Topic: Finance, Banking & Monetary Policy

Who’s Blogging about Cato

A few bloggers who wrote about Cato this week:

  • New York Times blogger Andrew C. Revkin wrote about Cato’s forthcoming full-page ad on climate change that will run in newspapers around the country next week.
  • Wes Messamore helped set the record straight: Cato scholars have criticized the growth of government regardless of who’s in power.
  • Brandon Dutcher posted Cato’s Monday podcast with Adam Schaeffer on universal pre-school.

Week in Review: No End to Spending and Regulation in Sight

Geithner to Propose Unprecedented Restrictions on Financial System

geithnerThe Washington Post reports, “Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system… The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.”

Calling Geithner’s plan another “jihad against the market,” Cato senior fellow Jerry Taylor blasts the administration’s proposal:

What President Obama is selling is the idea that government must be the final arbiter regarding how much risk-taking is appropriate in this allegedly free market economy. It is unclear, however, whether anybody short of God is in the position to intelligently make that call for every single actor in the market.

Cato senior fellow Gerald P. O’Driscoll reveals the real reason behind the proposal:

Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers. It was a failure of will, not an absence of authority.   If the authority is extended over more institutions, there is no reason to believe we will have a different outcome.  This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.

A new paper from Cato scholar Jagadeesh Gokhale explains the roots of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve’s actions to prop up the financial sector. Gokhale argues that recovery is likely to be slow with or without the government’s bailout actions.

In the new issue of the Cato Policy Report, Cato chairman emeritus William A. Niskanen explains how President Obama is taking classic steps toward turning this recession into a depression:

Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.

Obama Defends His Massive Spending Plan

President Obama visited Capitol Hill on Wednesday to lobby Democratic lawmakers on his $3.6 trillion budget proposal. Both the House and Senate are expected to vote on the plan next week.

obama-budget1In a new bulletin, Cato scholar Chris Edwards argues, “Sadly, Obama’s first budget sets a course for more government bloat, more economic distortions, and ultimately lower standards of living for everyone who is not living off of federal hand-outs.”

On Cato’s blog, Edwards discusses Obama’s misguided theory on government spending:

Obama’s budget would drive government health care costs up, not down. But aside from that technicality, the economics of Obama’s theory don’t make any sense.

Obama’s budget calls for a massive influx of government jobs. Writing in National Review, Cato senior fellow Jim Powell explains why government jobs don’t cure depression:

If government jobs were the secret of success, then the Soviet Union wouldn’t have collapsed, because it had nothing but government jobs. Communist China, glutted with government jobs, would have generated more income per capita than Hong Kong where, at least before the Communist takeover, there were hardly any government jobs, but Hong Kong’s per capita income was about 20 times higher than that on the mainland.

Multiplying the number of government jobs did nothing then and does nothing now to revive the private sector that pays all the bills, in large part because of the depressing effect of taxes required to pay for government jobs.

Cato on YouTube

Cato Institute is reaching out to new audiences with our message of individual liberty, free markets and peace. Last year, we launched our first YouTube channel, which has garnered thousands of views and subscriptions. Here are a few highlights:

The Fed Is Now Scared

Bloomberg News (March 25, 2009) reported a speech by San Francisco Fed president Janet Yellen in which she called for authority for the central bank to issue its own debt. The request must have most people perplexed, especially since her rationale was delivered in Fed-speak. “Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet,” Yellen said.

Actually, Yellen, who is also an economist, is addressing a very serious issue. It is one that critics of current Fed policy have been raising for some time.

The Fed is loading up its balance sheet with illiquid assets, including many dubious assets taken in as collateral for loans of money and Treasury securities to financial institutions. In the process, the Fed has an ever diminishing supply of highly liquid (and safe) Treasury securities on its own balance sheet.

Critics like economic historian Anna J. Schwartz and former Fed attorney Walker F. Todd have pointed out that the Fed will have a technical problem if it wants to start sopping up all the liquidity it has created. In a 2008 paper in International Finance, Schwartz and Todd wrote that “it is fair to ask what the Fed intends to do if it decided that it would tighten monetary policy by raising interest rates.” Without a sufficient supply of highly liquid assets to sell in the markets, the Fed would need to dispose of its illiquid assets at losses. That would possibly drive up interest rates more than desired.

Yellen’s call for the power to issue Fed debt signals a number of things. First, the Fed, contrary to recent happy talk from other officials, is worried about inflation. Second, its critics are correct that the Fed has painted itself into a corner by taking illiquid assets onto its balance sheet. Third, the Fed wants to hold those dubious assets to maturity (hence Yellen’s point about not “shrinking the total size of our balance sheet”).

Yellen’s trial balloon drew a “no comment” from the Fed’s Washington headquarters. The issue will not go away.

Regulations We’ve Got. Geithner’s Seeking Something Else

Another day, another mad power grab by Treasury Secretary Tim Geithner.

Only in government does failure bring more responsibility.

Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers.

It was a failure of will, not an absence of authority.

If the authority is extended over more institutions, there is no reason to believe we will have a different outcome.

This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.

Fannie Mae and Freddie Mac: The Toxic Duo

Treasury Secretary Timothy Geithner has finally unveiled details about his bailout plan. Not surprisingly, he plans on propping up insolvent (but politically influential) financial institutions. Even worse, there is no effort to shut down – or even reform – the two government-sponsored enterprises that deserve the lion’s share of the blame for the financial crisis. Yet as Peter Wallison of the American Enterprise Institute explains in this new video from the Center for Freedom and Prosperity, Fannie Mae and Freddie Mac are at the epicenter of the housing bubble and subsequent damage to financial markets.

America’s Problem: Too Little Government Lending!

Suffering through a massive housing bust spurred by the activities of utterly irresponsible government-sponsored entities such as Fannie Mae and Freddie Mac, may have led you to believe that the government should stop subsidizing the irresponsible and improvident.   Indeed, with government spending and lending off the charts, you might even have come to believe that Washington should cut back on its spending and lending. 

Silly you.

According to the Obama administration, more spending and lending is in order.  And by Fannie Mae and Freddie Mac.  Indeed, preparing the government for even more spending and lending apparently is the goal of current policy, which already includes a lot of spending and lending.

Christina Romer, Chairwoman of the Council of Economic Advisers, was interviewed by CNN’s John King on Sunday.  She helpfully sought to clear up the confusion exhibited by  those of us who thought the current economic crisis resulted from irresponsible spending and lending.  According to CNN:

KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?

ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what is the best way.

Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer. What is going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy.

Of course. 

“Lend like crazy” really is the “just basically functioning” of Fannie and Freddie.  But it is beyond question that this behavior helped spark the current crisis.  Unfortunately, Dr. Romer does not explain exactly how we can make these fiscally irresponsible, money-losing organizations “safe.”  Nor does she enlighten us on how having Fannie and Freddie ”lend like crazy” will have better results than before. 

If this is the advice President Barack Obama is getting from what traditionally is one of the most economically responsible agencies in the executive branch, imagine what he is hearing elsewhere.  Buckle up, for the economic ride is likely to get much worse.