Archives: 07/2011

The Ratchet Effect, Agriculture Edition

Between the lines of a front-page Wall Street Journal article about farm subsidies [$] is an instructive example of the ratchet effect:

Land prices are way up and so are bank deposits, as high corn and soybean prices mean local farmers are making the most money in their lives…An exception to the boom is the local office of the U.S. Agriculture Department, the dispensary of federal payments to farmers from an array of arcane programs with names like ‘loan deficiency’ and ‘milk income loss.’ On a recent afternoon, the parking lot in front of the squat brick building behind a Chinese restaurant was nearly empty.

The reason: Payments from America’s primary farm-subsidy program, dating from the 1930s, have stopped here. Grain prices are far too high to trigger payouts under the program’s ‘price support’ formula. The market, in other words, has done what decades of political wrangling couldn’t: slash farm subsidies.

Though the subsidy payments always ebbed and flowed with crop prices, many economists are convinced that what is happening now is different. A fundamental upward shift in crop prices is creating the real possibility that Midwestern farmers won’t ever again qualify for the primary form of farm subsidy.

There remain other types of subsidies, which continue to pay out because they aren’t linked to market prices. But high prices are undermining political support for those programs…

Well, there’s some good news. Maybe we can start downsizing the USDA, including by closing some of those local offices? Not so fast. The last two paragraphs of the article (on page A10) leave us with this cheery thought [emphasis added]:

Meanwhile, workers in the USDA’s county offices, seeing the handwriting on the wall, are campaigning for new things to do, now that there aren’t any price-support payments to dispense. One idea is to give them responsibility for federally subsidized crop insurance, currently handled by private companies.

Heck, why not? Heaven knows the federal government is flush with cash.

What to Read on the Financial Crisis, Part II: Popular

Last week I offered my suggestion on the one book you should read, if you really want to understand the financial crisis. In this Part II, I offer a list of popular books, mostly written by journalists, along with very brief thoughts.  Part III, to come, will focus on more “scholarly” books.

As general rule, these popular books lack a theoretical framework of the crisis. They often have the feel of a “bad people did bad things” narrative. These are only books I’ve actually read (and remember), so its a selective list. Some are insider stories of only a single firm, and hence, somewhat limited in their usefulness. I will also give little evidence behind my judgments, so if you don’t value my opinion, stop reading now. 

1. All the Devils Are Here, by Bethany McLean and Joe Nocera. (2 stars) There’s only one reason to read this: it is the model of the establishment Left version of the crisis. This is the book that future Harvard professors will force their students to read to “understand” the evil Bush years. Otherwise, skip it. Wildly off both in terms of fact and interpretation.  Read any of their columns and you know what the book is like.

2. Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. (4 stars) See Part I. Despite many flaws, probably the best of the “popular” books.

3. After the Fall, by Nicole Gelinas. (3 stars) I usually love Nicole’s stuff, and the story here on “too-big-to-fail’ is dead-on, but I think she’s off on Glass-Steagall and doesn’t make that case. Still, a relatively short and worthwhile read.

4. Fool’s Gold, by Gillan Tett. (4 stars) Exclusively about JP Morgan, but great background on credit default swaps. So despite its narrow focus on one firm, still a worthwhile read.

5. Chain of Blame, by Paul Muolo and Mathew Padilla. (3 stars) A narrow, but interesting, focus on subprime mortgage lending. Muolo is a long time reporter for National Mortgage News, so this has an almost insider’s feel of the mortgage industry, for that reason a worthwhile read.

6. Senseless Panic, by William Isacc. (4 stars) Author is the former FDIC Chair during the S&L crisis, and applies insights learned there to the current crisis. He misses a lot, but it’s breezy and short, and what is there is very worth reading. I wouldn’t put this at the top of your list, but if you’re going to read several, then add this one.

7. House of Cards, by William Cohen. (3 stars) Focused exclusively on Bear Stearns.  Again, a narrow focus, but generally fast moving and an interesting story line.

8. The Sellout, by Charles Gasparino. (4 stars) Despite a few minor factual errors, this was one of the better books.  He’s tough on Washington and Wall Street, and accurately so. 

9. A Colossal Failure of Common Sense, by Larry McDonald. (3 stars) Focused only on the failure of Lehman. Maybe too much useless personal detail, but otherwise an interesting story.

10. In Fed We Trust, by David Wessel. (3 stars).  Despite reading like a love letter to Bernanke, it is probably the best inside story of the Fed’s behavior during the crisis, which is also its weakness as the book offers little insight into happens outside the Fed.

Again, Part III will focus on more scholarly books, and in my opinion, generally more insightful reading.  That said, they don’t often make fun beach reading, which the above should be safe for.

From Hell to Heaven

Cory Maye was in his home one evening minding his own business when his front door came crashing down.  Frightened that criminals were going to harm him and his child, Maye quickly retrieved a gun.  When his bedroom door came crashing down next, Maye fired.  When the lights came on, it turned out that the intruders were police officers and that Maye had killed one of them.  The nightmare had only just begun for Maye.  Police and prosecutors twisted a case of self-defense into a “murder” charge and they sought the death penalty.  Cato fellow Radley Balko read about the case when he was researching a paper concerning the militarization of police tactics and no-knock raids.  Radley then wrote about the injustice of Maye’s situation and word spread via the internet.  A new legal team took up the case and appeals followed.  When a court ordered a new trial for Maye, prosecutors offered a deal–plead guilty to a lesser charge and Maye would be set free because he had already served years in a Mississippi prison.  Maye took the deal even though many thought he should not have any criminal conviction on his record for what happened that night.  Still, it is hard to blame a guy for wanting to get out of prison to see his children just as fast as he possibly could.  Maye was released a few days ago and here’s a snap of him playing around with his son. 

Congrats to Maye.  Congrats to Radley.  And congrats to Maye’s lawyers at Covington and Burling.

Previous coverage here and here.

An Intended Consequence

The New Republic has an interesting article explaining “How Campaign Finance Laws Made the British Press so Powerful.” Basically, only British newspapers are free of regulations that suppress political speech. The author suggests adding more controls (including content restrictions) on the British newspapers to enforce “impartial” coverage. In other words, the media should be just as repressed as everyone else, and political leaders should be free of criticism.

Like many others, I have long thought that U.S. newspapers editorialize in favor of campaign finance restrictions to control competing speech and thereby become more powerful. After Citizens United, other organizations now enjoy the same First Amendment protections as media corporations like The New York Times and The Washington Post. No doubt that does mean such corporations are less powerful than they would be if campaign finance laws suppressed political speech that competes with their editorials and news reports. However, such competition is good for voters.

Lobbyists Are Doing Fine in the Recession

In this week’s Encyclopedia Britannica column I write:

Headlines this week reported a slight decline in reported expenditures by federal lobbyists. Of course, it would have been hard to keep up the pace set as companies and other interest groups fought to get a piece of the TARP bailout, the massive stimulus bill, the omnibus appropriations bill, the health care bill, and other spending and regulatory bills that passed during the 2008-2010 legislative frenzy.

But don’t worry about the big lobbying firms. They’ll do fine.

I explain why those reports can be misleading, cite Adam Smith and F. A. Hayek and lots of recent news stories, and conclude:

Lobbying is one of the costs—not the worst cost, but certainly a galling one—of a government that is “generous and compassionate,” based on “a progressive vision of our society,” a government that “helps families find jobs at a decent wage, care they can afford, a retirement that is dignified,” a government that “directs help to the inspired and the effective,” a government that will “restore the security of working families.” If that’s the government you want, then lobbying is an inevitable adjunct. Let’s not forget that analysis from Craig Holman of Public Citizen: “the amount spent on lobbying … is related entirely to how much the federal government intervenes in the private economy.”

Read the whole thing.

Richard Haass on U.S. Foreign Policy

Council on Foreign Relations President Richard Haass has just published an article in Time magazine (also available here) that challenges many of the comfortable nostrums guiding U.S. foreign policy for at least the last twenty years. He scores a 9 out of 10 in his analysis of what is wrong: we have an inordinate fear of things that shouldn’t be that frightening; we have a misplaced faith in our ability to fix nettlesome problems in distant lands; and we repeatedly stumble into costly and counterproductive wars that we should generally avoid.

Haass then proposes a new doctrine to “help establish priorities and steer the allocation of resources” and “that fits the U.S.’s circumstances.”

 It is one that judges the world to be relatively nonthreatening and makes the most of this situation. The goal would be to rebalance the resources devoted to domestic challenges, as opposed to international ones, in favor of the former. Doing so would not only address critical domestic needs but also rebuild the foundation of this country’s strength so it would be in a better position to stave off potential strategic challengers or be better prepared should they emerge all the same.

So far, so good. The problem, however, is not what Haass proposes to do – refocus America’s attention and resources at home, what he calls “restoration” – but rather how he proposes to do it. For all his wisdom in defying the Washington foreign policy consensus, he betrays a typical Washington-centric approach by suggesting that the federal government must take the lead “in restoring this country’s strength and replenishing its resources — economic, human and physical government.”

Restoration is not just about acting more discriminating abroad; it is even more about doing the right things at home. The principal focus would be on restoring the fiscal foundations of American power.

[…]

Reducing discretionary domestic spending would constitute one piece of any fiscal plan. But cuts need to be smart: domestic spending is desirable when it is an investment in the U.S.’s human and physical future and competitiveness.

In other words, the money we save by not waging foolish wars abroad would be redirected to other government projects. Thus, he calls for more federal spending for higher education, despite the fact that such spending has exploded over the past three decades, and has coincided with an equally dramatic rise in tuition – often three to four times the rate of inflation. (H/T N.M.) Haass likewise calls for more money to public transportation, despite the fact that federal support for Amtrak, for example, amounts to a massive subsidy paid from non-riders to the often relatively well-to-do. Similar facts prevail in other government-subsidized transit systems.
 
Haass is also wrong to perpetuate the myth that we are dependent on Middle East oil. We’re not. The Middle Easterners are dependent upon selling it. We have alternatives to buying their oil, and we don’t need government to force us to exercise them.

Here’s a different approach to restoring America’s strength at home: we should stop asking our brave men and women in uniform to be the world’s policemen; refocus a smaller, less expensive military on a few core missions that are vital to U.S. security; and give every American family a tax cut. If we spent what the average British or French citizen devotes to national security, that could amount to more than $6,000 a year for the average family of four. The savings would be even greater if we matched what Germans and Japanese spend. Every American family could then choose how to spend or invest their money (e.g. Save for college. Pay for bus/train fare. Buy a more fuel-efficient car, etc). 
 
There is already considerable support for cutting the Pentagon’s budget, and I think there would be even more if people believed that these savings would not merely be diverted elsewhere within the federal government. Richard Haass has made an important and timely contribution to the debate over the future of U.S. foreign policy, and I generally concur with his assessment. But he and others should demonstrate the tangible benefits that would flow to the average American from a more prudent, restrained foreign policy. I think that fewer dumb wars and more money in our pockets is a pretty compelling case.

Who Wants To Be ‘Too-Big-To-Fail’?

I’ve argued that the Dodd-Frank financial reform bill does not end “too-big-to-fail”, that is the belief that certain companies are implicitly backed by the government because policy-makers are unlikely to let said institutions actually fail. By naming some companies as ”systemically important” – as required by Dodd-Frank – the government is actually sending a signal as to who is likely to be bailed out.

As evidenced by regulators’ behavior during the financial crisis, the prime beneficiaries would be the creditors of these companies, as even when shareholders and management suffered, creditors generally did not. This should allow such firms to borrow at a cost lower than firms not deemed systemically important.

Given this funding advantage, it would seem natural that firms would want to be included as systemically important. Sure they might be examined by bank regulators more often, but that’s hardly a large cost compared to the funding advantage.

Congressman Frank has attempted to refute that there are any benefits from being deemed “systemically important” by the fact that ”so many financial institutions have lobbied against being designated in this way.” What his argument misses, or chooses to ignore, is that these benefits are not the same for all institutions. It is companies that rely heavily on debt market financing, such as banks, that have the most to gain. And under Dodd-Frank, the largest banks are automatically included. They have no opportunity to lobby to be in or out. The firms that are not automatically in, the most important of which are insurance companies, do not fund themselves primarily via the debt markets. Insurance companies get most of their funding from the premiums paid by their policyholders. And those premiums must be sufficient to cover expected losses, which have little to do with funding costs in the debt markets. Other non-bank financial companies, such as hedge funds and private equity, do not gain to the same extent that banks do because they have traditionally been a lot less leveraged than banks.

So the answer to Mr. Frank’s point is that those who have the most to gain from being ”systemically important” are already included, those with the least the gain are the very ones lobbying against being included. The real perversity is that once they are included, they will have a strong incentive to shift their business models toward more debt funding, making them riskier and more likely to fail (debt markets are far more fickle than insurance policy-holders). We are left relying solely on the judgment of the regulators to avoid this outcome, the same regulators who were asleep at the wheel as the housing bubble expanded.