In a column on what Jane Jacobs would have thought of the Wall Street protests, Sandy Ikeda quotes a line from her book Systems of Survival:

[W]e have two distinct ways of making a living, no more no less. . . . First, we’re able to take what we want – simply take, depending of course, on what’s available to be taken. That’s what all other animals do. . . . But in addition, we human beings are capable of trading – exchanging our services for other goods and services, depending, again, on what’s available, but in this case what’s available for exchange rather than taking. [51-2]

And that reminded me of a cartoon from 2002 that I found last week in moving my office (upstairs to the Cato Institute’s beautiful new seventh floor):

Ikeda goes on to urge the Wall Street protesters to follow Jane Jacobs’s advice:

The “commercial moral syndrome” that underlies free markets and trade counsels: “shun force, come to voluntary agreements, be honest, collaborate easily with strangers and aliens, compete, respect contracts, use initiative and enterprise, be open to inventiveness and novelty, be efficient, promote comfort and convenience, dissent for the sake of the task, invest for productive purposes, be industrious, be thrifty, and be optimistic.”

On the other hand, the “guardian moral syndrome” that underlies government and forced takings counsels: “shun trading, exert prowess, be obedient and disciplined, adhere to tradition, respect hierarchy, adhere to tradition, be loyal, take vengeance, deceive for the sake of the task, make rich use of leisure, be ostentatious, dispense largesse, be exclusive, show fortitude, be fatalistic, and treasure honor.”

Which of these best fits the personality profile of the young, iconoclastic but peaceful, ideologically driven protesters with their iPhones, Twitter, and leaderless organization? Now which of these best fits their enemy?

They really are the two choices that have faced us throughout history. And fortunately, as Deirdre McCloskey and Steven Pinker have pointed out in very different recent books, human life has been enhanced by the fact that people have perceived that making and trading are better than taking.

Making and Taking is a post from Cato @ Liberty - Cato Institute Blog

• Higher deficits and debt mean we must confront entitlements and re-think the way government insurance creates perverse incentives that increase our dependence.
• Higher gas prices have nothing to do with Wall Street speculators.
• Higher polemics against limited government aren’t going to restore our fiscal sanity.
• Higher taxes on soda will have little, if any, effect on our waistlines.
• Please join us one week from tomorrow, on Friday, April 29 at 4:00 p.m. Eastern for a special sneak preview of Free or Equal, a documentary from Free to Choose Media. In this one-hour film, Cato Senior Fellow Johan Norberg retraces Milton Friedman’s steps from the trailblazing 1980 documentary Free to Choose to see how economic liberalization has transformed societies around the world. Norberg will introduce Free and Equal, and will answer questions following the screening. Complimentary registration is required of all attendees by noon Eastern on Thursday, April 28. Until then, please enjoy this preview:

  And don’t miss Milton Friedman’s 1988 essay in the Cato Policy Report, “Using the Market for Social Development,” an excellent primer to some of the topics addressed in the two films.

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

• America’s unemployment rate has nothing to do with immigration.
• It’s possible to cut waste in government without succumbing to the Washington Monument ploy.
• Does this anti-obesity crusade make me look fat? (No, the junk science behind it shaping policy does.)
• Did Wall Street greed create the housing crisis? Or did government subsidies incentivize subprime lending by buying up 40% of new private-label subprime mortgages during the height of the housing boom?

Wednesday Links is a post from Cato @ Liberty - Cato Institute Blog

A Wall Street Journal editorial today shines a long overdue spotlight on an antidumping case that is emblematic of the dissonance within U.S. trade policy. I, too, wrote about this case last year as an example of how the U.S. antidumping regime undermines U.S. manufacturing, penalizes U.S. exporters, and diminishes chances for achieving the administration’s goal of doubling exports in five years.

In 2005, U.S. Magnesium Corporation, the sole producer of magnesium in the United States, succeeded in convincing the U.S. International Trade Commission and U.S. Commerce Department to impose duties on imports of magnesium from competitors in Russia and China. Before toasting this outcome with some clichéd or specious utterance about how the antidumping law ensures fair trade and a level playing field for U.S. producers, it is important to understand that downstream, consuming industries (those U.S. producers that require for their own production the raw materials and intermediate goods subject to the antidumping measures) have no legal standing in these cases. Statute forbids the U.S. International Trade Commission from considering their arguments or projections about the likely consequences of prospective duties. Statute requires that the ITC consider only the conditions of the petitioning industry.  In other words, the analysis is slanted.  The antidumping law codifies these evidentiary asymmetries, which makes it easier for U.S. suppliers to cut-off their U.S. customers’ access to alternative sources of supply. In our increasingly globalized economy, this is a recipe for propping up old industries and discouraging and crippling new ones. It is a recipe for economic decline.

Here’s what I wrote about the impact of the magnesium duties on one formerly promising U.S. growth industry in May 2010:

Consider the case of Spartan Light Metal Products, a small Midwestern producer of aluminum and magnesium engine parts (and other mechanical parts), which presented its story to Obama administration officials, who were dispatched across the country earlier this year to get input from manufacturers about the problems they confronted in export markets.

Beginning in the early-1990s, Spartan shifted its emphasis from aluminum to magnesium die-cast production because magnesium is much lighter and more durable than aluminum, and Spartan’s biggest customers, including Ford, GM, Honda, Mazda, and Toyota were looking to reduce the weight of their vehicles to improve fuel efficiency. Among other products, Spartan produced magnesium intake manifolds for Honda V-6 engines; transmission end and pump covers for GM engines; and oil pans for all of Toyota’s V-8 truck and SUV engines.

Spartan was also exporting various magnesium-cast parts (engine valve covers, cam covers, wheel armatures, console brackets, etc.) to Canada, Mexico, Germany, Spain, France, and Japan. Global demand for magnesium components was on the rise.

But then all of a sudden, in February 2004, an antidumping petition against imports of magnesium from China and Russia was filed by the U.S. industry, which comprised just one producer, U.S. Magnesium Corp. of Utah with about 370 employees. Prices of magnesium alloy rose from slightly more than $1 per pound in February 2004 to about $1.50 per pound one year later, when the U.S. International Trade Commission issued its final determination in the antidumping investigation. By mid-2008, with a dramatic reduction of Chinese and Russian magnesium in the U.S. market, the U.S. price rose to $3.25 per pound (before dropping in 2009 on account of the economic recession).

By January 2010, the U.S. price was $2.30 per pound, while the average price for Spartan’s NAFTA competitors was $1.54. Meanwhile, European magnesium die-casters were paying $1.49 per pound and Chinese competitors were paying $1.36 per pound. According to Spartan’s presentation to Obama administration officials, magnesium accounts for about 40-60% of the total product cost in its industry. Thus, the price differential caused by the antidumping order bestowed a cost advantage of 19 percent on Chinese competitors, 17 percent on European competitors, and 16 percent on NAFTA competitors.

As sure as water runs downhill, several of Spartan’s U.S. competitors went out of business due to their inability to secure magnesium at competitive prices. According to the North American Die Casting Association, the downstream industry lost more than 1,675 manufacturing jobs–more than five-times the number of jobs that even exist in the entire magnesium producing industry!

Spartan’s outlook is bleak, unless it can access magnesium at world market prices. Its customers have turned to imported magnesium die cast parts or have outsourced their own production to locations where they have access to competitively-priced magnesium parts, or they’ve switched to heavier cast materials, sacrificing ergonomics and fuel efficiency in the face of rapidly-approaching, federally-mandated 35.5 mile per gallon fuel efficiency standards.

Thus, antidumping duties on magnesium have almost entirely snuffed out a U.S. growth industry that was succeeding in export markets by selling environmentally-friendlier auto parts—two attributes that really should make this a showcase industry, given the administration’s stated goals.

But on trade policy formulation, it seems that the right hand doesn’t always know what the left hand is doing. Last year, while magnesium imports from China were subject to U.S. antidumping duties, the Obama administration launched a WTO case against China for its restraints on exports of raw materials, including magnesium. That’s right. The U.S. government officially opposes China’s tax on exported magnesium because it imposes extra costs of U.S. consuming industries, but it insists on enforcing its own antidumping duties on magnesium imported from China despite those costs.

As if that is not enough dissonance, consider that the same U.S. Commerce Department that authorized the antidumping duties on magnesium is simultaneously charged with overseeing the National Export Initiative (and its goal of doubling U.S. exports to $3.14 trillion by 2015). The Commerce secretary, Gary Locke, was even featured in Washington Post profile piece Sunday preaching about the national imperative to boost exports. Is Secretary Locke even aware of the incongruities under his roof?

The WSJ editorial concludes with a call to revoke the antidumping duties on magnesium, which is under consideration in a “Sunset Review.” (Regrettably, as presented in this analysis from 2005, revocation pursuant to sunset review is more the excepton than the rule.). I agree with the WSJ’s conclusion, but would implore policymakers to go further and implement sweeping reform of the antidumping law. It is extremely costly to U.S. industry and totally out-of-step with 21st century economic reality. As I wrote last year:

Spartan’s is not an isolated incident. Routinely, the U.S. antidumping law is more punitive toward U.S. manufacturers than it is to the presumed foreign targets. Routinely, U.S. producers of upstream products respond to their customers’ needs for better pricing, not by becoming more efficient or cooperative, but by working to cripple their access to foreign supplies. More and more frequently, that is how and why the antidumping law is used in the United States. Increasingly, it is a weapon used by American producers against their customers—other American producers, many of whom are exporters.

If President Obama really wants to see exports double, he must implore Congress to change the antidumping law to explicitly give standing to downstream industries so that their interests can be considered in trade remedies cases. He must implore Congress to include a public interest provision requiring the U.S. International Trade Commission to assess the costs of any duties on downstream industries and on the broader economy before imposing any such duties.

The imperative of U.S. export growth demands some degree of sanity be restored to our business-crippling trade remedies regime

Death by Antidumping is a post from Cato @ Liberty - Cato Institute Blog

As an economist, I should probably be most agitated about the economic consequences of TARP, such as moral hazard and capital malinvestment. But when I read stories about how political insiders (both in government and on Wall Street) manipulate the system for personal advantage, I get even more upset.

Yes, TARP was economically misguided. But the bailout also was fundamentally corrupt, featuring special favors for the well-heeled. I don’t like it when lower-income people use the political system to take money from upper-income people, but it is downright nauseating and disgusting when upper-income people use the coercive power of government to steal money from lower-income people.

Now, to add insult to injury, we’re being fed an unsavory gruel of deception as the political class tries to cover its tracks. Here’s a story from Bloomberg about the Treasury Department’s refusal to obey the law and comply with a FOIA request. A Bloomberg reporter wanted to know about an insider deal to put taxpayers on the line to guarantee a bunch of Citigroup-held securities, but the government thinks that people don’t have a right to know how their money is being funneled to politically-powerful and well-connected insiders.

The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used. More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails — none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!” None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees.

Here’s another reprehensible example. The Treasury Department, for all intents and purposes, prevaricated when it recently claimed that the AIG bailout would cost “only” $5 billion. This has triggered some pushback from Capitol Hill GOPers, as reported by the New York Times, but it is highly unlikely that anyone will suffer any consequences for this deception. To paraphrase Glenn Reynolds, “laws, honesty, and integrity, like taxes, are for the little people.”

The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program. …“The American people have a right for full and complete disclosure about their investment in A.I.G.,” Mr. Barofsky said, “and the U.S. government has an obligation, when they’re describing potential losses, to give complete information.” …“If a private company filed information with the government that was just as misleading and disingenuous as what Treasury has done here, you’d better believe there would be calls for an investigation from the S.E.C. and others,” said Representative Darrell Issa, the senior Republican on the House Committee on Oversight and Government Reform. He called the Treasury’s October report on A.I.G. “blatant manipulation.” Senator Charles E. Grassley of Iowa, the senior Republican on the Finance Committee, said he thought “administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers.” He said it reminded him of “misleading” claims that General Motors had paid back its rescue loans with interest ahead of schedule.

P.S. Allow me to preempt some emails from people who will argue that TARP was a necessary evil. Even for those who think the financial system had to be recapitalized, there was no need to bail out specific companies. The government could have taken the approach used during the S&L bailout about 20 years ago, which was to shut down the insolvent institutions. Depositors were bailed out, often by using taxpayer money to bribe a solvent institution to take over the failed savings & loan, but management and shareholders were wiped out, thus  preventing at least one form of moral hazard.

What Gets You Most Upset about the TARP Bailout, the Lying, the Corruption, or the Economic Damage? is a post from Cato @ Liberty - Cato Institute Blog

Recall the unionists’ siege of the Maryland banker’s home the other day? Perhaps it was inspired in part by this screed on the world financial crisis that appeared a little while back on the blog New Deal 2.0, published by the left-leaning Franklin and Eleanor Roosevelt Institute. Other advice in the same piece on how to handle execs from Goldman Sachs and similar investment banks: “Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.” And: “Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed.”

Tongue in cheek-ism, evidence of a genuine impulse to dispense with the rule of law, or some of both? Well, judge for yourself, bearing in mind what sorts of rhetoric serve in accusing, say, the Tea Party movement of extremism and worse. The “braintrusters” roster of the Roosevelt Institute, incidentally, boasts such respectables as Jonathan Alter, Hendrik Hertzberg, appeals court nominee Goodwin Liu, Joseph Stiglitz and Sean Wilentz.

As part of a symposium the other day, the recently launched blog Think Tanked asked me to help define what a think tank is and what it should do. My advice on the latter was to “let ‘em rip” — the scholars and thinkers, that is — but maybe in the case of the Roosevelt Institute I’d advise making an exception.

‘Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel.’ is a post from Cato @ Liberty - Cato Institute Blog

The Washington Post offers an instructive campaign finance story this morning. The essence of the story: employees of banks and brokerage houses contributed more to candidate Barack Obama in 2008 than to his rival John McCain. A lot more in fact: such employees gave almost twice as much to the current president at they did to the Arizona senator.

Now, however, President Obama is attacking the banks and Wall Street for greed and selfishness, not to mention for ruining the economy. Moreover, Obama is proposing curbs on Wall Street pay and heavy regulation of banks. It would appear, in other words, that contributions don’t buy many favors with this administration.

But the story goes deeper. Wall Street is now shifting its contributions to the GOP.  That’s not surprising. In fact, being an intelligent man, President Obama must have known his attacks on Wall Street might deprive his party of contributions. Yet, he went forward with the attacks and proposed laws.

Why? In the coming election, contributions will matter a lot less than votes. Obama thinks his attacks on Wall Street will cast the Democrats as the party of “us” against the detested “them.” The votes gained will greatly outweigh the donations lost. The currency of politics is votes in the market for election.

The next time someone tells you that donations are “legalized bribery,” ask them why Obama took $18 million from Wall Street and gave them in return endless abuse and hostile legislation.

Quid pro quo, indeed.

A Campaign Finance Lesson is a post from Cato @ Liberty - Cato Institute Blog

"Father of the Individual Mandate" Mitt Romney

The former nickname came from National Journal or The Wall Street Journal, I’m not sure which.  The latter nickname comes from Institute for Health Freedom president Sue Blevins.

See here for details on an upcoming event in Dallas where Goodman’s National Center for Policy Analysis will play host to Romney.

It should be an interesting event.  With all 40 Republican members of the U.S. Senate, including moderates like Sen. Olympia Snowe (R-ME), voting to declare an individual mandate unconstitutional…with 35 states moving legislation to block an individual mandate…with the Heritage Foundation rebuking an individual mandate…and with Virginia’s Democratically controlled Senate approving legislation to block an individual mandate…well, Romney may have a tough road to hoe with the conservatives who typically attend NPCA events.

‘Father of HSAs’ John Goodman Plays Host to ‘Father of the Individual Mandate’ Mitt Romney is a post from Cato @ Liberty - Cato Institute Blog

Yesterday, Cato released a new study, “The Massachusetts Health Plan: Much Pain, Little Gain,” which showed that official estimates overstate the gains in health insurance coverage resulting from a 2006 Massachusetts law by at least 45 percent.  The study also finds: supporters understate the law’s cost by nearly 60 percent; government programs are crowding out private insurance; self-reported health improved for some but fell for others; and young adults are responding to the law by avoiding Massachusetts.

Given that the Massachusetts health plan bears a “remarkable resemblance” to the Obama plan, the study should serve as a warning sign to members of Congress, says Michael Cannon, director of health policy studies.

The study has received coverage in Investor’s Business Daily, The Wall Street Journal, The Washington Post, Detroit News, The Washington Times, the Reason Foundation and the Pioneer Institute.

Trouble in Massachusetts is a post from Cato @ Liberty - Cato Institute Blog

• Nat Hentoff: If you’re looking for reform in Cuba, don’t rest your hopes on Raul Castro.

• Tim Carney, author of Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses gives the inside scoop on why big government is good for big business.

• The Patriot Act: What should go, and what should stay?

• Dear Poor People- “Please remain poor.” Sincerely, Obamacare.

• Podcast: “Obamanomics in Health Care” featuring Tim Carney.

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

• The moral and constitutional case for gay marriage.

• The populists have it wrong. Why free trade and globalization are great blessings to  Americans and poor families around the world.

• How Obama’s plan for health care will affect medical innovation in America: “Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a ‘public option’ or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.”

• Register now for the upcoming Cato forum featuring author Tim Carney and his new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. Buy the book, here.

• Podcast: “Shoes, Undies and Airplane Security” featuring Jim Harper.

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

I was just listening to the December CatoAudio interview with Tom Palmer and Ian Vasquez about the fall of the Soviet empire 20 years ago, and Tom mentioned that even as late as October 7, 1989, when the East German government held a gala celebration of its 40th year in power, no one anticipated that within a month the Wall would open and communism would come to an abrupt end in eastern Europe.

And then I looked at the predictions of various scholars and pundits at Politico’s Arena one year ago today and noticed how wrong most of them were — Terry McAuliffe would be elected governor of Virginia, Rod Blagojevich would still be governor in April, Iran would test a nuclear weapon, several Republican members of Congress would switch to the Democratic Party (!), Justice Stevens would retire. No one predicted the surge of small-government, anti-spending sentiment, which was arguably the top political story of 2009.

And then, looking up who said “Nobody knows anything” (screenwriter William Goldman, about Hollywood), I stumbled on this blog post from October 2008:

I pulled from my desk drawer a copy of the Wall Street Journal from Wednesday, May 23, 2007.

It was not a particularly notable day.  The bull market was in force, and the Dow was hitting new highs … even though gasoline prices were at record levels.  But here at Cabot we had been noting a growing divergence in the market; both the NYSE Advance-Decline Line and the Nasdaq had failed to confirm the Dow’s high.  Also, we detected a high level of optimism among both investors and the general media.  So I saved The Wall Street Journal, in part because of the lead article that announced, “Why Market Optimists Say This Bull Has Legs.”

The subhead of the article followed with, “They See Decade of Gain Fed by Global Growth; Skeptics Cite Big Doubts.”…

So I reread the article and what did I find?  Fundamental talk about global growth, low interest rates and a technology revolution that would boost productivity.  [One bull] even had the courage to utter the phrase that makes an experienced investor quail, ” … it really is different this time.”

Also given ink were the detractors, who claimed that reversion to the mean was inevitable, that low interest rates couldn’t last, and that the weak dollar and above-average P/E ratios would eventually pull the market down.

But here’s what I found interesting (in hindsight):  Not once in the entire article did anyone mention credit!!!

Today, we know from our rearview mirror that credit was the culprit of a decline that has crushed the global financial system.  But just 17 months ago, a reporter looking for reasons the bull might not last found no one mentioning credit!

All of which is to explain why you’re not going to find any predictions for 2010 in this post.

Predictions for 2010 is a post from Cato @ Liberty - Cato Institute Blog

• Helping out the “Wall Street fat cats:” Bankers are responding to the incentives generated by the economic policies of the Treasury and the Federal Reserve.

• How charter schools can save states big education dollars.

• Doug Bandow:  “Congress has spent the country blind, inflated a disastrous housing bubble, subsidized every special interest with a letterhead and lobbyist, and created a wasteful, incompetent bureaucracy that fills Washington. But now, legislators want to take a break from all their good work and save college football.”

• In case you missed it last week, watch Cato’s Jerry Taylor on the premier episode of Stossel.

• Podcast: “Urban Planners Romanticize Immobility“

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

Today’s Politico Arena asks:

The WH Jobs Summit: “A little less conversation? A little more action? ( please)”

My response:

Today’s White House ‘Jobs Summit’ is a post from Cato @ Liberty - Cato Institute Blog

This past week witnessed continued debate in congressional committees over changes to our financial regulatory system.  Perhaps catching the most attention was Fed Chairman Ben Bernanke’s appearance before House Financial Services. 

Sadly missing from all the noise this week was any discussion over reforming those entities at the center of the housing bubble and mortgage meltdown:  Fannie Mae and Freddie Mac.

While many, including Bernanke, have identified the “global savings glut” as a prime force behind the historically low interest rates that drove the housing bubble, often missed in this analysis is the critical role played by Fannie and Freddie as channels of that savings glut.  After all, the Chinese Central Bank was not plowing its reserves into Countrywide stock; it was putting hundreds of billions of its dollar reserves into Fannie and Freddie debt.  Fannie and Freddie were the vehicle that carried excess world savings into the United States.

Had this massive flow of global capital been invested in productive activities, or even just prime mortgages, it is unlikely tha we would have seen such a large housing bubble.  Instead, what did Fannie and Freddie do with its Chinese funds?  It invested those funds in the subprime mortgage market.  At the height of the bubble, Fannie and Freddie purchased over 40 percent of private-label subprime mortgage-backed securities.  Fannie and Freddie also used those funds to lower the underwriting standards of the “prime” whole mortgages it purchased, turning much of the Alt-A and subprime market into what looked to the world like prime mortgages.

Given the massive leverage (at one point Freddie was leveraged 200 to 1) and shoddy credit quality of mortgages on their books, why were the Chinese and other investors so willing to trust their money to Fannie and Freddie?  Because they were continually told by U.S. officials that their losses would be covered.  At the end of the day, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking any losses on its Fannie/Freddie investments.  Adding insult to injury is the fact that the Chinese accumulated these large dollar holdings in order to suppress the value of their currency, enabling Chinese products to be more competitive with American-made products.

While foreign investors have been willing to put considerable money into Wall Street, without the implied guarantees of Fannie and Freddie, trillions of dollars of global capital flows would not have been funneled into the U.S. subprime mortgage market.  As Washington seems intent on continuing to mortgage America’s future to the Chinese, that at minimum it seems that fixing Fannie and Freddie might help insure that something more productive is done with that borrowing.

Fixing Fannie Is Essential is a post from Cato @ Liberty - Cato Institute Blog

Was it just me, or did there seem to be a whole lot of applause during Obama’s Wall Street speech?  Remember this was a room full of Wall Street executives.  The President even started by thanking the Wall Street execs for their “warm welcome.”

While of course, there was the obligatory slap on the wrist, that “we will not go back to the days of reckless behavior and unchecked excess,” but there was no mention that the bailouts were a thing of the past.  Indeed, there is nothing in Obama’s financial plan that would prevent future bailouts, which is why I believe there was such applause.  The message to the Goldman’s of the world, was, you better behave, but even if you don’t, you, and your debtholders will be bailed out.

The president also repeatedly called for “clear rules” and “transparency” – but where exactly in his plan is the clear line dividing who will or will not be bailed out?  That’s the part Wall Street loves the most; they can all say we’ve “learned the lesson of Lehman:  Wall Street firms cannot be allowed to fail.”  At least that’s the lesson that Obama, Geithner and Bernanke have taken away.  The truth is we’ve been down this road before with Fannie and Freddie.  Politicians always called for them to do their part, and that their misdeeds would not be tolerated.  Remember all the tough talk after the 2003 and 2004 accounting scandals at Freddie and Fannie?  But still they got bailed out, and what new regulations were imposed were weak and ineffective.

As if the applause wasn’t enough, as Charles Gaspario points out, financial stocks rallied after the president’s speech.  Clearly the markets don’t see his plan as bad for the financial industry.

It would seem the best investment Goldman has made in recent years was in its employees deciding to become the largest single corporate contributor to the Obama Presidential campaign.  That’s an investment that continues to yield massive dividends.

Why Wall Street Loves Obama is a post from Cato @ Liberty - Cato Institute Blog

When Treasury Secretary Hank Paul proposed the bailout of Wall Street banks last September, I objected in part because the TARP meant that government connections, not economic merit, would come to determine how capital gets allocated in the economy. That prediction now looks dead on:

As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation’s political and financial capitals.

In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.

“In the old days, Washington was refereeing from the sideline,” said Mohamed A. el-Erian, chief executive officer of Pimco. “In the new world we’re going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly.”

Read the rest of the article; it is truly frightening. We have taken a huge leap toward crony capitalism, to our peril.

The Legacy of TARP: Crony Capitalism is a post from Cato @ Liberty - Cato Institute Blog

• 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.

• The economics of health care reform.

• 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?”

Monday Links is a post from Cato @ Liberty - Cato Institute Blog

While banks such as Goldman and J.P. Morgan have managed to find a way to re-pay the capital injections made under the TARP bailout, their reliance on public subsidies is far from over. The federal government, via a debt guarantee program run by the FDIC, is still putting considerable taxpayer funds at risk on behalf of the banking industry.  The Wall Street Journal estimates that banks participating in the FDIC debt guarantee program will save about $24 billion in reduced borrowing costs of the next three years. The Journal estimates that Goldman alone will save over $2 billion on its borrowing costs due to the FDIC’s guarantees.

One of the conditions imposed by the Treasury department for allowing banks to leave the TARP was that such banks be able to issue debt not guaranteed by the government.  Apparently this requirement did not apply to all of a firm’s debt issues.  These banks should be expected to issue all their debt without a government guarantee and be required to pay back any currently outstanding government guaranteed debt.

To add insult to injury, not only are banks reaping huge subsidies from the FDIC debt guarantee program, but the program itself is likely illegal.  The FDIC’s authority to take special actions on behalf of a failing ”systemically” important bank is limited to a bank-by-bank review.  The FDIC’s actions over the last several months to declare the entire banking system as systemically important is at best a fanciful reading of the law. 

The FDIC should immediately terminate this illegal program and end the continuing string of subsidies going to Wall Street banks, many of which are reporting enormous profits.

Out of the TARP, But Still on the Dole is a post from Cato @ Liberty - Cato Institute Blog

In today’s Wall Street Journal, Fed Chairman Ben Bernanke has outlined “The Fed’s Exit Strategy.” He tells the reader how the central bank will avoid an inflation of historic proportions resulting from all the money and credit it has injected into the economy. All of the strategies he outlines are technically feasible ways for the Fed to implement monetary restraint.

The op-ed has an air of a classroom exercise, however, rather than a practical central-bank strategy. Much of the article is devoted to explaining how the Fed can now pay interest on reserves, and how it could raise that interest rate so as to dissuade commercial banks from lending the reserves out. It could do that, but what would that rate need to be in order to meet a private bank’s threshold rate of return in normal economic times?

More importantly, the Fed has never lacked the technical tools to combat inflation. What it has so often lacked is the will to make tough decisions. And, quite frankly, it does not possess the information needed to fine-tune the economy in the way Chairman Bernanke imagines (a point made by Milton Friedman many years ago). Lack of will and lack of information combine to keep the Fed behind the curve. Its policy was too easy after 2001, and so it fueled the housing boom. It was late to recognize the turn in housing and the economy, and its policy was then too tight. If past is prologue, it will be late to implement its exit strategy.

The Fed Chairman has presented a laundry list of policy tools. What investors need is some assurance that the right tools will be used at the right moment. The mere promise of a policymaker to do the right thing has little credibility. There is no monetary rule in place, only the rule of a man.

Bernanke Rules? is a post from Cato @ Liberty - Cato Institute Blog