Tag: Fed

The Legacy of TARP: Crony Capitalism

When Treasury Secretary Hank Paul proposed the bailout of Wall Street banks last September, I objected in part because the TARP meant that government connections, not economic merit, would come to determine how capital gets allocated in the economy. That prediction now looks dead on:

As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation’s political and financial capitals.

In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.

“In the old days, Washington was refereeing from the sideline,” said Mohamed A. el-Erian, chief executive officer of Pimco. “In the new world we’re going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well… . And that changes the dynamics significantly.”

Read the rest of the article; it is truly frightening. We have taken a huge leap toward crony capitalism, to our peril.

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

Obama to Seek Cap on Federal Pay Raises

USA Today reports that President Obama is seeking a cap on federal pay raises:

President Obama urged Congress Monday to limit cost-of-living pay raises to 2% for 1.3 million federal employees in 2010, extending an income squeeze that has hit private workers and threatens Social Security recipients and even 401(k) investors.

…The president’s action comes when consumer prices have fallen 2.1% in the 12 months ending in July, because of a massive drop in energy prices. The recession has taken an even tougher toll on private-sector wages, which rose only 1.5% for the year ended in June — the lowest increase since the government started keeping track in 1980. Private-sector workers also have been subject to widespread layoffs and furloughs.

Last week, economist Chris Edwards discussed data from the Bureau of Economic research that revealed the large gap between the average pay of federal employees and private workers. His call to freeze federal pay “for a year or two” received attention and criticism, (FedSmith, GovExec, Federal Times, Matt Yglesias, Conor Clarke) to which he has responded.

As explained on CNN earlier this year, the pay gap between federal and private workers has been widening for some time now:

“If You’re Not Having Fun Advocating for Freedom, You’re Doing it Wrong!”

The health care debate has catalyzed a wonderful national clash of cultures centering on freedom versus control. Here’s one example that’s both complex and delightful.

Progressive site TalkingPointsMemo ran a story yesterday about a man named “Chris” who carried a rifle outside an event in Phoenix at which President Obama appeared. “We will forcefully resist people imposing their will on us through the strength of the majority with a vote,” Chris said.

To many TPM readers, this kind of thing is self-evidently shocking and wrong: Carrying a weapon is inherently threatening, Second Amendment notwithstanding. And vowing to resist the properly expressed will of the majority—isn’t that an outrageous denial of our democratic values?

Well, … No. Our constitution specifically denies force to democratic outcomes that impinge on freedom of speech and religion, on bearing arms, and on the security of our persons, houses, papers, and effects, to name a few. Our constitution also tightly circumscribed the powers of the federal government. Those restrictions were breached without abiding the supermajority requirements of Article V, alas.

There are many nuances in this clash of cultures, and it’s fascinating to watch the battle for credibility. One ugly issue is preempted rather handily by the fact that Chris is African-American.

Next question, taken up by CNN: Was the interview staged? Hell, yeah! says Chris’ interviewer. And they know each other—big deal.

Finally, they were laughing and having a good time. Isn’t this serious? Yes, it is serious, says Chris’ interviewer, but “If you’re not having fun advocating for freedom, you’re doing it wrong!”

It’s a great line—friendly, in-your-face advocacy that might just succeed in familiarizing more Americans with the idea of living as truly free people.

Today Talking Points Memo is charging that the man who interviewed Chris was a prominent defender of a militia group in the 90s, some members of which were convicted of crimes. I know nothing of the truth or falsity of this charge, and I had never heard of the militia group, the interviewer, or his organization before today.

This struggle over credibility is all part of the battle between freedom and control that is playing itself out right now. It’s an exciting time, and a chance for many more Americans to learn about liberty and the people who live it.

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The Pay Czar at Work

Mark Calabria notes how the form of salary scheme at financial institutions played no apparent role in sparking the financial crisis.  But that hasn’t stopped the federal pay czar from boasting about his power, even to regulate compensation set before he took office.

Reports the Martha’s Vineyard Times:

Speaking to a packed house in West Tisbury Sunday night, Kenneth Feinberg rejected the title of “compensation czar,” but he also said said his broad and “binding” authority over executive compensation includes not only the ability to trim 2009 compensation for some top executives but to change pay plans for second tier executives as well.

In addition, Mr. Feinberg said he has the authority to “claw back” money already paid to executives in the seven companies whose pay plans he will review.

And, he said that if companies had signed valid contractual pay agreements before February 11 this year, the legislation creating his “special master” office allowed him to ask that those contracts be renegotiated. If such a request were not honored, Mr. Feinberg explained that he could adjust pay in subsequent years to recapture overpayments that were legally beyond his reach in 2009.

This isn’t the first time that federal money has come with onerous conditions, of course.  But it provides yet another illustration of the perniciousness of today’s bail-out economy.

Would Summers Be Any Worse than Bernanke?

As I have argued elsewhere, Bernanke’s record as both a Fed governor and Chair suggest we be better off with a new Fed Chair come January 2010, when Bernanke’s term as Chair expires. Outside of those who believe the bailouts have saved capitalism, two very reasonable arguments are put forth for keeping Bernanke at the helm:  1) in a time of crisis, the markets need certainty and dislike change; and 2) the alternatives, such as Larry Summers, would be worse.  Both these points have real merit, however I believe in both cases the pros of change outweigh the cons of staying the course with Bernanke.  I will save the “certainty” debate for another time, for now, let’s ask ourselves:  Would Summers really be any worse than Bernanke?

Before I make the case for Summers, I do want to make clear, President Obama, and the country, would best be served by a “Carter picks Volcker” type moment.  Go outside the Administration, go beyond the usual circle of easy-money, new Keynesians.  The Fed lacks creditability in two (at least two) important areas: bailouts and inflation.  And one doesn’t even need to go outside of the Federal Reserve System to find candidates.  Topping my list would be Jeff Lacker (Richmond Fed), Gary Stern (Minn Fed) and Charles Plosser (Philly Fed).  Any of these three know the workings of the Fed, have the respect of the Fed staff, and have taken strong positions on both “too big to fail” and easy money.  In the case of Gary Stern, it would seem especially appropriate, as his early warnings (see his 2004 book on bank bailouts) were largely ignored and dismissed.  If we want to reward and promote those who got it right, these guys are at the top of the list.

But let’s reasonably suppose that Obama wants someone close, someone he personally knows and will stick with tradition by picking a member of his own administration.  Without going into any detail, picking Romer would offer little substantial difference with keeping Bernanke.  The case for Summers is essentially that here is one instance where his enormous ego would be an asset.  One easily gets the sense that when Summers sits next to President Obama, Summers is thinking to himself just how lucky the President is to be sitting next to Larry Summers.  One can call Summers lots of things, starstruck is not one of them.  Given what we now need most in a Fed Chair is true independence, from especially the Administration but also from Congress, Summers is the only qualified economist close to the President who displays even the slightest streak of independent thinking.  Bernanke, in contrast, has endlessly pandered to the Administration and to Congressional Democrats.  Summers has been willing on occasion to actually defend the sanctity of contract (remember the debates over the AIG bonuses), a rarity on the Left, and more than Bernanke was willing to say.  

So forced to choose between Bernanke and Summers, the need for an independent Fed Chair willing to take on the Administration and Congress, when appropriate, makes Summers a far better choice.  That said, here’s to encouraging Obama go outside his comfort zone and pick someone who has the will to remove excess liquidity from the system before the next bubble gets going.

Gallup Poll: Federal Reserve Makes the IRS Look Good

A recent Gallup Poll surveyed the public’s impression of how various federal agencies were doing their job.  Of the agencies evaluated, on the bottom was the Federal Reserve Board.  Only 30 percent of the respondents rated the Fed’s performance as either excellent or good.  I can understand now why Chairman Bernanke felt the need to take his act on the road.  Even the IRS managed to get 40 percent of respondents to see its job performance as excellent or good. A majority of the public, 57 percent, sees the Fed’s current performance as either poor or fair.

The result is not just driven by a general public disdain for federal agencies; over a majority of respondents thought such agencies as the Center for Disease Control, NASA and the FBI were doing an excellent or good job.

Nor is the result driven by public ignorance or indifference to the Fed; only a few years ago, back in 2003, 53 percent of Americans said the Federal Reserve was doing an excellent or good job and only 5% called its job performance poor.  But then, the Fed was also giving us negative real interest rates at that time as well.  Perhaps there’s a good reason to insulate the Fed from short-term public and political pressures.  Let’s hope Chairman Bernanke does not read these results as an excuse for repeating the Fed’s 2003 monetary policies.