Tag: regulators

Poll: Americans Want Financial Regulators to Prioritize Fraud Protection

Later this month the Cato Institute will be releasing an in-depth report analyzing the results of the national Cato 2017 Financial Regulation Survey. The survey, conducted in collaboration with YouGov, asked 2,000 Americans what they think of Wall Street, the regulators who oversee Wall Street, the Federal Reserve, and what Americans think of their banks, credit cards issuers, and lenders, among many other important issues. Today we’re pre-releasing several of the survey findings.

Find topline results here.

Sign up here to receive the forthcoming Cato Institute 2017 Financial Regulation Survey report.

Americans generally agree about what the top two priorities for government financial regulators should be. First, protect consumers from fraud (65%) and second ensure banks and financial institutions fulfill obligations to account holders (56%). Even though respondents were asked to select their top three priorities for regulators, most agree on the first two. After that, Americans diverge on what should be financial regulators’ focus and if they should take on additional social initiatives.

Less than half agree the following should be top priorities for regulators: fostering economic growth (29%), ensuring bank efficiency (22%), preventing banks from making bad decisions (20%), promoting competition (18%), preventing consumers from making bad decisions (14%), banning risky financial products (13%), ensuring banks don’t make too much profit (12%), and promoting innovation (10%).

Given that the 2008 financial crisis focused public attention on excessive risk taken by financial institutions, it’s particularly interesting that only 13% say regulators should make it a priority to ban risky financial products.

Ethics in Payday Lending

The large sample size also offered an opportunity to ask Americans who have used payday and installment loans about their experiences. In the past 12 months about 4% of Americans report having taken out a payday or installment loan. Among these, 63% say their payday or installment lender gave them good information about the fees and risks associated with taking out the loan. However, 35% believe their lender misled them.

Sign up here to receive the forthcoming Cato Institute 2017 Financial Regulation Survey report.

The Cato Institute 2017 Financial Regulation Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online May 24-31, 2017 from a national sample of 2,000 Americans 18 years of age and older. The margin of error for the survey is +/- 2.17 percentage points at the 95% level of confidence. The full survey report is forthcoming.

Plowing Through the Defenses of National Education Standards

Arguably the most troubling aspect of the push for national education standards has been the failure – maybe intentional, maybe not – of standards supporters to be up front about what they want and openly debate the pros and cons of their plans. Unfortunately, as Pioneer Institute Executive Director Jim Stergios laments today, supporters are using the same stealthy approach to implement their plans on an unsuspecting public.

Standing in stark contrast to most of his national-standards brethren is the Fordham Institute’s Mike Petrilli, who graciously came to Cato last week to debate national standards and is now in a terrific blog exchange with the University of Arkansas’s Jay Greene. Petrilli deserves a lot of credit for at least trying to answer such crucial questions as whether adopting the standards is truly voluntary, and if there are superior alternatives to national standards. You can read Jay’s initial post here, Mike’s subsequent response here, and Jay’s most recent reply right here.

I’m not going to leap into most of Jay and Mike’s debate , though it covers a lot of the same ground we hit in our forum last week, which you can check out here. I do want to note two things, though: (1) While I truly do appreciate Mike’s openly grappling with objections to what might be Fordham’s biggest reform push ever, I think his arguments don’t stand up to Jay’s, and (2) I think Mike’s identifying national media scrutiny as what will prevent special-interest capture of national standards is about as encouraging as BP telling Gulf-staters ”we’ve got a plan!”

Let’s delve into #2.

For starters, how much scrutiny does the national media give to legislating generally? Reporters might hit the big stuff and whatever is highly contentious, but even then how much of the important details do they offer? Think about the huge health care debate that just dominated the nation’s attention. How many details on the various bills debated did anybody get through the major media? How much clarity? Heck, sometimes legislators were debating bills that even they hadn’t seen, much less reporters. Of course, the health care bill was much bigger than, say, the No Child Left Behind Act, but remember how long after passage of NCLB it was before the Department of Education, much less the media, was able to nail down all of its important parts?

Which brings us to a whole different layer of policy making, one major media wade into even less often than legislating: writing regulations. How many stories have you read, or watched on TV news, about the writing of regulations for implementing anything, education or otherwise? I’d imagine precious few, yet this is where often vaguely written statutes are transformed into on-the-ground operations. It’s also where the special interests are almost always represented – after all, they’re the ones who will be regulated – but average taxpayers and citizens? Don’t go looking for them.

Finally, maybe it’s just me, but I feel like I keep hearing that daily newspapers are on their way out. Of course they might be replaced by cable television news, but those outlets almost always fixate on just the few, really big stories of the day – war, economic downturns, murders, golfers’ affairs, celebrity arrests – and education can rarely compete for coverage. And that seems likely to remain the case even if the education story is as scintillating as, say, federal regulators reducing the content of national standards by five percent. Indeed, education is so low on the reporting totem poll that the Brookings Institution has undertaken a crusade to save its life, and has noted that right now “there is virtually no national coverage of education.”

Wait, virtually none? Uh-oh. If national media scrutiny is supposed to be the primary bulwark protecting national standards from the special-interest capture that has repeatedly doomed state standards, the fact that almost no such coverage actually takes place really doesn’t give you a warm-fuzzy, does it? And if special-interest capture can’t be prevented – if standards can’t be kept high – then the entire raison d’etre of national standards crumbles to the ground.  

Which helps explain, of course, why national standards supporters are typically so eager to avoid debate: Their proposal is hopelessly, fatally flawed.

Fannie Mae and Greece’s Problems Enabled by Basel

On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis.  Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress.  Primary blame for Greece’s problems clearly lies with the Greek government. 

Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt.  One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.

Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards.  Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category.  For the highest risk assets, like corporate bonds, banks are required to hold 8%.  Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital.  So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt.  Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class.  Fannie and Freddie debt required holding only 1.6% capital.  Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.

The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild.  It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.

Regulatory Spending Actually Rose under Bush

Analysts across the ideological spectrum generally agree that the government’s regulatory bodies fail far too frequently. However, analysts seem to learn different lessons from this experience.

Washington Post business columnist Steve Pearlstein cites numerous examples of failure and concludes, “It’s time for the business community to give up its jihad against regulation.”

He says:

It hardly captures the breadth and depth of these regulatory failures to say that during the Bush administration the pendulum swung a bit too far in the direction of deregulation and lax enforcement. What it misses is just how dramatically the regulatory agencies have been shrunken in size, stripped of talent and resources, demoralized by lousy leadership, captured by the industries they were meant to oversee and undermined by political interference and relentless attacks on their competence and purpose.

It’s true that regulators often do the bidding of the industries that they regulate. But “regulatory capture” is a long recognized phenomenon that undermines the contention that the government is well-suited to be a watchdog.

Regardless, is Pearlstein right that federal regulatory agencies were “dramatically” shrunk? Not according to a new study from George Washington University and Washington University in St. Louis. The figure shows that regulatory spending actually rose an inflation-adjusted 31 percent during the Bush administration (FY2002-FY2009):

Similarly, regulatory staff jumped by 42 percent under Bush’s watch:

Fed Governor Starting to Make Sense

Despite still defending the Fed’s bailouts, Fed Governor Kevin Warsh gave a speech this morning offering a few insights about reforming our financial system that seem to be lost on both Obama and Bernanke.

A few highlights:

The mortgage finance system is owed far stricter scrutiny to gather a fuller appreciation of the causes of the crisis. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, for example, were given license and direction to take excessive risks.

One has to hope that both Bernanke and Obama are listening.  The silence of the Obama administration on fixing Fannie and Freddie is nothing short of shocking and irresponsible.  Any commitment to real reform has to include the GSEs.

Granting new powers to resolve failing firms in the discretionary hands of regulators is unlikely, in the near-term, to drive the market discipline required to avoid the recurrence of financial crises.

…Some newly-empowered and untested regulatory structure is not likely – in and of itself – to be sufficient to tackle institutions that are too-big-to-fail, particularly as memories of the crisis fade. Regulation is too important to be left to regulators alone.

I believe these two points cannot be stated more strongly:  what we need is more market discipline, rather than less.  Putting the entire weight of our financial system on the backs of our financial regulators is a crisis just waiting to happen.  Sadly the direction of both President Obama and Congress seems to be in undermining market monitoring of firms and relying solely on regulators to “get it right” – the very same regulators who were asleep at the wheel prior to the last crisis.

Thursday Links

  • The financial regulators’ pipe dream: “Most new regulation will do nothing to limit crises because markets will innovate around it. Worse, some regulation being considered by Congress will guarantee bigger and more frequent crises.”
  • The illegal cigarette trade in Ireland reaches “epidemic proportions“  after the government imposes draconian regulations on tobacco products.

Fact-checking Drug Czar Barry McCaffrey

I appeared on the CNN program Lou Dobbs Tonight last Thursday (Oct. 22) to discuss the medical marijuana issue and the drug war in general.  There were two other guests: Peter Moskos from John Jay College and the organization Law Enforcement Against Prohibition (LEAP) and Barry McCaffrey, retired General of the U.S. Army and former “Drug Czar” under President Bill Clinton.

I was really astonished by the doubletalk coming from McCaffrey.  Watch the clip below and then I’ll explain two of the worst examples so you can come to your own conclusions about this guy.

Doubletalk: Example One:

Tim Lynch: “Some states have changed their marijuana laws to allow patients who are suffering from cancer and AIDS–people who want to use marijuana for medical reasons–they’re exempt from the law. But there’s a clash between the laws of the state governments and the federal government. The federal government has come in and said, ‘We’re going to threaten people with federal prosecution, bring them into federal court.’ And what the [new memo from the Obama Justice Department] does this week is change federal policy. Basically, Attorney General Eric Holder is saying, ‘Look, for people, genuine patients–people suffering from cancer, people suffering from AIDS–these people are now off limits to federal prosecutors.’ It’s a very small step in the direction of reform.”

Now comes Barry McCaffrey: “There is zero truth to the fact that the Drug Enforcement Administration or any other federal law enforcement ever threatened care-givers or individual patients. That’s fantasy!”

Zero truth? Fantasy?  This report from USA Today tells the story of several patients who were harassed and threatened by federal agents. Excerpt:  ”In August 2002, federal agents seized six plants from [Diane] Monson’s home and destroyed them.”

This report from the San Francisco Chronicle tells the story of Bryan Epis and Ed Rosenthal.  Both men, in separate incidents, were raided, arrested, and prosecuted by federal officials.  The feds called them “drug dealers.”  When the cases came to trial, both men were eager to inform their juries about the actual circumstances surrounding their cases–but they were not allowed to convey those circumstances to jurors.  Federal prosecutors insisted that information concerning the medical aspect of marijuana was “irrelevant.”   Both men were convicted and jailed.

This report from the New York Times tells readers about the death of Peter McWilliams.  The feds said he was a “drug dealer.”  McWilliams also wanted to tell his story to a jury, but pled guilty when the judge told him he would not be allowed to inform the jury of his medical condition.  Excerpt:  “At his death, Mr. McWilliams was waiting to be sentenced in federal court after being convicted of having conspired to possess, manufacture and sell marijuana…. They pleaded guilty to the charge last year after United States District Judge George H. King ruled that they could not use California’s medical marijuana initiative, Proposition 215, as a defense, or even tell the jury of the initiative’s existence and their own medical conditions.”  The late William F. Buckley wrote about McWilliams’ case here.

Imagine what Diane Monson, Bryan Epis, Ed Rosenthal, and Peter McWilliams (and others) would have thought had they seen a former top official claim that federal officials never threatened patients or caregivers?!

Doubletalk: Example Two:

Tim Lynch: “After California changed its laws to allow the medical use of marijuana, [General Barry McCaffrey] was the Drug Czar at the time and he came in taking a very hard line. The Clinton administration’s position was that they were going to threaten doctors simply for discussing the pros and cons of using marijuana with their patients. That policy was fought over in the courts and [the Clinton/McCaffrey] policy was later declared illegal and unconstitutional for violating the free speech of doctors and for interfering with the doctor-patient relationship. This was the ruling by the Ninth Circuit Court of Appeals in a case called Conant – “C-O-N-A-N-T.”

Lou Dobbs: “The ruling stood in the Ninth Circuit?”

Tim Lynch: “Yes, it did.”

Now comes Barry McCaffrey: “That’s all nonsense!”

Nonsense?  Really?

Go here to read the New York Times story about McCaffrey’s hard-line policy.

The Conant ruling can be found here.  The name of the case was initially Conant v. McCaffrey, but as the months passed and the case worked its way up to the appeals court, the case was renamed Conant v. Walters because Bush entered the White House and he appointed his own drug czar, John Walters, who maintained the hard line policy initiated by Clinton and McCaffrey.

I should also mention that Conant was not an obscure case that McCaffrey could have somehow ”missed.”  Here’s a snippet from another New York Times report:  “The Supreme Court, in a silent rebuff on Tuesday to federal policy on medical marijuana, let stand an appeals court ruling that doctors may not be investigated, threatened or punished by federal regulators for recommending marijuana as a medical treatment for their patients.”  The point here is that the case was covered by major media as it unfolded.

When our television segment concluded, Lou Dobbs asked me some follow-up questions and asked me to supply additional info to one of his producers, which I was happy to do.

Whatever one’s view happens to be on drug policy, the historical record is there for any fair-minded person to see – and yet McCaffrey looked right into the camera and denied  past actions by himself and other federal agents.  And he didn’t say, “I think that’s wrong” or “I don’t remember it that way.”  He baldly asserted that my recounting of the facts was “nonsense.”   Now I suppose some will say that falsehoods are spoken on TV fairly often–maybe, I’m not sure–but it is distressing that this character held the posts that he did and that he continues to instruct cadets at West Point!

My fellow panelist, Peter Moskos, has a related blog post here and he had a good piece published in the Washington Post just yesterday.  For more Cato scholarship on drug policy, go here.

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