Archives: 12/2013

Frank: Nonbank “Designation” Goes Too Far

An interesting op-ed in today’s WSJ echoing my own previous op-eds ( and The WSJ quotes former House Financial Services Chairman Barney Frank as saying that he does not favor designating large asset managers such as BlackRock or Fidelity as “systemically important” and that this was not the intent of his law. Those are pretty strong words from one of the chief architects of Dodd-Frank and all the more remarkable since Frank has seldom acknowledged an aspect of the financial sector he didn’t think could use more regulation.

According to the Journal, Frank noted that “overloading the circuits isn’t a good idea” and said that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank “has enough to do regulating the institutions that are clearly meant to be covered—the large banks.”

Implicit in this this statement, is the idea that the FSOC is somewhat out of its depth when it comes to identifying “systemic risks” in the nonbank financial system. Unsurprising, since most of the Council’s staffers are young political appointees with no financial sector experience. Even more fundamental, as Frank alludes to, is the lack of evidence that the industries being targeted in any way contribute to widespread systemic risk. Frank concentrated on the lack of evidence that asset managers transmit risk through the system, but the same logic can be applied to insurers and hedge funds as well.

Absent a full repeal of the Dodd-Frank, and given the growing bipartisan recognition of the dangers of extending bank-like supervision to the nonbank sector, at the very least, Congress should limit the application of Titles I and II of Dodd-Frank to bank holding companies only.

Cuba: Global Free Trade Champion?

I would like to second Simon Lester’s ambivalent endorsement of the trade agreement reached by WTO members in Bali last week.  Despite cheers from governments and embarrassingly unrealistic claims of economic value, the new WTO agreement on trade facilitation is hardly something for free traders to get super-excited about. 

There was some excitement, however,  when a bit of last-minute diplomatic drama at the talks threatened to derail everything.  Cuba, it turns out, had some genuine demands for actual trade liberalization and indecorously refused to be ignored.  As reported by Inside U.S Trade [$]:

Cuba and three other Latin American countries – Bolivia, Venezuela and Nicaragua – had withheld consensus from the so-called Bali package consisting of a trade facilitation agreement as well as agriculture and development components.

Specifically, Cuba had refused to endorse the package until its demands were met for a provision in the trade facilitation deal that would prevent countries from applying discriminatory measures to goods in transit. This was aimed at counteracting a part of the U.S. trade embargo that prevents ships that engage in trade in Cuban ports from unloading cargo in the U.S. for 180 days thereafter.

After Cuba’s demands on trade facilitation came to the fore as the last outstanding issue on the evening of Dec. 6, WTO Director-General Roberto Azevedo held consultations throughout the night with the U.S. and Cuban delegations until 6 am. At that point, the two sides agreed to compromise language to address Cuba’s demands, according to an informed source.

The compromise language consists of one sentence in the Bali ministerial declaration that appears immediately after a sentence adopting the trade facilitation deal. It states: “In this regard, we affirm that the non-discrimination principle in Article V of the [General Agreement on Tariffs and Trade] 1994 remains valid.”

This “compromise” means that the U.S. takes on no new obligations, and the embargo remains as is.  Cuba wasn’t looking for an end to the embargo with its demands, merely recognition that this one small component of the embargo violates the brand new, U.S.-approved WTO rules. 

It’s difficult to imagine, however, that the process could have worked out any differently.  If there’s one thing that’s clear about the new WTO package at this point, it’s that the deal will not have any meaningful impact on U.S. trade policy.

Something is amiss when the global trading system’s achievements depend on the United States convincing Cuba and Venezuela to stop demanding freer trade.


Budget Deal: A Dangerous Precedent

Republican and Democratic negotiators are expected to agree to a budget deal this week setting spending levels for 2014. The Washington Post says that the deal will amount to “little more than a cease-fire.”

However, the deal being described in media reports would be much worse than a cease-fire for Republicans, at least for fiscally conservative Republicans. That’s because the Budget Control Act of 2011 and related sequester have started bearing fruit and are currently providing substantial discretionary spending control. Yet Republican leaders are apparently planning to throw it away in return for revenue increases and paltry spending trims.

In theory, Republicans have the upper hand in budget talks because current law specifies that discretionary spending will be modestly reduced in 2014 to $967 billion. Republicans always claim that they are for spending restraint, and here they just need to hold firm on current-law budget caps to save serious money over time.

However, the Post story indicates that the GOP may agree to scrap the budget cap for 2014 and spend up to $1.015 billion in return for a tiny cut to federal pensions and a revenue increase, possibly from auctioning radio spectrum.

That would be a giant cave-in because a precedent will have been set. The next decade of savings from current-law budget caps would be in jeopardy. If Republican leaders up-end the budget caps this year, they will empower big-spending Democrats, liberal Republicans, and appropriators to completely blow up the caps in later years.

A $48 billion cap overrun this year could set the stage for spending hundreds of billions of dollars more over the coming decade. That would be snatching defeat from the jaws of 2011’s modest budget victory.

Trade Talks Are Heating Up

There’s suddenly a lot going on in the trade negotiating world.  Unfortunately, there is not as much free trade involved as one might hope or expect.

Over the weekend, the members of the WTO reached an agreement on several issues, the main one being “trade facilitation”.  This was touted as a big deal because it is the first time the WTO agreed on just about anything in its almost 20 years of existence.  In addition, supporters talked up its potential “$1 trillion” increase in global trade. 

It’s important to understand, however, that this agreement is not an agreement under which all countries will lower tariffs or barriers to trade in services, which is the traditional kind of trade agreement.  My colleague Dan Ikenson wrote about trade facilitation here. Reading through a draft of the agreement, it seems to cover two things.  First, it tries to achieve “good governance” in customs procedures, such as through requiring an appeals process for customs decisions.  And second, it requires governments to speed up the import process where possible, for example by letting frequent traders use expedited procedures. These are all good things, but it is not the same as using trade agreements to rein in protectionism. Also of note is how it accomplishes these things.  Basically, it will be rich country governments paying, through money and training, for improvements to customs procedures in developing countries. Is that the best way to accomplish all this?  I’m not really sure, to be honest, but that’s what they are doing.

Next up is the Trans Pacific Partnership (TPP), an agreement being negotiated by 12 countries in the Pacific region.  Those talks have started up again, with a goal of finishing by the end of the year. (Probably won’t happen, but it’s good to have goals, I guess).  What’s fascinating about these talks is how many non-free trade issues are involved.  Someone just leaked a summary of where the parties stand on all the issues.  What jumps out at me in this document is that about half the issues deal with environmental law or intellectual property!  Not that there is no free trade at all in there, of course.  There is the traditional tariff lowering as well.  But there are so many other things to be ambivalent about.

And finally, next week the Europeans will be in town for another round of negotiations on the Transatlantic Trade and Investment Partnership (TTIP).  These talks are in a much earlier stage than the others.  The big issue being talked about here is what to do about “regulatory trade barriers.” Some on the left fear that this will mean lowering everybody’s regulation to a least common denominator.  Some conservatives and libertarians worry that it will mean more regulation, as regulations are harmonized around higher standards.  In practice, I think it is unlikely to mean either of these things.  I don’t see much of a role for international law, through trade agreements, to make substantive regulatory policy, and I would be surprised if the TTIP does much of this.  But where I think international agreements could help is pushing countries to remove the impact of divergent regulations.  For example, if the U.S. and EU both regulate for auto safety, but do it differently, why can’t both sides sell their cars in the other market as is, based on the assumption that the regulations are functionally equivalent?

So that’s a basic round-up.  There are some modest successes, and some issues causing distractions from actual free trade, but things are moving forward, for better or worse.  (How’s that for a not-so-ringing endorsement?)


Obamacare’s Top 10 Constitutional Violations

Two years ago this week, I published an op-ed called “President Obama’s Top 10 Constitutional Violations.” Although it didn’t go into depth about any particular issue, it struck a chord (note to aspiring pundits: readers and media bookers like lists, particularly at year’s end).

There’s so much material to choose from for an updated piece on which I’m long overdue, but in the meantime the House Judiciary Committee had an important hearing last week on the president’s constitutional duty “to take care that the laws be faithfully executed.” My colleagues Michael Cannon and Nicholas Quinn Rosenkranz testified, as did GW law professor Jonathan Turley (who voted for Obama in 2008 and is not known to be libertarian or conservative), and their devastating testimony is a collective tour de force regarding this administration’s incredible and unconstitutional power grab. (My friend and frequent sparring partner Simon Lazarus of the Constitutional Accountability Center also testified, on the other side, offering a valiant if ultimately insufficient defense.)

Given the state of current affairs, the hearing focused on Obamacare, whose problematic rollout should have come as no surprise to those who follow this blog. Quite apart from the fiasco – incompetent, sure, but it’s not unconstitutional to have a bad website – you simply cannot require expansive health “insurance” for all without regard to preexisting conditions and expect insurers not to cancel nonconforming policies or increase premiums. (Forget never running a business or caring about the Constitution; has nobody in the White House ever taken an economics class?)

After watching snippets of the hearing and reading the written testimony, I thought maybe I should start my “top 10 constitutional violations” update with the Affordable Care Act alone. But it seems that I’m not the only one thinking along these lines. Hot off the presses, at 10am today, the office of Senator Ted Cruz (R-TX) released its second report on “The Obama Administration’s Attempts to Expand Federal Power” – the first was on the Supreme Court’s unanimous rejection of the Justice Department’s more outlandish positions, a trend I’ve written about as well – titled “The Administration’s Lawless Acts on Obamacare and Continued Court Challenges to Obamacare.”

Here are the seven items the new Cruz report highlights:

Category One: Implementation Contrary to Statutory Text

  1. Unilateral grant of a one-year delay on all Obamacare health insurance requirements.
  2. Unilateral delay of the employer mandate.
  3. Unilateral delay of out-pocket caps.
  4. Allowing congressional staff to continue on government-subsidized health care.

Category Two : Pending Court Challenges

  1. Violates the Origination Clause because it’s a revenue-raising bill that originated in the Senate.
  2. Contraception/abortifacient mandate violates religious liberties.
  3. Expansion of employer mandate’s penalty through IRS regulation.

Add to those the individual mandate (which the Supreme Court struck down before Chief Justice Roberts rewrote and upheld the provision as a tax), the coerced expansion of Medicaid (which the Court made voluntary), and the Independent Payment Advisory Board (litigation ongoing), and you’ve got an even ten. And that’s without straining to find the constitutional defects buried in thousands of pages of legislation and hundreds of thousands of pages of regulations.

Forget PPACA, ACA, and Obamacare; what people really ought to call the healthcare law is the “Constitutional Scholar Full Employment Act.”

Beijing’s Diplomatic Hardball and Washington’s Clumsy Response

As China’s economic and military power continues to grow, the country’s political leaders are engaging in increasingly assertive, if not abrasive, behavior. Two recent examples confirm that Beijing is determined to play diplomatic hardball.

The first was a stunningly meager pledge of aid to the Philippines in response to Typhoon Haiyan. In an article over at China-U.S. Focus, I point out that while such countries as the United States, Australia, and Japan rushed to provide generous relief assistance, China’s response was miserly and grudging. Beijing initially offered a paltry $100,000 in aid funds, and then after some apparent reluctance upped that total to a still very modest $1.6 million.

That appeared to be a deliberate snub, and the Chinese leadership seemed willing to incur the negative international publicity. Beijing’s relations with Manila have been quite frosty in recent years, primarily because of competing territorial claims in the South China Sea. Tensions surged again earlier this year when the Philippines filed an unprecedented arbitration case—over Beijing’s strenuous objections—regarding those claims with the United Nations’ Convention on the Law of the Sea. Chinese officials have been doing a slow burn since that filing.

One should not underestimate the depth of China’s anger about such developments, or the willingness of Chinese officials to “send Manila a message”—including by withholding humanitarian aid during a time of great need. The message is that there will be a substantial price to pay for any nation that defies China’s policy preferences and seeks to undermine China’s interests.

The second episode that confirms Beijing’s willingness to play diplomatic hardball was the announcement on November 23rd of a new Air Defense Identification Zone over the East China Sea. Portions of that ADIZ overlapped similar zones that Japan and South Korea had long implemented. China’s ADIZ also included the airspace over the Senkaku/Diaoyu Islands, which are the subject of a bitter territorial dispute between China and Japan, and airspace near another island involving a bilateral dispute with South Korea. Beijing insisted that all foreign military and commercial aircraft flying through the new zone file approved flight plans with the Chinese government.

That action was not well received. Unless Chinese leaders were uncharacteristically obtuse, Beijing had to anticipate that the Japanese and South Korean governments would not tamely accept the new proclamation and the procedures it outlined. They also had to assume that Washington would back the position of its allies. The decision appeared to be a diplomatic ploy to strengthen China’s territorial claims in the East China Sea, and quite possibly to be a precedent for creating a similar ADIZ in the South China Sea, where Beijing has even more extensive claims that various neighboring countries challenge.

What Chinese leaders may not have fully calculated was the nature of the reaction from the United States and its allies. Tokyo, Seoul, and Washington did not confine their response to diplomatic protests. Instead, all three countries promptly sent military aircraft (in Washington’s case, B-52 bombers) through the zone without complying with any of Beijing’s requirements. That defiance has infuriated the Chinese government, and tensions have now reached worrisome levels.

The measures that the United States and its allies adopted were both premature and excessive. China’s proclamation may not have been the most skillful diplomatic initiative, but creating a new ADIZ was not outrageous—especially since Japan has insisted on similar requirements in the same area for years. Indeed, Tokyo warns violators that they risk interception by Japanese military aircraft, and apparently has occasionally even carried out such intercepts. In any case, engaging in a provocative display of military power to defy China’s ADIZ was a clumsy response that has made matters even worse. This is an issue that cries out for restraint and sober dialogue on the part of all parties.