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May 29, 2011 2:12PM

How Fannie and Fed Caused the Crash

Economist John B. Taylor reviews Reckless Endangerment by Gretchen Morgenson and Joshua Rosner:

The book focuses on two agencies of government, Fannie Mae and the Federal Reserve. The mutual support system is better explained and documented in the case of Fannie, the government‐​sponsored enterprise that supported the home mortgage market by buying mortgages and packaging them into marketable securities which it then guaranteed and sold to investors. The federal government supported Fannie Mae — and the other large government‐​sponsored enterprise, Freddie Mac — by implicitly backing up those guarantees and by providing favorable regulatory treatment and protection from competition. These benefits enabled Fannie to rake in excess profits — $2 billion in excess, according to a 1995 study by the Congressional Budget Office.


The book then gives examples where Fannie’s executives — Jim Johnson, CEO from 1991 to 1998 [and also top aide to Vice President Walter Mondale, campaign manager for Mondale, head of vice presidential selection for both John F. Kerry and Barack Obama, and chairman of both the Kennedy Center and the Brookings Institution], is singled out more than anyone else — used the excess profits to support government officials in a variety of ways with plenty left over for large bonuses: They got jobs for friends and relatives of elected officials, including Rep. Barney Frank, who is tagged as “a perpetual protector of Fannie,” and they set up partnership offices around the country which provided more jobs. They financed publications in which writers argued that Fannie’s role in promoting homeownership justified federal support. They commissioned work by famous economists, such as Nobel Prize‐​winner Joseph Stiglitz, which argued that Fannie was not a serious risk to the taxpayer, countering “critics who argued that both Fannie and Freddie posed significant risks to the taxpayer.” They made campaign contributions and charitable donations to co‐​opt groups like the community action organization ACORN, which “had been agitating for tighter regulations on Fannie Mae.” They persuaded executive branch officials — such as then Deputy Treasury Secretary Larry Summers — to ask their staffs to rewrite reports critical of Fannie. In the meantime, Countrywide, the mortgage firm led by Angelo Mozilo, partnered with Fannie in originating many of the mortgages Fannie packaged (26 percent in 2004) and gave “sweetheart” loans to politicians with power to affect Fannie, such as Sen. Chris Dodd of Connecticut. The authors write that “Countrywide and Fannie Mae were inextricably bound.”

But don’t ignore the role of the Fed:

Early on the authors take on the Boston Fed, and in particular its research director Alicia Munnell, for using a study documenting racial discrimination in mortgage lending to justify the relaxation of credit standards, even though the study’s findings were found to be flawed by other researchers. And they criticize the very low interest rate set by the Fed when Alan Greenspan was chairman and Ben Bernanke was a Fed governor, saying it “contributed mightily to the mortgage lending craze,” adding that “with the Fed on a rate‐​cutting rampage, demand for adjustable‐​rate mortgages with relatively low initial interest costs had become incendiary.”

If you watched the HBO movie Too Big to Fail, you wouldn’t get much sense that government actions — easy money, the homeownership mania, HUD and Fannie’s push to lend to non‐​creditworthy borrowers — played a major role in the housing bubble and subsequent financial crisis. Sounds like this book would make good supplemental reading for viewers, along with Johan Norberg’s Financial Fiasco.

May 27, 2011 4:39PM

Obama as Reluctant Deregulator: Four Months Later

When President Obama, following his midterm “shellacking” at the polls, announced his belated conversion to the cause of regulatory relief, I was skeptical. I noted that, despite the reputation of OIRA chief Cass Sunstein as a brilliant scholar with an openness to cost‐​benefit analysis rare on the Left, the first two years of the Obama administration had been marked by a tremendous ramping up of regulatory burdens on the economy, both in areas of new legislation (ObamaCare, Dodd‐​Frank) and in new agency rulemakings gearing up from the “ultras” — ardently pro‐​regulatory appointees like Margaret Hamburg at FDA, Lisa Jackson at EPA, and David Michaels at OSHA. I also observed that in boasting of its deregulatory accomplishments, the administration chose an exceedingly minor example (saccharin’s reclassification as not being a hazardous waste) in which no one important seemed to have been pushing on the opposite side. That suggested that the Obama White House might lack the stomach to press deregulation when doing so might actually offend pro‐​regulation constituencies.


Yesterday the administration announced the results of its comprehensive review in which more than two dozen agencies looked at existing regulations to identify areas where burdens could be reduced [WaPo, AEI Enterprise, Wayne Crews/​CEI]. As Cary Coglianese notes at the Penn Program on Regulation’s RegBlog,

[M]any of the initial rules agencies have proposed to put under the microscope seem underwhelming. Frequently they are what might be considered “paperwork” rules, with agencies hoping to find ways to streamline reporting and make more information available online. The Treasury Department, for example, plans to review an Internal Revenue Service regulation so as to correct instructions about where to file for a tax refund or credit. The Commerce Department’s plan identifies, among other things, the rule governing the “application number” and “filing date” for patents.

There’s nothing wrong with streamlining paperwork, of course, but it’s a cause that even “ultras” can get behind. Indeed, one of the largest line‐​item claims of savings comes from an OSHA plan “to finalize a proposed rule that would harmonize U.S. hazard classifications and labels with those used by other nations, which is expected to result in an annualized $585 million in estimated savings for employers.” As Coglianese notes, “few of the rules listed in the plans as targets for review are the salient regulatory issues of the day.” Tellingly, one of the most significant retreats on a regulatory issue in recent weeks — the EPA’s decision to pull back expensive new regulations on boiler emissions — is not boasted about, perhaps because the retreat is intended to be only temporary.


I do note with a ripple of “great minds think alike” satisfaction that Sunstein did advance, as one of his central examples of a new administration accomplishment, the EPA’s very belated recognition that spills of milk on dairy farms are not “oil spills” requiring elaborate containment and remediation measures. I had been writing about that one in this space for a while, and had specifically cited it in January as an example of the sort of craziness the Obamanauts should be trying to address if they want to be taken seriously on the issue of deregulation.

May 27, 2011 3:54PM

Raw Onions Served As Snack in D.C. Schools

Fifty‐​three elementary schools in the District of Columbia take part in the federal government’s Fresh Fruit and Vegetable Program, a recently ramped‐​up federal initiative that dishes out millions to local schools to get them to use raw produce as snacks. According to the Washington Examiner, it was by inadvertence that students at Turner Elementary School were given raw green onions (scallions) as a snack the other day when they were supposed to be given zucchini slices instead. Children were observed making “yuck” faces before throwing the offerings in the trash or, in some cases, resourcefully tucking them into their bags to take home for their parents to cook.


Are we sure this is the best way to keep students from sneaking Doritos into the building?


On a less tear‐​inducing note, the school board in the town of Darien, Conn. has unanimously voted to pull out of the federal school lunch program. Finance director Richard Huot cited current and forthcoming federal mandates that, among other things, ban chocolate milk, discourage reliance on refillable sports water bottles, and require schools to push salads in preference to longtime favorites such as fruit. The regulations also drive up labor costs, Huot said, and make the lunch program more complex to run generally. “The children in this town are savvy consumers,” Huot said. “You put a lousy product on the table; they are not going to buy it.”


As a famously affluent suburb, Darien can afford to turn down the bribes — sorry, subsidies — that come with doing it Washington’s way. Isn’t it a shame so many other communities feel they have no real financial choice but to go along?

May 27, 2011 3:50PM

“If He Approve, He Shall Sign It…”

The Patriot Act extension passed by Congress this week did not become the law of the land. It is void and without effect.

So may argue some future defendant whose conviction rests on evidence gotten under Patriot Act powers during the extended period Congress sought to establish in the bill it passed this week.

President Obama is at a meeting in Europe, so he had the bill signed by auto-pen. Representative Tom Graves (R-GA) has written a letter inquiring of the president whether he was presented the bill and truly intended to sign it.

Article I, Section 7 of the Constitution says:

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it...

Is presentment and signing a quaint formality? Something to put aside in light of modern technology and time-constraints? Or is it an important step in the law-making process, to be executed quite literally without deviation from past practice?

The answer lies mostly in consideration of what a signature is, and what it does. I looked into signatures, among many other identifiers and security techniques in my book, Identity Crisis.

Wikipedia has a definition of "signature" that's good enough: "A signature is a handwritten (and sometimes stylized) depiction of someone's name, nickname, or even a simple 'X' that a person writes on documents as a proof of identity and intent." Key words: identity and intent.

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May 27, 2011 1:25PM

Atlas Bugged: Why the “Secret Law” of the Patriot Act Is Probably About Location Tracking

Barack Obama's AutoPen has signed another four-year extension of three Patriot Act powers, but one silver lining of this week's lopsided battle over the law is that mainstream papers like The New York Times have finally started to take note of the growing number of senators who have raised an alarm over a "secret interpretation" of Patriot's "business records" authority (aka Section 215). It would appear to be linked to a "sensitive collection program" referenced by a Justice Department official at hearings during the previous reauthorization debate—one that would be disrupted if 215 orders were restricted to the records of suspected terrorists, their associates, or their "activities" (e.g., large purchases of chemicals used to make bombs). Naturally, lots of people are starting to wonder just what this program, and the secret interpretation of the law that may be associated with it, are all about.

All we can do is speculate, of course: only a handful of legislators and people with top-secret clearances know for sure. But a few of us who closely monitor national security and surveillance issues have come to the same conclusion: it probably involves some form of cellular phone geolocation tracking, potentially on a large scale. The evidence for this is necessarily circumstantial, but I think it's fairly persuasive when you add it all up.

First, a bit of background. The recent fiery floor speeches from Sens. Wyden and Udall are the first time widespread attention has been drawn to this issue—but it was actually first broached over a year ago, by Sen. Richard Durbin and then-Sen. Russ Feingold, as I point out in my new paper on Patriot surveillance. Back in 2005, language that would have required Section 215 business record orders to pertain to terror suspects, or their associates, or the "activities" of a terror group won the unanimous support of the Senate Judiciary Committee, though was not ultimately included in the final reauthorization bill. Four years later, however, the Justice Department was warning that such a requirement would interfere with that "sensitive collection program." As Durbin complained at the time:

The real reason for resisting this obvious, common-sense modification of Section 215 is unfortunately cloaked in secrecy. Some day that cloak will be lifted, and future generations will ask whether our actions today meet the test of a democratic society: transparency, accountability, and fidelity to the rule of law and our Constitution.

Those are three pretty broad categories of information—and it should raise a few eyebrows to learn that the Justice Department believes it routinely needs to get information outside its scope for counterterror investigations. Currently, any record asserted to be "relevant" to an investigation (a standard so low it's barely a standard) is subject to Section 215, and records falling within those three categories enjoy a "presumption of relevance." That means the judges on the secret Foreign Intelligence Surveillance Court lack discretion to evaluate for themselves whether such records are really relevant to an investigation; they must presume their relevance. With that in mind, consider that the most recent report to Congress on the use of these powers shows a record 96 uses of Section 215 in 2010, up from 22 the previous year. Perhaps most surprisingly though, the FISC saw fit to "modify" (which almost certainly means "narrow the scope of") 42 of those orders. Since the court's discretion is limited with respect to records of suspected terrorists and their associates, it seems probable that those "modifications" involved applications for orders that sweep more broadly. But why would such records be needed? Hold that thought.

Fast forward to this week. We hear Sen. Wyden warning that "When the American people find out how their government has secretly interpreted the Patriot Act, they will be stunned and they will be angry," a warning echoed by Sen. Udall. We know that this surprising and disturbing interpretation concerns one of the three provisions that had been slated for sunset. Lone Wolf remains unused, so that's out, leaving roving wiretaps and Section 215. In the context of remarks by Sens. Feingold and Durbin, and the emphasis recently placed on concerns about Section 215 by Sen. Udall, the business records provision seems like a safe bet. By its explicit terms, that authority is already quite broad: What strained secret interpretation of it could be surprising to both legislators and the general public, but also meet with the approval of the FISC and the Office of Legal Counsel?

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May 27, 2011 11:25AM

Punish Me? I Didn’t Do Anything — and Johnny’s Guilty, Too!

It's hard to pin down what's more frustrating about Michael Petrilli's response to my recent NRO op-ed on national standards: the rhetorical obfuscation about what Fordham and other national-standardizers really want, or the grade-school effort to escape discipline by saying that, hey, some kids are even worse!

Let's start with the source of aggravation that by now must seem very old to regular Cato@Liberty readers, but that  has to be constantly revisited because national standardizers are so darned disciplined about their message: The national-standards drive is absolutely not "state led and voluntary," and by all indications this is totally intentional. Federal arm-twisting hasn't just been the result of "unforced errors," as Petrilli suggests, but is part of a conscious strategy.

There was, of course, Benchmarking for Success: Ensuring Students Receive a World-class Education, the 2008 joint publication of Achieve, Inc., the National Governors Association, and the Council of Chief State School Officers that called for Washington to implement "tiered incentives" to push states to adopt "common core" standards. Once those organizations formed the Common Core State Standards Initiative they reissued that appeal while simultaneously — and laughably — stating that "the federal government has had no role in the development of the common core state standards and will not have a role in their implementation [italics added]."

Soon after formation of the CCSSI, the Obama administration created the "Race to the Top," a $4.35-billion program that in accordance with the CCSSI's request — as opposed to its hollow no-Feds "promise" — went ahead and required states to adopt national standards to be fully competitive for taxpayer dough.

The carnival of convenient contradiction has continued, and Fordham — despite Petrilli's assertion that "nobody is proposing" that "federal funding" be linked "to state adoption of the common core standards and tests" — has been running it. Indeed, just like President Obama's "blueprint" for reauthorizing the Elementary and Secondary Education Act — better known as No Child Left Behind — Fordham's ESEA "Briefing Book" proposes (see page 11) that states either adopt the Common Core or have some other federally sanctioned body certify a state's standards as just as good in order to get federal money. So there would be an "option" for states, but it would be six of one, half-dozen of the other, and the Feds would definitely link taxpayer dough to adoption of Common Core standards and tests.

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May 26, 2011 5:32PM

‘Wait and Hurry Up’ in Debate over Patriot Act

If Senate leaders believed that expiring portions of the Patriot Act constituted an immediate increase in the risk of terrorism, it’s amazing that they waited until now to even nod toward debating the law’s renewal. A few thoughts from Cato Research Fellow Julian Sanchez on the current Patriot Act debate ripped from today’s podcast:

… Democrats have had no interest in pointing out how closely President Obama has followed the playbook written by George (W.) Bush. And of course Republicans are the ones who helped write that playbook, so they don’t have much interest in revisiting it.

On Section 215 of the Patriot Act:

It seems extremely likely from what we know so far that this business records authority has been transformed into a large‐​scale people‐​tracking authority. … It strikes me as extraordinarily subject to abuse. It strikes me as a dangerous power to grant, even in this most vital task.

Listen to the whole thing. And subscribe (iTunes).