Topic: Finance, Banking & Monetary Policy

Taxpayers Picking Up the Tab for a Bigger Bailout Thanks to Republican Lobbyists

The Associated Press reports on the various former Republican politicians who got fat contracts and enriched themselves in exchange for lobbying on behalf of Freddie Mac. Unfortunately for taxpayers, these amoral lobbyists were successful and the government-created entity was able to dig itself even deeper into a hole - which taxpayers are now responsible for filling.

When the Washington Nationals played their first-ever baseball game in the nation’s capital in April 2005, two congressmen who oversaw mortgage giant Freddie Mac had choice seats — courtesy of the very company they were supposed to be keeping an eye on. …The Nationals tickets were bargains for Freddie Mac, part of a well-orchestrated, multimillion-dollar campaign to preserve its largely regulatory-free environment, with particular pressure exerted on Republicans who controlled Congress at the time. Internal Freddie Mac budget records show $11.7 million was paid to 52 outside lobbyists and consultants in 2006. Power brokers such as former House Speaker Newt Gingrich were recruited with six-figure contracts. Freddie Mac paid the following amounts to the firms of former Republican lawmakers or ex-GOP staffers in 2006: Sen. Alfonse D’Amato of New York, at Park Strategies, $240,000. Rep. Vin Weber of Minnesota, at Clark & Weinstock, $360,297. Rep. Susan Molinari of New York, at Washington Group, $300,062. Susan Hirschmann at Williams & Jensen, former chief of staff to House Majority Leader Tom DeLay, R-Texas, $240,790. …The tactics worked — for a time. Freddie Mac was able to operate with a relatively free hand until the housing bubble ultimately burst in 2007.

Interestingly, at least one of these former politicians is contemplating a return to the political arena. He even portrays himself as a friend of the taxpayer. It is unclear, though, how much of a friend he really is considering that the story reveals that, “Freddie Mac enlisted prominent conservatives, including Gingrich…, paying [him] $300,000 in 2006, according to internal records.”

Hyperinflation?

Half a century ago, Illinois Senator Everett Dirksen is supposed to have summed up the Federal government’s profligate ways with the comment that “a billion here, a billion there, and pretty soon you’re talking real money.” These days it’s “a trillion here, trillion there.” Unfortunately, many don’t believe it’s real money any more. And they may be right, which might explain the eagerness in Congress to shovel some of it to failing enterprises such as the Big 3. How long before it’s “a quadrillion here, a quadrillion there?” At the rate we are going, it will be a lot sooner than another half century.

This Month at Cato Unbound: What Happened?

Writing the history of a financial crisis can’t be easy, and it’s even harder when that crisis is still unfolding.  That’s why this month we’ve invited a team of economic experts for a very special issue of Cato Unbound.  Each brings a different perspective on our financial troubles, and, partly because the matter is so far from settled, we’ve decided to give them all equal billing:  Lawrence H. White, William K. Black, Casey Mulligan, and J. Bradford DeLong will each write a full-length essay in a first of its kind roundtable format.  The question at hand:  What happened?

Prof. White’s essay is available here, and I found the following particularly interesting:

One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.

I’m just old enough to remember how everyone called the 1980s a decade of greed. Then there were the 1990s, also a decade of greed. The 2000s? Greed yet again. (I wish I could invest in this “greed” thing. It never seems to go out of style.)

I also liked the following, which makes one of its most substantive points in the final parenthesis:

As calculated by the Federal Reserve Bank of St. Louis, the Fed from early 2001 until late 2006 pushed the actual federal funds rate well below the estimated rate that would have been consistent with targeting a 2 percent inflation rate for the PCE [Personal Consumption Expenditure] deflator. The gap was especially large—200 basis point or more—from mid-2003 to mid-2005. [4]

The excess credit thus created went heavily into real estate. From mid-2003 to mid-2007, while the dollar volume of final sales of goods and services was growing at a compounded rate of 5.9 percent per annum, real-estate loans at commercial banks were (as already noted) growing at 12.26 percent. [5] Credit-fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates. The housing sector thus exhibited a disproportionate share of the price inflation predicted by the Taylor Rule. (House prices are not, however, included in standard measures of price inflation.)

I understand that it isn’t easy to incorporate housing prices into measures of inflation, and that there is no generally accepted method of doing it. It seems more important than ever, though, to include these prices in some way, if only to let the public know the sort of trouble housing inflation has very likely been causing.

Greenspan: The Debate Continues

Jeffrey Rogers Hummel and David Henderson have responded to critics of their defense of Alan Greenspan’s monetary policy. Answering particularly the criticisms of Cato adjunct scholar George Selgin, they provide further evidence for their contention that Greenspan was not pursuing an unduly loose monetary policy in the early years of this decade.

As I noted before, in early November Cato published a paper by Henderson and Hummel with the now-controversial and counterintuitive thesis that “although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.” A couple of weeks later we published a paper by Lawrence H. White with a very different perspective. White argued that after the dot-com bust, the Greenspan Fed held interest rates extremely low for several years, setting off what Cato senior fellow Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”

Back in May, Gerald P. O’Driscoll Jr. had also sharply criticized the Greenspan Fed in a Cato Briefing Paper. He wrote that the Fed had been creating asset bubbles and moral hazard by its implicit policy of intervening to keep asset prices high.

Bailouts May Scare U.S. Economy to Death

A Pew Research poll conducted more than a week ago found that 57 percent of Americans are terrified by Bailout Mania 2008. That was several days, and many billions of dollars, before Bloomberg reported that U.S. taxpayers are now on the hook for $7.7 trillion in bailout bucks – half of the nation’s entire GDP for the past year. At this point, not even Carl Sagan could get a handle on the numbers we’re talking about.

What do people do when they’re scared about the state of the economy? They stop spending. With each new government “investment” announced by our new overlord Hank Paulson, Americans are going to clutch ever more fiercely at their wallets. They will eat out even less than they’ve been doing. They will rediscover the true spirit of Christmas and give each other hugs instead of Blue-Ray disc players. They will forgo that new coat or pair of winter boots. And they will bring the U.S. economy to a halt.

Even if all these bailouts could save the economy, other things being equal, other things are NOT equal. The bailouts themselves have an effect on consumer psychology, which has an effect on consumer spending. The Fed had better hire a shrink, quick, to let them know that they are on the brink of scaring the U.S. economy to death.

Pointless, Political, and Pork-filled

Greg Mankiw speculates on the best alliterative description of the stimulus package:

Instead of fiscal stimulus that is temporary, targeted, and timely, John Taylor suggests that it be permanent, pervasive, and predictable.

What the Obama administration is aiming for, it seems, is helpful, hopeful, and humongous.

Critics fear it might end up pointless, political, and pork-filled.

—–

Update: A reader emails me that Larry Summers now calls for stimulus that is speedy, substantial, and sustained.

Other readers think it will be:

big, bloated, and borrowed.
immodest, immoral, and imbecilic.
clumsy, corrupt, and counterproductive.
expansive, extensive, and expensive.
weighty, worrisome, and wayward.
politicized, pandered, and pathetic.
socialized, silly, and sorry.
random, record-setting, and ridiculed.
ultimate utilitarian utopianism.
absolutely abjectly apocalyptic.

The Left Embraces the Shock Doctrine

Last week Rahm Emanuel said to a prestigious audience, “You never want a serious crisis to go to waste. It’s an opportunity to do things you could not do before.”

And that’s just the strategy that bestselling author Naomi Klein accuses right-wingers of employing. Weaving a convoluted yet superficially simple tale of world events, she claims in her book The Shock Doctrine that right-wing ideologues and governments both use and create moments of crisis to implement their nefarious agenda.

“Some people stockpile canned goods and water in preparation for major disasters,” Klein writes. “Friedmanites stockpile free-market ideas.” Which is exactly what American left-liberals have been doing in anticipation of a Democratic administration coming to power at a time when the public might be frightened into accepting more government than it normally would. The Center for American Progress, for instance, run by John Podesta, who was President Bill Clinton’s chief of staff and is now President-elect Obama’s transition director, has just released Change for America: A Progressive Blueprint for the 44th President.

The ideas in that report mesh well with the opportunities that Emanuel identified. After re-emphasizing the opportunities that crisis provides, he told his audience that the Obama administration wanted to use the opportunity to implement central planning of health care and energy, higher taxes, a federal program directed at “training the workforce,” and tighter control of financial institutions and capital flows.

But Emanuel isn’t the only one. As I mentioned previously, Paul Krugman has also endorsed the “don’t let a good crisis go to waste” power grab.

And now Arianna Huffington, the founder of the left-wing bulletin board HuffingtonPost, makes the same point in a public radio appearance. On KCRW’s “Left, Right, and Center,” November 21 (at about 27:20 in the podcast), she declared: “A crisis is a terrible thing to waste. And it might be this particular crisis that will make it possible for the Obama administration to do some really innovative, bold things on health care, on energy independence, on all the areas that have been neglected.” (Hat tip: Thaddeus Russell.) Last year Huffington wrote a rave review of The Shock Doctrine, calling it “prophetic.” So it seems.

So … Emanuel. Krugman. Huffington. They’re all rallying around the theme that, well, that a left-liberal government should use this crisis to implement a more sweeping agenda than it could achieve in the absence of crisis. That’s the Shock Doctrine. Where are Naomi Klein and her legion of fans to expose and denounce it?

Of course, Klein might well decry their corporatist, big government/big business plans as just another example of Friedmanite/neoconservative/Pinochetist right-wing ideology. Anything other than local worker’s collectives smells like capitalism to her. So she can add the Obama administration to Milton Friedman, laissez-faire, the Bush administration, the Iraqi government, the Pinochet government, the Chinese Communist Party, and the ANC government of South Africa on the list of things that seem so many peas in a pod to her.

The San Francisco Chronicle says that Klein “may well have revealed the master narrative of our time.” The reviewer may have been more right than he knew.