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  • FSOC Misunderstands Leverage, Threatens Risk Management

    April 27, 2016 9:43 AM

    The Financial Stability Oversight Council recently released its “Update on Review of Asset Management Products and Activities,” in which it questions “how certain asset management products and activities could pose potential risks to U.S. financial stability.”

    One aspect of the report focuses on hedge funds’ use of leverage, and the purported increase in risk associated with an increase in leverage:

    The relationship between a hedge fund’s level of leverage and risk, and whether that risk may have financial stability implications, is highly complex. Leverage is not a perfect proxy for risk, but there is ample evidence that the use of leverage, in combination with other factors, can contribute to risks to financial stability. These risks are likely to be greater if an elevated level of leverage is employed…

    While the report strikes an appropriately cautious tone about using leverage as a proxy for risk, and lists the shortcomings of such an approach, it also cautiously endorses this method of measuring risk, which was written into a proposed rule change by the SEC last December that would limit the amount of leverage 1940 Act funds may obtain through derivatives.

    The above passage quoted from the report refers to hedge funds, though the same logic drove the SEC’s proposed rule change that would affect other much more heavily regulated funds, including mutual funds and exchange traded funds. It is important to examine how this simplistic approach may potentially harm average investors if it is used to impose limits on the amount of borrowing by 1940 Act funds.

  • Business Leaders Mount the Barricades

    April 15, 2016 2:45 PM

    This has been a good week for capitalist backbone. As Kim Strassel discusses in the Wall Street Journal today, we’ve seen two high profile cases of the CEOs of large, prominent company give spirited defenses to the role of their firms in society. General Electric’s Jeff Immelt and Verizon’s Lowell McAdam both hit back against the charge that their firms were “destroying the moral fabric” of the country with greed.

    As Strassel goes on to emphasize, however, the categorical defense of business as a moral enterprise delivered by Immelt and McAdam is conspicuous by its rarity. Not only do most CEOs not stand up for capitalist virtue when they have the platform and opportunity, all too many of the nation’s blue chip corporate players have taken one of two unfortunate paths: they either “retreat into spinelessness” by not challenging expanding government control of the economy, or they actively jump into the cronyist game by lobbying for favorable treatment from government officials. Even Immelt of GE, who Strassel and others are rightly praising for his recent public comments, has a decidedly mixed history in this regard.

  • CEOs Confront Anti-Capitalist Rhetoric

    April 14, 2016 1:20 PM

    Another CEO of a big American company has spoken up about the charge that he and his employees are “destroying the moral fabric” of America. Lowell McAdam of Verizon, in a post at LinkedIn, answered the charges (also addressed recently by General Electric CEO Jeff Immelt) that his company doesn’t pay the appropriate amount of tax, doesn’t invest in the U.S., and, specifically in Verizon’s case, is trying to force inappropriate concessions on the unionized portion of its workforce.

    Today – as we have over our long history – Verizon provides good jobs for tens of thousands of Americans. We’re generating the profitable growth that allows us to invest in America and innovate for the future. More than that, we offer our employees the chance to contribute something vitally important to customers, businesses and the society as a whole by building the country’s best networks and delivering great communications services.

    But in return, we’re asking our represented employees to look at the facts and engage in an honest conversation about what needs to be done to ensure these opportunities will be around for future generations. We need our employees to partner with us in creating a sustainable, competitive and, yes, profitable company.

    To me, that’s just the moral thing to do.

  • How to Address Income Inequality

    April 11, 2016 2:31 PM

    Over at the Foundation for Economic Education, Iain Murray and I give a short preview of our two forthcoming CEI papers on income inequality and poverty relief.

    In the first, “People, Not Ratios: Priorities, Please,” we argue that inequality in itself is not the problem — poverty is.

    Piketty and Krugman’s focus on income inequality treats people like statistics. Instead, we should focus on individuals’ actual standards of living and on ways to empower them — as individuals — to improve their lot.

    In the second paper, “Policies to Help the Poor,” we suggest a policy agenda to make poor and middle-class individuals better off in absolute terms.

    Of course, the elimination of global poverty is a bigger topic than even the longest think tank policy paper can fully address, so we focus on some key regulatory actions that can have a significant impact, such as ensuring access to affordable energy, easing access to capital for entrepreneurs, ending minimum wages to create greater employment opportunities for the young and low-skilled, and repealing compulsory collective bargaining laws that hurt nonunion workers.

    Read the whole thing here; the papers will be released soon.

  • Is GE a Capitalist Good Guy or a Corporate Bad Guy?

    April 7, 2016 5:25 PM

    General Electric CEO Jeff Immelt has an interesting op-ed today in the Washington Post, hitting back against charges that his company is “destroying the moral fabric” of the country with a culture of corporate greed. The thrust of Immelt’s response is that, unlike politicians, companies like GE “create wealth and jobs, instead of just calling for them in speeches.”

  • Freedom of Contract at Risk in Carcano v. McCrory

    March 28, 2016 2:18 PM

    Virginia’s Dillon rule prevents cities and counties from regulating the employment practices of private businesses. That bars them from setting minimum wages higher than the state or federal minimum wage, or adding new protected classes of employees at businesses’ expense (through anti-bias ordinances). That is good for businesses, promotes freedom of contract, and prevents a confusing patchwork quilt of regulation that varies from city to city and county to county. It is also one reason why Virginia has a better than average business climate.

    North Carolina has now enacted legislation giving businesses the same protection (see, e.g., Section 143-422.2(c)). Unfortunately, it is part of House Bill 2, a statute that also addresses a contentious social issue, bathroom use by transgender people (it preempts an ordinance in the City of Charlotte giving people the right to use the bathroom of the gender they identify with, as opposed to their biological sex). CEI took no position on that legislation.

    A lawsuit has now been filed challenging not just the controversial bathroom provisions, but also the statute’s general preemption of local employment regulations, which is perfectly legal and constitutional. (See Carcano v. McCrory.)

  • UnChartered Cronyism: The FCC's Attempts to Block Cable Merger

    February 29, 2016 11:10 AM

    When you hear about “crony capitalism,” what comes to mind? The Export-Import Bank? The ethanol mandate? Fannie Mae and Freddie Mac? Tax credits and loan guarantees for “green energy”? These are all prime examples of government intervention enriching narrow yet politically savvy corporate interests at the expense of taxpayers and consumers. But many other pernicious forms of crony capitalism slide under the radar. A case in point: the Federal Communications Commission’s (FCC) vetting of media and telecom mergers, a highly politicized process that empowers a few unelected bureaucrats to shape the future of entire markets.

    Almost a year ago, the cable company Charter made a deal to purchase another cable company, Bright House Networks. Then, after the FCC decided to block another cable deal—Comcast’s attempted acquisition of Time Warner Cable (TWC)—Charter announced that it would buy TWC, in addition to Bright House. Now, nine months later, the FCC still hasn’t decided whether to let the Charter-TWC-Bright House merger go forward. Meanwhile, the satellite television carrier Dish Network, which competes against cable companies across the nation, has mounted a big push to persuade regulators to nix the Charter transactions.

    On March 2, when the Senate Commerce Committee holds an FCC oversight hearing, all five of the agency’s Commissioners will testify. Lawmakers should ask the FCC Chairman some tough questions about the Charter deal, among many other issues.

  • Market Dominance Doesn't Last; Regulation Shouldn't Either

    January 22, 2016 10:51 AM

    One of the justifications for heavy regulation of large companies is that they use market power to crush competition and maintain market dominance. Yet the history of America’s most successful companies—those that make it on to the Dow Jones Industrial Average (DJIA)—doesn’t support that theory. Sustainable competitive advantage is very hard to achieve, even for these titans of industry.

    If we look at the history of the DJIA, we can immediately identify several significant changes in its sectoral composition over the years.

    The DIJA was first published in 1884. It consisted of 11 companies, eight of which were railroad companies. The index was later expanded to 12 companies, before being expanded to 20 in 1916. The present Dow Jones Industrial Average began in 1928, when the list was lengthened once more from 20 to 30, consisting mostly of manufacturing companies and resource extraction companies such as Bethlehem Steel and Atlantic Petroleum (who?).

  • Three Economists Had the Answer to the President's Questions

    January 13, 2016 4:58 PM

    Last night at the State of the Union, the President asked three questions regarding domestic policy (I’ll leave the foreign policy question to others). They were:

    First, how do we give everyone a fair shot at opportunity and security in this new economy?

    Second, how do we make technology work for us, and not against us – especially when it comes to solving urgent challenges like climate change?

    And finally, how can we make our politics reflect what’s best in us, and not what’s worst?

    These three questions are best answered by three great economists, Joseph Schumpeter, Ronald Coase, and Friedrich Hayek.

  • Much to Be Thankful For

    November 25, 2015 12:00 PM

    Thanksgiving is tomorrow, and all of us have much to be thankful for. Over at Inside Sources, I have a Julian Simon-inspired take on the holiday:

    This Thursday is an opportunity to give thanks for a wonderful fact: In all of human history, there has never been a better time to be alive than right now. This might seem an odd thing to say at the moment. War, terrorism, poverty, political repression and hunger still plague many countries. The most recent wounds, inflicted in Paris, Syria, and elsewhere, are still fresh.

    But life is improving in unprecedented ways.

    Over the last century or so, the typical American’s income has grown sixfold. Life expectancy increased 30 years during the 20th century, from 47 years in 1900 to 77 in 2000. Infant mortality went down by more than 90 percent over that period, from roughly one in 10 to less than one in 100. Just think of all the broken hearts avoided. Nutrition and health care improved so rapidly that the typical American in 1950 was three inches taller than in 1900. Today’s Americans are taller still.

    Read the whole thing here.

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