Archive for the ‘Finance, Banking & Monetary Policy’ Category
Government Program Competes with First-Time Home Buyers
If there should ever be a great time to be a first-time home buyer — it should be now. Mortgage rates are at historic lows. Prices have fallen almost 30% across the country since the peak. Builders continue to add supply into already saturated markets. Yet, as the Wall Street Journal reports, potential first time home buyers are facing stiff competition from investors…and from the government.
Congress has appropriated about $6 billion to local and state governments to buy foreclosed properties. President Obama is proposing to add another $1.5 billion that could be used for similar purposes. The argument is supposed to be that these funds would eliminate the negative impact of foreclosures on communities, while also providing shelter to needy families. Part of the program’s rationale is that local governments’ will select a better group of tenants and purchasers that would private investors (the history of public housing should rebut that assumption).
With the exception of cities like Detroit, Cleveland and Buffalo, many of the country’s boom areas still have significant population and other amenities (like sunny weather). Many people would continue to choose to live in these areas, if only they were more affordable. After all these years of massive subsidies for home-ownership, there seems a great irony in having the government now be one of the largest barriers to families achieving home-ownership — by using tax dollars to bid up and compete away existing homes.
Government-Mandated Spying on Bank Customers Undermines both Privacy and Law Enforcement
I recently publicized an interesting map showing that so-called tax havens are not hotbeds of dirty money. A more fundamental question is whether anti-money laundering laws are an effective way of fighting crime — particularly since they substantially undermine privacy.
In this new six-minute video, I ask whether it’s time to radically rethink a system that costs billions of dollars each year, forces banks to snoop on their customers, and misallocates law enforcement resources.
Doubling Down on Failed Policies
Today in Las Vegas, President Obama will take another $1.5 billion in taxpayer money and let it ride another spin on the roulette wheel otherwise known as foreclosure assistance. This time, however, he’s not even bothering to send the money to homeowners; its all going to state governments.
That’s correct, he’s sending a huge check to select state governments to use in almost any manner they choose, as long as it offers some pretense at propping up the housing market.
The assistance will be targeted at those states that have seen at least a 20% decline in home prices. Subsidizing states because their housing markets are getting more affordable almost makes one yearn for the days when we subsidized states because their housing markets were too expensive. What we are really subsidizing is those states whose destructive land-use policies contributed to the magnitude of the housing bubble. Basic economics tells us that as supply becomes more inelastic (think growth boundaries), prices become more volatile. It’s bad enough that most of our housing subsidies, both homeowner and renter, have ended up going to states that have crippled their housing markets, but now we are sending them a big check to reward such behavior.
Washington needs to end its constant attempts to prop up the housing market. The only viable solution to an over-supply of housing is a further decline in prices. Most of the worst-hit areas, such as California, do not lack for families wanting to buy homes. They lack a supply of homes at affordable prices, which would be solved by letting prices fall.
Tax Havens Are Not Money Laundering Centers
Demagogues such as Sen. Carl Levin (D-MI), as well as many other politicians and journalists, often assert that low-tax jurisdictions are havens for dirty money and terrorist financing. From a theoretical perspective, this does not make sense. So-called tax havens have a big incentive to avoid scandal since they are much more vulnerable to reputational risk. Just imagine what would have happened, after all, if the 9-11 terrorists had used a bank in the Bahamas instead of a bank in Florida. Critics of low-tax jurisdictions automatically would have assumed that the bank was complicit and the entire financial services industry in the Bahamas would have been crippled — or even destroyed. But because the terrorists used American banks (as well as banks in high-tax European nations and the Middle East), there was no knee-jerk reaction. People understood that the bank tellers and managers had no way of knowing that the flight school students were actually lunatics.
But this does not stop the anti-tax haven smear campaign. Low-tax jurisdictions are viewed as a threat by politicians since it is much harder to impose bad tax policy in a world where tax competition is allowed to flourish. This is why tax havens are attacked whenever something bad happens. If there is a terrorist attack, blame tax havens. If there is a financial crisis, blame tax havens.
With this in mind, a new report from the University of Basel’s Institute of Governance did some real research and came up with a list of nations where there actually is a high risk of money laundering and terrorist financing. As the map below indicates, only one so-called tax haven is among the 28 countries listed, and that nation was in the lowest-risk category.
Housing Market on Government Crutches
My house has been on the market for a month and it has drawn a lot more looks than I expected. I’ve been quizzing realtors as they come through, and each one tells me the same story: the government is single-handedly propping up the demand for housing. In addition to the homebuyer tax credit and government-induced low mortgage interest rates, most sales are being done with Federal Housing Administration backing.
As a seller, I’m looking to get out before the tax credit expires and interest rates starting ticking upward. But when I do sell, I certainly won’t be looking to buy a house, particularly since I’ll be selling at a loss. If my situation is representative of other current sellers, the housing market could be in for another tumble if the government crutches are removed. However, if the government instead continues trying to prop up the housing market, the risk that taxpayers will take another bath goes up. It’s a nasty Catch-22 that demonstrates the problems with the government distorting the housing market to begin with.
A recent New York Times article looked at the housing market in the “beleaguered” manufacturing city of Elkhart, Indiana, which has twice served as a prop for President Obama. The Times says Elkhart “symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis” and that “[h]ousing in this community has become almost entirely dependent on a string of federal support programs.”
The situation in Elkhart described by the Times matches perfectly with what realtors are telling me:
To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit. Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.
The one problem with the Times piece is that it doesn’t completely connect the dots. Namely, the problem the government is trying to solve is a problem that its housing policies instigated: the housing boom and bust. For instance, the article cites a good example of government policies mimicking the irresponsible lending that helped create this mess in the first place:
The programs favor first-time buyers, who have the fewest resources to bring to a deal. Heather Stevens, a 23-year-old nurse here, is closing on a three-bedroom house this week. Since her loan was insured by the Federal Housing Administration, she had to put down only 3.5 percent of the $74,900 purchase price.
“It was a breeze to get approved,” she said.
The sellers are covering her closing costs, which agents say is often the case here. That meant Ms. Stevens had to come up with only the $2,600 down payment, which still took all her savings.
But the best part is the $7,500 tax credit. She will use that to remodel the kitchen. “If it wasn’t for the credit, we would have waited to buy,” said Ms. Stevens, who is getting married this year.
Buying houses with no money down was a feature of the latter stages of the housing bubble. It gave prices a final push into the stratosphere. But buyers with no equity were the first to abandon their properties as the market turned south.
But there’s no mention of the role Fannie and Freddie, HUD, or the FHA played in fostering that bubble.
The article continues:
With housing prices stagnant, bolstering the market by again letting people buy with hardly any money down is viewed in some quarters as a bad bet.
Neil Barofsky, the special inspector general for the government’s Troubled Asset Relief Program, wrote in his most recent report to Congress that “the federal government’s concerted efforts to support” housing prices “risk reinflating” the bubble.
He noted one difference from the last bubble: taxpayers, rather than banks, are now directly at risk in these new mortgages.
I would argue that the mere existence of TARP is proof that taxpayers were directly at risk to begin with. The risk may be more explicit now, but that’s only because the bubble’s bursting washed away a lot of the private sector’s bad actors. But the ultimate bad actor, Uncle Sam, who encouraged the private sector’s risky lending activities, has stepped in to fill the void. Just how badly this turns out for taxpayers remains to be seen.
Krugman: The Hubris of Central Planning
In the New York Times today, Paul Krugman discusses the Euro and the problem of Greece. He hastens to note that the problem is not debts, deficits, and government profligacy, which it sure might seem like to the untrained eye. But he fingers a different and deeper problem:
No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment….
It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.
Now, you’ll note that Krugman says that Europe wasn’t yet “ready” for a single currency, suggesting that in some happy day it will be. Because of course the logic of history is always to move toward centralization and conformity, right? Nevertheless, it’s great to see Paul Krugman criticizing the arrogance of elites and the hubris of the centralizing impulse.
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 »
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.
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.)
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.
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