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OpenMarket: December 2012

  • CEI's Battered Business Bureau: The Week In Regulation

    December 31, 2012 5:00 AM

    54 new regulations, from handling spearmint oil to drug testing railroad workers.

  • Europe 2013: A Primer

    December 28, 2012 2:48 PM

    As the New Year approaches, many challenges loom for Europe. Here’s a quick list of the toughest hurdles for 2013:

    1. Implementing the Single Supervisory Mechanism (SSM): Earlier this month, European leaders agreed to establish a supranational banking regulator for the member states of the European Union (EU). The European Central Bank (ECB) will directly supervise banks with assets greater than €30 billion or 20 percent of national GDP. National regulators, operating within the confines of the European regulatory framework, will oversee smaller banks within their respective countries. Although the SSM is scheduled to begin operation in March 2014, the actual regulations to be enforced are still unwritten. As political leaders hash out the specifics next year and attempt to harmonize national regulatory structures of EU member states into one single framework, tensions will run high. Calls for a common European deposit insurer or reinsurance scheme will likely be one of the political speed bumps, as Brussels insists and Germany resists. The drama this fall between EU leaders and the U.K., Sweden, and the Czech Republic (all opting out of the common regulator) was a taste of the future tension that implementing the European banking regulator will inevitably entail.

  • EPA Regulations Cost How Much?!

    December 28, 2012 2:20 PM

    Over at the Daily Caller, I summarize my recent CEI Regulatory Report Card on the EPA. Recommended if you don't feel like reading the entire document (though it is a mere six pages).

  • Community Reinvestment Act Induced Banks To Take Bad Risks, Economic Study Finds

    December 26, 2012 7:44 PM

    The Community Reinvestment Act, which "prods banks to make loans in low-income communities,” encouraged banks to make riskier loans, concludes a recent study from the National Bureau of Economic Research.

    As J.D. Tuccille at Reason notes, the federal government played

    a role in inducing, even strong-arming, banks to take risks they otherwise would have avoided. Specifically, the Community Reinvestment Act and related policy pressures are pointed to as culprits, part of a government effort to extend home-ownership in lower-income neighborhoods. Now comes a new study from the National Bureau of Economic Research that says, quite bluntly. that the CRA played a major role.

    In the academic world, mealy-mouthed delivery of even powerful conclusions is the norm, so it's refreshing to see authors Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru answer the title's question, "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?," with the clear, "Yes, it did. ... We find that adherence to the act led to riskier lending by banks." The full abstract reads:

    Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

    Investor's Business Daily does a very nice job of summarizing the nature of the pressure brought on lenders . . .“‘We want your CRA loans because they help us meet our housing goals,' Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. 'We will buy them from your portfolios or package them into securities.' She described 'CRA-friendly products' as mortgages with less than "3% down" and "flexible underwriting. "From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features."

    Tuccille is correct that beginning the article abstract with the certainty of "Yes, it did" is unusual for generally cautious academics. The conclusion is also worth highlighting, as the authors note their estimated impact of the CRA on lending risk "provide[s] a lower bound to the actual impact of the Community Reinvestment Act. If adjustment costs in lending behavior are large and banks can’t easily tilt their loan portfolio toward greater CRA compliance, the full impact of the CRA is potentially much greater than that estimated" in their study.

  • CEI's Battered Business Bureau: The Week In Regulation

    December 24, 2012 5:00 AM

    68 new regulations, from summer flounder fishing to switching contractors.

  • GM Stock Sale Doesn't End Damage Of Government Motors

    December 21, 2012 4:25 PM

    Below is my statement released today on the government's planned 15-month sale of its remaining General Motors stock:

    On Wednesday, the government announced a plan to sell its remaining stake in General Motors at an estimated loss to taxpayers of $12 billion. If the losses on General Motors Acceptance Corporation (GMAC) are included, the total probably rises to nearly $20 billion.

    It is good news the government is winding down its misguided involvement in Government Motors. It has announced an 15-month plan to divest its stock. It also is good news the auto industry is expanding – though most of the growth has been enjoyed by foreign automakers who have built plants in right-to-work Southern states and had nothing to do with the bailout.

    But there is nothing new or remarkable about businesses showing signs of improvement thanks to massive infusions of public dollars. We will never know how many small businesses may have survived, expanded or moved into more profitable lines of business had the government pursued a more pro-growth alternative to this massive government bailout. We hear a lot about jobs allegedly “saved or created” by this bailout. But in reality, we will never know how much farther along the road to recovery we might be if we had foregone this “investment” and lowered tax rates so entrepreneurs could invest, grow and hire.

  • France's Anti-Business Orthodoxy

    December 21, 2012 2:33 PM

    In France, running a productive business is not important. Simply creating jobs -- not wealth or innovation -- is the sole purpose of enterprise. At least, that’s the government’s mindset in economically stagnant France. And there’s a danger that this mental disease is spreading to America.

    Last month, the French government threatened to nationalize the country’s largest steelworks plant run by ArcelorMittal, after the multinational had idled its blast furnaces due to a 29-percent drop in demand over the past five years. The Socialist government gave ArcelorMittal an ultimatum: restart the furnaces and put French metalworkers back to work, or sell the plant to a buyer willing to fire up production (a tall proposition in the current economic climate). If the firm would chose neither of these options, the government would take the plant by force and resume production itself.

    ArcelorMittal and the French government reached a deal earlier this month, in which the furnaces would remain idle, but there would be no layoffs and the firm would sink 180 million euros of new investment into the unprofitable plant.

    Unions were outraged and accused Socialist President Francois Hollande of “betrayal.” He broke with the French orthodoxy of business’s inherent obligation to provide jobs regardless of cost.

    Today, the European branch of ArcelorMittal absorbed a write-down in its value totaling a whopping $4.3 billion. The steelmaker has been trying to get out of Europe and move to higher-demand regions like North America, but the strong arm of the French government is holding it back.

  • Fear The Regulatory Cliff, Not The Fiscal Cliff

    December 20, 2012 8:11 PM

    Economist Bruce Bartlett notes that by cutting the federal budget deficit, the much-feared fiscal cliff will actually increase the size of the economy in the long run, even though it will reduce "short-run" economic growth: "It’s too bad that misplaced fears about the fiscal cliff have taken off the table the option of simply letting all the automatic tax increases and spending cuts go into effect. While this would indeed reduce short-run growth, the Congressional Budget Office says the reduction in projected deficits would actually raise growth in the medium- and long-term (see pages 24-25 of the report)." The fiscal cliff is the combination of large tax increases and automatic spending cuts that will take effect next year unless they are canceled by Congress and the president. These measures will cut the deficit roughly in half.

    Canceling these deficit reductions would be bad, leading to increased national debt service costs in the future, which will crowd out private investment. While canceling them would "prevent disruptions to the economy in the very near term, it would lead to higher debt over the long term," thus reducing the size of the economy, notes the GAO.

    The tax increases contained in the fiscal cliff will be painful (they are large enough that they have been called "Taxmageddon”), and will reduce economic growth slightly over the long run, especially any increases in investment taxes on the middle class (although most of the tax increases will help shrink the deficit).

    But the automatic budget cuts contained in the fiscal cliff are essential and economically valuable. Those budget cuts will grow the economy in the long run, in addition to reducing the staggering size of America's national debt, and their negative impact on economic growth in the short run is exaggerated. The budget cuts are so valuable that they should not be canceled even as part of a deal to eliminate the tax increases. “The whole notion that federal cuts is going to push us into recession is nonsense,” Cato Institute budget policy expert Tad Dehaven says. “All that money that the federal government spends was taken or borrowed out of the economy to begin with.”  Spending cuts have helped the economy in the past – such as when America experienced an “economic boom” after our government slashed spending in 1946, and when Canada’s economy boomed after it slashed government spending in the 1990s. To get the deficit under control, we need to cut skyrocketing welfare spending, eliminate agricultural subsidies, trim unnecessarily high Pentagon spending, and reduce wasteful education spending. America can reduce military spending significantly without sacrificing national security. The Cato Institute has identified billions in readily achievable savings at the Pentagon.

  • Free Speech, The Disfavored Stepchild Of The Law

    December 20, 2012 4:15 PM

    In a recent column, George Will discussed how college students have been disciplined for racial or discriminatory "harassment" for constitutionally protected expression, such as reading a history book about ugly past racial events, or discussing unpleasant truths about racial or religious matters:

    In 2007, Keith John Sampson, a middle-aged student working his way through Indiana University-Purdue University Indianapolis as a janitor, was declared guilty of racial harassment. Without granting Sampson a hearing, the university administration — acting as prosecutor, judge and jury — convicted him of “openly reading (a) book related to a historically and racially abhorrent subject.” . . .

    The book, “Notre Dame vs. the Klan,” celebrated the 1924 defeat of the Ku Klux Klan in a fight with Notre Dame students. But some of Sampson’s co-workers disliked the book’s cover, which featured a black-and-white photograph of a Klan rally. Someone was offended, therefore someone else must be guilty of harassment. . .

    At Tufts, a conservative newspaper committed “harassment” by printing accurate quotations from the Quran and a verified fact about the status of women in Saudi Arabia. . . .

    In 2007, Donald Hindley, a politics professor at Brandeis, was found guilty of harassment because when teaching Latin American politics he explained the origin of the word “wetbacks,” which refers to immigrants crossing the Rio Grande. Without a hearing, the university provost sent Hindley a letter stating that the university “will not tolerate inappropriate, racial and discriminatory conduct.” The assistant provost was assigned to monitor Hindley’s classes “to ensure that you do not engage in further violations of the nondiscrimination and harassment policy.” Hindley was required to attend “anti-discrimination training.”

    Why does this sort of nonsense persist? One reason is that college administrators don't fear First Amendment lawsuits very much. If a state university violates the First Amendment, often it pays nothing for the violation. The Eleventh Amendment protects a state university from having to pay any monetary damages for such a violation. (The Supreme Court has said that Congress can waive Eleventh Amendment immunities to protect civil rights, but Congress has only done so for discrimination cases, not First Amendment cases.)

    State university officials -- as opposed to the university itself -- can be individually sued for First Amendment violations under 42 U.S.C. 1983, but they are protected by the defense of qualified immunity from having to pay any monetary damages at all, unless the court finds that they not only violated the First Amendment, but did so in a very clear way that was obviously unconstitutional under an appeals court's own past rulings, or past rulings by the Supreme Court -- any legal ambiguity, and they are protected against damages. (See, e.g., Reichle v. Howards, 132 S.Ct. 2088, 2094 (2012) (the right "violated must be established, not as a general proposition, but in a particularized sense"); Harrell v. Southern Oregon University, 474 Fed. Appx. 665 (9th Cir. July 20, 2012) (circuit court of appeals granted qualified immunity because "the appropriate speech standard for college and graduate students' speech remains an open question in this circuit"; First Amendment violation must be "sufficiently clear that every reasonable official would have understood" that it was illegal) (emphasis added).)

  • The Great California Government Union Swindle

    December 20, 2012 1:56 PM

    Are government employees overpaid? A six-part Bloomberg report answers that question with a resounding "Yes." It also singles out one state as the biggest spender by far: California. This isn't a case of a handful of isolated incidents. The team of Bloomberg reporters found a pattern of fiscal irresponsibility characterized by:

    • Lack of control in overtime pay and unused vacation time payouts;
    • Lack of coordination among state agencies which in one instance launched a costly salary bidding war for qualified personnel; and
    • Compensation for pension fund managers that bears little relation to performance.

    Government employee unions supported many of the policy changes that have led to the Golden State's current mess. During his first tenure (1975-1983), Governor Jerry Brown gave state employee unions the right to collectively bargain, greatly increasing their ability to gain more generous compensation -- which makes a Brown spokesman's assertion that, "Governor Brown is busy fixing the many problems that he inherited from past administrations” oddly ironic. (Interestingly, local government employees had been granted collective bargaining privileges by Brown's Republican predecessor, Ronald Reagan.)

    However, it would take the next Democratic governor to really put the state in hock to the government unions. In Gray Davis, the unions found a compliant ally willing to break the bank for them. It led to a public backlash against Davis, who in 2003 became the first U.S. governor in 82 years to be recalled by voters. But the damage had been done. In the first part of the series, Bloomberg's Mark Niquette, Michael B. Marois, and Rodney Yap note:

    One of the first goals of state employee unions when Davis took over in 1999 after 16 years of Republican governors was to unwind curbs on pensions put in place by Governor Pete Wilson in 1991. Workers also wanted broad wage increases.

    Unions persuaded the California Public Employees’ Retirement System to sponsor legislation called Senate Bill 400, which sweetened state and local pensions and gave retroactive increases for tens of thousands of retirees. Highway-patrol officers were granted the right to retire after 30 years of service with 90 percent of their top salaries, a benefit that was copied by police agencies across the state.

    California’s annual payment toward pension obligations ballooned to $3.7 billion in the current fiscal year from $300 million when the bill was enacted. Some cities that adopted the highway-patrol pension plan later cited those costs for contributing to their bankruptcy filings.

    But that was just the beginning.

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