Archives: 04/2010

Mismanaged States Blame Messenger

Mismanaged municipal and state governments around the country are finding a new target to blame for their own self-inflicted wounds:  the growing market for credit defaults swaps (CDS) on municipal debt.

A municipal credit default swap would be a derivative that pays off in the event of default by a specific state or a default on one of said state’s debt instruments.

As reported in today’s Wall Street Journal, a handful of state treasurers are demanding information from Wall Street firms on who exactly is “betting against” these states.

It should come as no surprise, except to state officials, that the major buyers of these CDS are the very bondholders investing in their state.  In fact the availability of municipal CDS will likely increase the demand for municipal debt.  Just speaking for myself, there’s no way I’d buy debt issued by California if I couldn’t at least hedge some of that credit risk

Of course states complain that “betting on a default creates a perception of risk,” as if there wasn’t already a widespread perception of risk to investing in municipal debt of certain states.  The states also express concern that adverse movements in the price of CDS could impact their credit ratings, and hence their cost of borrowing.  Given the slow speed of which credit ratings moved on sub-prime mortgage debt, I am not sure that cities and states have much to worry about rating agencies being “too aggressive”.  If these states had even a small understanding of how markets work, they’d understand the rating is just one element that goes into pricing.  Witness the large spread in yields of similarly rated debt.  No rating, or credit default swap price for that matter, is going to fool investors into believing that many American local and state governments are just anything other than mini versions of Greece.

Downsizing on Glenn Beck

Fox News’ Glenn Beck Show recently spent a week featuring Chris Edwards and the Downsizing Government website.

The following video provides highlights of Glenn’s discussions with Chris on how we can downsize the federal government:

We applaud Glenn’s efforts to shine a spotlight on the urgent need to rein in the federal government before massive spending, deficits, and debt bankrupt the country.

Advice to Tea Partiers

The Tea Party movement may endure, but its endurance will be a testament to its ability to understand that cutting government means having a long-term focus, says John Samples, author of the Cato book The Struggle to Limit Government.  In a new video, Samples outlines an assessment of what Tea Partiers should do if they want to sustain an effort to cut government.

He offers five pieces of advice for members of the Tea Party movement:

1. Republicans aren’t always your friends.

2. Some tea partiers like big government.

3. Democrats aren’t always your enemies.

4. Smaller government demands restraint abroad.

5. Leave social issues to the states.

Misguided Fears of Crime Fuel Arizona Immigration Law

Arizona’s harsh new law against illegal immigration is being justified in part as a measure to combat crime. The murder of an Arizona rancher in March, allegedly by somebody in the country without documentation, galvanized support for the bill.

The death of the rancher was a tragedy, and drug-related violence along the border is a real problem, but it is a smear to blame low-skilled immigrant workers from Latin America for creating a crime problem in Arizona.

The crime rate in Arizona in 2008 was the lowest it has been in four decades. In the past decade, as the number of illegal immigrants in the state grew rapidly, the violent crime rate dropped by 23 percent, the property crime rate by 28 percent. (You can check out the DoJ figures here.)

Census data show that immigrants are actually less likely to commit crimes than their native-born counterparts, as I unpacked a few months ago in an article for Commentary magazine titled, “Higher Immigration, Lower Crime.”

The Case for Auditing the Fed

Recently, the Federal Reserve has significantly altered the procedures and goals that it had followed for decades. Rep. Ron Paul (R-TX) has introduced a bill calling for an audit of the Fed.

Remarkably, there is significant opposition to such oversight, and the political prospects for undertaking such an audit are relatively bleak. In a new paper, Cato scholar Arnold Kling examines the processes and outcomes on which an audit should focus, and looks at opposition to the audit:

We should document why the Fed took each step, what the expected results were, and whether those results were achieved. …The profit or loss of the Fed’s investments would provide a very helpful indicator of whether the Fed’s actions served the economy as a whole or merely transferred wealth from ordinary taxpayers to bank shareholders.

Read the whole thing.

Obama for Entrepreneurs, but Not American Ones

Entrepreneur.org ran an article today that begins:

This afternoon, President Obama addressed the Presidential Summit on Entrepreneurship organized by the Department of State and the Department of Commerce … designed to promote entrepreneurship in Africa, the Middle East, and South, Central and Southeast Asia.

Meanwhile, on the home front, Obama signed into law a health bill, which includes a massive new mandate on businesses to file billions more tax returns for their routine business dealings. Obama supports a financial regulatory bill that could kill the angel investment industry, and thus end angel support of start-up businesses. Obama supports raising the top two income tax rates, even though 44 percent of the income hit will be small business income. And Obama supports raising the capital gains tax, even though a lower gains rate has been crucial to the success of high-tech entrepreneurship in Silicon Valley elsewhere.

The Obama administration and today’s Democrats are driven by regulatory zeal, lust for higher revenues, and apparent ignorance of the workings of the market economy. I don’t think they planned it this way, but their anti-market actions are accumulating cut by cut, threatening major long-term damage to America’s standard of living.

Chilean Government Now Wants Higher Taxes on Junk Food

Following Rahm Emmanuel’s advice of not letting a crisis go to waste, the new center-right government in Chile now wants to extend the permanent rise in tobacco taxes—supposedly adopted as a measure to finance post-earthquake reconstruction—to foods with high concentrations of salt and trans fat [in Spanish]. Jaime Malañich, the Health Minister, said that the earthquake is opening up an opportunity to implement a measure that would increase the government’s revenue and fight obesity and that has been considered for many years.

My colleague Ian Vásquez wrote a few days ago that, by announcing unnecessary tax increases as post-earthquake reconstruction measures, the recently-inaugurated administration of Sebastian Piñera was quick to disappoint those who expected a bold move toward strengthening free market policies that have made Chile a Latin American success story. If these announcements are any guide, expect more disappointments.