Environmentalism as Religion. By PAUL H. RUBIN
While people have worshipped many things, we may be the first to build shrines to garbage.
WSJ, Apr 22, 2010
Many observers have made the point that environmentalism is eerily close to a religious belief system, since it includes creation stories and ideas of original sin. But there is another sense in which environmentalism is becoming more and more like a religion: It provides its adherents with an identity.
Scientists are understandably uninterested in religious stories because they do not meet the basic criterion for science: They cannot be tested. God may or may not have created the world—there is no way of knowing, although we do know that the biblical creation story is scientifically incorrect. Since we cannot prove or disprove the existence of God, science can't help us answer questions about the truth of religion as a method of understanding the world.
But scientists, particularly evolutionary psychologists, have identified another function of religion in addition to its function of explaining the world. Religion often supplements or replaces the tribalism that is an innate part of our evolved nature.
Original religions were tribal rather than universal. Each tribe had its own god or gods, and the success of the tribe was evidence that their god was stronger than others.
But modern religions have largely replaced tribal gods with universal gods and allowed unrelated individuals from outside the tribe to join. Identification with a religion has replaced identification with a tribe. While many decry religious wars, modern religion has probably net reduced human conflict because there are fewer tribal wars. (Anthropologists have shown that tribal wars are even more lethal per capita than modern wars.)
It is this identity-creating function that environmentalism provides. As the world becomes less religious, people can define themselves as being Green rather than being Christian or Jewish.
Consider some of the ways in which environmental behaviors echo religious behaviors and thus provide meaningful rituals for Greens:
• There is a holy day—Earth Day.
• There are food taboos. Instead of eating fish on Friday, or avoiding pork, Greens now eat organic foods and many are moving towards eating only locally grown foods.
• There is no prayer, but there are self-sacrificing rituals that are not particularly useful, such as recycling. Recycling paper to save trees, for example, makes no sense since the effect will be to reduce the number of trees planted in the long run.
• Belief systems are embraced with no logical basis. For example, environmentalists almost universally believe in the dangers of global warming but also reject the best solution to the problem, which is nuclear power. These two beliefs co-exist based on faith, not reason.
• There are no temples, but there are sacred structures. As I walk around the Emory campus, I am continually confronted with recycling bins, and instead of one trash can I am faced with several for different sorts of trash. Universities are centers of the environmental religion, and such structures are increasingly common. While people have worshipped many things, we may be the first to build shrines to garbage.
• Environmentalism is a proselytizing religion. Skeptics are not merely people unconvinced by the evidence: They are treated as evil sinners. I probably would not write this article if I did not have tenure.
Some conservatives spend their time criticizing the way Darwin is taught in schools. This is pointless and probably counterproductive. These same efforts should be spent on making sure that the schools only teach those aspects of environmentalism that pass rigorous scientific testing. By making the point that Greenism is a religion, perhaps we environmental skeptics can enlist the First Amendment on our side.
Mr. Rubin is a professor of economics at Emory University. He is the author of "Darwinian Politics: The Evolutionary Origin of Freedom" (Rutgers University Press, 2002).
Thursday, April 22, 2010
On Presidential Rhetoric
On Presidential Rhetoric. WSJ Editorial
Obama's ad hominem method and the politics of polarization.WSJ, Apr 22, 2010
President Obama came to office promising an era of political comity, but even he has had to concede that his first 15 months in office haven't lived up to his campaign hope of transcending partisan divisions. While it takes two to tangle, we think the hyper-polarization owes more than a little to Mr. Obama's own rhetorical habits. More than any President in memory, Mr. Obama has a tendency to vilify his opponents in personal terms and assail their arguments as dishonest, illegitimate or motived by bad faith.
A notable instance is Mr. Obama's ad hominem attack on Mitch McConnell at a California fundraiser for Barbara Boxer on Monday. The Senate Minority Leader "paid a visit to Wall Street a week or two ago," Mr. Obama said, and "met with some of the movers and shakers up there. I don't know exactly what was discussed. All I can tell you is when he came back, he promptly announced he would oppose the financial regulatory reform."
In other words, the Kentucky Republican is merely a mouthpiece for the bankers. Mr. Obama added that Mr. McConnell's objections to the bill were not merely "just plain false" but also "cynical"—and then he repeated the attack on motives at another event the following evening.
We can't recall anything close to this kind of language from, say, Ronald Reagan toward House Speaker Tip O'Neill, or even George W. Bush after Harry Reid called him a "liar." But it is an Obama staple.
A few hours after the Supreme Court's vindication of political speech last year in Citizens United, Mr. Obama called the decision "a major victory for Big Oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans."
He later personalized his criticism by rebuking the Justices as they sat in front of him during the January State of the Union, accusing them of reversing "a century of law to open the floodgates for special interests—including foreign corporations—to spend without limit in our elections." So the Justices, too, are mere tools of corporate interests. Don't expect many of them at next year's SOTU.
The President is especially fond of employing this blunt rhetorical force against business. In a December interview, Mr. Obama said he "did not run for office to be helping out a bunch of fat cat bankers on Wall Street. . . . They're still puzzled why it is that people are mad at banks. Well, let's see," he continued. "You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it's gone through in—in decades, and you guys caused the problem."
Amid the Beltway panic during the AIG bonus bonfire in March 2009, Mr. Obama played directly to the public anger. "This is a corporation that finds itself in financial distress due to recklessness and greed," said the President, and asked, "How do they justify this outrage to the taxpayers who are keeping this company afloat?"
He did the same with the Chrysler bondholders who had initially resisted the White House's bankruptcy terms that squeezed them in favor of the United Auto Workers. Mr. Obama characterized these investors in April 2009 as "a small group of speculators" who "were hoping that everybody else would make sacrifices, and they would have to make none." They quickly caved.
Likewise, in his September address to Congress on health care, Mr. Obama did not merely disagree with opponents but accused them of being "cynical and irresponsible," spreading "misinformation," and making "bogus," "wild" or "false" claims through "demagoguery and distortion."
He added that "If you misrepresent what's in this plan, we will call you out." He later singled out Anthem Blue Cross by name, describing the California insurer's behavior "jaw-dropping" in February after it attempted to raise consumer premiums.
Politics ain't beanbag, but most Presidents leave this kind of political attack to surrogates or Vice Presidents. Mr. Obama seems to enjoy being his own Spiro Agnew. A President may reap a short-term legislative gain from this kind of rhetoric, but he also pays a longer-term price in ill-will and needless polarization.
Presidents speak to all of America and they best build consensus through argument and persuasion—not by singling out political targets, cultivating resentment, questioning motives and mocking differences of principle or political philosophy. Mr. Obama's bellicosity is no more attractive than Sarah Palin's attempts to pit "the real America" against the big-city slickers. And his rhetorical method seems especially discordant coming from a President who still insists, in between these assaults, that he is striving mightily to change the negative tone of American politics.
If the President and his advisers are wondering why his approval ratings are falling even as the economy is recovering, they might look to his own divisive conduct and the contempt he too often shows for anyone who disagrees with him.
Obama's ad hominem method and the politics of polarization.WSJ, Apr 22, 2010
President Obama came to office promising an era of political comity, but even he has had to concede that his first 15 months in office haven't lived up to his campaign hope of transcending partisan divisions. While it takes two to tangle, we think the hyper-polarization owes more than a little to Mr. Obama's own rhetorical habits. More than any President in memory, Mr. Obama has a tendency to vilify his opponents in personal terms and assail their arguments as dishonest, illegitimate or motived by bad faith.
A notable instance is Mr. Obama's ad hominem attack on Mitch McConnell at a California fundraiser for Barbara Boxer on Monday. The Senate Minority Leader "paid a visit to Wall Street a week or two ago," Mr. Obama said, and "met with some of the movers and shakers up there. I don't know exactly what was discussed. All I can tell you is when he came back, he promptly announced he would oppose the financial regulatory reform."
In other words, the Kentucky Republican is merely a mouthpiece for the bankers. Mr. Obama added that Mr. McConnell's objections to the bill were not merely "just plain false" but also "cynical"—and then he repeated the attack on motives at another event the following evening.
We can't recall anything close to this kind of language from, say, Ronald Reagan toward House Speaker Tip O'Neill, or even George W. Bush after Harry Reid called him a "liar." But it is an Obama staple.
A few hours after the Supreme Court's vindication of political speech last year in Citizens United, Mr. Obama called the decision "a major victory for Big Oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans."
He later personalized his criticism by rebuking the Justices as they sat in front of him during the January State of the Union, accusing them of reversing "a century of law to open the floodgates for special interests—including foreign corporations—to spend without limit in our elections." So the Justices, too, are mere tools of corporate interests. Don't expect many of them at next year's SOTU.
The President is especially fond of employing this blunt rhetorical force against business. In a December interview, Mr. Obama said he "did not run for office to be helping out a bunch of fat cat bankers on Wall Street. . . . They're still puzzled why it is that people are mad at banks. Well, let's see," he continued. "You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it's gone through in—in decades, and you guys caused the problem."
Amid the Beltway panic during the AIG bonus bonfire in March 2009, Mr. Obama played directly to the public anger. "This is a corporation that finds itself in financial distress due to recklessness and greed," said the President, and asked, "How do they justify this outrage to the taxpayers who are keeping this company afloat?"
He did the same with the Chrysler bondholders who had initially resisted the White House's bankruptcy terms that squeezed them in favor of the United Auto Workers. Mr. Obama characterized these investors in April 2009 as "a small group of speculators" who "were hoping that everybody else would make sacrifices, and they would have to make none." They quickly caved.
Likewise, in his September address to Congress on health care, Mr. Obama did not merely disagree with opponents but accused them of being "cynical and irresponsible," spreading "misinformation," and making "bogus," "wild" or "false" claims through "demagoguery and distortion."
He added that "If you misrepresent what's in this plan, we will call you out." He later singled out Anthem Blue Cross by name, describing the California insurer's behavior "jaw-dropping" in February after it attempted to raise consumer premiums.
Politics ain't beanbag, but most Presidents leave this kind of political attack to surrogates or Vice Presidents. Mr. Obama seems to enjoy being his own Spiro Agnew. A President may reap a short-term legislative gain from this kind of rhetoric, but he also pays a longer-term price in ill-will and needless polarization.
Presidents speak to all of America and they best build consensus through argument and persuasion—not by singling out political targets, cultivating resentment, questioning motives and mocking differences of principle or political philosophy. Mr. Obama's bellicosity is no more attractive than Sarah Palin's attempts to pit "the real America" against the big-city slickers. And his rhetorical method seems especially discordant coming from a President who still insists, in between these assaults, that he is striving mightily to change the negative tone of American politics.
If the President and his advisers are wondering why his approval ratings are falling even as the economy is recovering, they might look to his own divisive conduct and the contempt he too often shows for anyone who disagrees with him.
Monday, April 19, 2010
Fannie and Freddie Amnesia - Taxpayers are on the hook for about $400 billion
Fannie and Freddie Amnesia. By PETER J. WALLISON
Taxpayers are on the hook for about $400 billion, partly because Sen. Obama helped to block reform.WSJ, Apr 20, 2010
Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.
The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.
Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.
The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.
One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.
These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.
The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.
Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.
Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."
He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.
With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?
Mr. Wallison is a senior fellow at the American Enterprise Institute.
Taxpayers are on the hook for about $400 billion, partly because Sen. Obama helped to block reform.WSJ, Apr 20, 2010
Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.
The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.
Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.
The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.
One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.
These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.
The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.
Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.
Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."
He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.
With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?
Mr. Wallison is a senior fellow at the American Enterprise Institute.
The SEC vs. Goldman - More a case of hindsight bias than financial villainy
The SEC vs. Goldman. WSJ Editorial
More a case of hindsight bias than financial villainy.
WSJ, Apr 19, 2010
The Securities and Exchange Commission's complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is?
After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world's most sophisticated investors about a single 2007 "synthetic" collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.
***
Let's deconstruct the supposed fraud, in which Goldman worked with hedge fund investor John Paulson, who wanted to bet on a decline in the subprime mortgage market. The SEC alleges that Goldman let Paulson & Co. dictate the mortgage-backed securities on which investors would speculate via the CDO, and then withheld from investors Paulson's role on the other side of the transaction.
The SEC also alleges that Goldman deceived ACA Management—a unit of the largest investor on the other side of the deal and the firm officially selecting which mortgage-backed securities everybody would bet on—into believing that Mr. Paulson was actually investing in an "equity" tranche on ACA's side of the deal.
Regarding the second point, the offering documents for the 2007 CDO made no claim that we can find that Mr. Paulson's firm was betting alongside ACA. The documents go so far as to state that an equity tranche was not offered by Goldman, as ACA must have known since it helped put the deal together and presumably read the documents. The SEC complaint itself states that ACA had the final word on which assets would be referenced in the CDO. And in some cases, ACA kicked out of the pool various assets suggested by the Paulson firm.
More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.
Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.
More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction.
Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett.
Not that there are any innocent widows and orphans in this story. Goldman is being portrayed as Mr. Potter in "It's a Wonderful Life," exploiting the good people of Bedford Falls. But a more appropriate movie analogy is "Alien vs. Predator," with Goldman serving as the referee. Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets.
IKB describes itself as "a leading investor in CDOs" and "a leading credit manager in the German market." ACA, for its part, participated in numerous similar transactions. The Journal reports that ACA was known for embracing more risk than its competitors, because, with a less-than-stellar credit rating, it had a higher cost of capital.
By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?
As for the role this trade played in the financial crisis, its main impact was transferring $1 billion from the long-side housing gamblers to Mr. Paulson. Ultimately, this meant big losses for the Royal Bank of Scotland, which acquired one of the long-side players after the transaction and had to be rescued by a capital injection from the U.K. government. But RBS made more than enough bad choices of its own that contributed to its failure. These hedge-fund trades make for entertaining tales of financial derring-do, but they are hardly the root of the panic.
***
Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage. "I'm pleased that the Obama Administration is using all of the tools in its arsenal to bring accountability to Wall Street and standing up for homeowners and small businesses across America," said Senate Majority Leader Harry Reid on Friday about the SEC case. "This is also why we need to pass strong Wall Street reform this year." Of course, this case matters to homeowners not at all.
We have had our own disputes with Goldman, and we've criticized the firm for its explanations of its dealings with AIG. We have also urged the Senate to rewrite its flawed financial regulatory-reform bill precisely because it would benefit Goldman and other giant banks with explicit bailout powers available to assist them. There are serious questions about the role of Goldman and other too-big-to-fail banks in the American financial market. Yet this case addresses none of these questions.
Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found.
More a case of hindsight bias than financial villainy.
WSJ, Apr 19, 2010
The Securities and Exchange Commission's complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is?
After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world's most sophisticated investors about a single 2007 "synthetic" collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.
***
Let's deconstruct the supposed fraud, in which Goldman worked with hedge fund investor John Paulson, who wanted to bet on a decline in the subprime mortgage market. The SEC alleges that Goldman let Paulson & Co. dictate the mortgage-backed securities on which investors would speculate via the CDO, and then withheld from investors Paulson's role on the other side of the transaction.
The SEC also alleges that Goldman deceived ACA Management—a unit of the largest investor on the other side of the deal and the firm officially selecting which mortgage-backed securities everybody would bet on—into believing that Mr. Paulson was actually investing in an "equity" tranche on ACA's side of the deal.
Regarding the second point, the offering documents for the 2007 CDO made no claim that we can find that Mr. Paulson's firm was betting alongside ACA. The documents go so far as to state that an equity tranche was not offered by Goldman, as ACA must have known since it helped put the deal together and presumably read the documents. The SEC complaint itself states that ACA had the final word on which assets would be referenced in the CDO. And in some cases, ACA kicked out of the pool various assets suggested by the Paulson firm.
More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.
Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.
More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction.
Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett.
Not that there are any innocent widows and orphans in this story. Goldman is being portrayed as Mr. Potter in "It's a Wonderful Life," exploiting the good people of Bedford Falls. But a more appropriate movie analogy is "Alien vs. Predator," with Goldman serving as the referee. Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets.
IKB describes itself as "a leading investor in CDOs" and "a leading credit manager in the German market." ACA, for its part, participated in numerous similar transactions. The Journal reports that ACA was known for embracing more risk than its competitors, because, with a less-than-stellar credit rating, it had a higher cost of capital.
By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?
As for the role this trade played in the financial crisis, its main impact was transferring $1 billion from the long-side housing gamblers to Mr. Paulson. Ultimately, this meant big losses for the Royal Bank of Scotland, which acquired one of the long-side players after the transaction and had to be rescued by a capital injection from the U.K. government. But RBS made more than enough bad choices of its own that contributed to its failure. These hedge-fund trades make for entertaining tales of financial derring-do, but they are hardly the root of the panic.
***
Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage. "I'm pleased that the Obama Administration is using all of the tools in its arsenal to bring accountability to Wall Street and standing up for homeowners and small businesses across America," said Senate Majority Leader Harry Reid on Friday about the SEC case. "This is also why we need to pass strong Wall Street reform this year." Of course, this case matters to homeowners not at all.
We have had our own disputes with Goldman, and we've criticized the firm for its explanations of its dealings with AIG. We have also urged the Senate to rewrite its flawed financial regulatory-reform bill precisely because it would benefit Goldman and other giant banks with explicit bailout powers available to assist them. There are serious questions about the role of Goldman and other too-big-to-fail banks in the American financial market. Yet this case addresses none of these questions.
Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found.
Thursday, April 8, 2010
Tokyo Rising
Tokyo Rising, by Ted Galen Carpenter
Cato, April 7, 2010
One very clear fact emerged from my recent meetings with officials and foreign-policy scholars in Australia and New Zealand: even though both countries have major economic stakes in their relationship with China, they are exceedingly nervous about the possibility of Chinese hegemony in East Asia. Since most of them also are reaching the (reluctant) conclusion that the United States will not be able to afford indefinitely the financial burden and military requirements of remaining the region's security stabilizer, a role the United States has played since the end of World War II, they are looking for other options to blunt China's emerging preeminence.
Increasingly, policy makers and opinion leaders in Australia and New Zealand seem receptive to the prospect of both India and Japan playing more active security roles in the region, thereby acting as strategic counterweights to China. That is a major shift in sentiment from just a decade or two ago. The notion of India as a relevant security player is a recent phenomenon, but there did not appear to be any opposition in Canberra or Wellington to the Indian navy flexing its muscles in the Strait of Malacca in the past few years. That favorable reaction was apparent even in vehemently anti-nuclear New Zealand, despite India's decision in the late 1990s to deploy a nuclear arsenal, which dealt a severe blow to the global nonproliferation cause.
Even more surprising is the reversal of attitudes regarding a more robust military role for Japan. When I was in Australia in the 1990s, scholars and officials were adamantly opposed to any move by Tokyo away from the tepid military posture it had adopted after World War II. The belief that Japan should play only a severely constrained security role—under Washington's strict supervision—was the conventional wisdom not only in Australia, but throughout East Asia.
And U.S. officials shared that view. Major General Henry Stackpole, onetime commander of U.S. Marine forces in Japan, stated bluntly that "no one wants a rearmed, resurgent Japan." He added that the United States was "the cap in the bottle" preventing that outcome. The initial draft of the Pentagon's policy planning guidance document, leaked to the New York Times, warned that a larger Japanese security role in East Asia would be destabilizing, and that Washington ought to discourage such a development.
U.S. policy makers appear to have warmed gradually to a more robust Japanese military stance. That was certainly true during the administration of George W. Bush, when officials clearly sought to make the alliance with Japan a far more equal partnership.
Yet some distrust of Japanese intentions lingers, both in the United States and portions of East Asia. The wariness about Japan as a more active military player is strongest in such countries as the Philippines and South Korea. The former endured a brutal occupation during World War II, and the latter still bears severe emotional scars from Tokyo's heavy-handed behavior as Korea's colonial master.
Even in those countries, though, the intensity of the opposition to Japan becoming a normal great power and playing a more serious security role is waning. And in the rest of the region, the response to that prospect ranges from receptive to enthusiastic. That emerging realism is encouraging. The alternative to Japan and India (and possibly other actors, such as Indonesia and Vietnam) becoming strategic counterweights to a rising China ought to be worrisome. Given America's gradually waning hegemony, a failure by other major countries to step up and be significant security players would lead to a troubling power vacuum in the region. A vacuum that China would be well-positioned to fill.
If China does not succumb to internal weaknesses (which are not trivial), it will almost certainly be the most prominent power in East Asia in the coming decades, gradually displacing the United States. But there is a big difference between being the leading power and being a hegemon. The latter is a result that Americans cannot welcome.
The emergence of a multipolar power system in East Asia is the best outcome both for the United States and China's neighbors. It is gratifying that nations in the region seem to be reaching that conclusion. Australia and New Zealand may be a little ahead of the curve in that process, but the attitude in those countries about the desirability of Japan and India adopting more active security roles is not unique. Washington should embrace a similar view.
Ted Galen Carpenter, vice president for defense and foreign-policy studies at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America (2008).
Cato, April 7, 2010
One very clear fact emerged from my recent meetings with officials and foreign-policy scholars in Australia and New Zealand: even though both countries have major economic stakes in their relationship with China, they are exceedingly nervous about the possibility of Chinese hegemony in East Asia. Since most of them also are reaching the (reluctant) conclusion that the United States will not be able to afford indefinitely the financial burden and military requirements of remaining the region's security stabilizer, a role the United States has played since the end of World War II, they are looking for other options to blunt China's emerging preeminence.
Increasingly, policy makers and opinion leaders in Australia and New Zealand seem receptive to the prospect of both India and Japan playing more active security roles in the region, thereby acting as strategic counterweights to China. That is a major shift in sentiment from just a decade or two ago. The notion of India as a relevant security player is a recent phenomenon, but there did not appear to be any opposition in Canberra or Wellington to the Indian navy flexing its muscles in the Strait of Malacca in the past few years. That favorable reaction was apparent even in vehemently anti-nuclear New Zealand, despite India's decision in the late 1990s to deploy a nuclear arsenal, which dealt a severe blow to the global nonproliferation cause.
Even more surprising is the reversal of attitudes regarding a more robust military role for Japan. When I was in Australia in the 1990s, scholars and officials were adamantly opposed to any move by Tokyo away from the tepid military posture it had adopted after World War II. The belief that Japan should play only a severely constrained security role—under Washington's strict supervision—was the conventional wisdom not only in Australia, but throughout East Asia.
And U.S. officials shared that view. Major General Henry Stackpole, onetime commander of U.S. Marine forces in Japan, stated bluntly that "no one wants a rearmed, resurgent Japan." He added that the United States was "the cap in the bottle" preventing that outcome. The initial draft of the Pentagon's policy planning guidance document, leaked to the New York Times, warned that a larger Japanese security role in East Asia would be destabilizing, and that Washington ought to discourage such a development.
U.S. policy makers appear to have warmed gradually to a more robust Japanese military stance. That was certainly true during the administration of George W. Bush, when officials clearly sought to make the alliance with Japan a far more equal partnership.
Yet some distrust of Japanese intentions lingers, both in the United States and portions of East Asia. The wariness about Japan as a more active military player is strongest in such countries as the Philippines and South Korea. The former endured a brutal occupation during World War II, and the latter still bears severe emotional scars from Tokyo's heavy-handed behavior as Korea's colonial master.
Even in those countries, though, the intensity of the opposition to Japan becoming a normal great power and playing a more serious security role is waning. And in the rest of the region, the response to that prospect ranges from receptive to enthusiastic. That emerging realism is encouraging. The alternative to Japan and India (and possibly other actors, such as Indonesia and Vietnam) becoming strategic counterweights to a rising China ought to be worrisome. Given America's gradually waning hegemony, a failure by other major countries to step up and be significant security players would lead to a troubling power vacuum in the region. A vacuum that China would be well-positioned to fill.
If China does not succumb to internal weaknesses (which are not trivial), it will almost certainly be the most prominent power in East Asia in the coming decades, gradually displacing the United States. But there is a big difference between being the leading power and being a hegemon. The latter is a result that Americans cannot welcome.
The emergence of a multipolar power system in East Asia is the best outcome both for the United States and China's neighbors. It is gratifying that nations in the region seem to be reaching that conclusion. Australia and New Zealand may be a little ahead of the curve in that process, but the attitude in those countries about the desirability of Japan and India adopting more active security roles is not unique. Washington should embrace a similar view.
Ted Galen Carpenter, vice president for defense and foreign-policy studies at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America (2008).
New START - Evaluating the U.S.-Russia Nuclear Deal
Evaluating the U.S.-Russia Nuclear Deal. By KEITH B. PAYNE
The White House and Kremlin can't seem to agree what's in it, but it appears to restrict U.S. missile defense efforts and has no limits on Russia's tactical nukes.
WSJ, Apr 08, 2010
Today President Obama will sign a new strategic arms reduction treaty with Russia. Official Washington is already celebrating the so-called New START Treaty in the belief that it reduces forces below the 2002 Moscow Treaty levels and "resets" U.S.-Russian relations in the direction of greater cooperation. But the new treaty—whose actual text and accompanying legal documents were not released before the signing ceremony in Prague—may not accomplish these goals.
The administration's "fact sheet," for example, claims that the treaty will reduce the number of strategic weapons to 1,550, 30% lower than the 2002 treaty. But New START has special counting rules.
For example, there are reportedly 76 Russian strategic bombers, and each one apparently can carry from six to 16 nuclear weapons (bombs and cruise missiles). Nevertheless, and unlike under the Moscow Treaty, these many hundreds of nuclear weapons would count as only 76 toward the 1,550 ceiling. Consequently, the New START Treaty includes the potential for a large increase in the number of deployed strategic nuclear weapons, not a reduction.
The administration claims, as Under Secretary of State Ellen Tauscher stated emphatically on March 29, that "There is no limit or constraint on what the United States can do with its missile defense systems . . . definitely, positively, and no way, no how . . ." Yet our Russian negotiating partners describe New START's constraints on missile defenses quite differently.
On March 30, Russian Foreign Minister Sergei Lavrov said in a press conference after the G-8 foreign ministers meeting in Canada that there are obligations regarding missile defense in the treaty text and the accompanying interpretive texts that constitute "a legally binding package." He also stated at a press conference in Moscow on March 26 that "The treaty is signed against the backdrop of particular levels of strategic defensive systems. A change of these levels will give each side the right to consider its further participation in the reduction of strategic offensive armaments." Kremlin National Security Council Secretary Sergei Prikhodko told journalists in Moscow on April 2 that "The United States pledged not to remodel launchers of intercontinental ballistic missiles and submarine-based ballistic missiles for firing interceptor missiles and vice versa."
The New START restrictions on missile defense as described by Russian officials could harm U.S. security in the future. For example, if the U.S. must increase its strategic missile defenses rapidly in response to now-unforeseen threat developments, one of the few options available could be to use Minuteman silo launchers for interceptors, either at California's Vandenberg Air Force Base or empty operational silos elsewhere. Yet, if the Russian description of New START is correct, doing so would be prohibited and the launchers themselves probably will be eliminated to meet the treaty's limitation on launchers. U.S. officials' assurances and Russian descriptions cannot both be true.
Another claim for New START is that possible concerns about the limitations on U.S. forces must be balanced against the useful limits on Russian forces. Yes, this argument goes, the U.S. will have to reduce the number of its strategic delivery vehicles—silos, submarine tubes and bombers—but in the bargain it will get the benefit of like Russian reductions.
This sounds reasonable. According to virtually all Russian sources, however, New START's agreed ceiling on strategic nuclear delivery vehicles will not require Russia to give up anything not already bound for its scrap heap.
The aging of its old Cold War arsenal and the pace of its strategic nuclear force modernization program means that Russia will remain under the New START ceiling of 700 deployed launchers with or without a new treaty. Whatever the benefit to the U.S. agreement to reduce its operational strategic force launchers, it is not to gain reciprocal Russian reductions. No such reciprocity is involved.
Some hope that New START's amicable "reset" in U.S.-Russian relations will inspire Russian help with other issues, such as the Iranian and North Korean nuclear programs, where they have been less than forthcoming. This is a vain hope, as is demonstrated by the past 40 years of strategic-arms control: Innovative strategic force agreements and reductions follow improvements in general political relations. They do not lead to them.
Finally, for many the great locus of concern about Russian nuclear weapons lies in its large arsenal of tactical (i.e., short-range) nuclear weapons. According to U.S. officials, Russia has a 10-to-one numeric advantage. In 2002, then Sens. Joe Biden and John Kerry, and the current White House Science Adviser, John Holdren, expressed great concern that the Bush administration's Moscow Treaty did not limit Russian tactical forces. One might expect, therefore, that New START would do so; but the Russians apparently were adamant about excluding tactical nuclear weapons from New START.
This omission is significant. The Russians are now more explicit and threatening about tactical nuclear war-fighting including in regional conflicts. Yet we still have no limitations on Russia's tactical nuclear arsenal. The problem may now be more severe than in 2002, but concern seems curiously to have eased.
This brief review is based on the many open descriptions of the treaty by U.S. and Russian officials. Given the apparent inconsistencies on such basic matters as whether the treaty requires weapon reductions or allows increases, or whether missile defenses are limited or untouched, the Senate will have to exercise exceptional care in reviewing the actual language of the treaty documents before drawing conclusions about their content.
Mr. Payne is head of the department of defense and strategic studies at Missouri State University, and a member of congressional Strategic Posture Commission.
The White House and Kremlin can't seem to agree what's in it, but it appears to restrict U.S. missile defense efforts and has no limits on Russia's tactical nukes.
WSJ, Apr 08, 2010
Today President Obama will sign a new strategic arms reduction treaty with Russia. Official Washington is already celebrating the so-called New START Treaty in the belief that it reduces forces below the 2002 Moscow Treaty levels and "resets" U.S.-Russian relations in the direction of greater cooperation. But the new treaty—whose actual text and accompanying legal documents were not released before the signing ceremony in Prague—may not accomplish these goals.
The administration's "fact sheet," for example, claims that the treaty will reduce the number of strategic weapons to 1,550, 30% lower than the 2002 treaty. But New START has special counting rules.
For example, there are reportedly 76 Russian strategic bombers, and each one apparently can carry from six to 16 nuclear weapons (bombs and cruise missiles). Nevertheless, and unlike under the Moscow Treaty, these many hundreds of nuclear weapons would count as only 76 toward the 1,550 ceiling. Consequently, the New START Treaty includes the potential for a large increase in the number of deployed strategic nuclear weapons, not a reduction.
The administration claims, as Under Secretary of State Ellen Tauscher stated emphatically on March 29, that "There is no limit or constraint on what the United States can do with its missile defense systems . . . definitely, positively, and no way, no how . . ." Yet our Russian negotiating partners describe New START's constraints on missile defenses quite differently.
On March 30, Russian Foreign Minister Sergei Lavrov said in a press conference after the G-8 foreign ministers meeting in Canada that there are obligations regarding missile defense in the treaty text and the accompanying interpretive texts that constitute "a legally binding package." He also stated at a press conference in Moscow on March 26 that "The treaty is signed against the backdrop of particular levels of strategic defensive systems. A change of these levels will give each side the right to consider its further participation in the reduction of strategic offensive armaments." Kremlin National Security Council Secretary Sergei Prikhodko told journalists in Moscow on April 2 that "The United States pledged not to remodel launchers of intercontinental ballistic missiles and submarine-based ballistic missiles for firing interceptor missiles and vice versa."
The New START restrictions on missile defense as described by Russian officials could harm U.S. security in the future. For example, if the U.S. must increase its strategic missile defenses rapidly in response to now-unforeseen threat developments, one of the few options available could be to use Minuteman silo launchers for interceptors, either at California's Vandenberg Air Force Base or empty operational silos elsewhere. Yet, if the Russian description of New START is correct, doing so would be prohibited and the launchers themselves probably will be eliminated to meet the treaty's limitation on launchers. U.S. officials' assurances and Russian descriptions cannot both be true.
Another claim for New START is that possible concerns about the limitations on U.S. forces must be balanced against the useful limits on Russian forces. Yes, this argument goes, the U.S. will have to reduce the number of its strategic delivery vehicles—silos, submarine tubes and bombers—but in the bargain it will get the benefit of like Russian reductions.
This sounds reasonable. According to virtually all Russian sources, however, New START's agreed ceiling on strategic nuclear delivery vehicles will not require Russia to give up anything not already bound for its scrap heap.
The aging of its old Cold War arsenal and the pace of its strategic nuclear force modernization program means that Russia will remain under the New START ceiling of 700 deployed launchers with or without a new treaty. Whatever the benefit to the U.S. agreement to reduce its operational strategic force launchers, it is not to gain reciprocal Russian reductions. No such reciprocity is involved.
Some hope that New START's amicable "reset" in U.S.-Russian relations will inspire Russian help with other issues, such as the Iranian and North Korean nuclear programs, where they have been less than forthcoming. This is a vain hope, as is demonstrated by the past 40 years of strategic-arms control: Innovative strategic force agreements and reductions follow improvements in general political relations. They do not lead to them.
Finally, for many the great locus of concern about Russian nuclear weapons lies in its large arsenal of tactical (i.e., short-range) nuclear weapons. According to U.S. officials, Russia has a 10-to-one numeric advantage. In 2002, then Sens. Joe Biden and John Kerry, and the current White House Science Adviser, John Holdren, expressed great concern that the Bush administration's Moscow Treaty did not limit Russian tactical forces. One might expect, therefore, that New START would do so; but the Russians apparently were adamant about excluding tactical nuclear weapons from New START.
This omission is significant. The Russians are now more explicit and threatening about tactical nuclear war-fighting including in regional conflicts. Yet we still have no limitations on Russia's tactical nuclear arsenal. The problem may now be more severe than in 2002, but concern seems curiously to have eased.
This brief review is based on the many open descriptions of the treaty by U.S. and Russian officials. Given the apparent inconsistencies on such basic matters as whether the treaty requires weapon reductions or allows increases, or whether missile defenses are limited or untouched, the Senate will have to exercise exceptional care in reviewing the actual language of the treaty documents before drawing conclusions about their content.
Mr. Payne is head of the department of defense and strategic studies at Missouri State University, and a member of congressional Strategic Posture Commission.
Tuesday, April 6, 2010
The Dodd Bill: Bailouts Forever
The Dodd Bill: Bailouts Forever. By PETER J. WALLISON AND DAVID SKEEL
The Lehman Brothers liquidation shows that bankruptcy works fine. The FDIC has no experience with such large institutions.WSJ, Apr 07, 2010
There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.
The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.
Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.
The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.
Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, "too big to fail" institution will only become that much larger.
When the FDIC can't find a buyer, it can usually transfer a failed bank's deposits to another bank, because deposits have real business value for banks. This is not true of the liabilities of large financial institutions, which consist of derivatives contracts, repurchase agreements, and other complex instruments that no one else is interested in acquiring.
The real choice before the Senate is between the FDIC and the bankruptcy courts. It should be no contest, because bankruptcy courts do have the experience and expertise to handle a large-scale financial failure. This was demonstrated most recently by the Lehman Brothers bankruptcy.
It didn't get a lot of media attention, but an important financial event occurred on March 15, when Lehman Brothers offered a blueprint for its reorganization and exit from Chapter 11—18 months to the day after it filed its bankruptcy petition. In the course of Lehman's resolution, its creditors, shareholders and management all took severe losses.
The firm's principal assets—its broker-dealer, investment-management and underwriting businesses—were all sold off to four different buyers within weeks of the filing of its petition. At the time of its failure, the firm had over 900,000 derivatives contracts, more than 700,000 of which were canceled and the rest either enforced or settled, if its creditors agreed, in the blueprint for the firm's reorganization.
The FDIC has no significant experience with broker dealers, investment management, securities underwriting, derivatives contracts, complex collateral arrangements for repos, or the vast number of creditors that had to be included in the Lehman settlement. Is it at all likely the agency could have done any better?
There is another lesson in the Lehman bankruptcy. Mr. Dodd claims his bill cures the too-big-to-fail problem because it requires the liquidation of a failing firm. But Lehman has been liquidated; what is left is a shell that may or may not struggle back to profitability.
The difference between the Lehman bankruptcy and what the Dodd bill proposes is important to understand. The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for. But if the creditors are to take most of the losses—as they did in Lehman—a fund isn't necessary.
Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. As Sen. Richard Shelby (R., Ala.) wrote in a March 25 letter to Treasury Secretary Tim Geithner, the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"
Mr. Shelby is right on target. It doesn't matter where the money comes from—whether it's the taxpayers or a fund collected from the financial industry itself. The question is how the money is used, and if it is used to bail out creditors of large firms—reducing their lending risks—it will encourage large firms to grow ever larger.
Like Fannie and Freddie, these large financial firms will be seen as protected by the government and, with lower funding costs, will squeeze out their Main Street competitors. Then, if these financial giants are on their way to failure, they are handed over for resolution to a government agency that has no experience with firms of this size or complexity. Surely the Senate will see the flaws in this idea.
Mr. Wallison is a senior fellow at the American Enterprise Institute. Mr. Skeel is a law professor at the University of Pennsylvania.
The Lehman Brothers liquidation shows that bankruptcy works fine. The FDIC has no experience with such large institutions.WSJ, Apr 07, 2010
There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.
The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.
Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.
The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.
Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, "too big to fail" institution will only become that much larger.
When the FDIC can't find a buyer, it can usually transfer a failed bank's deposits to another bank, because deposits have real business value for banks. This is not true of the liabilities of large financial institutions, which consist of derivatives contracts, repurchase agreements, and other complex instruments that no one else is interested in acquiring.
The real choice before the Senate is between the FDIC and the bankruptcy courts. It should be no contest, because bankruptcy courts do have the experience and expertise to handle a large-scale financial failure. This was demonstrated most recently by the Lehman Brothers bankruptcy.
It didn't get a lot of media attention, but an important financial event occurred on March 15, when Lehman Brothers offered a blueprint for its reorganization and exit from Chapter 11—18 months to the day after it filed its bankruptcy petition. In the course of Lehman's resolution, its creditors, shareholders and management all took severe losses.
The firm's principal assets—its broker-dealer, investment-management and underwriting businesses—were all sold off to four different buyers within weeks of the filing of its petition. At the time of its failure, the firm had over 900,000 derivatives contracts, more than 700,000 of which were canceled and the rest either enforced or settled, if its creditors agreed, in the blueprint for the firm's reorganization.
The FDIC has no significant experience with broker dealers, investment management, securities underwriting, derivatives contracts, complex collateral arrangements for repos, or the vast number of creditors that had to be included in the Lehman settlement. Is it at all likely the agency could have done any better?
There is another lesson in the Lehman bankruptcy. Mr. Dodd claims his bill cures the too-big-to-fail problem because it requires the liquidation of a failing firm. But Lehman has been liquidated; what is left is a shell that may or may not struggle back to profitability.
The difference between the Lehman bankruptcy and what the Dodd bill proposes is important to understand. The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for. But if the creditors are to take most of the losses—as they did in Lehman—a fund isn't necessary.
Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. As Sen. Richard Shelby (R., Ala.) wrote in a March 25 letter to Treasury Secretary Tim Geithner, the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"
Mr. Shelby is right on target. It doesn't matter where the money comes from—whether it's the taxpayers or a fund collected from the financial industry itself. The question is how the money is used, and if it is used to bail out creditors of large firms—reducing their lending risks—it will encourage large firms to grow ever larger.
Like Fannie and Freddie, these large financial firms will be seen as protected by the government and, with lower funding costs, will squeeze out their Main Street competitors. Then, if these financial giants are on their way to failure, they are handed over for resolution to a government agency that has no experience with firms of this size or complexity. Surely the Senate will see the flaws in this idea.
Mr. Wallison is a senior fellow at the American Enterprise Institute. Mr. Skeel is a law professor at the University of Pennsylvania.
Monday, April 5, 2010
RIP Michael Foot, a Socialist Who Understood What Socialism Was
“Michael Foot, a bookish intellectual and anti-nuclear campaigner who led Britain’s Labour Party to a disastrous defeat in 1983, died [March 3],” reported the Associated Press. He was 96.
And he wasn’t the only one. The American socialist Michael Harrington wrote, “World War I showed that, despite the claims of free-enterprise ideologues, government could organize the economy effectively.” He hailed World War II as having “justified a truly massive mobilization of otherwise wasted human and material resources” and complained that the War Production Board was “a success the United States was determined to forget as quickly as possible.” He went on, “During World War II, there was probably more of an increase in social justice than at any [other] time in American history. Wage and price controls were used to try to cut the differentials between the social classes. . . . There was also a powerful moral incentive to spur workers on: patriotism.”
Collectivists such as Foot and Harrington don’t relish the killing involved in war, but they love war’s domestic effects: centralization and the growth of government power. They know, as did the libertarian writer Randolph Bourne, that “war is the health of the state”—hence the endless search for a moral equivalent of war.
As Don Lavoie demonstrated in his book National Economic Planning: What Is Left?, modern concepts of economic planning—including “industrial policy” and other euphemisms—stem from the experiences of Germany, Great Britain, and the United States in planning their economies during World War I. The power of the central governments grew dramatically during that war and during World War II, and collectivists have pined for the glory days of the War Industries Board and the War Production Board ever since.
Walter Lippmann was an early critic of the collectivists’ fascination with war planning. He wrote, “A close analysis of its theory and direct observation of its practice will disclose that all collectivism. . . is military in method, in purpose, in spirit, and can be nothing else.” Lippman went on to explain why war—or a moral equivalent—is so congenial to collectivism:
Foot personified the socialist tendency in the Labour Party, which Tony Blair successfully erased when he won power at the head of a business-friendly, interventionist “New Labour.” Yet Foot remained a respected, even revered, figure.Michael Foot may have been the most serious intellectual ever to head a major Western political party. He wrote biographies of Labour politicians Aneurin Bevan and Harold Wilson, and of H.G. Wells, and a 1988 book on Lord Byron, “The Politics of Paradise,” and he edited the “Thomas Paine Reader” in 1987. So when you asked Michael Foot what socialism was, you could expect a deeply informed answer. And that’s what the Washington Post got in 1982, when they asked the Labour Party leader for an example of socialism in practice that could “serve as a model of the Britain you envision.” Foot replied,
“Michael Foot was a giant of the Labour movement, a man of passion, principle and outstanding commitment to the many causes he fought for,” Blair said Wednesday. Prime Minister Gordon Brown, Blair’s partner in creating “New Labour,” praised Foot as a “genuine British radical” and a “man of deep principle and passionate idealism.”
The best example that I’ve seen of democratic socialism operating in this country was during the second world war. Then we ran Britain highly efficiently, got everybody a job. . . . The conscription of labor was only a very small element of it. It was a democratic society with a common aim.Wow. Michael Foot, the great socialist intellectual, a giant of the Labour movement, a man of deep principle and passionate idealism, thought that the best example ever seen of “democratic socialism” was a society organized for total war.
And he wasn’t the only one. The American socialist Michael Harrington wrote, “World War I showed that, despite the claims of free-enterprise ideologues, government could organize the economy effectively.” He hailed World War II as having “justified a truly massive mobilization of otherwise wasted human and material resources” and complained that the War Production Board was “a success the United States was determined to forget as quickly as possible.” He went on, “During World War II, there was probably more of an increase in social justice than at any [other] time in American history. Wage and price controls were used to try to cut the differentials between the social classes. . . . There was also a powerful moral incentive to spur workers on: patriotism.”
Collectivists such as Foot and Harrington don’t relish the killing involved in war, but they love war’s domestic effects: centralization and the growth of government power. They know, as did the libertarian writer Randolph Bourne, that “war is the health of the state”—hence the endless search for a moral equivalent of war.
As Don Lavoie demonstrated in his book National Economic Planning: What Is Left?, modern concepts of economic planning—including “industrial policy” and other euphemisms—stem from the experiences of Germany, Great Britain, and the United States in planning their economies during World War I. The power of the central governments grew dramatically during that war and during World War II, and collectivists have pined for the glory days of the War Industries Board and the War Production Board ever since.
Walter Lippmann was an early critic of the collectivists’ fascination with war planning. He wrote, “A close analysis of its theory and direct observation of its practice will disclose that all collectivism. . . is military in method, in purpose, in spirit, and can be nothing else.” Lippman went on to explain why war—or a moral equivalent—is so congenial to collectivism:
Under the system of centralized control without constitutional checks and balances, the war spirit identifies dissent with treason, the pursuit of private happiness with slackerism and sabotage, and, on the other side, obedience with discipline, conformity with patriotism. Thus at one stroke war extinguishes the difficulties of planning, cutting out from under the individual any moral ground as well as any lawful ground on which he might resist the execution of the official plan.National service, national industrial policy, national energy policy—all have the same essence, collectivism, and the same model, war. War is sometimes, regrettably, necessary. But why would anyone want its moral equivalent?
Sunday, April 4, 2010
Beyond Bankruptcy And Bailouts - The FDIC resolution process is the right model for failing firms
Beyond Bankruptcy And Bailouts. By SHEILA BAIR
The FDIC resolution process is the right model for failing firms.WSJ, Monday, April 5, 2010
Meaningful reform of our financial regulatory system is finally within reach. The opportunity to pass such a comprehensive overhaul may not come again in our lifetimes.
Never again should taxpayers be asked to bail out large, failing financial firms. Unfortunately, we still lack a viable way to close financial behemoths without risking market collapse.
The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.
Financial institutions are unique in that their funding sources can dry up very quickly, disrupting credit flows to the real economy. Bankruptcy can abruptly sever those credit flows, which can cause an immediate systemic impact. The FDIC resolution process for insured banks provides continuity of credit functions, while liquidating the operations of a failing firm.
Over its 76-year history, the FDIC has handled thousands of resolutions of all manner of size and complexity. The FDIC resolution mechanism closes the institution and auctions it to the private sector, reallocating resources to stronger institutions. And it gives the government the right to repudiate executive contracts, eliminate bonuses, require derivatives counterparties to perform on their obligations, and impose losses where they belong: on shareholders and creditors.
Both the already passed House bill, as well as the bill approved by the Senate Banking Committee, draw on the FDIC model to create a resolution authority that specifically applies to large, complex nonbank financial firms. Under both bills, bankruptcy would be the normal process. But under extraordinary procedures, the government would have the option to put the very largest firms into an FDIC-style liquidation process if necessary to avert a broader systemic collapse.
As with banks, the legislation would allow the FDIC to create a temporary institution in order to allow continuity and prevent a systemic collapse while the firm is being liquidated. To provide working capital for this bridge, both bills would require the largest financial firms to pay assessments in advance so that taxpayers would not be at risk. The firms that pose the most risk would pay the most. This orderly liquidation process—funded by the firms themselves—would, for the first time, force these institutions to internalize the full costs of the risks they create.
The FDIC process can also facilitate pre-planning and international cooperation when a large, global financial entity gets into trouble. Given the conflicting bankruptcy regimes throughout the world, there is growing international consensus that we need a special liquidation process available as an alternative. Great Britain and the European Union are both seeking to construct special resolution mechanisms. The U.S. should draw on the FDIC's long experience and lead the way.
Some have tried to label the FDIC model as a "bailout" because it is not bankruptcy. Yet the FDIC process is anything but a bailout, as any small bank can attest.
Some are opposed to this reform because the creation of a realistic liquidation process would eliminate the funding advantage that the largest financial firms have. But these changes will strengthen the competitive position of smaller banks whose relative funding costs have grown significantly in the wake of the bailouts. Because of "too big to fail," markets assume that larger institutions do not face the same risk of failure as smaller ones. Real reform will put their shareholders and creditors on notice to do their own due diligence rather than rely on taxpayers.
The disruptions caused by forcing large, nonbank financial institutions through bankruptcy can create significant risks for the real economy, as we saw in the case of Lehman Brothers in the fall of 2008. The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way.
We support any constructive improvements to the legislation that will reinforce market discipline and preclude future bailouts, while providing the FDIC with the necessary tools to market and sell a failed institution in a way that maximizes recoveries and protects the government against loss. Any legislation must remove all doubt that bailouts are an option. Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favorable market funding these firms receive from their implicit government backing.
We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.
Ms. Bair is chairman of the FDIC.
The FDIC resolution process is the right model for failing firms.WSJ, Monday, April 5, 2010
Meaningful reform of our financial regulatory system is finally within reach. The opportunity to pass such a comprehensive overhaul may not come again in our lifetimes.
Never again should taxpayers be asked to bail out large, failing financial firms. Unfortunately, we still lack a viable way to close financial behemoths without risking market collapse.
The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.
Financial institutions are unique in that their funding sources can dry up very quickly, disrupting credit flows to the real economy. Bankruptcy can abruptly sever those credit flows, which can cause an immediate systemic impact. The FDIC resolution process for insured banks provides continuity of credit functions, while liquidating the operations of a failing firm.
Over its 76-year history, the FDIC has handled thousands of resolutions of all manner of size and complexity. The FDIC resolution mechanism closes the institution and auctions it to the private sector, reallocating resources to stronger institutions. And it gives the government the right to repudiate executive contracts, eliminate bonuses, require derivatives counterparties to perform on their obligations, and impose losses where they belong: on shareholders and creditors.
Both the already passed House bill, as well as the bill approved by the Senate Banking Committee, draw on the FDIC model to create a resolution authority that specifically applies to large, complex nonbank financial firms. Under both bills, bankruptcy would be the normal process. But under extraordinary procedures, the government would have the option to put the very largest firms into an FDIC-style liquidation process if necessary to avert a broader systemic collapse.
As with banks, the legislation would allow the FDIC to create a temporary institution in order to allow continuity and prevent a systemic collapse while the firm is being liquidated. To provide working capital for this bridge, both bills would require the largest financial firms to pay assessments in advance so that taxpayers would not be at risk. The firms that pose the most risk would pay the most. This orderly liquidation process—funded by the firms themselves—would, for the first time, force these institutions to internalize the full costs of the risks they create.
The FDIC process can also facilitate pre-planning and international cooperation when a large, global financial entity gets into trouble. Given the conflicting bankruptcy regimes throughout the world, there is growing international consensus that we need a special liquidation process available as an alternative. Great Britain and the European Union are both seeking to construct special resolution mechanisms. The U.S. should draw on the FDIC's long experience and lead the way.
Some have tried to label the FDIC model as a "bailout" because it is not bankruptcy. Yet the FDIC process is anything but a bailout, as any small bank can attest.
Some are opposed to this reform because the creation of a realistic liquidation process would eliminate the funding advantage that the largest financial firms have. But these changes will strengthen the competitive position of smaller banks whose relative funding costs have grown significantly in the wake of the bailouts. Because of "too big to fail," markets assume that larger institutions do not face the same risk of failure as smaller ones. Real reform will put their shareholders and creditors on notice to do their own due diligence rather than rely on taxpayers.
The disruptions caused by forcing large, nonbank financial institutions through bankruptcy can create significant risks for the real economy, as we saw in the case of Lehman Brothers in the fall of 2008. The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way.
We support any constructive improvements to the legislation that will reinforce market discipline and preclude future bailouts, while providing the FDIC with the necessary tools to market and sell a failed institution in a way that maximizes recoveries and protects the government against loss. Any legislation must remove all doubt that bailouts are an option. Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favorable market funding these firms receive from their implicit government backing.
We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.
Ms. Bair is chairman of the FDIC.
Wednesday, March 31, 2010
Thin-skinned countries, and why foreigners can't win in China
Why Foreigners Can't Win in China. By WARREN KOZAK
A 1980s swimming race and its lessons for the likes of Google.WSJ, Mar 31, 2010
Nothing in China is ever as it seems—at least for an outsider. I lived there in the mid-1980s while I was working as a journalist. Throughout that period, every time something of consequence occurred there would be a three-day gestation period before all of the pieces fell together and I understood what actually had happened. Back then, I blamed this time lag on cultural differences. In retrospect, it also involved the vast chasm between someone raised in a free society and those used to a totalitarian one.
Google is the first entity—business or government—to square off against the emerging Asian power. On the surface, it's a battle over censorship. But it's important to keep in mind that in China nothing is evident on the surface and reality can reveal itself in the strangest ways. It certainly did for me.
One summer afternoon in 1985, posters went up in my neighborhood announcing a "friendly swimming competition." There were never enough opportunities to really mix with my Chinese neighbors: We would smile at each other and exchange greetings, but it rarely went beyond that. So I accepted any chance that came along.
Unlike most Western journalists in China at that time, I lived in a Chinese neighborhood in a typical Chinese apartment. Granted, the seven other British and American families in the unit were all sequestered together in one section of the building with our own entrance. But everyone around us was Chinese, which made us feel like we actually lived in China.
When the day of the swimming competition arrived one warm Sunday in July, I walked over to the local pool with all of my neighbors. I remember it as one of the more pleasant afternoons that summer, with a lot of laughing and kidding around.
I have never been much of an athlete, but I was on the swim team in high school so I thought there was a chance I might not embarrass myself. I had signed up for three events and to my surprise I managed to win all three races. Prizes were even given out, which I promptly passed on to my Chinese friends. I remember one was a bottle of perfume.
But over the next two weeks, I noticed something that should have registered with me immediately. One day at lunch I was walking with a colleague on the other side of town when some strangers pointed to me using an unfamiliar word: yo yung. I asked him what they were saying and he said "swimmer—they are calling you 'the swimmer.'" By that point, I had already forgotten about the event, but I laughed and explained my great triumph two weeks earlier.
It was around that same time that a Chinese coworker approached me and told me that I had been invited to another swimming competition. This time, it was just me. I felt flattered and I accepted.
I arrived at a different pool with an American friend and a Chinese colleague. We didn't know anyone, and it was very hot. The longer I waited for my race to be called the more uncomfortable I felt in the heat. Finally, I was told to step up to the starting block.
When the starter's pistol rang out, I dove in and quickly realized I wasn't going to lead this time. I did my best to keep up, but I came in dead last. Worse, I was so exhausted I could barely get out of the pool. My American friend said she had never seen such fast swimmers in her life.
I didn't need the three-day incubation period to figure this one out. I had committed an offense two weeks earlier by winning three races, and for this I had to be put in my place. The second race was a setup. As punishments go, this one was relatively benign. I laughed it off because the whole exercise struck me as juvenile. I couldn't imagine anyone in the U.S. going to such lengths to teach a foreigner a lesson in humility. But dismissing it was my mistake: Winning a race was anything but inconsequential to my hosts.
If this minor insult caught the attention of some local party functionary, it's safe to assume that everything from emails to Web surfing does not go unnoticed today. Google has taken a bold step by standing up to this behemoth. Perhaps only Google has the size and strength to do this. It also could make good business sense—if China, Russia or any other country were to use a dissident's email to prosecute and even execute him, it would be a disaster for any search engine. Either way, Google should be commended.
Yet the lesson here goes beyond the Internet and China. Any American doing business abroad should keep something in mind. Americans tend to walk with confidence—not arrogance, confidence—down foreign streets. It's a particular quirk in our national character and it derives, I believe, from our unusually successful history and our power. Some countries are considerably more thin-skinned and don't always view that confidence, history or power in a positive light, even when they have been its beneficiaries.
When I finally got out of the pool that afternoon, one Chinese man watching the race offered his observation: "You were very good," he said with a smile. "They were just better."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
A 1980s swimming race and its lessons for the likes of Google.WSJ, Mar 31, 2010
Nothing in China is ever as it seems—at least for an outsider. I lived there in the mid-1980s while I was working as a journalist. Throughout that period, every time something of consequence occurred there would be a three-day gestation period before all of the pieces fell together and I understood what actually had happened. Back then, I blamed this time lag on cultural differences. In retrospect, it also involved the vast chasm between someone raised in a free society and those used to a totalitarian one.
Google is the first entity—business or government—to square off against the emerging Asian power. On the surface, it's a battle over censorship. But it's important to keep in mind that in China nothing is evident on the surface and reality can reveal itself in the strangest ways. It certainly did for me.
One summer afternoon in 1985, posters went up in my neighborhood announcing a "friendly swimming competition." There were never enough opportunities to really mix with my Chinese neighbors: We would smile at each other and exchange greetings, but it rarely went beyond that. So I accepted any chance that came along.
Unlike most Western journalists in China at that time, I lived in a Chinese neighborhood in a typical Chinese apartment. Granted, the seven other British and American families in the unit were all sequestered together in one section of the building with our own entrance. But everyone around us was Chinese, which made us feel like we actually lived in China.
When the day of the swimming competition arrived one warm Sunday in July, I walked over to the local pool with all of my neighbors. I remember it as one of the more pleasant afternoons that summer, with a lot of laughing and kidding around.
I have never been much of an athlete, but I was on the swim team in high school so I thought there was a chance I might not embarrass myself. I had signed up for three events and to my surprise I managed to win all three races. Prizes were even given out, which I promptly passed on to my Chinese friends. I remember one was a bottle of perfume.
But over the next two weeks, I noticed something that should have registered with me immediately. One day at lunch I was walking with a colleague on the other side of town when some strangers pointed to me using an unfamiliar word: yo yung. I asked him what they were saying and he said "swimmer—they are calling you 'the swimmer.'" By that point, I had already forgotten about the event, but I laughed and explained my great triumph two weeks earlier.
It was around that same time that a Chinese coworker approached me and told me that I had been invited to another swimming competition. This time, it was just me. I felt flattered and I accepted.
I arrived at a different pool with an American friend and a Chinese colleague. We didn't know anyone, and it was very hot. The longer I waited for my race to be called the more uncomfortable I felt in the heat. Finally, I was told to step up to the starting block.
When the starter's pistol rang out, I dove in and quickly realized I wasn't going to lead this time. I did my best to keep up, but I came in dead last. Worse, I was so exhausted I could barely get out of the pool. My American friend said she had never seen such fast swimmers in her life.
I didn't need the three-day incubation period to figure this one out. I had committed an offense two weeks earlier by winning three races, and for this I had to be put in my place. The second race was a setup. As punishments go, this one was relatively benign. I laughed it off because the whole exercise struck me as juvenile. I couldn't imagine anyone in the U.S. going to such lengths to teach a foreigner a lesson in humility. But dismissing it was my mistake: Winning a race was anything but inconsequential to my hosts.
If this minor insult caught the attention of some local party functionary, it's safe to assume that everything from emails to Web surfing does not go unnoticed today. Google has taken a bold step by standing up to this behemoth. Perhaps only Google has the size and strength to do this. It also could make good business sense—if China, Russia or any other country were to use a dissident's email to prosecute and even execute him, it would be a disaster for any search engine. Either way, Google should be commended.
Yet the lesson here goes beyond the Internet and China. Any American doing business abroad should keep something in mind. Americans tend to walk with confidence—not arrogance, confidence—down foreign streets. It's a particular quirk in our national character and it derives, I believe, from our unusually successful history and our power. Some countries are considerably more thin-skinned and don't always view that confidence, history or power in a positive light, even when they have been its beneficiaries.
When I finally got out of the pool that afternoon, one Chinese man watching the race offered his observation: "You were very good," he said with a smile. "They were just better."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
Tuesday, March 30, 2010
The Ballad of Sallie Mae - A cautionary tale of public subsidy and arbitrary politics
The Ballad of Sallie Mae. WSJ Editorial
A cautionary tale of public subsidy and arbitrary politics.The Wall Street Journal, page A18, Mar 30, 2010
President Obama today signs his nationalization of the college student loan market, which will put the Department of Education directly in charge of doling out cash to students and colleges. It's one more plank in the cradle-to-grave entitlement state, but this landmark is also a good moment to recount the rise and fall of Sallie Mae. It's a cautionary tale for our times about public subsidy, arbitrary politics and doing business with the government.
The story begins in another progressive heyday, 1965, when the federal government launched a program to make college "affordable" by offering a taxpayer guarantee on student loans. College has if anything become even less affordable since, as the subsidies have merely driven up the prices that colleges charge.
So in 1972, with affordability still an issue, Congress created a new government-sponsored enterprise, the Student Loan Marketing Association, or Sallie Mae. Like Fannie Mae and Freddie Mac in housing, Sallie was born with a federal charter and an implied taxpayer backstop to provide a secondary market for student loans. Sallie would go public in 1983 and, also like Fan and Fred, mint money for shareholders by enjoying a lower cost of funds than fully private lenders.
[Stock price of Sallie Mae January 2000 - March 2010 http://sg.wsj.net/public/resources/images/ED-AL245_1salli_NS_20100329194502.gif]
This free lunch gradually became a source of political concern and an inviting target under federal accounting. In 1993 President Bill Clinton claimed in his first budget that the government could save billions by cutting out the private firms and lending directly to students. But even a liberal Congress had concerns about this "single-payer" model.
That year the White House and Congress compromised and created a "public option." The government's new Direct Lending program would compete with private loan originators. Sallie would still be able to provide a secondary market for the loans made by private firms, but new fees in the law took away much of Sallie's cost-of-funds advantage.
The Clinton Administration continued to push for the end of Sallie's federal charter. But in contrast to Margaret Thatcher's campaign to convert U.K. state-owned monopolies into private competitive companies, the Clinton team wanted to turn most of the market over to its new state-owned program at the Department of Education.
A 1996 law set a 2008 deadline to make Sallie fully private. The company moved aggressively into the loan origination market and went private a few years early, in 2004. For a time, business was very good, and the leader in the student-loan market saw its stock approach $60 a share as recently as 2007.
However, liberals were perennially disappointed that the "public option" at the Department of Education, plagued by customer-service failures, had failed to win most of this business. So when Democrats took control of Congress in 2007, they also seized greater control of education financing. First they reduced the return on originating government loans, then they increased regulation of private loans, and this year they pressed their outright ban on private origination of federal loans. Today a Sallie share costs $12.67. Sallie's shares fell with the financial panic, but thanks to the Congressional squeeze they haven't rebounded like those of the big banks.
We have no special brief for Sallie or its shareholders, who presumably understood the political risks they were running. Democrats have also been shrewd in pitching their takeover as an end to public subsidy, though there will be no such thing. The reality going forward is likely to be even more subsidies, more taxpayer risk and higher tuition prices.
George Miller in the House and Tom Harkin in the Senate are on a march to all-government financing, and that includes enacting new rules in recent years to discourage even private student loans with no taxpayer risk. Sallie had a booming business in fully private loans, but expansions of the federal Stafford and PLUS programs helped drive the volume of Sallie's private business down 50% last year. The PLUS expansion was enacted in 2006, proving that Republicans have also helped to build the subsidy machine.
This week's legislation is also a way to lever up spending on federal college grants. That's because Congress is pouring the putative savings from punishing Sallie and other private companies into more Pell grants. The savings are illusory, based on government accounting rules that ignore the likelihood of higher future loan losses, but the spending will be all too real for taxpayers.
We should note that not even the Congressional Budget Office believes that CBO's analysis is correct. In an only-in-Washington farce, CBO director Douglas Elmendorf has to his credit written a series of letters explaining in detail why his official estimates are wrong, which of course Congress ignores.
Following today's signing ceremony, Sallie says it will have to fire 2,500 of its 8,600 employees, though perhaps they can look for jobs at the Department of Education. Sallie's saga is almost certainly the future of health-care insurers as liberals attempt to resurrect their "public option" once insurance premiums inevitably rise.
As for the cost of college, expect it to become even less affordable as the subsidies keep flowing. The main achievements of this new legislation will be to give more power to government, and to transfer more of the costs and risks of college financing to taxpayers. There's no such thing as a free entitlement state.
A cautionary tale of public subsidy and arbitrary politics.The Wall Street Journal, page A18, Mar 30, 2010
President Obama today signs his nationalization of the college student loan market, which will put the Department of Education directly in charge of doling out cash to students and colleges. It's one more plank in the cradle-to-grave entitlement state, but this landmark is also a good moment to recount the rise and fall of Sallie Mae. It's a cautionary tale for our times about public subsidy, arbitrary politics and doing business with the government.
The story begins in another progressive heyday, 1965, when the federal government launched a program to make college "affordable" by offering a taxpayer guarantee on student loans. College has if anything become even less affordable since, as the subsidies have merely driven up the prices that colleges charge.
So in 1972, with affordability still an issue, Congress created a new government-sponsored enterprise, the Student Loan Marketing Association, or Sallie Mae. Like Fannie Mae and Freddie Mac in housing, Sallie was born with a federal charter and an implied taxpayer backstop to provide a secondary market for student loans. Sallie would go public in 1983 and, also like Fan and Fred, mint money for shareholders by enjoying a lower cost of funds than fully private lenders.
[Stock price of Sallie Mae January 2000 - March 2010 http://sg.wsj.net/public/resources/images/ED-AL245_1salli_NS_20100329194502.gif]
This free lunch gradually became a source of political concern and an inviting target under federal accounting. In 1993 President Bill Clinton claimed in his first budget that the government could save billions by cutting out the private firms and lending directly to students. But even a liberal Congress had concerns about this "single-payer" model.
That year the White House and Congress compromised and created a "public option." The government's new Direct Lending program would compete with private loan originators. Sallie would still be able to provide a secondary market for the loans made by private firms, but new fees in the law took away much of Sallie's cost-of-funds advantage.
The Clinton Administration continued to push for the end of Sallie's federal charter. But in contrast to Margaret Thatcher's campaign to convert U.K. state-owned monopolies into private competitive companies, the Clinton team wanted to turn most of the market over to its new state-owned program at the Department of Education.
A 1996 law set a 2008 deadline to make Sallie fully private. The company moved aggressively into the loan origination market and went private a few years early, in 2004. For a time, business was very good, and the leader in the student-loan market saw its stock approach $60 a share as recently as 2007.
However, liberals were perennially disappointed that the "public option" at the Department of Education, plagued by customer-service failures, had failed to win most of this business. So when Democrats took control of Congress in 2007, they also seized greater control of education financing. First they reduced the return on originating government loans, then they increased regulation of private loans, and this year they pressed their outright ban on private origination of federal loans. Today a Sallie share costs $12.67. Sallie's shares fell with the financial panic, but thanks to the Congressional squeeze they haven't rebounded like those of the big banks.
We have no special brief for Sallie or its shareholders, who presumably understood the political risks they were running. Democrats have also been shrewd in pitching their takeover as an end to public subsidy, though there will be no such thing. The reality going forward is likely to be even more subsidies, more taxpayer risk and higher tuition prices.
George Miller in the House and Tom Harkin in the Senate are on a march to all-government financing, and that includes enacting new rules in recent years to discourage even private student loans with no taxpayer risk. Sallie had a booming business in fully private loans, but expansions of the federal Stafford and PLUS programs helped drive the volume of Sallie's private business down 50% last year. The PLUS expansion was enacted in 2006, proving that Republicans have also helped to build the subsidy machine.
This week's legislation is also a way to lever up spending on federal college grants. That's because Congress is pouring the putative savings from punishing Sallie and other private companies into more Pell grants. The savings are illusory, based on government accounting rules that ignore the likelihood of higher future loan losses, but the spending will be all too real for taxpayers.
We should note that not even the Congressional Budget Office believes that CBO's analysis is correct. In an only-in-Washington farce, CBO director Douglas Elmendorf has to his credit written a series of letters explaining in detail why his official estimates are wrong, which of course Congress ignores.
Following today's signing ceremony, Sallie says it will have to fire 2,500 of its 8,600 employees, though perhaps they can look for jobs at the Department of Education. Sallie's saga is almost certainly the future of health-care insurers as liberals attempt to resurrect their "public option" once insurance premiums inevitably rise.
As for the cost of college, expect it to become even less affordable as the subsidies keep flowing. The main achievements of this new legislation will be to give more power to government, and to transfer more of the costs and risks of college financing to taxpayers. There's no such thing as a free entitlement state.
Monday, March 29, 2010
The Rich Can't Pay for ObamaCare - The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
The Rich Can't Pay for ObamaCare. By ALAN REYNOLDS
The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
WSJ, Mar 03, 2010
President Barack Obama's new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% "Medicare tax" on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.
The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.
Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.
It won't work. It never works.
The maximum tax rate fell to 28% in 1988-90 from 50% in 1986, yet individual income tax receipts rose to 8.3% of GDP in 1989 from 7.9% in 1986. The top tax rate rose to 31% in 1991 and revenue fell to 7.6% of GDP in 1992. The top tax rate was increased to 39.6% in 1993, along with numerous major revenue enhancers such as raising the taxable portion of Social Security to 85% of benefits from 50% for seniors who saved or kept working. Yet individual tax revenues were only 7.8% of GDP in 1993, 8.1% in 1994, and did not get back to the 1989 level until 1995.
Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.
From past experience, these are just a few of the ways that taxpayers will react to the Obama administration's tax plans:
• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump many of those shares in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.
• Faced with a 23.8% capital gains tax, high-income investors would avoid realizing gains in taxable accounts unless they had offsetting losses.
• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.
• Faced with numerous tax penalties on added income in general, many two-earner couples would become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.
In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.
The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that "for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%." That elasticity estimate of 0.5 would whittle the Obama team's hoped-for $1.2 trillion down to $671 billion. As the authors note, however, "there is much evidence to suggest that the ETI is higher for high-income individuals." The authors' illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich.
For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates.
If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration's intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.
The ETI studies exclude capital gains, but other research shows that when the capital gains tax goes up investors avoid that tax by selling assets less frequently, and therefore not realizing as many gains in taxable accounts. In these studies elasticity of about 1.0 suggests the higher tax is unlikely to raise revenue and elasticity above 1.0 means higher tax rates will lose revenue.
In a 1999 paper for the Australian Stock Exchange I examined estimates of the elasticity of capital gains realization in 11 studies from the Treasury, Congressional Budget Office and various academics. Whenever there was a range of estimates I used only the lowest figures. The resulting average was 0.9, very close to one. Four of those studies estimated the revenue-maximizing capital gains tax rate, suggesting (on average) that a tax rate higher than 17% would lose revenue.
Raising the top tax on dividends to 23.8% would prove as self-defeating as raising the capital gains tax. Figures from a well-know 2003 study by the Paris School of Economics' Thomas Piketty and Mr. Saez show that the amount of real, inflation-adjusted dividends reported by the top 1% of taxpayers dropped to about $3 billion a year (in 2007 dollars) after the 1993 tax hike. It hovered in that range until 2002, then soared by 169% to nearly $8 billion by 2007 after the dividend tax fell to 15%. Since very few dividends were subject to the highest tax rates before 2003 (many income stocks were held by tax-exempt entities), the 15% dividend tax probably raised revenue.
In short, the belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated. The cost of new health-insurance subsidies and Medicaid enrollees are projected to grow by at least 7% a year, which means the cost doubles every decade—to $432 billion a year by 2029, $864 billion by 2039, and more than $1.72 trillion by 2049. If anyone thinks taxing the rich will cover any significant portion of such expenses, think again.
The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
The president intends to squeeze an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes. It won't work.
WSJ, Mar 03, 2010
President Barack Obama's new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% "Medicare tax" on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.
The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.
Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.
It won't work. It never works.
The maximum tax rate fell to 28% in 1988-90 from 50% in 1986, yet individual income tax receipts rose to 8.3% of GDP in 1989 from 7.9% in 1986. The top tax rate rose to 31% in 1991 and revenue fell to 7.6% of GDP in 1992. The top tax rate was increased to 39.6% in 1993, along with numerous major revenue enhancers such as raising the taxable portion of Social Security to 85% of benefits from 50% for seniors who saved or kept working. Yet individual tax revenues were only 7.8% of GDP in 1993, 8.1% in 1994, and did not get back to the 1989 level until 1995.
Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.
From past experience, these are just a few of the ways that taxpayers will react to the Obama administration's tax plans:
• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump many of those shares in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.
• Faced with a 23.8% capital gains tax, high-income investors would avoid realizing gains in taxable accounts unless they had offsetting losses.
• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.
• Faced with numerous tax penalties on added income in general, many two-earner couples would become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.
In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.
The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that "for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%." That elasticity estimate of 0.5 would whittle the Obama team's hoped-for $1.2 trillion down to $671 billion. As the authors note, however, "there is much evidence to suggest that the ETI is higher for high-income individuals." The authors' illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich.
For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates.
If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration's intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.
The ETI studies exclude capital gains, but other research shows that when the capital gains tax goes up investors avoid that tax by selling assets less frequently, and therefore not realizing as many gains in taxable accounts. In these studies elasticity of about 1.0 suggests the higher tax is unlikely to raise revenue and elasticity above 1.0 means higher tax rates will lose revenue.
In a 1999 paper for the Australian Stock Exchange I examined estimates of the elasticity of capital gains realization in 11 studies from the Treasury, Congressional Budget Office and various academics. Whenever there was a range of estimates I used only the lowest figures. The resulting average was 0.9, very close to one. Four of those studies estimated the revenue-maximizing capital gains tax rate, suggesting (on average) that a tax rate higher than 17% would lose revenue.
Raising the top tax on dividends to 23.8% would prove as self-defeating as raising the capital gains tax. Figures from a well-know 2003 study by the Paris School of Economics' Thomas Piketty and Mr. Saez show that the amount of real, inflation-adjusted dividends reported by the top 1% of taxpayers dropped to about $3 billion a year (in 2007 dollars) after the 1993 tax hike. It hovered in that range until 2002, then soared by 169% to nearly $8 billion by 2007 after the dividend tax fell to 15%. Since very few dividends were subject to the highest tax rates before 2003 (many income stocks were held by tax-exempt entities), the 15% dividend tax probably raised revenue.
In short, the belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated. The cost of new health-insurance subsidies and Medicaid enrollees are projected to grow by at least 7% a year, which means the cost doubles every decade—to $432 billion a year by 2029, $864 billion by 2039, and more than $1.72 trillion by 2049. If anyone thinks taxing the rich will cover any significant portion of such expenses, think again.
The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
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