Topic: Government and Politics

An Elephant Never Forgets?

Over at Ars Technica, I’ve got an in-depth write-up of the White House’s problems with email archiving. Federal law has required executive branch officers’ official emails to be preserved for legal and historical purposes. Unfortunately, the Bush administration has had some difficulties with this:

In 1994, the Clinton administration reacted to the previous year’s court decision by rolling out an automated e-mail-archiving system to work with the Lotus-Notes-based e-mail software that was in use at the time. The system automatically categorized e-mails based on the requirements of the FRA and PRA, and it included safeguards to ensure that e-mails were not deliberately or unintentionally altered or deleted.

When the Bush administration took office, it decided to replace the Lotus Notes-based e-mail system used under the Clinton Administration with Microsoft Outlook and Exchange. The transition broke compatibility with the old archiving system, and the White House IT shop did not immediately have a new one to put in its place.

Instead, the White House has instituted a comically primitive system called “journaling,” in which (to quote from a recent Congressional report) “a White House staffer or contractor would collect from a ‘journal’ e-mail folder in the Microsoft Exchange system copies of e-mails sent and received by White House employees.” These would be manually named and saved as “.pst” files on White House servers.

As you can imagine hijinks ensue. The White House developed a new archiving system that was ready to go in 2006, but the White House CIO reportedly canceled the system just before it was due to go live. They’re supposedly working on yet another archiving system, but it’s looking increasingly likely that it won’t be ready before the Bush administration leaves office.

Transparency is an important tool for limited government. Senior administration officials are more likely to behave themselves if they know their correspondence is subject to subpoena and will be available for the scrutiny of future historians. It’s therefore troubling that for most of the last 8 years, the Bush administration has failed to have an automated system in place for complying with the law as his predecessor did. More pressure needs to be placed on the next administration to ensure that the law is followed.

Peggy Noonan on Conservative Disenchantment

Peggy Noonan has a column in today’s WSJ in which she reports having given a speech in Lubbock, Texas that was tough on the current president and of the attendees at the talk “no one–not one–defended or disagreed.” She closes this way:

I finally understand the party nostalgia for Reagan. Everyone speaks of him now, but it wasn’t that way in 2000, or 1992, or 1996, or even ‘04.

I think it is a manifestation of dislike for and disappointment in Mr. Bush. It is a turning away that is a turning back. It is a looking back to conservatism when conservatism was clear, knew what it was, was grounded in the facts of the world.

The reasons for the quiet break with Mr. Bush: spending, they say first, growth in the power and size of government, Iraq. I imagine some of this: a fine and bitter conservative sense that he has never had to stand in his stockinged feet at the airport holding the bin, being harassed. He has never had to live in the world he helped make, the one where grandma’s hip replacement is setting off the beeper here and the child is crying there. And of course as a former president, with the entourage and the private jets, he never will. I bet conservatives don’t like it…

Albany Sweeps Up

As other states contemplate cutting spending growth in light of slowing revenue growth, New York State recently passed a $122 billion budget for 2008-2009. Coming nearly 5 percent higher than last fiscal year’s spending plan, the budget relies on $1.5 billion in higher taxes and fees, including a near-doubling of the state’s cigarette tax rate. The increased taxes will fund, among other programs, a record-breaking $1.75 billion increase in school aid. But it’s doubtful the state will even raise that money because higher taxes will just generate an even larger black market in cigarettes.

Despite this stunning increase in spending, the state is still using creative techniques to balance the last budget. According to a recent Times Union article, the Paterson administration “swept” $100 million from various special accounts to supplement general revenues. But the funds in the dedicated accounts are raised through user fees and slated for specific programs, not for the general spending whims of policymakers;

For instance, more than $1 million was swept from the Animal Population Control account, which is fueled from $3 surcharges on dog licenses, $25 Love Your Pet license plates and other funds from pet lovers. It is supposed to go to spaying programs.

Beyond the fact that Albany should not be in the spaying business to begin with, there appears to be dishonesty in budgeting if Albany creates new programs, overcharges “fees” to accumulate surpluses in various dedicated accounts and then “sweeps” the funds into the black-hole that is the general fund budget. It comes as no surprise several of these user fees were increased in the 2008-2009 budget. With spending on an unsustainable upward path, much more sweeping is yet to come.

How “the Party of Limited Government” Abets Its Opponents

I’m sitting at the 5th annual World Health Care Congress listening to George Shultz and others debate the merits of the presidential candidates’ health care reform plans. 

Rep. Jim Cooper (D-TN), speaking for Sen. Barack Obama’s (D-IL) plan, noted that Sen. Hillary Clinton’s (D-NY) plan would not get a single Republican co-sponsor because it includes an individual mandate. 

Speaking for Sen. Clinton’s plan, former (Bill) Clinton health policy advisor Christoper Jennings responded that there are plenty of Republicans on the individual-mandate bill sponsored by Sens. Ron Wyden (D-OR) and Bob Bennett (R-UT).  And not just Republicans, but conservative Republicans.

So much for that talking point.

McCain on Judges

Cato scholars have increasingly been evaluating the respective policies of John McCain, Hillary Clinton, and Barack Obama. The trade shop understandably prefers McCain (see my colleague Sallie James’s new paper), as does, cautiously, our director of health and welfare studies, Michael Tanner. The foreign policy shop, meanwhile, doesn’t like McCain because he is ”wedded to perpetual war” and generally given to neoconservative tendencies.

On judges, I’ll go with the trade and health care folks: While John McCain’s views on  the First Amendment are unacceptable to freedom-lovers of any stripe, he has at least promised to nominate Supreme Court justices in the mold of John Roberts and Sam Alito (who have ruled against campaign finance restrictions). Obama and Clinton, meanwhile, are in the John Paul Stevens camp of relying on empathy, international opinion, and “my own experience” as a basis for constitutional interpretation.

Indeed, while defending his vote against Chief Justice Roberts’s confirmation, Obama explained that his standard for a justice must be “one’s deepest values, one’s core concerns, one’s broader perspectives on how the world works, and the depth and breadth of one’s empathy.”

As Jonah Goldberg says in a devastating column, “Now that is a pure expression of the principle of judicial fiat.”

Supreme Court justices take an oath to “administer justice without respect to persons, and do equal right to the poor and to the rich, and that I will faithfully and impartially discharge and perform all the duties incumbent on me as a justice of the Supreme Court of the United States under the Constitution and laws of the United States, so help me God.” Any contention that justices must tilt toward any particular type of party — the downtrodden (or privileged), the politically unpopular (or popular), the ethnic minority (or majority) — is an argument for judicial dictatorship instead of the rule of law.

As Roberts said when Senator Richard Durbin (D-IL) asked him whether he would be “for the little guy,” if the law says the little guy wins, then the little guy should win — and if the law says the big guy wins, then it would be a miscarriage of justice to rule for the little guy. And those who don’t like that result should complain to their elected officials and get the law changed.

The Housing Crisis: Maybe We Should Do Nothing?

Two weeks ago, the Senate passed legislation ostensibly intended to address home foreclosures. That legislation is now being criticized as little more than a handout to corporate interests. The criticism is legit; the bill is largely a package of tax breaks for developers (and other struggling industries, including those that have nothing to do with housing), along with tax credits for the purchasers of foreclosed homes (a provision that has its own criticisms) and grant money to local governments that want to play Flip This House.

Across Capitol Hill, the House is considering different foreclosure legislation that would give tax credits to first-time homebuyers and developers of lower-cost housing (proposals that are subject to some of the same criticisms now being lobbed at the Senate bill). House and Senate committees are also considering additional legislation that would permit the Federal Housing Authority to underwrite as much as $300 billion in mortgages for borrowers who are at risk of falling behind on their payments.

Lawmakers’ interest in combating the mortgage problem is understandable: default and foreclosure are painful for homeowners, clusters of vacant houses are hard on communities, and the struggling homebuilding industry is a significant contributor to the nation’s overall economic malaise. (Another factor that makes it understandable: this is an election year.)

However, before Congress puts taxpayers (most of whom are also paying mortgages or renting their homes) on the hook for billions of dollars in grants, tens of billions in tax breaks, and guarantees for hundreds of billions of dollars in mortgages, three points should be acknowledged:

  1. The bailout proposals are as much a benefit to lenders as borrowers.
  2. The homebuyers who are to be rescued are not the victims of “raw deals” (unless they were deceived or defrauded).
  3. The bailout could make the nation’s overall economic condition worse.

The housing market turmoil is the product of two related factors:

  • a decline in house prices in several geographic areas that were super-heated in recent years, and
  • the discovery that many mortgage borrowers are higher-risk than lenders had previously realized.

As long as house prices were rising, the risky borrowers were not a problem. Borrowers who fell behind in their payments could sell their houses (and usually reap capital gains). But when the market reversed, this “escape hatch” closed and defaults and foreclosures ensued.

The home loans at the heart of the mortgage meltdown are “subprime” loans — loans made to borrowers with less-than-stellar credit and/or little money down. Though subprimes constitute only 12.7 percent of all outstanding mortgages, they comprise 55.2 percent of mortgages that are in foreclosure. (Mortgage figures are calculated using data from the most recent National Delinquency Survey.)

The fact that subprime loan defaults are (literally) breaking the investment banks indicates that lenders were charging subprime borrowers too little — that subprime borrowers’ mortgage payments weren’t sufficient to cover their risk of default. That’s why investment banks are suffering severe write-downs (and in the case of Bear Stearns, near collapse) and brokerage firms have needed capital infusions. Those firms would benefit greatly from many of the proposed government interventions, even if they have to take a “haircut” on their loans. Hence, claims that bailout legislation is intended to “help Main Street, not Wall Street” should be taken with grains of salt.

Further, consider that 73.3 percent of the subprime loans in foreclosure are adjustable rate mortgages (ARMs). ARM borrowers not only paid lower rates than what their default risk merited, but they also paid even-lower introductory rates for the first few years of their mortgages. In essence, the borrowers entered into “lease-to-buy” contracts, with the “buy” provision kicking in when the ARMs reset to higher rates. The increased foreclosures can be understood as borrowers deciding not to exercise the “buy” portion of the contract, either because the terms are relatively unaffordable or because the house is no longer worth the contracted amount.

Commentators err when they describe these borrowers as being irresponsible or foolish for signing such contracts. The borrowers simply made a risky but reasonable decision to try to buy a house, on very generous terms given their default risk, in a market that was experiencing tremendous appreciation. They are now making a reasonable decision to bail on their contracts and go back to renting in the wake of the housing market downturn. Of course, the borrowers feel pain when they lose their homes. But, unless they were deceived or defrauded, they were not the victims of raw deals.

Moreover, for the overwhelming majority of subprime loans, the borrowers’ original decision to buy has worked out nicely — more than 80 percent of subprime loans (and just under 80 percent of subprime ARMs) are currently in good standing. Moreover, many of the people who have used subprime loans, ARMs, and other oft-denigrated “exotic vehicles” over the past decade have realized significant capital gains, even with the recent decline in house prices. If some so-called “consumer advocates” get their wish and regulation is implemented to curtail or prohibit the use of subprime loans and ARMs, higher-risk would-be homebuyers as a group will be harmed.

Another worry is that the bailout and other interventions could make overall economic matters worse. The United States’ current economic malaise is partly the product of the housing market collapse and the associated mortgage woes, but it is also partly the product of higher energy prices. Put simply, current conditions indicate that market actors need to shift their investment and risk-taking away from housing and toward energy development and conservation.

However, government and Federal Reserve efforts to combat the housing crunch and the financial crisis could dampen the incentives to make that necessary investment switch. Ready money makes it easier to delay painful but necessary changes.

Economic corrections are always painful, but as GMU economist Alex Tabarrok and WaPo columnist Robert Samuelson each recently wrote, the pain is increased if the correction process is drawn out. Tabarrok’s NYT column compares the recent U.S. housing experience with Japan’s dramatic boom-and-bust cycle of 1985–2000. We should be mindful of Japan’s broader experience over the 1990s: the government struggled mightily to blunt the pain of a correction, resulting in an agonizing decade of economic stagnation.

All of this raises the question: Should government intervene at all in the foreclosure mess? In asking this, I’m not arguing that struggling borrowers should drop dead. But there is much more downside risk and much less justification for intervention than what proponents have acknowledged.