Tag: ownership

Does CRA Undermine Bank Safety?

A recent policy forum here at Cato discussed the role of the Community Reinvestment Act (CRA) in the financial crisis.  While the forum focused on the federal push for ever expanding homeownership to marginal borrowers, the analysis did not touch directly upon the question of whether CRA lending undermines bank safety.

Fortunately this is a question that one economist at the Federal Reserve Bank of Dallas bothered to ask.  While his research findings were available before the crisis, they were clearly ignored.

In a peer-reviewed published article, appearing in the journal Economic Inquiry, economist Jeff Gunther concludes that there is “evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but comes at the expense of safety and soundness.”  Specifically he finds an inverse relationship between CRA ratings and safety/soundness, as measured by CAMEL ratings.

In another study Gunther finds that increases in bank capital are associated with an increase substandard CRA ratings.  Apparently bank CRA examiners prefer that capital to be lend out, rather than serve as a cushion in times of financial distress.

Given the current attempts in Washington to expand CRA, it seems some people never learn.  One can always argue over how CRA should work, but the evidence is quite clear how it has worked, once again proving: there’s no free lunch.

Likely Supreme Court Tie Would Be a Loss to Property Owners

Today, the Supreme Court heard argument in Stop the Beach Renourishment v. Florida Department of Environmental Protection, which is a Fifth Amendment Takings Clause challenge involving beachfront property (that I previously discussed here).

Essentially, Florida’s ”beach renourishment” program created more beach but deprived property owners of the rights they previously had – exclusive access to the water, unobstructed view, full ownership of land up to the “mean high water mark,” etc. That is, the court turned beachfront property into “beachview” property.  After the property owners successfully challenged this action, the Florida Supreme Court – “SCOFLA” for those who remember the Bush v. Gore imbroglio – reversed the lower court (and overturned 100 years of common property law), ruling that the state did not owe any compensation, or even a proper eminent domain hearing.

As Cato adjunct scholar and Pacific Legal Foundation senior staff attorney Timothy Sandefur noted in his excellent op-ed on the case in the National Law Journal, “[T]he U.S. Constitution also guarantees every American’s right to due process of law and to protection of private property. If state judges can arbitrarily rewrite a state’s property laws, those guarantees would be meaningless.”

I sat in on the arguments today and predict that the property owners will suffer a narrow 4-4 defeat.  That is, Justice Stevens recused himself – he owns beachfront property in a different part of Florida that is subject to the same renourishment program – and the other eight justices are likely to split evenly.  And a tie is a defeat in this case because it means the Court will summarily affirm the decision below without issuing an opinion or setting any precedent.

By my reckoning, Justice Scalia’s questioning lent support to the property owners’ position, as did Chief Justice Roberts’ (though he could rule in favor of the “judicial takings” doctrine in principle but perhaps rule for the government on a procedural technicality here).  Justice Alito was fairly quiet but is probably in the same category as the Chief Justice.  Justice Thomas was typically silent but can be counted on to support property rights.  With Justices Ginsburg, Breyer, and Sotomayor expressing pro-government positions, that leaves Justice Kennedy, unsurprisingly, as the swing vote.  Kennedy referred to the case as turning on a close question of state property law, which indicates his likely deference to SCOFLA.

For more analysis of the argument, see SCOTUSblog.  Cato filed an amicus brief supporting the land owners here, and earlier this week I recorded a Cato Podcast to that effect. Cato also recently filed a brief urging the Court to hear another case of eminent domain abuse in Florida, 480.00 Acres of Land v. United States.

Americans Don’t Want It

“Americans are more likely today than in the recent past to believe that government is taking on too much responsibility for solving the nation’s problems and is over-regulating business,” according to a new Gallup Poll.

New Gallup data show that 57% of Americans say the government is trying to do too many things that should be left to businesses and individuals, and 45% say there is too much government regulation of business. Both reflect the highest such readings in more than a decade.

Byron York of the Examiner notes:

The last time the number of people who believe government is doing too much hit 57 percent was in October 1994, shortly before voters threw Democrats out of power in both the House and Senate. It continued to rise after that, hitting 60 percent in December 1995, before settling down in the later Clinton and Bush years.

Also, the number of people who say there is too much government regulation of business and industry has reached its highest point since Gallup began asking the question in 1993.

That might give an ambitious administration pause. The independents who swung the elections in 2006 and 2008 clearly think things have gone too far. An administration as smart as Bill Clinton’s will take the hint and rein it in. Meanwhile, another recent poll, by the Associated Press and the National Constitution Center, shows that

Americans decidedly oppose the government’s efforts to save struggling companies by taking ownership stakes even if failure of the businesses would cost jobs and harm the economy, a new poll shows.

The Associated Press-National Constitution Center poll of views on the Constitution found little support for the idea that the government had to save AIG, the world’s largest insurer, mortgage giants Fannie Mae and Freddie Mac, and the iconic American company General Motors last year because they were too big to fail.

Just 38 percent of Americans favor government intervention - with 60 percent opposed - to keep a company in business to prevent harm to the economy. The number in favor drops to a third when jobs would be lost, without greater damage to the economy.

Similarly strong views showed up over whether the president should have more power at the expense of Congress and the courts, if doing so would help the economy. Three-fourths of Americans said no, up from two-thirds last year.

“It really does ratify how much Americans are against the federal government taking over private industry,” said Paul J. Lavrakas, a research psychologist and AP consultant who analyzed the results of the survey.

Note that 71 percent of the respondents opposed government takeovers, with 50 percent strongly opposed, before the “benefits” of such takeovers were presented.

President Obama is an eloquent spokesman for his agenda, and he has an excellent political team with a lot of outside allies to push it. But as the old advertising joke goes, you can have the best research and the best design and the best advertising for your dog food, but it won’t sell if the dogs don’t like it.

Washington Legal Foundation Opposes GBS Deal

Via James Grimmelmann, the Washington Legal Foundation, a group known for its defense of property rights, filed an objection to the Google book deal earlier this month focusing on concerns related to those I raised in my posts earlier this week.

WLF points out that the Supreme Court has mandated that plaintiffs seeking to certify a class must make a diligent effort to notify all affected class members. According to the high court’s Shutts decision, this effort must include—at a minimum—sending a letter to every identifiable member of the class. In this case, this would mean sending a letter to every address in the US Copyright Office’s database of authors. WLF questions whether this was done; the foundation reports that it never received notification related to any of the books for which it holds the copyrights.

Now, it might be objected that this process would be prohibitively expensive. But if the class is so large that it’s impractical to notify all of its members, then the class is certainly too large to expect a judge to verify that the interests of all class members is being served by the settlement. If the class is too large to notify, then it’s too large to certify.

WLF also points out that the sprawling and heterogeneous class of plaintiffs makes it unlikely that the plaintiffs’ lawyers can fairly represent all parties who would be bound by the settlement:

For example, only those class members whose works have already been copied by Google are entitled to cash payments under the Settlement Agreement. Thus, the financial interests of those whose works have been copied diverge from the interests of class members whose works have not been copied. The former have an interest in maximizing cash payments, while the latter would prefer to see a smaller portion of the settlement pot allocated to those cash payments and a larger portion allocated to compensation for copying to be performed by Google in the future.

Another distinction among class members involves orphan works – that is, works whose owners are difficult (if not impossible) to ascertain. The owners of orphan works (who may not even know that they hold any ownership interests) have an obvious interest in ensuring that a large portion of settlement funds is dedicated to identifying the ownership of orphan works. On the other hand, the owners of works whose ownership is readily identifiable have an interest in holding down such search costs. If less money is devoted to such search efforts, a correspondingly greater percentage of settlement funds will be available to provide compensation
to them.

The point here isn’t that the amount allocated to orphan works searches is too high (or too low), or that more (or less) should be allocated to pay for previously-scanned books. The point is that a settlement involving millions of plaintiffs will inevitably enrich some plaintiffs at the expense of others. This isn’t a problem that can be solved by changing the details of the settlement. It’s a problem that can only be solved by limiting the scope of the settlement to parties whose interests are actually represented by the plaintiffs’ attorneys.

Does the Left Know We Had a Housing Bubble?

Over the last week, speaking at a variety of events, I heard three different representatives of the Left; first a Democrat US Senator, then a senior member of the Obama Administration, and finally a “consumer” advocate, all repeat the same narrative:  all was fine in the housing market until predatory lenders forced hard-working honest families into foreclosure, which reduced house prices, bringing the economy to a crash.  That’s correct, apparently the Left believes we all would still be seeing double-digit home price appreciation if it wasn’t for those evil lenders.

Undoubtedly foreclosures, especially those that result in houses that remain vacant for a considerable amount of time, have an adverse impact on surrounding property values.  Many constitute a serious eye-sore and provide a haven for criminal activity.  But did foreclosures really drive down prices, or were foreclosures first driven by price declines resulting from a bursting housing bubble?  While causality is always difficult to establish with certainty, we do know that the rate of house price appreciation peaked and started declining about 18 months before the dramatic up-turn in mortgage delinquencies.  If one prefers a more rigorous test, economists at the Boston Fed have directly tested if prices first drove foreclosures or whether foreclosures drove prices.  Their results conclude that its was declining prices that matter, and that the price effect of foreclosures is minimal.

Why does any of this ultimately matter?  Because if we craft policies to avoid the adverse impacts of the next property bubble based upon a narrative of “consumer protection” – as is being pushed by the Obama Administration, we will do little to avoid the creation of the next housing bubble and its damaging aftermath.  Instead we should be focusing attention on those policies that contributed to the creation of the housing bubble: expansionary monetary policy and the Federal government’s blind pursuit of ever-expanding home-ownership rates at any cost.

Intervention Begets Intervention, Which Begets…

The logic in Washington is ineluctable.  If government provides money, then it needs to impose regulations.  If the government takes ownership, then it must provide management.

Bail out the banks.  Set bankers’ salaries.  Bail out the insurers.  Decide on corporate bonuses.

And if the government takes over the automakers, then it should run the automakers.  That, of course, means deciding who can be dealers. 

Reports the Washington Post:

Now that the Obama administration has spent billions of dollars on the bailouts of General Motors and Chrysler, Congress is considering making its first major management decision at the automakers.

Under legislation that has rapidly gained support, GM and Chrysler would have to reinstate more than 2,000 dealerships that the companies had slated for closure.

The automakers say the ranks of their dealers must be thinned in order to match the fallen demand for cars. But some of the rejected dealers and their Capitol Hill supporters argue that the process of selecting dealerships for closure was arbitrary and went too far.

Since federal money has been used to sustain the automakers, they say Congress has an obligation to intervene.

At a gathering of dozens of dealers who came to Capitol Hill yesterday to lobby their representatives, House Majority Leader Steny H. Hoyer (D-Md.) and several other congressmen spoke in support of the dealers. More than 240 House members have signed onto the bill, supporters said.

“We are going to stand with them for as long as it takes,” Hoyer told an approving crowd.

What is next?  Congress deciding the prices that should be charged for autos?  The accessories to be offered?  The colors cars should be painted?

I have no idea who should or should not be an auto dealer.  But I do know that it is a decision which should not be made in Washington, D.C.