Tag: credit

The Fraud From Basel

Despite every major US bank being declared by regulators as “well capitalized” prior to the financial crisis, we still found ourselves watching the government plow hundreds of billions of capital into said banks.  How can this be?  The answer is quite simple:  we were lied to.  Maybe that’s a little harsh, after all these banks did meet the regulatory definition of “well capitalized”.  But when push came to shove, market participants rightly ignored regulatory capital.  After all you cannot use things like “deferred tax losses” to pay your bills with.

It is hard to improve upon Martin Wolf’s observation in today’s Financial Times:  “This amount of equity is far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis.”  This point is best illustrated by the trend in bank capital over the last 100 years.  Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital.   In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%.  The trend is unmistakable:  the more government has regulated bank capital, the less capital banks have ended up holding.

Despite the claims of the banking industry, what the bank regulators have just delivered with “Basel III” is simply another fraud upon the public and investors.  Any framework that continues to treat say Greek or Fannie Mae debt as largely risk-free is a sham.

The real solution is to first end the various government bailouts, guarantees and subsidies behind the banking system, subjecting bank creditors to actual losses, while also abandoning the charade that is capital regulation.   Sadly politicians (see the Dodd-Frank Act) and regulators continue to simply tweak a flawed and morally bankrupt system.

Moody’s Mulls Downgrading U.S. Debt

The U.S. isn’t Greece.  Yet.

Moody’s is no longer so sure about the quality of Uncle Sam’s debt.  Reports the Christian Science Monitor:

The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.

The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.

If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.

That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still.

“There’s a profound effect in this announcement,” says Max Fraad Wolff, a professor of economics at New School University in New York. “The US has always been the gold standard … and this begins to signal a fall or weakness in US global economic position. That’s a bit like a sea change.”

Obviously we are long overdue for some fiscal responsibility in Washington.  And that means cutting spending across the board.  Lawmakers might start by considering what programs are authorized by the Constitution–and the far larger number which represent unconstitutional political power grabs.

Credit Card Dementia and Boundary Cases

credit cardsThe most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:

I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:

- 1) What is your age?
- 2) What day of the week are you taking this survey?
- 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
- 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
- 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
- 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
- 7) Write a sentence you’d like us to hear about anything, good or bad!
- 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?

Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here…

I smell money – it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.

Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:

I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible – I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.

But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.

The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.

I’d add two responses of my own.

First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people – those who slightly overspend, then have to make it up later – those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)

Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases – How old before you can vote? How demented before a contract doesn’t bind? – are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.

What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth – with annoying boundary issues at every stop along the way – libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.

The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.

Obama: ‘All Part of the Job’

Via the Spectator’s Alex Massie, comes this ABC News report on last Thursday’s Obama town hall in New Orleans:

“Why do people hate you?”, a fourth-grade boy asked Obama …. “They’re supposed to love you. And God is love.”

Massie comments,

Obama’s answer is actually pretty reasonable. But this is what happens when you make a mere elected politician assume the status of Priest-King. It is, in its own way, a corrupting influence. I don’t blame the kid asking the question since, heck, there are plenty of professional journalists in DC who basically think along the same lines. This isn’t Obama’s fault, but it’s a problem nonetheless.

True enough, Americans had an irrational conception of presidential responsibility long before 44 took office. Still, Obama’s far from blameless. At the same town hall, Obama commented :

“You know, I listen to, sometimes, these reporters on the news: Well, why haven’t you solved world hunger yet?” he joked.

Ha: silly reporters! They should ask the president about something he’s actually promised to do, like provide “a cure for cancer in our time,” or stop the oceans’ rise, or “create a Kingdom right here on Earth.”

Obama’s right that it’s “part of the job” that the president gets an outsized share of credit or blame for the direction of the country. It’s been that way for a long time. As Thomas Cronin put it in his classic 1970 essay “Superman: Our Textbook President”:

on both sides of the presidential popularity equation [the president’s] importance is inflated beyond reasonable bounds. On one side, there is a nearly blind faith that the president embodies national virtue and that any detractor must be an effete snob or a nervous Nellie. On the other side, the president becomes the cause of all personal maladies, the originator of poverty and racism, inventor of the establishment, and the party responsible for a choleric national disposition.

Barack Obama didn’t create this view of presidential responsibility; he inherited it. But, other than the occasional “change is hard” caveat, it’s not as though Obama’s sought to dispel the irrational expectations people invest in the office. To the contrary, he’s done more than any president in living memory to encourage the view that the president is a benevolent father protector endowed with magical powers – a living American talisman against hurricanes, terrorism, economic downturns, and spiritual malaise. It’s the sort of view that people ought to – but often don’t – grow out of by, say, fifth grade. And a good deal of the burgeoning public dissatisfaction with Obama stems from his aggressive attempts to secure powers to match the boundless responsibilities he embraces.

Eyewitness to Government’s Robbery of Chrysler Creditors

Further to Ilya Shapiro’s post this morning, let me also point you to a concise chronology of events culminating in the government’s robbery of Chrysler creditors.

The story is that of Richard Mourdock, Treasurer of the State of Indiana and the man responsible for stewardship of the state’s pension funds, some of which were victimized by the Obama administration’s pre-packaged and then forced-fed bankruptcy deal for Chrysler. I strongly urge you to read Mr. Mourdock’s testimony, which is at once revealing, sobering, compelling and, regrettably, a frightening sign of the times.

Mourdock will be speaking on this very topic at Cato, along with bankruptcy law expert David Skeel, on Thursday, October 15 at noon. Reserve your seat now.

Housing Bailouts: Lessons Not Learned

The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.

Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:

The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

And what is the result of this surge in FHA insurance?

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

This is madness. Repeat after me: TANSTAAFL (There ain’t no such thing as a free lunch).

C/P Libertarianism, from A to Z

The Post and Times Push for Cap and Trade

Since the June House vote on the Waxman-Markey “cap-and-trade” bill, lawmakers from both chambers have backed significantly away from the legislation. The first raucous “town hall” meetings occurred during the July 4 recess, before health care. Voters in swing districts were mad as heck then, and they’re even more angry now. Had the energy bill not all but disappeared from the Democrats’ fall agenda, imagine the decibel level if members were called to defend it and Obamacare.

But none of this has dissuaded the editorial boards of the The New York Times and Washington Post. Both newspapers featured uncharacteristically shrill editorials today demanding climate change legislation at any cost.

The Post, at least, notes the political realities facing cap-and-trade and resignedly confesses its favored approach to the warming menace: “Yes, we’re talking about a carbon tax.” The paper—motto: “If you don’t get it, you don’t get it”—argues that in contrast to the Boolean ball of twine that is cap-and-trade, a straight carbon tax will be less complicated to enforce, and that the cost to individuals and businesses “could be rebated…in a number of ways.”

Get it? While ostensibly tackling the all-encompassing peril of global warming, bureaucrats could rig the tax code in other ways to achieve a zero net loss in economic productivity or jobs. Right. Anyone who makes more than 50K, or any family at 100K who thinks they will get all their money back, please raise you hands.

The prescription offered by the Times, meanwhile, is chilling in its cynicism and extremity. It embraces the fringe—and heavily discredited—idea of “warning that global warming poses a serious threat to national security.” It bullies lawmakers with the threat that warming could induce resource shortages that would “unleash regional conflicts and draw in America’s armed forces.”

(Note to the Gray Lady: This is why we have markets. Not everyone produces everything, especially agriculturally. For example, it’s too cold in Canada to produce corn, so they buy it from us. They export their wheat to other places with different climates. Prices, supply, and demand change with weather, and will change with climate, too. Markets are always more efficient than Marines, and will doubtless work with or without climate change.)

Appallingly, the piece admits that “[t]his line of argument could also be pretty good politics — especially on Capitol Hill, where many politicians will do anything for the Pentagon. … One can only hope that these arguments turn the tide in the Senate.” In other words: the set of circumstances posited by the national-security strategy are not an object reality, but merely a winning political gambit.

There’s no way that people who see through cap-and-trade are going to buy the military card, but one must admire the Times’ stratagem for durability. Militarization of domestic issues is often the last refuge of the desperate. How many lives has this cost throughout history?

Nevertheless, one must wonder at the sudden and inexplicable urgency that underpins the positions of both these esteemed newspapers. Global surface temperatures haven’t budged significantly for 12 years, and it’s becoming obvious that the vaunted gloom-and-doom climate models are simply predicting too much warming.

Still, one must admire the Post and Times for their altruism. The economic distress caused by a carbon tax, militarization, or any other radical climatic policy certainly won’t be good for their already shaky finances, unless, of course, the price of their support is a bailout by the Obama Administration.

Now that’s cynical.