Archive for the ‘Finance, Banking & Monetary Policy’ Category
Obama Ringing the Pell
As part of his ill-considered credentialing-to-compete initiative, President Obama wants to greatly increase both the size and availablity of Pell Grants. Under his proposed FY 2011 budget, the total pot of Pell aid would rise from $28.2 billion in 2009 to $34.8 billion in 2011; the maximum award would go from $5,350 to $5,710; and the number of students served would rise by around 1 million.
A critical question, of course, is whether increasing Pell will ultimately make college more affordable or self-defeatingly fuel further tuition inflation. The New York Times took that up in yesterday’s Room for Debate blog.
Economist Richard Vedder has long educated people about the inflationary effect of student aid, and does so again with great clarity. It’s higher-ed analyst Art Hauptman, however, whom I think best captures what likely occurs when Pell is combined with all the cheap loans and other aid furnished by Washington, states, and schools themselves:
Read the rest of this post »
Filed under: Education and Child Policy; Finance, Banking & Monetary Policy
A Perfect Storm of Regulatory Ignorance
Does the government know what it’s doing, can it know what it’s doing, in financial regulation? In the latest issue of Cato Policy Report, Jeffrey Friedman doubts it:
You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low equity mortgages; and the role of the Community Reinvestment Act in mandating loans to “subprime” borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don’t know the half of it. And neither does the government….
Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register’s state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects….
This premise would be questionable enough even if we started with a blank legal slate. But we don’t. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can’t possibly know what they all say, let alone how they might interact to create another perfect storm.
Read the whole thing — about moral hazard, banking regulations, and the “perfect storm of ignorance” that happened and will happen again — here in PDF. Less attractive HTML version here. Jeffrey Friedman is editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.
Filed under: Cato Publications; Finance, Banking & Monetary Policy; General
Need a Mortgage? Your Papers, Please . . .
In case you need any evidence that the federal background check system would expand to cover many more things than employment, that process is already underway. H.R. 4586 would require someone seeking modification of a home mortgage loan held by Fannie Mae or Freddie Mac to be verified under the E-verify program. (Same would go for modifying mortgages insured under the National Housing Act.)
Filed under: Finance, Banking & Monetary Policy; Telecom, Internet & Information Policy
Fed Governor Starting to Make Sense
Despite still defending the Fed’s bailouts, Fed Governor Kevin Warsh gave a speech this morning offering a few insights about reforming our financial system that seem to be lost on both Obama and Bernanke.
A few highlights:
The mortgage finance system is owed far stricter scrutiny to gather a fuller appreciation of the causes of the crisis. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, for example, were given license and direction to take excessive risks.
One has to hope that both Bernanke and Obama are listening. The silence of the Obama administration on fixing Fannie and Freddie is nothing short of shocking and irresponsible. Any commitment to real reform has to include the GSEs.
Granting new powers to resolve failing firms in the discretionary hands of regulators is unlikely, in the near-term, to drive the market discipline required to avoid the recurrence of financial crises.
…Some newly-empowered and untested regulatory structure is not likely–in and of itself–to be sufficient to tackle institutions that are too-big-to-fail, particularly as memories of the crisis fade. Regulation is too important to be left to regulators alone.
I believe these two points cannot be stated more strongly: what we need is more market discipline, rather than less. Putting the entire weight of our financial system on the backs of our financial regulators is a crisis just waiting to happen. Sadly the direction of both President Obama and Congress seems to be in undermining market monitoring of firms and relying solely on regulators to “get it right”. The very same regulators who were asleep at the wheel prior to the last crisis.
Obama Small Business Lending Fund Likely A Bust
President Obama has announced his intention to use $30 billion in TARP funds to create a new small business lending fund. In all likelihood, this is $30 billion the taxpayers will never see returned.
First of all, the problem facing small business, outside of the massive uncertainty being created by Washington, is one of credit availability, not cost. For those who can get credit, its quite cheap, arguably too cheap. So if the president doesn’t intend to lower the cost of credit, the plan must be to lower the quality; using the $30 billion to cover expected credit losses. Of course, we tried throwing lots of taxpayer money at unsustainable homeownership, is there any reason to believe throwing taxpayer money at unsustainable businesses is going to work any better?
Using TARP funds for this program is also somewhat disingenuous. This program adds $30 billion to the deficit regardless of whether it’s funded by TARP or by Congressional appropriations. Taking from the TARP only allows the President to keep treating the TARP as his personal slush fund. Nowhere in the TARP legislation can you find language authorizing the use of funds to cover credit losses on new loans. Being a constitutional scholar, the President should know very well that the spending power rests with Congress, not the President. If we are to have a new small business lending program, it should be designed and funded by Congress, not bureaucrats at the Treasury Department.
Historically the two main sources of small business start-up funding have been home equity and credit cards. Clearly the availability of home equity has declined. Sadly as well, with the passing of credit card “reform” the availability of credit card lending has also declined. If the President truly wants to help small business, then the first thing to do is ask Congress to repeal the credit card bill and then just get out of the way.
Why the Slow Recovery?
“Wealthy Face Higher Taxes.” That’s the headline that greeted two million American businesspeople Tuesday when they opened their Wall Street Journals. Inside, another banner head: “Big Firms Would Face Deeper Tax Bite.” Turn to the New York Times: “A Red-Ink Decade/Obama Budget Sees Years of Deficits.” The Financial Times: “Obama to target overseas tax breaks.” Investor’s Business Daily: “Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.” And the Washington Post (not that many productive people get that on their doorstep): “Obama budget would spend billions more.”
And President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back? As the Economic Policy Institute illustrates, this is the slowest recovery of any postwar recession.
![[chart: Current downturn is far worse than any other in post-War period]](http://www.epi.org/page/-/img/20100127_snapshot_580.jpg)
Let’s hope the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.”
Taxes, regulation, and uncertainty — and Obama asks why businesses aren’t lending, investing, and hiring.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
FHA Bailout Watch
The Federal Housing Administration has been one of the government’s main instruments for propping up the housing market in the wake of the housing bust. But as has been widely reported, the FHA is in danger of needing a taxpayer bailout because of rising defaults on mortgages it insures.
FHA-insured loans originated in 2007 and 2008 – when Bush administration housing officials were mainly concerned with “winning back our share of the market” – are defaulting at higher rates as this graphic from the Washington Post shows:
FHA officials are optimistic a bailout won’t be needed, but the Post reports that not everyone shares this optimism:
The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53 percent of the value of all FHA single-family-home loans — far lower than the 2 percent required by Congress.
But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.
To avoid a bailout, the FHA recently proposed more stringent standards, which would include raising the premiums it charges to cover losses. However, even if a bailout isn’t needed and the FHA continues to “make money,” that would only call into question the need for the FHA to begin with. Why can’t the private sector provide all mortgage insurance?
The answer is that the mortgage lending industry likes knowing it can originate mortgages that the government will cover in the event of a default. Heads they win, tails Uncle Sam loses. The president’s new budget makes this clear in addressing concerns about the FHA’s currently low reserves:
However, it is important to note that a low capital ratio does not threaten FHA’s operations, either for its existing portfolio or for new books of business. Unlike private lenders, the guarantee on FHA and other federal loans is backed by the full faith and credit of the Federal Government, and is not dependent on capital reserves — FHA can never “run out” of money.
That’s right – the federal government can simply tax, borrow, or fire up the printing presses.
The government has been propping up the housing market with taxpayer subsidies in the wake of a housing boom and bust it helped create. If policymakers continue to keep the housing market on artificial life support, taxpayer will remain on the hook. If it pulls the plug and the market takes another downward spiral, Washington will probably rush in with more bailouts. It appears taxpayers can’t win.
See this essay for more on federal housing finance.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Volcker Rule Misses the Mark
Today Paul Volcker appears before the Senate Banking Committee to argue for the separation of proprietary trading and commercial banking. In Mr. Volcker’s own works “what we plainly need are authority and methods to minimize the occurrence of those failures that threaten the basic fabric of financial markets.”
Using his own test, the Volcker Rule fails miserably. Had this rule been in place say five or even ten years ago, we’d most likely be in the same place we are today. It would have not avoided the crisis, and may potentially have made it worse.
First of all the proposal ignores the fact that those institutions at the heart of the crisis, Bear, Lehman, Fannie, Freddie, AIG, were not commercial banks. They were not using federally insured deposits to gamble in our financial markets. Those commercial banks with proprietary trading activities that did fail, such as Wachovia, were sunk not by proprietary trading, but by bad mortgage lending.
Mr. Volcker is correct in arguing for a change in assumptions that institutions and their creditors will not be bailed out. He errs in believing that the House passed financial “reform” bill achieves that. One has to wonder if he’s bother to even read the bill. The House bill explicitly allows for rescuing creditors. The House bill does not reduce the chance of bailouts, it increases them.
While the Obama Administration may have changed the face of its reforms, sadly the substance of its proposals continue to bear little relation to the actual causes of our financial crisis. Nowhere in the President’s proposals do we see any efforts at avoiding future housing bubbles. Perhaps this should come as no surprise given Washington’s continued attempts to re-inflate the last housing bubble.
Financial Fiasco: ‘Best Books of 2009′
Johan Norberg’s Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis has been named one of the best books of 2009 by the Spectator, Britain’s most important political affairs magazine. Excerpt:
Ever since the crash, I have been waiting for Johan Norberg to write about it — and finally, this year, he has obliged. I have three copies of his first book, In Defence of Globalisation, with varying degrees of annotation. I have already started to deface Financial Fiasco, his book showing how governments created this mess. The American government pumped up the housing bubble — and then there was a collective delusion that the market was rational. As Norberg says, the market is no more than a collection of humans who fall prey to hubris. And their hubris was imagining that computer models had eliminated risk: that the boom would not be followed by a bust.
It previously got an excellent review in the Financial Times. It’s enough to make you think that the elite British press are smarter than the elite American press.
Filed under: Cato Publications; Finance, Banking & Monetary Policy
Do Democratic Presidents Create More Jobs?
Politifact.com looked into a remark from Rep. Carolyn Maloney, D-N.Y., that “Democrats have been considerably more effective at creating private-sector jobs.”
The statement was rated true, as a purely statistical matter. Yet the poltifact researcher did a good job questioning the significance of his own figures. He noted, correctly, that the president usually “deserves less credit for the good times — and less blame for the bad times.” And he added that job figures can be driven by outside factors such as oil price shocks, demographic changes or soldiers coming home after World War Two. He wryly noted “how surprised we are that Eisenhower, who presided over the ‘happy’ 1950s, managed an anemic half-percent job growth per year, while Jimmy “Malaise” Carter finished second with 3.45 percent annual job growth.” Anyone who remembers the runaway inflation of the Carter era will realize that annual rates of job growth are not enough to describe the overall economic situation.
The author also quoted me making the point that “timing can be hugely important.” It is so important, in fact, that we may need to add another dimension to politifact’s true-false meter to deal with political comments that are simply meaningless.
For the record, what follows is the full text of my email on this topic:
The error involved with assigning rates of job growth to Presidential terms is that six recent Presidents took office within a few months of the start of a recession: Obama (recession began December 2007), H.W. Bush (July 1990), G.W. Bush (Mar 2001), Reagan (July 1981), Nixon (Dec. 1969) and Ike (July 1953). As it happens, four of the five were Republicans.
One might argue that recessions launched near the end of the previous administration helped get these men elected. But these recessions were clearly left over from events that began previous years. It didn’t help that the first Pres. Bush passed a tax increase three months after the 1990 recession began, but the start of that recession is more plausibly blamed on the earlier spike in oil prices when Iraq invaded Kuwait.
Since employment is a lagging indicator (one of the last things to improve), that means average job growth among Presidents who took office near the start of recessions is bound to look bad in comparison with Presidents who took office after an expansion was well underway. Bill Clinton took office in 1993, long after recession ended in March 1991. The same was true of Truman, LBJ and Carter. JFK took office a month before the 1960 recession ended.
Two-term Presidents also have more time to show good numbers, but only if they’re lucky enough to get out of office just before the next recession starts. Clinton squeaked by (despite falling stock prices and industrial production 2000), but Nixon, Eisenhower, Carter and G.W. Bush did not.
Since Bush 2nd began and ended office in recession, averages over 8 years outweigh 4 reasonably good years. This unprecedented bad timing is exaggerated by Paul Krugman’s comparison of “decades” [and President Obama’s recent reference to “the lost decade” of 1999-2009] which relies on starting and ending each decade in boomy 1959 rather than slumping 1960, ditto 1969 rather than 1970, 1979 rather than 1980, 1989 rather than 1990, and 1999 rather than 2000.
In short, statistics about employment growth over Presidential terms are dominated by the timing of the “business cycle” (including Federal Reserve policy), and have no apparent connection to economic policies attributed to the White House (as opposed to Congress).
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
Can Unemployment Benefits Create Jobs?
At the Center on Budget and Policy Priorities, sociologist Michael Leachman claims “some of the most effective job-creation and job protection measures” in last year’s American Recovery and Reinvestment Act are excluded from the job figures to be released on recovery.gov on January 30. He explains that, “Most of ARRA’s distributed dollars to date have gone directly to individuals (including greater jobless benefits and food stamps) and states (including greater federal support for Medicaid). Although these dollars are likely protecting or creating hundreds of thousands of jobs, none of the aid for individuals or the Medicaid support are [sic] reflected in the January 30 jobs data release.”
In particular, Leachman claims Recovery Act funds to extend unemployment benefits from 26 to 79 weeks (and to 99 weeks since November) “produces and sustains jobs.” For proof, he cites estimates from Mark Zandi of Economy.com “that every dollar spent on extending unemployment insurance benefits produces $1.61 in economic activity.”
This analysis runs into two big problems. The first is that it assumes that the amount of time people spend on unemployment insurance is unrelated to how long the government offers to keep paying benefits. The second is that it assumes that the assumptions about “fiscal multipliers” built into Economy.com econometric model are actually evidence rather than just assumptions.
On the first point, page 75 of the 2007 OECD Employment Outlook explains: “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment… This could have a negative impact on productivity through inefficient use of resources and depreciation of human capital during long spells of unemployment. In addition, by reducing the opportunity cost of unemployment, generous unemployment benefits may lead existing employees to reduce their work effort, thereby lowering productivity (see e.g. Shapiro and Stiglitz, 1984; Albrecht and Vroman, 1996).”
As I recently noted, the overwhelming evidence that extended unemployment benefits raise the duration and rate of unemployment comes from economists in the Obama administration, Larry Summers and Treasury economist Alan Krueger, as well as many others such as Lawrence Katz of Harvard and Bruce Meyer of the University of Chicago.
Contrary to Leachman, bribing people to stay on the dole for an extra 53-73 weeks leaves them with less money to spend, not more. It also looks bad on resumes, and may cause lasting damage to future job prospects.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Health, Welfare & Entitlements; Tax and Budget Policy
Are We Mad about SAFRA?
This morning I mused about whether yesterday’s Massachusetts miracle would curb the drive to have the feds take over K-12 education. In particular, I wondered if the president’s new proposal to extend the “Race to the Top” – and as part of that directly connect local districts to the feds –will meet an almost immediate demise as legislators dive frantically to avoid the backlash against ever-expanding federal power.
My hope is that it will, but I’m not especially sanguine. The prospects for stemming the centralization tide are probably better today than they were yesterday, but federal education initiatives tend to have a fair amount of bipartisan support, especially if they throw money at public schools — which liberals like — as well as things like charter schools, merit pay, and “standards” that conservatives support. Indeed, I wouldn’t be surprised if President Obama, facing hopeless prospects on health care, cap and trade, and other anger-igniters, were to propose reauthorizing the No Child Left Behind Act as one big Race to the Top. Incorporating both big bucks and things conservatives endorse, it would stand a pretty good chance of garnering some Republican support. And that would allow Obama to say he has learned his lesson about working with both parties while letting legislators head back home declaring that they’d done something “for the children.”
Filed under: Education and Child Policy; Finance, Banking & Monetary Policy; General; Government and Politics
FHA’s New Stringent Standards
The Federal Housing Administration will reportedly announce more stringent lending requirements and higher borrowing fees. The move comes in response to growing concerns that rising losses on mortgages it insures will require a taxpayer bailout. Although any credit tightening is welcome, the agency will not propose an increase in the minimum downpayment, currently 3.5 percent. (Borrowers with credit scores below 580 will be required to put down a minimum of 10 percent, but most FHA lenders already require a 620 minimum score.)
Yesterday, the Wall Street Journal noted that “home builders are worried” the FHA would propose raising the minimum downpayment. The CEO of a Texas builder said it would be a “game changer,” meaning that it would hinder the nascent housing recovery. However, other industry observers believe otherwise:
In markets where home values are still falling, buyers who put little money down could see their equity wiped out quickly. The FHA is “just manufacturing more upside-down homeowners by the truckload in Arizona, California, and Nevada,” says Brett Barry, a Phoenix real-estate agent who specializes in selling foreclosed homes.
FHA commissioner David Stevens counters that inhibiting lending by increasing downpayment requirements would “perpetuate” price declines. But falling prices are a painful, but necessary, correction needed to bring the housing market back into equilibrium. Government interventions in the wake of the housing bubble’s burst have created an artificial cushion. Thus, any alleged housing recovery could prove illusory when the cushion is removed. In addition, the longer the government tries to prop up the housing market, the greater the economic distortions and risk to taxpayers.
The article cites the example of a 42-year-old air-conditioning repairman who just bought a house with the FHA minimum 3.5 percent downpayment. To meet the requirement he had to borrow part of the money from his father-in-law, which he then repaid with the $8,000 first time homebuyer tax credit. He now has a $1,466 monthly mortgage payment on a $50,000 salary. Factoring in utilities and other homeownership costs, it’s not inconceivable that half of his pre-tax salary will be devoted to just his home. Is it any wonder the FHA is experiencing large default rates?
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
In Case This Needs Saying: It’s a Tax
Last week, President Obama unveiled a plan for something he called a ”Financial Crisis Responsibility Fee,” to be fleshed out in his forthcoming budget proposal. He will seek to have some set of financial services providers pay money to the government as comeuppance for the recent financial crisis and government involvement in trying to remedy it.
The naming of the “Financial Crisis Responsibility Fee” is a fairly conspicuous attempt to avoid calling it a tax. (My colleague David Boaz points out the sheer number of taxes the Obama administration and its allies are considering.) But it’s fairly clear that this thing is, indeed, a tax.
The galaxy of government revenues has a number of different planets—taxes, fees, penalties, and a few others. If they’re well constructed, fees are generally favored because the recipients of services or benefits pay their costs. Fees avoid redistribution of wealth (either toward or away from payers). But this doesn’t mean that you can name any payment to the government a ”fee” and produce fair and appropriate results.
When I worked on Capitol Hill, I was tasked with writing a bill to deny federal agencies the power to raise taxes, requiring them to be approved by Congress. (You’d think that only Congress should set or raise taxes, right? Sorry to disappoint.) The goal was not to draw fee-setting into the ambit of the bill.
After extensive reasearch into the dividing line between fees and taxes, which is not as simple as one might imagine, I produced the following definition, as found in the Taxpayer’s Defense Act (introduced in the House during the 105th Congress, and the House and Senate in the 106th Congress):
[T]he term “tax” means a non-penal, mandatory payment of money or its equivalent to the extent such payment does not compensate the Federal Government or other payee for a specific benefit conferred directly on the payer.
Parsing it briefly: A penalty is not a tax. A voluntary payment is not a tax. Both payments of money and tranfers of value not denominated in dollars can be taxes. A payment that compensates a benefit conferred is not a tax, but the part of a payment going above the benefit conferred is. Non-tax payments are for a specific benefit conferred directly on the payer, not benefits conferred on regulated entities generally or on the country as a whole. (Though this isn’t specified in the definition, being regulated isn’t a benefit.)
With even the New York Times referring to President Obama’s “Financial Crisis Responsibility Fee” as a “tax,” there doesn’t seem to be much chance of that the administration will get the “fee” label to stick. But, just in case, here’s confirmation: It’s a tax.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Reforming Previous Reforms, ad Infinitum
In the forthcoming issue of Cato Policy Report, Jeffrey Friedman describes the cumulative effects of regulations that led to the 2008 financial collapse:
So deposit insurance begat bank-capital regulations. Initially these were blunderbuss rules that required banks to spend the same levels of capital on all their investments and loans, regardless of risk. In 1988 the Basel accords took a more discriminating approach, distinguishing among different categories of asset according to their riskiness — riskiness as perceived by the regulators. The American regulators decided in 2001 that mortgage-backed bonds were among the least risky assets, so they required much lower levels of capital for these securities than for every alternative investment but Treasurys. And in 2006, Basel II applied that erroneous judgment to the capital regulations governing most of the rest of the world’s banks. The whole sequence leading to the financial crisis began, in 1933, with deposit insurance…
Deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators’ and regulators’ ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.
Friedman is talking about financial and housing regulation. But I was reminded of them when I heard President Obama tell congressional Democrats, “Today we are on the doorstep of accomplishing something that Washington has been talking about since Teddy Roosevelt was President, and that is reforming health care and health insurance here in America.” And his formal speech to Congress in September: “I am not the first President to take up this cause, but I am determined to be the last.”
But of course we’ve been “reforming” health care ever since Teddy Roosevelt, and those reforms have brought us to our present difficulties. The Flexner Report 100 years ago reduced the supply of doctors and drove up the price. Wage and price controls during another Roosevelt era led to the system of employer-provided insurance, again driving up costs. Medicare and Medicaid poured more third-party payments into the system and added layers of government bureaucracy. HMOs and other cost-containment measures were a response to a problem created by the absence of normal consumer pressure. Then we got HIPAA, Kennedy-Kassebaum, the Mental Health Parity Act, state mandated-coverage laws, and the Medicare Prescription Drug Benefit.
And here we are today, with a health care system that everyone agrees needs reform. Maybe it’s time to recognize that we’re just piling new regulations on top of old regulations, like some compulsory Rube Goldberg device, and to try instead free markets, in which consumers pay for what they want from providers, insurance companies, managed care organizations, and other entities that compete for their business by seeking to provide better care at lower prices. Otherwise, we can be sure that Barack Obama won’t be the last president to stand before Congress and declare that our health insurance system needs reform. Indeed, we can bet that if he signs the current bill, he himself will be back before Congress in a year or two asking for reforms to reform the reforms that were intended to reform the previous reforms.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Health, Welfare & Entitlements; Regulatory Studies
Obama Bank Tax Is Misguided
Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit? But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?
If the effort is really about deficit reduction, then it completely misses the mark. Any serious deficit reduction plan has to start with Medicare and Social Security. Assessing bank fees is nothing more than a rounding error in terms of the deficit. Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order. The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.
The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs. Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do. So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.
Government-Subsidized Risk Is a Bad Idea
Kudos to Nicki Kurokawa, a former Cato employee, for this short but substantive video explaining “moral hazard.” She notes that government-subsidized risk played a pernicious role in the housing bubble and financial crisis, and warns that “too big to fail” may create similar problems in the future.
Filed under: Finance, Banking & Monetary Policy; Regulatory Studies
Where’s Our Bailout Vote?
It’s easy to forget that the financial crisis was not simply one of American financial institutions getting into trouble; banks around the world found themselves on the brink of failure. One of the more interesting cases is Landsbankinn, a privately owned bank in Iceland. Landsbankinn also operated a branch in Britain and the Netherlands called “Icesave.” When Icesave failed in 2008, the British government rushed in and covered the deposits of its British savers — a move that was neither requested by Landsbankinn or the government of Iceland. Now the Brits are demanding that Iceland pay them to cover those expenses.
For a brief moment it looked like that was exactly what was going to happen, as the legislature in Iceland passed a bill to pay off the Brits. Sensing the public opposition, Iceland’s president blocked the bill. This is likely to lead to a public vote by the people of Iceland on whether they want to cover the losses of British depositors in Icesave.
Britain had no legal basis for seizing Icesave assets in the UK, nor did depositors in Icesave have any right to have their losses covered. If England wants to bail out its citizens, that is its business. Asking Iceland to foot the tab afterwards sets a dangerous precedent.
But then at least the citizens of Iceland are getting a vote on whether to bail out or not. By comparison, both U.S. Treasury Secretaries Paulson and Geithner have decided that U.S. taxpayers must honor foreign investments in Fannie Mae and Freddie Mac, even if those investments were explicitly not insured by the U.S. government. Perhaps the U.S. could learn a little about democracy and accountability from Iceland.
Federal Bias Toward Homeownership
The Wall Street Journal ran the story last week: “U.S. Now a Renters’ Market.” Apartment vacancies hit a 30-year high in the last quarter of 2009, and rents are falling in most markets. For current or former homeowners trying to stumble out of the debris left from the government-fueled housing bubble, a renter-friendly environment is a positive opportunity.
But it’s also a reminder of how the government’s obsession with homeownership continues to distort the market for housing. As the Journal notes, “Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes.”
Homeownership in the U.S. began an upward trajectory following the federal government’s plunge into the housing market during the Great Depression. Prior to that fewer than half of Americans owned their own home according to University of Pennsylvania Prof. Thomas J. Sugrue. Owning one’s home is now viewed in this country as American as apple pie. but as Sugrue points out, this mentality is “a story riddled with irony”:
[F]or at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army of banking, real-estate and construction lobbyists who rose to protect their industries’ newfound gains Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever.
Indeed, the housing industry “army” remains a potent force behind the government’s distortionary housing policies, as I discussed in a policy analysis on the Department of Housing and Urban Development’s failures:
An important driver of the bad policymaking is the large influence that housing lobby groups have in Washington. Ultimately, federal policymakers are responsible for their actions, but a brief review of the political power of the housing lobbies illustrates where policymakers get a lot of their bad ideas.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Don’t Trust Economists
Sometimes a picture really does tell a thousand words. Here’s a chart, based on data from the Philadelphia Fed, showing actual economic results compared to the predictions of professional economists. As you can see, my profession does a wretched job. Comparisons based on predictions from the IMF, OECD, CBO, and OMB doubtlessly would generate equally embarrassing results. This does not mean economists are idiots (insert obvious joke here), but it is an additional reason why Keynesianism is misguided. If economists are unable to predict what’s going to happen with the economy in the near future, why should we expect anything positive when politicians tinker with short-run economic performance? That’s especially the case when they pass so-called stimulus legislation that increases the burden of government spending.
This doesn’t mean that economists – and others – are never accurate with predictions. But I am quite confident that we will never see an economic model that successfully predicts future economic fluctuations.
h/t: James Montier, via Paul Kedrosky, via Andrew Sullivan
Cato on Facebook
Cato on Twitter
Cato on YouTube
Cato Tweets
