Archives: 09/2009

The Coming FHA Bail-Out

The taxpayers continue to get hit for Uncle Sam’s profligate ways in guaranteeing and insuring loans to virtually anyone and everyone who wanted to buy a house.  The financial fall-out continues, and this time it isn’t Fannie Mae and Freddie Mac.  It is the Federal Housing Administration.

Reports the Wall Street Journal:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.

It isn’t clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don’t have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. “They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.”

Oh well, it’s only money.  When you have a national debt of nearly $12 trillion, face another $10 trillion in red ink over the next decade, and have accumulated $107 trillion in unfunded liabilities for Medicare and Social Security alone, what’s a few billion dollars more?

Iran’s Stalinist Show Trials — With a Blogger’s Touch

Joseph Stalin’s show trials were notorious for the fantastic confessions.  It seems just about every one of the original Bolshevik revolutionaries had been suborned by the foreign capitalists into conspiring to destroy the workers’ paradise.  But these wonderfully choreographed charades look rather dated today, missing today’s innovations, like blogging.

Iran’s government may represent Medieval theology, but it has grasped modern technology.  Tehran has decided to provide its own version of fantastic coerced confessions via blog!

Reports the Washington Post:

The headline on the last blog item that former Iranian vice president Mohammad Ali Abtahi published before his June 15 arrest – “It was a huge swindling” – left no doubt that he believed that his country’s presidential election had been stolen.His more recent entries, from prison, have taken a different view.

“The majority of detainees know there was no real cheating,” the onetime opposition leader wrote in a recent posting.

“Whoever understands present-day Iran realizes that the street riots are against Iran’s glory, history and people,” he wrote in another.

Abtahi has been allowed to continue blogging from his prison cell by his “good friend the interrogator,” he writes, and he wants the Iranian people to know that he did not come under any pressure to change his mind about what he once decried as massive rigging by President Mahmoud Ahmadinejad’s supporters to keep the hard-liner in office.

But Abtahi’s family and friends say they don’t buy it. The blog, they say, is just one more example of a pervasive campaign by the government to purge the opposition through show trials and forced confessions after protests over the outcome of the June 12 election shook the foundations of the Islamic republic. The official results showed that Ahmadinejad won in a landslide, but the opposition believes that the tally was fraudulent and has said the election should be annulled.

Who would have thought that someone could one-up Joseph Stalin when it came to the finer techniques of brutal repression?

Cato on C-SPAN

Watch for a couple of Cato presentations on C-SPAN this weekend.

Saturday morning at 10 a.m. (EDT), senior fellow Dan Mitchell will be talking about tax policy on a panel from the recent Steamboat Institute meeting in Colorado.

Then, as soon as that panel is over, switch to Book TV on C-SPAN2 to see the Cato Book Forum on “The Age of Reagan,” featuring author Steven Hayward and Cato’s William Niskanen, who served for four years on Reagan’s Council of Economic Advisers. If you miss the 11:15 showing, you’ll have another chance at 3 p.m. Sunday.

And if you missed my “Freedom in Crisis” speech on C-SPAN last weekend, you can watch it at your leisure on or


What Is ‘Unreasonable’ Compensation? And Who Gets to Decide?

As could be expected, the effects of the financial crisis — and people’s reaction thereto — are starting to make their way to the least political branch of government, the judiciary.  The Supreme Court this term will be hearing several cases that could have serious repercussions on our economic recovery, one of which led us to file an amicus brief.  Here’s the situation:

The Investment Company Act of 1940 places on investment advisers a fiduciary duty with respect to the compensation they receive for the services they provide their clients. In the case of Jones v. Harris Associates, shareholders in various mutual funds contend that their adviser fees were excessive and violated the ICA. The Seventh Circuit, the federal appellate court based in Chicago, affirmed the judgment of the district court that the fees were not excessive but also expressly disapproved of the  methodology for evaluating such claims used by the Second Circuit (based in New York). Judge Frank Easterbrook’s opinion explains that the ICA creates a fiduciary duty but does not act as a rate regulator, and that judicial price-setting does not accompany fiduciary duties. Judge Richard Posner, writing for five judges, dissented from the denial of an en banc rehearing. The Supreme Court agreed to review the case to settle the circuit split.

Our brief supports the investment adviser and makes three arguments:

  1. All persons have a fundamental human right to whatever compensation their contracting partners freely and honestly choose to pay them.
  2. Courts have no power to second-guess the reasonableness of any salary or compensation agreement honestly and freely signed by both contracting parties.
  3. The ICA’s fiduciary duty requires only fair dealing, not any particular outcome.

Thanks to Cato adjunct scholar Tim Sandefur for spearheading this effort, and to Cato legal associate Matthew Aichele for helping with much of the attendant busywork.

Some Good Spending For a Change

Cato analysts regularly identify areas where the government is either wasting money or spending money on unconstitutional or inappropriate matters. There are a few areas, however, where the state does not spend money where it ought to. 

A case in point is where the state has mistakenly locked up an innocent person.  Believe it or not, in some jurisdictions no compensation is offered to the victims.  Zero! 

The Associated Press has a story today about a new Texas law that will pay about $80,000 in compensation to victims for each year they were wrongly incarcerated.  Other states should follow suit.  Inaction is inexcusable. 

(H/T:  Grits for Breakfast)

Foreign Aid Spent Domestically to Promote Foreign Aid

A new study by the International Policy Network in London documents how the United Kingdom’s foreign aid agency is spending money, much of it domestically, on NGOs to fund pro-aid lobbying and the promotion of political ideology.

Millions of pounds have gone to UK trade unions to enable teachers to “become global agents of change” and for other union members to celebrate “International Women’s Day,” for example. In one case, the UK’s Department for International Development created an NGO — Connections for Development — to provide a forum for minorities to discuss international development. The aid agency is the only donor to that  “NGO” and has spent £600,000 on it.

Much of the funding goes on behind closed doors without the benefit of an open tendering system or the possibility of new applications, thus creating a closed circle that includes an increasingly elite group of supposedly independent NGOs.

Whether or not you favor foreign aid, it is thoroughly undemocratic to spend tax dollars lobbying for a particular government program, spending the money in non-transparent ways, and creating the impression of independent views that support such funding. Certainly, such a practice is inimical to the principles of a free society. And it surely reduces accountability. But that’s a problem that plagues all foreign aid programs whether the money is spent domestically or internationally — a problem that has not been solved and is widely recognized by aid critics and supporters alike. All the more reason to doubt the wild claims of those who would massively increase foreign aid. 

Aid is indeed encumbered, among other things, by the problem of no accountability for end results, so more aid is unlikely to work better. But rewarding an unaccountable system of aid delivery with dramatic increases in funds will only make the problem of accountability worse.