Archive for the ‘Finance, Banking & Monetary Policy’ Category
SEC Favors Special Interests in New Corporate Elections Rule
Yesterday, the SEC repealed a long-standing rule which allowed brokers to vote shares on behalf of their investors, unless they obtained written directions from each individual investors. While investors have long been able to direct the voting of their shares, many do not take the time to. In these cases, the brokers vote those shares, after all they are the agents of the investors and are hired to act on their behalf.
The direct effect of the rule will be to reduce the voting weight of retail investors, as represented by their brokers. In voting against the rule, SEC Commissioner Kathy Casey raised the point that the rule would skew voting toward large institutional investors and away from little retail investors.
What did the large institutions investors have to say? As reported in today’s Financial Times, Ann Yerger, who represents large pension funds claimed that “counting uninstructed broker votes is akin to stuffing the ballot box for management.” One has to wonder whether the pension funds, which Ms. Yerger represents should have to get written instructions from all the pensioners whose pensions are managed by these funds? Of course not, treating all agents of investors equally would make too much sense for the SEC.
Then one should not be too surprised to see pension funds be allowed to cast their “uninstructed” votes while brokers cannot. The largest pension funds manage the retirement of unionized state and local employees, often with the fund management itself representing the interests of the unions. We witnessed this same favoring of union interests over the common good in the auto bailouts.
The rule once again illustrates that the new bosses in Washington are busy rewarding their allies at the expense of everyone else.
Washington Push on Executive Pay Has Unintended Consequences
Regulators at the SEC and politicians on Capitol Hill seem to have short memories when it comes to executive compensation. When the SEC years ago decided to make the compensation of top executives public information, it had the all too predictable result of actually increasing average compensation levels. Once a top CEO knew what other CEOs were making, he could argue for a pay hike based upon being “underpaid”. Of course regulators were “shocked” by the resulting “race to the top.”
Similarly Congress was shocked when after deciding to heavily tax salaries over $1 million, that companies shifted away from direct cash pay and toward options and increased bonuses in the form of shares.
And soon Washington will also pretend to be shocked and outraged that the current anger over Wall Street bonuses is leading firms to reduce bonuses, but increase base pay. As illustrated in today’s Wall Street Journal, companies like Morgan Stanley have increased their base pay from $300,000 to $400,000. Even Citibank, essentially a ward of the US government, is increasing its base pay to $300,000 for employees that were previously eligible for bonuses.
The real harm in this is not that Wall Street employees are getting paid more in cash, but that less of their compensation will be tied to their performance, and the performance of their firm. A flat salary, regardless of how hard you work, will encourage shirking. Perhaps even worse, is that more upfront cash, and less long-term stock options, will shift Wall Street’s focus even more toward today, rather than tomorrow. So much for Washington fixing the short term focus of Wall Street, but then one shouldn’t be too surprised given the even more short term focus of Washington.
Too Big to Fail
One of the most pernicious public policies aggravating the financial crisis is that of “too big to fail.” The doctrine states that some banks (now financial institutions generally) are so large that their failure would incur “systemic risk” for the financial system. That sounds terrible and it is intended to. Financial services regulators and Treasury secretaries use it to frighten small children and congressmen. How can an elected official vote to incur systemic risk? He must vote to approve the bank bailout of the day. In fact, people who use the term cannot even agree among themselves as to what it means, much less what causes it and, therefore, what the appropriate response would be. I suggest the reader substitute the phrase “too politically connected to fail” whenever he sees “too big to fail.” What follows will then be rendered intelligible.
The Failure of Do-Nothing Policies
A news story from today in a slightly alternate universe:
Jobless Rate at 26-Year High
Employers kept slashing jobs at a furious pace in June as the unemployment rate edged ever closer to double-digit levels, undermining signs of progress in the economy, and making clear that the job market remains in terrible shape.
The number of jobs on employers’ payrolls fell by 467,000, the Labor Department said. That is many more jobs than were shed in May and far worse than the 350,000 job losses that economists were forecasting.
Job losses peaked in January and had declined every month until June. The steep losses show that even as there are signs that total economic activity may level off or begin growing later this year, the nation’s employers are still pulling back.
White House press secretary Robert Gibbs said, “President Obama proposed a $787 billion stimulus program to get this country moving again. He tried to save the jobs at GM and Chrysler. But the do-nothing Republicans filibustered and blocked that progressive legislation, and these are the results.”
House Speaker Nancy Pelosi said at a press conference, “We begged President Bush to save Fannie Mae, Merrill Lynch, Bank of America, AIG, the rest of Wall Street, the banks, and the automobile industry. We begged him to spend $700 billion of taxpayers’ money to bail out America’s great companies. We begged him to ignore the deficit and spend more money we don’t have. But did he listen? No, he just sat there wearing his Adam Smith tie and refused to spend even a single trillion to save jobs. And now unemployment is at 9.5 percent. I hope he’s happy.”
Democrats on Capitol Hill agreed that the “do-nothing” response to the financial crisis had led to rising unemployment and a sluggish economy. If the Bush and Obama administrations had been willing to invest in American companies, run the deficit up to $1.8 trillion, and talk about all sorts of new taxes, regulations, and spending programs, then certainly the economy would be recovering by now, they said.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Immigration and Labor Markets; Tax and Budget Policy
Congress Just Raised Our Credit Card Fees
Technically, it was the companies which raised their fees. But they did so to anticipate new legislative restrictions on fees taking effect. Congress wanted to cut costs for consumers, but ended up costing them instead.
Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.
Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.
“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta — lower limits, higher rates, higher minimum payments.”
It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.
The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.
One hates to think of what additional “help” Congress plans on providing for us in the future.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Regulatory Studies
Support for Federal Reserve Audit Increasing
Last week Cato hosted a policy forum on “Bringing Transparency to the Federal Reserve,” featuring Congressman Ron Paul. As mentioned in CQ Politics, Rep. Paul’s bill, HR 1207, has been gaining considerable momentum in the House, with currently 244 co-sponsors, ranging from John Boehner to John Conyers Jr. In fact, the Senate companion bill was introduced by Senator Bernie Sanders.
Fed Chairman Ben Bernanke discussed the very topic of Federal Reserve Transparency at Cato’s annual monetary conference in the Fall of 2007.
After praising moves toward greater transparency at the Fed, Bernanke argued that “monetary policy makers are public servants whose decisions affect the life of every citizen; consequently, in a democratic society, they have a responsibility to give the people and their elected representatives a full and compelling rationale for the decisions they make.”
Chairman Bernanke also goes on to argue that “improving the public’s understanding of the central bank’s objectives and policy strategies reduces economic and financial uncertainty and thereby allows businesses and households to make more-informed decisions.” Bernanke’s full remarks can be found in the Spring 2008 issue of the Cato Journal.
Over the last two years, we have seen an almost tripling of the Federal Reserve’s balance sheet to $2.3 trillion, resulting from the bailouts of AIG and Bear Stearns and the creation of 14 new lending programs.
Our recent forum, and Rep. Paul’s bill, bring much needed debate and focus to the issue of Fed’s inner-workings.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Gift Cards: What Congress Gives, the States Take Away
Little noticed in the recently enacted credit card bill was a provision prohibiting retailers and financial institutions from issuing gift cards that expired with a set time, except under certain circumstances. While card issuers had been using expiration dates to estimate and manage their liabilities, many States had been “collecting” the value of these unused cards as “abandoned property”, as discussed in today’s Wall Street Journal.
Some states have even been going after cards with no expiration date, arguing that if you leave that gift card sitting around your house or in your wallet for too long, then you’ve abandoned. What’s next, funds sitting unused in your bank account will next be considered abandoned. The States that require unused gift cards, or unused portions, to be turned over require retailer and card processors to maintain databases tracking card amounts and usage.
There is some comfort, however, in knowing that some States do allow you to re-claim your “abandoned gift dollars,” for instance of the $9.6 million collected by New York State last year in unused gift cards, rightful owners were able to recover $2,150.
Consumer Financial Product Commission Distracts from Real Reform
Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.
The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.
If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses. No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.
Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.
Don’t Count on Getting Your “Investment” Back from Government Motors
The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company. But there aren’t many cases of this sort of lemon socialism actually paying off.
Now most everyone connected with GM is admitting the same thing. Reports the Washington Post:
If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.
It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.
“I’m not going to predict it — that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.
“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.
This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.
The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.
“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.
She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.
“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”
Oh, well. As they say, it’s only money!
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Beginning of the End for Bernanke
Fed Chairman Bernanke’s term as Chair ends in January 2010. So far President Obama has offered Bernanke praise for his performance, but little else. After last week’s House Oversight Committee hearing focusing on Bernanke’s role in Bank of America’s purchase of Merrill Lynch, it is now readily apparent that the Chairman has few supporters on Capitol Hill. While his nomination will not be subject to the approval of the House of Representatives, or any of its Committees, the Senate Banking Committee’s reaction to Treasury Secretary Geithner’s plan to extend the Fed’s power serves as a useful proxy in gauging that Committee’s view of the Fed’s recent performance.
Several recent polls show President Obama to be broadly popular with the American public, while the public holds some concern over the scope and cost of his policies. His policy that garners the least support has been his bailout and support for the auto industry. It is no secret that the American public was not enthusiastic about the bailouts at the time, and is even less so now. With Hank Paulson having left the stage, Bernanke is now the public face of corporate bailouts. While having Bernanke around may offer President Obama a convenient target for the public’s anger over bailouts, re-appointing Bernanke would finally force Obama’s hand — so far he’s managed to support the bailouts with little fallout, as Bush and others have taken the blame. Re-appointing Bernanke makes him Obama’s pick.
In addition to political risk to President Obama, one can assume that many Senate Democrats are not looking forward to having to vote for the man who bailed out AIG. It is a fair bet that many Republican Senators would not vote for Bernanke’s re-appointment, leaving it up to the Democrats to secure his re-appointment.
Whatever the merits, or flaws, in his performance as Federal Reserve Chair, support for Bernanke’s re-appointment is becoming a proxy for one’s support, or opposition, to corporate bailouts.
Ron Paul at Cato: ‘Audit the Fed’
When Texas Congressman and former Republican presidential candidate Ron Paul speaks about transparency in the Federal Reserve, he sums up his argument with one simple question. Why not?
“Why in the world should this much power be given to a Federal Reserve that has the authority to create $1 trillion secretly?” Ron Paul asked a standing room-only crowd today at the Cato Institute.
Paul was on a panel of speakers, including Gilbert Schwartz, former associate general counsel to the Federal Reserve, to discuss a new bill that will audit the Fed for the first time in its history. This comes at a time when the Fed’s balance sheet has almost tripled, from just over $800 billion before the financial crisis to almost $2.3 trillion now.
“We will only win when the people wake up and realize that transparency is what we need,” said Paul. “When we know exactly what’s happening, there will be monetary reform.”
Watch the rest of Paul’s comments below:
Going Bankrupt Double-Quick
George W. Bush and the Republicans worked hard to ruin the U.S. government’s finances. The Obama administration and the Democrats are doing an even better job of wrecking the Treasury.
Treasuries headed for their second monthly loss, pushing 10-year yields up the most in almost six years, as President Barack Obama’s record borrowing spree overwhelmed Federal Reserve efforts to cap interest rates.
Notes, little changed today, also tumbled this week on speculation the worst of the economic recession is over. A private report today will show confidence among U.S. consumers gained in May for a third month, economists said. South Korea’s National Pension Service, the nation’s largest investor, plans to reduce the weighting of U.S. bonds in its holdings, the government said in a statement.
“It’s a disastrous market,” said Hideo Shimomura, who oversees $4 billion in non-yen bonds as chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo, a unit of Japan’s largest bank. “I expected yields to rise but not this fast. We will see new highs in yields.”
The benchmark 10-year note yielded 3.61 percent at 6:29 a.m. in London, according to BGCantor Market Data. The 3.125 percent security due in May 2019 traded at a price of 95 30/32.
Ten-year rates rose about half a percentage point in May, extending an increase of 46 basis points in April. The two-month climb was the most since July and August of 2003. A basis point is 0.01 percentage point.
As borrowing costs rise, so will future deficits, requiring more borrowing, which will push up interest rates, hiking future deficits, requiring…
Just how are we going to finance trillions of dollars for health care reform while wrecking the economy with cap and trade? And then there’s the $107 trillion in unfunded liabilities for Social Security and Medicare.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
The Biggest Leeches Always Live
By proposing to eliminate the Federal Family Education Loan Program, President Obama has raised a pretty big ruckus in the relatively staid world of higher education policy. For the uninitiated, FFELP uses taxpayer dollars to essentially guarantee profits to participating financial institutions, and to keep student loans cheap and abundant.
Since neither corporate welfare nor rampant tuition inflation are really good things, getting rid of this beast would be a welcome move. Unfortunately, the president wants to replace FFELP with direct-from-Washington lending and to plow the savings into Pell Grants, so there’ll be no savings for taxpayers and probably very little beneficial effect on college prices.
As I wrote on NewMajority.com in May, no one should expect big lenders to get kicked off the federal gravy train:
[T]he Obama administration is saying they’d keep private companies as servicers of loans to maintain quality customer service. Of course, this could very well be worse than the status quo: It will likely keep at least the biggest current lenders (read: Sallie Mae) at the political trough, but Washington will be THE lender for all students.
Right I was! Or, at least, signs of my prescience keep getting brighter: Despite Obama promising to go to war against an ”army” of lenders’ lobbyists, the U.S. Department of Education just awarded Sallie Mae and three other big lenders lucrative contracts to service federal loans. So while smaller leeches could very well be removed from their supply of taxpayer blood, the biggest will keep on sucking!
Filed under: Education and Child Policy; Finance, Banking & Monetary Policy; Government and Politics
Administration Reform Plan Misses the Mark
The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crises. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.
Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.
Instead of addressing our destructive federal policies aimed at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However, such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.
While the Administration plan recognizes the failure of the credit rating agencies, it appears to misunderstand the source of that failure: the rating agencies’ government-created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the outsourcing of their own due diligence to the rating agencies.
The Administration’s inability to admit the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.
Obama Financial Reform Plan Misses the Mark
The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crisis. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.
Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of the TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.
While the Administration plan recognizes the failure of the credit rating agencies, is appears to misunderstand the source of that failure: the rating agencies government created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the out-sourcing of their own due diligence to the rating agencies.
Instead of addressing our destructive federal policies at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.
The Administration’s inability to admit to the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.
A Libertarian Dilemma
What is to be done with the nation’s largest financial institutions, 19 of which have been officially designated as “too big to fail?” When thus guaranteed government protection, such institutions can be expected to take excessive risk and generally operate recklessly. Profits on risky ventures remain privatized, while losses become socialized. That is what happens when you bet with other people’s (that is, taxpayers’) money. I have called the system “casino capitalism.”
The solution, of course, is to end the policy of “too big to fail.” That will not happen soon, however, and we will likely see the government’s safety net extended to more institutions before there is any prospect for its withdrawal. In the interim, the risk-taking appetite of the large banks must be constrained, that is, regulated. What should the classical liberal response be?
MIT’s Simon Johnson has argued, “Anything that is too big to fail is too big to exist.” He favors breaking these institutions up. Chicago’s Gary Becker has suggested imposing progressive capital requirements as a disincentive for financial services firms to grow large enough to become too big to fail. The larger the institution, the higher the required capital ratio.
What cannot in conscience be done is to apply presumptive free-market arguments to such entities. They are not being constrained by market forces. The market’s invisible hand has been replaced by the state’s protective embrace.
Fed to BoA: ‘We Will Not Leave You in the Lurch’
Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.
While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.
One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”
If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.
One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.
While BoA has been saved, it appears that the rule of law has been “left in the lurch.”
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Bachus Plan a Good Start toward Ending Bailouts
Today Congressman Spencer Bachus, along with several of the Republican members of the House Financial Services Committee, offered a plan for reforming our financial system and ending future government bailouts of the financial sector
At the heart of the financial crisis has been the Federal Reserve’s willingness to invoke its powers under Paragraph 13-3 of the Federal Reserve Act to bail out firms like Bear Stearns and AIG — all without a single vote from Congress or any form of public debate. Almost 10 months after the initial AIG bailout by the Fed, there is still no plan for resolving that firm, and no strategy for recovering the taxpayers investment.
While some might pretend that the Fed puts no taxpayer funds at risk under the use its 13-3 powers, it is the American taxpayer who ultimately stands behind any Federal Reserve actions. In focusing on 13-3, the Bachus proposal rightly targets the largest, and least accountable, source of the bailouts. The Bachus proposal would require the Treasury secretary to approve any 13-3 actions and allow Congress the ability to disapprove such actions. While a complete repeal of 13-3 would be preferred, the presented reforms are a step in the right direction.
Another feature of the Bachus plan is to require large, non-financial firms to be resolved under the bankruptcy code, and not under a regime of continuing bailouts or political manipulation. Despite whatever flaws it may have, the bankruptcy process is one that is separated from politics. As we have witnessed in the recent government restructuring of U.S. auto companies, allowing Washington to resolve firms is an invitation for violating contracts and rewarding political constituencies.
The Bachus plan also addresses the two institutions at the center of our mortgage crisis: Fannie Mae and Freddie Mac. Their model of private profits and public losses has become an expensive one, with little public benefit. Any reform proposal that does not deal with Fannie and Freddie does not merit being called reform. The Bachus plan would rightly begin phasing out the privileged status of Fannie and Freddie.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Senators Want to Delay Housing Recovery
As discussed in a recent Bloomberg piece, several U.S. senators from both parties are pushing to almost double the recently enacted $8,000 tax credit for first-time homebuyers to $15,000. The same senators are also pushing to remove the current income restrictions — $75,000 for individuals and $150,000 for couples — while also removing the first-time buyer requirement.
The intent of the increase, and the original credit, is to increase the demand for housing and to create a “bottom” to the housing market. The flaw of this approach is that it creates a false bottom, one characterized by government-inflated prices and not fundamentals. It was excessive government subsidies into housing that helped create the housing bubble, additional subsidies to re-inflate the bubble will only prolong the actual market adjustment.
If it were only a matter of prolonging the adjustment, then the huge cost of the tax credit might be easier to justify. Yet by encouraging increased housing production, the tax credit will increase supply when we already have a huge glut of housing. Despite housing starts being near 50-year lows, there is still too much construction going on. The way to spur demand in housing is the same way you spur demand in any market: you cut prices.
Removing the income limits makes clear the real intention of the tax credit, to help the wealthiest households. About three-fourths of existing families already fall under the income cap of $75,000. As we move up the income latter, home equity makes up a smaller percentage of one’s total wealth. The richest families can make do with a decline in their housing wealth and continue spending; they have other substantial sources of wealth. If we have learned anything from the housing boom and bust, it should be that continued government efforts to rearrange the housing market have been costly failures.
Public Tires of Wasteful “Stimulus” Spending
The president may believe that he’s created thousands (or is that millions?) of jobs, but the public doesn’t believe him. In fact, according to Rasmussen Reports, a plurality of the public wants to drop the rest of the “stimulus” spending while keeping the tax cuts:
Forty-five percent (45%) of Americans say the rest of the new government spending authorized in the $787-billion economic stimulus plan should now be canceled. A new Rasmussen Reports national telephone survey found that just 36% disagree and 20% are not sure.
…
Just 20% of adults say the tax cuts included in the stimulus plan should be canceled while 55% disagree. The stimulus plan includes $288 billion in tax cuts.
While there is a wide partisan gap on the question of stimulus spending, there is little partisan disagreement on maintaining the tax cuts.
President Obama on Monday vowed to speed up the pace of stimulus spending and said the money will help “create or save” 600,000 more jobs this summer.
However, only 31% of Americans believe the new government spending in the stimulus package creates new jobs. Forty-eight percent (48%) say the stimulus spending does not create jobs, and 21% are not sure.
This is certainly a better approach for growing the economy. The people are proving to be a lot smarter than their governors in Washington.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Indiana: Defender of “the Rule of Law”
While the majority of Chrysler’s senior creditors sacrificed their fiduciary duties and caved into political pressure in accepting the Obama Administration’s pre-packaged bankruptcy of Chrysler, a small group of state pension funds in Indiana has challenged the Obama plan and is asking the Supreme Court to review said plan. As in the 1930s, the protection of contractual rights, one of the most basic pillars of a free society, along with the rule of law, is now in the hands of the Supreme Court.
As discussed in today’s Washington Post, these pension funds believe their rights were infringed by the Administration’s placing of junior creditors in a preferred situation to senior creditors. It doesn’t take Ms. Manners to remind us that cutting in line, whether in traffic, at the grocery store, or in a bankruptcy, is plain rude. To have the government re-order the line for you is even worse.
To re-build confidence in our markets, trust in our institutions must be re-stored. Not simply in our private institutions, but also in our government. If players believe the game is going to be rigged, fewer will be willing to play. And while the Administration has portrayed Chrysler’s senior creditors as nothing more than greedy speculators, the Indiana request exposes that myth. President Obama should clearly articulate why retired state employees, such as teachers and firefighters, should have their pension funds raided solely for the benefit of the auto unions. Here’s to hoping Indiana goes all the way in this Court.
Should You Vote on Keeping Your Local Car Dealership?
There are lots of reasons Washington should not bail out the automakers. Whatever the justification for saving financial institutions — the “lifeblood” of the economy, etc., etc. — saving selected industrial enterprises is lemon socialism at its worst. The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.
One obvious problem is that legislators now have a great excuse to micromanage the automakers. And they have already started. After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street? That’s what our Congresscritters seem to think.
Observes Stephen Chapman of the Chicago Tribune:
The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.
That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”
Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.
The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”
Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.
Lemon socialism mixed with pork barrel politics! Could it get any worse? Don’t ask: after all, this is Washington, D.C.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
The Corporate Culture at Government Motors
David Brooks comes in for his share of criticism in these parts, but he has a very astute column today about the ways that government ownership will worsen an already problematic corporate culture at a once-great company:
Fifth, G.M.’s executives and unions now have an incentive to see Washington as a prime revenue center. Already, the union has successfully lobbied to move production centers back from overseas. Already, the company has successfully sought to restrict the import of cars that might compete with G.M. brands. In the years ahead, G.M.’s management will have a strong incentive to spend time in Washington, urging the company’s owner, the federal government, to issue laws to help it against Ford and Honda.
Sixth, the new plan will create an ever-thickening set of relationships between G.M.’s new owners — in government, management and unions. These thickening bonds between public and private bureaucrats will fundamentally alter the corporate culture, and not for the better. Members of Congress are also getting more involved in the company they own, and will have their own quaint impact.
The end result is that G.M. will not become more like successful car companies. It will become less like them.
Marginal Tax on Corporate Profits was 74.2% in the 1st Quarter
From the Bureau of Economic Analysis news release of May 29:
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $42.6 billion in the first quarter. . . Taxes on corporate income increased $31.6 billion. . . [therefore] profits after tax . . . increased $11.1 billion.
In other words, taxes extracted 74.2% of any added (marginal) corporate earnings, leaving only scraps for stockholder.
Companies that lost money, on the other hand, were often bailed out and/or nationalized.
Why bother even trying to maximize profits or minimize losses?
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Tough Words
In the Wall Street Journal, Mary Anastasia O’Grady got Dallas Fed president Richard Fisher to go on the record about current Fed policy. He talks tough about inflation. “Throughout history, what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen.”
What is lacking is a plan to match the tough words with tough actions. Only when a tough and resolute U.S. president, Ronald Reagan, was matched with a tough and resolute Fed Chairman, Paul Volcker, did the Fed turn into an effective inflation fighter. There is no such match up now in the face of trillion dollar deficits forecast with no end in sight.
Ms. O’Grady describes Fisher as “the lead inflation worrywart” on the Federal Open Market Committee of the Fed. But Fed officials do not act in a political vacuum, and regional Fed presidents cannot on their own stop the Fed’s printing money in the face of the deficits. That requires leadership at the top from both the Fed chairman and the U.S president.
The Administration’s plan appears to be “to print their way out of an unfunded liability.” Thus far, despite tough words from some quarters, the Fed seems ready to accommodate “the political class.”
“They Don’t Have the Money to Pay Us Back”
When they let their guard down, politians can say the most revealing things. In today’s Wall Street Journal, representatives of local governments in California attacked Governor Schwarnenegger’s plan to borrow $2 billion from local property tax revenues to cover some of the state’s budget shortfalls. In response, Don Knabe, chairman of the Los Angeles County Board of Supervisiors said, “They’re hijacking our dollars. They don’t have the money to pay us back. It’s a joke.”
Given that California doesn’t have the money to pay back borrowing from its local government, it’s likely they might not be able to pay back borrowing from private investors either. To solve this problem, we have the Municipal Bond Insurance Enhancement Act, on which the House Financial Services Committee held a hearing this week. To encourage investors to buy California’s risky debt, the federal government would cover any losses to the investor. We’re told that the federal government would charge bond-issuing governments insurance premiums to cover any losses, but the federal government’s history of setting rates based on politics rather than risk (have you looked at the health of the National Flood Insurance Program lately?) guarantees that the taxpayer would likely have to cover billions in losses on any guarantee of California’s debt.
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