Topic: Finance, Banking & Monetary Policy

Pelosi Eyeing Global Tax on Financial Transactions

Imagine if the government got to pick your pocket every time you engaged in a financial transaction? That nightmare scenario is a distinct possibility now that senior Democrats have joined with European politicians and urged that such a tax be applied on a worldwide based. Reuters has the disturbing details:

Any tax imposed on financial transactions would have to take effect internationally to keep Wall Street jobs and related business from moving overseas, U.S. House of Representatives Speaker Nancy Pelosi said on Thursday.

“It would have to be an international rule, not just a U.S. rule,” Pelosi said at a news conference. “We couldn’t do it alone, we’d have to do it as an international initiative.”

Several House Democrats have proposed a Wall Street tax to pay for job-creating legislation they plan to pass in December. The tax, which could raise $150 billion per year, would tap into widespread public outrage at Wall Street in the wake of the financial crisis.

…The No. 4 Democrat in the House, Representative John Larson, said his proposal to impose a 0.25 percent tax on over-the-counter derivatives transactions would apply internationally. “Part of our proposal would include that it would be international,” Larson told Reuters after meeting with other lawmakers about the jobs package. Democratic Representative Peter DeFazio said his separate proposal, which would tax a wider array of trading activity, would cover all U.S. corporations and individuals no matter where their trades took place.

…Britain urged other governments earlier this month to consider a bank tax as a way to fund future bailouts, and France and Germany have also called for a bank tax. The International Monetary Fund is studying the idea.

This issue reveals the value of tax competition – but also its limitations. Pelosi and other collectivists realize that economic activity will migrate to friendlier jurisdictions if if they unilaterally impose this punitive tax. This externally-imposed discipline is why tax competition is a liberalizing force. But competition can be undermined if governments create a cartel, which is exactly what American and European statists would like to see.

Congress Grows Fed Up

The Wall Street Journal reported that Congress likes Fed Chairman Bernanke, but not the institution that he heads. There is growing consensus that the Fed needs to be reformed and restructured.  Most notably, there are calls to strip the Fed of its supervisory authority.  In practice, the new sentiment reflects the failure of the Fed to rein in risk taking by the largest banks.

The Fed is pushing back.  One reserve bank president said that removing the Fed’s supervisory authority “would affect our ability to conduct monetary authority effectively.” He went on to say that without the supervisory authority, the Fed wouldn’t know enough about risks brewing in the economy.  This argument is shop worn. The Fed had the authority. It fueled the housing boom with its monetary policy and failed to head off the banking crisis with its supervisory powers. And let us not forget the regional banking crises of the 1990s; the fallout of the Latin American debt crisis for Citibank; and others (e.g., the failure of Continental Illinois National Bank).  All on the Fed’s watch.

Around the world, some central banks have supervisory authority over banks and some do not.  There is no clear pattern for either monetary policy or bank regulation with respect to how the powers are structured and distributed.  Other factors seem to matter much more. It would be useful to identify what they are.

Congress is moving a few deck chairs around as the ship sinks. No fundamental rethinking of bank regulation is occurring. The Fed is probably being made a scapegoat for Congress’s own failings.  But that is how Washington works.

Homeownership Myths

In a recent Washington Post op-ed, Professor Joseph Gyourko, chair of the Wharton School’s Real Estate Department, lists what he sees as the five biggest myths about homeownership. Given the central role of federal housing policy, particularly Fannie Mae and Freddie Mac, in our recent financial crisis, it is worth following Professor Gyourko’s suggestion and question whether a national policy of ownership, all the time for everyone, really makes sense.

Professor Gyourko’s five myths:

1.  Housing is a great long-term investment.

2.  The homebuyer tax credit makes buying a house more affordable.

3.  Homeowners are better citizens.

4.  It’s safe to buy a house with a very low downpayment.

5.  Owning is always cheaper than renting.

You’ll have to read the op-ed to see his explanations.  An important qualification on his analysis is that in many cases what can be good for the buyer, such as putting no money down, may not be good for the economy if it results in additional foreclosures.

Dollar Crisis

Over the weekend, Liu Mingkang, a senior Chinese official, blasted the economic policies of the Obama Administration.  He identified low interest rates in the U.S. as the cause of “massive speculation” that was inflating asset bubbles around the world. The U.S. dollar is being used in what is known as a carry trade and is borrowed cheaply to finance the purchase of real estate in Asian cities like Hong Kong and Singapore. The easy money policies of the Fed are also fueling a boom in commodity prices.

The ordinary American, if not the political class, recognizes that neither the Fed’s monetary actions nor the trillions in spending have helped them. Unemployment is in double digits. Former senior Bush economic adviser Larry Lindsey is reported to have estimated that Americans’ net worth has dropped $13 trillion since the beginning of the recession in December 2007. Americans suffer while speculators profit.

We are on the cusp of a dollar crisis.  President Jimmy Carter faced a similar crisis in his presidency. Carter ousted his own choice for Chairman of the Fed and appointed Paul Volcker to that position. Volcker recognized that the dollar crisis needed to be ended and instituted painful but necessary sound money policies.  President Reagan re-appointed Volcker and together they restored American prosperity. Volcker advises President Obama and can explain to the president why he must act now.

A Plug for Financial Fiasco

The distinguished Harvard economist Richard N. Cooper, former president of the Federal Reserve Bank of Boston, praises Johan Norberg’s Financial Fiasco: How America’s Infatuation With Homeownership and Easy Money Created the Economic Crisis in Foreign Affairs:

The economic crisis of 2008-9 will no doubt spawn dozens of books. Here are two good early ones….

Norberg, a knowledgeable Swede, provides a much more detailed account of the broader events of 2007-9, from the useful perspective of a non-American. He finds plenty of blame with all the major players in the U.S. financial system: politicians, who thoughtlessly pushed homeownership on thousands who could not afford it; mortgage loan originators, who relaxed credit standards; securitizers, who packaged poor-quality mortgage loans as though these were conventional loans; the Securities and Exchange Commission, which endowed the leading rating agencies with oligopoly powers; the rating agencies, which knowingly overrated securitized mortgages and their derivatives; and investors, who let the ratings substitute for due diligence. Senior management in large parts of the financial community lacked an attribute essential to any well-functioning financial market: integrity. But solutions, Norberg warns, do not lie in greater regulation or public ownership. Politicians and bureaucrats are not immune from the “short-termism” that plagues private firms.

The other book he praises, by the way, is Paul Krugman’s The Return of Depression Economics. And oddly, his list of Norberg’s villains doesn’t include one implied in the title: the Federal Reserve Bank, which issued the “easy money” that allowed the boom to happen. Purchase Financial Fiasco here or on Kindle.

Fed Opposed by Left and Right

On its front page today, the Washington Times reports that expanded powers for the Federal Reserve are being opposed by “odd allies.”  The Fed’s imperial over-reach for additional regulatory powers is being opposed by Democrats and Republicans, and liberals and conservatives alike.  As well it should be.  As Senator Shelby observed, “Anointing the Fed as the systemic-risk regulator will make what has proven to be a bad bank regulator even worse.”

The regulation of financial services failed conspicuously to prevent the worst financial crisis since the Great Depression.  The Fed failed most conspicuously as it was charged with oversight of all the major banks, including notably Citigroup and Bank of America. Bank regulation now functions to insulate banks from the consequences of their own bad acts.  The regulatory system enables banks to engage in excessive risk taking.

The Obama Administration and Chairman Barney Frank of the House Financial Services Committee propose that an expanded role for the Fed and generally more of the same will improve matters. Instead, the proposed legislation will worsen the situation by codifying the status of the major financial institutions as “too-big-to-fail.”  It would thereby provide them with special legal status.  We have all seen this movie and how it ends.  Fannie Mae and Freddie Mac had such a status and collapsed.  Do we need 20 more such disasters?

Three cheers for all those opposing this destructive piece of legislation. End “too-big-to-fail” instead.

Is the Economy Booming Again?

The lead headline in Friday’s Wall Street Journal proclaims

Economy Snaps Long Slump

But buried on page C10 is a more skeptical view:

If the Obama administration were managing a company, it might have hoped the latest gross-domestic-product numbers would be greeted with cries of “great quarter, guys!”

At least the stock-market obliged, rising on the back of better-than-expected GDP data Thursday morning. But then bulls have become used to looking to Washington for inspiration. Zero rates and stimulus programs boost economic data as well as nudge money toward riskier assets.

Fully 2.2 percentage points of the third quarter’s 3.5% growth figure related to vehicle purchases and residential construction, both juiced by government support. Federal spending added 0.6%.

If these GDP data were company earnings, they would be what analysts euphemistically call “low quality.” Investors buying into the market off the back of them are ignoring weekly unemployment-claims data that came in above 500,000 again on the same day.

The danger is that all these short-term fixes leave the economy dangerously addicted to taxpayer-funded steroids. The circularity in the housing market, whereby Washington provides tax breaks to first-time buyers, guarantees most of the mortgages written, and then buys most of those, beggars belief, and suggests a worrying case of amnesia following the bursting of the housing bubble. (emphasis added)

Johan Norberg warned about the dangers of repeating the very mistakes that created the bubble and bust in the first place in Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis (available in hardcover, e-book, or Kindle).