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OpenMarket: Banking and Finance

  • Dodd-Frank Is Obamacare for Non-Health Insurance

    July 7, 2014 1:48 PM

    “If you like your life, home, and auto insurance, you can keep them.”

    President Obama didn’t make this promise when he signed into law the Dodd-Frank financial overhaul on July 21, 2010, as he did regarding the health insurance law – Obamacare – that he signed into law a few months earlier that year. But as syndicated columnist Jay Ambrose points out, “if the Dodd-Frank regulatory law does what is now plotted, though he will still share responsibility for the insurance provision that, along with others, could bloody lots of noses.”

    As Dodd-Frank approaches its fourth anniversary, Obama is singing its praises. He told National Public Radio on July 2 that Dodd-Frank is “an unfinished piece of business, but that doesn't detract from the important stabilization functions” it has provided

    Yet even to lawmakers from Obama’s own party, this “financial reform” legislation is looking more and more like a destabilizing force – much like the so-called “reform” of health insurance. Even at the outset, there were many similarities. Both Obamacare and Dodd-Frank contained about 2,500 pages that were rammed through a Democrat-controlled House and Senate at breakneck speed. Because of the length of the law and speed of passage, many did not understand and/or hadn’t read the bills.

    Also as with Obamacare, unintended consequences of Dodd-Frank almost immediately began to surface. First, there was a sharp reduction in free checking due to the price controls on debit card transactions from the Durbin Amendment. Then, community banks and credit unions – including some with close to zero foreclosures – found the “qualified mortgage” rules so costly and complex that they slowed down or stopped altogether the issuance of new mortgages. Then, with regard to a provision with no plausible connection to sound banking and finance, domestic manufacturers found themselves having to trace back numerous materials they utilize to determine if they had originated as “conflict minerals” from the Congo.

    But the latest unintended consequence may be the one that bears the most striking similarity to Obamacare. Just as health insurance premiums and deductibles skyrocketed due to Obamacare’s many mandates, so too may those of life, home and car insurance due to provisions of Dodd-Frank. Life insurance rates alone could soar by $5 billion to $8 billion a year, according to the respected economic consulting firm Oliver Wyman. And as with Obamacare, choices of policies will be more limited and some policies may even be canceled.

  • Obama Drives Up Tuition at Taxpayer Expense by Expanding Pay As You Earn Program

    July 2, 2014 4:11 PM

    If you wanted to encourage wastefully run colleges to ratchet up their tuition at taxpayer expense, you couldn’t come up with a better way than the Obama administration’s recent expansion of the Pay As You Earn program. That program limits borrowers' monthly debt payments to 10 percent of their discretionary income. The balance of their loans is then forgiven after 20 years—or just 10 years, if the borrower works for the government or a nonprofit.

    It will cost taxpayers a bundle, while doing nothing for most student borrowers (who may experience tuition increases as a result), and it will favor imprudent borrowers over prudent borrowers. 

    Most students chose inexpensive colleges or otherwise borrowed modestly, meaning “the average graduate’s debt level of $27,000” is no more than “the price of a car.” They will not choose to participate in this program, since they would pay more, rather than less, by paying ten percent of their income for years, which could add up to much more than $27,000 over a 20-year period.

    But imprudent borrowers who borrowed much more than that, for a major that does not lead to a high-paying job, will now be able to limit their payments to a fixed percentage of their discretionary income, and then have the unpaid balance remaining after 20 years (or just 10 years, if they go to work in the federal bureaucracy) written off at taxpayer expense, no matter how huge the unpaid balance is.

  • Finance for the People

    June 19, 2014 9:49 AM

    Over at The Freeman, I take a look at how technology has been democratizing access to capital, bringing news ways of raising money to people who need it but don’t have it. I outline some of the many tools people now have for accepting, raising, or borrowing funds.

  • Ex-Im Reauthorization Fight: Release the Reagan

    June 19, 2014 9:46 AM

    The Export-Import Bank is up for reauthorization in September. If the vote fails in Congress, the Bank and its $140 billion portfolio will cease to exist. In an effort to appeal to free-market types who oppose Ex-Im, the Aerospace Industries Association is invoking Ronald Reagan. A page two ad in today’s Politico and an accompanying fact sheet sent to every member’s office on Capitol Hill prominently feature Reagan’s image and include quotes of the Gipper praising Ex-Im.

    The fact sheet even notes that Reagan increased the cap on Ex-Im’s lending portfolio by 14 percent from 1981-86, from $8.8 billion to $12 billion. Then again—Reagan cut Ex-Im in 1983 and again in 1988. And over Reagan’s entire time in office, Ex-Im’s cap actually shrank in real terms. You can check the numbers yourself with the Minneapolis Fed’s handy inflation calculator.

    And as Veronique de Rugy ably points out here and here, Reagan was no fan of the Export-Import Bank, and said so publicly (see also video evidence).

  • Questions for Richard Cordray

    June 18, 2014 8:39 AM

    This morning, Richard Cordray, head of the Consumer Financial Protection Board, testifies to a House Committee on the Board's semi-annual report. One of the Board's prime focuses has been the payday lending industry, which it was empowered to regulate by the Dodd-Frank Act of 2010 (and CEI has concerns about the way it is going about that).

    However, the industry is under a quite separate assault from the Department of Justice and other banking regulators, who are aggressively investigating the banks that provide its financial oxygen in an initiative known as Operation Choke Point. While the CFPB was involved at a very early stage, according to internal DOJ memos, it appears to have dropped out. Cordray should face some questions on this. Here are a few he perhaps should be asked:

    Q1: “You have said that you are aware of Operation Choke Point that the Department of Justice is coordinating ostensibly to investigate fraud among banks and payday lenders. Do you believe it is possible that such a broad sweep investigation as Choke Point might deter banks from doing business with legitimate payday lenders?”

    If Cordray answers in the negative, he should be shown the complaint recently filed in federal court by payday lenders. There is plenty of evidence this is happening.

  • Cantor’s Loss a Warning Shot to Supporters of Ex-Im Bank and Johnson-Crapo

    June 16, 2014 4:31 PM

    Defying conventional wisdom as he often does, Pulitzer prize-winning pundit George F. Will disputed the notion that in the wake of the shocking primary loss of House Majority Leader Eric Cantor (R-Va.), even less in Congress will get done.

    “I’ll tell you something that may get done now because of this and that is deauthorizing – refusing to reauthorize -- the Export-Import Bank.” Will said on “Fox News Sunday” (hat tip to National Review for providing the clip.)

    Will went on to state his view that “the Export-Import bank played as large a role in that election as immigration did.” Michael Barone also lists Cantor’s support of reauthorizing the Export-Import Bank as a reason for the stunning loss.  

    While political prognostication is admittedly not OpenMarket’s expertise, the Export-Import Bank – a government backstop for foreign businesses buying goods from large U.S. corporations -- does seem to fit the “cronyism” charges of Cantor’s victorious opponent Dave Brat.  And though not an issue in the Brat-Cantor race, the Senate Banking Committee’s GSE “reform” legislation known as Johnson-Crapo would fit that bill as well.

  • Laughing All the Way to the Export-Import Bank

    June 16, 2014 12:29 PM

    The Kronies are back with a video about the Export-Import Bank, one of the federal government’s largest corporate welfare programs. While the video is less than subtle, it makes the rent-seeking and deal-making surrounding the Bank very clear. Fortunately, the Bank’s charter expires on September 30 of this year. Ex-Im will cease to exist unless Congress votes to reauthorize it. CEI’s Iain Murray recently weighed in on the Ex-Im fight here.

  • When Hedge Funds Meet Pension Funds

    June 5, 2014 3:22 PM

    Are hedge funds dangerous? Depends on who you ask -- and where you look. For most investors, they're no riskier than other assets -- just ask Eastman Kodak shareholders. But this week, the Guardian featured a brief discussion of hedge funds that shines a light on type of investor whose involvement in hedge funds is more questionable: public pension funds seeking higher returns.

    The first essay -- subtly titled, "Hedge funds: the mysterious power pulling strings on Wall Street" -- provides more heat than light. Author Chris Arnade describes hedge funds as shadowy entities that thrive on secrecy as a means of exaggerating performance in order to earn lavish compensation for fund managers.

    The bottom line: investors, sophisticated or not, can't know in detail what many hedge funds are doing. But as long as the mystique exists, perhaps many don’t want to know.

    In his response, Timothy Spangler clears away some of Arnade's imaginary fog. As he explains, hedge fund manager compensation isn't all that mysterious.

    Hedge fund managers who earn large amounts of money from their clients do so for one simple reason. For every $1 of profit they earn on their client’s account, they get to keep 20 cents. This is called a performance fee. No profits, no performance fees.

    So the astute manager who turns $100 into $200 gets to keep $20 as compensation. The client gets his or her original $100 back plus the $80 of profit. No profit, no performance fees. Its fairly clear incentive arrangement and aligns interests between manager and client in an unambiguous way.

  • Johnson-Crapo Is Fannie and Freddie on Steroids

    May 15, 2014 8:10 AM

    foreclosed_33Today, after delays and much opposition from many quarters on different grounds, the Johnson-Crapo housing finance overhaul is set to be voted on by the Senate Banking Committee. If it clears, the vote will likely be narrow.

    The Competitive Enterprise Institute coordinated a letter opposing the legislation signed by 26 leaders of conservative and free-market groups. Here are four key reasons to why Johnson-Crapo, named for Senate Banking Chairman Tim Johnson (D-S.D.) and and Ranking Member Mike Crapo (R-Idaho), is such a monstrosity.

  • Johnson-Crapo Delayed; CEI-Coordinated Coalition Letter Cited as a Factor

    April 29, 2014 3:43 PM

    Today, in a surprise move, the Senate Banking Committee postponed the vote it had been set to mark up for Johnson-Crapo. Reports vary as to whether this bill is "dead on arrival" or coming up soon with amendments (mostly to bring around liberal Democrats).

    One thing is clear, though. The bill is losing momentum, and the proverbial Congressional clock is ticking.

    Today's delay is great news for ordinary American taxpayers and shareholders who would have been ripped off by Johnson-Crapo and its creation of the Federal Mortgage Insurance Corportation, or Feddie Mic. The Competitive Enterprise Institute (CEI) has for decades warned about the risk to taxpayers and the economy posed by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. In 2000, CEI founder and then-president (now chairman) Fred Smith warned in Congressional testimony that if anything went wrong, Fannie and Freddie could put taxpayers on the hook for $200 billion. Many thought he was exaggerating then, but he turned out to have underestimated it.

    Needless to say, we would support any true reform of the GSEs that reduces the government's role in the housing market. Unfortunately, after examining the Johnson-Crapo legislation, we have concluded it would actually make the situation worse. It replaces Fannie and Freddie with an even bigger government backstop in the form of the Feddie Mic, which could hold the bag for as much as 90 percent of losses from mortgage-backed securities.

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