July 22, 2013 12:15 PM
Over the weekend, President Obama hailed the third anniversary of the enactment of the Dodd-Frank "financial reform." In his weekly radio address, the president also hailed the confirmation of Consumer Financial Protection Bureau Director Richard Cordray, which occurred last week after Senate Republicans caved to Majority Leader Harry Reid's "nuclear option" threat to end the filibuster.
The president began his address, "Three years ago this weekend, we put in place tough new rules of the road for the financial sector so that irresponsible behavior on the part of the few could never again cause a crisis that harms millions of middle-class families." And he concluded, "If we keep moving forward with our eyes fixed on that North Star of a growing middle class, I’m confident we’ll get to where we need to go."
Sorry, Mr. President, but just the opposite is true. Dodd-Frank has declared certain large financial institutions to be "Systemically Important Financial Institutions," enshrining too-big-to-fail in law. And the volumes of regulations emanating from the law's 2,500-plus pages have harmed community banks, credit unions, small businesses, farms and manufacturers that had nothing to do with the crisis.
Here are some articles my colleagues and I have written on Dodd-Frank's devastating toll as well as some its just plain silly, but still destructive, provisions:
July 22, 2013 12:11 PM
The government has spent vast sums of money promoting homeownership through subsidies, tax exemptions, and bailouts. For example, in prosperous Alexandria, Virginia, certain people who never saved up enough money for a down payment received interest-free loans from the federal government to enable them to make a down payment. They do not have to repay those loans until they sell their home. Thrifty people with savings were not eligible for such a handout, penalizing them for their thrift.
Supporters of taxpayer subsidies for homeownership falsely claim it promotes political stability and prosperity. But As George Mason University's Michael Greve notes, "there’s actually very little support that home ownership correlates with—let alone promotes—democratic stability. If anything, the data suggest that ownership rates are inversely correlated with political stability and the rule of law." Bankrupt, unstable Greece has a much higher homeownership rate than does the United States. Stable, prosperous Germany and Switzerland have much lower homeownership rates than the U.S. does. European countries facing fiscal crises, like Italy, Spain, and Portugal, have higher homeownership rates.
Similarly, The Washington Post reports that a recent study found that "higher levels of homeownership can kill jobs":
Andrew Oswald and Dartmouth’s David G. Blanchflower have a brand new working paper (pdf) suggesting that homeownership has an even bigger and wider effect on unemployment than anyone has realized. Here are the key points:
"We find that rises in the home-ownership rate in a US state are a precursor to eventual sharp rises in unemployment in that state. …A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate."
. . .the authors argue that homeownership has a much broader — and negative — impact on the labor market as a whole.
Why is that? The authors find that higher levels of homeownership in a state appear to be associated with lower levels of labor mobility, higher commute times, and fewer new businesses created. Taken together, those three factors tend to increase the unemployment rate.
Anti-Business and Anti-Freedom: The United Nations Convention on the Rights of Persons with DisabilitiesMay 23, 2013 12:38 PM
In the American Spectator, CEI Vice President for Strategy Iain Murray and Geoffrey McLatchey explain why the Senate should be skeptical of the United Nations Convention on the Rights of Persons with Disabilities, which fell six votes short of the 67 needed for ratification last December. As they note, "the treaty would enable an enormous increase in the potential power of UN bureaucrats over the American people and undermine national sovereignty." Moreover, although "CRPD proponents argue that it merely reiterates existing U.S. disability law," this is simply false, based on the treaty's plain language.
It also delegates authority to a UN committee, they note, resulting in a "loss of U.S. sovereignty." UN committees like to define free speech as discrimination against minority groups in violation of international treaties, making it dangerous to ratify such treaties. For example, the U.N. Committee on the Elimination of Racial Discrimination has ruled Germany violated international law by not prosecuting a former legislator for remarks to a scholarly journal about Turkish-immigrant welfare recipients that were deemed racially offensive. The UN committee ruled Germany's failure to prosecute the speaker violated the International Convention on the Elimination of All Forms of Racial Discrimination.
May 9, 2013 2:46 PM
As state governments across the nation struggle to address a public pension underfunding crisis they can no longer deny, The Economist is the latest major news outlet to turn its gaze on the ongoing debacle. In the current issue, the magazine's "Buttonwood" column draws a sketch of U.S. public pension accounting that is not only dysfunctional, but that runs against plain common sense.
American public-sector schemes discount their liabilities by the expected return on their assets. The riskier the asset mix, the higher the assumed return—and the lower the bill appears to be.
This is an odd way of thinking. Suppose a car company borrowed $10 billion in the form of a 20-year bond to build a manufacturing plant and planned to pay off the debt with the profits from running the plant. The car company will assume a higher return on capital than its financing cost (otherwise it should not build the plant). But it still has to recognise the $10 billion bond liability on its balance-sheet. It cannot say it owes only $2 billion because it expects a very high return.
The reason is clear. If the plant fails to earn a high return, the firm will still be liable to repay the bond. Similarly, if pension schemes fail to earn a high return on their assets, they still have to pay benefits. Final-salary pensions are a debt-like liability.
The Buttonwood columnist (currently Philip Coggan) notes recent changes to the nation's largest public pension plan, the California Public Employee Retirement System (CalPERS), that would require greater employer contributions. But such changes will be ineffective in the long run unless they were to be accompanied by major reforms that address some of the structural factors that have made public pension shortfalls severe and chronic: payouts based on final-year pay, negotiation of benefits through collective bargaining, benefit increases through binding arbitration, politicized pension fund boards, and flawed accounting standards.
May 6, 2013 1:20 PM
In the Daily Caller, historian and presidential biographer Charles C. Johnson writes that "Housing nominee Mel Watt helped create the subcrime crisis.” Watt has been nominated by President Obama to be director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. As John Berlau discussed earlier, Watt's record also flunks privacy, transparency and government-accountability tests.
May 6, 2013 10:35 AM
In The Washington Post, Allan Sloan points out that while President Obama wants to cap American citizens' IRAs at $3 million or substantially less—discouraging saving and investment in the process—Obama's own-taxpayer-subsidized retirement benefits are worth more than twice as much, a generous $6.6 million. A sweet pension for me, but not for thee, seems to be Obama's thinking. Discussing the president's "proposal to limit the value of 401(k)s, pensions and other tax-favored retirement accounts to about $3.4 million" (or much less, as interest rates rise), Sloan notes that Obama want "to limit savers’ tax-favored accounts to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. . . .And that doesn’t include [his] IRA . . . Or the $18,000 (plus cost of living) a year he will get at age 62 for his service in the Illinois Senate."
He also notes that "the point at which Obama wants to eliminate the ability of you and your employer to deduct contributions to your retirement account isn’t actually the $3.4 million in his budget proposal—that’s just an estimate. The real number is how much a couple age 62 would have to pay for an annuity that yields $205,000 a year. That $3.4 million—which applies to the combined values of your pension and retirement accounts—is subject to a sharp downward change in the future because annuity issuers charge significantly less for an annuity when interest rates are higher than they do today, with rates at rock-bottom levels."
Obama has discouraged saving in other ways, such as raising taxes on capital gains and dividends, imposing a new Obamacare tax on investment income, and by giving costly bailouts to irresponsible people who, despite ample incomes, saved so little money that they could not "afford" more than a tiny downpayment, and thus ended up with negative equity on their home later on due to declines in the value of their home, qualifying them for the bailouts that certain favored underwater mortgage borrowers have received.
New York Times: Obama Administration Discrimination Settlement Was "Magnet For Fraud" That Enriched Trial LawyersApril 26, 2013 4:51 PM
A page 1 New York Times story today describes how the Obama administration, despite opposition from civil servants, radically expanded a legal settlement that had already become a "magnet for fraud," paying out vast sums of money over baseless claims of discrimination at the Agriculture Department in the Pigford case. As the Cato Institute's Walter Olson notes, its story "today breaks vital new details about how career government lawyers opposed Obama appointees’ insistence on reaching a gigantic settlement for claims of bias against female and Hispanic farmers in the operation of federal agriculture programs" over the objections of "career government lawyers." As the Times reports,
On the heels of the Supreme Court’s ruling [adverse to claimants and favorable toward USDA], interviews and records show, the Obama administration’s political appointees at the Justice and Agriculture Departments engineered a stunning turnabout: they committed $1.33 billion to compensate not just the 91 plaintiffs but thousands of Hispanic and female farmers who had never claimed bias in court.
The deal, several current and former government officials said, was fashioned in White House meetings despite the vehement objections — until now undisclosed — of career lawyers and agency officials who had argued that there was no credible evidence of widespread discrimination. What is more, some protested, the template for the deal — the $50,000 payouts to black farmers — had proved a magnet for fraud.
The ever-growing settlement became “a runaway train, driven by racial politics, pressure from influential members of Congress and law firms that stand to gain more than $130 million in fees.”
April 19, 2013 2:02 PM
Progressives have always assumed that if something is good, it must be provided through coercive force by a central government. This is illustrated in progressive support for continuing large Amtrak subsidies. Various liberal policy outfits including the Brookings Institution and the Center for American Progress have been recently celebrating the mild uptick in the government-subsidized passenger railroad’s ridership levels. The train served a record 32.1 million passengers in 2012, a 55-percent increase since 1997. In earlier times, liberal advocates would have congratulated themselves on the success of a government program’s drive to self-sufficiency and move to let it fend for itself in the private sector, in the same way federally controlled Conrail was privatized and later sold off to CSX and Norfolk Southern. But this doesn’t cut it for today’s progressives, who appear to believe Amtrak’s recent uptick in ridership is reason for increasing federal subsidies. This is because they are well aware that Amtrak’s supposed success is largely a mirage.
The rise in ridership appears impressive, until one realizes that 1997 was a severe low-point for train travel. If measuring Amtrak’s total passenger miles starting in 1991, its increase over the past 22 years is a pathetic 8 percent. Its condition looks even worse when considering that population growth has increased over this period by 25 percent, pushing Amtrak’s share of intercity passenger travel down from 0.45 to 0.36 percent. Passenger rail is alone in the dismal state of its ridership. Despite the airline industry’s financial instability, not to mention the costs incurred due to the September 11 attacks and the TSA, airline ridership increased by 68 percent. Even intercity buses carry three times more passenger miles than Amtrak does, while the vast majority of intercity travel is made by private automobile.
April 2, 2013 11:31 AM
American financial regulators could take a lesson from their European counterparts. The recent EU bail-in/bailout of Cyprus, despite its dangers, shows that reducing moral hazard in the banking industry without provoking bank runs is possible.
As I write in Forbes, Cyprus is one of the most insolvent Euro member states.
Non-performing loans [in Cyprus] (NPLs) are 15.5 percent of gross loans, which is comparable to Italy (13 percent), Ireland (19 percent), and even Greece (21 percent). But the real problem is Cyprus’s staggering inability to absorb losses. NPLs account for an enormous 264 percent of tier 1 capital—a level so high that not even basket case Greece, at 217 percent, can compare.
Cyprus got this way because of the risky actions of its banks, which were heavily invested in Greek debt. Once Greece hit the wall, so did the Cypriot banking system.
Unlike larger countries like France, Italy, and Spain, the little Mediterranean island’s fate does not have great effects upon the Euro in purely economic terms. But its precedent matters because markets extrapolate future EU actions (for example, what the EU will do when larger economies come under financial scrutiny) from present ones. Accordingly, Cyprus represented a low-stakes means through which to change expectations for the future. In February, before the drama and media hype surrounding Cyprus began, I wrote about this opportunity in the Global Post.
Europe should think twice before simply handing out a bailout package equal to the entire Cypriot economy.
As Ireland’s current plight shows, burdening the taxpayers to save the banks and bondholders imposes unnecessary and long-lasting pain. Once the European Union provides the stabilization funding needed to prevent Cypriot contagion to the rest of the euro zone, the EU ought to set a new precedent going forward: that inefficiency has the freedom to fail.
March 20, 2013 5:00 AM
There's no shortage of criticism of the Cyprus "bail-in" -- the one-time tax the government had proposed levying on insured and uninsured depositors to rescue the nations' banks.
And there is no shortage of criticisms that I could levy either on Cyprus and the EU's slapdash approach, which now looks like it will be rejected by the Cyprus parliament. The biggest being that the failing financial institutions should have been put through a bankruptcy system rather propped up -- whether through this levy or general taxation. Having said that, the initial Cyprus approach could have been much worse, and what comes next may be much more likely to spread contagion.
There is one fundamental thing the initial plan got right. Depositors must not be considered sacrosanct in a bank failure, and, conversely, a bank's contractual obligations to creditors such as bondholders cannot be ignored. The controversy should also open a much-needed debate about the role of ever-expanding deposit insurance in spreading moral hazard, as it encourages a lack of due diligence among customers of banks.