Tag: inspector general

Drug War Defeats Taxpayers

The federal government spends about $30 billion a year on the war on drugs. Much of the spending is wasteful and counterproductive. This week, for example, an auditor’s report revealed how the drug bureaucracy flushed $86 million down the drain on an anti-drug aircraft that was never used.

The Washington Post described this Drug Enforcement Administration (DEA) and Department of Defense (DOD) boondoggle:

The plan was for DOD to modify a DEA plane to be used in counter-narcotics operations in a combat zone. … The Justice Department’s Office of the Inspector General (IG) determined “collectively, the DEA and DOD spent more than $86 million to purchase and modify a DEA aircraft with advanced surveillance equipment to conduct operations in the combat environment of Afghanistan, in what became known as the Global Discovery Program. We found that more than 7 years after the aircraft was purchased for the program, it remains inoperable, resting on jacks in Delaware, and has never flown in Afghanistan.”

The IG found that the “program has cost almost four times its original anticipated amount of $22 million.” Sadly, this sort of failure is par for the course when it comes to federal capital investments.  

Thank goodness for the IGs who uncover such waste, but what will come of these findings? Will anyone be fired? Will policymakers begin to rethink the drug war? Not yet it seems. When the Washington Post asked the DEA and DOD about the report, “the Pentagon did not reply and the DEA response was short boilerplate.”

For more on the government’s drug war, see Jeff Miron’s work here.

U.S. Mail Monopoly Wants Rate Hike

The long-term prospects for the U.S. Postal Service monopoly are bleak. To help stem the flow of red ink, the USPS intends to seek a rate increase. Only a government monopoly would try to raise prices when the demand for its services is plummeting. The rate increase will only push its already declining customer base to use cheaper, more efficient electronic alternatives.

The USPS is in need of drastic reform, but instead of looking at big picture, Congress is hung up on the USPS’s request to eliminate Saturday mail delivery service. In contrast, countries around the world are continuing to liberalize their postal markets by embracing competition and private sector involvement.

Britain is a good example.

In 1969, the British Post Office transformed from a government agency into a corporation, which would come to be known as Royal Mail. However, the company’s shares are owned by the government. In 2006, Royal Mail’s regulator removed its monopoly and opened British mail delivery to full competition, which the postal unions opposed.

Like their counterparts in the U.S., the British postal unions are a hindrance to effective and efficient postal management. With email and other technologies undermining traditional mail, neutering the inflexibility caused by unions is paramount for mail operations here and abroad.

According to the Daily Mail, the British government is now prepared to take the next step: privatization. In doing so, the government is considering transferring a portion of Royal Mail’s shares to its employees. Giving the employees ownership stakes would inhibit the unions’ ability to extract concessions that would negatively affect the company’s bottom line.

A popular argument against mail privatization in the U.S. is that an important service can’t be entrusted to self-interested capitalists concerned only with making a profit. But public officials are just as motivated by self-interest. The difference is that public officials aren’t subject to market forces, which compel private businesses to adapt and economize to survive.

For example, the third-ranking official at the USPS stepped down in May after it came to light that he awarded six-figure, no-bid contracts to former colleagues at various companies.

From the Washington Post:

A 64-page report by the Postal Service Office of Inspector General found that [Robert F.] Bernstock clashed with Postal Service lawyers over whether he could conduct outside business by using agency computers, e-mail and staff… Bernstock also used office telephones to conduct teleconferences and other meetings related to his private business holdings and also instructed staffers to conduct private work for him, investigators found.

The report details how Bernstock awarded non competitive contracts to five former business associates and a $1.5 million consultant deal with Goldman Sachs. He also violated company policy by negotiating a holiday bulk stamp sale agreement with Costco while owning $30,000 in company stock. The Postal Service requires officials owning more than $15,000 in a company’s stock to recuse themselves from any official dealings with the company.

Government Housing Adventures

The Wall Street Journal is reporting that Fannie Mae and Freddie Mac, which have already consumed $112 billion in taxpayer bailouts, may have additional losses if they can’t recoup claims from struggling private mortgage insurers.

From the Journal:

Fannie Mae has about $109.5 billion of mortgage-insurance coverage in force, which represents 4 percent of all single-family home loans it owns or guarantees. Freddie Mac had $63.4 billion in mortgage insurance and $12.2 billion in bond insurance. Private mortgage insurance is required for any home loan with less than a 20 percent down payment, and the policies typically cover 12 percent to 35 percent of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.

Escalating loan defaults are also likely to bite taxpayers through the Federal Housing Administration, which covers 100 percent of losses. The FHA is in deep trouble:

The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5 percent down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.

Who is looking out for taxpayers here?

Ryan Grim at Huffington Post reports that the Federal Housing Finance Agency, which is in charge of Fannie and Freddie, has used a legal technicality to rid itself of its inspector general:

There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice’s Office of Legal Counsel ruled that the agency’s inspector general didn’t have authority to operate, according to internal memos obtained by the Huffington Post. The ruling came in response to a request from the Federal Housing Finance Agency itself — which means that a federal agency essentially succeeded in getting rid of its own inspector general.

The timing is curious:

Fannie and Freddie are burning through cash at a staggering rate. Fannie reported a loss of $18.9 billion in the third quarter of 2009, four billion more than it lost in the second quarter. FHFA requested $15 billion from Treasury to plug the hole. What’s it spending money on? “The company continued to concentrate on preventing foreclosures and providing liquidity to the mortgage market during the third quarter of 2009, with much of our effort focused on the Making Home Affordable Program,” boasts the press release accompanying the announcement of the massive loss. “As of September 30, 2009, approximately 189,000 Fannie Mae loans were in a trial period or a completed modification under the Home Affordable Modification Program.” Those are the precise programs that Kelley was looking into when his own agency shut him down.

See here for essays on the problems associated with the federal government’s housing market interventions. Also check out Johan Norberg’s book, Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis.