On Monday, the Treasury Department released the first of four planned reports on the U.S. financial system. While the 150-page report, focusing on banks and credit unions, includes a number of observations and recommendations worth discussing, there is one page I’d like to highlight here. It’s a single chart. And yet it speaks volumes about the current state of regulation in the financial sector. Here’s the chart:
Those in Washington often talk about the “alphabet soup” of federal agencies. We do love our acronyms here. But this chart shows that the financial sector has a complete soup all of its own. There are nine federal regulators who oversee the financial sector. Additionally, each state has its own regulators, typically one each for securities, insurance, and banking. Plus, there are the self-regulatory organizations—quasi-private bodies whose decisions can have the effect of law on the companies and individuals they oversee. A single organization can be subject to as many as six regulators. An organization that does business in multiple states can potentially be subject to regulation in each of them, in addition to regulation at the federal level.Read the rest of this post »
I am just as distressed as the rest of America at Prince's passing, and there's little I can say that would meaningfully add to his deserved tributes and encomiums: it's not an exaggeration to say that we may not ever again have an entertainer like that who has the ability to produce music that cuts across race and class and age to be appreciated by everyone.
But the fact that he died just as America put the portraits of Elizabeth Cady Stanton, Sojourner Truth and Harriet Tubman on U.S. currency may be serendipitous, in that it gives us a precedent for the government to honor his accomplishments in a meaningful way.
This morning, I attended an interesting speech by Jack Lew, Secretary of the Treasury, on the future of economic sanctions. The speech was notable in that Lew made not only a defense of the effectiveness of sanctions, but also highlighted their potential costs, a variable that is too often missing from debates over sanctions policy.
Some of the points Lew made – like the argument that multilateral sanctions are better than unilateral ones – were hardly novel. Yet others were more interesting, including the argument that sanctions implementation should be based on cost/benefit analysis and an assessment of whether they are likely to be successful. Though such an approach sounds like common sense, it has not always been the rule.
He also focused on the importance of lifting sanctions once they’ve achieved their ends. This is a rebuke to some, particularly in congress, who have argued for reintroducing the sanctions on Iran lifted by the nuclear deal through some other mechanism. As he pointed out, refusing to lift these sanctions now means that they will be less effective in the future: if states know sanctions will remain in place regardless of their behavior, what incentive do they have to change it?
Perhaps most interestingly, Lew argued for the ‘strategic and judicious’ use of sanctions and against their overuse. This is an interesting argument from an administration for whom sanctions have often been the ‘tool of first resort.’ In doing so, he referenced both growing concerns about the costs of sanctions from the business community, and the broader strategic concern that overuse of sanctions could weaken the U.S. financial system or dollar in the long-run.
I still disagree with the Secretary on several points. While he is correct that nuclear sanctions on Iran have broadly been a success, he dramatically overstates the effectiveness of sanctions in the more recent Russian case. Much of the economic damage in that case was the result of falling oil prices, and sanctions have produced little in the way of coherent policy change inside Russia.
He also overstates the extent to which today’s targeted sanctions avoid broad suffering among the population. In fact, evidence suggests that modern sanctions still suffer some of the same flaws as traditional comprehensive trade sanctions, allowing the powerful to deflect the impact of sanctions onto the population, and reinforcing, not undermining, authoritarian dictators.
Despite this, it is refreshing to hear concerns about the long-term implications of runaway sanctions policy expressed by policymakers. In alluding to these concerns – many of which have been noted for some time now by researchers – the Treasury Secretary may help to spark a broader policy discussion of the benefits and costs of sanctions. If we wish to retain sanctions as an effective tool of foreign policy moving forward, such discussion is vital.
For more on some of the big issues surrounding sanctions policy, you can read some of Cato’s recent work on sanctions policy here and here, or check out the video from our recent event on the promises and pitfalls of economic sanctions.
On Friday the Obama Administration released its report on "reforming America's Housing Finance Market." The report claimed that the Administration would work toward "winding down Fannie Mae and Freddie Mac on a responsible timeline."
While the report was silent on what a responsible timeline would be (surprise, no details); I assumed, perhaps naively, that a reasonable timeline would be 5 to 6 years. So you can imagine my surprise while reading the Administration's budget proposal (see Table S-12 of the summary tables), released Monday, that the Administration is projecting that the government will be receiving, between 2012 and 2021, $89 billion in dividend payments from Fannie Mae and Freddie Mac. In 2021 alone the White House projects $8 billion in dividend payments. But here's the rub, for Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.
So would the Administration please be straight with us for just a minute: are you or are you not proposing that Fannie Mae and Freddie Mac disappear; and if so, when?
Another odd thing from the budget, again Table s-12 lists the net equity position of Fannie and Freddie as negative. Well that's obviously true, but it also raises the question of why they are still in conservatorship, as the law requires them to be taken into receivership once they've reached negative equity. Then perhaps OMB and Treasury have different definitions of net equity.
It's not surprising that Treasury Secretary Geithner's recent G-20 proposal that governments agree to keep their current-account balances (either surplus or deficit) within 4 percent of GDP has met with resistance. After all, it assumes governments can and should manage the buying, selling, and investment decisions of hundreds of millions of Americans and billions of people worldwide. But I marvel at how deeply Chinese Vice Foreign Minister Cui Tiankai's tongue must have been planted in cheek when he uttered this rich rejection of Geithner's idea: "The artificial setting of a numerical target cannot but remind us of the days of a planned economy." If the shoe fits....
Yesterday the Treasury and HUD hosted a "Conference on the Future of Mortgage Finance." It was an invite-only of Washington insiders. Somehow I found myself on the invite list, which was almost enough to make me believe that the Administration was finally serious about reforming Fannie and Freddie.
After getting over the nausea of being in a room full of people who I personally knew bore some responsibility for the mess we are in, I was then shocked that, compared to the rest of the room, Treasury Secretary Geithner came across as the radical. On one hand Geithner was very clear that the Administration was going to push for some sort of government guarantee, but also that the current structure, particularly Fannie and Freddie, were broken. He also went as far as admitting that Fannie and Freddie were a cause of the crisis.
Such statements only became radical in contrast to the rest of the room. Maybe about 80 percent of the attendees were blindly and violently attached to the status quo. Most offensive to those us who fight for free markets was that the industry representatives were the most vocal advocates for the status quo. To even suggest that lenders should bear the risk of loans they make was crazy to this group. It was a clear reminder that being pro-market and pro-business are generally two very different things. In fairness, not all lenders were busy plotting to find ways to profit while dumping their risk onto the taxpayer; some, such as Wells Fargo, were far more supportive of the private sector actually bearing the risk.
Most of those who were not industry insiders were housing and community advocates. While this group did seem a little less self-interested, they appear to have learned little about the risks of over-expanding homeownership. Repeatedly, access to homeownership, as if it could solve every social ill, was pushed as the primary goal. A few dissenters reminded us that rental is a viable option too, although they were mainly looking to continue/expand Fannie and Freddie's support of the multifamily rental market.
If the Administration was hoping that this group was going to come up with answers, then they must have been sorely disappointed. If Obama is serious about taking the taxpayer off the hook for risk in the mortgage market, then he is going to have to take on the special interests. My fear is that the event was just the beginning of how health care reform played out: cut a deal with the industry, pay off the Democratic base, and screw the taxpayer. Let's hope we actually see some change on this one.
The U.S. isn't Greece. Yet.
Moody's is no longer so sure about the quality of Uncle Sam's debt. Reports the Christian Science Monitor:
The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.
The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.
If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.
That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still.
“There’s a profound effect in this announcement,” says Max Fraad Wolff, a professor of economics at New School University in New York. “The US has always been the gold standard … and this begins to signal a fall or weakness in US global economic position. That’s a bit like a sea change.”
Obviously we are long overdue for some fiscal responsibility in Washington. And that means cutting spending across the board. Lawmakers might start by considering what programs are authorized by the Constitution--and the far larger number which represent unconstitutional political power grabs.