You Mislead!, by Michael F. Cannon and Ramesh Ponnuru
Cato, Sep 29, 2009
This article appeared in the National Review (Online) on September 28, 2009.
It is a good thing that other congressmen did not follow Rep. Joe Wilson's lead. If they yelled out every time President Obama said something untrue about health care, they would quickly find themselves growing hoarse.
By our count, the president made more than 20 inaccurate claims in his speech to Congress. We have excluded several comments that are deeply misleading but not outright false. (For example: Obama pledged not to tap the Medicare trust fund to pay for reform. But there is no money in that "trust fund," anyway, so the pledge is meaningless.) Even so, we may have missed one or more false statements by the president. Our failure to include one of his comments in the following list should not be taken to constitute an endorsement of its accuracy, let alone wisdom.
1. "Buying insurance on your own costs you three times as much as the coverage you get from your employer." The Congressional Budget Office writes, "Premiums for policies purchased in the individual insurance market are, on average, much lower — about one-third lower for single coverage and one-half lower for family policies." It is true that individual insurance policies are generally 30 percent less comprehensive than employer-provided insurance, and comparable individual policies are about twice as expensive. But much of the extra cost is a function of the tax penalty on purchasing such insurance and the stunted market that penalty has yielded.
2. "There are now more than 30 million American citizens who cannot get coverage." An outright falsehood, whether you use the president's noncitizen-free estimate or the standard, questionable estimate of 46 million uninsured residents.
A study prepared for the federal government estimates that 9 million people counted as "uninsured" in the standard estimate are in fact enrolled in Medicaid. The left-leaning Urban Institute estimates that 12 million are eligible but not enrolled, meaning they could get coverage at any time. Health economists Mark Pauly of the University of Pennsylvania and Kate Bundorf of Stanford estimate that one quarter to three quarters of the uninsured can afford to purchase coverage, but choose not to do so.
3."And every day, 14,000 Americans lose their coverage." The paper that generated this estimate assumed that two months of severe job losses would continue forever. Applying that paper's methodology to a broader period of rising unemployment (January 2008 through August 2009) produces a figure below 9,000.
It also assumes those coverage losses are permanent. Like many of the 46 million Americans we label "uninsured," many of those 9,000 will regain coverage after a number of months. (David Freddoso illustrates the absurdity of assuming that all coverage losses are permanent.)
4. "One man from Illinois lost his coverage in the middle of chemotherapy... They delayed his treatment, and he died because of it." He didn't die because of it. The originator of this false claim, a writer for Slate named Timothy Noah, has admitted he got it wrong.
5. "Another woman from Texas was about to get a double mastectomy when her insurance company canceled her policy because she forgot to declare a case of acne." Scott Harrington supplied more facts in the Wall Street Journal: "The woman's testimony at the June 16 hearing confirms that her surgery was delayed several months. It also suggests that the dermatologist's chart may have described her skin condition as precancerous, that the insurer also took issue with an apparent failure to disclose an earlier problem with an irregular heartbeat, and that she knowingly underreported her weight on the application." The woman deserves sympathy, but Obama has stretched the truth here.
6. Rising costs are "why so many employers . . . are forcing their employees to pay more for insurance." Perhaps no other issue generates as much of a consensus among health-care economists as this one: The "employer's share" of employees' health-care costs comes out of those employees' wages, not out of profits. In this comment and in five others in his speech, Obama contradicts that basic truth. Employers aren't forcing their employees to pick up a larger share of the bill because they can't. Workers are already paying the entire bill.
7. Rising costs are "why American business that compete internationally... are at a huge disadvantage." False. The rising cost of health benefits does not increase employers' labor costs because, again, wages adjust downward to compensate. The Congressional Budget Office, under the leadership of Obama's OMB director, Peter Orszag, confirmed that health-care costs do not hinder competitiveness. Obama economic aide Christina Romer has called this competitiveness argument "schlocky."
8. "Those of us with health insurance are also paying a hidden and growing tax for those without it — about $1,000 per year that pays for somebody else's emergency room and charitable care." That number comes from a left-wing advocacy group. A Kaiser Family Foundation study debunked the group's analysis, reaching an estimate closer to $200 per year for a family. The CBO report mentioned above reached the same conclusion.
9. At this point, Obama said, "These are the facts. Nobody disputes them." This comment continues Obama's already long tradition of trying to curtail debate by denying that anyone disagrees with him.
10. "[Reform] will slow the growth of health-care costs for our families, our businesses, and our government." In July, CBO director Douglas Elmendorf said, "In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health-care costs." The CBO projects that the legislation that Sen. Max Baucus (D., Mont.) has since introduced "would reduce the federal budgetary commitment to health care, relative to that under current law, during the decade following the 10-year budget window," but hints that the 40 percent cut in Medicare's reimbursement rates, which helps Baucus achieve that feat, is politically unrealistic. (More on that below.) Health economist Victor Fuchs writes that the proposals before Congress "aim at cost shifting rather than cost reduction." Obama and his allies have yet to demonstrate anything to the contrary.
11. "Nothing in this plan will require you or your employer to change the coverage or the doctor you have. Let me repeat this: Nothing in our plan requires you to change what you have." Obama's wording is lawyerly: While not denying that his plan would cause people to lose existing coverage with which they are satisfied, he leads us to believe that he is denying it. But even on its own terms, Obama's claim is false. The CBO estimates that slashing payments to Medicare Advantage, as Obama advocates, "would reduce the extra benefits that would be made available to beneficiaries through Medicare Advantage plans." It would also cause some people to lose their coverage.
12. Requiring insurers to cover preventive care "saves money." Nope. According to a review in the New England Journal of Medicine, "Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not."
13. "The [bogus] claim... that we plan to set up panels of bureaucrats with the power to kill off senior citizens... is a lie, plain and simple." Sarah Palin claimed that Obama's "death panels" would deny people medical care, not actively kill them. If Palin believes her claim, it is not "a lie, plain and simple." Most important, the substance of Palin's claim is, in fact, true. Obama himself proposed a new Independent Medicare Advisory Council with the authority to deny life-extending care to the elderly and disabled.
14. "There are also those who claim that our reform efforts would insure illegal immigrants. This, too, is false. The reforms I'm proposing would not apply to those who are here illegally." For better or worse, the president's plan would, in his words, insure illegal immigrants. Various federal agencies, immigration critics, and the media all acknowledge that a small number of undocumented aliens obtain Medicaid benefits despite being ineligible. The president seeks to expand Medicaid, which would create greater opportunities for ineligible aliens to enroll.
The House Democrats' health-insurance exchange, which Obama supports, would "apply to" undocumented aliens. The CRS writes that the House legislation "does not contain any restrictions on noncitizens participating in the Exchange — whether the noncitizens are legally or illegally present." Nor does it require that the legal status of people receiving subsidies be verified.
Finally, Obama supports granting legal status to millions of illegal immigrants, which would make them eligible for government benefits under his health plan.
15. "Under our plan, no federal dollars will be used to fund abortions." Unless Obama refers to some draft legislation inside his head, this claim is false. The House bill allows the "government option" to pay for abortions directly from the U.S. Treasury. Both the House and Baucus bills would subsidize private insurance that cover abortions. (See Douglas Johnson's comment on this article.)
16. Critics of the public option would "be right if taxpayers were subsidizing this public insurance option. But they won't be. I've insisted that like any private insurance company, the public insurance option would have to be self-sufficient and rely on the premiums it collects." How quickly we forget the example of Fannie Mae and Freddie Mac. Like those institutions, the public option would benefit from an implicit subsidy: Everyone would know that Washington would not allow the program to fail, and financial institutions would therefore offer it better rates. (During the Clinton administration, Obama adviser Larry Summers reported that a similar implicit guarantee was worth $6 billion per year to Fannie and Freddie.) The public option would thus be able to undercut its less-subsidized competitors.
17. "And I will make sure that no government bureaucrat or insurance company bureaucrat gets between you and the care that you need." Unless the president proposes to abolish insurance, or abolish all care management, there will always be tension between patients, doctors, and public/private insurers over what patients "need." Such tensions are sure to arise under the president's IMAC proposal.
But even if a new program would be "administered by the government, just like Medicaid or Medicare," it would interfere in those decisions. As an administrative-law judge wrote to one of us after Obama's address: "I am a government bureaucrat . . . and I just happen to be reviewing [six] cases, albeit involving Medicare and Medicaid, where the government has inserted itself between the patient and the care prescribed by the physician."
18. "I will not sign a plan that adds one dime to our deficits — either now or in the future." "The plan will not add to our deficit." None of the bills before Congress can credibly claim to keep the deficit from rising. The one that comes closest, the Baucus bill, does so by making the wildly implausible assumption that Congress will allow 40 percent cuts in physician payments under Medicare to take place in 2012. Congress has routinely refused to support much smaller cuts.
19. "Now, add it all up, and the plan I'm proposing will cost around $900 billion over ten years." Even the supposedly parsimonious Baucus bill would cost closer to $2 trillion than $1 trillion once we "add it all up." The CBO says that bill would spend a mere $774 billion over ten years, in part because the spending begins late in that ten-year window. Republican staffers on the Senate Budget Committee estimate that the Baucus bill would cost $1.7 trillion over the first ten years of full implementation.
Moreover, the preliminary CBO score does not measure the full cost of the bill because it does not include the mandates Baucus would impose on states (about $37 billion) and the private sector (not yet estimated, but 60 percent of total costs in Massachusetts). The other bills would cost even more.
20. "The middle class will realize greater security, not higher taxes." Obama would make health insurance compulsory for the middle class (and everyone else). If he thinks that isn't a tax, he should listen to his economic adviser Larry Summers, or his nominee for assistant secretary for planning and evaluation at HHS, Sherry Glied. Both liken the "individual mandate" to a tax, as do other prominent health economists like Uwe Reinhardt (Princeton) and Jonathan Gruber (MIT). The CBO affirms that the penalties for non-compliance "would be equivalent to a tax or fine."
If Obama thinks the middle class wouldn't pay the taxes he wants to impose on the "drug and insurance companies," he should read this CBO report or talk to the junior senator from West Virginia, who accurately describes those levies as a "big, big tax" on middle-class coalminers.
21. "I won't stand by while the special interests use the same old tactics to keep things exactly the way they are." Who are these special interests? In case Obama hadn't noticed, everyone from the drug-makers to the unions to the insurance companies he demonizes are spending millions to build momentum for his version of reform — in no small part because Obama has promised to buy them off with middle-class tax dollars.
When President Obama makes a factual claim about health-care policy, he does not deserve the benefit of the doubt about its accuracy. We do not know whether he has been badly misinformed or is deliberately trying to mislead. Either way, he cannot be trusted to reform American health care.
Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What's Holding Back Health Care and How to Free It. Ramesh Ponnuru is a senior editor at National Review.
Wednesday, September 30, 2009
Tuesday, September 29, 2009
We've Been Talking to Iran for 30 Years
We've Been Talking to Iran for 30 Years. By MICHAEL LEDEEN
The seizure of the U.S. embassy followed the failure of Carter administration talks with Ayatollah Khomeini's regime.
WSJ, Sep 30, 2009
The Obama administration's talks with Iran—set to take place tomorrow in Geneva—are accompanied by an almost universally accepted misconception: that previous American administrations refused to negotiate with Iranian leaders. The truth, as Secretary of Defense Robert Gates said last October at the National Defense University, is that "every administration since 1979 has reached out to the Iranians in one way or another and all have failed."
After the fall of the shah in February 1979, the Carter administration attempted to establish good relations with the revolutionary regime. We offered aid, arms and understanding. The Iranians demanded that the United States honor all arms deals with the shah, remain silent about human-rights abuses carried out by the new regime, and hand over Iranian "criminals" who had taken refuge in America. The talks ended with the seizure of the American Embassy in November.
The Reagan administration—driven by a desire to gain the release of the American hostages—famously sought a modus vivendi with Iran in the midst of the Iran-Iraq War during the mid-1980s. To that end, the U.S. sold weapons to Iran and provided military intelligence about Iraqi forces. High-level American officials such as Robert McFarlane met secretly with Iranian government representatives to discuss the future of the relationship. This effort ended when the Iran-Contra scandal erupted in late 1986.
The Clinton administration lifted sanctions that had been imposed by Messrs. Carter and Reagan. During the 1990s, Iranians (including the national wrestling team) entered the U.S. for the first time since the '70s. The U.S. also hosted Iranian cultural events and unfroze Iranian bank accounts. President Bill Clinton and Secretary of State Madeleine Albright publicly apologized to Iran for purported past sins, including the overthrow of Prime Minister Mohammed Mossadegh's government by the CIA and British intelligence in August 1953. But it all came to nothing when Supreme Leader Ali Khamenei proclaimed that we were their enemies in March 1999.
Most recently, the administration of George W. Bush—invariably and falsely described as being totally unwilling to talk to the mullahs—negotiated extensively with Tehran. There were scores of publicly reported meetings, and at least one very secret series of negotiations. These negotiations have rarely been described in the American press, even though they are the subject of a BBC documentary titled "Iran and the West."
At the urging of British Foreign Minister Jack Straw, the U.S. negotiated extensively with Ali Larijani, then-secretary of Iran's National Security Council. By September 2006, an agreement had seemingly been reached. Secretary of State Condoleezza Rice and Nicholas Burns, her top Middle East aide, flew to New York to await the promised arrival of an Iranian delegation, for whom some 300 visas had been issued over the preceding weekend. Mr. Larijani was supposed to announce the suspension of Iranian nuclear enrichment. In exchange, we would lift sanctions. But Mr. Larijani and his delegation never arrived, as the BBC documentary reported.
Negotiations have always been accompanied by sanctions. But neither has produced any change in Iranian behavior.
Until the end of 2006—and despite appeals for international support, notably from Mr. Clinton—sanctions were almost exclusively imposed by the U.S. alone. Mr. Carter issued an executive order forbidding the sale of anything to Tehran except food and medical supplies. Mr. Reagan banned the importation of virtually all Iranian goods and services in October 1987. Mr. Clinton issued an executive order in March 1995 prohibiting any American involvement with petroleum development. The following May he issued an additional order tightening those sanctions. Five years later, Secretary of State Albright eased some of the sanctions by allowing Americans to buy and import carpets and some food products, such as dried fruits, nuts and caviar.
Mr. Bush took spare parts for commercial aircraft off the embargo list in the fall of 2006. On the other hand, in 2008 he revoked authorization of so-called U-turn transfers, making it illegal for any American bank to process transactions involving Iran—even if non-Iranian banks were at each end.
Throughout this period, our allies advocated for further diplomacy instead of sanctions. But beginning in late 2006, the United Nations started passing sanctions of its own. In December of that year, the Security Council blocked the import or export of "sensitive nuclear material and equipment" and called on member states to freeze the assets of anyone involved with Iran's nuclear program.
In 2007, the Security Council banned all arms exports from Iran, froze Iranian assets, and restricted the travel of anyone involved in the Iranian nuclear program. The following year, it called for investigations of Iranian banks, and authorized member countries to start searching planes and ships coming or going from or to Iran. All to no avail.
Thirty years of negotiations and sanctions have failed to end the Iranian nuclear program and its war against the West. Why should anyone think they will work now? A change in Iran requires a change in government. Common sense and moral vision suggest we should support the courageous opposition movement, whose leaders have promised to end support for terrorism and provide total transparency regarding the nuclear program.
Mr. Ledeen, a scholar at the Foundation for the Defense of Democracies, is the author, most recently, of "Accomplice to Evil: Iran and the War Against the West," out next month from St. Martin's Press.
The seizure of the U.S. embassy followed the failure of Carter administration talks with Ayatollah Khomeini's regime.
WSJ, Sep 30, 2009
The Obama administration's talks with Iran—set to take place tomorrow in Geneva—are accompanied by an almost universally accepted misconception: that previous American administrations refused to negotiate with Iranian leaders. The truth, as Secretary of Defense Robert Gates said last October at the National Defense University, is that "every administration since 1979 has reached out to the Iranians in one way or another and all have failed."
After the fall of the shah in February 1979, the Carter administration attempted to establish good relations with the revolutionary regime. We offered aid, arms and understanding. The Iranians demanded that the United States honor all arms deals with the shah, remain silent about human-rights abuses carried out by the new regime, and hand over Iranian "criminals" who had taken refuge in America. The talks ended with the seizure of the American Embassy in November.
The Reagan administration—driven by a desire to gain the release of the American hostages—famously sought a modus vivendi with Iran in the midst of the Iran-Iraq War during the mid-1980s. To that end, the U.S. sold weapons to Iran and provided military intelligence about Iraqi forces. High-level American officials such as Robert McFarlane met secretly with Iranian government representatives to discuss the future of the relationship. This effort ended when the Iran-Contra scandal erupted in late 1986.
The Clinton administration lifted sanctions that had been imposed by Messrs. Carter and Reagan. During the 1990s, Iranians (including the national wrestling team) entered the U.S. for the first time since the '70s. The U.S. also hosted Iranian cultural events and unfroze Iranian bank accounts. President Bill Clinton and Secretary of State Madeleine Albright publicly apologized to Iran for purported past sins, including the overthrow of Prime Minister Mohammed Mossadegh's government by the CIA and British intelligence in August 1953. But it all came to nothing when Supreme Leader Ali Khamenei proclaimed that we were their enemies in March 1999.
Most recently, the administration of George W. Bush—invariably and falsely described as being totally unwilling to talk to the mullahs—negotiated extensively with Tehran. There were scores of publicly reported meetings, and at least one very secret series of negotiations. These negotiations have rarely been described in the American press, even though they are the subject of a BBC documentary titled "Iran and the West."
At the urging of British Foreign Minister Jack Straw, the U.S. negotiated extensively with Ali Larijani, then-secretary of Iran's National Security Council. By September 2006, an agreement had seemingly been reached. Secretary of State Condoleezza Rice and Nicholas Burns, her top Middle East aide, flew to New York to await the promised arrival of an Iranian delegation, for whom some 300 visas had been issued over the preceding weekend. Mr. Larijani was supposed to announce the suspension of Iranian nuclear enrichment. In exchange, we would lift sanctions. But Mr. Larijani and his delegation never arrived, as the BBC documentary reported.
Negotiations have always been accompanied by sanctions. But neither has produced any change in Iranian behavior.
Until the end of 2006—and despite appeals for international support, notably from Mr. Clinton—sanctions were almost exclusively imposed by the U.S. alone. Mr. Carter issued an executive order forbidding the sale of anything to Tehran except food and medical supplies. Mr. Reagan banned the importation of virtually all Iranian goods and services in October 1987. Mr. Clinton issued an executive order in March 1995 prohibiting any American involvement with petroleum development. The following May he issued an additional order tightening those sanctions. Five years later, Secretary of State Albright eased some of the sanctions by allowing Americans to buy and import carpets and some food products, such as dried fruits, nuts and caviar.
Mr. Bush took spare parts for commercial aircraft off the embargo list in the fall of 2006. On the other hand, in 2008 he revoked authorization of so-called U-turn transfers, making it illegal for any American bank to process transactions involving Iran—even if non-Iranian banks were at each end.
Throughout this period, our allies advocated for further diplomacy instead of sanctions. But beginning in late 2006, the United Nations started passing sanctions of its own. In December of that year, the Security Council blocked the import or export of "sensitive nuclear material and equipment" and called on member states to freeze the assets of anyone involved with Iran's nuclear program.
In 2007, the Security Council banned all arms exports from Iran, froze Iranian assets, and restricted the travel of anyone involved in the Iranian nuclear program. The following year, it called for investigations of Iranian banks, and authorized member countries to start searching planes and ships coming or going from or to Iran. All to no avail.
Thirty years of negotiations and sanctions have failed to end the Iranian nuclear program and its war against the West. Why should anyone think they will work now? A change in Iran requires a change in government. Common sense and moral vision suggest we should support the courageous opposition movement, whose leaders have promised to end support for terrorism and provide total transparency regarding the nuclear program.
Mr. Ledeen, a scholar at the Foundation for the Defense of Democracies, is the author, most recently, of "Accomplice to Evil: Iran and the War Against the West," out next month from St. Martin's Press.
Monday, September 28, 2009
Subprime Uncle Sam - The FHA makes Countrywide Financial look prudent
Subprime Uncle Sam. WSJ Editorial
The FHA makes Countrywide Financial look prudent.
WSJ, Sep 29, 2009
The Treasury has announced new "capital cushion" requirements for financial institutions to reduce excessive risk and prevent taxpayer bailouts. Seems sensible enough. Perhaps the Administration will even impose those safety and soundness standards on federal agencies.
One place to start is the Federal Housing Administration, the nation's insurer of nearly $750 billion in outstanding mortgages. The agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA's cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.
[table The Federal Housing Administration leverage ratio http://s.wsj.net/public/resources/images/ED-AK249_1fha_D_20090928180420.gif]
At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.
The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.
All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more.
So far Congress has pretended that these liabilities don't exist because they are technically "off budget." They stay invisible until they move on-budget when a Fannie Mae-type cash bailout is needed. The Obama Administration is at least finally catching on to these perils and last week proposed some modest reforms. These include appointing a "chief risk officer" at FHA, tightening home appraisals, requiring that FHA lenders have audited financial statements, and increasing the capital requirement of FHA lenders to $1 million up from $250,000. The scandal is that these basic standards weren't in place years ago.
Unfortunately, Washington won't touch more significant reforms for fear of angering the powerful nexus of Realtors, mortgage bankers and home builders. As we've written for years, the FHA's main lending problem is that it requires neither lenders nor borrowers to have a sufficient financial stake in mortgage repayment. The FHA's absurdly low 3.5% down payment policy, in combination with other policies to reduce up-front costs for new homebuyers, means that homebuyers can move into their government-insured home with an equity stake as low as 2.5%. The government's own housing data prove that low down payments are the single largest predictor of defaults.
Private banks know this. Burned on subprime mortgages, they are back to requiring 10% or even 20% down payments. Congress should at least require a 5% down payment on loans that carry a taxpayer guarantee. If borrowers can't put at least 5% down, they can't afford the house.
As for rooting out fraud that contributes to high loss rates, the obvious solution is to drop the 100% guarantee on FHA mortgages. Why not hold banks liable for the first 10% of losses on the housing loans they originate, a reform that has been recommended since as far back as the early Reagan years? No other mortgage insurer insures 100% loan repayment. Alas, while offering its minireforms, the Obama Administration reassured its real-estate pals that FHA insurance will continue to carry "no risk to homeowners or bondholders."
Which means all the risk is on taxpayers. David Stevens, the FHA commissioner, nonetheless declared this month: "There will be no taxpayer bailout." That's also what Barney Frank said about Fannie and Freddie.
The FHA makes Countrywide Financial look prudent.
WSJ, Sep 29, 2009
The Treasury has announced new "capital cushion" requirements for financial institutions to reduce excessive risk and prevent taxpayer bailouts. Seems sensible enough. Perhaps the Administration will even impose those safety and soundness standards on federal agencies.
One place to start is the Federal Housing Administration, the nation's insurer of nearly $750 billion in outstanding mortgages. The agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA's cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.
[table The Federal Housing Administration leverage ratio http://s.wsj.net/public/resources/images/ED-AK249_1fha_D_20090928180420.gif]
At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.
The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.
All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more.
So far Congress has pretended that these liabilities don't exist because they are technically "off budget." They stay invisible until they move on-budget when a Fannie Mae-type cash bailout is needed. The Obama Administration is at least finally catching on to these perils and last week proposed some modest reforms. These include appointing a "chief risk officer" at FHA, tightening home appraisals, requiring that FHA lenders have audited financial statements, and increasing the capital requirement of FHA lenders to $1 million up from $250,000. The scandal is that these basic standards weren't in place years ago.
Unfortunately, Washington won't touch more significant reforms for fear of angering the powerful nexus of Realtors, mortgage bankers and home builders. As we've written for years, the FHA's main lending problem is that it requires neither lenders nor borrowers to have a sufficient financial stake in mortgage repayment. The FHA's absurdly low 3.5% down payment policy, in combination with other policies to reduce up-front costs for new homebuyers, means that homebuyers can move into their government-insured home with an equity stake as low as 2.5%. The government's own housing data prove that low down payments are the single largest predictor of defaults.
Private banks know this. Burned on subprime mortgages, they are back to requiring 10% or even 20% down payments. Congress should at least require a 5% down payment on loans that carry a taxpayer guarantee. If borrowers can't put at least 5% down, they can't afford the house.
As for rooting out fraud that contributes to high loss rates, the obvious solution is to drop the 100% guarantee on FHA mortgages. Why not hold banks liable for the first 10% of losses on the housing loans they originate, a reform that has been recommended since as far back as the early Reagan years? No other mortgage insurer insures 100% loan repayment. Alas, while offering its minireforms, the Obama Administration reassured its real-estate pals that FHA insurance will continue to carry "no risk to homeowners or bondholders."
Which means all the risk is on taxpayers. David Stevens, the FHA commissioner, nonetheless declared this month: "There will be no taxpayer bailout." That's also what Barney Frank said about Fannie and Freddie.
Banks that are 'too big to fail' have prevented low interest rates from doing their job
The Blob That Ate Monetary Policy. By RICHARD W. FISHER AND HARVEY ROSENBLUM
Banks that are 'too big to fail' have prevented low interest rates from doing their job.
WSJ, Sep 28, 2009
Fans of campy science fiction films know all too well that outsized monsters can wreak havoc on an otherwise peaceful and orderly society.
But what B-movie writer could have conjured up this scary scenario—Too Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007.
While the list of competitive advantages TBTF institutions have over their smaller rivals is long, it is also well-known. We focus instead on an unrecognized macroeconomic threat: The very existence of these banks has blocked, or seriously undermined, the mechanisms through which monetary policy influences the economy.
Economics textbooks tell us that when the Federal Reserve encounters rising unemployment and slowing growth, it purchases short-term Treasury bonds, thus lowering interest rates and inducing banks to lend more and borrowers to spend more. The banking system, and the capital markets that respond to these same signals, are critical to transmitting Fed policy actions into changes in economic activity.
These links normally function smoothly. Numerous academic studies have concluded that monetary policy before the financial crisis was working better, faster and more predictably than it did a few decades ago. Monetary policy's increased effectiveness helped usher in a quarter century of unprecedented macroeconomic stability often called The Great Moderation—infrequent and mild recessions accompanied by low inflation.
Then the Blob struck. With financial markets in trouble and the economy wobbling, the Fed began lowering its target interest rate two years ago, bringing it close to zero by December 2008. Other central banks followed suit. Based on recent experience, such aggressive policies should have fairly quickly restored stability and growth. Unfortunately, the Blob was already blocking the channels monetary policy uses to influence the real economy.
Many TBTF banks grew lax about risk as they chased higher returns through complex, exotic investments—the ones now classified as "toxic assets." As the financial crisis erupted, these banks saw their capital bases erode and wary financial markets made them pay dearly for new capital to shore up their balance sheets.
In this environment, monetary policy's interest-rate channel operated perversely. The rates that matter most for the economy's recovery—those paid by businesses and households—rose rather than fell. Those banks with the greatest toxic asset losses were the quickest to freeze or reduce their lending activity. Their borrowers faced higher interest rates and restricted access to funding when these banks raised their margins to ration the limited loans available or to reflect their own higher cost of funds as markets began to recognize the higher risk that TBTF banks represented.
The credit channel also narrowed because undercapitalized banks, especially those writing off or recognizing massive losses, must shrink, not grow, their private-sector loans. TBTF institutions account for more than half of the U.S. banking sector, and the industry is even more highly concentrated in the European Union. Small banks, most of them well capitalized, simply don't have the capacity to offset the TBTF banks' shrinking lending activity.
The balance-sheet channel depends on falling interest rates to push up the value of homes, stocks, bonds and other assets, creating a positive wealth effect that stimulates spending. When the financial crisis pushed interest rates perversely high, balance-sheet deleveraging took place instead, with households and businesses cutting their debt at the worst possible time.
Falling interest rates usually drive down the dollar's value against other currencies, opening an exchange-rate channel for monetary policy that boosts exports. In the financial crisis, the dollar rose for about a year relative to the euro and pound (but not the yen). This unusual behavior partly reflected higher interest rates, but probably had more to do with the perception that financial conditions at TBTF banks were worse in the EU than in the U.S.
Finally, the troubles of TBTF institutions gummed up the capital-market channel. In past crises, large companies had the alternative of issuing bonds when troubled banks raised rates or curtailed lending. In the past decade, however, deregulation allowed TBTF banks to become major players in capital markets. The dead weight of their toxic assets diminished the capacity of markets to keep debt and equity capital flowing to businesses and scared investors away.
Obstructions in the monetary-policy channels worsened a recession that has proven to be longer and, by many measures, more painful than any post-World War II slump. With its conventional policy tools blocked, the Fed has resorted to unprecedented measures over the past two years, opening new channels to bypass the blocked ones and restore the economy's credit flows.
Guarding against a resurgence of the omnivorous TBTF Blob will be among the goals of financial reform. Our analysis underscores the urgency of quickly implementing reforms in order to restore the ability of central banks to manage an effective monetary policy. Most observers agree on the need to implement and enforce rules that require more capital and less leverage for TBTF financial institutions. Think of it like lower speed limits for the heavy trucks, the ones whose accidents cause the most damage.
Japan paid dearly for propping up its troubled banks in the 1990s. We need to develop supervision and resolution mechanisms that make it possible for even the biggest boys to fail—in an orderly way, of course. We want creative destruction to work its wonders in the financial sector, just as it does elsewhere in the economy, so we never again have a system held hostage to poor risk management.
Other useful ideas center on creating early warning systems and acting more quickly to resolve problems at large financial enterprises with overwhelming problems. For example, we might require the largest institutions to issue debt with mandatory conversion to equity when certain triggers are reached. The existence of this contingency capital would induce debt holders to exert more market discipline on management and encourage increased transparency and reduced complexity, not to mention speed up the bankruptcy process.
Fueling the rapid growth of TBTF banks in this decade were convoluted arrangements now widely reduced to three-letter shorthand—CDSs, CDOs, SIVs and the rest, all brought to you by the same people who gave you TBTF.
Widespread use of these three-letter monsters had a lot to do with making financial institutions too complex to manage. How else can top management explain being blindsided by the wave of writedowns that began in February 2007? If a bank's true financial condition isn't understood by its highly paid leaders, how can bank supervisors, who rely on a bank's internal measurements as basic input, do their jobs?
Instead of attacking bigness per se, public policy should focus on encouraging transparency and simplicity. This is what markets are supposed to do but, for a variety of reasons, have failed to do.
The problem isn't just the riskiness of a big bank's assets, nor even the bank's size relative to the overall system. It's important to know whether the bank's asset holdings are highly correlated with those of other banks. Did they all make the same bad bets at the same time? Did they all bet that real-estate prices would rise forever? As we all know, the answer, in this decade, unfortunately, is "yes."
We hope that putting these basic principles into practice will encourage market forces to move in the direction of opportunistic deconsolidation—that is, the spinning off of parts of banking empires that have little or no economic basis for existing in the new environment.
Since the TBTF Blob reduces the effectiveness of monetary policy's transmission mechanisms, unorthodox policies become the only recourse. These measures carry great risks. Don't do enough and the economy may descend into a deflationary spiral. Doing too much for too long may ignite an inflationary burst.
Holding the TBTF Blob at bay will help keep the conventional channels operational. Monetary policy will stay in the ideal middle ground, navigating small changes in inflation rates running in the low one-to-two percent range, where central bankers are most comfortable and economies perform at maximum efficiency.
Mr. Fisher is president and chief executive officer of the Federal Reserve Bank of Dallas. Mr. Rosenblum is the bank's executive vice president and director of research.
Banks that are 'too big to fail' have prevented low interest rates from doing their job.
WSJ, Sep 28, 2009
Fans of campy science fiction films know all too well that outsized monsters can wreak havoc on an otherwise peaceful and orderly society.
But what B-movie writer could have conjured up this scary scenario—Too Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007.
While the list of competitive advantages TBTF institutions have over their smaller rivals is long, it is also well-known. We focus instead on an unrecognized macroeconomic threat: The very existence of these banks has blocked, or seriously undermined, the mechanisms through which monetary policy influences the economy.
Economics textbooks tell us that when the Federal Reserve encounters rising unemployment and slowing growth, it purchases short-term Treasury bonds, thus lowering interest rates and inducing banks to lend more and borrowers to spend more. The banking system, and the capital markets that respond to these same signals, are critical to transmitting Fed policy actions into changes in economic activity.
These links normally function smoothly. Numerous academic studies have concluded that monetary policy before the financial crisis was working better, faster and more predictably than it did a few decades ago. Monetary policy's increased effectiveness helped usher in a quarter century of unprecedented macroeconomic stability often called The Great Moderation—infrequent and mild recessions accompanied by low inflation.
Then the Blob struck. With financial markets in trouble and the economy wobbling, the Fed began lowering its target interest rate two years ago, bringing it close to zero by December 2008. Other central banks followed suit. Based on recent experience, such aggressive policies should have fairly quickly restored stability and growth. Unfortunately, the Blob was already blocking the channels monetary policy uses to influence the real economy.
Many TBTF banks grew lax about risk as they chased higher returns through complex, exotic investments—the ones now classified as "toxic assets." As the financial crisis erupted, these banks saw their capital bases erode and wary financial markets made them pay dearly for new capital to shore up their balance sheets.
In this environment, monetary policy's interest-rate channel operated perversely. The rates that matter most for the economy's recovery—those paid by businesses and households—rose rather than fell. Those banks with the greatest toxic asset losses were the quickest to freeze or reduce their lending activity. Their borrowers faced higher interest rates and restricted access to funding when these banks raised their margins to ration the limited loans available or to reflect their own higher cost of funds as markets began to recognize the higher risk that TBTF banks represented.
The credit channel also narrowed because undercapitalized banks, especially those writing off or recognizing massive losses, must shrink, not grow, their private-sector loans. TBTF institutions account for more than half of the U.S. banking sector, and the industry is even more highly concentrated in the European Union. Small banks, most of them well capitalized, simply don't have the capacity to offset the TBTF banks' shrinking lending activity.
The balance-sheet channel depends on falling interest rates to push up the value of homes, stocks, bonds and other assets, creating a positive wealth effect that stimulates spending. When the financial crisis pushed interest rates perversely high, balance-sheet deleveraging took place instead, with households and businesses cutting their debt at the worst possible time.
Falling interest rates usually drive down the dollar's value against other currencies, opening an exchange-rate channel for monetary policy that boosts exports. In the financial crisis, the dollar rose for about a year relative to the euro and pound (but not the yen). This unusual behavior partly reflected higher interest rates, but probably had more to do with the perception that financial conditions at TBTF banks were worse in the EU than in the U.S.
Finally, the troubles of TBTF institutions gummed up the capital-market channel. In past crises, large companies had the alternative of issuing bonds when troubled banks raised rates or curtailed lending. In the past decade, however, deregulation allowed TBTF banks to become major players in capital markets. The dead weight of their toxic assets diminished the capacity of markets to keep debt and equity capital flowing to businesses and scared investors away.
Obstructions in the monetary-policy channels worsened a recession that has proven to be longer and, by many measures, more painful than any post-World War II slump. With its conventional policy tools blocked, the Fed has resorted to unprecedented measures over the past two years, opening new channels to bypass the blocked ones and restore the economy's credit flows.
Guarding against a resurgence of the omnivorous TBTF Blob will be among the goals of financial reform. Our analysis underscores the urgency of quickly implementing reforms in order to restore the ability of central banks to manage an effective monetary policy. Most observers agree on the need to implement and enforce rules that require more capital and less leverage for TBTF financial institutions. Think of it like lower speed limits for the heavy trucks, the ones whose accidents cause the most damage.
Japan paid dearly for propping up its troubled banks in the 1990s. We need to develop supervision and resolution mechanisms that make it possible for even the biggest boys to fail—in an orderly way, of course. We want creative destruction to work its wonders in the financial sector, just as it does elsewhere in the economy, so we never again have a system held hostage to poor risk management.
Other useful ideas center on creating early warning systems and acting more quickly to resolve problems at large financial enterprises with overwhelming problems. For example, we might require the largest institutions to issue debt with mandatory conversion to equity when certain triggers are reached. The existence of this contingency capital would induce debt holders to exert more market discipline on management and encourage increased transparency and reduced complexity, not to mention speed up the bankruptcy process.
Fueling the rapid growth of TBTF banks in this decade were convoluted arrangements now widely reduced to three-letter shorthand—CDSs, CDOs, SIVs and the rest, all brought to you by the same people who gave you TBTF.
Widespread use of these three-letter monsters had a lot to do with making financial institutions too complex to manage. How else can top management explain being blindsided by the wave of writedowns that began in February 2007? If a bank's true financial condition isn't understood by its highly paid leaders, how can bank supervisors, who rely on a bank's internal measurements as basic input, do their jobs?
Instead of attacking bigness per se, public policy should focus on encouraging transparency and simplicity. This is what markets are supposed to do but, for a variety of reasons, have failed to do.
The problem isn't just the riskiness of a big bank's assets, nor even the bank's size relative to the overall system. It's important to know whether the bank's asset holdings are highly correlated with those of other banks. Did they all make the same bad bets at the same time? Did they all bet that real-estate prices would rise forever? As we all know, the answer, in this decade, unfortunately, is "yes."
We hope that putting these basic principles into practice will encourage market forces to move in the direction of opportunistic deconsolidation—that is, the spinning off of parts of banking empires that have little or no economic basis for existing in the new environment.
Since the TBTF Blob reduces the effectiveness of monetary policy's transmission mechanisms, unorthodox policies become the only recourse. These measures carry great risks. Don't do enough and the economy may descend into a deflationary spiral. Doing too much for too long may ignite an inflationary burst.
Holding the TBTF Blob at bay will help keep the conventional channels operational. Monetary policy will stay in the ideal middle ground, navigating small changes in inflation rates running in the low one-to-two percent range, where central bankers are most comfortable and economies perform at maximum efficiency.
Mr. Fisher is president and chief executive officer of the Federal Reserve Bank of Dallas. Mr. Rosenblum is the bank's executive vice president and director of research.
Sunday, September 27, 2009
Bank regulation, capital and credit supply: Measuring the impact of Prudential Standards
Bank regulation, capital and credit supply: Measuring the impact of Prudential Standards. By William Francis & Matthew Osborne
UK Financial Services Authority. Sept 2009
Abstract
The existence of a “bank capital channel”, where shocks to a bank’s capital affect the level and composition of its assets, implies that changes in bank capital regulation have implications for macroeconomic outcomes, since profit-maximising banks may respond by altering credit supply or making other changes to their asset mix. The existence of such a channel requires (i) that banks do not have excess capital with which to insulate credit supply from regulatory changes, (ii) raising capital is costly for banks, and (iii) firms and consumers in the economy are to some extent dependent on banks for credit. This study investigates evidence on the existence of a bank capital channel in the UK lending market. We estimate a long-run internal target risk-weighted capital ratio for each bank in the UK which is found to be a function of the capital requirements set for individual banks by the FSA and the Bank of England as the previous supervisor (Although within the FSA’s regulatory capital framework the FSA’s view of the capital that an individual bank should hold is given to the firm through individual capital guidance, for reasons of simplicity/consistency this paper refers throughout to “capital requirements”). We further find that in the period 1996-2007, banks with surpluses (deficits) of capital relative to this target tend to have higher (lower) growth in credit and other on- and off-balance sheet asset measures, and lower (higher) growth in regulatory capital and tier 1 capital. These findings have important implications for the assessment of changes to the design and calibration of capital requirements, since while tighter standards may produce significant benefits such as greater financial stability and a lower probability of crisis events, our results suggest that they may also have costs in terms of reduced loan supply. We find that a single percentage point increase in 2002 would have reduced lending by 1.2% and total risk weighted assets by 2.4% after four years. We also simulate the impact of a countercyclical capital requirement imposing three one-point rises in capital requirements in 1997, 2001 and 2003. By the end of 2007, these might have reduced the stock of lending by 5.2% and total risk-weighted assets by 10.2%.
UK Financial Services Authority. Sept 2009
Abstract
The existence of a “bank capital channel”, where shocks to a bank’s capital affect the level and composition of its assets, implies that changes in bank capital regulation have implications for macroeconomic outcomes, since profit-maximising banks may respond by altering credit supply or making other changes to their asset mix. The existence of such a channel requires (i) that banks do not have excess capital with which to insulate credit supply from regulatory changes, (ii) raising capital is costly for banks, and (iii) firms and consumers in the economy are to some extent dependent on banks for credit. This study investigates evidence on the existence of a bank capital channel in the UK lending market. We estimate a long-run internal target risk-weighted capital ratio for each bank in the UK which is found to be a function of the capital requirements set for individual banks by the FSA and the Bank of England as the previous supervisor (Although within the FSA’s regulatory capital framework the FSA’s view of the capital that an individual bank should hold is given to the firm through individual capital guidance, for reasons of simplicity/consistency this paper refers throughout to “capital requirements”). We further find that in the period 1996-2007, banks with surpluses (deficits) of capital relative to this target tend to have higher (lower) growth in credit and other on- and off-balance sheet asset measures, and lower (higher) growth in regulatory capital and tier 1 capital. These findings have important implications for the assessment of changes to the design and calibration of capital requirements, since while tighter standards may produce significant benefits such as greater financial stability and a lower probability of crisis events, our results suggest that they may also have costs in terms of reduced loan supply. We find that a single percentage point increase in 2002 would have reduced lending by 1.2% and total risk weighted assets by 2.4% after four years. We also simulate the impact of a countercyclical capital requirement imposing three one-point rises in capital requirements in 1997, 2001 and 2003. By the end of 2007, these might have reduced the stock of lending by 5.2% and total risk-weighted assets by 10.2%.
Saturday, September 26, 2009
Too Early To Call Recovery, NYSE Euronext CEO Says
Too Early To Call Recovery, NYSE Euronext CEO Says. By Daisy Maxey
Dow Jones, Sep 24, 2009 15:13
New York -(Dow Jones)- Duncan Niederauer, chief executive of the NYSE Euronext (NYX), said he sees reason to be optimistic about the economy, but believes it's far too early to tell if the market's rebound indicates an economic recovery.
Niederauer said he hasn't seen enough from the government to directly stimulate investments. He made his comments here Thursday at the Investment Company Institute's 11th annual capital markets conference.
"We need to make sure that the money is available, and right now the credit market is not really open," he said. If you are a smaller company looking for affordable private capital, "forget it," he said.
He also called for simpler, more harmonized market regulation, and a more level playing field between regulated exchanges and alternatives, such a dark pools.
With U.N. meetings now taking place in the city, Niederauer said he's met with many heads of state this week.
"When I say that it's really difficult for small companies with pristine credit ratings to get affordable private capital," they say it's the same in their countries, he said.
While a lot of the solutions proposed by the Obama administration are " directionally correct," it hasn't taken action on many reforms yet, Niederauer said. One area of concern, he said, is the gap that exists between the Securities and Exchange Commission and the Commodity Futures Trading Commission.
It's important to recognize that a lot of those in Washington, D.C., are not aware that about 40% of the market is opaque and largely unregulated. "They don't understand it," he said.
As for unregulated exchanges, Niederauer said he's not calling for the end to dark pools, though he does wish the barriers to entry were higher. He noted, however, that "we are burdened with a lot of stuff that those entities are not."
While a dark pool can simply move ahead with an idea, "we have to write a rule, file with the SEC, go through drafting, drafting, drafting," to move forward, he said. "They go fast, and we are forced to go really slow."
He called on regulators to level the playing field between the regulated exchanges and these unregulated venues.
"If you are going to allow these pools to exist, why would anyone want to be a regulated exchange?" he asked. "There are only burdens (to being a regulated exchange) in this country, and it's becoming increasing the case in Europe."
In addition, Niederauer indicated that there's room for manipulation of exchanges as they exist now. "If our responsibility collectively is to police the broader equity market, somebody needs 100% of the information," he said. " Right now, we don't have it."
Those venues that say they can't be manipulated don't know enough to be sure, he said. Those who wish to manipulate will not execute all legs of their plan in one venue, he said.
(END) Dow Jones Newswires
Dow Jones, Sep 24, 2009 15:13
New York -(Dow Jones)- Duncan Niederauer, chief executive of the NYSE Euronext (NYX), said he sees reason to be optimistic about the economy, but believes it's far too early to tell if the market's rebound indicates an economic recovery.
Niederauer said he hasn't seen enough from the government to directly stimulate investments. He made his comments here Thursday at the Investment Company Institute's 11th annual capital markets conference.
"We need to make sure that the money is available, and right now the credit market is not really open," he said. If you are a smaller company looking for affordable private capital, "forget it," he said.
He also called for simpler, more harmonized market regulation, and a more level playing field between regulated exchanges and alternatives, such a dark pools.
With U.N. meetings now taking place in the city, Niederauer said he's met with many heads of state this week.
"When I say that it's really difficult for small companies with pristine credit ratings to get affordable private capital," they say it's the same in their countries, he said.
While a lot of the solutions proposed by the Obama administration are " directionally correct," it hasn't taken action on many reforms yet, Niederauer said. One area of concern, he said, is the gap that exists between the Securities and Exchange Commission and the Commodity Futures Trading Commission.
It's important to recognize that a lot of those in Washington, D.C., are not aware that about 40% of the market is opaque and largely unregulated. "They don't understand it," he said.
As for unregulated exchanges, Niederauer said he's not calling for the end to dark pools, though he does wish the barriers to entry were higher. He noted, however, that "we are burdened with a lot of stuff that those entities are not."
While a dark pool can simply move ahead with an idea, "we have to write a rule, file with the SEC, go through drafting, drafting, drafting," to move forward, he said. "They go fast, and we are forced to go really slow."
He called on regulators to level the playing field between the regulated exchanges and these unregulated venues.
"If you are going to allow these pools to exist, why would anyone want to be a regulated exchange?" he asked. "There are only burdens (to being a regulated exchange) in this country, and it's becoming increasing the case in Europe."
In addition, Niederauer indicated that there's room for manipulation of exchanges as they exist now. "If our responsibility collectively is to police the broader equity market, somebody needs 100% of the information," he said. " Right now, we don't have it."
Those venues that say they can't be manipulated don't know enough to be sure, he said. Those who wish to manipulate will not execute all legs of their plan in one venue, he said.
(END) Dow Jones Newswires
Volcker says Treasury's reform will lead to future bailouts
Too Big to Ignore. WSJ Editorial
Volcker says Treasury's reform will lead to future bailouts. He's right.
The Wall Street Journal, page A14, Sep 26, 2009
President Obama's economic advisers are struggling to sell their financial reform plan to . . . an Obama economic adviser. Paul Volcker, the Democrat and former Federal Reserve chairman who worked with President Reagan to slay inflation in the 1980s, now leads President Obama's Economic Recovery Advisory Board. He warned in Congressional testimony Thursday that the pending Treasury plan could lead to more taxpayer bailouts by designating even nonbanks as "systemically important."
"The clear implication of such designation whether officially acknowledged or not will be that such institutions . . . will be sheltered by access to a federal safety net in time of crisis; they will be broadly understood to be 'too big to fail,'" Mr. Volcker told Congress.
Rather than creating broad bailout expectations destined to be expensively fulfilled, the former Fed chairman wants Washington to draw a tighter circle around commercial banks with insured deposits. Those inside the circle get heavy oversight and are eligible for assistance during a crisis. Assumptions that various other firms also enjoy the federal safety net "should be discouraged," said Mr. Volcker.
We don't agree with all of Mr. Volcker's prescriptions—nor he with ours—but on too big to fail he's exactly right. As he also told Congress, regulators are unlikely to correctly guess which firms will pose systemic risk, and the implicit protection by taxpayers could put firms not deemed important by Washington at a market disadvantage. He also pointed out that, while Team Obama pushes its plan to address firms that are "systemically important," Treasury still hasn't said what exactly that means.
Mr. Volcker's comments won't endear him to Administration officials due to receive more power under the Treasury plan, but taxpayers should be cheering his counsel.
Volcker says Treasury's reform will lead to future bailouts. He's right.
The Wall Street Journal, page A14, Sep 26, 2009
President Obama's economic advisers are struggling to sell their financial reform plan to . . . an Obama economic adviser. Paul Volcker, the Democrat and former Federal Reserve chairman who worked with President Reagan to slay inflation in the 1980s, now leads President Obama's Economic Recovery Advisory Board. He warned in Congressional testimony Thursday that the pending Treasury plan could lead to more taxpayer bailouts by designating even nonbanks as "systemically important."
"The clear implication of such designation whether officially acknowledged or not will be that such institutions . . . will be sheltered by access to a federal safety net in time of crisis; they will be broadly understood to be 'too big to fail,'" Mr. Volcker told Congress.
Rather than creating broad bailout expectations destined to be expensively fulfilled, the former Fed chairman wants Washington to draw a tighter circle around commercial banks with insured deposits. Those inside the circle get heavy oversight and are eligible for assistance during a crisis. Assumptions that various other firms also enjoy the federal safety net "should be discouraged," said Mr. Volcker.
We don't agree with all of Mr. Volcker's prescriptions—nor he with ours—but on too big to fail he's exactly right. As he also told Congress, regulators are unlikely to correctly guess which firms will pose systemic risk, and the implicit protection by taxpayers could put firms not deemed important by Washington at a market disadvantage. He also pointed out that, while Team Obama pushes its plan to address firms that are "systemically important," Treasury still hasn't said what exactly that means.
Mr. Volcker's comments won't endear him to Administration officials due to receive more power under the Treasury plan, but taxpayers should be cheering his counsel.
Thursday, September 24, 2009
Bank Pay and the Financial Crisis: G-20 accounting rules, not bank bonuses, put the system at risk
Bank Pay and the Financial Crisis. By JEFFREY FRIEDMAN
G-20 accounting rules, not bank bonuses, put the system at risk.
The Wall Street Journal, page A21
The developed world's financial regulators and political leaders have, as one, decided what caused the financial crisis: the compensation systems used by banks to reward their employees. So the only question to be discussed at the G-20 summit that begins today in Pittsburgh is how draconian the restrictions on banker compensation should be.
The compensation theory is a familiar greed narrative: Bank employees, from CEOs to traders, knowingly risked the destruction of their companies because their pay rewarded them for short-term profits, regardless of long-term risks. It's conceivable this theory is true. But thus far there is no evidence for it—and much evidence against it.
For one thing, according to Rene Stulz of Ohio State, bank CEOs held about 10 times as much of their banks' stock as they were typically paid per year. Deliberately courting risk would have put their own fortunes at risk. Richard Fuld of Lehman Brothers reportedly lost almost $1 billion due to the decline in the value of his holdings, while Sanford Weill of Citigroup reportedly lost half that amount.
In the only scholarly study of the relationship between banker pay and the financial crisis, Mr. Stulz and his colleague Rüdiger Fahlenbrach show that banks whose CEOs held a lot of bank stock did worse than banks whose CEOs held less stock. (The study was published in July on SSRN.com.) Another study by compensation consultant Watson Wyatt Worldwide in July shows a negative correlation between firm Z scores—a measure of their risk of bankruptcy—and their use of such widely criticized practices as executive bonuses, variable pay and stock options. These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.
Ignorance of risk is also suggested in a study by Viral V. Acharya and Matthew Richardson of New York University (just published in the journal Critical Review). Their research shows that 81% of the time the mortgage-backed securities purchased by bank employees were rated AAA. AAA securities produced lower returns than the AA and lower-rated tranches that were available. Bankers greedy for high returns and oblivious to risk would have bought BBBs, not AAAs.
Even more relevant to the question of culpability in the financial system's crisis is why banks were buying mortgage-backed securities at all.
Commercial bank capital holdings are governed by the Basel regulations, which are set by the financial regulators of the G-20 nations. In 2001, U.S. regulators enacted the Recourse Rule, amending the Basel I accords of 1988. Under this rule, American banks needed to hold far more of a capital cushion against individual mortgages and commercial loans than against mortgage-backed securities rated AA or AAA. Similar regulations, contained in the Basel II accords, began to be implemented across the other G-20 countries in 2007. The effect of these regulations was to create immense profit opportunities for a bank that shifted its portfolio from mortgages and commercial loans to mortgage-backed securities.
Bankers were of course seeking profits by purchasing mortgage-backed securities, but the evidence is that they thought they were being prudent in doing so. They bought AAA instead of more lucrative AA tranches, and they bought credit-default-swap and other insurance against default. None of this can be explained unless, on balance, the banks' management and risk-control systems kept in check whatever incentives to ignore risk had been created by the banks' compensation systems.
Banks did not behave uniformly. Citigroup bought as many mortgage-backed securities as it could; banks such as J.P. Morgan Chase did not. Were incentives at work? Yes. But all bankers faced the same artificially created incentive to buy mortgage-backed securities. Most bankers seem to have agreed with the regulators that the profit opportunity created by the regulations outweighed any risk in these securities, especially when they were rated AAA. But some bankers, like Morgan's Jamie Dimon, disagreed.
That type of disagreement, otherwise known as "competition," is the beating heart of capitalism. Different enterprises compete with each other by pursuing different strategies. These strategies encompass everything an enterprise does—including how it manages and pays its employees.
At bottom, all the practices of an enterprise are tacit predictions about which procedures will bring the most reward and which ones will avoid excessive risk. Accurate predictions bring profits and survival; mistaken predictions bring losses and bankruptcy. But nobody can know in advance which predictions are right. By allowing different capitalists' fallible predictions to compete, capitalism spreads a society's bets among a variety of different ideas. That, not the pursuit of self-interest, is the secret of capitalism's achievements.
To be sure, capitalists' different ideas are all, in the end, about how to gain profit. That's why incentives matter. But what matters even more are diverse predictions about where profits—and losses—are likely to be found. For this reason, herd behavior is a danger to capitalism, if the herd bets wrong. But herd behavior is imposed on capitalists every time a regulation is enacted—and regulators, being as human as bankers, can be wrong.
Regulations homogenize. The Basel rules imposed on the whole banking system a single idea about what makes for prudent banking. Even when regulations take the form of inducements rather than prohibitions, they skew the risk/reward calculations of all capitalists subject to them. The whole point of regulation is to make those being regulated do what the regulators predict will be beneficial. If the regulators are mistaken, the whole system is at risk.
That was what happened with the G-20's own Basel rules. Now the G-20 has decided to blame the crisis on bank compensation systems, which it proposes to homogenize just as it had previously homogenized bank capital allocation. What has not been explained is why we should trust that the G-20's regulations won't be mistaken once again.
Mr. Friedman is a visiting scholar in the government department at the University of Texas, Austin, and the editor of the journal Critical Review, which has just published a special issue on the causes of the financial crisis.
G-20 accounting rules, not bank bonuses, put the system at risk.
The Wall Street Journal, page A21
The developed world's financial regulators and political leaders have, as one, decided what caused the financial crisis: the compensation systems used by banks to reward their employees. So the only question to be discussed at the G-20 summit that begins today in Pittsburgh is how draconian the restrictions on banker compensation should be.
The compensation theory is a familiar greed narrative: Bank employees, from CEOs to traders, knowingly risked the destruction of their companies because their pay rewarded them for short-term profits, regardless of long-term risks. It's conceivable this theory is true. But thus far there is no evidence for it—and much evidence against it.
For one thing, according to Rene Stulz of Ohio State, bank CEOs held about 10 times as much of their banks' stock as they were typically paid per year. Deliberately courting risk would have put their own fortunes at risk. Richard Fuld of Lehman Brothers reportedly lost almost $1 billion due to the decline in the value of his holdings, while Sanford Weill of Citigroup reportedly lost half that amount.
In the only scholarly study of the relationship between banker pay and the financial crisis, Mr. Stulz and his colleague Rüdiger Fahlenbrach show that banks whose CEOs held a lot of bank stock did worse than banks whose CEOs held less stock. (The study was published in July on SSRN.com.) Another study by compensation consultant Watson Wyatt Worldwide in July shows a negative correlation between firm Z scores—a measure of their risk of bankruptcy—and their use of such widely criticized practices as executive bonuses, variable pay and stock options. These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.
Ignorance of risk is also suggested in a study by Viral V. Acharya and Matthew Richardson of New York University (just published in the journal Critical Review). Their research shows that 81% of the time the mortgage-backed securities purchased by bank employees were rated AAA. AAA securities produced lower returns than the AA and lower-rated tranches that were available. Bankers greedy for high returns and oblivious to risk would have bought BBBs, not AAAs.
Even more relevant to the question of culpability in the financial system's crisis is why banks were buying mortgage-backed securities at all.
Commercial bank capital holdings are governed by the Basel regulations, which are set by the financial regulators of the G-20 nations. In 2001, U.S. regulators enacted the Recourse Rule, amending the Basel I accords of 1988. Under this rule, American banks needed to hold far more of a capital cushion against individual mortgages and commercial loans than against mortgage-backed securities rated AA or AAA. Similar regulations, contained in the Basel II accords, began to be implemented across the other G-20 countries in 2007. The effect of these regulations was to create immense profit opportunities for a bank that shifted its portfolio from mortgages and commercial loans to mortgage-backed securities.
Bankers were of course seeking profits by purchasing mortgage-backed securities, but the evidence is that they thought they were being prudent in doing so. They bought AAA instead of more lucrative AA tranches, and they bought credit-default-swap and other insurance against default. None of this can be explained unless, on balance, the banks' management and risk-control systems kept in check whatever incentives to ignore risk had been created by the banks' compensation systems.
Banks did not behave uniformly. Citigroup bought as many mortgage-backed securities as it could; banks such as J.P. Morgan Chase did not. Were incentives at work? Yes. But all bankers faced the same artificially created incentive to buy mortgage-backed securities. Most bankers seem to have agreed with the regulators that the profit opportunity created by the regulations outweighed any risk in these securities, especially when they were rated AAA. But some bankers, like Morgan's Jamie Dimon, disagreed.
That type of disagreement, otherwise known as "competition," is the beating heart of capitalism. Different enterprises compete with each other by pursuing different strategies. These strategies encompass everything an enterprise does—including how it manages and pays its employees.
At bottom, all the practices of an enterprise are tacit predictions about which procedures will bring the most reward and which ones will avoid excessive risk. Accurate predictions bring profits and survival; mistaken predictions bring losses and bankruptcy. But nobody can know in advance which predictions are right. By allowing different capitalists' fallible predictions to compete, capitalism spreads a society's bets among a variety of different ideas. That, not the pursuit of self-interest, is the secret of capitalism's achievements.
To be sure, capitalists' different ideas are all, in the end, about how to gain profit. That's why incentives matter. But what matters even more are diverse predictions about where profits—and losses—are likely to be found. For this reason, herd behavior is a danger to capitalism, if the herd bets wrong. But herd behavior is imposed on capitalists every time a regulation is enacted—and regulators, being as human as bankers, can be wrong.
Regulations homogenize. The Basel rules imposed on the whole banking system a single idea about what makes for prudent banking. Even when regulations take the form of inducements rather than prohibitions, they skew the risk/reward calculations of all capitalists subject to them. The whole point of regulation is to make those being regulated do what the regulators predict will be beneficial. If the regulators are mistaken, the whole system is at risk.
That was what happened with the G-20's own Basel rules. Now the G-20 has decided to blame the crisis on bank compensation systems, which it proposes to homogenize just as it had previously homogenized bank capital allocation. What has not been explained is why we should trust that the G-20's regulations won't be mistaken once again.
Mr. Friedman is a visiting scholar in the government department at the University of Texas, Austin, and the editor of the journal Critical Review, which has just published a special issue on the causes of the financial crisis.
Tuesday, September 22, 2009
Paul H Robinson: Many restrictions on the use of force against aggressors make no moral sense
Israel and the Trouble With International Law. By PAUL H. ROBINSON
Many restrictions on the use of force against aggressors make no moral sense.
The Wall Street Journal, page A25, Sep 22, 2009
Last week the United Nations issued a report painting the Israelis as major violators of international law in the three-week Gaza war that began in December 2008. While many find the conclusion a bit unsettling or even bizarre, the report's conclusion may be largely correct.
This says more about international law, however, than it does about the propriety of Israel's conduct. The rules of international law governing the use of force by victims of aggression are embarrassingly unjust and would never be tolerated by any domestic criminal law system. They give the advantage to unlawful aggressors and thereby undermine international justice, security and stability.
Article 51 of the U.N. Charter forbids all use of force except that for "self-defense if an armed attack occurs." Thus the United Kingdom's 1946 removal of sea mines that struck ships in the Strait of Corfu was held to be an illegal use of force by the International Court of Justice, even though Albania had refused to remove its mines from this much used international waterway. Israel's raid on Uganda's Entebbe Airport in 1976—to rescue the victims of an airplane hijacking by Palestinian terrorists—was also illegal under Article 51.
Domestic criminal law restricts the use of defensive force in large part because the law prefers that police be called, when possible, to do the defending. Force is authorized primarily to keep defenders safe until law enforcement officers arrive. Since there are no international police to call, the rules of international law should allow broader use of force by victims of aggression. But the rules are actually narrower.
Imagine that a local drug gang plans to rob your store and kill your security guards. There are no police, so the gang openly prepares its attack in the parking lot across the street, waiting only for the cover of darkness to increase its tactical advantage. If its intentions are clear, must you wait until the time the gang picks as being most advantageous to it?
American criminal law does not require that you wait. It allows force if it is "immediately necessary" (as stated in the American Law Institute's Model Penal Code, on which all states model their own codes), even if the attack is not yet imminent. Yet international law does require that you wait. Thus, in the 1967 Six Day War, Israel's use of force against Egypt, Syria and Jordan—neighbors that were preparing an attack to destroy it—was illegal under the U.N. Charter's Article 51, which forbids any use of force until the attack actually "occurs."
Now imagine that your next-door neighbor allows his house to be used by thugs who regularly attack your family. In the absence of a police force able or willing to intervene, it would be quite odd to forbid you to use force against the thugs in their sanctuary or against the sanctuary-giving neighbor.
Yet that is what international law does. From 1979-1981 the Sandinista government of Nicaragua unlawfully supplied arms and safe haven to insurgents seeking to overthrow the government of El Salvador. Yet El Salvador had no right under international law to use any force to end Nicaragua's violations of its sovereignty. The U.S. removal of the Taliban from Afghanistan in 2001 was similarly illegal under the U.N. Charter (although it earned broad international support).
An aggressor pressing a series of attacks is protected by international law in between attacks, and it can take comfort that the law allows force only against its raiders, not their support elements. In 1987, beginning with a missile strike on a Kuwaiti tanker, the Iranians launched attacks on shipping that were staged from their offshore oil platforms in the Persian Gulf. While it was difficult to catch the raiding parties in the act (note the current difficulty in defending shipping against the Somali pirates), the oil platforms used to stage the attacks could be and were attacked by the U.S. Yet these strikes were held illegal by the International Court of Justice.
Social science has increasingly shown that law's ability to gain compliance is in large measure a product of its credibility and legitimacy with its public. A law seen as unjust promotes resistance, undermines compliance, and loses its power to harness the powerful forces of social influence, stigmatization and condemnation.
Because international law has no enforcement mechanism, it is almost wholly dependent upon moral authority to gain compliance. Yet the reputation international law will increasingly earn from its rules on the use of defensive force is one of moral deafness.
True, it will not always be the best course for a victim of unlawful aggression to use force to defend or deter. Sometimes the smart course is no response or a merely symbolic one. But every state ought to have the lawful choice to do what is necessary to protect itself from aggression.
Rational people must share the dream of a world at peace. Thus the U.N. Charter's severe restrictions on use of force might be understandable—if only one could stop all use of force by creating a rule against it. Since that's not possible, the U.N. rule is dangerously naive. By creating what amount to "aggressors' rights," the restrictions on self-defense undermine justice and promote unlawful aggression. This erodes the moral authority of international law and makes less likely a future in which nations will turn to it, rather than to force.
Mr. Robinson, a professor of law at the University of Pennsylvania, is the co-author of "Law Without Justice: Why Criminal Law Does Not Give People What They Deserve" (Oxford, 2006).
Many restrictions on the use of force against aggressors make no moral sense.
The Wall Street Journal, page A25, Sep 22, 2009
Last week the United Nations issued a report painting the Israelis as major violators of international law in the three-week Gaza war that began in December 2008. While many find the conclusion a bit unsettling or even bizarre, the report's conclusion may be largely correct.
This says more about international law, however, than it does about the propriety of Israel's conduct. The rules of international law governing the use of force by victims of aggression are embarrassingly unjust and would never be tolerated by any domestic criminal law system. They give the advantage to unlawful aggressors and thereby undermine international justice, security and stability.
Article 51 of the U.N. Charter forbids all use of force except that for "self-defense if an armed attack occurs." Thus the United Kingdom's 1946 removal of sea mines that struck ships in the Strait of Corfu was held to be an illegal use of force by the International Court of Justice, even though Albania had refused to remove its mines from this much used international waterway. Israel's raid on Uganda's Entebbe Airport in 1976—to rescue the victims of an airplane hijacking by Palestinian terrorists—was also illegal under Article 51.
Domestic criminal law restricts the use of defensive force in large part because the law prefers that police be called, when possible, to do the defending. Force is authorized primarily to keep defenders safe until law enforcement officers arrive. Since there are no international police to call, the rules of international law should allow broader use of force by victims of aggression. But the rules are actually narrower.
Imagine that a local drug gang plans to rob your store and kill your security guards. There are no police, so the gang openly prepares its attack in the parking lot across the street, waiting only for the cover of darkness to increase its tactical advantage. If its intentions are clear, must you wait until the time the gang picks as being most advantageous to it?
American criminal law does not require that you wait. It allows force if it is "immediately necessary" (as stated in the American Law Institute's Model Penal Code, on which all states model their own codes), even if the attack is not yet imminent. Yet international law does require that you wait. Thus, in the 1967 Six Day War, Israel's use of force against Egypt, Syria and Jordan—neighbors that were preparing an attack to destroy it—was illegal under the U.N. Charter's Article 51, which forbids any use of force until the attack actually "occurs."
Now imagine that your next-door neighbor allows his house to be used by thugs who regularly attack your family. In the absence of a police force able or willing to intervene, it would be quite odd to forbid you to use force against the thugs in their sanctuary or against the sanctuary-giving neighbor.
Yet that is what international law does. From 1979-1981 the Sandinista government of Nicaragua unlawfully supplied arms and safe haven to insurgents seeking to overthrow the government of El Salvador. Yet El Salvador had no right under international law to use any force to end Nicaragua's violations of its sovereignty. The U.S. removal of the Taliban from Afghanistan in 2001 was similarly illegal under the U.N. Charter (although it earned broad international support).
An aggressor pressing a series of attacks is protected by international law in between attacks, and it can take comfort that the law allows force only against its raiders, not their support elements. In 1987, beginning with a missile strike on a Kuwaiti tanker, the Iranians launched attacks on shipping that were staged from their offshore oil platforms in the Persian Gulf. While it was difficult to catch the raiding parties in the act (note the current difficulty in defending shipping against the Somali pirates), the oil platforms used to stage the attacks could be and were attacked by the U.S. Yet these strikes were held illegal by the International Court of Justice.
Social science has increasingly shown that law's ability to gain compliance is in large measure a product of its credibility and legitimacy with its public. A law seen as unjust promotes resistance, undermines compliance, and loses its power to harness the powerful forces of social influence, stigmatization and condemnation.
Because international law has no enforcement mechanism, it is almost wholly dependent upon moral authority to gain compliance. Yet the reputation international law will increasingly earn from its rules on the use of defensive force is one of moral deafness.
True, it will not always be the best course for a victim of unlawful aggression to use force to defend or deter. Sometimes the smart course is no response or a merely symbolic one. But every state ought to have the lawful choice to do what is necessary to protect itself from aggression.
Rational people must share the dream of a world at peace. Thus the U.N. Charter's severe restrictions on use of force might be understandable—if only one could stop all use of force by creating a rule against it. Since that's not possible, the U.N. rule is dangerously naive. By creating what amount to "aggressors' rights," the restrictions on self-defense undermine justice and promote unlawful aggression. This erodes the moral authority of international law and makes less likely a future in which nations will turn to it, rather than to force.
Mr. Robinson, a professor of law at the University of Pennsylvania, is the co-author of "Law Without Justice: Why Criminal Law Does Not Give People What They Deserve" (Oxford, 2006).
Laffer: Tariffs, rising state and federal taxes, and currency devaluation ruined the 1930s, and they could do the same today
Taxes, Depression, and Our Current Troubles. By ARTHUR B. LAFFER
Tariffs, rising state and federal taxes, and currency devaluation ruined the 1930s, and they could do the same today.
The Wall Street Journal, page A25, Sep 22, 2009
The 1930s has become the sole object lesson for today's monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there's been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.
Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.
While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.
In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.
But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.
Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.
The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.
In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.
The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.
By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, "A Monetary History of the United States," economists Milton Friedman and Anna Schwartz wrote, "Fears of devaluation were widespread and the public's preference for gold was unmistakable." Panic ensued and there was a rush to buy gold.
In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to "hoard" gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax.
The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story.
The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.
My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.
Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen" (Threshold, 2008).
Tariffs, rising state and federal taxes, and currency devaluation ruined the 1930s, and they could do the same today.
The Wall Street Journal, page A25, Sep 22, 2009
The 1930s has become the sole object lesson for today's monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there's been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.
Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.
While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.
In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.
But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.
Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.
The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.
In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.
The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.
By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, "A Monetary History of the United States," economists Milton Friedman and Anna Schwartz wrote, "Fears of devaluation were widespread and the public's preference for gold was unmistakable." Panic ensued and there was a rush to buy gold.
In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to "hoard" gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax.
The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story.
The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.
My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.
Mr. Laffer is the chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen" (Threshold, 2008).
How Missouri Cut Junk Lawsuits
How Missouri Cut Junk Lawsuits. By MATT BLUNT
We showed how to do malpractice reform, if Congress wants a model
The Wall Street Journal, page A23, Sep 22, 2009
There has been a lot of talk in Washington about cutting wasteful health-care spending, but it is troubling that such talk has not created a sense of urgency for national tort reform. It is especially frustrating because states have already shown that curbing junk lawsuits can cut costs, create jobs, and increase the quality of care available to patients.
I know this because that is exactly what happened in Missouri when, as governor, I helped to enact comprehensive reforms.
I took office in January 2005 at a time when runaway lawsuits were driving up the cost of doing business in my state and forcing doctors and other business owners to close their doors. The U.S. Chamber of Commerce Institute for Legal Reform keeps a list of states ranked according to their legal environment. At the time, Missouri ranked among the 10 worst.
"Venue-shopping," a tactic that involves shifting a case to a friendly court regardless of where the injury occurred, was common. Defendants could be made to pay 100% of a judgment even if they were only 1% responsible for the injury. And caps on damages had been rendered meaningless by state court decisions.
This legal environment raised the cost of health care for everyone and imposed stiff costs on businesses. It also forced doctors to close their doors. For example, the eastern half of Jackson County, one of Missouri's largest, lost its only neurosurgeons in 2003 due to high malpractice insurance costs. Many other parts of the state suffered from a lack of doctors able to deliver babies. One obstetrician who delivered more than 200 babies annually was forced to quit after his annual insurance premiums skyrocketed 82% in just one year. Making matters worse, few new doctors wanted to move to Missouri. One Kansas City area doctor sent letters to more than 400 physicians finishing their residencies and did not receive a single response back.
To counteract these problems we required that cases be heard in the county where the alleged injury occurred, and we changed the law so that defendants could only be forced to pay a full judgment if their fault exceeded 50%.
We put a $350,000 cap on noneconomic damages and created rules to prevent baseless cases from getting off of the ground. Previously, personal injury lawyers could file cases if they got a written affidavit from any qualified health-care provider claiming that there was negligence. We tightened that by requiring that the affidavit come from an active professional practicing substantially the same specialty as the defendant.
We also took another common-sense step. Doctors often express empathy to a suffering patient regardless of fault. Saying you are "sorry" for someone's plight is a testament of good character, and should not be used against you in court. But tort lawyers were claiming that such statements were an admission of guilt. We stopped that abuse.
Tort reform works. Missouri's medical malpractice claims are now at a 30-year low. Average payouts are about $50,000 below the 2005 average. Malpractice insurers are also turning a profit for the fifth year in a row—allowing other insurers to compete for business in Missouri. This will drive down costs, which will save government programs money as well as improve the system for patients. It will also leave doctors with more resources to invest in better care.
Since 2005, Missouri has moved up to 31st on the Chamber of Commerce Institute for Legal Reform's list.
Because we passed tort reform, cut taxes and controlled state spending, Missouri's economy is now in better shape than it would have been. During the four years I was in office, about 70,000 net new jobs were created in my state.
Texas has seen similar success from its 2003 tort reforms. The number of doctors applying for a license in that state has increased by 57% and doctors' insurance rates have declined by an average of 27%. There are now more doctors in Texas providing care in previously underserved areas.
There is no reason that the success that Missouri, Texas and other states have experienced cannot be replicated nationally. States are demonstrating that tort reform lowers costs, expands access, and creates jobs. The time to get behind national tort reform is now.
Mr. Blunt, a Republican, is a former governor of Missouri.
We showed how to do malpractice reform, if Congress wants a model
The Wall Street Journal, page A23, Sep 22, 2009
There has been a lot of talk in Washington about cutting wasteful health-care spending, but it is troubling that such talk has not created a sense of urgency for national tort reform. It is especially frustrating because states have already shown that curbing junk lawsuits can cut costs, create jobs, and increase the quality of care available to patients.
I know this because that is exactly what happened in Missouri when, as governor, I helped to enact comprehensive reforms.
I took office in January 2005 at a time when runaway lawsuits were driving up the cost of doing business in my state and forcing doctors and other business owners to close their doors. The U.S. Chamber of Commerce Institute for Legal Reform keeps a list of states ranked according to their legal environment. At the time, Missouri ranked among the 10 worst.
"Venue-shopping," a tactic that involves shifting a case to a friendly court regardless of where the injury occurred, was common. Defendants could be made to pay 100% of a judgment even if they were only 1% responsible for the injury. And caps on damages had been rendered meaningless by state court decisions.
This legal environment raised the cost of health care for everyone and imposed stiff costs on businesses. It also forced doctors to close their doors. For example, the eastern half of Jackson County, one of Missouri's largest, lost its only neurosurgeons in 2003 due to high malpractice insurance costs. Many other parts of the state suffered from a lack of doctors able to deliver babies. One obstetrician who delivered more than 200 babies annually was forced to quit after his annual insurance premiums skyrocketed 82% in just one year. Making matters worse, few new doctors wanted to move to Missouri. One Kansas City area doctor sent letters to more than 400 physicians finishing their residencies and did not receive a single response back.
To counteract these problems we required that cases be heard in the county where the alleged injury occurred, and we changed the law so that defendants could only be forced to pay a full judgment if their fault exceeded 50%.
We put a $350,000 cap on noneconomic damages and created rules to prevent baseless cases from getting off of the ground. Previously, personal injury lawyers could file cases if they got a written affidavit from any qualified health-care provider claiming that there was negligence. We tightened that by requiring that the affidavit come from an active professional practicing substantially the same specialty as the defendant.
We also took another common-sense step. Doctors often express empathy to a suffering patient regardless of fault. Saying you are "sorry" for someone's plight is a testament of good character, and should not be used against you in court. But tort lawyers were claiming that such statements were an admission of guilt. We stopped that abuse.
Tort reform works. Missouri's medical malpractice claims are now at a 30-year low. Average payouts are about $50,000 below the 2005 average. Malpractice insurers are also turning a profit for the fifth year in a row—allowing other insurers to compete for business in Missouri. This will drive down costs, which will save government programs money as well as improve the system for patients. It will also leave doctors with more resources to invest in better care.
Since 2005, Missouri has moved up to 31st on the Chamber of Commerce Institute for Legal Reform's list.
Because we passed tort reform, cut taxes and controlled state spending, Missouri's economy is now in better shape than it would have been. During the four years I was in office, about 70,000 net new jobs were created in my state.
Texas has seen similar success from its 2003 tort reforms. The number of doctors applying for a license in that state has increased by 57% and doctors' insurance rates have declined by an average of 27%. There are now more doctors in Texas providing care in previously underserved areas.
There is no reason that the success that Missouri, Texas and other states have experienced cannot be replicated nationally. States are demonstrating that tort reform lowers costs, expands access, and creates jobs. The time to get behind national tort reform is now.
Mr. Blunt, a Republican, is a former governor of Missouri.
Sunday, September 20, 2009
Bank of America - Ken Lewis takes the fall for bonuses and bailouts
Banking Scapegoat of America. WSJ Editorial
Ken Lewis takes the fall for bonuses and bailouts.
The Wall Street Journal, page A18
When Bank of America bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill.
***
The Securities and Exchange Commission has already taken a whack at BofA and pounded out a $33 million fine, with the bank not admitting or denying guilt. However, a federal judge tossed the settlement last week on grounds that it hit shareholders a second time (for the cost of the fine) rather than fingering the individual corporate culprits. If the SEC doesn't appeal, the case is headed to court on the merits next year.
Meanwhile, New York Attorney General Andrew Cuomo and House Oversight and Government Reform Chairman Edolphus Towns are also investigating whether BofA properly disclosed details of the transaction. Mr. Cuomo claims BofA "allowed Merrill to make $3.6 billion in undisclosed bonus payments." The SEC and the AG say that the proxy materials sent to BofA shareholders prior to their December 5, 2008 vote for the transaction didn't make clear that these checks would soon be heading out the door.
Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than to inform investors. Was this one worse than the average? Reasonable people could probably disagree, but let's look at the context: Was it surprising to investors that Merrill paid $3.6 billion in bonuses?
This figure leaned toward the low end of estimates that had appeared in the press, and it was significantly less than the $6.7 billion that some news outlets had forecast. Just two days before the shareholder vote last December, the Wall Street Journal's Deal Journal cited a Bloomberg report estimating a 50% cut in Merrill bonuses compared to 2007 (a year when the firm also lost billions and also paid billions in bonuses). A 50% cut suggested Merrill bonuses in the range of $3 billion—not too far from the actual amount paid.
A week earlier, the Journal reported that 4,500 Merrill brokers would receive retention bonuses for agreeing to stick around after the deal closed. Anyone who cared enough to read the proxy probably consumed enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset—its employees. Ironically, Ken Lewis is one bank CEO who didn't pay himself a bonus last year, yet he's the one who may have to pay this political bill.
Mr. Cuomo also claims that the rising trading losses at Merrill that ultimately motivated Mr. Lewis to consider breaking the deal were known to BofA before the shareholder vote. The record suggests that from late November through much of December the estimates of Merrill's losses kept rising. Since losses could more easily be used to justify a lower price for Merrill before the vote, rather than after the deal was approved, it defies explanation why the acquirer would not wish to disclose and use this information, if he thought it was truly material.
Mr. Cuomo has already interviewed senior BofA managers and received close to 450,000 pages of documents. Mr. Towns has given the bank a Monday noon deadline to cough up even more records, and who knows what these will reveal. But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it.
Messrs. Cuomo and Towns are nonetheless going further and demanding that BofA release documents protected by attorney-client privilege, barely more than a year after the U.S. Department of Justice repudiated such a demand in its guidelines for prosecutors.
If Messrs. Towns and Cuomo use political muscle to force the bank to waive this privilege, the damage will be felt far beyond the banking world. The ability to communicate candidly with a lawyer and to seek legal advice has been recognized by the Supreme Court as a valuable means of facilitating compliance with the law. If there is no longer any zone of privacy for such contacts, expect all sensitive legal matters in business to be driven to oral communications, with all of the inefficiencies and misunderstandings sure to result.
If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. In late December then-Treasury Secretary Hank Paulson threatened that Mr. Lewis and the board would be fired if they didn't complete the Merrill deal. Mr. Lewis was considering invoking his rights under a material adverse condition (MAC) clause to kill the merger.
Mr. Paulson has argued that his intervention helped everyone, including BofA shareholders, because in fact the MAC clause would not have allowed Mr. Lewis to get out of the deal. A more likely scenario is that Mr. Lewis would have used Merrill's exploding losses and the threat underlying the MAC to get Merrill CEO John Thain to lower his price.
Under oath, Mr. Lewis told the New York AG's office that he would have tried to renegotiate for a better price—if Mr. Paulson hadn't told him not to. When asked several times if this were true at a July Congressional hearing, Mr. Paulson refused to give a straight answer. After one such response, an exasperated Mr. Towns observed, "I'm still trying to find out whether that was a yes or no."
***
Here's a theory of this case that won't help Mr. Cuomo become governor, and won't help Mr. Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under enormous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses.
Maybe this is a case in which instead of looking for a villain to punish, our political class should thank Mr. Lewis and BofA for coming to their rescue when they really needed it.
Ken Lewis takes the fall for bonuses and bailouts.
The Wall Street Journal, page A18
When Bank of America bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill.
***
The Securities and Exchange Commission has already taken a whack at BofA and pounded out a $33 million fine, with the bank not admitting or denying guilt. However, a federal judge tossed the settlement last week on grounds that it hit shareholders a second time (for the cost of the fine) rather than fingering the individual corporate culprits. If the SEC doesn't appeal, the case is headed to court on the merits next year.
Meanwhile, New York Attorney General Andrew Cuomo and House Oversight and Government Reform Chairman Edolphus Towns are also investigating whether BofA properly disclosed details of the transaction. Mr. Cuomo claims BofA "allowed Merrill to make $3.6 billion in undisclosed bonus payments." The SEC and the AG say that the proxy materials sent to BofA shareholders prior to their December 5, 2008 vote for the transaction didn't make clear that these checks would soon be heading out the door.
Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than to inform investors. Was this one worse than the average? Reasonable people could probably disagree, but let's look at the context: Was it surprising to investors that Merrill paid $3.6 billion in bonuses?
This figure leaned toward the low end of estimates that had appeared in the press, and it was significantly less than the $6.7 billion that some news outlets had forecast. Just two days before the shareholder vote last December, the Wall Street Journal's Deal Journal cited a Bloomberg report estimating a 50% cut in Merrill bonuses compared to 2007 (a year when the firm also lost billions and also paid billions in bonuses). A 50% cut suggested Merrill bonuses in the range of $3 billion—not too far from the actual amount paid.
A week earlier, the Journal reported that 4,500 Merrill brokers would receive retention bonuses for agreeing to stick around after the deal closed. Anyone who cared enough to read the proxy probably consumed enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset—its employees. Ironically, Ken Lewis is one bank CEO who didn't pay himself a bonus last year, yet he's the one who may have to pay this political bill.
Mr. Cuomo also claims that the rising trading losses at Merrill that ultimately motivated Mr. Lewis to consider breaking the deal were known to BofA before the shareholder vote. The record suggests that from late November through much of December the estimates of Merrill's losses kept rising. Since losses could more easily be used to justify a lower price for Merrill before the vote, rather than after the deal was approved, it defies explanation why the acquirer would not wish to disclose and use this information, if he thought it was truly material.
Mr. Cuomo has already interviewed senior BofA managers and received close to 450,000 pages of documents. Mr. Towns has given the bank a Monday noon deadline to cough up even more records, and who knows what these will reveal. But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it.
Messrs. Cuomo and Towns are nonetheless going further and demanding that BofA release documents protected by attorney-client privilege, barely more than a year after the U.S. Department of Justice repudiated such a demand in its guidelines for prosecutors.
If Messrs. Towns and Cuomo use political muscle to force the bank to waive this privilege, the damage will be felt far beyond the banking world. The ability to communicate candidly with a lawyer and to seek legal advice has been recognized by the Supreme Court as a valuable means of facilitating compliance with the law. If there is no longer any zone of privacy for such contacts, expect all sensitive legal matters in business to be driven to oral communications, with all of the inefficiencies and misunderstandings sure to result.
If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. In late December then-Treasury Secretary Hank Paulson threatened that Mr. Lewis and the board would be fired if they didn't complete the Merrill deal. Mr. Lewis was considering invoking his rights under a material adverse condition (MAC) clause to kill the merger.
Mr. Paulson has argued that his intervention helped everyone, including BofA shareholders, because in fact the MAC clause would not have allowed Mr. Lewis to get out of the deal. A more likely scenario is that Mr. Lewis would have used Merrill's exploding losses and the threat underlying the MAC to get Merrill CEO John Thain to lower his price.
Under oath, Mr. Lewis told the New York AG's office that he would have tried to renegotiate for a better price—if Mr. Paulson hadn't told him not to. When asked several times if this were true at a July Congressional hearing, Mr. Paulson refused to give a straight answer. After one such response, an exasperated Mr. Towns observed, "I'm still trying to find out whether that was a yes or no."
***
Here's a theory of this case that won't help Mr. Cuomo become governor, and won't help Mr. Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under enormous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses.
Maybe this is a case in which instead of looking for a villain to punish, our political class should thank Mr. Lewis and BofA for coming to their rescue when they really needed it.
Wednesday, September 16, 2009
The Stimulus Didn't Work - The data show government transfers and rebates have not increased consumption at all
The Stimulus Didn't Work. By JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND
The data show government transfers and rebates have not increased consumption at all.
The Wall Street Journal, page A23
Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act's passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.
Now, six months after the act's passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.
Consider first the part of the package that consists of government transfers and rebates. These include one-time payments of $250 to eligible individuals receiving Social Security, Supplemental Security Income, veterans benefits or railroad retirement benefits and temporary reductions in income-tax withholding for a refundable tax credit of up to $400 for individuals and $800 for families with incomes below certain thresholds. These payments, which began in March of this year, were intended to increase consumption that would help jump-start the economy. Now that a good fraction of these actions have taken place, we can assess their impact.
The nearby chart [http://s.wsj.net/public/resources/images/ED-AK183_Taylor_D_20090916182924.gif] reviews income and consumption through July, the latest month this data is available for the U.S. economy as a whole.
Consider first the part of the chart pertaining to the spring of this year and observe that disposable personal income (DPI) the total amount of income people have left to spend after they pay taxes and receive transfers from the government jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures. Because the boost to income is temporary, at best only a very small fraction was consumed.
This is exactly what one would expect from "permanent income" or "life-cycle" theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.
Indeed, one need not have looked any further than the Bush administration's Economic Stimulus Act of 2008 to find plenty of evidence that temporary payments of this kind would not jump-start consumption. That package made one-time payments and rebates to people in the spring of 2008, but, as the chart shows, failed to stimulate consumption as had been hoped. Some argued that other factors such as high oil and gasoline prices caused consumption to fall during this period and that consumption would have been even lower without the stimulus, but no significant impact of these rebates is found even after controlling for oil prices.
Consider next the government-spending part of the stimulus package. The Obama administration points to the sharp reduction in the decline in real GDP from the first to the second quarter of 2009 as evidence that the package is working. Economic growth was minus 6.4% in the first quarter and minus 1% in the second quarter, so the implied improvement of 5.4 percentage points is indeed big. But how much of that improved growth rate can be attributed to higher government spending due to the stimulus? If we rely on predictions of models, again we see disagreement and debate. According to our research with modern macroeconomic models, the increase in government spending would add less than a percentage point, a relatively small portion. The model predictions cited by the administration's economists suggest a much larger portion: two to three percentage points. Prof. Barro's model predicts zero.
So let's look at the data on the contributions of government spending and other components of GDP to the 5.4 percentage-point improvement. By far the largest positive contributor to the improvement was investment which went from minus 9% to minus 3.2%, an improvement of 5.8% and more than enough to explain the improved GDP growth. Investment by private business firms in plant, equipment and inventories, rather than residential investment, were the major contributors to the investment improvement. In contrast, consumption was a negative contributor to the change in GDP growth, because consumption growth declined following the passage of the stimulus package.
One is hard put to see what specific items in the stimulus act could have arrested the decline in business investment by such a magnitude. When one looks at monthly investment indicators such as new orders for nondefense capital goods one sees a flattening out starting early in the first quarter of 2009, well before the package went into operation. The free fall of investment orders caused by the financial panic last fall stabilized substantially by January, and investment has remained relatively stable since then. This created the residue of a very large negative growth rate from the fourth quarter of 2008 to the first quarter of 2009, and then moderation from the first quarter to the second of 2009. There is no plausible role for the fiscal stimulus here.
Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic not the fiscal stimulus program deserves the lion's share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.
Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Taylor, an economics professor at Stanford and a Hoover senior fellow, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009). Mr. Wieland is a professor of monetary theory at Goethe University in Frankfurt, Germany.
The data show government transfers and rebates have not increased consumption at all.
The Wall Street Journal, page A23
Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act's passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.
Now, six months after the act's passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.
Consider first the part of the package that consists of government transfers and rebates. These include one-time payments of $250 to eligible individuals receiving Social Security, Supplemental Security Income, veterans benefits or railroad retirement benefits and temporary reductions in income-tax withholding for a refundable tax credit of up to $400 for individuals and $800 for families with incomes below certain thresholds. These payments, which began in March of this year, were intended to increase consumption that would help jump-start the economy. Now that a good fraction of these actions have taken place, we can assess their impact.
The nearby chart [http://s.wsj.net/public/resources/images/ED-AK183_Taylor_D_20090916182924.gif] reviews income and consumption through July, the latest month this data is available for the U.S. economy as a whole.
Consider first the part of the chart pertaining to the spring of this year and observe that disposable personal income (DPI) the total amount of income people have left to spend after they pay taxes and receive transfers from the government jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures. Because the boost to income is temporary, at best only a very small fraction was consumed.
This is exactly what one would expect from "permanent income" or "life-cycle" theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.
Indeed, one need not have looked any further than the Bush administration's Economic Stimulus Act of 2008 to find plenty of evidence that temporary payments of this kind would not jump-start consumption. That package made one-time payments and rebates to people in the spring of 2008, but, as the chart shows, failed to stimulate consumption as had been hoped. Some argued that other factors such as high oil and gasoline prices caused consumption to fall during this period and that consumption would have been even lower without the stimulus, but no significant impact of these rebates is found even after controlling for oil prices.
Consider next the government-spending part of the stimulus package. The Obama administration points to the sharp reduction in the decline in real GDP from the first to the second quarter of 2009 as evidence that the package is working. Economic growth was minus 6.4% in the first quarter and minus 1% in the second quarter, so the implied improvement of 5.4 percentage points is indeed big. But how much of that improved growth rate can be attributed to higher government spending due to the stimulus? If we rely on predictions of models, again we see disagreement and debate. According to our research with modern macroeconomic models, the increase in government spending would add less than a percentage point, a relatively small portion. The model predictions cited by the administration's economists suggest a much larger portion: two to three percentage points. Prof. Barro's model predicts zero.
So let's look at the data on the contributions of government spending and other components of GDP to the 5.4 percentage-point improvement. By far the largest positive contributor to the improvement was investment which went from minus 9% to minus 3.2%, an improvement of 5.8% and more than enough to explain the improved GDP growth. Investment by private business firms in plant, equipment and inventories, rather than residential investment, were the major contributors to the investment improvement. In contrast, consumption was a negative contributor to the change in GDP growth, because consumption growth declined following the passage of the stimulus package.
One is hard put to see what specific items in the stimulus act could have arrested the decline in business investment by such a magnitude. When one looks at monthly investment indicators such as new orders for nondefense capital goods one sees a flattening out starting early in the first quarter of 2009, well before the package went into operation. The free fall of investment orders caused by the financial panic last fall stabilized substantially by January, and investment has remained relatively stable since then. This created the residue of a very large negative growth rate from the fourth quarter of 2008 to the first quarter of 2009, and then moderation from the first quarter to the second of 2009. There is no plausible role for the fiscal stimulus here.
Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic not the fiscal stimulus program deserves the lion's share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.
Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Taylor, an economics professor at Stanford and a Hoover senior fellow, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009). Mr. Wieland is a professor of monetary theory at Goethe University in Frankfurt, Germany.
Massachusetts Is a Health-Reform Model - it insures 97% of state residents
Massachusetts Is a Health-Reform Model. By DEVAL L. PATRICK
Our system insures 97% of state residents.
WSJ, Sep 17, 2009
Our country now faces the best opportunity in decades to provide quality health care for all Americans while containing spiraling costs. My state, Massachusetts, can serve as a model for national reform.
The case for country-wide change is clear. The health-care system in America costs us too much for what we get. Rising health-care costs are hurting families working hard to make ends meet and businesses trying to compete and create jobs. Too many people face financial disaster when they get sick because their insurance is inadequate or their coverage is dropped. Other Americans get their primary care during expensive visits to the emergency room because they have no other option. These costs affect all of us; everyone has a stake in health-care reform.
When we in Massachusetts set out to change our system, some were afraid. People almost always fear change, and politicians sometimes seize on that fear to prevent it. But in an act of political courage, a Democratic senator, a Republican governor and a Democratic state legislature formed a broad coalition with health-care providers, medical experts, business and labor leaders and patient advocates to fundamentally reform our system. And we have maintained our coalition as we've moved forward. After many years of widespread dissatisfaction with the old health-care system, we realized that a perfect solution or the status quo were not our only choices.
Because of our reform, over 97% of Massachusetts residents are insured the highest rate of coverage of any state in the nation. Our residents now have better access to preventive care in lower cost primary-care settings. Employers have expanded coverage for workers, not retreated as some feared. Families are less likely to be forced into bankruptcy by medical costs. Most importantly, lives have been saved. This is all good news for our residents, as well as for our state's long-term economic prosperity.
Opponents of reform claim that the Massachusetts experiment is too costly. They are wrong. State estimates and independent analysis from the Massachusetts Taxpayers Foundation concur that health-care reform has only added moderate incremental costs to the state budget. As more of our residents have become insured, there has been a decrease in demand for costly emergency-room care. Even in the midst of the current economic downturn, our state budget was balanced.
But the real issue is not the incremental costs of expanding coverage. It's the fact that medical costs even for those who have always had insurance are rising too fast.
Massachusetts is poised to lead the nation in addressing this problem, too. A special state commission has unanimously recommended moving away from the "fee for service" practice that drives up costs and fragments care, and replacing it with an alternative payment strategy designed to reward doctors and hospitals for providing coordinated care that achieves the best health outcomes for patients and lowers costs. As we work to translate this vision into practice, health care in the state will just get better.
We are proud of our success in Massachusetts. But we are also deeply committed to supporting federal health-care reform that will tackle costs and establish important patient protections to guard against some of the worst insurance-industry practices, including exorbitant out-of-pocket expenses, co-pays and deductibles that drive many families into bankruptcy. Working families and businesses have been waiting too long for relief.
Tough economic times are no excuse for more delay. Massachusetts is required by law to pass a balanced budget, and the recession has meant that we face the same kinds of financial strains as the critics of national reform. But changing our health-care system is essential to improving our economy. The current economic crisis only underscores the need to push ahead with reform.
At the national level, nothing will happen if we fear change. But innovation can work for everyone if we give President Barack Obama and congressional leaders a chance to do what we have done in Massachusetts.
Mr. Patrick, a Democrat, is the governor of Massachusetts.
Our system insures 97% of state residents.
WSJ, Sep 17, 2009
Our country now faces the best opportunity in decades to provide quality health care for all Americans while containing spiraling costs. My state, Massachusetts, can serve as a model for national reform.
The case for country-wide change is clear. The health-care system in America costs us too much for what we get. Rising health-care costs are hurting families working hard to make ends meet and businesses trying to compete and create jobs. Too many people face financial disaster when they get sick because their insurance is inadequate or their coverage is dropped. Other Americans get their primary care during expensive visits to the emergency room because they have no other option. These costs affect all of us; everyone has a stake in health-care reform.
When we in Massachusetts set out to change our system, some were afraid. People almost always fear change, and politicians sometimes seize on that fear to prevent it. But in an act of political courage, a Democratic senator, a Republican governor and a Democratic state legislature formed a broad coalition with health-care providers, medical experts, business and labor leaders and patient advocates to fundamentally reform our system. And we have maintained our coalition as we've moved forward. After many years of widespread dissatisfaction with the old health-care system, we realized that a perfect solution or the status quo were not our only choices.
Because of our reform, over 97% of Massachusetts residents are insured the highest rate of coverage of any state in the nation. Our residents now have better access to preventive care in lower cost primary-care settings. Employers have expanded coverage for workers, not retreated as some feared. Families are less likely to be forced into bankruptcy by medical costs. Most importantly, lives have been saved. This is all good news for our residents, as well as for our state's long-term economic prosperity.
Opponents of reform claim that the Massachusetts experiment is too costly. They are wrong. State estimates and independent analysis from the Massachusetts Taxpayers Foundation concur that health-care reform has only added moderate incremental costs to the state budget. As more of our residents have become insured, there has been a decrease in demand for costly emergency-room care. Even in the midst of the current economic downturn, our state budget was balanced.
But the real issue is not the incremental costs of expanding coverage. It's the fact that medical costs even for those who have always had insurance are rising too fast.
Massachusetts is poised to lead the nation in addressing this problem, too. A special state commission has unanimously recommended moving away from the "fee for service" practice that drives up costs and fragments care, and replacing it with an alternative payment strategy designed to reward doctors and hospitals for providing coordinated care that achieves the best health outcomes for patients and lowers costs. As we work to translate this vision into practice, health care in the state will just get better.
We are proud of our success in Massachusetts. But we are also deeply committed to supporting federal health-care reform that will tackle costs and establish important patient protections to guard against some of the worst insurance-industry practices, including exorbitant out-of-pocket expenses, co-pays and deductibles that drive many families into bankruptcy. Working families and businesses have been waiting too long for relief.
Tough economic times are no excuse for more delay. Massachusetts is required by law to pass a balanced budget, and the recession has meant that we face the same kinds of financial strains as the critics of national reform. But changing our health-care system is essential to improving our economy. The current economic crisis only underscores the need to push ahead with reform.
At the national level, nothing will happen if we fear change. But innovation can work for everyone if we give President Barack Obama and congressional leaders a chance to do what we have done in Massachusetts.
Mr. Patrick, a Democrat, is the governor of Massachusetts.
WSJ Editorial: Obama and the cost of individual insurance
Another Health-Care Invention. WSJ Editorial
Obama and the cost of individual insurance.
The Wall Street Journal, page A26, Sep 16, 2009
Speaking of health-care distortions, as President Obama likes to do, consider his assertion to Congress that "buying insurance on your own costs you three times as much as the coverage you get from your employer." He liked that one so much that he repeated it over the weekend in Minneapolis, this time as a swipe at "the marketplace."
The media's "fact-check" brigade hasn't noticed, but this is simply false. The Congressional Budget Office expects premiums for employer-sponsored coverage to cost about $5,000 for singles and $13,000 for families this year on average. "Premiums for policies purchased in the individual market," adds CBO, "are much lower—about one-third lower for single coverage and half that level for family policies."
Similarly, the federal Agency for Healthcare Research and Quality finds that the growth rate for premiums is also lower for individuals over employers. Mr. Obama's health team surely knows this dynamic, given that the CBO report was issued under the auspices of Peter Orszag, now the White House budget director.
One reason that individual policies are cheaper is that they generally require more cost-sharing by consumers. The reason that employment-based plans seem cheaper is that on average workers only pay 17% of the premiums directly if they're single, and 27% for family policies, according to the Kaiser Family Foundation. Businesses pick up the rest by paying lower wages, thus hiding the real costs. Meanwhile, in the individual market, consumers pay with after-tax dollars because Democrats won't allow individuals to have the same tax subsidy that employer policies receive.
This tax differential is the core of "our inefficient and inequitable system of tax-advantaged, employer-based health insurance," writes Jeffrey Flier, the dean of Harvard Medical School, in a new commentary in the Journal of Clinical Investigation.
"While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care," he writes, "the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick. . . . How this developed and persisted despite its unfairness and maladaptive consequences is a powerful illustration of the law of unintended consequences and the fact that government can take six decades or more to fix its obvious mistakes." Well said.
As Dr. Flier notes, Democrats have no plans to fix this tax bias, though they are likely to "create a new generation of problems." If Mr. Obama is going to slam "the marketplace," he should at least admit the real cause of its ills rather than invent statistics and strawmen.
Obama and the cost of individual insurance.
The Wall Street Journal, page A26, Sep 16, 2009
Speaking of health-care distortions, as President Obama likes to do, consider his assertion to Congress that "buying insurance on your own costs you three times as much as the coverage you get from your employer." He liked that one so much that he repeated it over the weekend in Minneapolis, this time as a swipe at "the marketplace."
The media's "fact-check" brigade hasn't noticed, but this is simply false. The Congressional Budget Office expects premiums for employer-sponsored coverage to cost about $5,000 for singles and $13,000 for families this year on average. "Premiums for policies purchased in the individual market," adds CBO, "are much lower—about one-third lower for single coverage and half that level for family policies."
Similarly, the federal Agency for Healthcare Research and Quality finds that the growth rate for premiums is also lower for individuals over employers. Mr. Obama's health team surely knows this dynamic, given that the CBO report was issued under the auspices of Peter Orszag, now the White House budget director.
One reason that individual policies are cheaper is that they generally require more cost-sharing by consumers. The reason that employment-based plans seem cheaper is that on average workers only pay 17% of the premiums directly if they're single, and 27% for family policies, according to the Kaiser Family Foundation. Businesses pick up the rest by paying lower wages, thus hiding the real costs. Meanwhile, in the individual market, consumers pay with after-tax dollars because Democrats won't allow individuals to have the same tax subsidy that employer policies receive.
This tax differential is the core of "our inefficient and inequitable system of tax-advantaged, employer-based health insurance," writes Jeffrey Flier, the dean of Harvard Medical School, in a new commentary in the Journal of Clinical Investigation.
"While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care," he writes, "the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick. . . . How this developed and persisted despite its unfairness and maladaptive consequences is a powerful illustration of the law of unintended consequences and the fact that government can take six decades or more to fix its obvious mistakes." Well said.
As Dr. Flier notes, Democrats have no plans to fix this tax bias, though they are likely to "create a new generation of problems." If Mr. Obama is going to slam "the marketplace," he should at least admit the real cause of its ills rather than invent statistics and strawmen.
Tuesday, September 15, 2009
The ICC Investigation in Afghanistan Vindicates U.S. Policy Toward the ICC
The ICC Investigation in Afghanistan Vindicates U.S. Policy Toward the ICC. By Brett D. Schaefer and Steven Groves
Heritage, September 14, 2009
WebMemo #2611
Last week, the prosecutor for the International Criminal Court (ICC) stated that investigations into alleged war crimes and crimes against humanity in Afghanistan may result in the prosecution of U.S. policymakers or servicemen. The potential prosecution of U.S. persons by the court over incidents that the U.S. deems lawful is one of the prime reasons why the Bush Administration did not seek U.S. ratification of the treaty creating the court, rejected ICC claims of authority over U.S. persons, and sought to negotiate agreements with countries to protect U.S. persons from being arrested and turned over to the ICC.[1]
The investigation is not complete, the prosecutor has not determined if he will seek warrants against U.S. officials or servicemen, and Afghanistan is constrained from turning over U.S. persons to the ICC under existing agreements. However, the potential legal confrontation justifies past U.S. policy, emphasizes the need to maintain and expand legal protections for U.S. persons against ICC claims of jurisdiction, and should lead the Obama Administration to endorse the Bush Administration's policies toward the ICC.
U.S. Policy toward the ICC
The U.S. initially was an eager participant in the effort to create the ICC in the 1990s. However, America's support waned because many of its concerns about the proposed court were ignored or opposed. Among other concerns, the U.S. concluded that the ICC lacked prudent safeguards against political manipulation, possessed sweeping authority without accountability to the U.N. Security Council, and violated national sovereignty by claiming jurisdiction over the nationals and military personnel of non-party states in some circumstances.
In the end, U.S. efforts to amend the Rome Statute were rejected. President Bill Clinton urged President George W. Bush not to submit the treaty to the Senate for advice and consent necessary for ratification. After additional efforts to address key U.S. concerns failed, President Bush felt it necessary to "un-sign" the Rome Statute and take additional steps to protect U.S. nationals, officials, and service members from the ICC, including passing the American Service-Members' Protection Act of 2002, which restricts U.S. interaction with the ICC and its state parties, and seeking Article 98 agreements to preclude nations from surrendering, extraditing, or transferring U.S. persons to the ICC or third countries for that purpose without U.S. consent.[2]
The Afghan Investigation
On September 10, the Prosecutor for the International Criminal Court, Argentinean Luis Moreno Ocampo, announced that ICC investigators had begun looking into allegations of war crimes and crimes against humanity, including torture, "massive attacks," and collateral damage resulting from military action in Afghanistan. The allegations were made by human-rights groups and the Afghan government. According to Béatrice Le Fraper du Hellen, a special adviser to Ocampo, the ICC has been "collecting data about allegations made against the various parties to the conflict" since 2007.[3]
Since Afghanistan acceded to the Rome Statute--the treaty establishing the ICC-- on February 10, 2003, the prosecutor is empowered to receive and investigate crimes alleged to have occurred in Afghanistan after the establishment of the court in July 2002.[4]
Although the investigation will also look into crimes allegedly committed by the Taliban, Ocampo confirmed that North Atlantic Treaty Organization troops participating in the United Nations mandated International Security Assistance Force (ISAF) mission to bolster the Afghan government could become a target of ICC prosecution. A decision to prosecute ISAF forces for actions in Afghanistan would almost certainly involve American servicemen which, as of July 23, 2009, constituted nearly half of all foreign troops involved in the mission (29,950 out of 64,500[5]) and represent one of the few countries willing to fully engage in military action to confront Taliban forces.
The ICC investigation is at an early stage. According to du Hellen, "[I]t's particularly complex. It's taking time to gather information on crimes allegedly committed on the government side, on the Taliban side and by foreign forces." [6] In the end, the ICC may find no evidence to proceed with a warrant against anyone--American or otherwise.
Status of Forces Agreement
The ICC can act only if a country is unwilling or unable to pursue the alleged crimes. However, in a situation like Afghanistan, it is very likely that the ICC would have to assert jurisdiction because the government of Afghanistan has extremely limited legal jurisdiction over U.S. officials and service members. Specifically, the U.S. and the Afghan government entered into a Status of Forces Agreement (SOFA) regarding military and civilian personnel in Afghanistan engaged in "cooperative efforts in response to terrorism, humanitarian and civic assistance, military training and exercises, and other activities." Under the SOFA,
Thus, the ICC would undoubtedly find the Afghan government unable to pursue the alleged crimes. Such a finding would raise another issue. Under the Article 98 agreement with Afghanistan, the government has agreed not to turn over U.S. persons to the ICC or to allow a third party to do so without U.S. permission--an unlikely development, given that a U.S. official has stated that the United States has no reason to believe that U.S. persons have committed crimes in the conduct of their official duties under ISAF that have not been properly investigated and adjudicated.[8]
These safeguards are not a guarantee of protection from the illegitimate claims of ICC jurisdiction, but U.S. officials and service members are much more protected than they would be without them. Most likely, an ICC warrant would be executed against a U.S. person in Afghanistan only if that person traveled to an ICC state party that does not have an Article 98 agreement with the U.S. The current scenario, therefore, only underscores the urgency of negotiating more such agreements.
Reject the Rome Statute
The Obama Administration is reportedly close to announcing a change in U.S. policy toward the ICC, including affirming President Clinton's 2000 signature on the Rome Statute and increasing U.S. cooperation with the court. Weakening protections against ICC prosecution of U.S. officials and service members would be a grave mistake, as illustrated by the ongoing investigation in Afghanistan.
The ICC's Afghan investigation is a testament to the wisdom of the Bush Administration. To protect its officials and servicemen, the U.S. should continue to insist that it is not bound by the Rome Statute and does not recognize the ICC's authority over U.S. persons, maintain and expand legal protections like Article 98 agreements, and exercise great care when deciding to support the court's actions.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs and Steven Groves is Bernard and Barbara Lomas Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
References at the original article
Heritage, September 14, 2009
WebMemo #2611
Last week, the prosecutor for the International Criminal Court (ICC) stated that investigations into alleged war crimes and crimes against humanity in Afghanistan may result in the prosecution of U.S. policymakers or servicemen. The potential prosecution of U.S. persons by the court over incidents that the U.S. deems lawful is one of the prime reasons why the Bush Administration did not seek U.S. ratification of the treaty creating the court, rejected ICC claims of authority over U.S. persons, and sought to negotiate agreements with countries to protect U.S. persons from being arrested and turned over to the ICC.[1]
The investigation is not complete, the prosecutor has not determined if he will seek warrants against U.S. officials or servicemen, and Afghanistan is constrained from turning over U.S. persons to the ICC under existing agreements. However, the potential legal confrontation justifies past U.S. policy, emphasizes the need to maintain and expand legal protections for U.S. persons against ICC claims of jurisdiction, and should lead the Obama Administration to endorse the Bush Administration's policies toward the ICC.
U.S. Policy toward the ICC
The U.S. initially was an eager participant in the effort to create the ICC in the 1990s. However, America's support waned because many of its concerns about the proposed court were ignored or opposed. Among other concerns, the U.S. concluded that the ICC lacked prudent safeguards against political manipulation, possessed sweeping authority without accountability to the U.N. Security Council, and violated national sovereignty by claiming jurisdiction over the nationals and military personnel of non-party states in some circumstances.
In the end, U.S. efforts to amend the Rome Statute were rejected. President Bill Clinton urged President George W. Bush not to submit the treaty to the Senate for advice and consent necessary for ratification. After additional efforts to address key U.S. concerns failed, President Bush felt it necessary to "un-sign" the Rome Statute and take additional steps to protect U.S. nationals, officials, and service members from the ICC, including passing the American Service-Members' Protection Act of 2002, which restricts U.S. interaction with the ICC and its state parties, and seeking Article 98 agreements to preclude nations from surrendering, extraditing, or transferring U.S. persons to the ICC or third countries for that purpose without U.S. consent.[2]
The Afghan Investigation
On September 10, the Prosecutor for the International Criminal Court, Argentinean Luis Moreno Ocampo, announced that ICC investigators had begun looking into allegations of war crimes and crimes against humanity, including torture, "massive attacks," and collateral damage resulting from military action in Afghanistan. The allegations were made by human-rights groups and the Afghan government. According to Béatrice Le Fraper du Hellen, a special adviser to Ocampo, the ICC has been "collecting data about allegations made against the various parties to the conflict" since 2007.[3]
Since Afghanistan acceded to the Rome Statute--the treaty establishing the ICC-- on February 10, 2003, the prosecutor is empowered to receive and investigate crimes alleged to have occurred in Afghanistan after the establishment of the court in July 2002.[4]
Although the investigation will also look into crimes allegedly committed by the Taliban, Ocampo confirmed that North Atlantic Treaty Organization troops participating in the United Nations mandated International Security Assistance Force (ISAF) mission to bolster the Afghan government could become a target of ICC prosecution. A decision to prosecute ISAF forces for actions in Afghanistan would almost certainly involve American servicemen which, as of July 23, 2009, constituted nearly half of all foreign troops involved in the mission (29,950 out of 64,500[5]) and represent one of the few countries willing to fully engage in military action to confront Taliban forces.
The ICC investigation is at an early stage. According to du Hellen, "[I]t's particularly complex. It's taking time to gather information on crimes allegedly committed on the government side, on the Taliban side and by foreign forces." [6] In the end, the ICC may find no evidence to proceed with a warrant against anyone--American or otherwise.
Status of Forces Agreement
The ICC can act only if a country is unwilling or unable to pursue the alleged crimes. However, in a situation like Afghanistan, it is very likely that the ICC would have to assert jurisdiction because the government of Afghanistan has extremely limited legal jurisdiction over U.S. officials and service members. Specifically, the U.S. and the Afghan government entered into a Status of Forces Agreement (SOFA) regarding military and civilian personnel in Afghanistan engaged in "cooperative efforts in response to terrorism, humanitarian and civic assistance, military training and exercises, and other activities." Under the SOFA,
U.S. personnel are immune from criminal prosecution by Afghan authorities, and are immune from civil and administrative jurisdiction except with respect to acts performed outside the course of their duties. [The agreement] explicitly authorized the U.S. government to exercise criminal jurisdiction over U.S. personnel, and the Government of Afghanistan is not permitted to surrender U.S. personnel to the custody of another State, international tribunal [including the ICC], or any other entity without consent of the U.S. government.[7]Although the SOFA was signed by the interim government, it remains binding on the current government and the Afghan government could not try U.S. officials or service members for acts committed during the "course of their duties," even if it wanted to.
Thus, the ICC would undoubtedly find the Afghan government unable to pursue the alleged crimes. Such a finding would raise another issue. Under the Article 98 agreement with Afghanistan, the government has agreed not to turn over U.S. persons to the ICC or to allow a third party to do so without U.S. permission--an unlikely development, given that a U.S. official has stated that the United States has no reason to believe that U.S. persons have committed crimes in the conduct of their official duties under ISAF that have not been properly investigated and adjudicated.[8]
These safeguards are not a guarantee of protection from the illegitimate claims of ICC jurisdiction, but U.S. officials and service members are much more protected than they would be without them. Most likely, an ICC warrant would be executed against a U.S. person in Afghanistan only if that person traveled to an ICC state party that does not have an Article 98 agreement with the U.S. The current scenario, therefore, only underscores the urgency of negotiating more such agreements.
Reject the Rome Statute
The Obama Administration is reportedly close to announcing a change in U.S. policy toward the ICC, including affirming President Clinton's 2000 signature on the Rome Statute and increasing U.S. cooperation with the court. Weakening protections against ICC prosecution of U.S. officials and service members would be a grave mistake, as illustrated by the ongoing investigation in Afghanistan.
The ICC's Afghan investigation is a testament to the wisdom of the Bush Administration. To protect its officials and servicemen, the U.S. should continue to insist that it is not bound by the Rome Statute and does not recognize the ICC's authority over U.S. persons, maintain and expand legal protections like Article 98 agreements, and exercise great care when deciding to support the court's actions.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs and Steven Groves is Bernard and Barbara Lomas Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
References at the original article
Monday, September 14, 2009
Federal Pres Says Danes Receive 20% of Their Power Via Wind; New Study Tells Different
Something Rotten? Obama Says Danes Receive 20% of Their Power Via Wind; New Study Tells the Real Story
Danish experts visit Washington this week to explain to American audiences what’s really happening in Denmark
IER, Sep 15, 2009
WASHINGTON – President Obama has frequently cited Denmark as an example to be followed in the field of wind power generation, stating on several occasions that the Danes satisfy “20 percent of their electricity through wind power.” The findings of a new study released this week cast serious doubt on the accuracy of that statement. The report finds that in 2006 scarcely five percent of the nation’s electricity demand was met by wind. And over the past five years, the average is less than 10 percent — despite Denmark having ‘carpeted’ its land with the machines.
“As climate officials descend upon Copenhagen later this year to continue their work to engineer a world in which energy is rendered less reliable, less affordable and increasingly scarce, the eyes of the world will naturally fall upon the host country as well,” said Thomas J. Pyle, president of the Institute for Energy Research (IER), which commissioned the report.
“In the case of Denmark,” added Pyle, “you have a nation of 5.4 million, occupying some of the most wind-intense real estate in the world, whose citizens are forced to pay the highest electricity rates in Europe — and it still doesn’t even come close to the 20 percent threshold envisioned by President Obama for the United States. This may indeed be the model for the future – but only if you believe that a combination of smoke, mirrors and prohibitively high utility rates are the key to our economic and environmental salvation.”
Prepared by the independent Danish think tank CEPOS and co-authored by economist Henrik Meyer and Hugh Sharman, a prominent Denmark-based international energy consultant, the report details the extent to which Denmark’s claim to wind superiority is essentially founded on a myth – the function of a complicated trading scheme in which the Danes off-load excess, value-subtracted wind generation to other nations for roughly free, asking only in return that these countries sell some of their baseload power back to Denmark on the frequent occasions in which the wind does not blow there
The upshot? The Danes retain the title of world’s most prolific wind producer, and President Obama cites their experience as a path to be followed. The cost? Danish ratepayers are forced to pay the highest utility rates in Europe. And the American people are led to believe that, though wind may only provide a little more than one percent of our electricity now, reaching a 20 percent platform – as the Danes have allegedly done – will come at no cost, with no jobs lost and no externalities to consider.
Speaking of jobs, the report also pulls back the curtain on the wind power industry’s near-complete dependence on taxpayer subsidies to support the fairly modest workforce it presently maintains. Just as in Spain, where per-job taxpayer subsidies for so-called “green jobs” exceeds $1,000,000 per worker in some cases, wind-related jobs in Denmark on average are subsidized at a rate of 175 to 250 percent above the average pay per worker. All told, each new wind job created by the government costs Danish taxpayers between 600,000-900,000 krone a year, roughly equivalent to $90,000-$140,000 USD.
“That the current political leadership in Washington is enamored of the European energy model has been made abundantly clear — from the president himself, all the way on down,” added Pyle. “Less clear is the extent to which these people actually know what’s taking place over there, and whether they’re willing to level with the American people about the serious costs associated with following this dubious path.”
On Tuesday, report co-author Hugh Sharman will join CEPOS chief executive officer Martin Agerup in Washington, D.C., part of a three-day tour (Tues-Thurs) aimed at explaining to a wider American audience the core conclusions of their report. Those interested in speaking with Messrs. Sharman and/or Agerup or setting up an interview should contact Patrick Creighton (202.621.2947) or Chris Tucker (202.346.8825).
Danish experts visit Washington this week to explain to American audiences what’s really happening in Denmark
IER, Sep 15, 2009
WASHINGTON – President Obama has frequently cited Denmark as an example to be followed in the field of wind power generation, stating on several occasions that the Danes satisfy “20 percent of their electricity through wind power.” The findings of a new study released this week cast serious doubt on the accuracy of that statement. The report finds that in 2006 scarcely five percent of the nation’s electricity demand was met by wind. And over the past five years, the average is less than 10 percent — despite Denmark having ‘carpeted’ its land with the machines.
“As climate officials descend upon Copenhagen later this year to continue their work to engineer a world in which energy is rendered less reliable, less affordable and increasingly scarce, the eyes of the world will naturally fall upon the host country as well,” said Thomas J. Pyle, president of the Institute for Energy Research (IER), which commissioned the report.
“In the case of Denmark,” added Pyle, “you have a nation of 5.4 million, occupying some of the most wind-intense real estate in the world, whose citizens are forced to pay the highest electricity rates in Europe — and it still doesn’t even come close to the 20 percent threshold envisioned by President Obama for the United States. This may indeed be the model for the future – but only if you believe that a combination of smoke, mirrors and prohibitively high utility rates are the key to our economic and environmental salvation.”
Prepared by the independent Danish think tank CEPOS and co-authored by economist Henrik Meyer and Hugh Sharman, a prominent Denmark-based international energy consultant, the report details the extent to which Denmark’s claim to wind superiority is essentially founded on a myth – the function of a complicated trading scheme in which the Danes off-load excess, value-subtracted wind generation to other nations for roughly free, asking only in return that these countries sell some of their baseload power back to Denmark on the frequent occasions in which the wind does not blow there
The upshot? The Danes retain the title of world’s most prolific wind producer, and President Obama cites their experience as a path to be followed. The cost? Danish ratepayers are forced to pay the highest utility rates in Europe. And the American people are led to believe that, though wind may only provide a little more than one percent of our electricity now, reaching a 20 percent platform – as the Danes have allegedly done – will come at no cost, with no jobs lost and no externalities to consider.
Speaking of jobs, the report also pulls back the curtain on the wind power industry’s near-complete dependence on taxpayer subsidies to support the fairly modest workforce it presently maintains. Just as in Spain, where per-job taxpayer subsidies for so-called “green jobs” exceeds $1,000,000 per worker in some cases, wind-related jobs in Denmark on average are subsidized at a rate of 175 to 250 percent above the average pay per worker. All told, each new wind job created by the government costs Danish taxpayers between 600,000-900,000 krone a year, roughly equivalent to $90,000-$140,000 USD.
“That the current political leadership in Washington is enamored of the European energy model has been made abundantly clear — from the president himself, all the way on down,” added Pyle. “Less clear is the extent to which these people actually know what’s taking place over there, and whether they’re willing to level with the American people about the serious costs associated with following this dubious path.”
On Tuesday, report co-author Hugh Sharman will join CEPOS chief executive officer Martin Agerup in Washington, D.C., part of a three-day tour (Tues-Thurs) aimed at explaining to a wider American audience the core conclusions of their report. Those interested in speaking with Messrs. Sharman and/or Agerup or setting up an interview should contact Patrick Creighton (202.621.2947) or Chris Tucker (202.346.8825).
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