Tag: financial system

Monday Links

  • Burnt rubber: Obama’s decision to slap a 35 percent tariff on Chinese tires whiffs of senseless protectionism.

AFL-CIO Wants to Tax Stock Trades…to Stop Speculation

Earlier this week, the AFL-CIO, building upon a suggestion made last week in the UK, proposed that the federal government impose a 1/10 of 1 percent tax of all stock trades.  The union group argues that such a tax would reduce non-productive speculative activity in the stock market.

First of all, we have all sorts of transfer taxes on housing, and yet we still had a housing bubble.  So much for small taxes stopping speculative activity.  If an investor expected to double his money, it seems quite a stretch to believe that such a small tax would discourage him.

More importantly, our recent financial crisis was not triggered by too much equity (like stocks) but by too much debt.  In taxing stock transactions, we only add to the already favorable treatment of debt compared to equity, encouraging even greater leverage in our financial system.

The real purpose of this tax on speculation becomes apparent when the AFL-CIO suggests what the money should be used for…building new infrastructure that would require the hiring of unionized workers.  The AFL-CIO should stop hiding behind the spin of stopping speculation and directly engage in the real debate:  the massive size of our federal government and the unsustainable fiscal path we are on.

Timmy Throws a Temper-Tantrum

As reported in yesterday’s Wall Street Journal, Treasury Secretary Tim Geithner called fellow bank regulators, included Fed Chair Ben Bernanke and FDIC Chair Sheila Bair, over for an obscenity-laced rant about their audacity in raising questions about his scheme to fix our financial system.

Reportedly the Secretary told regulators that “enough is enough” and that they’ve been heard, so the time for debate is over.  This sounds eerily like the President’s previous comments about including Republicans in the talks over the stimulus - you’ve been heard, so you were “included,” now shut up.   The shouting down of debate is becoming all too much a signature of this Administration.

The Secretary apparently also told the regulators in attendance that it was the administration and the Congress that sets policy.  Perhaps next he’ll tell us that the power of the purse lies with the Treasury and the Congress.  Secretary Geithner has no more constitutional authority to set policy than do any of the bank regulators.  It is the job of Congress to make laws, not the Treasury Secretary’s.  He can offer his opinion, just as they can, and should, offer theirs.

Of course, Secretary Geithner’s frustrations are understandable, given that his regulatory proposals have hit a brick-wall with both Congress and the Public.  He has made no effort to explain to either Congress or the public how exactly his plan will stop future bailouts.  Instead, any reasonable read of his proposal would lead to the conclusion that we will have more bailouts, rather than less, under the Obama-Geithner plan.  Instead of directing his energies at anger, he should put them toward coming up with solutions that actually increase the stability of our financial system.

We were all told during his confirmation process that we must overlook such facts as his failure to pay taxes, because Tim Geithner was the “boy-wonder” who would save our financial system.  As his recent out-bursts demonstrate, “boy-wonder” is only half-right.

Bailouts Could Hit $24 Trillion?

ABC News reports:

“The total potential federal government support could reach up to $23.7 trillion,” says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government’s efforts to fix the financial system.

Yes, $23.7 trillion.

“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just $1 trillion – $23.7 trillion is a staggering figure.”

Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.

At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.

We used to complain that George W. Bush had increased spending by ONE TRILLION DOLLARS in seven years. Who could have even imagined new government commitments of $24 trillion in mere months? These promises could make the implosion of Fannie Mae and Freddie Mac look like a lemonade stand closing.

Too Big to Fail

One of the most pernicious public policies aggravating the financial crisis is that of “too big to fail.” The doctrine states that some banks (now financial institutions generally) are so large that their failure would incur “systemic risk” for the financial system. That sounds terrible and it is intended to. Financial services regulators and Treasury secretaries use it to frighten small children and congressmen. How can an elected official vote to incur systemic risk? He must vote to approve the bank bailout of the day. In fact, people who use the term cannot even agree among themselves as to what it means, much less what causes it and, therefore, what the appropriate response would be. I suggest the reader substitute the phrase “too politically connected to fail” whenever he sees “too big to fail.” What follows will then be rendered intelligible.

Consumer Financial Product Commission Distracts from Real Reform

Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.

The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.

If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses.  No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.

Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.

Administration Reform Plan Misses the Mark

The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crises. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.

Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.

Instead of addressing our destructive federal policies aimed at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However, such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.

While the Administration plan recognizes the failure of the credit rating agencies, it appears to misunderstand the source of that failure: the rating agencies’ government-created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the outsourcing of their own due diligence to the rating agencies.

The Administration’s inability to admit the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.