July 9, 2012 3:02PM

Dishonest by Definition: Barclays and LIBOR

“We are therefore being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators.” — Barclays staff responsible for LIBOR submission, email December 4, 2007.

By now you’ve undoubtedly heard about Barclays’ manipulation of its submissions to the calculation of the London Interbank Offer Rates (LIBOR), or rather rates. The Barclays employee quoted above obviously understood the ramifications of the bank’s actions on the banks, unfortunately what he missed was something more important, the extent to which such actions would undermine the public’s support for both markets and finance, two key ingredients for a wealthy society. This I fear will be the more long‐​lasting impact of the LIBOR scandal and those of us who support free‐​market should be among the loudest condemning Barclays’ behavior.

It is not that I believe Barclays (or banks in general) is any more dishonest than say government politicians and bureaucrats, because in fact I believe bankers to generally be more honest than your typical politician (a low standard I know), but because banking is a business fundamentally built on trust. As we learned so painfully from the financial crisis, all the credit scores and data in the world does not guarantee that someone will honor the contract they’ve signed their name to. One of my greatest concerns is this loss of trust among market participants that makes any society function. The truth is that rules, courts and regulations are always going to be costly ways to monitor society. Trust is one of the great economizers of transactions costs. When we lose it on a broad scale, society is immensely poorer.

Of course trust alone is often insufficient. Incentives should be aligned so as to reduce misbehavior. As it relates to LIBOR, my first suggestion would be to move away from survey based borrowing measures, like LIBOR, and instead rely on market measures, based upon actual transactions, which are less subject to manipulation. Perhaps surprisingly, market measures are likely to be more volatile than surveys (compare the daily LIBOR and federal funds rates for instance), but such volatility would be a more honest assessment of market conditions. In fact one of the ironies, at least to me, is that looking at the various manipulations presented by the FSA, it isn’t clear, pre‐​crisis, that Barclays was even able to move the market with its false submissions. Of course it isn’t the result here that matters, but the intent. And if our intent is to have a freer and wealthier society, then those who abuse our trust should be held to account.

July 9, 2012 1:40PM

The Case of the Missing Wiretaps: Is Congress Getting Bad Information?

This morning, I wrote about an important New York Times report revealing, for the first time ever, the astonishing scale of government surveillance of cell phone users. In response to queries from Rep. Ed Markey (D‑Mass.), most of the nation’s major cell providers revealed the number of government requests they process each year. The total—covering everything from traditional wiretaps to location tracking orders, “pen registers,” and subpoenas for basic subscriber records—came to an astonishing 1.3 million requests. (Incomplete records mean that number is almost certainly low, and one major carrier, T‑Mobile, refused to provide Congress with specific numbers.)

I’m currently poring over the individual carrier reports for more details, but one figure in the response from Sprint— which volunteered a more specific breakdown of the specific types of requests they received—jumped out at me immediately (emphasis added):

Over the past five years, Sprint has received approximately 52,029 court orders for wiretaps; 77,519 court orders for the installation of a pen register/​trap and trace device; and 196,434 court orders for location information. […] Over the same time frame Sprint received subpoenas from law enforcement agencies requesting basic subscriber information. Each subpoena typically requested subscriber information on multiple subscribers and last year alone we estimate that Sprint received approximately 500,000 subpoenas from law enforcement.

Certainly a report of 52,029 wiretaps over five years—and that just from the third largest carrier in the country—is remarkable in and of itself. But it’s also more than double the number of all wiretaps counted in annual reports required by federal law. The Administrative Office of the U.S. Courts keeps track of the number of wiretaps authorized each year for criminal investigations. The Justice Department files an annual report to Congress on individual warrants issued by the Foreign Intelligence Surveillance Court for intelligence investigations. (If you don’t feel like wading through, The Electronic Privacy Information Center has charts and graphs that should make it clear.) The total number of all wiretaps counted in the official reports over the five year period 2007–2011 comes to 24,270. I’ve made a table breaking it down year by year:


YEAR TITLE III (Criminal) Wiretap Orders FISA (Intelligence) Wiretap Orders
2011 2,732 1,745
2010 3,795 1,579
2009 3,043 1,320
2008 2,631 2,083
2007 2,927 2,370
TOTAL 15,173 9,097

The obvious question: How is one cell phone carrier—and not the largest by a longshot—reporting 27,759 more wiretap orders than the official numbers acknowledge for all carriers? Possibly Sprint is using the term “wiretap” a little loosely to include warrants and other legal orders requiring disclosure of the contents of stored communications—including texts, voice mail, and e‑mail. Those wouldn’t necessarily be covered in the tally of Title III “wiretap” orders under the stricter legal definition. But it’s hard to believe that alone could account for such a massive gap—especially when it’s clear Sprint is counting the dizzying number of pen/​trap and location tracking demands separately.

So what’s going on here? What explains the discrepancy? The official reports generated pursuant to federal law are the only information the public gets about the scale of government wiretapping. I’ve already explained why those figures aren’t terribly useful in 2012, given how many other kinds of intrusive electronic surveillance tools are now available. Now it’s not clear we can trust the official numbers even when it comes to wiretaps. The disconnect between the official figures and what’s suggested by Sprint’s response is profound—Congress has a responsibility to keep probing until we understand why.

July 9, 2012 12:04PM

Libya: A Mixed Bag

Libyans voted for a new parliament over the weekend. President Barack Obama called the elections “another milestone on their extraordinary transition to democracy.” Political and regional fault lines, though, are derailing that transition.

Libya remains divided between its oil‐​rich East and its politically dominant West. Even though Western rebels ended up capturing Tripoli, it was Eastern rebels who had fought most of the civil war against Qaddafi’s regime. Qaddafi marginalized the East for decades. New election laws have reinvigorated that sense of political alienation.

The Associated Press reports, “The laws allocate the east less than a third of the parliamentary seats, with the rest going to the western region that includes Tripoli and the sparsely‐​settled desert south.” [Emphasis added] Particularly noteworthy is that the election laws were issued by Libya’s National Transitional Council, previously chaired by Qaddafi’s former economics minster, Mahmoud Jabril.

Backed by their own council and army, some rebel commanders and tribal leaders have teamed up and declared self‐​rule. To pressure a cancellation of this weekend’s vote, armed militias and former rebels calling for semi‐​autonomy for the East attacked election offices in Benghazi and in Ajdabiya, and captured oil refineries in Ras Lanouf, Brega, and Sidr.

Last month, Dirk Vandewalle, who has lived and worked in Libya for almost fifteen years and just recently returned from Libya as a Senior Political Advisor to the Carter Center’s Election Observation Mission in Libya, spoke at Cato on what Libya’s long‐​simmering East/​West division portends for its transition to democracy. Authorities, he finds, have thus far proved incapable of controlling militias who seek greater autonomy.

As a former rebel commander in the East put it: “We don’t want Tripoli to rule all of Libya.” The crux of Libya’s challenges, which Vandewalle was careful to differentiate, is state-building—the institutions that make a country governable—and nation-building—national consensus to govern once institutions are in place. These grievances and divisions are compounded by competing visions offered by ultra‐​conservative Salafists and jihadists inspired by al Qaeda. Formal elections may give a voice to many in Libya, but their hardest days may still lie ahead.

Cross‐​posted from the Skeptics at theNational Interest.

July 9, 2012 11:25AM

Government Surveillance of Cell Users: 1.3 Million Annual Requests and Rising

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Last week, I wrote that the annual report on government wiretaps has become increasingly misleading and irrelevant, as new technologies have granted investigators a wide array of powerful and intrusive electronic surveillance tools that don't meet the legal definition of a "wiretap"—or require police to meet the same strict standards of proof before they can be used. Today, The New York Times provides a dramatic and shocking illustration of the point, with a story revealing that cell phone companies report receiving a mind-boggling 1.3 million government requests for information about their customers in 2011, an estimate that almost certainly understates the true number. (Rep. Ed Markey has now posted these reports from the carriers online.) Here's the Times' Eric Lichtblau:

In the first public accounting of its kind, cellphone carriers reported that they responded to a startling 1.3 million demands for subscriber information last year from law enforcement agencies seeking text messages, caller locations and other information in the course of investigations.

The cellphone carriers’ reports, which come in response to a Congressional inquiry, document an explosion in cellphone surveillance in the last five years, with the companies turning over records thousands of times a day in response to police emergencies, court orders, law enforcement subpoenas and other requests. [...]

AT&T alone now responds to an average of more than 700 requests a day, with about 230 of them regarded as emergencies that do not require the normal court orders and subpoena. That is roughly triple the number it fielded in 2007, the company said. Law enforcement requests of all kinds have been rising among the other carriers as well, with annual increases of between 12 percent and 16 percent in the last five years. Sprint, which did not break down its figures in as much detail as other carriers, led all companies last year in reporting what amounted to at least 1,500 data requests on average a day.

Incredibly, Lichtblau notes, these are probably lowball numbers, because of incomplete record keeping: The government doesn't generally tabulate or report this sort of information, and but for a novel request from Congress a few months ago, the public would normally have no way of getting the numbers from the companies. Moreover, a single "request" may in some cases reveal information about hundreds or thousands of innocent customers, thanks to the growing popularity of so-called "tower dumps"—which police use to demand a list of every mobile user who was within range of a particular tower at a given date and time. Nor does it cover requests to Internet providers and online companies: Google alone, remember, reported fielding 12,271 law enforcement requests last year.

A big part of what's driving this explosive growth is the realization that cell phones can now be used as highly precise tracking devices—and even provide a substantial amount of historical information about a suspect's location. That's compounded by ever-falling data storage costs, which have made it common for cell providers to hang on to subscriber information for months, or even years. Phones have also been transformed over the past decade from simple voice calling devices to full-fledged computers. Many people—youths and ethnic minorities disproportionately—now primarily access the Internet via smartphone, which means mobile carriers will often be able to provide data necessary to track a user's Web or e-mail habits. A few carriers even retain the contents of text message after they've been transmitted—though there's no obvious legitimate business reason to do so—which would make them available as "stored communications" and eliminate the need for a full-blown wiretap order.

There's also a potential feedback loop in play: As several carriers note, thousands of requests per day is a fair amount of paperwork to handle, which has motivated some carriers to look for more efficient and automated ways of handling law enforcement requests. We know that Sprint, for example, has developed an interface for law enforcement called "LSite," which allows requests to be submitted electronically and turned around extremely fast, as one executive explained at a closed-door 2009 surveillance conference:

We have actually our LSite [Application Programming Interface (API)] is, there is no agreement that you have to sign. We give it to every single law enforcement manufacturer, the vendors, the law enforcement collection system vendors, we also give it to our CALEA vendors, and we've given it to the FBI, we've given it to NYPD, to the Drug Enforcement Agency. We have a pilot program with them, where they have a subpoena generation system in-house where their agents actually sit down and enter case data, it gets approved by the head guy at the office, and then from there, it gets electronically sent to Sprint, and we get it ... So, the DEA is using this, they're sending a lot and the turn-around time is 12-24 hours. So we see a lot of uses there.

That may be one reason that Sprint—with only about half as many subscribers as Verizon or AT&T—leads the pack in number of requests handled. A glut of requests leads to more plug-and-play surveillance solutions, which leads to still more requests.

It's absurd that only now are we learning these astonishing figures for the first time—and no sane reason Congress should not provide for regular, annual reporting of aggregate data for the kinds of requests that we can now clearly see constitute the overwhelming majority of 21st century government surveillance. That first, common-sense step would be easy. Then we'd at least be in a position to start asking harder questions, like: How can we guarantee effective oversight over such an incredible quantity of government monitoring? Is the cost to privacy of such routine data collection justified by measurable improvements in law enforcement outcomes? With 1.3 million requests each year, isn't it high time we updated and clarified the Electronic Communications Privacy Act? With 1.3 million requests each year—and apparently growing fast—these are questions we can't afford to put off any longer.

July 9, 2012 10:46AM

This Month’s Cato Unbound: Liberty, Commerce, and Literature

This month’s Cato Unbound is on the theme of Liberty, Commerce, and Literature. We all know that the western canon is often extraordinarily critical of the free market, sometimes without its authors appearing to understand very much about economics at all. But why should this be? Literature as we know it owes much to commercial society. Before the early modern era, one could almost never make a living as a writer. People read many fewer books — if they could read at all — and serious literature frequently belonged to the upper classes alone. It would be odd if literature were so unaware of the institutions that made it so popular in today’s commercial, market‐​driven world.

In her lead essay for Cato Unbound, literary scholar Sarah Skwire asks us to revisit the western canon’s portrayal of business and commerce. Mainstream scholars and libertarians both seem to agree that the “great books” portray business in a uniformly negative light, but Skwire finds the evidence for this contention to be thin. Good literature is not mere propaganda — for either side — and readings that collapse the great books into anti‐​capitalist polemic are likely to be missing a lot.

In his response essay, Robert A. Heinlein biographer William H. Patterson, Jr. reflects on the origins of liberty, commerce, and literature as we have come to understand them today. He finds that all three have a common root in the European Enlightenment. History, however, often comes in cycles or waves, and the fortunes of all three have risen and fallen over time. He expresses the hope that each of these “at‐​risk children of the Enlightenment” will flourish in the coming decades.

Poet and literary theorist Frederick Turner suggests a structural explanation for why scholars have been so eager to supply anti‐​commercial readings to the western canon — which is not, he adds, really that anti‐​commercial at all: Literary criticism began among gentlemen; it then passed to the anti‐​commercial meritocracy of the universities. Both built up their own legitimacy by arguing against that of mere businessmen. But alternate readings exist, and Turner even offers a startlingly pro‐​commerical reading of The Merchant of Venice.

Libertarian activist and science fiction scholar Amy H. Sturgis adds that much of the apparent anti‐​market bias in literature stems from elitism. By excluding genre fiction, mainstream literary critics also exclude many thoughtful and provocative treatments of markets and their place in political economy. Often the excluded works are highly sympathetic to libertarian ideals. Fiction shapes public opinion, including public opinion about markets, and popular fiction by definition reaches more than any other kind.

As always, our panelists will continue to discuss and debate through the end of the month. We also welcome your letters, which we may publish at our option. Send them to JKuznicki [at] cato [dot] org.

July 9, 2012 9:55AM

If Tax Policy Is any Indication, Birthers Should Accuse Obama of Being Born in Denmark

I'm not a big fan of government conspiracy theories, largely because the people in Washington are too bloody incompetent to do anything effectively. Heck, sometimes they can't even waste money properly even though they have lots of practice.

But it recently crossed my mind that maybe President Obama was born in Denmark. Not in a serious way, of course, but you'll understand my thought process when you read this passage from a report by the government-appointed Danish Economic Council. It doesn't mention the Laffer Curve, but the report openly states that an increase in the top tax rate would lose revenue because of changes in taxpayer behavior.

...increased taxation on high income earners in Denmark at best is revenue neutral, and may even reduce total tax revenue. This result applies whether one considers the top 10, the top 5 or the top 1 per cent income group. ...Using the base estimate of the elasticity of taxable labour income of 0.2, the conclusion is thus that the existing Danish tax system implies an effective tax rate on high income earners that is above - though close to - the tax rate that generates the highest tax revenue. ...As an example, the revenue effect of an increase in the marginal tax rate by 6 percentage points for high-income earners is calculated. Using the base estimate of the behavioural response to taxation, this leads to a revenue loss of about ½ billion DKK. ...Overall, the scope for acquiring extra tax revenue from high income earners in Denmark is very limited.

Yet there are some politicians in Denmark who want to raise tax rates, even though the damage to the economy will be so significant that the government loses revenue!

If you're thinking this sounds familiar, you probably remember President Obama's infamous statement during the 2008 campaign that he wanted to raise the capital gains tax rate for reasons of "fairness" regardless of whether tax revenues decreased (if you think I'm somehow exaggerating or distorting his words, just go to the 4:20 mark of this video).

By the way, the Danish study probably understates how much revenue the government would lose. Their base estimate about the elasticity of taxable labor income (economist jargon for how sensitive labor income is to changes in tax rates) is much lower than Alan Reynolds reported in his recent Wall Street Journal column.

Rich people, unlike the rest of us, have tremendous ability to change the timing, composition, and level of their income, which is a big reason why upper-income taxpayers paid much more to the IRS in the 1980s after President Reagan slashed the top tax rate from 70 percent to 28 percent.

I'm constantly amazed - in a bad way - that politicians and bureaucrats have been so successful in resisting the insights of the Laffer Curve. The U.S. Treasury Department, for instance, is to the left of the Danish Economic Council and basically assumes that tax policy has no impact on economic performance. The same can be said about the Joint Committee on Taxation on Capitol Hill.

This has to be a case of leftist ideology trumping reality, because the evidence for the Laffer Curve is quite powerful - some of it even being produced by international bureaucracies.

None of this is to suggest that "all tax cuts pay for themselves." That only happens in unusual cases where a group of taxpayers - such as wealthy entrepreneurs and investors - have considerable flexibility in their economic affairs.

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In most cases, the government will collect more revenue when tax rates increase. This is because the impact of the change in the tax rate is larger than the impact of the change in taxable income.

But the real question is whether it is ever a good idea to reduce private economic output in order to give politicians more money to spend. To sensible people, that's the most important insight of the Laffer Curve.

P.S. While this discussion has focused on the foolishness of setting tax rates so high that the government loses revenue, this does not mean politicians should seek the revenue-maximizing tax rate. The ideal point on the Laffer Curve is the growth-maximizing tax rate.

July 9, 2012 9:17AM

How Crony Capitalism Works

Tad DeHaven summed up the congressional report on Countrywide Financial's VIP loan for members of Congress and other Beltway players.

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But I was struck by this point in a Bloomberg report, about Countrywide CEO Angelo Mozilo's close relationship with Fannie Mae chief executive Jim Johnson, former top aide to Vice President Walter Mondale and chairman of both the Brookings Institution and the Kennedy Center. Instructing his staff to give a discount mortgage loan to Johnson, Mozilo wrote in an email:

Jim Johnson continues to be a source of many loans for our company and this is just a small token of appreciation for the business that he sends to us.

Note that Jim Johnson didn't favor Countrywide with his personal business. He didn't invest in Countrywide. He didn't sell houses and send the buyers to Countrywide. No, he sent loans backed by taxpayers' money to Countrywide, and was rewarded with personal benefits. That's crony capitalism.

This was kind of a stunning detail:

Jim Johnson, chief executive officer of Fannie Mae from 1991 to 1998, earned $100 million during his time at the company. Nonetheless, Countrywide employees expressed concern about giving him a loan because he didn’t pay his bills regularly and had a low credit score, according to e-mails published in Issa’s report.

Given his credit report, Countrywide underwriters didn't want to sign off on a loan to Johnson. But Mozilo, who knew the business Countrywide was really in, told them not only to approve the loan but to give Johnson a discounted rate.

And that, kiddies, is how being involved with a highly respected politician can get you a job in Washington that pays $100 million, backed by the full faith and credit of the American taxpayers, as well as extra perks from other companies tied into the crony corporatist state.

More on Johnson, Fannie, and Mozilo here.