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OpenMarket: Subsidies and Bailouts

  • When Hedge Funds Meet Pension Funds

    June 5, 2014
    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...
  • Johnson-Crapo Is Fannie and Freddie on Steroids

    May 15, 2014
    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...
  • Johnson-Crapo Delayed; CEI-Coordinated Coalition Letter Cited as a Factor

    April 29, 2014
    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-...
  • CEI Podcast for April 23, 2014: Reforming Fannie and Freddie

    April 23, 2014
    Senior Fellow John Berlau argues that a bill from Senators Tim Johnson and Mike Crapo intended to reform Fannie Mae and Freddie Mac would only make things worse.
  • Johnson-Crapo Is Phony Fannie-Freddie Reform

    March 20, 2014
    Ever since the phrase appeared in Shakespeare's Romeo and Juliet, "A rose by any other name would smell as sweet," and its variations, have become familiar expressions. A corollary is that garbage by any other name would stink just as badly, if not worse. The latter phrase seems applicable to the "reform" of the government-sponsored housing enterprises Fannie Mae and Freddie Mac just introduced by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho). The media often describe this plan as "ending" Fannie and Freddie. And yes, it does "end" them in the sense that there will no longer be entities named Fannie and Freddie. But most of their functions would simply be transferred to a new giant government entity called the Federal Mortgage Insurance Corporation...
  • The "California Rule" and the "The Fall of Pacific Grove"

    March 6, 2014
    In my previous post, I described the "California rule," which puts state governments in a legal straitjacket when trying to reform underfunded public pensions. Specifically, it places pensions in a privileged position relative to other types of compensation, like salary or health insurance benefits, by making them more difficult to change. This post highlights a real-world example of the California rule's dangers. The place is Pacific Grove, California, a town of 15,000 residents on the Monterey Peninsula's northern tip, with an annual budget of $11 to $12 million. In 2008, John Moore, a Pacific Grove resident and retired attorney, learned that the City of Pacific Grove had issued $19 million of pension bonds two years earlier, while at the same time it gave the police union a 30%...
  • How the "California Rule" Holds Back Pension Reform

    March 5, 2014
    These days, local governments announcing bankruptcy seems like routine in California. Since the onset of the 2008 financial crisis, many state and local governments have seen their pension funds take huge losses. Yet, many of the underlying problems that have made pension shortfalls difficult to address go back many years -- more than half a century, in fact. One major reason public pensions have been so difficult to reform is their having a special legal status above other kinds of employee compensation. A new Federalist Society paper by Emory University law professor (and CEI alumnus) Alexander Volokh explains how this strange situation came to be and offers some ideas for reform. One of the most important developments in public pension policy occurred in 1955. That's when the California Supreme Court...
  • To Enact Pension Reform, Make Good Policy Good Politics

    March 5, 2014
    broken-piggy-bankIn my previous post, I looked at some basic principles that should guide state policy makers when tackling pension reform. Now, we turn to the politics. And in that regard, Rhode Island's 2011 pension reform offers a useful example for other states to consider. In his Brookings study, "Pension Politics: Public Employee Retirement...
  • Who Wants to See Their State Go Broke?

    March 5, 2014
    Few people would raise their hands when asked that question. But actually putting a state's financing on sound footing is difficult in practice. That makes Rhode 's Island's pension reform not only unique, but also a good example for other states to consider.  Rhode Island got not only the policy, but also the politics right, according to Drew University political science professor Patrick McGuinn in a new Brookings Institution study. In other words, how pension reform is accomplished is as important as what the reforms entail. In his study, McGuinn offers some sound principles on the politics -- the "how" -- of pension reform. Another new study, commissioned by the Society of...
  • "The bill doesn't come due until well after the legislators who wrote the check have left office"

    March 4, 2014
    Thus describes an Illinois state Senator the challenge states face in reforming their public employee pension systems. Given that reality, it's astounding reform would ever succeed. But succeed it has, in states with very large pension shortfalls that threaten to blow up their budgets. Staring into the financial abyss, it seems, can help politicians overcome their strong temptation to offer generous benefits to their supporters -- government employee unions in the case of pensions -- and passing off the bill to future generations. Yet, government unions will defend their benefits even in states in extreme financial distress, as the recent Rhode Island pension settlement shows. On February 14, Rhode Island officials reached an agreement to end six legal challenges to the state's 2011...

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