Topic: Finance, Banking & Monetary Policy

Is Turkey Golden?

Recently, Moody’s Investors Service took some wind from Turkey’s sails, when it declined to upgrade Turkey’s credit rating to investment grade. Moody’s cited external imbalances, along with slowing domestic growth, as factors in its decision. This move is in sharp contrast to the one Fitch made earlier this month, when it upgraded Turkey to investment grade.   Moody’s decision not to upgrade Turkey, and its justification, left me somewhat underwhelmed – given how well the Turkish economy has done in recent years.

Since the fall of Lehman Brothers, Turkey’s central bank has employed a so-called unorthodox monetary policy mix. For example, a little over a year ago, it began to allow commercial banks to purchase gold from Turkish citizens and allowed banks to count gold to fulfill their reserve requirements. Incidentally, this was a remarkable success – from 2010-2012, the Turkish banking sector’s precious metal account increased by over 7 billion USD.

For all the criticism its unconventional monetary policies have garnered, the Central Bank of the Republic of Turkey has, in fact, produced orthodox, golden results. Indeed, as the accompanying chart shows, the central bank has delivered on the only thing that really matters – money.

Turkey’s economic performance has been quite strong (despite some concerns about inflation and its current account deficit) . Turkey’s money supply has been close to the trend level for some time, and it currently stands 2.41% above trend. This positive pattern is similar to that of many Asian countries, who continue to weather the current economic storm better than the West.  And, it stands in sharp contrast to the unhealthy economic picture in the United States and Europe – both of which register significant money supply deficiencies.

So, why would Moody’s not follow Fitch’s lead and upgrade Turkey to investment grade? To understand this divergence, one should examine Turkey’s recent current account activity. Since late 2011, Turkey’s current account has rebounded somewhat (see the accompanying chart).

But, if gold exports are excluded from the current account (on a 12-month rolling basis), a rather significant 47% of this improvement, from the end of 2011 to September 2012, magically disappears.

Where is this gold going? Well, a quick look at the accompanying chart shows just how drastically exports to Iran and the UAE have surged this year.

Taken together, the charts indicate that Turkey is exporting gold to Iran, both directly and via the UAE , propping up their current account in the process. This has put Turkey and the UAE in the crosshairs of proponents of anti-Iranian sanctions.   Those who beat the sanctions drum are now seeking to impose another round of sanctions, aimed at disrupting programs such as Turkey’s gold-for-natural-gas exchange. This proposal clearly highlights some of the problems associated with sanctions, specifically the unintended costs imposed on the friends of the U.S. and EU in the region. Indeed, Dubai has already taken a hit, with its re-exports falling dramatically as a result of the sanctions.

What is the U.S. to do – go against Turkey, its NATO ally? Believe it or not, some in the Senate are allegedly considering such a wrong-headed move.

If these proposed sanctions are implemented, then Moody’s pessimistic outlook on Turkey may turn out to be not so far from the mark, after all – and Turkey will have no one but its “allies” to blame.

From the Bank of Canada to Threadneedle Street – Finally

On July 1st 2013, Bank of Canada Governor Mark Carney will assume the position of Governor of the Bank of England . Will Carney’s hat-switching be good for the UK? At present, one thing is certain; Carney has delivered to Canada the one thing that matters – money .

A quick comparison of the money supply in Canada to that of the UK shows the stark differences in the health of their respective money supplies  (and thus, of their respective economies).

 

 

The Canadian money supply has managed to stay near trend throughout the post-Lehman era. In fact, the Canadian total money supply is currently 0.5% above trend, while the UK’s money supply is a dismal 12.1% below trend – no wonder the UK keeps flirting with recession. Although Canada’s GDP growth rates are less than stellar, they are above the average of the 34 OECD nations . Indeed, Canada’s overall economic outlook is much stronger than that of the UK .

In his new position, Carney will face the formidable challenge of turning around the UK’s slumping money supply. Regardless of Carney’s success in Canada, we will have to wait and see if he’ll be able to pull it off on the other side of the pond.

FYI Memo for Senator McConnell: Medicare Is Already Means-Tested

Speaking of the “fiscal cliff,” a November 11 Wall Street Journal interview of the Senate minority leader asked, “What kind of a deal would Mr. [Mitch] McConnell accept? The senator’s top priority is long-term entitlement reform. ‘Changing the eligibility for entitlements is the only thing that can possibly fix the country long term.’ He wants means-testing for programs like Medicare. ‘Warren Buffett’s always complaining about not paying enough in taxes,’ he says. ‘What really irritates me is I’m paying for his Medicare.’”

In reality, means-testing entitlements would be a nonsensical “top priority” in fiscal cliff negotiations because (1) the fiscal cliff is not about fixing long-term problems but about preventing rather than postponing an imminent $536 billion tax hike, and because (2) the U.S. already imposes means-testing for both Social Security and Medicare.

With Social Security, the ratio of benefits to “contributions” is lowest for those who paid the most payroll taxes for the most years and highest for those who paid the least.  Making matters much worse, up to 85 percent of benefits are now taxable for seniors who either saved for retirement or keep working, but tax-exempt for others.  That highly-progressive 1993 tax on benefits is another devious way of means-testing after-tax retirement benefits.

Thanks to new redistributionist rules from the Obama administration, monthly Medicare premiums now rise from $99.90 on single seniors with less than $85,000 in income to $229.70 (including drug coverage) at incomes from $107,000 to $160,000, and to $386.10 above $214,000.   Since President Clinton removed any ceiling on income subject to Medicare payroll tax, those who had relatively high salaries while working paid many thousands more in Medicare taxes than they can ever expect to receive in benefits – assuming they are foolish enough to sign up (as I did not) for benefits that also cost nearly four times as much as others pay.

The most money that Medicare might save by denying benefits to the “top 1 percent” would be roughly 1 percent.  That would leave 99 percent of Medicare spending untouched.  If high-income people were denied benefits, however, they would also be relieved of the steeply-progressive new Medicare premiums.  Medicare would then lose all that revenue they are now expecting to collect by charging much higher premiums at higher incomes.    The net effect of eliminating both benefits and premiums of high-income seniors offers no solution to the nation’s long-term fiscal problems.  It is certainly no solution to the very-near-term threat of a series of massive tax increases on January 1.

 

 

 

How the CFPB Distorts the Facts about College Loans

Last month, the Consumer Financial Protection Bureau – a rogue creation of Dodd-Frank – released the first annual report from its private student loan “ombudsman.” And boy, does the report illustrate how far off the rails government has gotten.

Start with the focus: private student loans. These and for-profit colleges have gotten huge, damning attention from Washington – and much of the higher ed commentariat – over the last few years. But even if they were true devil’s spawn, private loans are absolutely not the main problems in higher ed.

Even at their very brief peak in 2007-08, private student loans constituted only 12.5 percent of total student aid. In 2011-12 they were just 2.6 percent. The vast majority of funds have always come from other sources, first and foremost the federal government. Yes, it is primarily “aid” from Washington that lets colleges raise their prices with impunity, and enables students to take on substantial debt for often less-than-substantial studies.

Government, not private lending, is the Lex Luthor here. But to be fair, private lending is the CFPB’s bailiwick, so you can’t blame the agency for putting out the report. You can sure as heck, though, blame politicians for creating a bureau whose job seems simply to be pointing fingers at private companies.

You can also blame the CFPB for the content of its report, which is simply a summary of complaints the bureau has received from disgruntled borrowers. Fairly early on it even states that “the report does not attempt to present a statistically significant picture of issues faced by borrowers” (as if its findings are empirical at all). Unfortunately, it goes on to say that the report “can help to illustrate where there is a mismatch between borrower expectations and actual service delivered.”

Actually, no it can’t. At least not reliably. All it can tell you is what people complained to the CFPB about. It can’t tell you if the complaints had bases in fact. It can’t tell you if complaint-lodgers were really just motivated by a desire not to pay. And it can’t tell you what the lenders’ sides of the stories are.

Okay, it probably could do the last thing, but it seems the ombudsman chose not to. There is not an ounce of response from any lender to the anecdotes that essentially are this report. In other words, the report seems to be doing exactly what the bureau’s opponents feared CFPB would do: functioning as an unaccountable propaganda machine against private companies. And don’t be surprised to hear this report invoked repeatedly by Sen. Tom Harkin (D-IA) and other profit-haranguers as damning proof that private student lenders are out of control.

Sadly, the prominent role of government in student lending is ignored even when it is obvious from data on private lending. As one table shows, 46 percent of complaints received were about loans connected to Sallie Mae, and 12 percent about loans from American Education Services, an offshoot of the Pennsylvania Higher Education Assistance Agency (PHEAA).

Sallie Mae, of course, is the student-loan cousin of Fannie Mae and Freddie Mac, the federal creations at the heart of bad mortgage lending. And PHEAA? “Created in 1963 by the Pennsylvania General Assembly, PHEAA has evolved into one of the nation’s leading student aid organizations.”

Yup, more than half of the complaints about ostensibly private lending were really about government-created lenders. But don’t expect to find even a footnote in the report hinting that government might be the real problem.

It’s hard not to conclude that the major goal of the CFPB is to bash private companies, and in so doing justify more and more government control of the economy. If that’s the case, and if this report is any indication, then the CFPB is doing its job. Too bad that job serves the public so poorly.

Cross-posted from SeeThruEdu.com

Getting Our Money Back from Fannie and Freddie

Yesterday in the New York Times, Josh Rosner, co-author of Reckless Endangerment, asked one of the questions that almost everyone in Washington is avoiding: how do the taxpayers get back their money, currently about $180 billion (including dividends), from Fannie Mae and Freddie Mac? Obviously Democrats do not want to be reminded that their social engineering of the mortgage market has been a disaster, but why have Republicans been quiet?

I suspect many Republicans, at least those not closely aligned with the real estate industry, are torn between wanting to immediately get rid of Fannie and Freddie and getting the taxpayers’ money back.  A common attitude in Washington also appears to be that the money put into Fannie/Freddie is gone, sunk, and will never be returned. I’m not so willing to just give up, on either getting rid of them or getting our money back.

First, let’s accept that any wind-down would likely take a few years, say six or so. So I would suggest we immediately take Fannie and Freddie into receivership. Impose any future losses on creditors, but also continue to run the companies. And continue to buy and package mortgages during the receivership. This would minimize disruptions to the housing and mortgage market.

Instead of simply running the companies, business as usual, levy a surcharge on all their purchases and use that surcharge to pay back the taxpayer. Fannie and Freddie, combined, will likely purchase about a $1 trillion annually in mortgages over the next few years. Assuming a six year wind-down, that’s $6 trillion. A 2 percent surcharge gets back most of the bailout. That’s also high enough to encourage private money to come into the mortgage market and compete with Fannie and Freddie. If my Realtor friends feel this is a ”tax on home-ownership” then they are free to drop their commissions by 2 percent, leaving buyers no worse off. Even better, they can encourage buyers to use a non-government mortgage.

Any forecast of housing activity is going to have some error. So the numbers above are likely off, in one direction or another. The point is a surcharge on the purchases made by these Government-Sponsored Enterprises can kill two birds with one stone: getting the taxpayers’ money back and reducing the GSEs’ footprint in the mortgage market.

Statutes of Limitations Apply Especially to Government Agencies

Statutes of limitations exist for good reason: Over time, evidence can be corrupted or disappear, memories fade, and companies dispose of records. Moreover, people want to get on with their lives and not have legal battles from their past come up unexpectedly. Plaintiffs thus have a responsibility to bring charges within a reasonable time of injury so that the justice system can operate efficiently and effectively – and that’s doubly so when the would-be plaintiff is the government, with all its tools for investigation and enforcement.

There’s a general federal statute of limitations, therefore, 28 U.S.C. § 2462, which protects liberty by prohibiting government actions “for the enforcement of any civil fine, penalty, or forfeiture … unless commenced within five years from the date when the claim first accrued.” In April 2008, however, the Securities & Exchange Commission sued the managers of Gabelli Funds LLC, a mutual fund, for civil penalties relating to conduct that ceased in August 2002, more than five years earlier. The SEC alleged that Gabelli Funds defrauded investors by failing to disclose that the fund was allowing a favored investor to engage in “market timing” – buying and selling mutual fund shares in a manner designed to exploit short-term price swings.

The U.S. Court of Appeals for the Second Circuit ruled that the SEC’s claim was nevertheless valid because courts should read into § 2462 an implicit “discovery rule” – a common exception to statutes of limitations that prevents fraud-based claims from accruing (“stops the clock” on the limitations period) until the plaintiff discovers, or with reasonable diligence should have discovered, the basis for the claim. Because of the allegedly fraudulent nature of the defendants’ actions, the court found that the government’s claim accrued not when their conduct ceased but a year later, when the violation was actually discovered.

The Supreme Court decided to review the case, and Cato filed an amicus brief supporting the defendants. We make three points:

First, Congress could not have intended a discovery rule to be implicit here because at the time the operative language in § 2462 was enacted, case law explicitly rejected a discovery rule – and since then Congress enacted numerous statutes with explicit discovery rules that would be superfluous if a discovery rule had already existed implicitly.

Second, reading a discovery rule into § 2462 violates the principle of separation of powers by judicially changing the statute’s meaning: When judges rewrite laws, those laws fail to meet the constitutional requirement of bicameralism and presentment (“how a bill becomes a law”).

Third, even if courts could alter rather than merely interpret the meaning of statutes, there’s no basis for creating a discovery rule for government enforcement actions. Government agencies with broad investigatory powers – indeed, whose purpose is to monitor regulatory compliance – don’t face the same difficulty as private plaintiffs in identifying causes of action which give rise to the discovery rule. Adding a discovery rule to § 2462 would create an indefinite threat of government lawsuits and invite agencies to review decades of past conduct of selectively disfavored companies and individuals – inevitably chilling innocent and valuable economic activity.

To preserve individual liberty in the face of an ever-burgeoning regulatory state and ensure constitutional separation of powers, we urge the Court to reverse the Second Circuit’s decision and hold that no discovery rule applies in Gabelli v. SEC.  The case will be argued at the Supreme Court on January 8.

Receivership Does NOT End GSEs

Since their failure in 2008, I’ve been advocating that Fannie Mae and Freddie Mac be placed in receivership, which is essentially an administrative bankruptcy.  In what is an otherwise wonderful read, James Hagerty repeats in his new book (see pages 182-3) the myth that placing Fannie and Freddie into receivership would end those companies.  As he writes:

Under receivership, the main providers of funding for home mortgages would be going out of business at a time when private money for mortgages had dried up.” He continues, “The Bush administration would have to explain how it was going to make sure mortgage lending would continue without Fannie and Freddie.

Few journalists have as deep an understanding of Fannie and Freddie as Hagerty.  But I worked on the receivership language (Section 1145) in the Housing and Economic Recovery Act of 2008 (HERA) while staff on Senate Banking Committee, and I think his read of its powers are incorrect.

First, under a receivership, the GSEs can continue to be run – that is, the regulator, FHFA, can still issue debt, buy mortgages and do everything else the GSEs currently do. Skeptical?  Well, here’s the law:

Section 1367(b)(B) Operate the regulated entity.–The Agency may, as conservator or receiver– “(i) take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity; “(ii) collect all obligations and money due the regulated entity; “(iii) perform all functions of the regulated entity in the name of the regulated entity which are consistent with the appointment as conservator or receiver; “(iv) preserve and conserve the assets and property of the regulated entity; and “(v) provide by contract for assistance in fulfilling any function, activity, action, or duty of the Agency as conservator or receiver.”

Also the law prohibits FHFA from ending the charters:

HERA 1145 (Section 1367(k) of 1992 Act) “Prohibition of Charter Revocation.–In no case may the receiver appointed pursuant to this section revoke, annul, or terminate the charter of an enterprise.”.

The law is quite clear.  FHFA would continue to run the GSEs, with the option of a good/bad bank model to resolve bad assets, and the only way FHFA can terminate the receivership is to sell the charters back into the marketplace (see Section 1367(i)(6)(C) “Termination of status as limited-life regulated entity”).

So let’s get the facts straight.  Receivership would not end the GSEs.  The fundamental difference between receivership and the current conservatorship is the ability to impose losses on creditors.  The sole reason that Paulson and crew chose conservatorship was to protect the debt-holders and stick the taxpayer with the tab.  There were options to do otherwise.  Which is of course the primary reason I am skeptical of Dodd-Frank:  we had the “tools” to protect the taxpayer from GSE losses, yet chose not to use them.  Why should we believe we’d use them for Citibank if we didn’t for Fannie Mae?