Fed Opposed by Left and Right
On its front page today, the Washington Times reports that expanded powers for the Federal Reserve are being opposed by “odd allies.” The Fed’s imperial over-reach for additional regulatory powers is being opposed by Democrats and Republicans, and liberals and conservatives alike. As well it should be. As Senator Shelby observed, “Anointing the Fed as the systemic-risk regulator will make what has proven to be a bad bank regulator even worse.”
The regulation of financial services failed conspicuously to prevent the worst financial crisis since the Great Depression. The Fed failed most conspicuously as it was charged with oversight of all the major banks, including notably Citigroup and Bank of America. Bank regulation now functions to insulate banks from the consequences of their own bad acts. The regulatory system enables banks to engage in excessive risk taking.
The Obama Administration and Chairman Barney Frank of the House Financial Services Committee propose that an expanded role for the Fed and generally more of the same will improve matters. Instead, the proposed legislation will worsen the situation by codifying the status of the major financial institutions as “too-big-to-fail.” It would thereby provide them with special legal status. We have all seen this movie and how it ends. Fannie Mae and Freddie Mac had such a status and collapsed. Do we need 20 more such disasters?
Three cheers for all those opposing this destructive piece of legislation. End “too-big-to-fail” instead.
Putting Private Insurance Out of Business
Over at Think Progress, Matt Yglesias takes me to task for saying that the so-called public option in the House’s health care bill “would all but eliminate private insurance and force millions of Americans into a government-run system.”
Yglesias apparently still buys into the myth that the public option is, well, an option.
For people who receive health insurance through their employers, which is to say the vast majority of the Americans who currently have health insurance, the House bill would change very little. Or, rather, the biggest change would simply be the confidence that if, in the future, you cease to get health insurance from your employer (maybe you’ll lose your job or want to change jobs) that you’ll still be able to get health care. What’s more, of the minority of Americans who would be getting health care through the new “exchange,” the majority will probably sign up for private health insurance and everyone will have the option of doing so. If the government-run public plan is, for whatever reason, vastly more appealing than the private options then it will dominate. But if you believe the government can’t run health care well, there’s no reason to think that will happen. Whatever you think of that, though, the basic fact is that even if the public option does dominate the exchange most people will still have private employer-provided insurance.
That might be true if the new government-run program were going to compete on anything close to a level playing field. But, because the public option is ultimately supported by the taxpayers, the playing field can never be level. True, the bill does say that the new program is supposed to be self-sustaining, covering administrative and benefit costs entirely out of premium revenues. But remember that Medicare Part B was originally supposed to support 50 percent of its costs through premiums. That has shrunk to the point where premiums pay for less than 25 percent of the program’s cost.
And the government has a myriad of ways to prevent the true cost of the program from showing up in premium prices. For example, the government-run plan will not have to pay state or federal taxes, and unlike private insurance plans, who can be sued in state courts, the government-run plan could only be sued in federal court.
At the very least, the program carries with it an implicit guarantee against future losses. Suppose the public option prices its products too low and loses money. Can you imagine that Congress is simply going to let it go bankrupt, go out of business? Would a Congress that has bailed out banks and automobile companies because they are “too big to fail” resist subsidizing the government’s insurance plan if it began to lose money? Even without the actual bailout, such an implicit guarantee has a value. For example, the implicit guarantees behind Fannie Mae and Freddie Mac were estimated to have saved those institutions $6 billion per year.
All of this means that the government-run plan would be significantly cheaper than private insurance, not because it would out-compete private insurance or because it was more efficient, but because it had unfair advantages. The lower cost means that businesses, in particular, would have every incentive to dump workers from their current health insurance plan into the government plan. And, if other provisions of the bill make insurance more expensive, as is likely, the incentive for employers to shift workers to the government plan would be even greater. Estimates suggest that nearly 90 million workers could eventually be forced into the government plan.
As Robert Samuelson, dean of economic columnists, writes in the Washington Post, “a favored public plan would probably doom today’s private insurance.”
Samuelson is right. There is nothing “optional” about a public option. And that is just the way the Left wants it.
What Caused the Crisis?
Last night National Government Radio promoted a documentary on National Government TV about the financial crisis of 2008, which concludes that the problem was . . . not enough government.
If the “Frontline” episode mentioned any of the ways that government created the crisis — cheap money from the central bank, tax laws that encourage debt over equity, government regulation that pressured lenders to issue mortgages to borrowers who wouldn’t be able to pay them back — NPR didn’t mention it.
For information on those causes, take a look at this paper by Lawrence H. White or get the new book Financial Fiasco by Johan Norberg, which Amity Shlaes called “a masterwork in miniature.” Available in hardcover or immediately as an e-book. Or on Kindle!
And for a warning about the dangers lurking in Fannie Mae and Freddie Mac, see this 2004 paper by Lawrence J. White.
Filed under: Cato Publications; Finance, Banking & Monetary Policy
Americans Don’t Want It
“Americans are more likely today than in the recent past to believe that government is taking on too much responsibility for solving the nation’s problems and is over-regulating business,” according to a new Gallup Poll.
New Gallup data show that 57% of Americans say the government is trying to do too many things that should be left to businesses and individuals, and 45% say there is too much government regulation of business. Both reflect the highest such readings in more than a decade.
Byron York of the Examiner notes:
The last time the number of people who believe government is doing too much hit 57 percent was in October 1994, shortly before voters threw Democrats out of power in both the House and Senate. It continued to rise after that, hitting 60 percent in December 1995, before settling down in the later Clinton and Bush years.
Also, the number of people who say there is too much government regulation of business and industry has reached its highest point since Gallup began asking the question in 1993.
That might give an ambitious administration pause. The independents who swung the elections in 2006 and 2008 clearly think things have gone too far. An administration as smart as Bill Clinton’s will take the hint and rein it in. Meanwhile, another recent poll, by the Associated Press and the National Constitution Center, shows that
Americans decidedly oppose the government’s efforts to save struggling companies by taking ownership stakes even if failure of the businesses would cost jobs and harm the economy, a new poll shows.
The Associated Press-National Constitution Center poll of views on the Constitution found little support for the idea that the government had to save AIG, the world’s largest insurer, mortgage giants Fannie Mae and Freddie Mac, and the iconic American company General Motors last year because they were too big to fail.
Just 38 percent of Americans favor government intervention – with 60 percent opposed – to keep a company in business to prevent harm to the economy. The number in favor drops to a third when jobs would be lost, without greater damage to the economy.
Similarly strong views showed up over whether the president should have more power at the expense of Congress and the courts, if doing so would help the economy. Three-fourths of Americans said no, up from two-thirds last year.
“It really does ratify how much Americans are against the federal government taking over private industry,” said Paul J. Lavrakas, a research psychologist and AP consultant who analyzed the results of the survey.
Note that 71 percent of the respondents opposed government takeovers, with 50 percent strongly opposed, before the “benefits” of such takeovers were presented.
President Obama is an eloquent spokesman for his agenda, and he has an excellent political team with a lot of outside allies to push it. But as the old advertising joke goes, you can have the best research and the best design and the best advertising for your dog food, but it won’t sell if the dogs don’t like it.
CAP’s Proposal to Add ‘Public Members’ to Corporate Boards Is Flawed
Today the Center for American Progress rolled out its proposal that we add “public directors” to the boards of companies that have been bailed out by the government. CAP scholar Emma Coleman Jordan argues that “public directors will provide a corrective to the boards of the financial institutions that helped cause the crisis.”
One has to wonder whether Ms. Jordan has ever heard of Fannie Mae and Freddie Mac. If she had, she might recall that a substantial number of the board members of Fannie and Freddie were so-called “public” members appointed by the President. Perhaps she can ask CAP adjunct scholar and former Fannie Mae executive Ellen Seidman to review the history of those companies for her.
Housing Bailouts: Lessons Not Learned
The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.
Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:
The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
And what is the result of this surge in FHA insurance?
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
This is madness. Repeat after me: TANSTAAFL (There ain’t no such thing as a free lunch).
C/P Libertarianism, from A to Z
Fear of Freedom Leaves Only Faith Healing for Our Schools
Historian Diane Ravitch drives me nuts. She has written numerous, terrific books chronicling the ills of government control of education, including the wrenching social conflict it has caused; the ejection of meaningful content from textbooks and tests it has required; and the dominance of educrats over parents and children it has enabled. She has been, essentially, the official historian of government-schooling’s failure. And yet, in a new blog interview with journalist John Merrow, she appears not to comprehend the most important lesson her copious works have to offer: that government education is doomed to fail.
Why the huge disconnect between her historiography and willingness to act on its clear implications? Because, it appears, as much as she knows that government schooling fails, she fears educational freedom even more. “Privatization,” in her mind, is simply too dangerous:
I remember your saying in an interview years ago that you favored public schools but not the public school system that we have. In New Orleans Paul Vallas has called for ‘a system of schools, not a school system.’ What’s your ideal approach? Are we moving in that direction?
If “a system of schools” means that the public schools should be handed over to anyone who wants to run a school, then I think we are headed in the wrong direction. Privatization will not help us achieve our goals. We know from the recent CREDO study at Stanford that charter schools run the gamut from excellent to abysmal, and many studies have found that charters, on average, produce no better results than the regular public schools. Deregulation nearly destroyed our economy in the past decade, and we better be careful that we don’t destroy our public schools too.
Unfortunately, while Prof. Ravitch knows a gigantic amount about education history, she exhibits precious little understanding of freedom or its economic subset, free markets. For one thing, charter schooling – a system by which public schools are given a right to exist and largely held accountable by government – isn’t even close to “privatization,” if by that we mean taking control from government and giving it to free, “private” individuals. Worse, Ravitch evinces a reflexive and, frankly, simplistic fear of free markets in hyperbolically asserting that “deregulation nearly destroyed our economy in the past decade.” I’d strongly suggest that she explore some non-education history – for instance, that of government-sponsored institutions such as Fannie Mae and Freddie Mac; federal laws such as the Community Reinvestment Act; and federal regulation – before making any such over-the-top declaration again.
Ultimately, it seems likely that Prof. Ravitch fails to grasp – or, perhaps, to intuitively feel – how freedom works, and hence she fears it. Like many people, maybe she’s just not comfortable with seemingly ethereal spontaneous order, and needs to have some higher power pulling the strings to feel safe. Perhaps she fails to see how freedom, by fostering competition and innovation, produces all of the wonderful things we take for granted. Maybe she doesn’t really understand that it is due to freedom that we have an abundance of computers, coffee cups, cars, houses, package delivery services, miracle drugs, and pencils, not to mention religious pluralism, marketplaces of idea, and even happiness.
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
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.
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
Who’s Going to Buy Your Debt, Mr. President?
The administration’s presumption that America can borrow its way to prosperity has taken a couple of big hits over the last couple days.
First, just as the Third World debt crisis destroyed the belief among international bankers that countries don’t go bankrupt, so is the West’s borrowing binge ending the belief among international investors that the U.S. and other Western nations are safe economic bets.
Reports the Wall Street Journal:
Britain was warned by Standard & Poor’s Ratings Service that it may lose its coveted triple-A credit rating, triggering a drop in U.K. bonds and sparking global fears about the consequences of massive debts being incurred by the U.S. and other major nations as they try to dig out from the economic crisis.
…
The announcement quickly sent waves across the Atlantic. Investors initially dumped U.K. bonds and the pound, heading for the relative safety of U.S. Treasurys. But within hours, worries about an onslaught of new U.S. bond sales and the security of America’s own triple-A rating drove down the prices of U.S. Treasurys.
The yield of the benchmark U.S. 10-year bond, which moves in the opposite direction to the price, rose by 0.15 percentage point from Wednesday to 3.355%, its highest level in six months.
The relative gloom about the U.K. and the U.S. was apparent Thursday in the market for credit-default swaps, where investors can buy and sell insurance against sovereign defaults. Five years of insurance on $10 million in U.K. debt jumped to around $81,000 a year, from $72,000 earlier in the day. U.S. debt insurance cost the equivalent of $37,500 — in the same range as France at $38,000, and Germany at $35,000.
A shot across the bow of the American ship of state, some analysts have called it.
But shots also were being fired from another direction: East Asia. The Chinese are starting to have doubts about Uncle Sam’s creditworthiness. Reports the New York Times:
Filed under: Finance, Banking & Monetary Policy; Government and Politics; International Economics and Development; Tax and Budget Policy
Fannie Mae and Freddie Mac: The Toxic Duo
Treasury Secretary Timothy Geithner has finally unveiled details about his bailout plan. Not surprisingly, he plans on propping up insolvent (but politically influential) financial institutions. Even worse, there is no effort to shut down — or even reform — the two government-sponsored enterprises that deserve the lion’s share of the blame for the financial crisis. Yet as Peter Wallison of the American Enterprise Institute explains in this new video from the Center for Freedom and Prosperity, Fannie Mae and Freddie Mac are at the epicenter of the housing bubble and subsequent damage to financial markets.
America’s Problem: Too Little Government Lending!
Suffering through a massive housing bust spurred by the activities of utterly irresponsible government-sponsored entities such as Fannie Mae and Freddie Mac, may have led you to believe that the government should stop subsidizing the irresponsible and improvident. Indeed, with government spending and lending off the charts, you might even have come to believe that Washington should cut back on its spending and lending.
Silly you.
According to the Obama administration, more spending and lending is in order. And by Fannie Mae and Freddie Mac. Indeed, preparing the government for even more spending and lending apparently is the goal of current policy, which already includes a lot of spending and lending.
Christina Romer, Chairwoman of the Council of Economic Advisers, was interviewed by CNN’s John King on Sunday. She helpfully sought to clear up the confusion exhibited by those of us who thought the current economic crisis resulted from irresponsible spending and lending. According to CNN:
KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?
ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what is the best way.
Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer. What is going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy.
Of course.
“Lend like crazy” really is the “just basically functioning” of Fannie and Freddie. But it is beyond question that this behavior helped spark the current crisis. Unfortunately, Dr. Romer does not explain exactly how we can make these fiscally irresponsible, money-losing organizations “safe.” Nor does she enlighten us on how having Fannie and Freddie ”lend like crazy” will have better results than before.
If this is the advice President Barack Obama is getting from what traditionally is one of the most economically responsible agencies in the executive branch, imagine what he is hearing elsewhere. Buckle up, for the economic ride is likely to get much worse.
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