Tag: Financial

ObamaCare, Social Democracy & Socialism

The following excerpt from Jeffrey Friedman’s article in the January/February 2010 issue of Cato Policy Report, though about the financial industry rather than health care reform, captures why so many critics of ObamaCare are comfortable describing it as socialism:

What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress — social and economic problems — as they arise, one by one…. The case-by-case approach is supposed to be the height of pragmatism. But in substance, there is a striking similarity between social democracy and the most utopian socialism. Whether through piecemeal regulation or central planning, both systems share the conceit that modern societies are so legible that the causes of their problems yield easily to inspection. Social democracy rests on the premise that when something goes wrong, somebody — whether the voter, the legislator, or the specialist regulator — will know what to do about it. This is less ambitious than the premise that central planners will know what to do about everything all at once, but it is no different in principle.

Repeal the bill.

Obama Proposes Further Delay on Fannie & Freddie

President Obama seems to be slowly waking up to the fact that the American public has grown tired of the endless bailout of Fannie Mae and Freddie Mac.  The public has also rejected the talking point that Fannie and Freddie were simply victims of a 100 year storm in the housing market.  So what’s Obama’s response?  To ask for public comment and have public forums.

This strategy is clearly one of delaying and avoiding any reform of Fannie and Freddie while pretending to care about the issue.  Where was the public comment and forums on the Volcker rule?  Seemingly the standard is that fixing the real causes of the financial crisis should be delayed and debated while efforts like the Dodd bill, which do nothing to avoid future financial crises, should be rushed without debate or comment.

Even more disingenious is couching reform of Fannie and Freddie under the rubic of “fixing mortgage finance”.  This is no more than an attempt to take the focus away from Fannie and Freddie and shift it to “abusive lending” and other non-causes of the crisis.

This isn’t rocket science.  The role of Fannie and Freddie in the financial crisis is well understood.  The only thing missing is the willingness of Obama and Congress to stand up to the special interests and protect the taxpayer against future bailouts.

Monday Links

  • The case for high-deductible health insurance:  “Of every dollar spent on health care in this country, just 13 cents is paid for by the person actually consuming the goods or services….As long as someone else is paying, consumers have every reason to consume as much health care as is available….This all but guarantees that health care costs and spending will continue their unsustainable path. And that is a path leading to more debt, higher taxes, fewer jobs and a reduced standard of living for all Americans.”
  • Reality: The real housing crisis was the bubble, not the bust. “Washington must stop and re-learn basic economics. First, when you’re in a hole, stop digging. In the case of housing, as a country, we built too much. The cure is to build less.”

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?

Predictions for 2010

I was just listening to the December CatoAudio interview with Tom Palmer and Ian Vasquez about the fall of the Soviet empire 20 years ago, and Tom mentioned that even as late as October 7, 1989, when the East German government held a gala celebration of its 40th year in power, no one anticipated that within a month the Wall would open and communism would come to an abrupt end in eastern Europe.

And then I looked at the predictions of various scholars and pundits at Politico’s Arena one year ago today and noticed how wrong most of them were – Terry McAuliffe would be elected governor of Virginia, Rod Blagojevich would still be governor in April, Iran would test a nuclear weapon, several Republican members of Congress would switch to the Democratic Party (!), Justice Stevens would retire. No one predicted the surge of small-government, anti-spending sentiment, which was arguably the top political story of 2009.

And then, looking up who said “Nobody knows anything” (screenwriter William Goldman, about Hollywood), I stumbled on this blog post from October 2008:

I pulled from my desk drawer a copy of the Wall Street Journal from Wednesday, May 23, 2007.

It was not a particularly notable day.  The bull market was in force, and the Dow was hitting new highs … even though gasoline prices were at record levels.  But here at Cabot we had been noting a growing divergence in the market; both the NYSE Advance-Decline Line and the Nasdaq had failed to confirm the Dow’s high.  Also, we detected a high level of optimism among both investors and the general media.  So I saved The Wall Street Journal, in part because of the lead article that announced, “Why Market Optimists Say This Bull Has Legs.”

The subhead of the article followed with, “They See Decade of Gain Fed by Global Growth; Skeptics Cite Big Doubts.”…

So I reread the article and what did I find?  Fundamental talk about global growth, low interest rates and a technology revolution that would boost productivity.  [One bull] even had the courage to utter the phrase that makes an experienced investor quail, ” … it really is different this time.”

Also given ink were the detractors, who claimed that reversion to the mean was inevitable, that low interest rates couldn’t last, and that the weak dollar and above-average P/E ratios would eventually pull the market down.

But here’s what I found interesting (in hindsight):  Not once in the entire article did anyone mention credit!!!

Today, we know from our rearview mirror that credit was the culprit of a decline that has crushed the global financial system.  But just 17 months ago, a reporter looking for reasons the bull might not last found no one mentioning credit!

All of which is to explain why you’re not going to find any predictions for 2010 in this post.

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Tuesday Links

  • All eyes on India: Party crashers aside, Indian Prime Minister Manmohan Singh’s visit to the U.S. was an important event.