“Freedom in Crisis” on YouTube
My “Freedom in Crisis” speech, which has gotten some compliments as I’ve delivered it in various venues, is now available on the web, complete with accompanying Powerpoint illustrations.
Find it also on the Cato site here. And a partial transcript (pdf) was printed in Cato’s Letter. (Get a free subscription to Cato’s Letter here.) And to hear speeches like this live, watch for details on the next Cato University, July 25-30, 2010, in San Diego.
Monday Links
- Obama spoke on Wall Street today about increasing regulation of the American financial system. But did deregulation really cause the financial crisis?
- Burnt rubber: Obama’s decision to slap a 35 percent tariff on Chinese tires whiffs of senseless protectionism.
- According to the Economic Freedom in the World report, the U.S. was ranked the second-freest economy in 2000. It has fallen to 6th place this year.
- A bold exit strategy for Afghanistan.
- Why it’s time for the U.S. to start doing less abroad.
- Podcast: China’s economy is on track to be larger than the U.S. economy in a few years. Trade expert Dan Griswold says, “So what?”
Reform Needed, but Obama Plan Would Result in More Financial Crises, not Less
Today President Obama took his financial reform plan to the airwaves. While there is no doubt our financial system is in need of financial reform, the President’s plan would make bailouts a permanent feature of the regulatory landscape. Rather than ending “too big to fail” — the President wants us to believe that with additional discretion and power, the same Federal Reserve that missed the boat last time will save us next time.
The truth is that the President’s plan will result in a small number of companies being viewed by debtholders as “too big to fail”. These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger. Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.
Obama also chooses myth’s over facts. The President claims that de-regulation and competition among regulators caused the crisis. The facts could not be more different. Those institutions at the center of the crisis — Fannie Mae, Freddie Mac, Bear Stearns, Lehman –could not choose their regulator.
The President’s plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis. At no time have we heard the President discuss the expansionary monetary policies that helped fuel the bubble. Nor has the President talked about the global imbalances — the global savings glut that poured surplus savings from the rest of the world into the US. But then the President appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy. It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.
The President continues to say he inherited this crisis. While true, he did not inherit the same individuals — Tim Geithner and Ben Bernanke — who were at the center of creating the crisis. All Obama needs to do is find a position for Hank Paulson and he will have completely re-assembled the Bush financial team.
Without real reform — fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy – it will only be a matter of time before the next crisis hits. If we implement the President’s plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.
Filed under: Finance, Banking & Monetary Policy; Regulatory Studies
If I Only Had a Crisis
Bloomberg News points out that President Obama needs a health-care crisis in order to impose a health-care “solution”:
President Barack Obama returns to Washington next week in search of one thing that can revive his health-care overhaul: a sense of crisis….
“At the moment, except for the people without insurance, we’re not in a health-care crisis,” said Stephen Wayne, a professor of government at Georgetown University in Washington. “You do need a crisis to generate movement in Congress and to help build a consensus.”
This administration has used Naomi Klein’s book The Shock Doctrine as a manual. Klein said in an interview that
The Shock Doctrine is a political strategy that the Republican right has been perfecting over the past 35 years to use for various different kinds of shocks. They could be wars, natural disasters, economic crises, anything that sends a society into a state of shock to push through what economists call ‘economic shock therapy’ – rapid-fire, pro-corporate policies that they couldn’t get through if people weren’t in a state of fear and panic.
Whether or not that’s true about the “right-wing” policies that she purported to analyze, the Obama admininstration has taken it to heart. Rahm Emanuel said, “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before” such as taking control of the financial, energy, information and healthcare industries. Vice President Joe Biden, Secretary of State Hillary Clinton, and the president himself all echoed Emanuel’s exultation about the opportunities presented by crisis.
The financial crisis turned out to be shocking enough to let the federal government extend the power of the Federal Reserve, nationalize two automobile companies, spend $700 billion on corporate bailouts and another $787 billion on pork and “stimulus,” and inject a trillion dollars of inflationary credit into the economy. But now people are balking at further expansions of government, and the administration is longing for just a little more crisis to serve as a further opportunity.
Filed under: Government and Politics; Health, Welfare & Entitlements
Bailouts Could Hit $24 Trillion?
ABC News reports:
“The total potential federal government support could reach up to $23.7 trillion,” says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government’s efforts to fix the financial system.
Yes, $23.7 trillion.
“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just $1 trillion — $23.7 trillion is a staggering figure.”
Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.
At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.
We used to complain that George W. Bush had increased spending by ONE TRILLION DOLLARS in seven years. Who could have even imagined new government commitments of $24 trillion in mere months? These promises could make the implosion of Fannie Mae and Freddie Mac look like a lemonade stand closing.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Review of the Big REAL ID Hearing
The Senate Homeland Security and Governmental Affairs Committee held a hearing yesterday on the REAL ID Act and the REAL ID revival bill, known as PASS ID. I attended and want to share with you some highlights.
Good News!
Little good came from the hearing, as it was primarily focused on how to get the states and people to accept a national ID. But there is some good news.
First, Department of Homeland Security Secretary Janet Napolitano declared REAL ID dead (much as I did in my testimony two-plus years ago). “DOA” is how she referred to it.
She also said that no state will be in compliance with REAL ID by the current December 31, 2009 deadline. This is important because a lot of people think that states doing anything about the security of drivers’ licenses and ID cards are complying with REAL ID.
Another highlight was the commentary of Senator Roland Burris (D-IL). He is a beleaguered outsider to the Senate and evidently wasn’t coached on the talking points around REAL ID and PASS ID. So he flat out asked why we shouldn’t just have “a national ID.”
Senator Susan Collins’ (R-ME) nervous smile was particularly noticeable when Burris asked why the emperor had no clothes. No one was supposed to talk about national IDs at this hearing! But that’s what PASS ID is.
REAL ID and PASS ID are two versions of the same national ID system, and nobody is denying it. That’s good news because the effort to rebrand REAL ID through PASS ID has failed.
Why Promiscuous Bail-Outs Never Was a Good Idea
Jeffrey A. Miron explains in Reason why a government bail-out of most everyone was neither the only option nor the best option:
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it’s important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone’s mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price.
With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach. In weighing bankruptcy vs. bailouts, it’s useful to look at the problem from three perspectives: in terms of income distribution, long-run efficiency, and short-term efficiency.
From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they’d get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there’s money to be made. Distributionally, we clearly did the wrong thing.
It’s too late to reverse history. But it would help if Washington politicians stopped plotting new bail-outs. At this stage, most every American could argue that they are entitled to a bail-out because most every other American has already received one.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
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; Tax and Budget Policy; Trade and Immigration
Iraq’s Refugee Crisis
George W. Bush’s misguided attack on Iraq has had catastrophic consequences for the Iraqi people. Although the removal of Saddam Hussein was a blessing, the bloody chaos that resulted was not. Estimates of the number of dead in the ensuing strife starts at about 100,000 and rises rapidly. The number of injured is far greater.
Moreover, roughly four million people, about one-sixth of the population, have been driven from their homes. The most vulnerable tended to be Iraq’s Christian community and Iraqis who aided U.S. personnel — acting as translators, for instance. Yet the Bush administration resisted allowing any of these desperate people to come to America, since to resettle refugees would be to acknowledge that administration policy had failed to result in the promised paradise in Babylon.
This horrid neglect continues. Reports Hanna Ingber Win:
Of the millions displaced, the United States will resettle about 17,000 new Iraqis this coming fiscal year. While that is a relatively small number of arrivals compared to the number displaced, about a third of them will end up in El Cajon and Greater San Diego. More than 5,000 new Iraqis will arrive in San Diego County during the fiscal year ending September 30, 2009, according to Catholic Charities in the San Diego Diocese. Getting jobs, homes and visas to reunite the families of the new arrivals — many of whom put their lives and their families’ lives at risk by helping the U.S. military — is a monumental task.
As the Iraq War played out, the Bush administration seemed to do everything in its power to ignore the refugee crisis. Former President Bush, reluctant to admit to a failed war policy, never mentioned the plight of the refugees and for years refused to allow Iraqis fleeing the war zone to resettle in the U.S. Only after significant political pressure from members of Congress and advocacy groups did the administration’s policy begin to change, and refugees began gaining access to the United States.
As a presidential candidate, Barack Obama pledged to address the humanitarian crisis caused by the war. He vowed to increase the amount of aid given to countries like Syria and Jordan, which harbor most of the displaced people, as well as expedite the process of resettling refugees here.
“The Bush administration made every effort they could to try to minimize the issue [of Iraqi refugees] in the debate on the war,” Amelia Templeton, a refugee-policy analyst with Human Rights First, says not long after the presidential election. The Obama administration, on the other hand, she says, has made the issue an explicit policy priority. “Obama has said this is a major problem, that we are responsible for this problem and we will try to change this.”
Whether the Obama administration will live up to its rhetoric is still to be seen.
Immigration is an emotional issue at any time. But there is no excuse for not accepting more persecuted peoples who are fleeing violence sparked by U.S. military action and attacks sparked by their aid for U.S. military forces. If America refuses to act as a haven for these people, then yet another light will have gone out in what was once a shining city on a hill for the world.
Filed under: Foreign Policy and National Security; Trade and Immigration
Now Is Not the Time to Reduce Credit Card Availability
With the House having passed credit card legislation and the Senate scheduled to take up its own bill this week, one questions keeps coming back to me: What’s the hurry?
We are in the midst of a recession, which will not turn around until consumer spending turns around—so why reduce the availability of consumer credit now? And the Federal Reserve has already proposed a rule that would address many of Congress’ supposed concerns. The Fed rule will be implemented July 2010. Were Congress to get a bill to the president by Memorial Day, as he has asked, the Federal Reserve and the industry still couldn’t implement it before maybe January, if they were lucky.
Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.
It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.
As Treasury Secretary Timothy Geithner has repeatedly said, some of the biggest credit card issuers will not be allowed to fail (think Citibank, American Express, Capital One, KepCorp) should they suffer significant losses to their credit card portfolios. Will taxpayers ultimately be the ones covering those losses?
Congress should also further examine the wisdom of restricting credit to college students under the age of 21. Outside of the obvious age discrimination, why treat adults between the ages of 18 and 21 any differently from those above 21? The basic premise of college is making sacrifices today in order to have a wealthier tomorrow—accordingly being able to borrow against that better tomorrow should be an option for any college student. Just as some small number of college students don’t benefit from college, some don’t benefit from credit cards, but throwing the “baby out with the bathwater” hardly seems the idea solution.
The Cost of Flu Fears – and Our Ongoing Vulnerability
The ever-sensible Shaun Waterman has begun to tally the cost of overreaction to the fear outbreak inspired by the H1N1 flu strain. He reports in ISN Security Watch:
Even the precautions that you take against this kind of global flu pandemic could knock about 1.9 [or] 2 percent off global [economic production]. That’s about a trillion dollars,” according to journalist Martin Walker, who cited World Bank figures from a study last year.
The Economist reported last week that the crisis in Mexico was costing Mexico City’s service and retail industries $55m a day – not because of the handful of deaths but because of people’s reactions. And that was even before the national suspension of non-essential public activities called for this week by the authorities there, which was expected to double that cost.
Waterman also cites my joke about moving Vice President Biden to an undisclosed location in future crises – not for his protection or government continuity, but to keep him away from the media.
It’s comedic wrapping on a substantive point: As long as people look to government leaders in times of crises, leaders have a responsibility to communicate carefully, according to a plan, and with message discipline. If they don’t, the damage can be very high.
Even if all Americans knew to dismiss the words of the Vice President as if he’s a “Crazy Uncle Joe” – and they don’t – foreign tourists certainly don’t know that. Biden harmed the country simply by speaking off the cuff.
Here, an outbreak of flu appears to have caused billions of dollars in damage to the world economy. One billion lost to the U.S. economy is about 145 deaths (using the current $6.9 million valuation for a human life). When overreactions restrict economic activity, that reduces wealth and thus health and longevity.
Now, imagine what might happen if the United States encountered a novel, directed threat – some kind of attack that inspires widespread concern. Will Vice President Biden and officials from a half-dozen agencies rush forth with personal observations and speculation? The results could be devastating, especially to a country that is already suffering economically.
People die from poor situation management, and it makes Americans worse off. Political leaders should not get a free pass for failing to communicate well just because it’s hard to do.
The Obama Administration should learn from its many errors in handling the rather benign H1N1 flu situation. It should train up for communicating in the event of a real emergency. If the Obama Administration fails to soothe nerves in the event of some future terrorist attack, that will be a clear failure of leadership.
Filed under: Foreign Policy and National Security; Health, Welfare & Entitlements; Telecom, Internet & Information Policy
Like FDR — In a Really Bad Way
President Barack Obama based his candidacy in part on the promise to set a new tone in Washington. But we saw a much older tone emerge with his demonization of hedge funds over the Chrysler bankruptcy. Reports the Washington Post:
President Obama’s harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker’s debt.
Hedge funds and investment managers were irate at Obama’s description of them as “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
“Some of the characterizations that were used today to refer to us as speculators or to say we’re looking for a bailout is really unfair,” said one executive who spoke on condition of anonymity because of the sensitivity of the matter. “What we’re looking for is a reasonable payout on the value of the debt . . . more in line with what unions and Fiat were getting.”
George Schultze, the managing member of the hedge fund Schultze Asset Management, a Chrysler bondholder, said, “We are simply seeking to enforce our bargained-for rights under well-settled law.”
“Hopefully, the bankruptcy process will help refocus on this issue rather than on pointing fingers at lenders,” he said.
I won’t claim any special expertise to parse who is responsible for what in the crash of the U.S. (meaning Big Three) auto industry. However, attacking people for exercising their legal rights and trashing those who make their business investing in companies hardly seems like the right way to get the U.S. economy moving again.
During the Depression, FDR’s relentless attacks on business and the rich almost certainly added to a climate of uncertainty that discouraged investment during tough times. Why put your money at real risk when the president and his cohorts seem determined to treat you like the enemy? While President Obama need not treat gently those who contributed to the current crisis by acting illegally or unscrupulously, he should not act as if those who simply aren’t willing to turn their economic futures over to the tender mercies of the White House are criminals.
We’ve just lived through eight years of bitter partisan warfare. The president shouldn’t replace that with a jihad against businesses that resist increased government direction of the economy.
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