Tag: Federal Reserve

Week in Review: Bailout Bonuses, Marijuana and Eminent Domain Abuse

House Approves 90 Percent ‘Bonus Tax’

Sparked by outrage over the bonus checks paid out to AIG executives, the House approved a measure Thursday that would impose a 90 percent tax on employee bonuses for companies that receive more than $5 billion in federal bailout funds.

Chris Edwards, Cato’s director of tax policy studies, says the outrage over AIG is misplaced:

While Congress has been busy with this particular inquisition, the Federal Reserve is moving ahead with a new plan to shower the economy with a massive $1.2 trillion cash infusion — an amount 7,200 times greater than the $165 million of AIG retention bonuses.

So members of Congress should be grabbing their pitchforks and heading down to the Fed building, not lynching AIG financial managers, most of whom were not the ones behind the company’s failures.

Cato executive vice president David Boaz says this type of selective taxation is a form of tyranny:

The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers.

On a related note,  Cato senior fellow Richard W. Rahn defended the use of tax havens in a recent Wall Street Journal op-ed, saying the practice will only become more prevalent as taxes increase in the United States:

U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world’s highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.

Obama to Stop Raids on State Marijuana Distributors

Attorney General Eric Holder announced this week that the president would end federal raids on medical marijuana dispensaries that were common under the Bush administration.

It’s about time, says Tim Lynch, director of Cato’s Project on Criminal Justice:

The Bush administration’s scorched-earth approach to the enforcement of federal marijuana laws was a grotesque misallocation of law enforcement resources. The U.S. government has a limited number of law enforcement personnel, and when a unit is assigned to conduct surveillance on a California hospice, that unit is necessarily neglecting leads in other cases that possibly involve more violent criminal elements.

The Cato Institute hosted a forum Tuesday in which panelists debated the politics and science of medical marijuana. In a Cato daily podcast, Dr. Donald Abrams explains the promise of marijuana as medicine.

Cato Links

• A new video tells the troubling story of Susette Kelo, whose legal battle with the city of New London, Conn., brought about one of the most controversial Supreme Court rulings in many years. The court ruled that Kelo’s home and the homes of her neighbors could be taken by the government and given over to a private developer based on the mere prospect that the new use for her property could generate more tax revenue or jobs. As it happens, the space where Kelo’s house and others once stood is still an empty dustbowl generating zero economic impact for the town.

• Daniel J. Ikenson, associate director of Cato’s Center for Trade Policy Studies, explains why the recent news about increasing protectionism will be short-lived.

• Writing in the Huffington Post, Cato foreign plicy analyst Malou Innocent says Americans should ignore Dick Cheney’s recent attempt to burnish the Bush administration’s tarnished legacy.

• Reserve your spot at Cato University 2009: “Economic Crisis, War, and the Rise of the State.”

New Era of Unlimited Federal Power

The House has passed a measure imposing a special punitive tax of 90% on certain employee compensation in response to the AIG scandal. As others have noted, this raises serious constitutional issues. Article I, Section 9, Clause 3 says simply and directly: “No Bill of Attainder or ex post facto Law shall be passed.” The congressional bill being considered in response to the AIG bonuses seems to violate both those prohibitions at least in spirit.

The Constitution’s Framers apparently considered (page 154) this clause to be very important in guarding against legislative tyranny, and James Madison noted in Federalist 44:

Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation.

Aside from the dangers to liberty from overzealous members of Congress, there are issues of priorities here. While Congress has been busy with this particular inquisition, the Federal Reserve is moving ahead with a new plan to shower the economy with a massive $1.2 trillion cash infusion–an amount 7,200 times greater than the $165 million of AIG retention bonuses.

So members of Congress should be grabbing their pitchforks and heading down to the Fed building, not lynching AIG financial managers, most of whom were not the ones behind the company’s failures.

More Cheap Money from the Fed

The Federal Reserve announced that it would create $1.2 trillion out of thin air and use it to buy mortgage-backed securities and Treasury bonds, even though

Some Fed leaders have resisted buying Treasurys in the past because they were unsure whether it would help reduce borrowing costs and because they feared that it would appear that the central bank was simply printing money to finance the government’s deficit, a hallmark of countries with poorly managed economies.

Time to Think about the Gold Standard?

Back in 2007, presidential candidate Ron Paul generated a lot of talk, especially among libertarians, about monetary policy, the Federal Reserve, and the gold standard. As a longtime believer in sound money, I was surprised to discover how many smart young libertarians thought that talk of the gold standard was nutty. And perhaps more surprised to discover that they thought it was unnecessary now that the problem of central banking had been solved. As two of them wrote when I asked about their objections,

“The gold standard is the solution to no actual problem that is of concern to anyone. I think it’s a mistake to take a relatively professional and independent central bank for granted, but we have one. Inflation is low and predictable. The monetary climate is stable and amenable to savings and investment, etc.”

“What’s the beef with the Fed?  By my estimation, it’s been one of the most effective, restrained government agencies over the last twenty five years.  They’ve dramatically reduced the volatility of the business cycle while achieving low, reasonably constant inflation.” 

Well. How’s that confidence in central banking looking now? I’m reminded of Murray Rothbard’s comment in 1975 about what the era of Vietnam, Watergate, and stagflation had done to trust in government:

Twenty years ago, the historian Cecelia Kenyon, writing of the Anti-Federalist opponents of the adoption of the U.S. Constitution, chided them for being “men of little faith” – little faith, that is, in a strong central government. It is hard to think of anyone having such unexamined faith in government today.

Partly in response to such criticisms of the gold standard, in February 2008 Cato published a paper by Professor Lawrence H. White, “Is the Gold Standard Still the Gold Standard among Monetary Systems?” White argued:

The gold standard is not a flawless monetary system. Neither is the fiat money alternative. In light of historical evidence about the comparative magnitude of these flaws, however, the gold standard is a policy option that deserves serious consideration.

In a study covering many decades in a large sample of countries, Federal Reserve Bank economists found that “money growth and inflation are higher” under fiat standards than under gold and silver standards.

A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money. From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.

And he quoted a devastating line from an essay (p. 104) by Peter Bernholz:

A study of about 30 currencies shows that there has not been a single case of a currency freely manipulated by its government or central bank since 1700 which enjoyed price stability for at least 30 years running.

In February 2008 White’s study didn’t get much attention. Most people still thought the Greenspan-Bernanke Fed was doing a great job, so why talk about alternatives to fiat money? But now, after the crash of 2008 and the growing realization that Dow 14000 was the product of a cheap-money boom that led to the inevitable bust, maybe it’s time to think about the gold standard or other constraints on politicized money creation.

Why Bank Stocks Rose on Bernanke’s Remarks

In a CNBC spot with Steve Liesman & Erin Burnett, I tried to explain why investors in bank stocks had good reason to be pleased with part of Fed Chairman Ben Bernanke’s speech.  Judging by the response of Steve and Erin, and others on CNBC over the following day,  I must not have been persuasive.

For clarification, I am quoting the exact language from Bernanke’s talk, with my emphasis added.

My main point is that Bernanke admitted that when it comes to the “financial crisis” of some big banks, this is largely an artifact of unduly harsh regulation being applied at the worst possible time:

There is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical–that is, they lead financial institutions to ease credit in booms and tighten credit in downturns more than is justified by changes in the creditworthiness of borrowers, thereby intensifying cyclical changes.

For example, capital regulations require that banks’ capital ratios meet or exceed fixed minimum standards for the bank to be considered safe and sound by regulators. Because banks typically find raising capital to be difficult in economic downturns or periods of financial stress, their best means of boosting their regulatory capital ratios during difficult periods may be to reduce new lending, perhaps more so than is justified by the credit environment. We should review capital regulations to ensure that they are appropriately forward-looking…

Bernanke emphasized the regulators’ dangerous habit of raising capital requirements and loan loss reserves simply because of a strict mark-to-market misinterpretation of the “fair value” of mortgage-backed securities.

He noted that:

Determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency.

The key here is Bernanke’s criticism of the rigid use of Basel capital standards, not mark-to-market information per se (which would be harmless if it did not trigger foolish regulations). When combined with Barney Frank’s similar comments on the same day, it begins to look as though sensible economics might finally take priority over dubious bookkeeping.