Archives: 06/2010

Cult Watch

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Driving home the other night, I caught the end of the NPR program “On Point.” This edition, running the ideological gamut all the way from left to center-left, featured Bob Kuttner and Jonathan Alter, “on the Obama presidency and the oil spill challenge.” At about 45:20 in, Alter took the week’s prize for utterly creepy views of the presidency (no small feat):

One thing I want to make clear where Bob and I strongly really agree is that – when FDR died the funeral procession moved up Pennsylvania avenue and a man, a grieving man, fell to his knees, and another man helped him to his feet and said, “Did you know the President?”

And the grieving man said, “No, but he knew me.”

And Barack Obama is not yet at a point where the American people really feel like he knows them and their problems and that’s where he needs to get to.

Yes, if only our president could emit from his concern-furrowed brow rays of inspiration so powerful, they’d make Americans swoon in the street like holy rollers at an Appalachian snake-handling session – then and only then will we know our democracy is truly healthy.

“Man is a toad-eating animal,” the early 19th-century English essayist and political radical William Hazlitt wrote in 1819: “naturally a worshiper of idols and a lover of kings.” That’s a pretty pessimistic take on humanity as a whole, but it certainly holds true for a good many public intellectuals.

Free the Colombia Trade Agreement

Thirty-nine members of Congress from both major parties sent a letter to President Obama this week urging him to seek passage of the long-stalled free trade agreement with our South American ally Colombia.

The agreement to eliminate trade barriers between our two countries was signed in November 2006, but under the influence of their trade-union allies, Democratic leaders in the House have refused to even allow a vote.

As signers of the letter point out (go here for a Cato analysis), the agreement would be good for our economy and good for U.S. foreign policy.  So far, the delay in passage has forced U.S. exporters to Colombia to pay $2.7 billion in extra duties that would have been eliminated if the agreement had become law.

The bipartisan supporters also rightly note that Colombia is a key ally, standing as a democratic alternative to both the Marxist FARC guerrillas and their authoritarian friend, President Hugo Chavez of Venezuela. As the letter correctly states:

Colombia has made remarkable progress on many fronts, emerging as a major growth market and leading center for Latin American business. In a region that has seen a disturbing increase in hostility to U.S. interests and values, Colombia has consistently proven itself to be an important friend, a reliable partner and a bulwark for democracy.

With Colombia in the process of electing a new president after eight years of progress under Alvaro Uribe, it is more important than ever that we strengthen our ties with Colombia through peaceful commerce.

The 20 House Democrats who signed the June 2 letter prove that this need not be a partisan issue. If President Obama is serious about boosting U.S. exports, building friendships abroad, and reaching across the aisle for the good of the country, he should heed the wise words of this letter.

Education Standards Throwdown!

On Wednesday, Cato hosted what turned out to be a very animated – and informative – debate on the likely effects of the drive for national education standards. The video of that throwdown is now online, and watching it will greatly reward viewers on any side of the national standards debate.  Moreover, with states having to decide if they will adopt proposed national standards released the same day as our forum – and having to make that decision by August 2 to help compete for Race to the Top funds – Americans can no longer wait for this debate to go national.

And now, a little extension of our Wednesday debate. While it is perhaps a tad unfair of me to do this considering that the forum is technically over, this point is crucial: Protest to the contrary all they want, since at least December 2008 the primary Common Core State Standards Initiative members – the National Governors Association, the Council Of Chief State School Officers, and Achieve, Inc. – have said that the federal government should be involved in paying for and implementing ”common core” state standards. As stated on page 7 of Benchmarking for Success: Ensuring Students Receive a World-class Education:

The federal government can play an enabling role as states engage in the critical but challenging work of international benchmarking. First, federal policymakers should offer funds to help underwrite the cost for states to take the five action steps described above [including ”adopting a common core of internationally benchmarked standards in math and language arts.”] At the same time, policymakers should boost federal research and development (R&D) investments to provide state leaders with more and better information about international best practices, and should help states develop streamlined assessment strategies that facilitate cost-effective international comparisons of student performance.

As states reach important milestones on the way toward building internationally competitive education systems, the federal government should offer a range of tiered incentives to make the next stage of the journey easier, including increased flexibility in the use of federal funds and in meeting federal educational requirements and providing more resources to implement world-class educational best practices.

In case that doesn’t make clear that CCSSI proponents have long wanted federal money and power to help drive creation and adoption of national standards, there is also this contradictory, but nonetheless damning, final entry from the FAQs page of the CCSSI website:

The federal government has had no role in the development of the common core state standards and will not have a role in their implementation.

However, the federal government will have the opportunity to support states as they begin adopting the standards. For example, the federal government can

  • Support this effort through a range of tiered incentives, such as providing states with greater flexibility in the use of existing federal funds, supporting a revised state accountability structure, and offering financial support for states to implement the standards.
  • Provide long-term financial support for the development and implementation of common assessments, teacher and principal professional development, and research to help continually improve the common core state standards over time.
  • Revise and align existing federal education laws with the lessons learned from the best of what works in other nations and from research.

So there is no federal role in development or implementation of national standards. Oh right, except for providing “incentives” for states to “implement” the standards, and furnishing “long-term financial support for the development and implementation of common assessments.” In other words, there IS a federal role in developing and implementing national standards.

Finally, one last thing left hanging in Wednesday’s debate needs clarification: States knew very well that they would essentially have to sign on to the national standards effort to compete for Race to the Top money, which explains the seemingly widespread state support for the effort. Indeed, as early as February 2009 (registration required to read this and the next article) U.S. Secretary of Education Arne Duncan stated that he was contemplating using “stimulus” dollars to drive adoption of national standards, and the CCSSI didn’t even formally launch until April of that year.

So again, please watch Wednesday’s debate – it really is entertaining and informative. But make no mistake: The move to national standards is anything but truly voluntary and state led. It is very much a federal campaign.

Krugman’s Fannie Mae Fantasyland

An insightful op-ed in yesterday’s Financial Times by Raghu Rajan (who will be presenting his latest book soon here at Cato), apparently was too much for Paul Krugman to bear.  What was Rajan’s great crime that so upset Krugman?  Rajan, correctly, pointed out that US policies, such as Fannie Mae and the Community Re-investment Act, were direct contributors to the financial crisis and that bankers shouldn’t be blamed for simply reacting to perverse government incentives.

Now Krugman cannot bear to see CRA and Fannie questioned.  He claims that Rajan is relying on some blind faith that has been disproven by all thinking people.  Krugman offers two points (his supposed “facts”) that prove Fannie Mae and CRA are innocent.

First, he argues that the bad lending was done not by banks covered by CRA, but by non-banks that were exempt from CRA.  Now in Krugman’s defense, there is a grain of truth to this.  For instance, up until its purchase of a thrift, Countrywide, the largest subprime player, was not covered by CRA.  However, comparing Countrywide to say Bank of America, which was covered by CRA, misses a crucial point:  these non-CRA lenders were selling their loans to Fannie and Freddie, who were getting housing goal credit for those loans.  For instance, 25% of Fannie’s whole loan purchases were from Countrywide.  So rather than, as Paul claims that CRA didn’t matter, what the comparison shows is that the GSE housing goals were more damaging than CRA.

Krugman tries to cover this base by claiming that Fannie and Freddie were “sidelined by Congress” during the worst years of the boom.  As someone who spent the boom years as staff on the Senate Banking Committee, I found that claim to be insane.  For every Senator Shelby who tried to sideline the GSE’s, there was 10 Senators Sarbanes, Dodd and Schumer who pushed the GSEs to do more.  Krugman needs to move past empty assertions and offer some, any, evidence that Congress sidelined Fannie and Freddie.

What evidence he does offer is to show that during the boom, the percent of the market that was securitized by Fannie/Freddie fell, while the percent securitized by the private-label market increased.  Krugman has that fact correct, yet he misses a critical point.  That increase in private-label securities was being funded/purchased by Fannie and Freddie.

As my chart illustrates, the more involved were Fannie and Freddie in purchasing subprime MBS, the more the subprime market grew.  During the bubble years, Fannie and Freddie were the largest single source of liquidity for the subprime market.  And the chart doesn’t even take into account all the subprime whole loans being purchased by the GSEs.

Sadly Krugman has his facts on CRA wrong as well.  I point the reader to Ed Pinto’s work in this area, as well as my post on CRA from a few months ago.

We have little hope of avoiding a future financial crisis if we do not undo all the perverse government incentives for irresponsible lending.  Krugman’s presentation of selective and misleading data only makes true and meaningful reform all the more difficult.

Charles Murray on Ayn Rand

Ayn Rand’s books have been selling strongly for more than 50 years, a constant irritant to the literary and academic establishments. And since the acceleration in government growth about 18 months, they’ve been selling better than ever. In the middle of that surge of interest, two new biographies of Rand were published, whose authors were featured at a Cato Institute Book Forum last fall. Now Charles Murray, the author of such books as Human Accomplishment and What It Means to Be a Libertarian, reflects on Ayn Rand in a review of those books.

Murray does a great job of showing what was wrong – and what was very right – with Ayn Rand. To the certain annoyance of her fans, Murray insists that “there is a dismaying discrepancy between the Ayn Rand of real life and Ayn Rand as she presented herself to the world. The discrepancy is important because Rand herself made such a big deal about living a life that was the embodiment of her philosophy.” Nevertheless, he muses, “Why then has reading these biographies of a deeply flawed woman—putting it gently—made me want to go back and reread her novels yet again? The answer is that Rand was a hedgehog who got a few huge truths right, and expressed those truths in her fiction so powerfully that they continue to inspire each new generation.” He concludes:

Ayn Rand never dwelt on her Russian childhood, preferring to think of herself as wholly American. Rightly so. The huge truths she apprehended and expressed were as American as apple pie. I suppose hardcore Objectivists will consider what I’m about to say heresy, but hardcore Objectivists are not competent to judge. The novels are what make Ayn Rand important. Better than any other American novelist, she captured the magic of what life in America is supposed to be. The utopia of her novels is not a utopia of greed. It is not a utopia of Nietzschean supermen. It is a utopia of human beings living together in Jeffersonian freedom. 

Read the whole thing.

I note that the excellent new group blog Pileus got to this review before I did. Plenty of other good thoughts there, too, on topics ranging from Adam Smith to David Souter to a comparison between Rand and Marx.

Nevadans Don’t Want REAL ID, but the DMV Does, and That’s What Matters

Via the ACLU’s Blog of Rights, a temporary measure Governor Jim Gibbons put in place to bring Nevada into compliance with REAL ID has expired, and the legislature does not plan to renew it.

But the Nevada DMV wants it. The Las Vegas Review-Journal reports, “the DMV will seek legislative approval to implement the new licensing system at least by May 1, 2011.”

I wonder if the DMV will donate to candidates that support REAL ID, or perhaps campaign against legislators that don’t. Maybe it should just start voting in elections. The gall of these bureaucrats, telling the legislature what to do.

Fannie Mae and Greece’s Problems Enabled by Basel

On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis.  Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress.  Primary blame for Greece’s problems clearly lies with the Greek government. 

Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt.  One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.

Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards.  Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category.  For the highest risk assets, like corporate bonds, banks are required to hold 8%.  Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital.  So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt.  Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class.  Fannie and Freddie debt required holding only 1.6% capital.  Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.

The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild.  It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.