Thursday Links
- A Financial Super-Regulator: The dangers of giving the Fed too much power.
- The financial regulators’ pipe dream: “Most new regulation will do nothing to limit crises because markets will innovate around it. Worse, some regulation being considered by Congress will guarantee bigger and more frequent crises.”
- The shape of things to come? More war will come before peace in the Middle East, says journalist and foreign affairs analyst Leon Hadar.
- The illegal cigarette trade in Ireland reaches “epidemic proportions“ after the government imposes draconian regulations on tobacco products.
- Podcast: “Too Big to Fail Is Just Too Big“
Fact-checking Drug Czar Barry McCaffrey
I appeared on the CNN program Lou Dobbs Tonight last Thursday (Oct. 22) to discuss the medical marijuana issue and the drug war in general. There were two other guests: Peter Moskos from John Jay College and the organization Law Enforcement Against Prohibition (LEAP) and Barry McCaffrey, retired General of the U.S. Army and former “Drug Czar” under President Bill Clinton.
I was really astonished by the doubletalk coming from McCaffrey. Watch the clip below and then I’ll explain two of the worst examples so you can come to your own conclusions about this guy.
Doubletalk: Example One:
Tim Lynch: “Some states have changed their marijuana laws to allow patients who are suffering from cancer and AIDS–people who want to use marijuana for medical reasons–they’re exempt from the law. But there’s a clash between the laws of the state governments and the federal government. The federal government has come in and said, ‘We’re going to threaten people with federal prosecution, bring them into federal court.’ And what the [new memo from the Obama Justice Department] does this week is change federal policy. Basically, Attorney General Eric Holder is saying, ‘Look, for people, genuine patients–people suffering from cancer, people suffering from AIDS–these people are now off limits to federal prosecutors.’ It’s a very small step in the direction of reform.”
Now comes Barry McCaffrey: “There is zero truth to the fact that the Drug Enforcement Administration or any other federal law enforcement ever threatened care-givers or individual patients. That’s fantasy!”
Zero truth? Fantasy? This report from USA Today tells the story of several patients who were harassed and threatened by federal agents. Excerpt: ”In August 2002, federal agents seized six plants from [Diane] Monson’s home and destroyed them.”
This report from the San Francisco Chronicle tells the story of Bryan Epis and Ed Rosenthal. Both men, in separate incidents, were raided, arrested, and prosecuted by federal officials. The feds called them “drug dealers.” When the cases came to trial, both men were eager to inform their juries about the actual circumstances surrounding their cases–but they were not allowed to convey those circumstances to jurors. Federal prosecutors insisted that information concerning the medical aspect of marijuana was “irrelevant.” Both men were convicted and jailed.
This report from the New York Times tells readers about the death of Peter McWilliams. The feds said he was a “drug dealer.” McWilliams also wanted to tell his story to a jury, but pled guilty when the judge told him he would not be allowed to inform the jury of his medical condition. Excerpt: “At his death, Mr. McWilliams was waiting to be sentenced in federal court after being convicted of having conspired to possess, manufacture and sell marijuana…. They pleaded guilty to the charge last year after United States District Judge George H. King ruled that they could not use California’s medical marijuana initiative, Proposition 215, as a defense, or even tell the jury of the initiative’s existence and their own medical conditions.” The late William F. Buckley wrote about McWilliams’ case here.
Imagine what Diane Monson, Bryan Epis, Ed Rosenthal, and Peter McWilliams (and others) would have thought had they seen a former top official claim that federal officials never threatened patients or caregivers?!
Filed under: General; Government and Politics; Law and Civil Liberties
Understanding the Consequences of Internet Regulation
In an effort to achieve “network neutrality” online, the FCC is starting to write new regulations for Internet providers. Reuters reports:
U.S. communications regulators voted unanimously Thursday to support an open Internet rule that would prevent telecom network operators from barring or blocking content based on the revenue it generates.
The proposed rule now goes to the public for comment until Jan. 14, after which the Federal Communications Commissions will review the feedback and possibly seek more comment. A final rule is not expected until the spring of next year.
Cato Director of Information Policy Studies Jim Harper appeared on Fox News this week to discuss the FCC decision. “This is governmental tinkering with a market place that is working really well and growing right now,” said Harper. “The last thing we need is to cut that off.”
There are ways to achieve net neutrality without regulation, says Timothy B. Lee:
An important reason for the Internet’s remarkable growth over the last quarter century is the “end-to-end” principle that networks should confine themselves to transmitting generic packets without worrying about their contents. Not only has this made deployment of internet infrastructure cheap and efficient, but it has created fertile ground for entrepreneurship. On a network that respects the end-to-end principle, prior approval from network owners is not needed to launch new applications, services, or content.
…Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.
Filed under: General; Telecom, Internet & Information Policy
Too Big to Fail Redux
Mervyn King, governor of the Bank of England, has shocked the staid world of British banking by raising the possibility of breaking up the UKs big banks. Mr. King is no socialist, but a worried banking regulator. He is worried about “the sheer creative imagination of of the financial sector to think up new ways of taking risk.”
Around the world, regulators and finance ministers are hoping that banks will grow their way out of their current mess. To do so, however, banks will in fact need to seek new ways of taking on risk. It is called going for broke: the upside goes to stockholders and managers, and the downside to taxpayers. Mr. King knows that it is a “delusion” that regulators can control bank risk-taking.
Whether one agrees with his solution, at least he recognizes the problem. Would that were true of Treasury and Fed officials in the United States.
Geithner Ignores Bailout History
Perhaps the biggest problem with the Obama plan to “reform” our financial system is the impact it would have on the market perception surrounding “too big to fail” institutions. In identifying some companies as “too big to fail” holders of debt in those companies would assume that they would be made whole if those companies failed. After all, that is what we did for the debt-holders in Fannie, Freddie, AIG, and Bear. Both former Secretary Paulson and Geithner appear under the impression that moral hazard only applies to equity, despite debt constituting more than 90% of the capital structure of the typical financial firm.
Geithner believes he’s found a way to solve this problem – he’ll just tell everyone that there isn’t an implicit subsidy, and there won’t be a list of “too big to fail” companies. Great, why didn’t I think of that. After all, the constant refrain in Washington over the years that Fannie and Freddie weren’t getting an implicit subsidy really prepared the markets for their demise.
Even more bizarre is Geithner’s assertion that the government can force these institutions to hold higher capital, maintain more liquidity and be subjected to greater supervision, all without anyone knowing who exactly these companies are. Does the Secretary truly believe that these companies’ securities disclosures won’t include the amount of capital they are holding? Whether there is an official list or not is besides the question, market participants will be able to infer that list from publicly available information and the actions of regulators.
One has to wonder whether Geithner spent any of his time at the NY Fed actually watching how markets work. Before we continue down the path of financial reform, maybe it would be useful for our Treasury Secretary to take a few weeks off to study what got us into this mess. We’ve already been down this road of denying implicit subsidies and then providing them after the fact. Maybe it’s time to try something different.
Robbing Peter to Pay Paul
The FDIC’s insurance fund, which it uses to pay off despositors in failed banks, is getting low. One way it can bolster its reserves is to draw on a $100 billion line of credit from the Treasury. Instead, however,
Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.
A brilliant scheme to avoid another taxpayer bailout? Not really.
The banks are willing to lend because the FDIC will pay them a good interest rate. Repayment is virtually guaranteed because the FDIC can always draw on its line of credit. Thus the banks are getting a better deal than they would in the marketplace (that’s why they are doing this), so the scheme is a backdoor way of further bailing out the banks.
Why go through this charade? Apparently, using the Treasury credit line
is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.
“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”
Instead, the FDIC will con the taxpayers. The FDIC has no choice under existing policy, of course, but to pay off depositors of failing banks. They should just be honest about how who is paying for it.
C/P Libertarianism from A to Z
Filed under: Finance, Banking & Monetary Policy; General
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
Timmy Throws a Temper-Tantrum
As reported in yesterday’s Wall Street Journal, Treasury Secretary Tim Geithner called fellow bank regulators, included Fed Chair Ben Bernanke and FDIC Chair Sheila Bair, over for an obscenity-laced rant about their audacity in raising questions about his scheme to fix our financial system.
Reportedly the Secretary told regulators that “enough is enough” and that they’ve been heard, so the time for debate is over. This sounds eerily like the President’s previous comments about including Republicans in the talks over the stimulus – you’ve been heard, so you were “included,” now shut up. The shouting down of debate is becoming all too much a signature of this Administration.
The Secretary apparently also told the regulators in attendance that it was the administration and the Congress that sets policy. Perhaps next he’ll tell us that the power of the purse lies with the Treasury and the Congress. Secretary Geithner has no more constitutional authority to set policy than do any of the bank regulators. It is the job of Congress to make laws, not the Treasury Secretary’s. He can offer his opinion, just as they can, and should, offer theirs.
Of course, Secretary Geithner’s frustrations are understandable, given that his regulatory proposals have hit a brick-wall with both Congress and the Public. He has made no effort to explain to either Congress or the public how exactly his plan will stop future bailouts. Instead, any reasonable read of his proposal would lead to the conclusion that we will have more bailouts, rather than less, under the Obama-Geithner plan. Instead of directing his energies at anger, he should put them toward coming up with solutions that actually increase the stability of our financial system.
We were all told during his confirmation process that we must overlook such facts as his failure to pay taxes, because Tim Geithner was the “boy-wonder” who would save our financial system. As his recent out-bursts demonstrate, “boy-wonder” is only half-right.
End the Credit Rating Monopoly
Earlier this week, SEC Chair Mary Shapiro appeared before Congress to suggest ways to fix the failings in our credit rating agencies. Sadly her proposals miss the market, although that shouldn’t be so surprising as her suggestions appear to rest upon a misunderstanding of the problem.
The thrust of the SEC’s current approach is more disclosure, such as releasing “pre-ratings” that debt issuers may get before final issuance. Additional disclosure of ratings methodology and assumptions is likely to be useless. Almost all that information was available during the building housing bubble. The problem is that the rating agencies had little incentive to go beyond the consensus forecasts of increasing to at most modest declines in home prices. These same assumptions were the foundation of almost all government economic forecasting as well, yet few believe that forcing CBO or OMB to disclosure more of their forecasts will cure our budget imbalances. What is needed is a change in incentives.
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.
Banks, Bailouts, and Political Pressure
The Washington Post reports:
Sen. Daniel K. Inouye’s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.
The bank, Central Pacific Financial, was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm’s losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn’t meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.
Two weeks after the inquiry from Inouye’s office, Central Pacific announced that the Treasury would inject $135 million.
As we’ve said here many times, going back to 1983, when government is in the business of making economic decisions, you inevitably get more lobbying, more campaign spending, and more political influence on economic decision-makers.
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.
What Is “De-Identified”?
On a post at the TechLiberationFront blog, I discuss the fluidity of important concepts in information policy — and catch a friendly organization disagreeing with itself.
The upshot? “Until more intellectual groundwork is laid, information policy arguments before regulators, lawmakers, and courts will not rest on solid footing.”
New at Cato
Here are a few highlights from Cato Today, a daily email from the Cato Institute.
- Dan Ikenson and Scott Lincicome argue in a new study that restoring the pro-trade consensus must be a top priority for the Obama administration.
- In the DC Examiner, Gene Healy discusses Obama’s first 100 days and argues that he’s massively expanded the power of government in a short period of time.
- In the Asia Times Online, David Isenberg discusses private security contractors in the war in Iraq.
- Watch Patrick J. Michaels discuss energy on CNBC.
- In Tuesday’s Cato Daily Podcast, Peter Van Doren discusses the interaction between Congress and regulators on the issue of food safety.
Real Regulators: Madoff’s Accomplices
In his “Talking Business” column, Joe Nocera explores Bernie Madoff’s accomplices: the victims themselves, and the SEC. He quotes James R. Hedges IV of LJH Global Investments:
“It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.” And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.
Nocera ably acknowledges the hurt and suffering of Madoff’s victims while pointing out their thoroughgoing irresponsibility — especially in the suggestion that someone else should pick up the pieces.
I’m less sanguine: The more thoroughly their cascading delusions of government aid and protection are shattered, the better. And yours, too. And mine. No bailout.
(Earlier posts in this “real regulators” thread here and here.)
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