Topic: Finance, Banking & Monetary Policy

Get Government Out of Housing

My final two installments in my Los Angeles Times debate are available. On Thursday, I explained why Fannie Mae and Freddie Mac should be shut down. On Friday, I broadened the argument to explain that eliminating government housing programs is the best way to protect against future bubbles.

I also provided some commentary to NPR on the issue of moral hazard. If you like the article, feel free to click “recommended” at the top of the screen so the bureaucrats at the government-financed radio network have an incentive to allow more free market analysis. Perhaps one day they’ll allow someone from Cato to explain why taxpayers subsidizing radio is not a legitimate function of the federal government.

McCain’s Misguided Mortgage Bailout

As promised in an earlier post, here is the latest iteration of my Los Angeles Times debate on financial markets, housing policy, and the role of government. Wednesday’s debate featured a discussion of Senator McCain’s $300 billion scheme to buy bad mortgages. Not surprisingly, I explain why taxpayers should not be responsible for rewarding borrowers and lenders who were imprudent. Next installment will be up tomorrow.

Nice Little Bank You Got There; Shame If Anything Happened to It

Some years ago I wrote an article titled “The Gun behind the Law.” (Not online, but it appears in The Politics of Freedom.) It began with a photograph of 50 or so helmeted policemen storming the doors of a large and institutional building. As it turned out, the photograph depicted a bank nationalization in Peru during the first and disastrously leftist presidency of Alan Garcia. I noted that the Peruvians were helping us understand the real import of the term “bank nationalization”: “What really occurred there is that some people forced other people to give up their property at the point of a gun….As the bankers of Peru have learned, every law is en­forced at the point of a gun.”

And I noted that things are very different here: “When we Americans hear the words ‘bank nationalization,’ we are apt to imagine a piece of paper being signed by a bank president and a deputy assistant treasury secretary.”

Well, I was a little off. It was actually nine bank presidents and the secretary himself. But the general scene was right:

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

They weren’t allowed to negotiate. Mr. Paulson requested that each of them sign. It was for their own good and the good of the country, he said, according to a person in the room.”

At least one banker objected. “But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression.”

And all without any need for armed police takeovers of the banks. Nice and peaceful like. And no doubt some of the bankers were just delighted to get billions of dollars from the taxpayers. For those who didn’t want to be working for the government, the points I made in that long-ago article are still valid:

The gun is evident in the picture [from Peru], but it is no less real when an American is forced to give up his property by a law or regulation. Such commonly used terms as “national economic policy,” “social regulation,” “revenue enhancement,” “profamily legislation,” and “minimum-wage law” all obscure the simple fact that some people are forcing others to do as they’re told.

But Peru is not the United States, it will be said; our government would never send riot troops to take over a bank. That is largely because it wouldn’t have to—Americans don’t resist the demands of government. What would happen if they did?…

If more Americans decided to ignore absurd, special-interest, and counterproductive laws, it would soon be apparent that physical force lies behind the Federal Register. Does anyone believe that Americans would pay a large percentage of their income to the federal government if not for the ultimate threat of imprisonment and violence?

As the bankers of Peru have learned, every law is enforced at the point of a gun—a fact we should carefully consider when we are tempted to conclude that some perceived problem should be solved by enacting a law.

Do Aussies Really Think Fannie, Freddie, the Fed, and the Community Reinvestment Act Are Part of “Extreme Capitalism?”

The turmoil in financial markets is not good news, but one silver lining to the dark cloud is the rather amusing contest for the most inane reaction by a political figure. Australia’s Prime Minister is proudly demonstrating his economic illiteracy by blaming “extreme capitalism” even though the financial services are heavily regulated and a wide range of policy mistakes created the housing bubble. Agence France Presse (how appropriate) reports:

The global economic crisis is a result of the “comprehensive failure of extreme capitalism,” Australian Prime Minister Kevin Rudd said Wednesday as he took aim at bulging executive pay packets. The centre-left Labor Party leader named greed and fear as the “twin evils” at the root of the financial sector collapse, which began in the United States and swept the world. “What we have seen is the comprehensive failure of extreme capitalism – extreme capitalism which now turns to government to prevent systemic failure,” Rudd told the National Press Club in Canberra. …Governments should act so that greed and lax regulation were never allowed to put the world in the same position again, he said, adding that Australia would press for this at a meeting of the G20 group of 20 rich and emerging nations next month. …Rudd said his government would work with the Australian Prudential Regulatory Authority (APRA) to bring fat-cat pay packets under control. “This is not just a question of fairness and perceived fairness in the system, it goes actually to the kernel of the incentive structures around risk-taking,” he said.

Chavez 1, Bush 0

It’s never enjoyable to be mocked by a socialist dictator, but Hugo Chavez of Venezuela scores some solid points as he welcomes comrade Bush to the socialist camp. Reuters also reports that Chavez says Bush is both “clueless” and to the “left of me.” Whether he’s right about Bush, Chavez certainly is right about the aptitude of anyone to his left:

Socialist Venezuelan President Hugo Chavez mocked George W. Bush as a “comrade” on Wednesday, saying the U.S. president was a hard-line leftist for his government’s intervention of major private banks in the U.S. financial crisis. Chavez, who calls capitalism an evil and ex-Cuban leader Fidel Castro his mentor, ridiculed Bush for his plan for the federal government to take equity in American banks… “Bush is to the left of me now,” Chavez told an audience of international intellectuals debating the benefits of socialism. “Comrade Bush announced he will buy shares in private banks.” Chavez, who has insulted Bush in the past as a drunkard or the devil, called him clueless on Wednesday. He accused him of simply parroting the words of his aides without understanding the new policies that rely on heavy state intervention.

News That Rich People Can Use

I was astounded to watch a segment on the Newshour With Jim Lehrer tonight about the concerns of Seattle-area arts and public service organizations in the face of Washington Mutual’s acquisition by JPMorganChase, an annual donor of $100 million to nonprofits.

This was not a story about the loss of funds. It was a story about concerns with the potential loss of funds.

Colorful images of ballet dancers, a symphony orchestra, and stage actors in rehearsal flowed across the screen as non-profit heads fretted about the fate of their funding sources.

I enjoy the Newshour and its long-story format, but I’m aware of its government funding and it’s skew toward the wealthy and the politically liberal. And I have to say I can’t recall seeing a story more effete or more indulgent of this audience. The financial crisis - whither capitalism? - is causing arts agencies … concerns.

Something many people don’t seem to understand about mergers, acquisitions, and bankruptcies is that the assets involved in all these transactions don’t just go away. They continue in use under different owners or managers. That’s it! If philanthropy was a good idea before the acquisition of WaMu, it’s a good idea afterwards. If it wasn’t, it wasn’t, and it will go away as it should. I, for one, would rather get cheap or free checking than donate to other rich people’s arts organizations through my banking.

Will wealthy liberals lose corporate-subsidized access to ballet? Oh, I swoon!

Or, here’s an alternative: Get out your checkbooks, richies!

Surely, there are stories about the financial crisis with more substance than this. How about something on Franklin Raines, who headed Fannie Mae from 1999 to 2004 and received a slap on the wrist for accounting irregularities in an organization that we now know was a dumptruck careening toward a crowd of schoolchildren. There are a zillion stories more important than the nervousness of ballet directors in the northwest.

Rant over.

Housing, Financial Markets, and Government

I’ve been absent for Cato-at-liberty in recent weeks because I’ve been busy with the bailout and various related issues. I’ve missed the opportunity to post and get feedback from readers, so I’m posting some of my recent articles for your reading pleasure.

My first foray into the issue was a column for Real Clear Politics arguing against the bailout.

Needless to say, the political class disregarded my sage advice and voted to give the Treasury Department a blank check for $700 billion. So my next article was part of a Google-sponsored debate on whether the turmoil in financial markets is a reason to expand the size and scope of government. You can also see my opponent’s article  and my rebuttal if you are so inclined. You can also rate both of our arguments if you feel like putting your thumbs on the scale.

I’m also taking part in a debate sponsored by the Los Angeles Times. Monday’s topic was whether government should have any role in subsidizing housing, and Tuesday’s topic focused on who should get blamed for the current mess. I’ll post subsequent debates as they become available.