After reading the few details provided on the mortgage settlement, it could be easy to forget that this whole thing was supposed to be about compensating families who lost their homes to foreclosure due to “robo-signing” and other foreclosure process abuses.

Out of the $25 billion settlement, guess how much goes to borrowers who “lost” their homes to foreclosure?  $1.5 billion.  That’s correct, only 6% of the settlement actually could go to the victims it was all supposed to be about.  What’s worse is that the settlement does not even require that money to go to parties actually harmed.  The money can go to any borrower that had a foreclosure, harmed or not.  In fact, as far as I can tell, a borrower could get the money even if he got into the house via fraud, like over-stating his income.

While coverage has been a little loose on details, it appears that about $3 billion of the settlement is going into the coffers of state governments.  You read that right: state governments are looking to get about twice what the actual victims might get.  But then that doesn’t sound too far off from the typical class-action: lawyers make out like bandits and victims get peanuts.

If you’re wondering where the rest of the money is going, it is headed to homeowners who are still in their homes, and hence  by defintion not victims of foreclosure abuse.  So much for actually helping victims.  But then, since the state AGs apparently never bothered to look for any real victims, it should not be too surprisingly that they completely forgot about them when crafting the settlement.

Where’s the Compensation for Victims in the Mortgage Settlement? is a post from Cato @ Liberty - Cato Institute Blog

If you missed the news (Obama actually made a “big” speech about it), the federal government, along with 49 state AGs, reached a settlement with the largest mortgage servicers over servicing violations.  In some ways, what little detail has been offered raises more questions than answers.

Perhaps the biggest question is how much of the actual losses will be borne by the banks and how much will be passed along to investors, who were not even represented at the table.  One hears that both first and second mortgages would be written down “in proportion” so that if the first loan is reduced 10%, then the second is also reduced 10%.  Obviously this flies in the very face of what a first and second loan are.  The first shouldn’t take any loss until the 2nd is completely wiped out.  But since investors often hold the first while banks hold the second, it looks like Obama has blessed the banks sticking a good deal of their losses to the investors, which include pension funds, retirement accounts etc.

And while I was of course moved by the touching picture of a couple and their child featured so predominantly on the settlement’s website, I was also left wondering, what is the process for determining which foreclosed homeowners receive assistance.  The settlement is actual quite clear that  “$1.5 billion will be distributed nationwide to some 750,000 borrowers” but that such borrowers need not have actually been harmed.  This really seems little more than a lottery trying to pass as consumer protection.  But then I suspect your chances for getting a piece are bigger if you happen to live in a swing state (sorry California).

What really worries me is the massive payment to states.  Of course they claim this is going to help “fund consumer protection” but then we also told that the tobacco settlements would help smokers; it instead turned into state government slush funds.  Even more troubling is the high probability that such funds will flow to various non-profits, whatever the current incarnation of ACORN is calling itself.

Fortunately the entire settlement has to be approved by a federal judge.  Given that these issues really should have been decided in the courts in the first place (separation of powers, anyone?), this is the opportunity for the courts to ask for the AGs and Obama to actually produce some evidence of wrong-doing.  And also to ask that parties actually harmed be the ones compensated.  Anything else would be a perversion of justice.

Questions and Thoughts on the Mortgage Settlement is a post from Cato @ Liberty - Cato Institute Blog

First let me admit I do not have a crystal ball, nor does anyone I know, so given the limitations of economic forecasting, one can only attempt educated guesses as to the direction of any economic variable.  That said, I found the chart below, taken from the most recent Bureau of Labor Statistics’ Consumer Price Index release, to be interesting in terms of the clear trend.

The lower line is core CPI, the Federal Reserve’s preferred measure of inflation, the upper line is the full CPI, which includes food and energy prices.  The good news is that while still higher than I’d prefer, food and energy prices started to moderate in the fall of 2011.  That moderation in food/energy prices, however, did not translate into a lower core CPI.  In fact the core CPI continued its fairly steady increase.  Since September 2011, core CPI has been, on an annualized basis, above the Fed’s target of 2 percent (let’s set aside, for the moment, whether this is the right target or if it is even measured appropriately).  Remembering that monetary policy works with “long and variable lags” the time to worry about inflation is before it hits, not after.  Given the clear upward trend in the government’s own charts, I’d say we are already past the point where we should start worrying.

Which Way Is Inflation Headed? is a post from Cato @ Liberty - Cato Institute Blog

One of the direct results of the Federal Reserve’s zero interest rate policies has been a massive reduction in interest income going to households. Since 2008, household interest income has fallen by about $400 billion annually. That’s $400 billion each year that families have not had to spend.

Now of course you can also argue that families interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one’s person expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate.

As interest income/expense is not the only item on the household balance sheet, the Fed does try to make us feel richer via changes in asset prices. The problem, however, is that the change in many asset prices can also have little more than distributional effects. If owners feel richer because their house prices have gone up, or not fallen as much as they would have otherwise, then renters are poorer as they need to save more to by the same house. The same holds for commodity prices. Monetary driven increases in the price of food might be great for farmers, or speculators, but it makes households poorer by the same amount it increases the wealth of commodity holders. If the Fed truly wished to help our economy get back to “normal” then it would allow the free choices of individual borrowers and savers to determine the interest rate. It would also end its implicit practice of picking winners and losers in our economy. Unlike Fed driven changes in asset prices and interest payments, voluntary exchange between savers and borrowers increases the welfare of all parties involved.

Bernanke’s Anti-Stimulus is a post from Cato @ Liberty - Cato Institute Blog

Perhaps I’m a little sensitive from having spent 7 years working in the Senate (rather than just using the Senate as a stepping stone), but when Obama makes statements in his State of the Union like:

Some of what’s broken has to do with the way Congress does its business these days. A simple majority is no longer enough to get anything – even routine business – passed through the Senate. Neither party has been blameless in these tactics. Now both parties should put an end to it. For starters, I ask the Senate to pass a rule that all judicial and public service nominations receive a simple up or down vote within 90 days.

I have to wonder if he even has the slightest clue what he is talking about.  First, what’s with the “no longer”, the fact is that the Senate has operated under super-majority rules since before Obama was born.  The vast majority of bills and nominations pass by unanimous consent, meaning that 100 votes are needed.  As I’ve mentioned elsewhere, 95% of the nominations sent to the Senate in 2011 were confirmed.

And the rules aren’t to blame for “routine business” not getting done.  It’s been over 1000 days since Senate Democrats passed a budget, but then you have to assemble one to pass one.  In 2011 the Senate passed over 400 pieces of legislation, only about 20% below the average of the last 20 years.  As someone who’d like to see government come to a halt, let me assure you, this isn’t it.

Setting aside the offensive nature of a President suggesting changes in the Senate rules (ever hear of the separation of powers?) the fact is that his proposal wouldn’t have mattered in the case of his recent “recess” nominations.  First, Cordray was given a vote, with a required 60 for moving to consideration.  He didn’t get 60.  There’s nothing in the Constitution that defines Senate “consent” as a simple majority.  Obama’s unconstitutional NRLB nominations weren’t even in the Senate for 90 days (his apparent standard).

Our founding fathers purposely created a system that made it hard, not easy, to legislate.  The very existence of both a House and Senate is evidence they rejected simple majority rules for legislating.  One of the many things I learned from working in the Senate, and having spent more time on the Senate floor than Obama, is that dealing in good faith can almost always get you to an broad agreement.  If Obama feels his legislative agenda has come to a halt, he has himself to blame, not the Senate rules.

Was Obama Even Paying Attention during His Time in the Senate? is a post from Cato @ Liberty - Cato Institute Blog

One would think that after a housing boom driven by cheap credit, we would have heard the end of the “minorities charged higher rates regardless of credit” narratives.  But our friends at the Economic Policy Institute continue to spin the myth that it is really race, and not credit history, that determines a borrower’s interest rate.

EPI cleverly starts out by lumping most borrowers into the same category:  “In recent years, Latino and African American consumers with good credit scores of 660 and higher have too often ended up with high interest rate mortgages, mortgages which are supposed to go to risky borrowers.”  First of all, 660 is not a good credit score.  We can debate whether it’s poor or mediocre, but it isn’t good.  According to the Federal Reserve, loans with a FICO of around 660 default at a rate of almost nine times that of loans with a FICO of 720 or higher (see table below).  To mix the two and claim they are the same risk is misleading, at best.

So let’s start with some basic facts:

For a variety of reasons, including differences in age, Latino and black borrowers have lower credit scores than white borrowers. This still holds even when you exclude loans to borrowers with credit scores below 660 or 620.  Second, defaults continue to vary, by large magnitudes, even for rates above 660.  To imply 660 is equal to 700 or that 700 is equal to 780 is false.

There have also been a number of studies that reject the claim of large, or even any, differences in mortgage pricing by race, when one includes relevant variables. A recent NY Federal Reserve Bank study concludes:

we find no evidence of adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin. Indeed, if any pricing differential exists, minority borrowers appear to pay slightly lower rates.

A recent study in the peer-reviewed Journal of Real Estate Research concludes

that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that  appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

We all should be offended by racial discrimination.  But these vast claims of discrimination, where none actually appears to exist, contributed to the federal push to get everyone a mortgage.  This push has come at great cost to the taxpayer, our economy, and—as importantly—to the very families it claimed to help.

Sorry EPI, It’s Credit, Not Race, that Drives Mortgage Pricing is a post from Cato @ Liberty - Cato Institute Blog

The recently released Federal Reserve White Paper on the Housing Market has received considerable attention, at least for its policy proposals.  I found one of the more interesting pieces of data in the paper to be the number of mortgages with negative equity, reproduced below (Figure 3 in the Fed paper).

What I found both interesting and distressing is that despite the fact that the Federal Housing Administration (FHA) was only about 2 percent of mortgages at the height of the bubble in 2005/2006, FHA is now over a fourth of total mortgages with negative equity.  Of course this was all predictable (I actually predicted it).  If you decide, as did our federal government, to get lots of borrowers into loans with very little equity, at a time when prices are falling, you will create a whole lot of loans with negative equity.  Thank you FHA for creating a mess that was completely 100% avoidable.  But who cares when you’re ultimately just sticking it to the taxpayer, right?

FHA and the Foreclosures of Tomorrow is a post from Cato @ Liberty - Cato Institute Blog

If you’ve followed Obama’s nominations to the Federal Reserve, he’s been pretty consistent, displaying a strong preference for coastal academics or politicos.  Not one of his nominations came from the private sector (or “flyover country”), despite the very clear requirements of the Federal Reserve Act.

Recently released Fed transcripts reveal an interesting fact: it wasn’t the all-knowing, impartial Ivy League academics (like Bernanke and Yellen) or the long-term bureaucrats (like Geithner) that expressed concern about the housing and mortgage markets, it was the Republican banker from Tennessee, Susan Bies.  Unfortunately it appears that the academics and bureaucrats on the Board treated Governor Bies’s concerns with their usual contempt for anyone who’s actually had to make payroll (or didn’t do their graduate work at Harvard or Yale). 

In Obama’s defense, we are talking about the Federal Reserve Board as it existed in 2006.  Bush was almost as bad about filling important economic positions with either New Keynesian academics (Mankiw, Bernanke) or Wall Street insiders (Paulson).  Bush, however, did occasionally bow to some voices outside the Cambridge-Wall Street-Washington echo chamber, with Fed appointments such as Bies and the current Fed governor Duke.

The relevance for public policy choices facing us today?  First, while a Board is no panacea, it does mean alternative voices are at least heard before they are dismissed (think the Consumer Financial Protection Bureau) and second, having a bunch of arrogant (and ignorant of real markets) academics run our economy is a recipe for disaster.  And I’m not suggesting we turn our government over to corporate America, I’m suggesting we return our economy to the control and choices of free individuals.

It Was the Republican Banker on the Fed Board Raising Concern about Housing is a post from Cato @ Liberty - Cato Institute Blog

One of the more controversial provisions of the Dodd-Frank Act is its restrictions on proprietary trading, contained in Section 619. Setting aside the fact that even Paul Volcker has said the provision would have done little to avoid to the recent crisis, the Act’s various exemptions illustrate the confusion and hypocrisy underlying the rule.

Foremost among these exemptions is the allowance of proprietary trading when the financial instrument in question is either a U.S. Treasury bill/bond or a security issued by Fannie Mae and Freddie Mac. These instruments are actually the bulk of proprietary trading. Remember the failed hedge fund Long Term Capital Management? Their signature trade was arbitraging on-the-run and off-the-run Treasuries. Ever hear of Bear Stearns? The largest single asset in Maiden Lane I, those Bear Stearn assets guaranteed by the New York Federal Reserve, were Fannie and Freddie securities.

Countries around the World, such as Japan and Canada, have already raised concerns that if their government debt is subject to the Volcker rule, the result will be less liquidity and higher funding costs. But then one has to suspect that former senator Chris Dodd (D-CT) and Rep. Barney Frank (D-MA) understood this, as they allowed an exemption for Treasuries and Agencies (Fannie/Freddie). While I’m no expert on trade policy, this may very well raise World Trade Organization questions since the Volcker rule, as proposed, favors U.S. debt over foreign debt. Of greater concern should be that the Volcker rule favors non-productive investment, that of the U.S. government and Fannie/Freddie, over productive investment, such as corporate paper.

As in so many other areas, Dodd-Frank does leave the actual decision-making to the bank regulators. (Is it too much to ask Congress to actually legislate?) Section 619 is very clear that regulators may exempt Treasuries and Agencies, which implies they also may not. The first best solution would be to just scrap the Volcker rule, but if we are going to have it, then apply it to everyone and all asset classes. Otherwise, one is just introducing additional distortions into our financial markets, some of the same distortions that actually lead to the financial crisis.

If the ‘Volcker Rule’ Is So Great, Why Exempt Treasuries and Agencies? is a post from Cato @ Liberty - Cato Institute Blog

If you believe that the Constitution’s Commerce Clause empowers Congress to do pretty much anything it wants (that is, if you believe that me scratching my nose impacts interstate commerce), then you can stop reading now—you’re beyond help.

If, however, one follows both the history of banking law and the wording of the Commerce Clause, which in Article I, Section 8 in listing the powers of Congress reads “To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes,” then there arises the possibility that Congress lacks the authority to regulate non-bank financials, such as payday lenders, in the manner envisioned by the Consumer Financial Protection Bureau (CFPB), as created by the Dodd-Frank Act.

After you spend over a decade reading federal consumer finance laws, as I have, you notice a trend.  Terms like “federally related mortgage loan,” which appears in, among other places, the Real Estate Settlement Procedures Act, or “national bank,” which appears in lots of places, like the Home Owners’ Loan Act or the Federal Deposit Insurance Act, or “housing creditor” as defined under the Alternative Mortgage Transaction Parity Act, appear repeatedly.  The commonality of these terms?  They always tie back to deposit insurance or some sort of federal guarantee, such as those made by the Federal Housing Administration or Fannie Mae and Freddie Mac.

The structure of federal consumer finance laws has historically gotten around the Commerce Clause by tying said laws to the acceptance of some federal benefit.  In the case of banks, the bargain is, Banks get deposit insurance, which is ultimately backed by the taxpayer, and in exchange they get stuck with a whole host of regulations, some relating to safety and soundness, many others not.  This scheme has been expanded by trying similar restrictions to the ability to sell a loan to Fannie or Freddie.

While I think this arrangement has been a Faustian bargain for the banks, the fact is they don’t have to take deposit insurance or ask for any other type of bailout.

What is truly revolutionary (in a bad way) about the CFPB’s new powers over non-banks is that they go beyond this traditional framework.  I assume, and hope, we aren’t going to start bailing out payday lenders or check-cashers or give them any sort of federal insurance scheme.  So if there is no “bargain” here, as there is with federal depositories, then where exactly is the federal nexus?  The vast majority of payday loan transactions, for instance, do not cross state lines.  The states already have full power to regulate these activities, and already do.  There’s no national marketplace for most of these products.

So if non-bank financials lack a federal nexus (due to the absence of any federal guarantee) and are not interstate commerce, then where exactly is the authority (or the need) to regulate them?

Now, I’m not a lawyer, but it’s hard for me to see how the regulation of activities like payday lending meet the three categories spelled out in United States v. Lopez.  So in addition to the Appointments Clause challenges to the CFPB, I wouldn’t be surprised to also see a Commerce Clause challenge.

Commerce Clause Issues in the Regulation of Non-Bank Financials is a post from Cato @ Liberty - Cato Institute Blog

One of the rationales oft heard for Obama’s recent “recess” appointments is that the Senate is not “doing its job” or that Republicans have blocked his nominees and that our government “cannot function.”  Putting aside the absurdity of the argument that somehow if Congress fails to “do its job” that empowers the President to take over its job, the simple fact is that the vast majority of Obama nominations have actually been confirmed by the Senate.

Between January 5, 2011, the beginning of the 1st session of the 112th Congress, and December 30,2011, the Senate received 20,517 nominations from the Obama Administration.  Of those, 19,815 were confirmed by the Senate, which rounds up to 97 percent.  And this ignores the fact that some nominations, like those to the National Labor Relations Board, were not received until December, hardly giving the Senate any time to consider and confirm said nominations.

One can argue that not all nominations are equal.  For instance the majority of nominations are military positions.  You can decide for yourself whether a general or admiral is equal to an assistant secretary or bureau director.  If one wants to produce a “quality-adjusted” nominations index, they are free to do so.  None of this changes the basic fact:  President Obama has had the majority of his nominations confirmed by the Senate.  Claims to the contrary are simply false.

97% of Obama Nominations in 2011 Were Confirmed by the Senate is a post from Cato @ Liberty - Cato Institute Blog

In just a few weeks Washington enters that alternative universe called “budget season,” when the President delivers his budget proposal to Congress and Congress begins constructing its budget for the coming fiscal year (at least in normal years, don’t expect much budget action in 2012).  Underlying the budget process will be government projections of the deficit.  Such projections will be given considerable weight, both in Washington and among the press.  So if said projections are way off, then budgeting decisions by Washington will also miss the mark. 

Just in time to help frame this debate is a new paper from economists at the Federal Reserve Bank of St. Louis.  The entire paper is well worth a read, and accessible to the general public.  Below is a chart, reproduced from the paper, that expresses the basic point.

On the X axis is the Congressional Budget Office’s projected 5 year budget surplus/deficit, as a percent of GDP.  The Y axis plots the actual budget surplus/deficit.  An easy way to read the chart is that points below the 45 degree line are instances of where CBO was too optimistic.  Points above the 45 degree line are where CBO was too pessimistic.  If CBO’s errors were random, then the number of points below and above the 45 degree line would be about equal.  As you can see, however, CBO’s errors were not randomly distributed.  They were biased in the direction of being too optimistic.  So when you see the next round of CBO budget forecasts, take them with a huge grain of salt.  The truth is likely to be much worse.

How Good Are Government Deficit Forecasts? is a post from Cato @ Liberty - Cato Institute Blog

It has just been over a week since President Obama made his “recess” appointments to the Consumer Financial Protection Bureau and the National Labor Relations Board.  I suggested last week that this might turn out to be Obama’s “Court-Packing” moment, where he begins to discover that (some) Americans actually do care about the Constitution.  While its clearly too early to say anything with certainty, it appears I may have been correct.

On January 3th, the day before the appointments, Obama’s job approval ratings, according to RealClearPolitics, averaged 47.2 approval and 47.8 disapproval.  Basically a tie.

Today, his job approval is at 44.5 and disapproval is 50.3.  Moving over the course of a week from a tie to a spread of almost 6 percentage points. 

Usually we have not seen such large changes over the course of a week.  Now obviously one cannot contribute all this decline to the recess appointments, but there were no other big Presidential announcements or even big economic news over the last week that could account for such a slide in support.  So while this doesn’t prove anything, it does suggest these appointments, even if they are making his base happy, are coming at the expense of the support of independents.

Unconstitutional Recess Appointments Haven’t Helped Obama in the Polls is a post from Cato @ Liberty - Cato Institute Blog

Last week President Obama made the “recess” appointment of Richard Cordray to head the Consumer Financial Protection Bureau, created under the Dodd-Frank Act.  I’ve already discussed some of the various problems with this so-called recess appointment. 

Another, perhaps ultimately more critical, problem is that at the time of this action, January 4th, 2012, there was not a pending nomination of Richard Cordray before the Senate.  By the unanimous agreement of the Senate, his nomination was returned to the President on January 3rd, 2012, which for all purposes extinguishes said nomination.  Per Paragraph 6 of Senate Rule XXXI, the President would have to re-submit Cordray’s nomination in order for it to be considered by the Senate.   

But then I guess if one doesn’t really believe the Senate was in session on January 3rd, despite marking the beginning of a new session, then I guess one might also not believe the Senate could have conducted any business that day, such as returning nominations to the President.

Ironically enough, had the President made the appointment two days earlier, he would be on much stronger, if not still shaky ground.  The President’s own attempt at being clever, by trying to gain another year of service for his nominations, may be what ultimately dooms said nominations.

If indeed there was no pending Cordray nomination on January 4th, then following the decision of US District Court for DC in Olympic Federal Savings and Loan Association v. Director, Office of Thrift Supervision, it would seem pretty clear that Cordray’s appointment was unconstitutional.  But then I’m no lawyer, so we will see.

There Was No Nomination of Cordray before the Senate… is a post from Cato @ Liberty - Cato Institute Blog

Although Franklin Roosevelt did go on to win another term after his court-packing debacle in 1937, his support dramatically declined after the incident.  Whereas his 1936 election came with the support of 62% of voters, his 1940 was down to 55% (granted, still a “landslide by modern standards).  And while it wouldn’t be until 1946 that Republicans would take the Senate, the 1938 mid-terms did cost the Democrats five Senate seats.  The point of all this?  Constitutional overreach comes at a cost, and in a nation split roughly evenly on Red/Blue ideological lines, that coust could make all the difference.

While it is still too early to tell, President Obama’s recent “recess” appointments have the potential to erode his support among independents, many of whom actually care about the Constitution.  While the National Journal‘s Shane Goldmacher is pondering why Republicans even want to take on this fight, it really should be the White House questioning whether it is worth it.  When Ron Paul says, “The president is not a dictator or a king who can simply ignore the Constitution whenever he feels frustrated by the system of checks and balances,” this is something that anyone can understand, even former law professors.

A few things to remember about FDR’s court-packing scheme.  First, unlike Obama’s recent appointments, FDR’s plot was actually constitutional, but still struck at the checks and balances behind the Constitution.  FDR also painted his plan as a way to rein in an out-of-touch, conservative Court that, in his view, protected “big business” (sounds a little familiar).  Despite FDR’s massive popularity at the time, and the unpopularity of both Republicans and the Court, the plan still cost him.

It is also worth remembering that court-packing initially had some support.  From its announcement in February until about April, Gallup showed a steady support of around 45%.  In fact, support never fell below 30% before the plan was shelved.  Goes to show no matter how offensive, there will also be some blind partisans to support any scheme.

By now most of the public has already made up their mind about “who is the bigger front for Wall Street,”  so yes this maneuver will energize the base some. But it is unlikely to change anyone’s mind about Republicans and Wall Street.  What it does do, however, is further raise issues about Obama’s commitment to and understanding of the Constitution.  When the Obama campaign says, “He’ll work with Congress when he can, but if they refuse to act—he will,”  it really displays either a deep misunderstanding or outright contempt for the separation of powers inherent in our system.  If Obama doesn’t place any value upon that notion, perhaps the American public will.

Obama’s ‘Court-Packing’ Moment? is a post from Cato @ Liberty - Cato Institute Blog

 ”When I use a word,”  Humpty Dumpty said, in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master – that’s alls.”           – Lewis Carroll

Apparently some took issue with my concern, expressed yesterday, that President Obama’s “recess” appointment of Richard Cordray to head the Consumer Financial Protection Bureau, might have some legal and constitutional issues.  One of the concerned was my friend Mike Konczal at the Roosevelt Institute.

I’ve always been impressed with Mike Konczal’s ability to say so little in so many words.  His basic claim is that this is no different than any other recess appointment because Section 1011 of Dodd-Frank states the appointment is subject to the “advice and consent of the Senate” which he sees as meaningless boilerplate.  He cites a Congressional Research Service report as saying that a recess appointee has the same powers as a regular appointee.  On its face, that is correct.  Had there already been a Senate confirmed Director in place, with the additional powers over non-banks in place, then any future recess appointee would have those same powers.

The problem with that line of thought is that these powers are not already in place, something not addressed in the CRS report.  This is very real issue (not a “zombie” as Konczal would claim).  During my service on the Senate Banking Committee, when we were drafting language to create the new regulator for Fannie and Freddie, we were very aware of this danger, as it had been a problem when the OTS and FHFB were created out of the FHLBB.  We didn’t wish to have a similar problem, so we crafted language to avoid it (see Section 1101 of HERA).  The problem is that Dodd-Frank did not include such language (one of many drafting errors in the bill).

Now it’s never enough for Konczal to just disagree, he also has to be disagreeable when doing so (I assume it plays well to the nasty echo-chamber that is New York Liberalism).  He snidely says, ”I like how libertarians at Cato are all about the Constitution, with grants the President the power to fill up vacancies, until they aren’t.”  Well to help  him out, I am all about the Constitution as it is written.  And the Constitution’s Article 2, Section 2 clearly says “President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate”.  Did the vacancy of the CFPB director happen during a recess?  Not under the clear language of the Constitution (Mike, I’d be happy to send you a Pocket Copy).

So there you have it.  Konczal’s argument boils down to two issues, that in Konczalian Newspeak “advice and consent of the Senate” really means “unilateral action by the President” and that “may happen during the Recess” actually means “whenever the President decides.”  Now one has to remember that Konczalian Newspeak changes when the President is a Republican.

A Response to Konczal on Cordray Recess Appointment is a post from Cato @ Liberty - Cato Institute Blog

President Obama is announcing today that despite the fact that the Senate is not in recess, he’s going to recess appoint Richard Cordray to be the head of the Consumer Financial Protection Bureau (CFPB), created under the Dodd-Frank Act.

Of course the President is actually claiming that the Senate isn’t in session and that its “pro forma” sessions are just a “gimmick”.  Funny I don’t remember then Senator Obama complaining about gimmicks when the Senate used the sames tactics to block Bush recess appointments.  But then again this is the guy who signs a bill allowing indefinite detention of American citizens after having campaigned on shutting down Guantanamo.  Only a former constitutional law professor could be so creative with the Constitution.

More importantly the “recess” appointment of Cordray doesn’t solve the President’s problem.  The Dodd-Frank Act is very clear, even a law professor can probably understand this section, that authorities under the Act remain with the Treasury Secretary until the Director is “confirmed by the Senate”.  A recess appointment is not a Senate confirmation.  Now don’t ask me why Dodd and Frank included such unusual language, they could have just given the Bureau the new authorities, but they didn’t.  So even with this appointment, the CFPB won’t be able to go after all those non-banks, like the pay-day lenders and check-cashiers that caused the financial crisis (oh wait, those industries didn’t have anything to do with the crisis).

This appointment also guarantees that Obama, even if he gets a second term, is unlikely to ever get a CFPB Director past the Senate.  Maybe not such a big deal for Cordray since the rumor has always been this is just a political stepping stone so he can go back to Ohio and run for office.  The real harm is that Obama has decided to take a gamble with the Constitution, risk the further erosion of the Senate’s advise and consent powers, solely to have another campaign issue.  So he can try to paint Republicans as captive to Wall Street, all despite the fact the new agency exempts Wall Street (who will continue under the ever effective oversight of the SEC).  Maybe he can have Geithner and the various Goldman alum in the Administration stand next to him to help remind us how hard he is fighting for the middle class.

Obama’s Constitutional Gamble on Consumer Finance Nomination is a post from Cato @ Liberty - Cato Institute Blog

Perhaps the most significant difference between my own views and those of my progressive friends is on the relationship between business and government, especially “big business”. I’ve on more than one occasion heard that government needs to be there to off-set the power of big business. That without government, corporations would just continue to grow. Well to me that sounds like an empirical question.

Thanks to the Economic Freedom of the World report, we have some good indicators of just how free-market oriented a country is. What we need are measures of concentration. Unfortunately, these are a little harder to come by. Fortunately, the Office of the Comptroller of the Currency (OCC) did a survey about a decade ago (1999), the data for which are reported in Barth, Caprio, and Levine’s Rethinking Bank Regulation. The measure of concentration is the percent of deposits accounted for by the five largest banks. One could argue for a better measure, but it’s all we have.

The results? It would appear that the freer an economy, the less concentrated its banking system. The chart below offers a scatter diagram, along with a regression line. The vertical Y axis measures concentration and the X axis economic freedom (the higher the number, the freer the economy). Admittedly, the relationship is not a strong one, with a correlation of only -0.11, but it is negative. If anyone knows of comparable measures for other industries, I would encourage them to either send me the data or reproduce this analysis for other industries.

Do Free Markets Tend Toward Concentration? The Case of Banking is a post from Cato @ Liberty - Cato Institute Blog

We’ve sunk $169 billion, and counting, into bailing out Fannie Mae and Freddie Mac.

Every economist understands the concept of opportunity costs—that is, alternatives uses for resources that we expended. Put simply, the Fannie and Freddie bailout is $169 billion that could have been used productively by the private sector to create jobs and/or wealth.  Instead it has gone to continue a corrupt and broken system.

Unfortunately many non-economists, especially some of my friends on the left, behave as if there are no opportunity costs.  Instead, when faced with the bill for such expenditures, they seem to think, ”Oh well, we’ll just tax the rich some more.”

In order to help those folks better understand the opportunity costs of the Fannie/Freddie bailout, here are some things they could have done with that money:

1. Ended poverty for a year.  There are about 9 million U.S. families in poverty.  The poverty line is approximately $14,000 a year.  For the cost of the bailout, we could have ended poverty in the United States for a whole year, with some cash to spare.

2.  Ended homelessness.  Statistics for the homeless population are all over the map, with upper figures ranging to 1.5 million people.  Using that upper bound, for the cost of the bailout we could have spent about $110,000 on each homeless person.  That buys a decent condo in most U.S. cities.

3.  Provided school breakfasts for every student for 12 years.  There are about 50 million children in public schools, pre-K thru 12th grade.  At current costs ($250 per capita annually), we could have bought them all breakfast for their entire 12 years of school.

4. Give every renter a $5,000 down-payment  If you believe the GSEs should increase homeownership, then we could have given all 35 million families that rent $5,000 toward a down-payment, rather than rescue Fannie and Freddie.

5.  Provided health care to every uninsured person for one year.  There are about 50 million people in the United States without health care insurance.  At the average health care expense of around $3,200 (about two-thirds of which go to insurance costs), the cost of the Fannie/Freddie bailout could have provided full health care for everyone uninsured.

We should keep in mind that leaving Fannie and Freddie in place guarantees another massive bailout after the next housing boom and bust.

Those who claim we cannot do without Fannie and Freddie—who claim well-off homeowners need massive subsidies—are also implicitly arguing that they place more value on those activities than any of the above policies.  While neither the bailout (much less the existence of the GSEs) nor the above activities are within the proper scope of the federal government, the alternatives above should illustrate that the bailout was a costly one.

Note:  Most of the figures above were calculated using U.S. Census Bureau data.  If some of my math is a little off, the general point still holds.

The Opportunity Costs of Bailing Out Fannie and Freddie is a post from Cato @ Liberty - Cato Institute Blog

I take some pride, but little satisfaction, from having tried to fix several of the systemic flaws that ultimately led to the financial crisis.  I also was fortunate to spend that time serving under Senate Banking Committee leadership that was more often right than wrong.  But I’m only human and did miss a few things.  In the spirit of the new year, here is my, far from exhaustive, list of things I missed:

1.  The extent of house price declines.  While I never bought the housing industry line “prices never go down”, my sense back in 2005 was that we’d see something like a 10 to 15 percent decline.  It was well known before the bubble that inflation-adjusted home prices have declined nationally on several occasions.

2.  Growth of strategic default.  In previous housing busts, the percent of borrowers who simply walked away only because of their negative equity position was small.  Boston Fed economists have estimated 6% during the last bust.  We are likely between 20 and 30% this time around.

3.  There’s no substitute for a downpayment.  I served as the primary drafter of the American Dream Downpayment Act.  While small in impact, it did offer an experiment in downpayment assistance.  Its results have not been good in my view.  That bill was a mistake.

4.  Bailouts for everyone.  Don’t believe the spin, the rescues of AIG, Bear, Fannie, Freddie, the autos were all bailouts of choice.   While I had serious reservations about Paulson, Bernanke and Geithner, I underestimated their willingness to just throw money at every problem.  Accordingly I now have far less trust in the discretion of regulators (not that I had much before).

5.  Receivership doesn’t end too-big-to-fail.  The primary reason that Democrats, and some Republicans, opposed GSE reform beginning in 2004 was over the creation of a receivership (bankruptcy) mechanism for Fannie/Freddie.  Such a mechanism was finally put into place in July 2008.  It was ignored and the GSEs were rescued.  It is partly for this reason that I don’t see the receivership authority in Dodd-Frank as very credible.  If we won’t wind down Fannie, why would we wind down Citi.

6.  GSE role in the re-po market.  While banks regulators did nothing to reduce the exposure of the banking system to GSE debt, they at least knew about it.  What was less understood was that about a third of the collateral in the overnight re-purchase market (called by some “shadow-banking”) was GSE debt.  When hair-cuts on GSE debt expanded in 2008, liquidity in the re-po market contracted.

7.  Level of Pure Speculation in the Housing Market.  Setting aside that every home purchase entails a degree of speculation, the amount of pure investor sales as a percent of single family home sales turns out to be about double what I had thought back in 2005-06.

 Obviously this doesn’t cover the things that caused the crisis which I did see coming.  And perhaps an even bigger surprise to me was the degree during, and since, the crisis that many continue to hold onto certain beliefs even in the face of compelling evidence otherwise.  For instance, it seemed clear to me as early as 2007 that “exploding adjustable rate mortgages” were not the primary driver of default.  Anyway, we could all use a little more modesty when it comes to discussing the financial crisis.

Some Things I Missed Before the Financial Crisis is a post from Cato @ Liberty - Cato Institute Blog