Plowing Through the Defenses of National Education Standards
Arguably the most troubling aspect of the push for national education standards has been the failure — maybe intentional, maybe not — of standards supporters to be up front about what they want and openly debate the pros and cons of their plans. Unfortunately, as Pioneer Institute Executive Director Jim Stergios laments today, supporters are using the same stealthy approach to implement their plans on an unsuspecting public.
Standing in stark contrast to most of his national-standards brethren is the Fordham Institute’s Mike Petrilli, who graciously came to Cato last week to debate national standards and is now in a terrific blog exchange with the University of Arkansas’s Jay Greene. Petrilli deserves a lot of credit for at least trying to answer such crucial questions as whether adopting the standards is truly voluntary, and if there are superior alternatives to national standards. You can read Jay’s initial post here, Mike’s subsequent response here, and Jay’s most recent reply right here.
I’m not going to leap into most of Jay and Mike’s debate , though it covers a lot of the same ground we hit in our forum last week, which you can check out here. I do want to note two things, though: (1) While I truly do appreciate Mike’s openly grappling with objections to what might be Fordham’s biggest reform push ever, I think his arguments don’t stand up to Jay’s, and (2) I think Mike’s identifying national media scrutiny as what will prevent special-interest capture of national standards is about as encouraging as BP telling Gulf-staters ”we’ve got a plan!”
Let’s delve into #2.
For starters, how much scrutiny does the national media give to legislating generally? Reporters might hit the big stuff and whatever is highly contentious, but even then how much of the important details do they offer? Think about the huge health care debate that just dominated the nation’s attention. How many details on the various bills debated did anybody get through the major media? How much clarity? Heck, sometimes legislators were debating bills that even they hadn’t seen, much less reporters. Of course, the health care bill was much bigger than, say, the No Child Left Behind Act, but remember how long after passage of NCLB it was before the Department of Education, much less the media, was able to nail down all of its important parts?
Which brings us to a whole different layer of policy making, one major media wade into even less often than legislating: writing regulations. How many stories have you read, or watched on TV news, about the writing of regulations for implementing anything, education or otherwise? I’d imagine precious few, yet this is where often vaguely written statutes are transformed into on-the-ground operations. It’s also where the special interests are almost always represented — after all, they’re the ones who will be regulated — but average taxpayers and citizens? Don’t go looking for them.
Fannie Mae and Greece’s Problems Enabled by Basel
On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis. Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress. Primary blame for Greece’s problems clearly lies with the Greek government.
Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt. One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.
Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards. Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category. For the highest risk assets, like corporate bonds, banks are required to hold 8%. Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital. So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt. Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class. Fannie and Freddie debt required holding only 1.6% capital. Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.
The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild. It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.
Regulatory Spending Actually Rose under Bush
Analysts across the ideological spectrum generally agree that the government’s regulatory bodies fail far too frequently. However, analysts seem to learn different lessons from this experience.
Washington Post business columnist Steve Pearlstein cites numerous examples of failure and concludes, “It’s time for the business community to give up its jihad against regulation.”
He says:
It hardly captures the breadth and depth of these regulatory failures to say that during the Bush administration the pendulum swung a bit too far in the direction of deregulation and lax enforcement. What it misses is just how dramatically the regulatory agencies have been shrunken in size, stripped of talent and resources, demoralized by lousy leadership, captured by the industries they were meant to oversee and undermined by political interference and relentless attacks on their competence and purpose.
It’s true that regulators often do the bidding of the industries that they regulate. But “regulatory capture” is a long recognized phenomenon that undermines the contention that the government is well-suited to be a watchdog.
Regardless, is Pearlstein right that federal regulatory agencies were “dramatically” shrunk? Not according to a new study from George Washington University and Washington University in St. Louis. The figure shows that regulatory spending actually rose an inflation-adjusted 31 percent during the Bush administration (FY2002-FY2009):
Similarly, regulatory staff jumped by 42 percent under Bush’s watch:
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.
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?!
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.
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.
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.
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.
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