Tag: regulation

SEC vs. Goldman Sachs: Legislation by Demonization

The Obama administration thinks it has discovered the perfect formula to cram legislation through in a hurry:  Demonize some prominent firm within an industry you plan to redesign, and then pass a law that has nothing to do with the accusation against the demonized firm.  They did this with health insurance and now they’re trying it with finance.

With health insurance, the demon was Anthem Blue Cross Blue Shield of California, which Obama accused of raising premiums by “anywhere from 35 to 39 percent.” Why didn’t some curious reporter interview a single person who actually paid 39% more, or quote from a letter announcing such an increase?  Because it didn’t happen.  Insurance premiums are regulated by the states, and California wouldn’t approve such a boost.  Yet the media’s uncritical outrage over that 39% rumor helped to enact an intrusive, redistributive health bill that has nothing to do with health insurance premiums (which remain regulated by the states).

Today, the new demon de jour is Goldman Sachs, a handy scapegoat to promote hasty financial rejiggering schemes  The SEC’s suspiciously-timed civil suit against Goldman looks as flimsy as the last month’s health insurance story.  It also looks unlikely to win in court.

As Washington Post columnist Sebastian Mallaby explains, “This is a non-scandal. The securities in question, so-called synthetic collateralized debt obligations, cannot exist unless somebody is betting that they will lose value.”  In such a zero-sum contest, big investors who went long knew perfectly well that other investors had to be taking the other side of the bet.  Goldman lost $90 million by betting this CDO would go up; John Paulson went short.

Columnists have moralized about the unfairness of the short investor (Paulson) negotiating the terms of this deal with a long investor, ACA Management, which had the last word. This too, notes Mallaby, “is another non-scandal.  An investor who wants to bet against a bundle of mortgages is entitled to suggest what should go into the bundle. The buyer is equally entitled to make counter-suggestions.  As the SEC’s complaint states clearly, the lead buyer in this deal, a boutique called ACA that specialized in mortgage securities, did precisely that.”

Like the earlier fuming about Anthem California, this new SEC publicity stunt is likewise irrelevant to the pending legislation.  Congress hopes to get standardized derivatives traded on an exchange. But synthetic collateralized debt obligations dealing with a customized bundle of securities could not possibly be traded on an exchange, and would therefore be untouched by reform.

Losses sustained by a few financial speculators on one exotic derivative had nothing to do with starting a global recession in December 2007 or the related financial crisis of September 2008. The core of the latter crisis was mortgage-backed securities per se, yet Goldman was only the 12th largest private MBS issuer in 2007.  Fannie Mae and Freddie Mac were and are the biggest risk; any reform that excludes them is a fraud.

The SEC’s dubious civil suit against Goldman is a wasteful diversion at best. It has nothing to do with the Obama administration’s suicidal impulse to impose more tough regulations and taxes on banks to encourage them to lend more.

[Cross-posted at NRO’s The Corner]

Ending the Black Market in Low-skilled Labor

Alex Nowrasteh and Ryan Young of the Competitive Enterprise Institute make the case for immigration reform in an especially appealing way in a fresh op-ed this week in the Detroit News.

In a commentary article titled, “Fix immigration rules to crush black market,” they dissect a well-meaning but flawed Obama administration effort to fix the dysfunctional H-2A visa program for temporary farm workers. Instead of fine tuning an unworkable law, Nowrasteh and Young advocate liberalization:

That means making H-2A visas inexpensive, easy to obtain, and keeping the related paperwork and regulations to a minimum. That means no minimum wage hike. No costly background check requirements. People rarely break laws that are reasonable and easy to obey.

When legal channels cost too much in time and money, people will turn to illegal channels every time. That’s how the world works. Getting rid of immigration’s black market begins with admitting that fact.

Hear, hear.

When Regulators Attack

No, that’s not the name of a new TV series. We should be so lucky.

It’s actually a good description of the government’s approach to tobacco.

Instead of letting adults make up their own minds about costs and benefits of risky choices (which includes most things in life, such as crossing a street and eating a cheeseburger), nanny-state officials have decided to investigate menthol-flavored cigarettes. And since the Food and Drug Administration has been given authority over the tobacco industry and since the FDA’s supposed purpose is to ensure drugs are “safe and effective,” that almost certainly means this latest campaign will lead to either further restrictions on free speech or outright bans.

Here’s a blurb from the Wall Street Journal:

Congress last year added the tobacco industry to the FDA’s regulatory mix and today a panel of health experts making up the agency’s new Tobacco Products Scientific Advisory Committee is kicking off a two-day meeting. First on the agenda: how menthol flavoring in cigarettes affects smokers’ habits. Small wonder that menthol is getting early attention, says the New York Times, which notes menthol butts account for almost a third of the $70 billion U.S. cigarette market.

After more meetings, the advisory panel will send recommendations to the FDA, which could eventually decide to ban menthol products or take steps to curtail their marketing.

One can only wonder how far down the slope we will slide. There already are attacks against fatty foods and sugary soft drinks. Both provide pleasure to many people, but that no longer means much in Washington. Will regulators, either at the FDA or elsewhere, eventually decide that anything linked to obesity must be regulated and/or taxed?

And now that government is going to pick up the tab for an even larger share of health costs, how long before the politicians use obesity-related costs as a major justification for further efforts to control our private lives? Maybe some day we will have a Federal Health Police to enforce daily exercise mandates? I better stop now before I give them any ideas.

Annals of Unhelpful Polling: Internet Access Edition

A new BBC poll is garnering plenty of press attention for its striking finding that 78% of global respondents believe that Internet access “should be a fundamental right of all people.” Fascinating!  Except… what exactly does that mean?

The obvious problem here is that, at least as it’s worded in English, the question is ambiguous between two equally plausible readings.  Especially when juxtaposed with another question about whether the Internet should be regulated by government, it could be understood as asking whether there’s a fundamental negative right to be free to use the Internet – to read and communicate free of government censorship or other onerous barriers.  That’s probably how we’d interpret a parallel question about whether people had a “fundamental right” to “access” information via newspapers or books.

Many folks, though, seem to be reading it as a measure of support for a fundamental positive right to be provided with (broadband?) Internet access. And that just seems a bit silly, frankly. There’s a decent case to be made that it’s desirable for governments that can afford it to make some kind of public Internet access available to citizens who can’t.  You can even imagine that, a few years down the line, some states in the developed world might have moved so heavily toward interacting with the public online that it would become more or less necessary for full political equality.  But a basic human right? Something that governments are “violating fundamental rights” if they don’t do? It’s not just that I don’t believe this; I have trouble imagining that much of anyone literally thinks so.  A few of my friends at Free Press, maybe, but 4/5 of the world’s population?  Color me dubious.

I’ll confess being startled at the response to a much less ambiguous question: A global majority agreed that “the Internet should never be regulated by any level of government anywhere.” While I find this pattern of responses congenial enough, I can’t take it much more seriously.  After all, what falls under the category of “regulation of the Internet”?  Censorship, of course, which I expect is what most people immediately thought of.  But in reality, of course, there are a whole panoply of laws and rules that at least arguably “regulate” the Internet in some sense, some of which even I would approve of. I have many, many issues with the Digital Millennium Copyright Act, for instance, but there’s nothing wrong with the idea that there should be a basic protocol that provides both a safe harbor for service providers hosting user content and a mechanism for complaining about copyright-infringing or libelous or otherwise tortious material.  Probably there are other “regulations” I’d approve too, but I’d have to sit and think about it for an hour to even enumerate all the different kinds of rules that might be considered to “regulate the Internet” in one way or another.

Because it’s at least not susceptible to such dramatically divergent readings, this response might be more useful as a kind of big-picture attitude check. But the reality is that almost none of the respondents can really mean it because even someone steeped in tech policy would have to sit and think about the question for a half hour to really get a grip on what it entails. Or might entail. If the BBC were engaged in some kind of serious social science, they probably would have worked up better questions.  But of course, that’s not the business they’re in.  They’re in the business of asking the sort of question that will let them run exciting headlines that get re-tweeted and drive page views. And 100% of respondents in my poll of myself agree they’ve succeeded.

A Campaign Finance Lesson

The Washington Post offers an instructive campaign finance story this morning. The essence of the story: employees of banks and brokerage houses contributed more to candidate Barack Obama in 2008 than to his rival John McCain. A lot more in fact: such employees gave almost twice as much to the current president at they did to the Arizona senator.

Now, however, President Obama is attacking the banks and Wall Street for greed and selfishness, not to mention for ruining the economy. Moreover, Obama is proposing curbs on Wall Street pay and heavy regulation of banks. It would appear, in other words, that contributions don’t buy many favors with this administration.

But the story goes deeper. Wall Street is now shifting its contributions to the GOP.  That’s not surprising. In fact, being an intelligent man, President Obama must have known his attacks on Wall Street might deprive his party of contributions. Yet, he went forward with the attacks and proposed laws.

Why? In the coming election, contributions will matter a lot less than votes. Obama thinks his attacks on Wall Street will cast the Democrats as the party of “us” against the detested “them.” The votes gained will greatly outweigh the donations lost. The currency of politics is votes in the market for election.

The next time someone tells you that donations are “legalized bribery,” ask them why Obama took $18 million from Wall Street and gave them in return endless abuse and hostile legislation.

Quid pro quo, indeed.

Obama’s ‘Best’ Idea? Rationing Care via Clinton-esque Price Controls

Hoping to revive his increasingly unpopular health care overhaul, President Obama has invited Republicans to a bipartisan summit this Thursday and plans to introduce a new reform blueprint in advance of the summit.  On Sunday, the White House announced that a key feature of that blueprint will be premium caps, a form of government price control that helped kill the Clinton health plan when even New Democrats rejected it.

The New York Times reports on President Obama’s blueprint:

The president’s bill would grant the federal health and human services secretary new authority to review, and to block, premium increases by private insurers, potentially superseding state insurance regulators.

It bears repeating what Obama’s top economic advisor Larry Summers thinks about price controls:

Price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time.

For example, as I have written elsewhere, artificially limiting premium growth allows the government to curtail spending while leaving the dirty work of withholding medical care to private insurers: “Premium caps, which Massachusetts governor Deval Patrick is currently threatening to impose, force private insurers to manage care more tightly — i.e., to deny coverage for more services.”  No doubt the Obama administration would lay the blame for coverage denials on private insurers and claim that such denials demonstrate the need for a so-called “public option.”

As the Progressive Policy Institute’s David Kendall explained in a 1994 paper, the Clinton health plan contained similar price controls.  Kendall explains why they would be a disaster:

In spite of the late hour in the health care debate, Congress has not yet decided how to restrain runaway health care costs. The essential choices are a top- down strategy of government limits on health care spending enforced by price controls or a bottom-up strategy of consumer choice and market competition. History clarifies that choice: Previous government efforts to regulate prices in peacetime have invariably failed. Moreover, government attempts to control prices in the health care sector would undermine concurrent efforts to restructure the marketplace…

The idea of controlling costs by government fiat is seductively simple. But it rests on a conceit as persistent as it is damaging: that government bureaucracies can allocate resources more wisely and efficiently than millions of consumers and providers pursuing their interests in the marketplace. The alternative – one rooted in America’s progressive tradition of individual responsibility and free enterprise – is to improve the market’s ground rules in order to decentralize decision-making, spur innovation, reward efficiency, and respect personal choice.

As centrally planned economies crumble around the world, many in the United States seem bent on erecting a command and control economy in health care. This policy briefing examines the reasons why government price regulation would fail to constrain health care costs and create many adverse side effects…

Ultimately, government price regulation will always fail because it does not change the underlying economic forces driving up prices. If we are serious about slowing the growth of health care costs, we have to change the ways we consume and provide medical care. Price controls evade the hard but essential work of structural reform in health care markets: They are a quintessentially political response to an economic problem. The alternative is to allow well-functioning markets to set prices and allocate resources, while ensuring that all Americans have access to affordable health care coverage. The market-oriented approach leaves decisions to cost-conscious consumers and health care providers rather than bureaucrats.

Any of that sound familiar?  It’s worth reading the whole thing.

This is not hope.  This is not change.  (Much less a game-changer.)  It is, to pinch a phrase, a return to “the failed theories that helped lead us into this crisis.”

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.