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Cato Daily Dispatch for April 7, 2005

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(Links to outside sources were active as of the date of this dispatch; however, not all news sources maintain links to current stories indefinitely. Some links also may require registration.)

Declining Dollar Will Hit Developing Nations

"Developing countries that have amassed large U.S. dollar reserves face a growing threat of big losses from a sudden decline in the dollar, the World Bank warned on Wednesday," reports the Financial Times.

"In its 2005 Global Development Finance Report, the bank identified the 'gravest risk' for emerging markets as a deep and disorderly dollar decline that would create financial market volatility and push up interest rates."

In "How Far Will the Dollar Fall?" Richard W. Rahn, an adjunct scholar of the Cato Institute, argues: "The whole world has a vested interest in exchange-rate stability. The export-driven economies of Asia and Europe cannot afford for the dollar to fall too much, both because their markets will dry up and the value of their dollar assets in their own currencies will decline. It appears the dollar rose too high against the euro two years ago and now has fallen too low. The current drop in the dollar's value owed primarily to a decline in private foreign investment, and not to a decline in foreign central bank demand for dollars. The decline in private foreign demand for dollars was partially fueled by a belief the dollar had become too expensive -- a normal market response.

"However, the U.S. government made a series of mistakes that have discouraged foreign investors. America now is viewed as unfriendly to foreign investors. Certain provisions of the PATRIOT Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and unnecessary privacy intrusions. The president's tax bill reduced the tax on capital for U.S. taxpayers, but kept very high withholding rates on dividends for foreign investors, making them pay relatively more for helping our economy.

"The Treasury Department also has not withdrawn the proposed, destructive foreign interest-reporting requirement, opposed by nearly all economists, even the administration's."

Greenspan Calls for Regulator to Rein in Growth of Mortgage Lenders

"Federal Reserve Chairman Alan Greenspan told Congress he supports a new regulator for Fannie Mae and Freddie Mac if it has the power to rein in the growth of the two mortgage lenders," reports Bloomberg News.

"In testimony to the Senate Banking Committee today, Greenspan said the size of Fannie Mae's and Freddie Mac's portfolios, a combined $1.55 trillion, poses a risk to the global financial system. It would be difficult, if not impossible, to bail out the lenders, known as government-sponsored enterprises, should one get into financial trouble."

In the Cato Policy Analysis, "Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy," Lawrence J. White, a former member of the Federal Home Loan Bank Board and a board member of Freddie Mac, writes: "Though [Fannie Mae and Freddie Mac] appear to be 'normal' corporations, each with shares that trade on the New York Stock Exchange, they in fact have federal government origins and entanglements that make them quite special. Their specialness is a double-edged sword, however. On one side, they cause interest rates on many residential mortgages to be lower than would otherwise be the case; on the other, their size and mode of operation have created a significant contingent liability for the federal government and, ultimately, for taxpayers. In addition, their size and prominence has recently led to concerns about the larger consequences for the U.S. economy if either were to experience financial difficulties."

"The special governmental links that apply to Fannie Mae and Freddie Mac yield little that is socially beneficial, while creating significant potential social costs. The best policy would be to privatize them completely -- that is, to sever all governmental links and convert them to truly 'normal' corporations -- as well as to pursue other measures that would better address the positive externality of home ownership and efficiently reduce the cost of housing. In the event that true privatization does not occur, suitable 'second best' policies would include stronger statements by Treasury officials that the federal government has no intention of supporting the two companies, improved safety-and-soundness regulation of the two companies, limits on the amounts of their debt that can be held by regulated depository institutions, and increased efforts to focus Fannie Mae and Freddie Mac on the segment of the housing market where their social benefits would be greatest."

Spitzer's Influence Scam

"Eliot Spitzer was accused yesterday of blurring his role as New York attorney general with his political ambitions to run for state governor after his campaign office paid Google to link a search for 'AIG' to a website promoting his gubernatorial bid," the Financial Times reports. "AIG, the world's largest insurer, is at the centre of investigation by Spitzer and other regulators into alleged improper accounting. "But critics in the corporate world and in the Republican Party accuse him of launching investigations into high-profile targets that are guaranteed to make headlines."

In "Trial by Press Release," Alan Reynolds, a senior fellow with the Cato Institute, writes: "Eliot Spitzer is the best gift to trial lawyers since asbestos. It would hardly come as a surprise he can count on the mass class-action lawyers' financial gratitude when he runs for governor. Unfortunately, the economy of New York City cannot prosper on fat legal fees alone."

Kristen Kestner, editor, kkestner@cato.org