Tag: Treasury

Let’s Name Something Cool after Prince. And Stop Naming Things after Politicians While We’re at It.

I am just as distressed as the rest of America at Prince’s passing, and there’s little I can say that would meaningfully add to his deserved tributes and encomiums: it’s not an exaggeration to say that we may not ever again have an entertainer like that who has the ability to produce music that cuts across race and class and age to be appreciated by everyone.

But the fact that he died just as America put the portraits of Elizabeth Cady Stanton, Sojourner Truth and Harriet Tubman on U.S. currency may be serendipitous, in that it gives us a precedent for the government to honor his accomplishments in a meaningful way.

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Time for a Debate on Sanctions Policy

This morning, I attended an interesting speech by Jack Lew, Secretary of the Treasury, on the future of economic sanctions. The speech was notable in that Lew made not only a defense of the effectiveness of sanctions, but also highlighted their potential costs, a variable that is too often missing from debates over sanctions policy.

Some of the points Lew made – like the argument that multilateral sanctions are better than unilateral ones – were hardly novel. Yet others were more interesting, including the argument that sanctions implementation should be based on cost/benefit analysis and an assessment of whether they are likely to be successful. Though such an approach sounds like common sense, it has not always been the rule.

He also focused on the importance of lifting sanctions once they’ve achieved their ends. This is a rebuke to some, particularly in congress, who have argued for reintroducing the sanctions on Iran lifted by the nuclear deal through some other mechanism. As he pointed out, refusing to lift these sanctions now means that they will be less effective in the future: if states know sanctions will remain in place regardless of their behavior, what incentive do they have to change it?

Perhaps most interestingly, Lew argued for the ‘strategic and judicious’ use of sanctions and against their overuse. This is an interesting argument from an administration for whom sanctions have often been the ‘tool of first resort.’ In doing so, he referenced both growing concerns about the costs of sanctions from the business community, and the broader strategic concern that overuse of sanctions could weaken the U.S. financial system or dollar in the long-run.

I still disagree with the Secretary on several points. While he is correct that nuclear sanctions on Iran have broadly been a success, he dramatically overstates the effectiveness of sanctions in the more recent Russian case. Much of the economic damage in that case was the result of falling oil prices, and sanctions have produced little in the way of coherent policy change inside Russia.

He also overstates the extent to which today’s targeted sanctions avoid broad suffering among the population. In fact, evidence suggests that modern sanctions still suffer some of the same flaws as traditional comprehensive trade sanctions, allowing the powerful to deflect the impact of sanctions onto the population, and reinforcing, not undermining, authoritarian dictators.

Despite this, it is refreshing to hear concerns about the long-term implications of runaway sanctions policy expressed by policymakers. In alluding to these concerns – many of which have been noted for some time now by researchers – the Treasury Secretary may help to spark a broader policy discussion of the benefits and costs of sanctions. If we wish to retain sanctions as an effective tool of foreign policy moving forward, such discussion is vital.

For more on some of the big issues surrounding sanctions policy, you can read some of Cato’s recent work on sanctions policy here and here, or check out the video from our recent event on the promises and pitfalls of economic sanctions

Administration Playing Both Sides on Fannie Mae

On Friday the Obama Administration released its report on “reforming America’s Housing Finance Market.”  The report claimed that the Administration would work toward “winding down Fannie Mae and Freddie Mac on a responsible timeline.” 

While the report was silent on what a responsible timeline would be (surprise, no details); I assumed, perhaps naively, that a reasonable timeline would be 5 to 6 years.  So you can imagine my surprise while reading the Administration’s budget proposal (see Table S-12 of the summary tables), released Monday, that the Administration is projecting that the government will be receiving, between 2012 and 2021, $89 billion in dividend payments from Fannie Mae and Freddie Mac.  In 2021 alone the White House projects $8 billion in dividend payments.  But here’s the rub, for Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.

So would the Administration please be straight with us for just a minute: are you or are you not proposing that Fannie Mae and Freddie Mac disappear; and if so, when?

Another odd thing from the budget, again Table s-12 lists the net equity position of Fannie and Freddie as negative.  Well that’s obviously true, but it also raises the question of why they are still in conservatorship, as the law requires them to be taken into receivership once they’ve reached negative equity.  Then perhaps OMB and Treasury have different definitions of net equity.

Too Top-Down…Even for the Chinese Government!

It’s not surprising that Treasury Secretary Geithner’s recent G-20 proposal that governments agree to keep their current-account balances (either surplus or deficit) within 4 percent of GDP has met with resistance. After all, it assumes governments can and should manage the buying, selling, and investment decisions of hundreds of millions of Americans and billions of people worldwide. But I marvel at how deeply Chinese Vice Foreign Minister Cui Tiankai’s tongue must have been planted in cheek when he uttered this rich rejection of Geithner’s idea: “The artificial setting of a numerical target cannot but remind us of the days of a planned economy.” If the shoe fits….

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Reflections on a Mortgage Summit

Yesterday the Treasury and HUD hosted a “Conference on the Future of Mortgage Finance.”  It was an invite-only of Washington insiders.  Somehow I found myself on the invite list, which was almost enough to make me believe that the Administration was finally serious about reforming Fannie and Freddie.

After getting over the nausea of being in a room full of people who I personally knew bore some responsibility for the mess we are in, I was then shocked that, compared to the rest of the room, Treasury Secretary Geithner came across as the radical.  On one hand Geithner was very clear that the Administration was going to push for some sort of government guarantee, but also that the current structure, particularly Fannie and Freddie, were broken.  He also went as far as admitting that Fannie and Freddie were a cause of the crisis.

Such statements only became radical in contrast to the rest of the room.  Maybe about 80 percent of the attendees were blindly and violently attached to the status quo.  Most offensive to those us who fight for free markets was that the industry representatives were the most vocal advocates for the status quo.  To even suggest that lenders should bear the risk of loans they make was crazy to this group.  It was a clear reminder that being pro-market and pro-business are generally two very different things.   In fairness, not all lenders were busy plotting to find ways to profit while dumping their risk onto the taxpayer; some, such as Wells Fargo, were far more supportive of the private sector actually bearing the risk.

Most of those who were not industry insiders were housing and community advocates.  While this group did seem a little less self-interested, they appear to have learned little about the risks of over-expanding homeownership.  Repeatedly, access to homeownership, as if it could solve every social ill, was pushed as the primary goal.  A few dissenters reminded us that rental is a viable option too, although they were mainly looking to continue/expand Fannie and Freddie’s support of the multifamily rental market.

If the Administration was hoping that this group was going to come up with answers, then they must have been sorely disappointed.  If Obama is serious about taking the taxpayer off the hook for risk in the mortgage market, then he is going to have to take on the special interests.  My fear is that the event was just the beginning of how health care reform played out:  cut a deal with the industry, pay off the Democratic base, and screw the taxpayer.  Let’s hope we actually see some change on this one.

Moody’s Mulls Downgrading U.S. Debt

The U.S. isn’t Greece.  Yet.

Moody’s is no longer so sure about the quality of Uncle Sam’s debt.  Reports the Christian Science Monitor:

The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.

The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.

If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.

That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still.

“There’s a profound effect in this announcement,” says Max Fraad Wolff, a professor of economics at New School University in New York. “The US has always been the gold standard … and this begins to signal a fall or weakness in US global economic position. That’s a bit like a sea change.”

Obviously we are long overdue for some fiscal responsibility in Washington.  And that means cutting spending across the board.  Lawmakers might start by considering what programs are authorized by the Constitution–and the far larger number which represent unconstitutional political power grabs.

Obama’s Education Proposal Still a Bottomless Bag

This morning the Obama Administration officially released its proposal for reauthorizing the Elementary and Secondary Education Act (aka, No Child Left Behind). The proposal is a mixed bag, and still one with a gaping hole in the bottom.

Among some generally positive things, the proposal would eliminate NCLB’s ridiculous annual-yearly-progress and “proficiency” requirements, which have driven states to constantly change standards and tests to avoid having to help students achieve real proficiency.  It would also end many of the myriad, wasteful categorical programs that infest the ESEA, though it’s a pipedream to think members of Congress will actually give up all of their pet, vote-buying programs.

On the negative side of the register, the proposed reauthorization would force all states to either sign onto national mathematics and language-arts standards, or get a state college to certify their standards as “college and career ready.”  It would also set a goal of all students being college and career ready by 2020. But setting a single, national standard makes no logical sense because all kids have different needs and abilities; no one curriculum will ever optimally serve but a tiny minority of students.

Also, on the (VERY) negative side of the register, Obama’s budget proposal would increase ESEA spending by $3 billion from last year – for a total of $28.1 billion – to pay for all of the ESEA reauthorization’s promises of incentives and rewards. That’s $3 billion more that the utterly irresponsible spenders in Washington simply do not have, and that would do nothing to improve outcomes.

Even if this proposal were loaded with nothing but smart, tough ideas, it would ultimately fail for the same reason that top-down control of government schools has failed for decades. Teachers, administrators, and education bureaucrats make their livelihoods from public schooling, and hence spend more time and money on education lobbying and politicking than anyone else. That makes them by far the most powerful forces in public schooling, and what they want for themselves is what we’d all want in their place if we could get it: lots of money and no accountability to anyone.

As long as such asymmetrical power distribution is the case – and it’s inherent to “democratic” control of education – no proposal, no matter how initially tough, is likely to make any long-term improvements. As the matrix below lays out, no matter what combination of standards and accountability you have, politics will eventually lead to poor outcomes. It’s a major reason that the history of government schooling is strewn with “get-tough” laws that ultimately spend lots of money but produce no meaningful improvements, and it’s a powerful argument for the feds complying with the Constitution and getting out of education.

When all is said and done, you can throw all the great things you want into the federal education bag, but as long as politicians are making the decisions you’ll always come up empty.