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OpenMarket: Banking and Finance

  • Nationalizing Bitcoin?

    September 9, 2014 10:13 AM

    The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.

    Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.

    Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.

  • You’re a SIFI, Charlie Brown

    September 5, 2014 7:37 AM

    “Good grief!”

    That’s what the Charlie Brown, star of comic strip Peanuts and cartoon spokesman for the MetLife insurance firm, might say about the government’s actions against MetLife yesterday.

    The Financial Stability Oversight Council (FSOC), an unaccountable, secretive task force of financial bureaucrats created by the Dodd-Frank “financial reform” bill that was rammed through a Democrat-controlled Congress in 2010. Yesterday, FSOC designated MetLife as a “systemically important financial institution” or SIFI. This means that the federal government officially considers MetLife to be “too big to fail” and subject to the same Dodd-Frank bailout regime set up for banks.

    Many firms would see being tagged as a too-big-to-fail SIFI as a blessing. As CEI argues in our constitutional challenge to the FSOC, part of our comprehensive lawsuit against Dodd-Frank, the SIFI designation confers on a firm a strong competitive advantage, as investors know the government won’t let it fail. That’s why big banks and MetLife competitor AIG, who have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its great credit, has public stated it’s not too big to fail and does not want the special privileges that come with the SIFI status. MetLife’s Chairman and CEO Steven A. Kandarian declared publicly last year, “I do not believe that MetLife is a systemically important financial institution.”

    Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. And all it is asking for now is not a handout, but for the federal government to keep its hands off of the successful business model MetLife has utilized for decades to provide insurance to many satisfied customers.

  • Ex-Im Update

    September 3, 2014 5:23 PM

    Congress comes back from its annual August recess next week. One of the top items on its agenda is deciding the Export-Import Bank’s fate. Ex-Im subsidizes financing for U.S. exporters and their foreign customers. As I outlined here, Ex-Im subsidizes certain businesses at others’ expense. It is a pro-business policy, when what the economy needs are pro-market policies. Ex-Im will also be forced to shut its doors unless Congress reauthorizes its charter by the end of September, making for a golden reform opportunity for corporate welfare opponents.

    The merits of the issue are clear enough, but politics is getting in the way. A bill to reauthorizes Ex-Im’s charter would likely pass the Senate, but would have trouble getting through the House. This would ordinarily mean that Ex-Im opponents would succeed in shuttering the agency, since Ex-Im’s expiration is automatic without reauthorization. That means Ex-Im supporters will probably pursue other means, such as tucking Ex-Im’s reauthorization into a must-pass appropriations bill. Ex-Im opponents would have no choice but to swallow that poison pill, or risk another politically costly government shutdown.

  • Eric Holder Avenges Investor Fraud by Taking from Defrauded Investors

    August 22, 2014 1:54 PM

    “Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” declared a government official in a Department of Justice press release announcing yesterday’s record settlement in which Bank of America agreed to fork over $16.65 billion to settle charges it and companies it had purchased had deceived investors.

    Back in Washington from Ferguson, Mo., Attorney General Eric Holder announced at a press conference: “As part of this settlement, Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS [residential mortgage-backed securities] backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors.”

    Yet how much from this settlement goes to the investor victims? Nada! In fact, the settlement takes billions from the very investors who were defrauded.

    More than $9 billion from this settlement goes to the federal and various state government coffers. And, as Holder proclaimed at the press conference: “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue.”

    But whatever Bank of America’s misdeeds – and there were many by the company and those it purchased (Countrywide and Merrill Lynch) – it is certainly not “appropriate” to take from the investors the government itself says were victims to give to homeowners that the government never alleges were defrauded.

  • The Impending BitLicense and Premature Regulations

    August 19, 2014 3:19 PM

    Last month, the New York State Department of Financial Services (NYDFS) announced its proposed regulations for businesses engaged in “Virtual Currency Business Activity.”The Department defines these businesses as being involved in the following types of activities, according to provision 200.2n:

    “(1) receiving Virtual Currency for transmission or transmitting the same;

    (2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

    (3) buying and selling Virtual Currency as a customer business;

    (4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

    (5) controlling, administering, or issuing a Virtual Currency.”

    It is worth noting at the start that provision 200.3c2 would exempt “merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services,” from needing to obtain a license and thus being subject to these regulations. This is helpful, as otherwise these regulations would probably have prevented any widespread adoption of virtual currency by merchants. However, there are certain other non-consumer functions of virtual currencies that are not covered by this provision, such as charitable donation. It should therefore be broadened.

    The proposals were received with much skepticism and dismay among the virtual currency community, particularly after NYDFS head Benjamin Lawsky had said in January, “Our objective is to provide appropriate guardrails to protect consumers and root out money laundering -- without stifling beneficial innovation.” Unfortunately, the proposed regulations have provisions that will almost certainly stifle beneficial innovation while not doing much to protect consumers. Four provisions in particular stand out as problematic.

  • The Ex-Im Bank’s Unilateral Disarmament Fallacy

    August 12, 2014 12:12 PM

    One of the weakest arguments against free trade is the "unilateral disarmament" fallacy--that a country should refuse to liberalize its trade policies until other countries liberalize theirs. If your opponent uses it, you almost automatically win the debate. The Export-Import Bank's defenders must be getting desperate, because they are now having to resort to the unilateral disarmament fallacy. Here's a letter I sent to the Cleveland Plain-Dealer setting the record straight:

    Editor, Cleveland Plain-Dealer:

    George Landrith’s argument that the U.S. should subsidize certain businesses because other countries subsidize some of their businesses is equivalent to saying the U.S. government should stop ripping off its citizens only when foreign governments stop ripping off their own citizens (“Why keep the Ex-Im Bank? Unilateral economic disarmament is as unsound as unilateral defensive disarmament,” August 10).

    The Export-Import Bank’s special favors make U.S. businesses less competitive by rewarding political connections over customer service, and have led to 74 corruption allegations during the last five years. If other countries want such problems, fine. But the U.S. can, and should, do better by closing the Ex-Im Bank this fall, regardless of what other countries do.

    Ryan Young

    Fellow, Competitive Enterprise Institute

    Author of the study, “Ten Reasons to Abolish the Export-Import Bank.”

  • The Case for Closing the Export-Import Bank

    August 8, 2014 11:34 AM

    Over at American Banker’s BankThink blog, I have a piece making the case for closing the Export-Import Bank, mostly on corruption grounds:

    The Wall Street Journal reported on June 23 that four Ex-Im employees have been removed or suspended in recent months, "amid investigations into allegations of gifts and kickbacks."

    Former Ex-Im employee Johnny Gutierrez allegedly accepted cash payments from an executive of a Florida-based construction equipment manufacturer that has received Ex-Im financing on multiple occasions. In a July 28 congressional hearing, Gutierrez chose to plead the Fifth Amendment rather than deny the allegations. The other cases involve two "allegations of improperly awarding contracts to help run the agency" and another employee who accepted gifts from an Ex-Im suitor.

    Read the whole thing here. There are, of course, many other reasons to close Ex-Im. I compiled some of them in a paper here.

  • New Study Estimates around $70 billion in Financial Regulatory Costs

    July 31, 2014 7:00 PM

    Complying with regulations is part of the cost of doing business. For bigger businesses that can absorb those costs (or rather, pass them on to the consumer), it means armies of compliance officers and hefty fees. But for smaller businesses, like community banks, the costs can be so great that it means ceasing operation.

    Typically, this scenario works to the larger institutions’ advantage, as they are better placed to handle regulatory compliance costs than are their smaller competitors. But large financial institutions are also subject to certain regulations to which smaller banks are not. The Wall Street Journal cites a new study that estimates the cost to these larger banks of complying with these regulations at roughly $70 billion.

    Some of these costs are fair, such as, for example, premiums charged by the Federal Deposit Insurance Corp for insuring deposits. Others seem less fair, such as the $2.06 billion lost to interchange fee restrictions—which incidentally, have led to more and more banks to stop offering free checking in order to compensate for this loss of income. 

  • Bitcoin’s Undiscovered Potential

    July 28, 2014 9:58 AM

    A recent piece in American Banker magazine explores how Bitcoin and other cryptocurrencies can help the underprivileged, particularly the millions of unbanked people who do not have bank accounts. This is an area where digital currency could do much good.

    In fact, the online microfinancing platform Kiva has already begun a peer-to-peer service, known as Kiva Zip, whose model resembles some of the features in Bitcoin. Microfinancing is a form of lending for lower-income people that provides smaller loans than commercial banks are typically able to offer. Kiva Zip’s peer-to-peer structure means that users interact directly with each other, without administrators or other institutions acting as a middleman.

    Another service known as Swarm is already proposed to implement crowdfunding based on the Bitcoin protocol. Crowdfunding is a service where persons or companies propose a project or service they wish to develop and create a campaign to solicit funds for development. It is typical for campaigners to offer prize incentives for larger contributions, such as earlier access to the product or other perks.

    These new innovations represent just the initial adaptations of the Bitcoin protocol. In order for these technologies and services to continue to develop—and to help people—it is imperative that new regulations not be prematurely implemented. Otherwise, it will not be just Bitcoin businesses that suffer. Those at the bottom of the economic ladder could suffer as well, as they would lose precious opportunities to access capital.

  • Subprime Auto Concerns Caused by Government Intervention

    July 25, 2014 1:19 PM

    Should we worry about a crisis in subprime auto loans? That question has been asked in the financial media lately.

    My answer is yes, with caveats. While there are important differences in the auto and mortgage markets, there are similar government interventions that have the potential to fuel a bubble in car loans the same way they did for home loans.

    First, the differences. So far, thankfully, there is no auto equivalent of a Fannie Mae, Freddie Mac, or other government-sponsored enterprise to inflate the car loan market. Sure, there have been lots of bailouts in the auto industry in general, but the secondary market in car loans has developed largely on its own.

    And without a government backstop, it is much smaller than the mortgage market ever was. An otherwise alarmist front-page story this week by The New York Times conceded, “the size of the subprime auto loan market is a tiny fraction of what the subprime mortgage market was at its peak, and its implosion would not have the same far-reaching consequences.”

    Also, unlike with mortgages, there is no expectation among the vast majority of lenders of borrowers that a car’s value will appreciate. Most folks know that a car will be “underwater” the minute it is driven off the lot, and the loans are priced with that reality in mind.

    Yet, there are some striking similarities. But not the ones the NYT or other nannyists point to.

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