Topic: Finance, Banking & Monetary Policy

Like FDR — In a Really Bad Way

President Barack Obama based his candidacy in part on the promise to set a new tone in Washington.  But we saw a much older tone emerge with his demonization of hedge funds over the Chrysler bankruptcy.  Reports the Washington Post:

President Obama’s harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker’s debt.

Hedge funds and investment managers were irate at Obama’s description of them as “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

“Some of the characterizations that were used today to refer to us as speculators or to say we’re looking for a bailout is really unfair,” said one executive who spoke on condition of anonymity because of the sensitivity of the matter. “What we’re looking for is a reasonable payout on the value of the debt … more in line with what unions and Fiat were getting.”

George Schultze, the managing member of the hedge fund Schultze Asset Management, a Chrysler bondholder, said, “We are simply seeking to enforce our bargained-for rights under well-settled law.”

“Hopefully, the bankruptcy process will help refocus on this issue rather than on pointing fingers at lenders,” he said.

I won’t claim any special expertise to parse who is responsible for what in the crash of the U.S.  (meaning Big Three) auto industry.  However, attacking people for exercising their legal rights and trashing those who make their business investing in companies hardly seems like the right way to get the U.S. economy moving again.

During the Depression, FDR’s relentless attacks on business and the rich almost certainly added to a climate of uncertainty that discouraged investment during tough times.  Why put your money at real risk when the president and his cohorts seem determined to treat you like the enemy?  While President Obama need not treat gently those who contributed to the current crisis by acting illegally or unscrupulously, he should not act as if those who simply aren’t willing to turn their economic futures over to the tender mercies of the White House are criminals.

We’ve just lived through eight years of bitter partisan warfare.  The president shouldn’t replace that with a jihad against businesses that resist increased government direction of the economy.

In Ensuring Credit Card Holders’ ‘Rights,’ Congress May Actually Take Away Their Credit

With a vote expected today on the so-called Credit Card Holders’ Bill of Rights, the U.S. House is poised to follow up on President Obama’s finger-wagging rhetoric about fees and other perceived sins of the credit industry.

But Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. Now is the worst time to push measures that would curtail the availability of consumer credit, and that is exactly what the Credit Card Holders’ Bill of Rights will do.

While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing during this downturn.

It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.

The Federal Reserve recently issued regulations targeting practices in the credit card industry. While this regulation was itself overkill, it should be given an opportunity to work, and be modified if it results in significant contraction of credit. It is far easier to go back and change harmful regulations than legislation.

Chrysler: Everybody Relax, This Is Exactly What Should Have Happened

the-new-chryslerA small group of Chrysler debt holders rejected the Obama administration’s restructuring plan last night, leaving Chapter 11 bankruptcy as the most salient option for the company.

The Obama administration accused the investors who walked away of “failure to act…in the national interest.” But it’s not difficult to understand why these secured creditors rejected the government’s offer of essentially 29 cents on their investment dollar. If that is how the Obama administration treats capital markets, how exactly do they expect to spur private investment in American companies, as the White House claims it wants to do?

Bankruptcy reorganization will probably yield a better deal for investors than the government’s plan. It also will imbue the process with more financial sanity than anything the Obama administration cooked up. For instance: the historically overindulged United Auto Workers might be forced to make more “sacrifices” than being handed a 55 percent stake in the company—essentially what the core of the administration’s plan would have accomplished—or reducing their CBA-mandated breaks from 16 minutes to 13 minutes.

Bankruptcy has been the best option all along. That was clear the moment it was determined that new private capital or adequate sales revenues would not be available to fund operations. But once the Bush administration circumvented Congress to throw Chrysler (and GM) a lifeline, and the Obama administration followed suit with implicit backing, uncertainty prevailed and the problem persisted. The bankruptcy process will produce a less politically driven solution.

Love the Cards, Hate the Card Issuers

God hates the sin but loves the sinner, we are told.  Americans have a similar attitude towards credit cards.  They love the cards but hate the card issuers.

Naturally, President Barack Obama has picked up on this sentiment and wants the credit card companies to be “fair.”  Reports the Washington Post:

The Obama administration yesterday called for an end to unfair credit card industry practices such as retroactive interest rate increases for any reason, late-fee traps that penalize borrowers with weekend or middle-of-the-day deadlines and teaser rates that last less than six months.

In a written statement released by the Treasury Department, the administration outlined practices it would like Congress to reform as it considers two bills that would crack down on the industry. One proposal would force card companies to apply payments above the minimum amount to the highest interest rate debt. To crack down on over-limit fees, the administration would also like Congress to require card companies to get customers’ permission to set up accounts so transactions over the limit can still be processed.

There are lots of reasons to criticize the practices of  credit card companies, but many of the rules are simply mechanisms to charge riskier borrowers more.  If you pay off your bill every month, you don’t pay the extra fees and interest.  If you are more disorganized, short on cash, or both, you pay more. 

Higher charges make it possible to provide more credit to more people.  Of course, politicians believe in the latter but not the former.  Banks should provide credit cards, make loans, and issue mortgages to everyone, irrespective of credit standing, at rates akin to those charged Bill Gates.  Anything more is viewed as a variant of “predatory” lending deserving condemnation.

Maybe it would be best for some people not to buy so much on credit, but that isn’t – at least so far – the government’s decision.  However, it would be more honest if government branded people with the Scarlet C and banned them from borrowing than prohibiting companies from charging higher rates and fees to reflect higher credit risks.

The credit card debate is stranger than most in Washington.  Listening to critics you’d think that the card companies were dragooning people off the streets, forcing them at gunpoint to sign up for cards, and demanding that they spend money else their children will be kidnapped and sold into slavery.  Precisely who was forced to accept and use these terrible cards with their terrible terms?  No one.

Instead of posturing as defenders of the body politic, crusading politicians should, as my friend Don Boudreaux of George Mason University suggested,  give up their day jobs and start credit card companies.   These entrepreneurs then could offer consumers better cards with less onerous terms, making everyone better off.

Any takers?

The Joys of Stock Ownership

I happen to own shares in Bank of America, so I’ve just received a proxy statement for the upcoming annual meeting. The Board of Directors recommends that I authorize them to vote my shares FOR an uncontested slate of candidates for the board. Usually I go along with such proxy requests.

But this time I thought: Why should these people get something like $250,000 a year to take orders from President Obama and Secretary Geithner? It’s become pretty clear that the Obama administration intends to use the bailout money to control private companies. He intends to tell companies what cars to make, how much to lend, how much to charge for credit cards, what to pay their executives, what kinds of bonuses are acceptable, and other crucial management decisions.

So I decided to write in “Barack Obama” for all 18 positions on the Board of Directors. However, neither the paper ballot nor the online ballot allowed for write-ins. I guess the official slate will win. But make no mistake. Obama’s the boss.

Tarred by TARP

Government-backed equity was offered to adequately capitalized banks in order to remove the “stigma” from banks receiving TARP funds, and the management of these institutions took the bait and accepted the money.

Surprise, surprise: now they discover that the money came with strings.

Some banks want to pay back the TARP money to extricate themselves from government restrictions on compensation and pressure to make loans the banks view as unprofitable. Treasury Secretary Geithner has made it clear that the decision to pay back the funds early won’t be left to the banks, but to the Treasury: “My basic obligation is to make sure the system as a whole … has the ability to provide the credit that recovery requires.”

The banking system has thus become a tool for the government to further its policies. And the bankers themselves put their institutions in that position. While taxpayers may understandably feel the bankers got their comeuppance, there are at least two major problems with the Bush/Obama policy.

First, Mr. Geithner has misdiagnosed the problem.

We are in recovery from the effects of the bursting of a massive housing and finance bubble funded by debt. That boom in turn financed a consumption binge of monumental proportions.

The only resolution of a spending binge is restraint in the form of saving. Recovery requires not more credit and another boom, but a dose of economic sobriety.

Individuals and firms know that and are de-leveraging – unwinding what they now realize is excessive debt. That will take the rest of this year and the better part of 2010. Overall, credit is down because demand is down.

Second, and even more disturbing: it appears that the Obama Administration wants to control the financial sector in order to gain control over what Lenin called the “Commanding Heights” of the U.S. economy: the major industries and sources of employment. The auto industry is a prime example, and one in which the administration has involved itself directly. It is also pressuring major recipients of TARP funds to ease the terms of the loans they have made to firms such as Chrysler. Treasury is attempting to use the banks to conduct fiscal policy through credit allocation.

The bankers taking TARP funds got their firms into a mess and deserve no sympathy. Anyone believing in free markets, however, must oppose this power grab by the Obama Administration.

Let the banks pay the funds back and let it be a lesson for CEOs and their stockholders: If you take government funds, you have taken on an unreliable business partner.

Cato and the Bailouts: A Correction for the NY Times ‘Economix’ Blog

At the New York Times Economix blog, economist Nancy Folbre of the University of Massachusetts writes:

The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.

Excuse me?

Since she linked to one of our papers on corporate welfare, we assume she’s visited our site. How, then, could she get such an impression? Cato scholars have been deploring bailouts since last September. (Actually, since the Chrysler bailout of 1979, but we’ll skip forward to the recent avalanche of Bush-Obama bailouts.) Just recently, for instance, in – ahem – the New York Times, senior fellow William Poole implored, “Stop the Bailouts.” I wonder if our commentaries started with my blog post “Bailout Nation?” last September 8? Or maybe with Thomas Humphrey and Richard Timberlake’s “The Imperial Fed,” deploring the Federal Reserve’s help for Bear Stearns, on April 14 of last year?

Cato scholars appeared on more than 90 radio and television programs to criticize the bailouts during the last quarter of 2008. Here’s a video compilation of some of those appearances.

Folbre complains that some people seem more concerned about welfare – TANF, in the latest federal acronym – than about welfare for bankers – TARP. Google says that there are 138 references to TANF over the past 13 years or so on the Cato website, and 231 references to TARP in the past few months.

Now she has a legitimate point. Welfare for the rich is at least as bad as welfare for the poor. And as much as welfare for the poor has cost taxpayers, the new welfare for banks, insurance companies, mortgage companies, and automobile industries is costing us more. Samuel Brittan of the Financial Times has written that “reassignment,” an economic policy that changes individuals’ ranking in the hierarchy of incomes, is far more offensive than a policy of redistribution, which in his idealized vision would merely raise the incomes of the poorest members of society. By that standard, taxing some businesses and individuals to subsidize the high incomes of others is certainly offensive. Of course, Brittan underemphasized the harm done by welfare to people who become trapped in dependency. But there’s good reason to oppose both TANF and TARP, and Cato scholars have done both.

Lest the good work of Cato’s New Media Manager Chris Moody go under-utilized, here’s a probably incomplete guide to Cato scholars’ comments on the bailouts of the past few months. (Note that it doesn’t include blog posts, of which there have been many.) Quiet? I don’t think so:

Articles:

September 9, 2008, “Fannie/Freddie Bailout Baloney,” Gerald P. O’Driscoll Jr., New York Post.

September 18, 2008, “Why Bailouts Scare Stocks,” Alan Reynolds, New York Post.

September 17, 2008, “Bailout-Mania,” Jagadeesh Gokhale and Kent Smetters, Forbes.com.

October 1, 2008, “The Bailout’s Essential Brazenness,” Jay Cochran, Cato.org.

October 3, 2008, “The Big Bailout – What’s Next?” Warren Coats, Cato.org

October 13, 2008, “Should Taxpayers Fund the American Dream?,” Daniel J. Mitchell, Los Angeles Times.

October 20, 2008, “Is the Bailout Constitutional?,” Robert A. Levy, Legal Times.

November 11, 2008, “There’s Nothing Wrong with a “Big Two”,” Daniel J. Ikenson, New York Daily News.

November 21, 2008, “Don’t Bail Out the Big Three,” Daniel J. Ikenson, The American.

November 5, 2008, “Is it Constitutional?,” Richard W. Rahn, Washington Times.

December 14, 2008, “Consequences of the Bailout,” Richard W. Rahn, Washington Times.

December 5, 2008, “Bail Out Car Buyers?,” Daniel J. Ikenson, Los Angeles Times.

December 3, 2008, “Big Three Ask for Money — Again,” Daniel J. Ikenson, Los Angeles Times.

December 10, 2008, “Dissecting the Bailout Plan,” Alan Reynolds, Wall Street Journal.

January 14, 2009, “Bailing out the States,” Michael New, Washington Times.

February 28, 2009, “Stop the Bailouts,” William Poole, The New York Times.

Papers:

Bailout or Bankruptcy?,” by Jeffrey A. Miron (Cato Journal, Winter 2009)

Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer,” by Arnold Kling (September 8, 2008)

Financial Crisis and Public Policy,” by Jagadeesh Gokhale (March 23, 2009)

Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question,” by Vern McKinley and Gary Gegenheimer (April 20, 2009)

On Television and Radio:

Dan Ikenson discusses auto bailout

September 30, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 29, 2008 Peter Van Doren discusses government bailouts on WTTG FOX 5.

September 29, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 26, 2008 Jagadeesh Gokhale discusses the bailout on BNN (CANADA)

September 26, 2008 Steve H. Hanke discusses the bailout on BBC Radio’s “Have Your Say”

September 25, 2008 Patrick Basham discusses the bailout on Radio America’s “The Michael Reagan Show”

September 24, 2008 William A. Niskanen discusses government bailouts on WUSA 9

September 24, 2008 William Poole discusses government bailouts on NPR DC Affiliate WAMU’s “The Diane Rehm Show”

September 23, 2008 William A. Niskanen discusses government bailouts on CNBC’s “Closing Bell”

September 23, 2008Bert Ely discusses government bailouts on WOR’s “The John Gambling Show”

September 22, 2008 Daniel J. Mitchell discusses government bailouts on the CBS “Early Show”

September 22, 2008 William Poole discusses government bailouts on Bloomberg Live.

September 22, 2008 William A. Niskanen discusses government bailouts of financial institutions on Bloomberg TV

September 22, 2008 Steve H. Hanke discusses government bailouts of financial institutions on Bloomberg Radio’s “On the Money”

September 19, 2008 Daniel J. Mitchell discusses government bailouts on Federal News Radio

September 18, 2008 Daniel J. Mitchell discusses the AIG bailout on KTAR’s “Ankarlo Mornings”

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on WTTG FOX 5

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on FOX’s “America’s Election HQ”

September 10, 2008 Daniel J. Mitchell discusses a proposed bailout for the auto industry on Marketplace Radio.

October 24, 2008 Gerald P. O’Driscoll Jr. discusses the fallout of the bailout on FOX Business Network’s “Cavuto”

October 15, 2008 Daniel J. Mitchell discusses the bailout on Federal News Radio

October 14, 2008 Daniel J. Mitchell discusses the financial crisis on CNN’s “American Morning”

October 14, 2008 Daniel J. Mitchell discusses the banking crisis on BBC World

October 14, 2008 Gerald P. O’Driscoll Jr. discusses the banking crisis on WBAL Radio. (Baltimore, MD)

October 13, 2008 Daniel J. Mitchell discusses the financial crisis on the FOX Business Network

October 9, 2008 Jim Powell discusses the economy on FOX Business

October 9, 2008 Daniel J. Mitchell discusses the current treasury plan on Reuters TV.

October 9, 2008 Daniel J. Mitchell discusses the bailout on the WIBA’s “Upfront w/Vicki McKenna” (Madison, WI)

October 2, 2008 Daniel J. Mitchell discusses the bailout bill on WRVA’s “Morning Show” (West Virginia)

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “On the Money.”

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “Power Lunch”

October 1, 2008 William Poole discusses the bailout on KMOX’s “The Charlie Brennan Show” (St. Louis, MO)

October 1, 2008 Daniel J. Mitchell discusses the failed bailout on WTOP Radio (Washington, D.C.)