Tag: bailouts

Fed Governor Starting to Make Sense

Despite still defending the Fed’s bailouts, Fed Governor Kevin Warsh gave a speech this morning offering a few insights about reforming our financial system that seem to be lost on both Obama and Bernanke.

A few highlights:

The mortgage finance system is owed far stricter scrutiny to gather a fuller appreciation of the causes of the crisis. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, for example, were given license and direction to take excessive risks.

One has to hope that both Bernanke and Obama are listening.  The silence of the Obama administration on fixing Fannie and Freddie is nothing short of shocking and irresponsible.  Any commitment to real reform has to include the GSEs.

Granting new powers to resolve failing firms in the discretionary hands of regulators is unlikely, in the near-term, to drive the market discipline required to avoid the recurrence of financial crises.

…Some newly-empowered and untested regulatory structure is not likely – in and of itself – to be sufficient to tackle institutions that are too-big-to-fail, particularly as memories of the crisis fade. Regulation is too important to be left to regulators alone.

I believe these two points cannot be stated more strongly:  what we need is more market discipline, rather than less.  Putting the entire weight of our financial system on the backs of our financial regulators is a crisis just waiting to happen.  Sadly the direction of both President Obama and Congress seems to be in undermining market monitoring of firms and relying solely on regulators to “get it right” – the very same regulators who were asleep at the wheel prior to the last crisis.

Obama Bank Tax Is Misguided

Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit?   But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

If the effort is really about deficit reduction, then it completely misses the mark.  Any serious deficit reduction plan has to start with Medicare and Social Security.  Assessing bank fees is nothing more than a rounding error in terms of the deficit.  Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order.  The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.

The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs.  Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do.   So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.

But now the same administration is proposing to assess a fee on banks to cover losses from the TARP.  Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer.  He appears, however, to be missing the critical reason why:  the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

The Slippery Slope Goes Vertical

In the Obama era, the slippery slope has gone vertical. Instead of “eventually,” the feared extensions of government power come immediately.

When President Obama decided to convert George W. Bush’s bailout of General Motors Corp. and Chrysler L.L.C. into effective government ownership, critics warned that this could lead to political intrusion into the management of automobile companies, with decisions being made for political instead of economic reasons. The companies would get less efficient. The government might try to preserve jobs or engage in political grandstanding rather than build sound companies that serve consumers - eventually.

But there was no “eventually” about it. Before he had even secured government control, Obama fired the chief executive officer of General Motors. He decided what the ownership structure of the companies should be. He insisted that the companies build “clean cars” rather than cars that consumers want to buy. And as soon as a deal was concluded, members of Congress started trying to block the closing of inefficient dealerships and to require the companies to buy their palladium in Montana, use unionized trucking companies, remove mercury from scrapped cars, and so on. Politics reared its ugly head in the first moments of government control.

Now we have the federal government’s unprecedented intrusions into executive-pay decisions at seven bailed-out banks and automobile companies….

Read more at today’s Philadelphia Inquirer.

U.S. Cutting Pay for Bailed Out Company Executives

According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:

NEW YORK – The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.

The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.

But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.

This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.

I debate this further on CNBC:

C/P The Hill

Perpetuating Bad Housing Policy

Perhaps the worst feature of the bailouts and the stimulus has been that, whatever their merits as short terms fixes, they have done nothing to improve economic policy over the long haul; indeed, they compound past mistakes.

Here is a good example:

For months, troubled homeowners seeking to lower their mortgage payments under a federal plan have complained about bureaucratic bungling, ceaseless frustration and confusion. On Thursday, the Obama administration declared that the $75 billion program is finally providing broad relief after it pressured mortgage companies to move faster to modify more loans.

Five hundred thousand troubled homeowners have had their loan payments lowered on a trial basis under the Making Home Affordable Program.

The crucial words in the story are “$75 billion” and “pressured.”

No one should object if a lender, without subsidy and without pressure, renegotiates a mortgage loan. That can make sense for both lender and borrower because the foreclosure process is costly.

But Treasury’s attempt to subsidize and coerce loan modifications is fundamentally misguided. It means many homeowners will stay in homes, for now, that they cannot really afford, merely postponing the day of reckoning.

Treasury’s policy is also misguided because it presumes that everyone who owned a house before the meltdown should remain a homeowner. Likewise, Treasury’s view assumes that all the housing construction over the past decade made good economic sense.

Both presumptions are wrong. U.S. policy exerted enormous pressure for increased mortgage lending in the years leading up to the crisis, thereby generating too much housing construction, too much home ownership and inflated housing prices.

The right policy for the U.S. economy is to stop preventing foreclosures, to stop subsidizing mortgages, and to let the housing market adjust on its own. Otherwise, we will soon see a repeat of the fall of 2008.

The Czar Will Rule

President Obama’s real czar, “pay czar” Ken Feinberg, who has real power, brushes aside such claims even as he prepares to issue his Gosplan-style edicts on future and even past pay agreements:

The Obama administration’s pay czar says negotiations over executive compensation with the seven companies that received the biggest federal bailouts have been “a consensual process’’ - not a matter of forcing decisions on them.

“I’m hoping I won’t be required to simply make a determination over company objections,’’ veteran Washington attorney Kenneth Feinberg told the Chicago Bar Association in a speech.

But note: he’s “hoping” he won’t have to impose his own view. He’s hoping the companies will accede to his power without complaining. But the fact remains, he doesn’t have to get their consent. He “has sole discretion to set compensation for the top 25 employees of each of those companies,” and his decisions “won’t be subject to appeal.” Or, as Feinberg himself puts it,

The statute provides these guideposts, but the statute ultimately says I have discretion to decide what it is that these people should make and that my determination will be final. The officials can’t run to the Secretary of Treasury. The officials can’t run to the court house or a local court. My decision is final on those individuals.

That’s power. So where is Doonesbury? We need him to update his classic 1970s “energy czar” strips.

Doonesbury