also points to a couple of intelligent videos with Prof. Warren's insight: This 2007 lecture at UC Berkeley on "The Coming Collapse of the Middle Class," and this 2007 NightLine feature. Warren is an engaging and passionate speaker about economic topics that many folks would consider dry.)

Priorities Check: Terrorism vs. Economy

As you head for your Friday coffee break, here are a couple questions that might spark some conversation:

1. Which headline would you rather see tomorrow?

• Bin Laden Captured by U.S. Army
• Recession Over

2. Which is the greater infringement on liberty?

• Searching everyone, including Grandma, at the airport
• Imposing regulations on hedge funds, private equity funds, bank holding companies, and insurance conglomerates

House Bill 1094: Don't Trust Realtors?

So if I'm reading House Bill 1094 correctly, is Senator Russell Olson (R-8) saying his pal Pat Powers needs to submit to a criminal background check?

That appears to be the gist of HB 1094, legislation promoted by more than a few Republicans (Hunt, Krebs, Tom Hansen, Knudson...) to increase regulation of the real estate industry. Fingerprinting, state and federal background checks... wow, PP isn't getting much satisfaction from his Republican friends this week.

Now real estate agents and the other folks listed in HB 1094 do hold some degree of public trust, so perhaps we have an interest in investigating their backgrounds. But I wonder the sponsors of HB 1094 will also support an amendment extending criminal background checks to other important public figures, like, oh, say, state legislators?

But not to worry: even if Senator Olson wants PP to go through more red tape to carry out his chosen profession, he supports letting Pat buy a handgun without any delay.

Stronger Regulation Saves Money

Bush Favors Profit over Preventing Bioterror

A little Friday dander-raiser and counterexample for my conservative readers: an article this morning contends that a broader and more rigorous food safety regulatory regime axed by the Bush Administration not only would have helped the FDA find and address the cause of the salmonella scare over tomatoes (and now jalapeño peppers) but also would have mitigated the $250 million in business losses:

The industry pressured the Bush administration years ago to limit the paperwork companies would have to keep to help U.S. health investigators quickly trace produce that sickens consumers, according to interviews and government reports reviewed by The Associated Press.

The White House also killed a plan to require the industry to maintain electronic tracking records that could be reviewed easily during a crisis to search for an outbreak's source. Companies complained the proposals were too burdensome and costly, and warned they could disrupt the availability of consumers' favorite foods.

The apparent but unintended consequences of the lobbying success: a paper record-keeping system that has slowed investigators, with estimated business losses of $250 million. So far, nearly 1,300 people in 43 states, the District of Columbia and Canada have been sickened by salmonella since April [Larry Margasak, "Food Industry Bitten by Its Lobbying Success," AP via Yahoo News, 2008.07.25].

If the stricter regulations had been in place, FDA investigators would have been able to discover more quickly that the problem was not a Return of the Killer Tomatoes (starring George Clooney! really!), and growers would have lost less money.

Bonus hypocrisy: The regulations the industry so vigorously (and apparently counterproductively) opposed were supposed to be part of America's War on Terror:

According to government records reviewed by the AP, business groups met at least 10 times with the White House between March 2003 and March 2004, as the FDA regulations were under debate. Food industry lobbyists successfully blunted proposals using arguments familiar in other regulatory debates: The government's plans would saddle business with unnecessary and costly regulations.

"The FDA's strong proposed bioterrorism rules were significantly watered down before they became final," said Caroline Smith DeWaal, food safety director at the Washington-based Center for Science in the Public Interest. The private advocacy group obtained the White House meeting records under the Freedom of Information Act and provided them to the AP.

Participants in the meetings included companies and trade groups up and down the food chain, including Altria Group Inc. and Kraft Foods Inc., when Altria was Kraft's parent; The Kroger Co.; Safeway Inc.; ConAgra Foods Inc.; The Procter & Gamble Co.; the American Forest and Paper Association; the Polystyrene Packaging Council; the Glass Packaging Institute; the Cocoa Merchants' Association of America; the World Shipping Council; and the Food Marketing Institute [Margasak, 2008.07.25].

So I shouldn't argue against giving up my Fourth Amendment rights to prevent terrorist attacks, but big food corporations aren't expected to sacrifice a little profit for their country? Right.

Pricey Oil and Recession, Brought to You by Enron...

...and deregulation!

I know, I know: China, India, SUVs. But tonight's Marketplace leads with this interview with former commodity regulator Michael Greenberger, who says we can also thank "the Enron Loophole" for our high oil prices:

...[A]bout 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation being passed, all energy futures traded in the United States or affecting the United States in a significant fashion were regulated by United States regulators under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will [Michael Greenberger, interviewed by Kai Ryssdal, "Deflating the Oil Bubble," Marketplace, 2008.06.16].

Greenberger says straight out that speculators are making the oil futures market "completely dysfunctional and out of control."

Want to see your price at the pump go down? Forget the gas tax holiday or tapping the Strategic Petroleum Reserve. Bring back the regulations:

From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls? [Greenberger, 2008.06.16]

Congress? President Bush? Anyone listening?