My new column for National Journal agrees with the Fed that bankers’ pay needs to be supervised, but warns that by itself this will do little to improve financial safety.

The pay changes that the Fed proposes are worth making, but by themselves are insufficient. Other regulatory reforms in the works would do more to promote safety — and, indirectly, curb the excesses of Wall Street pay at the same time. Regulators are proposing to increase the capital that banks and other financial firms are required to set aside against the risk of loans or other assets going bad. They are also considering new rules on leverage (the amount of borrowing a firm can do as a multiple of its equity) and liquidity (the amount of easily salable assets it must hold). A financial institution with more capital, less leverage, and more liquidity would be a safer operation — and a less profitable one.

In thinking about future financial regulation, that is the fundamental trade-off. Taxpayers have learned that Wall Street’s profits, and the fabulous pay that went along with them, have come partly at their expense. In effect, the industry has enjoyed a disguised public subsidy, in the form of a promise to underwrite its losses when things go wrong. Heads we win, tails you — the taxpayer — lose. In demanding a safer financial industry, as we should, we will be withdrawing that subsidy and thus insisting on a somewhat smaller and less profitable industry as well.

This, in turn, will mean less-outlandish pay. Shareholders in banks and Wall Street firms have given their employees a very generous deal in recent years — far better than they have had themselves — handing over about half of their revenues in pay. If finance shrinks, pay in finance will shrink. Reviewing the wreckage of the past two years, both of those things look eminently desirable.

Last weekend I went to one of Levon Helm’s Midnight Rambles. I wrote a gushing, and entirely sincere, review of the event for the FT. I suggested “The best show in America” as the title for the article but my editor, I think, deemed this a little over the top. If she had come along I think she might have agreed with me.

[Incidentally, the second picture was miscaptioned. That's Teresa Williams not Amy Helm--to be fixed shortly on the website. Thanks to Dennis and Mari, and to Michael, Michael, and Stacy for a great weekend.]

Michael Cannon at Cato draws my attention to these posts by Donald Marron, a former CBO director, on the confusion surrounding recent estimates of the cost of the health reform bills. (A good place to start in fact is this earlier post by Marron, which sets out the various definitions of “cost”.) The president has promised that reform will not cost more than $1 trillion over ten years. The new House bill, on the definition used up to now, breaches that limit: therefore, its proponents adopted a different definition and at least to begin with almost everybody bought it. See also this piece from the NYT’s health policy blog.

Adair Turner of the UK Financial Services Authority gave a very good speech on the causes and implications of the financial crisis yesterday in Washington. The event was hosted by National Journal and the Economic Club of America. Video here for National Journal subscribers. Transcript here.

The speech drew on a new FSA discussion paper, prepared for a conference in London on Monday: well worth reading. I think I have already recommended this earlier discussion paper, which I still think gives one of the best overviews of the entire shambles.

This morning I took part in an event organized by Georgetown Law and the Aspen Institute: a conversation with Ken Feinberg, special master for executive compensation at firms receiving assistance under the TARP, followed by a panel discussion on some of the issues he raised, featuring Mike Oxley, Chris Brummer, John Olson and Nell Minow. Following last week’s announcements on pay, the session was very well-timed.

Perhaps it is stating the obvious, but Feinberg is an extremely impressive man, with a remarkable appetite for difficult assignments. This may be his hardest job yet. I thought his comments were interesting. If you have a couple of hours to spare, you can watch video of the entire event here.

In a new column for National Journal I ask what needs to happen before this problem is taken seriously.

The public debt stands at nearly $8 trillion and within 10 years, according to Congressional Budget Office projections, it will be more than $14 trillion. Getting to that second figure in one piece depends on two things. Some optimistic economic assumptions need to hold, and investors need to be willing to lend the government another $6 trillion. Taking either of these things for granted would be foolish.

Almost everybody in Washington agrees that the fiscal outlook is scary. Almost everybody says that something must be done. But the options for confronting the problem come down to spending cuts or tax increases, and as soon as you mention either, an embarrassed silence descends.

The politicians are not as worried as they say they are. And the same is true of the public. If you believe the polls, voters are more anxious about public borrowing than their politicians are — but not so worried as to welcome a rise in taxes (their own taxes, I mean) or cuts in Social Security or Medicare. They may be nervous about policies that would add to the fiscal problem — hence their hesitation over health care reform — but meaningful subtractions from the problem are a different matter.

Can anything be done? We have been here before. Washington has a time-honored procedure for such cases. Rather than thinking about entitlement reform or tax reform, it thinks about process reform.

And I go on to argue that process reform–despite the risk that it will degenerate into mere displacement activity–is not to be despised. In the past it has been a qualified success. Better that than having to deal with an otherwise unavoidable train wreck. You can read the whole column here.

After eight years of government by gut instinct, most Americans welcomed the arrival of a deliberative president. Yes, get the experts in. Reflect, weigh their advice. What a good idea.

And so it is if you are attempting, say, to reform the healthcare system. (A shame it was not tried.) There is even more to be said for taking your time if you are contemplating going to war. But when you are already fighting one, it has drawbacks. The US has been at war in Afghanistan for eight years – and it is losing. On this issue, Barack Obama is giving deliberation a bad name. He needs to make his mind up.

The White House is touchy about this and is deflecting critics by blaming the previous administration. Mr Obama is asking hard questions his predecessor ignored, goes the line. True enough, Mr Obama inherited a wretched situation – but the recent dithering is all his own.

The remainder of this article can be read here. Please post comments below.

The idea of a public option in healthcare reform is not dead yet. A lot of Democrats believe you need it to hold down costs. A lot also see it as a first stride towards Medicare-for-all, which is where they want the system to end up. Obama has signalled he is ready to drop the idea, but has given no strong steer one way or the other. The party, especially in the House, is not willing to give up on it just yet.

One of the things keeping the notion afloat is the belief that voters, too, are pretty keen. I’ve blogged before about this (here and here), noting that the polling results are actually all over the place. The answer depends on the way the question is framed. The variation also suggests confusion–which is warranted, given the complexity of these proposals, with or without the option.

The excellent Jay Cost at Real Clear Politics has taken a much more careful look at the question. Framing is everything, he finds, and questions which draw attention to possible consequences of the option elicit less support.

Cost draws attention to some Rasmussen polling. When asked,

“Would you favor or oppose the creation of a government-sponsored non-profit health insurance option that people could choose instead of a private health insurance plan?”

the answer is strong approval. Then comes a follow-up question.

“Suppose that the creation of a government-sponsored non-profit health insurance option encouraged companies to drop private health insurance coverage for their workers. Workers would then be covered by the government option. Would you favor or oppose the creation of a government-sponsored non-profit health insurance option if it encouraged companies to drop private health insurance coverage for their workers?”

A clear majority is now opposed.

So, does this mean that the public is actually against the public option? I’d say no. Instead, I would suggest that the public lacks sufficient information about that specific item to deliver a firm opinion. Accordingly, its opinion varies depending upon question wording, priming effects, the ebbs and flows of the news cycle, and so on.

Sounds right to me.