Switzerland, Austria, and Luxembourg Defend Financial Privacy…and Get Support from the Czech Republic

The Birmingham Star reports on how Switzerland, Austria, and Luxembourg are defending their human rights policies of protecting financial privacy:

Switzerland, Luxembourg and Austria are fighting attempts to put them on blacklist for being tax havens and over-secretive in banking rules. Luxembourg officials hosted discussions with the Swiss and Austrian finance ministers over the weekend, resulting in a demand for involvement in talks on the issue prior to the G20 summit next month. Luxembourg treasury officials said the small European group wanted to be involved in the debates about bank secrecy which were currently being discussed in meetings to which they did not belong, such as the G20.

Equally important, the Czech Republic is standing up for the sovereign right of jurisdictions to have strong human rights laws. The Finance Minister correctly explains that Switzerland’s laws should not be sacrificed on the altar of bigger government. The EU Business reports:

Czech Foreign Minister Karel Schwarzenberg defended Switzerland on Sunday against threats by EU member states to put it on a tax haven blacklist, saying sovereignty is “worth more” than lost taxes. “Certainly tax coffers here and there miss out on a couple of million euros… The independence of a country and the traditions of an independent, neutral Switzerland is however worth more than that,” Schwarzenberg said. “Why must one spoil that at all cost?” he added in an interview with the Swiss newspaper NZZ am Sonntag. The Czech Republic holds the rotating presidency of the European Union, and Switzerland has come under intense pressure in recent months over its banking secrecy laws.

Why Bank Stocks Rose on Bernanke’s Remarks

In a CNBC spot with Steve Liesman & Erin Burnett, I tried to explain why investors in bank stocks had good reason to be pleased with part of Fed Chairman Ben Bernanke’s speech.  Judging by the response of Steve and Erin, and others on CNBC over the following day,  I must not have been persuasive.

For clarification, I am quoting the exact language from Bernanke’s talk, with my emphasis added.

My main point is that Bernanke admitted that when it comes to the “financial crisis” of some big banks, this is largely an artifact of unduly harsh regulation being applied at the worst possible time:

There is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical–that is, they lead financial institutions to ease credit in booms and tighten credit in downturns more than is justified by changes in the creditworthiness of borrowers, thereby intensifying cyclical changes.

For example, capital regulations require that banks’ capital ratios meet or exceed fixed minimum standards for the bank to be considered safe and sound by regulators. Because banks typically find raising capital to be difficult in economic downturns or periods of financial stress, their best means of boosting their regulatory capital ratios during difficult periods may be to reduce new lending, perhaps more so than is justified by the credit environment. We should review capital regulations to ensure that they are appropriately forward-looking…

Bernanke emphasized the regulators’ dangerous habit of raising capital requirements and loan loss reserves simply because of a strict mark-to-market misinterpretation of the “fair value” of mortgage-backed securities.

He noted that:

Determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency.

The key here is Bernanke’s criticism of the rigid use of Basel capital standards, not mark-to-market information per se (which would be harmless if it did not trigger foolish regulations). When combined with Barney Frank’s similar comments on the same day, it begins to look as though sensible economics might finally take priority over dubious bookkeeping.

Let’s Be Fiscally Responsible, Starting Tomorrow

In his famous book, Confessions, the 5th-century theologian Augustine wrote that he used to pray before his conversion, “Lord, make me chaste, but not just yet.”

That quote came to mind as I read the news a moment ago that President Obama plans to sign the $410 billion catch-all appropriations bill even though it contains 8,500 “earmarks” that will cost taxpayers nearly $8 billion.

Recall that as a candidate, Obama said he and Democratic leaders in Congress would change the “business as usual” practice of stuffing spending bills with pet projects. Those earmarks, submitted by individual members to fund obscure projects in their own districts and states, typically become law without any debate or transparency.

Saying he would sign the “imperfect bill,” President Obama offered guidelines to curb earmarks … in the future. “The future demands that we operate in a different way than we have in the past,” he said. “So let there be no doubt: this piece of legislation must mark an end to the old way of doing business and the beginning of a new era of responsibility and accountability.”

Lord, make us fiscally responsible, but not just yet.

NPR and El Salvador: Setting the Record Straight

NPR had a story this morning on “social inequalities and growing discontent in El Salvador.” Relying exclusively on anecdotal evidence, the story was full of mischaracterizations about the economic and social reality of that country.

Let’s see: Regarding the upcoming presidential election this Sunday, NPR says,

…whichever candidate wins, he faces a faltering economy, entrenched poverty, rampant crime and a population that’s still recovering from a civil war.

Granted, rampant crime is a major problem—unfortunately El Salvador is the most violent country in the world—but a faltering economy? NPR didn’t provide any evidence aside from anecdotes.

Actually, El Salvador has made enormous progress thanks to an aggressive agenda of market reforms. Once you account for revised population data due to a new census, El Salvador’s per capita GDP has grown by 3.3 percent since 1992—the third highest rate in Latin America during this period, after the Dominican Republic (3.8) and Chile (3.6). And as I point out in my new paper on El Salvador, there is ample evidence that official figures significantly underestimate the performance of the economy, mostly because the service sector—an area in which El Salvador leads the region—is grossly undervalued in the country’s estimation of GDP. The economy is probably more than 30 percent larger than indicated by the official data. Thus the average per capita growth rate since 1992 has been approximately 5.2 percent per year.

Entrenched poverty? Since the end of the civil war in 1992, the number of households below the poverty line has diminished by more than 25 percentage points. Extreme poverty has also declined by almost 18 percentage points. During the first decade of the market reforms, net enrollment in primary education increased by close to 10 percentage points, infant mortality declined by 40 percent, and the population without access to safe water was halved. Yes, almost 35 percent of Salvadoran households still live in poverty, but by any indicator, poverty is in retreat.

One of the most telling facts about how tough life is in El Salvador right now is that a quarter of its population chooses not to live here. An estimated 2 million Salvadorans out of a population of less than 7 million live and work in the United States.

It is true that approximately 2 million live outside, but the bulk of Salvadorans who immigrated to the U.S. left during the period of civil conflict. Immigration has certainly continued, but presenting it in its entirety as a sign of economic hardship, as NPR correspondent Jason Beaubien does, is misleading.

El Salvador has moved aggressively under the conservative Nationalist Republican Alliance, or ARENA party, to align its economy with the U.S. In 2001, it adopted the U.S. dollar as its sole currency, and in 2006, it ratified a free-trade deal with the United States. The trade agreement led to a modest boost in exports, but in the market, shoppers and shopkeepers say it hasn’t helped them.

How does adopting free market reforms constitute an effort to “align” the economy to the U.S.? By liberalizing their economy, Salvadorans authorities are protecting the cash value of pensions and salaries, lowering interest rates, have incentivized savings,  and provided modern and affordable public services, etc. Their goal was to make the Salvadoran economy more dynamic and competitive, not to “align” it to the U.S.

Also, the increase in exports since CAFTA was implemented three years ago has been anything but “modest.” Exports were 34 percent higher last year than in 2005, the year before CAFTA went into effect. From 1991 to 2007 El Salvador had the highest export growth rate in all Latin America.

This is not to say that there aren’t serious challenges facing El Salvador. As I said earlier, crime is the most serious of all, and the main source of popular discontent in the country. The country is feeling the consequences of the global economic downturn, as are most developing countries. But the way that NPR presents life in El Salvador demands a serious reality check.

Where Are the Muckrakers?

In the mythology of journalism, investigative reporters fall somewhere between archangels and demigods. They protect the public by exposing political deceit and corruption, burrowing relentlessly into the words and deeds of those in power, in search of the truth. And in the field of education, they are as numerous as leprechauns and unicorns.

In education, “muckrakers,” as Teddy Roosevelt called them, are few and far between. There are, however, legions of mucksailors – reporters who glide over the surface of a story, seldom probing beneath the public statements of those in power to determine their truth or falsehood. Through my web browser window I can watch the sails of a vast muck navy.

Consider the coverage of the battle over DC’s school voucher program. Democrats inserted language into the $410 billion omnibus spending bill that would sunset funding for the program after next year, instead of simply reauthorizing it for another full five-year term. The vouchers could still be reauthorized when they come up again, but since House Appropriations Committee chairman David Obey ( D-Wis.) has already told DC public schools to prepare for the return of voucher students, that seems highly unlikely.

So here we have Democrats working to shut down a program serving 1,700 poor kids in the nation’s capital – kids who are so desperate to stay in their chosen private schools that they’ve made YouTube videos beseeching Congress and president Obama to save it. Given that most people are not inherently so cruel, why would Democrats want to kill this program? They say it’s because it robs money from needy public schools and gives it to private schools that are already flush from lavish tuition fees. But. Is. That. TRUE?

Is DC’s government-run k-12 system financially needy? Are the independent schools serving voucher students making a Madoff-style killing?

No. And… No.

These claims are rubbish. They are, in fact, MUCK. I have run the numbers on DC government k-12 education spending for the current school year and it is $26,555 per pupil. According to the government’s own published study of the voucher program, the average tuition charged by participating schools is $5,928. Furthermore, the voucher program actually added an extra $13 million a year to the DC public school budget, as a “sweetener” to elicit local and Democratic support.

But most Americans will never learn any of that. Because we have no muckrakers in the mainstream education media. We have mucksailors.

This is not entirely the journalists’ fault. Media businesses have been hit very hard in recent years, and are understaffed compared to earlier generations. Reporters are stretched very thin. But I ask the editorial establishment, what is more valuable to your readers: A dozen stories that merely regurgitate the official muck, or a single top notch investigative piece that demonstrates how our political leaders are flagrantly misleading the American people and exposes their real motives?

Speak truth to power? Anyone?

Anyone?

Regulations vs. Rate Cuts

A set of stories in International Tax Review today illustrate the backwards nature of U.S. corporate tax policy. The first story discusses the high-profile chest-thumping in Washington over corporate “tax haven abuse.” The congressional response to greater international tax competition is to load even more regulations on American businesses.

The second story is entitled “Taiwan Slashes Corporate Tax Rate”:

Taiwan’s government has approved plans to cut the country’s corporate tax rate from 25% to 20%. Ministers hope the cut will encourage investment in the country and stimulate growth in the economy…

America is in the worst recession in decades and it desperately needs to cut its 40 percent corporate tax rate to reinvigorate business investment. Why are U.S. policymakers so clueless about the most obvious way to spur investment when that policy imperative is clear to leaders just about everywhere else?

National-ID-Backing Intel Chief Steps Down

No sooner had I posted here about Chas Freeman’s support for a national ID than he withdrew his candidacy to be Chairman of the National Intelligence Council.

With a number of controversies roiling, the national ID issue may have been the straw that broke the camel’s back of Freeman’s aspirations to the intelligence post. Indeed, it may have been the mighty power of this blog, the acid keyboard of yours truly, that served as the catalyst … maybe.