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

In the New York Times, Floyd Norris reminds us:

The 1980 presidential election was fought by a Democratic incumbent weakened by a poor economy amid worries that the United States had lost its ability to compete in the world. Gold prices had risen to unprecedented levels as the election approached, and the Republican nominee hinted he might propose a return to a gold standard.

That Republican, Ronald Reagan, won the election and soon appointed a commission to study the role of gold in monetary systems.

And now:

Last month, Newt Gingrich, seeking to widen his support in the days leading up to the South Carolina primary, promised that he would appoint a new gold commission. “Part of our approach ought to be to re-establish something Ronald Reagan did in 1981 and that is to have a commission on gold to look at the whole concept of how do we get back to hard money,” he said in a speech.

Whatever the likelihood of Gingrich’s ever being in position to appoint a presidential commission, the minority report of the U.S. Gold Commission, by Rep. Ron Paul and Lewis Lehrman, still makes for worthwhile reading. And conveniently enough, it’s available right here at the Cato Institute. Download a pdf or epub here.

For a more recent analysis, read “Is the Gold Standard Still the Gold Standard among Monetary Systems?” by Lawrence H. White.

The Case for Gold — Again is a post from Cato @ Liberty - Cato Institute Blog

Some people might have been surprised to read in Sunday’s New York Times magazine that I believed “that all that easy money from China helped make the housing bubble much bigger and last longer, which created a far bigger crisis when the bubble finally burst.” As you might suspect, it was only those two little words “from China” that gave me pause. But I’m very grateful to Adam Davidson and his colleagues at NPR’s Planet Money for giving me a chance to elaborate on their blog. Here’s a brief excerpt:

China was eager to buy our debt, both Treasury bonds and Fannie and Freddie’s debt. But it was Congress that ran the deficits, and the Fed that kept interest rates artificially low. We don’t need to go to Beijing to find the villains in this piece….

Our economy could use plenty of reforms – lower, flatter, simpler taxes; a more stable monetary policy or even a move toward free markets in money; reduced regulatory burdens; the de-monopolization of services from education to mail delivery; and less government spending. In all those cases, the problem and the solution are right here in the USA.

Read it all! And special bonus links: Steve Hanke responds to the argument for a tougher policy toward China at Planet Money. And Adam Davidson talked with me about libertarianism in 2010 (plus a much longer version also featuring Mark Calabria).

Chinese Currency and the U.S. Financial Crisis is a post from Cato @ Liberty - Cato Institute Blog

Only days after the president declared, “No more bailouts, no more handouts,” I see that Arlo Guthrie is touring the South in February and March. What’s the connection? If you have the good fortune to see him, be sure to ask for “I’m Changing My Name to Fannie Mae.” That 2008 song was itself a new version of Tom Paxton’s classic song “I’m Changing My Name to Chrysler,” sung here by Arlo: “When they hand a million grand out, I’ll be standing with my hand out….If you’re a corporate titanic and your failure is gigantic, Down in Congress there’s a safety net for you.”

The 2008 version is sung here by Arlo and here by Paxton. Besides the name of the company, they had to make a few other changes in the lyrics, like “When they hand a trillion grand out, I’ll be standing with my hand out.”

But that was October 2008. By the end of December, I was noting that it was a Merry Christmas for GMAC, which learned on Christmas Eve that the Federal Reserve had approved its application to become a bank holding company. That gave GMAC “access to new sources of funding, including a potential infusion of taxpayer dollars from the Treasury Department and loans from the Fed itself,” as the Washington Post explained. GMAC wasn’t the only company that suddenly became a “bank holding company” in order to cash in on the $700 billion financial bailout. Late one night in November, American Express was granted the same privilege, along with Morgan Stanley, Goldman Sachs, and CIT. Which was why I suggested then that Tom and Arlo needed a new version: “I’m Changing My Name to Bank Holding Company.”

For now, enjoy “I’m Changing My Name to Fannie Mae”:

Arlo Sings Bailouts is a post from Cato @ Liberty - Cato Institute Blog

Daniel Hannan’s post on the establishment of the European Credit Rating Agency makes some good points. The recent downgrade of a number of European countries is a consequence of low growth and massive debts and deficits.

Instead of implementing far-reaching structural reforms, however, an increasing number of European politicians talk about an Anglo-American conspiracy to sink Europe’s single currency, the euro. According to one of the most prominent EU parliamentarians, Elmar Brok of the German Christian Democratic Party, credit-rating agencies Standard & Poor’s, Moody’s and Fitch are part of the American economic war against Europe. The EU Commission president Jose Manuel Barroso implied as much some time ago.

So, naturally, what the EU needs is a European credit-rating agency that will provide an “objective” and “independent” analysis of the “true” state of the European economies. (The EU already has an “independent” think-tank called Bruegel that is largely funded by the European governments.)

EU Credit Rating Agency Hoax is a post from Cato @ Liberty - Cato Institute Blog

From the Los Angeles Times.

It works on so many levels.

Headline of the Week: “Consumer Chief Richard Cordray Promises Not to Abuse His Power” is a post from Cato @ Liberty - Cato Institute Blog

Great article in the Sunday Washington Post by James Grant on the depression of 1920-21 and how after President Warren G. Harding’s response, “the unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared.”

And how did the administration of Warren G. Harding, in conjunction with the Federal Reserve, produce these astonishing results? Why, by raising interest rates, reducing the public debt and balancing the federal budget.

Pundits often accuse Herbert Hoover of “doing nothing” to counter the depression of 1929. Boy, are they wrong. Grant thinks Harding doesn’t get his due:

When he wasn’t presiding over a macroeconomic miracle cure, Harding convened a world disarmament conference and overhauled the creaky machinery of federal budget-making. For his trouble, historians customarily place him last, or next to last, in their rankings of U.S. presidents. Incredibly, they consign him near the bottom even in the subcategory of economic management, about 40 places behind Franklin D. Roosevelt, who inherited a depression that he didn’t actually fix.

The Hoover-Roosevelt-Bush-Obama do-something-anything-everything approach to economic recovery seems to result in elongated depressions. Take a look:

Maybe we should try the Harding do-nothing approach — which isn’t actually do-nothing; he cut taxes and spending and balanced the budget.

Cato scholars have written about how Harding ended a depression here and here.

How to End a Depression 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

In the New Yorker, Nicholas Lemann frets over Ron Paul’s “hostility to government” in an article titled “Enemy of the State.” I wonder if Lemann, who is both a long-time writer at a great magazine and the dean of a great school of journalism, would think “Enemy of the State” was red-baiting or otherwise inappropriate language if it was applied to some other candidate.

But I was especially struck by this comment in Lemann’s lament about all the government programs Paul would repeal:

As for the financial crisis, Paul would have countenanced no regulation that might have prevented it, no government stabilization of the financial system after it happened, and no special help for working people hurt by it. This is where the logic of government-shrinking leads.

The famous New Yorker editing process seems to have broken down here. Here’s how the paragraph should have read:

As for the financial crisis, Paul would have countenanced none of the regulation that helped to cause it, no government creation of cheap money that created the unsustainable boom, and no special help for Wall Street banks when the bubble collapsed. He would have seen that that was where the logic of government-expanding leads.

The New Yorker Misunderstands Ron Paul (Again) 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

Motivated by Newt Gingrich’s assertions — which cast a cloud over private equity operations by characterizing Mitt Romney as a predatory capitalist who destroyed jobs during his tenure at Bain Capital — the chattering classes are playing fast and loose with the facts.  If they want the facts, a recently released National Bureau of Economic Research paper authored by Steven J. Davis (University of Chicago), John C. Haltiwanger (University of Maryland), Ron S. Jarmin (U.S. Census Bureau), Josh Lerner (Harvard Business School) and Javier Miranda (U.S. Census Bureau) is just what the Doctor ordered.  It’s time for the private equity critics to stop talking and start reading.

Private Equity, A Capitalist Bane? 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

I’m not a big fan of Mitt Romney. I hammered him the day before Christmas for being open to a value-added tax, and criticized him in previous posts for his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

But I also believe in being intellectually honest, so I’ll defend a politician I don’t like (even Obama) when they do the right thing or when they get attacked for the wrong reason.

In the case of Romney, some of his GOP opponents are criticizing him for job losses and/or bankruptcies at some of the companies in which he invested while in charge of Bain Capital. But I don’t need to focus on that issue, because James Pethokoukis of AEI already has done a great job of debunking that bit of anti-Romney demagoguery.

In this post, I want to focus on the issue of tax havens.

Regular readers know that I’m a big defender of these low-tax jurisdictions, for both moral and economic reasons, and I guess that reporters must know that as well because I’ve received a couple of calls from the press in recent weeks. But I suspect I”m not being called because reporters want to understand international tax policy. Instead, based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens as part of his work at Bain Capital.

As far as I can tell, none of these reporters have come out with a story. And I’m also not aware that any of Romney’s political rivals have tried to exploit the issue.

But I think it’s just a matter of time, so I want to preemptively address this issue. So let’s go back to 2007 and look at some excerpts from a story in the Los Angeles Times about the use of so-called tax havens by Romney and Bain Capital.

While in private business, Mitt Romney utilized shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides to the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners. …Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in U.S. companies. The arrangement shields foreign investors from U.S. taxes they would pay for investing in U.S. companies. …In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital’s Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans. Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer’s office in downtown Hamilton, capital of the British island territory. … Investing through what’s known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals and university endowments, from paying a 35% tax on what the Internal Revenue Service calls “unrelated business income” from domestic hedge funds that invest in debt, experts say. …Brad Malt, who controls Romney’s financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors. “This is not Mitt trying to do something strange,” he said. “This is Bain trying to raise some number of billions from investors around the world.”

There are a couple of things worth noting about these excerpts.

1. Nobody has hinted that Romney did anything illegal for the simple reason that using low-tax jurisdictions is normal, appropriate, and intelligent for any business or investor. Criticizing Romney for using tax havens would be akin to attacking me for living in Virginia, which has lower taxes than Maryland.

2. Jurisdictions such as Bermuda and the Cayman Islands are good platforms for business activity, which is no different than a state like Delaware being a good platform for business activity. Indeed, Delaware has been ranked as the world’s top tax haven by one group (though American citizens unfortunately aren’t able to benefit).

3. America’s corporate tax system is hopelessly anti-competitive, so it is quite fortunate that both investors and companies can use tax havens as vehicles to profitably invest in the United States. This helps protect the economy and American workers by attracting trillions of dollars of investment to the U.S.

These three points are just the tip of the iceberg. Watch this video for more information about the economic benefit of tax havens.

Last but not least, here’s a prediction. I think it’s just a matter of time until Romney gets attacked for utilizing tax havens, though the press may wait until after he gets the GOP nomination.

But when those attacks occur, I’m extremely confident that the stories will fail to mention that prominent Democrats routinely utilize tax havens for business and investment purposes, including as Bill Clinton, John Kerry, John Edwards, Robert Rubin, Peter Orszag, and Richard Blumenthal.

It’s almost enough to make you think this cartoon is correct and that the establishment press is biased.

Mitt Romney and Bain Capital Were Right to Utilitize So-Called Tax Havens 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

I had an op-ed in the December 28th Wall Street Journal titled “The Federal Reserve’s Covert Bailout of Europe.” It generated a lot of discussion. Yesterday (January 5th), the Journal printed a letter from William C. Dudley, president of the New York Fed, responding to my piece.

In my op-ed, I focus on the currency swaps between the Fed and other central banks. The largest amount is with the European Central Bank (ECB). The Fed “swaps” dollars to the ECB and receives a like amount of euros in return as collateral. The ECB promises to return the dollars in the future at a fixed exchange rate. In the meantime, the ECB lends the dollars to European banks of its choosing. The Fed does not even know their identity.

Among other things, I point out that, thanks to prior Fed policy actions, there is no shortage of dollars in the world. The ECB could lend euros to their banks and the banks could then purchase however many dollars they needed on foreign-exchange markets.

I conclude that “the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments.” (The banks are major lenders to governments.)

President Dudley’s letter is non-responsive to the arguments of my op-ed. He never addresses my observation that there is no shortage of dollars in the world. He gives the game away in the following passage: “Banks with surplus dollars are more likely to lend to banks in need of dollars if they know that the borrowing bank will be able to obtain the dollars it needs to repay the loan, if necessary, from its central bank.”

Dudley is not describing a dollar shortage, but another reality. The reason one bank becomes reluctant to lend to another bank is that the potential lender has doubts about the solvency of the would-be borrower. The reality in Europe today is that banks have good reason to doubt the solvency of other banks because they know their own condition is none too strong.

By implication, Dudley’s letter acknowledges my main point: there is a Fed-financed bailout of European banks in progress. The Fed is implementing it through currency swaps because swaps obscure the nature of the transaction, which is in reality a loan. (The Greek government used currency swaps to hide the size of its fiscal deficits.)

It was widely reported that, in a December 14th meeting with Republican senators, Fed Chairman Ben Bernanke told them that he neither intended nor did he have the authority to bail out Europe. A reasonable person would see a conflict between the chairman’s words and those of the New York Fed president. Moreover, the swap arrangement is non-transparent and at odds with Bernanke’s promise of greater openness within the Fed. That is why I call for congressional hearings on it in my op-ed, and I repeat that call here.

A Fed Bailout for Europe is a post from Cato @ Liberty - Cato Institute Blog