The Freedom Agenda, According to Colin Powell; Plus, How Freedom Fills a Vacuum

Fred Kaplan’s new book, Daydream Believers: How a Few Grand Ideas Wrecked American Power, is written in a pleasantly breezy, journalistic style that makes it easy to blow through in an afternoon. While a lot of the material in the book will be familiar to those who’ve been closely watching the trainwreck-in-slow-motion that is the Bush administration’s foreign policy, it contains a few shocking tidbits that are new. Here’s one that was particularly striking, discussing the so-called “freedom agenda,” a plan to spur undemocratic Arab regimes to democracy that was led by Iran-Contra figure Elliot Abrams. When a document Abrams had overseen describing Washington’s agenda for overhauling the Arab world leaked to al Hayat, the Arab world unsurprisingly reacted with outright hostility. Secretary of State Colin Powell was dispatched to smooth ruffled feathers. He met with his staff before the trip.

Speaking privately with his aides, Powell said the White House was, in effect, telling the Arabs, “Get down out of those trees and be democrats.” The United States had just toppled the governments of Afghanistan and Iraq with military force. Now, Powell said, we seemed to be ordering the Arab nations, “Line up, you’re all next.”

There’s also this, where Natan Sharansky was apparently trying to warn Bush that Ariel Sharon’s policy of disengagement from Gaza could wreak havoc there.

Sharansky wrote a private letter to President Bush, making [the case that disengagement would be dangerous] and hoping that he too would oppose Sharon’s move. Bush wrote him back a private letter, saying that he supported Sharon’s policy. Disengagement, the president argued, would create a vacuum, which the natural forces of freedom would fill: Gaza would become a democracy almost of its own accord.

If you need to get caught up on what’s gone wrong, Kaplan’s book is a decent primer. More info here.

Union May Sue if Too Many Floridians Demand School Choice

According to a report by Tallahassee’s News Channel 7, the Florida Education Association may sue to shut down that state’s scholarship tax credit program. Under this program, businesses can donate to non-profit scholarship funds that subsidize tuition for low-income kids at the private schools of their families’ choosing. In return, the businesses can claim dollar for dollar tax credits up to a certain limit.

Public school employee unions have left this program alone since its enactment in 2001, despite having successfully sued to kill a much smaller school voucher program two years ago. So why the sudden talk about filing suit? Let’s go to the Chanel 7 report by Mike Vasilinda:

The teachers [i.e., the Florida Education Association, ed.] successfully challenged the voucher program that was centered around failing schools. They’ve turned a blind eye to the corporate voucher [i.e., scholarship tax credit, ed.] program, but they [through FEA attorney Ron Myer] say if it’s to triple over the next five years, they may go to court.

Keep in mind that scholarship organizations must allocate all donations to scholarships as they receive them, they can’t carry over more than 25% of donations from one year to the next, and the maximum scholarship value is fixed at $3,750 (far below per pupil spending in the public schools). So the only way the total value of scholarship donations could triple would be for triple the number of low-income families to ask for them.

So the Florida Education Association is saying that if too many poor parents want to escape the public schools and get their kids into independent schools, it will shut them and this whole program down.

That is evil.

Supreme Court to President Bush: Don’t Mess With Texas

Tuesday the Supreme Court slipped the Gordian knot of a case that could have come straight from a law school exam, involving federalism, treaty interpretation, the scope of executive power, criminal procedure, and conflicts between international and domestic law.  The issues in Medellin v. Texas boiled down to: 1) Whether a particular decision of the International Court of Justice is automatically binding on Texas courts and, if not, 2) Whether President Bush made it binding by issuing a memorandum to then-Attorney General Alberto Gonzales.  The Court answered in the negative on both counts by a 6-3 margin.

The result of this decision is that neither the ICJ (the so-called “World Court”) nor the president acting alone can force states to review criminal cases involving foreign nationals.  The underlying treaty at issue – which gives foreign nationals accused of a crime the right to meet with consular officials – is not enforceable in the absence of implementing legislation from Congress.  The ICJ ruling is similarly not self-executing, and does not gain legal effect merely because the president tells the states to abide by it.

The Supreme Court has thus protected America’s carefully calibrated system of federalism and checks and balances by preventing an international court from overriding a state’s duly enacted (and constitutionally sound) law.  Just as importantly, the Court correctly rejected the argument that the president has the power to enforce against the states a treaty that is, in the absence of congressional action, enforceable only by diplomatic means.  Telling state courts how to do their jobs is simply not among the powers of the nation’s chief executive.

Be Still My Beating Heart…

Move over Ron Paul, my heart belongs to Jack! How long until we see a “Kevorkian Girl” on You-Tube?

The assisted-suicide advocate Jack Kevorkian announced that he was running for Congress as an independent. If elected, he said his main priority would be promoting the Ninth Amendment, which protects rights not explicitly specified elsewhere in the Constitution. Mr. Kevorkian, 79, says he interprets it as protecting a person’s choice to die through assisted suicide or to avoid wearing a seat belt. The Congressional seat in Detroit’s suburbs is now held by Representative Joe Knollenberg, a Republican who is seeking re-election.

Those still a bit uncertain about the wisdom of physician assisted suicide might want to keep in mind the following three words: President Hillary Clinton.

Tyler Cowen Thinks Frozen Markets Justify Tougher Regulations?

In a New York Times piece of March 23, “It’s Hard to Thaw Frozen Markets,” Tyler Cowen concludes that “regulators should apply capital requirements consistently to the off-balance-sheet activities of financial institutions.” That conclusion follows from a surprisingly innocent confidence in regulation in general and capital requirements in particular. But it also follows from a faulty analysis of the situation.

Cowen writes, “What is distinctive today is the drying up of market liquidity — the inability to buy and sell financial assets — caused by a lack of good information about asset values… .The results have been a form of financial gridlock.”

To explain this alleged “drying up” process he says, “Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.” Cowen thinks “market prices have been drained of their informational value” in “many asset markets.”

With the possible exception of mortgage-backed securities, that seems fanciful if not absurd. The spread between junk bonds and Treasury widened mainly because Treasury yields fell, but there is massive trading in such bonds. Sales of nonfinancial commercial paper have grown briskly this year, and so have sales of financial paper aside from the “asset-backed” variety. There may be little trading of mortgage-backed securities, but that just suggest many owners (unlike, say, e-Trade) are in no hurry to sell at prices low enough to attract borrowers.

This poses a temporary problem for mark-to-market accounting (and Basle’s bureaucratic capital standards), but this seems a failure of accounting rather than markets. Cowen asks “why seek ‘fire sale’ prices when you might lose your job for doing so?” I would ask, “Why seek ‘fire sale’ prices if (unlike Bear Stearns) you are in a position to wait for a better deal once the market calms down?” Cowen says, “Only so many financial institutions have the size and expertise to buy up low-quality assets in large quantities.” But large holdings can often be sold in smaller batches. And we don’t know who might have bought Bear Stearns, warts and all, were it not for favoritism the Fed and Treasury showed to a single bidder (who was shamed into quintupling the offer).

Liquidity refers to the ease with which various assets can be converted to cash without dropping the value of the asset. Hedge fund managers bought gold on margin at $1000 may find it is less liquid than they expected. But what seems terrible to sellers of marked-down assets (e.g., of Las Vegas condos) can seem wonderful to buyers.

Most people think “liquidity drying up” means banks have cut back on lending, which is demonstrably false – bank loans are growing at a 10-11% annual rate since August, and much faster for C&I loans. Consumers and small businesses were never dependent on mortgage-backed IOUs.

There is no “financial gridlock” for most assets, even real estate (31% of household wealth). Auctions for foreclosed properties are drawing plenty of bids.

Mr. Cowen thinks “investors are instead flocking to the safest of assets, like Treasury bills.” Smart investors shun long-term Treasuries and are flocking to stocks, particularly U.S. stocks. The S&P 500 is down less than 10% this year – much better (in dollars) than most other markets, including Europe and China.

Tyler says, “Every step of the way, the pricing of [Bear Stearns] stock has surprised the market.” Really? It didn’t surprise the shorts, who owned a fourth of the shares. I own the SKF exchange fund (ultra-short financials) which, ironically, fell sharply a couple of days after Bear was sold out by omniscient and kindly government regulators.

Nobody ever said housing was a liquid asset, but even housing is far more liquid than the doomsday crowd imagines. The OFHEO index shows that home prices increased in all but 11 states between the fourth quarters of 2006 and 2007. Home prices fell 4% to 7% in California, Nevada, Florida and Michigan, but home prices rose 4% to 9% in 16 other states—most of which are not even counted in the widely-cited Case-Shiller index (which gives California a 27% weight).

The only problem with financial markets is that information is never free, and it sometimes takes time to discover market-clearing prices. The solution is not more regulations, but more patience.

Capital requirements, on the other hand, can cause very serious problems. The 1988 Basle Accord on capital requirements was a heavy-handed reaction to the 1982 LDC debt crisis. It was also one reason Japan’s monetary base shrunk by 2.8% a year in 1991-92 – the start of a period some U.S. journalists are now foolishly comparing to the restoration of sanity in coastal housing prices.

As I explained ten years ago, Basle “required that by the end of 1992 banks had to maintain capital equal to a minimum of 8 percent of risk-adjusted assets, where risk just happened to be defined in a way that favored government bonds over business loans… . Did relatively higher capital ratios in the United States and Great Britain mean they were less exposed than Japan to LDC default? On the contrary, even in the late eighties outstanding LDC loans still amounted to 93-199 percent of the capital of the largest U.S. banks, and as much as 82 percent for British banks, but only 55 percent for Japan. American banks seemed to have more capital. But unlike Japan, all of the capital of U.S. banks, and sometimes much more, was exposed to LDC default.”

Even if markets for a few risky, exotic U.S. securities appears “frozen” for a short while, that is far less problematic than imposing stern, politicized regulation over a wide array of assets and institutions.

Standards and Choice, Going Head-to-Head

Two months ago, the Manhattan Institute’s Sol Stern ignited an educational firestorm when he declared that, contrary to his past hopes, school choice cannot save American education. Only a focus on classrooms and curricula can do that, he argued, going so far as to laud a “thought experiment” that found a dictatorship with a “rich curriculum” preferable to universal school choice.

Even before Stern’s article went online the responses came fast and furious, especially from people at Cato. Afterward, it generated even more heat, pulling folks from all sides into the debate. For the most part, though, the dispute has been fought long-distance, with combatants hurling op-eds and blog entries at each other. But that is about to change…

On April 16, Cato will be hosting a policy forum putting Mr. Stern, Cato’s Andrew Coulson, Gary Huggins of the Aspen Institute’s Commission on No Child Left Behind, and University of Texas at San Antonio economics professor John Merrifield on the same stage to debate the big question: Is school choice enough to fix American education, or are government standards the key?

On April 16, the big debate comes to Cato. Sign up here to attend!