Archive for September, 2009
What Is ‘Unreasonable’ Compensation? And Who Gets to Decide?
As could be expected, the effects of the financial crisis — and people’s reaction thereto — are starting to make their way to the least political branch of government, the judiciary. The Supreme Court this term will be hearing several cases that could have serious repercussions on our economic recovery, one of which led us to file an amicus brief. Here’s the situation:
The Investment Company Act of 1940 places on investment advisers a fiduciary duty with respect to the compensation they receive for the services they provide their clients. In the case of Jones v. Harris Associates, shareholders in various mutual funds contend that their adviser fees were excessive and violated the ICA. The Seventh Circuit, the federal appellate court based in Chicago, affirmed the judgment of the district court that the fees were not excessive but also expressly disapproved of the methodology for evaluating such claims used by the Second Circuit (based in New York). Judge Frank Easterbrook’s opinion explains that the ICA creates a fiduciary duty but does not act as a rate regulator, and that judicial price-setting does not accompany fiduciary duties. Judge Richard Posner, writing for five judges, dissented from the denial of an en banc rehearing. The Supreme Court agreed to review the case to settle the circuit split.
Our brief supports the investment adviser and makes three arguments:
- All persons have a fundamental human right to whatever compensation their contracting partners freely and honestly choose to pay them.
- Courts have no power to second-guess the reasonableness of any salary or compensation agreement honestly and freely signed by both contracting parties.
- The ICA’s fiduciary duty requires only fair dealing, not any particular outcome.
Thanks to Cato adjunct scholar Tim Sandefur for spearheading this effort, and to Cato legal associate Matthew Aichele for helping with much of the attendant busywork.
Some Good Spending For a Change
Cato analysts regularly identify areas where the government is either wasting money or spending money on unconstitutional or inappropriate matters. There are a few areas, however, where the state does not spend money where it ought to.
A case in point is where the state has mistakenly locked up an innocent person. Believe it or not, in some jurisdictions no compensation is offered to the victims. Zero!
The Associated Press has a story today about a new Texas law that will pay about $80,000 in compensation to victims for each year they were wrongly incarcerated. Other states should follow suit. Inaction is inexcusable.
(H/T: Grits for Breakfast)
Foreign Aid Spent Domestically to Promote Foreign Aid
A new study by the International Policy Network in London documents how the United Kingdom’s foreign aid agency is spending money, much of it domestically, on NGOs to fund pro-aid lobbying and the promotion of political ideology.
Millions of pounds have gone to UK trade unions to enable teachers to “become global agents of change” and for other union members to celebrate “International Women’s Day,” for example. In one case, the UK’s Department for International Development created an NGO — Connections for Development — to provide a forum for minorities to discuss international development. The aid agency is the only donor to that “NGO” and has spent £600,000 on it.
Much of the funding goes on behind closed doors without the benefit of an open tendering system or the possibility of new applications, thus creating a closed circle that includes an increasingly elite group of supposedly independent NGOs.
Whether or not you favor foreign aid, it is thoroughly undemocratic to spend tax dollars lobbying for a particular government program, spending the money in non-transparent ways, and creating the impression of independent views that support such funding. Certainly, such a practice is inimical to the principles of a free society. And it surely reduces accountability. But that’s a problem that plagues all foreign aid programs whether the money is spent domestically or internationally — a problem that has not been solved and is widely recognized by aid critics and supporters alike. All the more reason to doubt the wild claims of those who would massively increase foreign aid.
Aid is indeed encumbered, among other things, by the problem of no accountability for end results, so more aid is unlikely to work better. But rewarding an unaccountable system of aid delivery with dramatic increases in funds will only make the problem of accountability worse.
Myth v. Fact: Afghanistan
While “Change” has been Barack Obama’s mantra, as of late he has been channeling his predecessor.
“Afghanistan,” according to Obama, “is a war of necessity… If left unchecked, the Taliban insurgency will mean an even larger safe haven from which al Qaeda would plot to kill more Americans.”
President George W. Bush was adept at keeping the American public in an elevated state of panic. That tactic may be useful for advancing controversial policies. But if policymakers continue to downplay the drawbacks of our current course of action, America risks intensifying the region’s powerful jihadist insurgency and entangling itself deeper into a tribal-based society it barely understands.
Americans must be told the truth about the war in Afghanistan. To understand the disadvantages of pursuing present policies, we must unpack the myths that war proponents use to justify staying the course.
Myth #1: Both al Qaeda and the Taliban Are Our Mortal Enemies
Given the magnitude of the atrocities unleashed on September 11th, removing both al Qaeda and the Taliban regime that sheltered the terrorist organization was appropriate. But eight years later, is waging a war against the Taliban a pressing national security interest? Not really.
One Regulator to Rule Them All
Part of the dominant narrative in Washington on the causes of the financial crisis is that competition among financial regulators allowed financial institutions to choose the weakest regulator, and also encouraged regulators to weaken their supervision and enforcement in order to attract more entities toward their charter. Hence the response of several prominent Democrat congressional leaders and the Obama administration calling for an elimination of both the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC), and their merger into a single “super” bank regulator.
But is this narrative based on fact or analysis, or simply mere assertion? Let’s start with a few counter-factuals: Fannie and Freddie could not choose their regulator, nor could Bear or Lehman. The worst-performing U.S. institutions at the very center of the crisis had no choice in their regulator.
And of course, this was not simply a U.S. crisis. Northern Rock had no ability to choose its regulator. The UK, like much of the world, does not have multiple bank supervisors, but only a single supervisor. In fact, only three developed countries have multiple bank supervisors: the United States, Germany and Liechtenstein. If this was a crisis driven by competition among bank regulators, then most of the world would have been spared.
What is the factual basis for merging the OTS and the OCC? Apparently the proposal rests upon the observation that both AIG and Countrywide owned thrifts at the time of their failure. In addition, the failure of thrift IndyMac was one of the largest bank failures to date. Therefore, the OTS must have been the weak link. However, both AIG and Countrywide acquired federally chartered thrifts late in the game; their failures were already “baked in the cake” long before they acquired thrifts. And in both cases: 1) the thrifts were very small parts of their balance sheets, and 2) the failure of AIG and Countrywide did not result from their thrift subsidiary. In relation to IndyMac, most of the entities regulated by the OTS specialize in mortgage finance, hence it should not be surprising that in the aftermath of a housing bubble, those engaging in mortgage finance fail at a greater rate.
Also it is worth remembering that prior to the savings and loan crisis, when there really was a significant difference between bank and thrift charters, thrifts could not choose to maintain their current business model and also flip charters.
Since the case for merging regulators seems pretty weak, here’s an easy solution to address concerns regarding charter shopping: require the FDIC to base deposit insurance premiums on the historical and expected losses by charter.
Housing Bailouts: Lessons Not Learned
The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.
Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:
The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
And what is the result of this surge in FHA insurance?
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
This is madness. Repeat after me: TANSTAAFL (There ain’t no such thing as a free lunch).
Contra the President, Americans Don’t Want Big Government
Although candidate Barack Obama presented a moderate face, as president he has pushed a program for expanding government control at most every turn. And that agenda appears to be causing the rush of independents away from the Democrats.
According to political analyst Charlie Cook:
What’s going on? While political analysts were fixated on last fall’s campaign and on Obama’s victory, inauguration, and first 100 days in office, two other dynamics were developing. First, the worst economic crisis since the Great Depression scared many voters, making them worry about their future and that of their children and grandchildren. And the federal government’s failure to prevent that calamity fundamentally undermined the public’s already low confidence in government’s ability to solve problems. Washington’s unprecedented levels of intervention — at the end of Bush’s presidency and the start of Obama’s — into the private sector further unnerved the skittish public. People didn’t mind that the head of General Motors got fired. What frightened folks was that it was the federal government doing the firing.
Many conservatives predictably fear — and some downright oppose — any expansion of government. But late last year many moderates and independents who were already frightened about the economy began to fret that Washington was taking irreversible actions that would drive mountainous deficits higher. They worried that government was taking on far more than it could competently handle and far more than the country could afford. Against this backdrop, Obama’s agenda fanned fears that government was expanding too far, too fast. Before long, his strategy of letting Congress take the lead in formulating legislative proposals and thus prodding lawmakers to take ownership in their outcome caused his poll numbers on “strength” and “leadership” to plummet.
The Democrats still have plenty of time to revive their fortunes … by dropping plans to make an already huge government ever bigger.
How Much for a Schlub?
Over at The Corner, Rich Lowry put up a post on detainee interrogations that I responded to. Follow-up posts are available here and here.
Jay Nordlinger steps in to offer the view that, with terrorists, the difference between a “schlub” and a “monster” isn’t much. A pathetic radical can cause a lot of damage with just a little bit of luck.
This may be true, but there is a valuable ends-means calculation that must be considered (also addressed in Julian Sanchez’s post here).
How many times must we use coercive interrogation and get nothing, suffering the inevitable backlash in public opinion and enemy recruiting, for each intelligence success? If you are willing to torture a dozen/hundred/thousand men for each schlub, you will motivate a sufficient number of monsters to make a small tactical victory a pyrrhic one at best, and a strategic debacle at worst.
The big picture trends against torture, or any use of force that crosses the line between mutual combat and violating human rights, or the use of indiscriminate force. The attack on September 11, 2001 crossed that line, and we justifiably responded with military action. The use of “enhanced interrogation techniques” (EIT’s) crossed that line, and the enemy used it as propaganda fodder.
The British faced a parallel situation in Northern Ireland in 1971. After employing mass arrests that stoked the fires behind the IRA, the Brits employed “special interrogation techniques.” Former FBI Special Agent and successful terrorist group infiltrator Mike German covers this in his book, Thinking Like a Terrorist (citing Armed Struggle: The History of the IRA):
Among the methods used on the internees were the “five techniques”: placing a hood over the head; forcing the internee to stand spreadeagled against a wall for long periods; denying regular sleep patterns; providing irregular and limited food and water; and subjecting people to white noise in the form of a constant humming sound.
Sound familiar? Violence in Northern Ireland increased as a result of these practices. The Brits crossed the line again on Bloody Sunday when they fired into a crowd of peaceful protestors (possibly a response to IRA gunfire at British paratroopers). The tide shifted in favor of the IRA until they broke the unwritten rules of the game on Bloody Friday, detonating twenty-two bombs in Belfast that killed nine people. Tactically masterful, but a political disaster.
The Bush administration changed tactics in its second term in office, discarding EIT’s and moving away from physical coercion of detainees. This was a sensible decision, and there is no reason for the Obama administration to change course.
Torture and the Broken Window Fallacy
Pouring millions of dollars into some government program, however ill-conceived, typically generates some sort of visible benefit to somebody—if only those who find jobs staffing it. Conservatives normally understand perfectly well that this is precisely what makes bigger government so appealing to so many people: The benefits are indirect and apparent, while the costs are diffuse and hidden, because it’s hard to measure innovation that doesn’t happen. They also understand that it’s a terrible way to assess whether a program is beneficial on the whole.
Yet in his most recent response to David Rittgers—which David himself has already ably tackled below—Rich Lowry falls for a surprisingly crude version of the so-called Broken Window Fallacy:
Unless Rittgers believes that every single one of these captures was of someone of no consequence, or would have happened anyway and just as quickly, he has to admit that the interrogation program helped us track down terrorists expeditiously. Most people would consider that a success and would doubt whether part of Rittgers’s preferred interrogation regime would be quite as effective — dangling the promise of reduced sentences.
This is a pretty strange decision procedure, and one I assume Lowry would recognize as wrongheaded in almost any other context—akin to arguing that a jobs program must be ranked a success if the particular jobs it funds wouldn’t otherwise exist. Stipulate, strictly for the sake of argument, that some of the particular intelligence we got was obtained more quickly under torture than it would have been otherwise, and that there were particular non-buffoonish terrorists we therefore apprehended more quickly than we otherwise would have. There isn’t actually an argument offered for this proposition—just the assertion that “most people…would doubt” its denial—but forget it, he’s rolling. There’s still a problem here. You can count your intelligence “hits,” but the misses—the intelligence not acquired and the terrorists not caught as quickly as they would have been under a different strategy—are, by definition, unseen. But at least some experts—like former FBI agent Asha Rangappa—offer good reason for expecting the costs to be substantial:
But getting people to flip is primarily a psychological game rather than a material one. After all, the FBI is asking its targets to commit the ultimate act of disloyalty to their country—treason. Few people are willing to make this leap quickly, even in exchange for the most lucrative or attractive offer. It’s an FBI agent’s job to slowly win the target’s trust and help him rationalize his decision to switch his allegiance. In my experience as a former FBI agent who both participated in and observed successful recruitments, it’s much easier to do this when a target has, at some level, a sense of admiration and respect for the United States. A nugget of goodwill toward America offers an agent the chance to step in, gain the target’s confidence, and convince him that playing for Team USA is worth the risk.
Policies like the use of torture make it more difficult for the FBI to develop relationships based on trust. Even when torture is used on a few people and in another country, and by a different agency, it casts doubts on the U.S. government’s overall willingness to act in good faith. Targets often project the skepticism about the United States that torture fosters onto individual FBI agents, who are often the only face of the government they see. In short, torture is fundamentally at odds with the image of the United States as a country that will play by the rules, and that is how the FBI must be perceived in order to do its job.
Method to the Meandering
For Calvin Coolidge, one of our greatest presidents, reticence was both a personality trait and a political strategy. As Coolidge told his Commerce secretary and successor, Herbert Hoover, “Nine-tenths of [visitors to the White House] want something they ought not to have. If you keep dead still, they will run down in three or four minutes.”
It seems that Ronald Reagan,–an admirer of Coolidge’s who hung Silent Cal’s portrait in the Cabinet Room–adopted a similar strategy, though one more in keeping with Reagan’s gregarious persona. Alas, Ted Kennedy, who recounted the story in his upcoming memoir, wasn’t sharp enough to figure out what was going on. From an article on the Kennedy book in today’s New York Times:
[Senator Kennedy] said it had been difficult to get Reagan to focus on policy matters. He described a meeting with him that he and other senators had sought to press for shoe and textile import limits.
The senators were told that they would have just 30 minutes with the president. Reagan began the meeting, the book said, commenting on Mr. Kennedy’s shoes — asking if they were Bostonians — and then talking for 20 minutes about shoes and his experience selling shoes for his father. “Several of us began conspicuously to glance at our watches.” But to no avail. “And it was over!” Mr. Kennedy said. “No one got a word in about shoe or textile quota legislation.”
Huh. Go figure.
(For an introduction to Coolidge’s virtues, try John Derbyshire’s wonderfully strange and charming novel Seeing Calvin Coolidge in a Dream.)
Lowry and Interrogation
Veronique de Rugy put up a post at The Corner referencing Rich Lowry’s defense of “enhanced interrogation techniques” and my response. Rich has since responded.
With regard to the apprehension of Uzair Paracha, an Al Qaeda facilitator in New York, it seems likely that the apprehension of Majid Khan in Pakistan four days after Khalid Sheikh Mohammed’s (KSM) apprehension came from material picked up with KSM and not from interrogation. The key here is that when Majid Khan was in Pakistan, Paracha was pretending to be Majid Khan in communications with immigration officials. Detective work was probably what brought this guy under the microscope.
However, I’m willing to lay that aside because, as Rich points out, there is probably more to the story that shouldn’t be declassified. As I said on Bill O’Reilly’s show, we cannot end this argument until we have declassified all of the dead ends we pursued, which has some serious strategic drawbacks. The CIA recently asserted in court that it cannot reveal any more without compromising sources and methods.
Rich also says that my preferred method of interrogation is “dangling the promise of reduced sentences.”
This is not my preferred method, but it is one that ought to be available to interrogators. Under the Army Field Manual, an interrogator cannot promise anything in the court system. As Matthew Alexander points out in his book, the Iraqi Central Criminal Court has the death penalty attached to almost all of what we consider “material support of terrorism.” I am saying that the Prisoner’s Dilemma is an effective tool if a lesser included offense is on the table so that the first to squeal gets a few years and the others get the noose.
But let’s not discount the lawful interrogation techniques. When I attended SERE, the psychological techniques were far more compelling than the physical ones. We were all young and tough, but the mind tricks that turned brothers in arms against each other were downright disturbing.
Presidential Cults
Glenn Greenwald, author of Cato’s much-discussed paper on the success of drug decriminalization in Portugal, writes about cults of presidential personality. He notes that Jay Nordlinger of National Review and other conservatives — not to mention a few libertarians — have criticized the Obama administration’s plan to broadcast a presidential speech into American schools and push teachers to post Obama quotes in their classrooms and encourage students to talk about how President Obama inspires them.
Greenwald never actually defends the Obama plan. But he does argue that conservatives have short memories when they say that this is something unique. In particular, he reminds us of the notorious Monica Goodling’s questions to job candidates at the George W. Bush Department of Justice, such as “[W]hat is it about George W. Bush that makes you want to serve him?” And also of White House political aide Sara Taylor, who told the Senate Judiciary Committee, “I took an oath to the president, and I take that oath very seriously.” Committee chairman Patrick Leahy had to ask her, “Did you mean, perhaps, you took an oath to the Constitution?”
Greenwald has a good point. Both the red and blue teams have been far too quick to succumb to a cult of presidential personality. (And really, swooning over Reagan or Obama is sort of understandable. But George W. Bush? You have to wonder if they worked really hard at creating a Bush cult because there wasn’t really much there.)
But I do see one difference: The Obama administration is trying to push its president-worship onto 50 million captive schoolchildren (not to mention using the NEA to enlist the nation’s artists in promoting Obama and his agenda). Goodling was asking people looking for government jobs why they wanted to “serve George W. Bush.” Now, sure, they should want to serve the public interest — and she was asking these questions to people seeking career legal positions as well as to political appointees. Still, it seems a smaller bit of cultishness than going into every public school.
Gene Healy wrote about cultishness by both Bush and Obama supporters here.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
