Archive for October, 2011
Stiglitz & Fannie Mae, continued…
Last week I expressed some disappointment that while Nobel prize winner Joseph Stiglitz now raises the issue of “privatized gains and socialized losses” in our financial system, he made very different claims about Fannie Mae some years ago. In a NPR piece back in July, Professor Stiglitz offers his response to this charge. You should read it and decide for yourself. To the Professor’s credit, he does admit that we have a problem with Fannie (and Freddie). Such an admission would have been more helpful a few years ago. But better late than never.
For the sake of brevity I will address one of the many claims now, and address the others later this week. Stiglitz argues that “our big banks get finance at lower rates of interest than do others, because of the belief, in part, that should they have a problem, they will be bailed out.” His implication is that had Fannie not existed the risk would have just flowed to the big banks, who had to be bailed out too. Now I’ve questioned elsewhere just how much of a problem “too big to fail” banks were before the crisis, but one critical point bears remembering, even the most higher leveraged and reckless of the big banks still had to hold multiples of the capital that Fannie and Freddie held. In the extreme the GSEs only were required to hold .45 percentage points of capital against their MBS guarantees. Had a bank held that same risk on portfolio, it would have been required to hold 4.0 percentage points. That’s correct, a bank would have held almost 9 times the capital for the same risk as did Fannie. Even if Fannie held that risk on balance sheet, banks would still be required to hold 160% more capital. The simple fact is that had Fannie/Freddie not existed and banks had instead held that risk, there would have been over a $100 billion more capital in our financial system.
Professor Stiglitz was far from alone, and far from the worst, in terms of academics writing work to provide cover for Fannie Mae. Current economic advisor to Mitt Romney and former Bush official Glenn Hubbard also produced work defending Fannie Mae. Fannie and Freddie were also some of the largest supporters of the various real estate finance academic organizations, like the American Real Estate and Urban Economics Association. This is less about picking on Stiglitz (or Hubbard) than exposing Fannie’s ability to corrupt academia for its own purposes.
U.S. Troops Out of Iraq by End of 2011. Or Not.
The Associated Press reported over the weekend that the Obama administration was “abandoning plans to keep U.S. troops in Iraq past a year-end withdrawal deadline,…despite ongoing concerns about [Iraqi] security forces and the potential for instability.”
The decision ends months of hand-wringing by U.S. officials over whether to stick to a Dec. 31 withdrawal deadline that was set in 2008 or negotiate a new security agreement to ensure that gains made and more than 4,400 American military lives lost since March 2003 do not go to waste.
The story buys into the pro-war/pro-surge narrative by presuming that a longer security agreement could ensure, or was likely to ensure, that the gains would not be wasted. That is a dubious proposition, at best. Despite eight years of sacrifice by the men and women of the U.S. military, they never had it within their power to write Iraq’s future. Meanwhile, the Iraqis who do have the power to write that future have either squandered their opportunities to build a modern, tolerant society that could defend itself, or they weren’t very interested in doing so.
The scale of violence is way down from 2007 or 2008, but this has not ensured an enduring political order. Yochi Dreazen’s story in the current National Journal documents how Iraqi Prime Minister Nuri Kamal al-Maliki has consolidated power and systematically marginalized and intimidated his political rivals, including former prime minister Ayad Allawi, and that he has done this under the noses of tens of thousands of U.S. military personnel. Perhaps Malki would have been more imperious in the absence of a major U.S. presence? Perhaps he will become more so after the last of the U.S. troops leave? Who knows? The obvious point is that the political reconciliation that the surge was supposed to facilitate hasn’t materialized. Iraq remains a bitterly divided society, and it is likely to remain that way for a very long time.
Still, one would think that the news that this costly and counterproductive war – the one that was supposed to be a cakewalk, that was supposed to be paid for by Iraqi oil revenues – was mercifully, finally, coming to a close, would elicit a favorable response from a public that has grown weary of it.
Time to strike up the band?
Not yet. The White House and Pentagon both sprang into action with statements throwing cold water on the reports. No final decision had been made about the force that would remain in Iraq past the end of the year, they explained.
Plans for keeping a large force in place were “being scaled back,” The New York Times reported, but that didn’t mean that the U.S. military mission in Iraq would end.
Both countries are still discussing whether to keep some trainers in Iraq, although the number of troops is most likely to be far less than the 3,000 to 5,000 that the administration had discussed with Iraqi leaders, one of the American officials said….
The officials said the administration’s plans changed in recent weeks as it became clear that the Iraqi Parliament would not give legal immunity to the American troops, something the Pentagon had insisted would be needed if troops were to continue to operate here.
I learned last year, during a trip to the United Arab Emirates and Saudi Arabia, that U.S. troops do occasionally deploy in countries without the protections of judicial extraterritoriality (we don’t have a formal agreement with the UAE, for example). The risk that U.S. military personnel might be subject to the vagaries of foreign justice systems might be justified in certain circumstances, but that doesn’t seem the case here. If the Iraqi people are not willing to offer that modest concession in exchange for the continued sacrifice of U.S. troops, and the continued expenditures of tens of billions of U.S. dollars, then we should bid them farewell.
Insider Trading and the Rajaratnam Case
Alexander R. Cohen of the Business Rights Center at the Atlas Society is sharply critical of the 11-year sentence given Raj Rajaratnam for alleged insider trading. Cohen notes:
And as long as the sentence is—and it is much longer than is typical in insider-trading cases—it’s less than half the maximum the government wanted, 24.5 years. Looking at that number, Rajaratnam’s lawyers offered, as points of comparison, the average sentences for other crimes in 2010:
For sexual abuse, 109 months—nearly two years less than Rajaratnam got.
For arson, 79 months—more than four years less.
For manslaughter, 73 months. That’s right: People who killed people got sentences more than four years shorter than Rajaratnam’s. (They did get longer sentences than his if their crimes rose to the level of murder—though even the average sentence for murder was less than the 24.5 years the government wanted to impose on Rajaratnam.) [emphasis added]
I do wonder how the U.S. attorney would explain those respective sentences. The prosecutor did face a challenge in explaining just how Rajaratnam had harmed people. Cohen isn’t impressed with his answer:
But even the prosecutors admitted that it was hard to identify victims or measure their losses directly. So they argued that the stock-market is a zero-sum game, and that however much profit Rajaratnam made, he took from someone else.
This is nonsense.
First of all, the stock market is not a zero-sum game. If a stock becomes more valuable, perhaps because the issuing company became more productive, it does not somehow take away money from everyone who doesn’t own that stock. It means they’ll have to pay more if they want to buy it—but (unless they’ve sold short) they do not have to buy it. It’s true that people who don’t own a stock when it goes up are missing an opportunity, but missing an opportunity is not the same thing as losing money.
Second, the previous owners of stocks Rajaratnam bought on inside information never owned the profits they would have made had they kept the stock. They only had the right to those profits if they chose to keep the stock long enough for its price to go up, then sell it before it went down. They chose not to keep it. Therefore, they never had the right to the money that Rajaratnam made.
Cato’s Doug Bandow argued in Barron’s at the beginning of the Rajaratnam case that insider trading shouldn’t be a crime. And way back in 1985 Henry G. Manne, one of the pioneering scholars in the field of insider trading, argued that “the economic, moral and legal arguments are very strong against the SEC’s stand on insider trading” in the Cato Journal.
The Perils of Overpromising
Today Politico Arena asks:
Will the Obama administration’s decision to scrap its long-term care insurance program be an issue in the 2012 campaign?
My response:
Of course ObamaCare — and the administration’s decision late Friday to scrap its unworkable long-term care insurance program — will be an issue in the 2012 campaign. It will be because ObamaCare is the huge overhang that explains, more than anything else, why employers aren’t hiring and the economy is stagnating. And this one part speaks volumes about the corruption that has surrounded ObamaCare from the start.
Remember, this was the program that was touted as central to the “savings” ObamaCare promised the nation — achieved in part by asking us to pay in for five years before any benefit was ever to be paid out. Yet even then it’s turned out, as Paul Ryan and many others said when the Democrats rammed it through, to be a gimmick designed to make the numbers look good. Like the countless “waivers” the administration has been giving to favored parties, this latest “setback” to ObamaCare is simply a prelude for what’s to come, either at the Court or at the ballot box.
The Laffer Curve Wins Again: Snooki 1 – IRS 0
The Laffer Curve is the simple notion that higher tax rates don’t necessarily generate as much loot as politicians expect because taxpayers have less incentive to earn and/or report income.
And it works in both directions. Lower tax rates don’t lose as much revenue as politicians fear because better tax policy leads to more taxable income.
In a few cases, higher tax rates may even lose revenue and lower tax rates may generate additional receipts. The IRS collected a lot more tax from upper-income taxpayers, for instance, after Reagan slashed the top tax rate from 70 percent to 28 percent.
Over the past few years, I’ve shown lots of evidence from around the world (England, Spain, and France) and in various states (Illinois, Oregon, Florida, Maryland, and New York) to make the case that it is foolish to ignore the Laffer Curve. Not surprisingly, leftists never seem to learn.
More recently, I’ve explained why Obama’s class-warfare tax policy is especially misguided because of Laffer Curve effects.
But I sometimes wonder whether I make any progress with these arguments. Maybe I’m being too much of a wonk? Perhaps I need an example that strikes a chord with regular people.
I don’t know if that’s true, but let’s give it a try. I now have an example of the Laffer Curve for the MTV audience. Best of all, the story is from USA Today.
The IRS got red-faced trying to collect the new tanning tax, burning a hole in estimates on how much the levy would bring in to federal coffers, a new report said Thursday. …Tanning tax receipts for that nine-month period totaled $54.4 million, the report found. That was below projections by the Congressional Joint Committee on Taxation, which had estimated the tax would raise $50 million in the last three months of fiscal year 2010 and $200 million for the full 2011 fiscal year.
Supply-Side Snooki?
Let’s deconstruct the numbers from the article. The Joint Committee on Taxation estimated that this new “Snooki” tax (part of the awful Obamacare legislation) was going to raise about $50 million every three months.
Yet during the first nine months, the tax raised just $54.4 million, not $150 million.
To be fair, some of this huge revenue shortfall may be a result of short-run factors associated with levying a new tax, but does anyone think the actual revenues will match the JCT’s estimates at any point in the future? If you think that will happen, get in touch with me so we can make a friendly wager.
Why am I willing to put my money where my mouth is? Simple, the government’s revenue estimators have been consistently wrong for decades because they use models that assume tax policy has no impact on economic performance.
Just in case you think I’m exaggerating, watch this video.
This is why I said last year that reforming the biased methodology at JCT was an important test of whether the GOP was genuinely on the side of taxpayers.
The Hoover Myth Marches On
In the New York Times today, columnist Joseph Nocera quotes a book published in 1940 on Herbert Hoover and the Great Depression:
Herbert Hoover was “leery of any direct governmental offensive against the Depression,” writes Allen. “So he stood aside and waited for the healing process to assert itself, as according to the hallowed principles of laissez-faire economics it should.”
OK, let’s go to the tape. In a new Cato study economist Steve Horwitz notes what Hoover really did:
- He almost doubled federal spending from 1929 to 1933.
- He expanded public works projects to “create jobs.”
- He pressured businesses not to cut wages, even in the face of deflation.
- He signed the Davis-Bacon Act and the Norris-LaGuardia acts to prop up unions.
- He signed the Smoot-Hawley tariff.
- He created the Reconstruction Finance Corporation.
- He proposed and signed the largest peacetime tax increase in
American history.
And that’s why FDR brains-trusters Rexford Guy Tugwell and Raymond Moley acknowledged later that Hoover “really invented” all the devices of the New Deal. Frederick Lewis Allen might not have recognized that in 1940, but Joseph Nocera should. And if we don’t want to relive the Great Depression, as Nocera worries, then we’d better learn what didn’t work in 1929-33 any better than it worked in 1933-39.
The Friday Bad News Dump: CLASS Dismissed
It turns out, the U.S. government cannot run a voluntary insurance scheme. Who knew.
The Washington Post reports that the Obama administration has officially scuttled ObamaCare‘s long-term care entitlement program, known as the CLASS Act. Note the time stamp:
Obama pulls plug on troubled long-term care program in new health law, citing design flaws
By Associated Press, Updated: Friday, October 14, 4:57 PM
WASHINGTON — The Obama administration says it is unable to go forward with a major program in the president’s signature health care overhaul law—a new long-term care insurance plan.
Officials said Friday the long-term care program has critical design flaws that can’t be fixed to make it financially self-sustaining.
Health and Human Services Secretary Kathleen Sebelius told Congress in a letter that she does not see a viable path forward at this time. By law, implementation of the program was contingent on Sebelius certifying it financially sound.
The program was supposed to be a voluntary insurance plan for working adults regardless of age or health. Workers would pay an affordable monthly premium during their careers, and could collect a modest daily cash benefit if they became disabled later in life.
The problem all along has been how to ensure enough healthy people would sign up.
One ObamaCare entitlement program down, one more to go.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Rep. Mike Pompeo wants to terminate the Economic Development Administration—and for the right reasons.
- Recent history shows that government efforts to micromanage industry range from unnecessary to disastrous, be it green energy, automakers, or the housing market. Small wonder, then, that the government has so drastically mismanaged its own “business”: the United States Postal Service.
- On Steve Jobs and charity.
- Workers’ compensation costs for postal employees are unnecessarily high thanks to stale federal laws and bureaucratic ineptitude at the USPS and the Department of Labor.
- Attention Occupy Wall Street protestors: the problem isn’t capitalism, it’s the “crony capitalism” that’s been fostered by an unhealthy relationship between government and business.
Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.
Stiglitz’s Switch in Time
Speaking before a group of protesters in Zuccotti Park, Nobel economics prize winner Joseph Stiglitz urged on the crowd, telling them they are “right to be indignant.” Professor Stiglitz goes on to explain, correctly in my view, that we have a financial system of socialized losses and privatized gains.
What the good professor fails to mention is only a few years ago, for what I understand was a nice paycheck, he was denying this very fact. In 2004, along with Jonathan and Peter Orszag, Professor Stiglitz wrote a paper for Fannie Mae in which he “estimated” that the “risk to the government from a potential default on GSE debt is effectively zero.” The paper goes on to argue “that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.” Now I understand his Nobel is in economics, not math, but $2 million sounds no where near the actual cost so far of $160 billion.
Certainly there was a time where some could be forgiven for not really understanding the nature of Fannie and Freddie, but this was published after Freddie’s accounting scandals came to light and while Fannie itself was being investigated.
So yes, you do have a right to be indignant. Especially at those “academics” who sold their work to the highest bidder defending the system and now pretend to be shocked at how everything turned out.
Who Understood RomneyCare Better: Mitt Romney or Ted Kennedy?
The video below shows former Massachusetts governor Mitt Romney (R) relaying a quip that former U.S. senator from Massachusetts Ted Kennedy (D) made at the 2006 signing ceremony for RomneyCare, a law that both men labored to make a reality. Cato adjunct scholar David Hyman quotes Kennedy’s quip in this paper on RomneyCare:
When you come to a celebration of a signing and Mitt Romney and Ted Kennedy and the Heritage Foundation are all together, it’s clear one of us didn’t read the bill.
Romney paraphrases Kennedy’s quip at 1:12 into the video, to the amusement of the conservatives attending the National Review Institute’s Conservative Summit:
RomneyCare later served as the model for ObamaCare. Guess who didn’t read the bill.
The Missing Option in a Time Poll
Question 12-C in last week’s Time Poll reads as follows:
Agree or Disagree? Executives of financial institutions responsible for the financial meltdown in 2008 should be prosecuted. (Question was asked of respondents familiar with the recent Wall Street protests.)
AGREE 71%
DISAGREE 23%
NO ANSWER/DON’T KNOW 6%
Missing from the options offered, unfortunately, was something along the lines of “Only the ones who have committed crimes.” Wouldn’t you say that’s a pretty serious omission? After all, there is no law on the books against the vague if ominous-sounding offense of being an executive responsible for a financial meltdown.
Some people help bring on financial crashes by committing acts of fraud, in which case it should be straightforward enough to prosecute them for those acts (and if the fraud has contributed to a wider economic calamity, things will probably not go well with them at sentencing). Other people help bring on a crash by insisting on their rights in an entirely lawful way. (“Sorry, Bear Stearns, but we’re declaring you in default on the money you owe us, and we don’t care if the Treasury secretary begs us to hold off till next week. We’re pulling all our money out of Lehman too.”) At least in a financial world where ignoring the Treasury secretary’s pleas is not yet a punishable offense, prosecution of someone in the latter position is probably doomed to acquittal.
And in between? In between are very many persons who behaved rashly or negligently in the period leading up to the crash, bought into bubble psychology, placed risky bets in the correct expectation of future bailouts and federal financial guarantees, built up mortgage businesses on models that were widely approved by experts at the time but now look deeply stupid in retrospect, and so forth. Reprehensible though some of those behaviors were, most of them do not violate any current law. Indeed, even among left-leaning lawmakers it is hard to find much of a serious constituency for broad-brush laws that would attempt to criminalize, say, financial negligence or risk-taking resulting in the need for a bailout. Criminal law needs to lay out more specifically what it is prohibiting.
It’s fair game to question failures to prosecute when the particulars are on the table: Why aren’t A and B facing charges when there’s strong evidence they violated U.S. Code such-and-such? It’s another matter to say we’ve had an economic calamity, someone needs to go to prison for it, and if we can’t identify some law they’ve broken then we should retroactively invent one to fit. If some demagogue out there is hoping to raise the latter demand, he may be smiling to himself at that 71-to-23 poll result.
Tehran v. Riyadh
The alleged Iranian plot to kill the Saudi ambassador, Adel al-Jubeir, has served to underscore that Washington and Riyadh view Tehran as a common enemy. This plot has already heightened both parties’ persisting anxieties over Iran, but the U.S.-Saudi partnership has often tended to reinforce, rather than diminish, each side’s most hawkish tendencies.
After the U.S.-led invasion and occupation of Iraq, Iran developed far greater influence among its allies and co-religionists in Syria, Lebanon, the Palestinian territories, and the Gulf States. Demonstrating the fear that Iran’s expanded Shia influence has inspired among Saudi leaders, in February 2007 Foreign Minister Prince Saud Al-Faisal encouraged the United States to strengthen its naval presence in the Persian Gulf, telling a U.S. diplomat that the Saudis would supply the logic for America’s deployment if Washington supplied the pressure.
Of course it is the Kingdom that is alarmed by the possibility of an Iranian SCUD missile attack on Saudi oil facilities; it is the Kingdom that is petrified by the possibility of Iran’s nuclear program posing a threat to the House of Saud’s regional prestige; and it is the Kingdom that has claimed that Shia-Persian Iran has been stage-managing the massive, popular uprisings sweeping the region in order to undermine Sunni Arab regimes. If the United States moves to increase the scope of its political, economic, and military sticks against Iran, it will only serve to invite further Iranian and Saudi intrigues. It may also encourage Iran and other states like it to seek a nuclear deterrent. Responding swiftly to this alleged plot, as some political pundits have encouraged, will further entangle the United States in an intra-Islamic, Shia-Sunni, Arab-Persian rivalry divorced from America’s vital interests.
As an aside, to shed some new light on the scorn currently being heaped on Iran’s odious regime, let us remember that it is America’s strategic ally—the Kingdom of Saudi Arabia—that remains one of the most oppressive regimes in the Middle East. And as much as folks are fulminating over Tehran’s support for terrorism, in reality it is donors in Saudi Arabia who constitute the most significant source of funding to terrorist groups worldwide.
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