Topic: Finance, Banking & Monetary Policy

Article III Court Should Hear Challenge to SEC’s Unconstitutional Enforcement Proceedings

How many constitutional infractions must one endure at the hands of the government before getting the chance to be heard in an Article III court? According to the Securities and Exchange Commission, the answer is at least two.

In April 2016, the SEC commenced an enforcement proceeding against Michelle Cochran for alleged violations of federal accounting regulations. The proceeding took place before an administrative law judge who was reported at the time to have said to defendants that “they should be aware he had never ruled against the agency’s enforcement division.” True to his word, the SEC judge issued an initial decision ruling in the SEC’s favor. Ms. Cochran was fined $22,500 and banned from practicing as an accountant for at least five years.

But before the SEC could finalize its order against Ms. Cochran, the Supreme Court held in Lucia v. SEC that administrative law judges are “inferior officers” subject to the Constitution’s Appointments Clause. Because SEC judges had not been appointed by the “President alone…Courts of Law, or…Heads of Departments”—as required for all “inferior officers” by Article II—the Supreme Court invalidated all ongoing administrative enforcement proceedings before the SEC, including the one against Ms. Cochran.

After Lucia, the SEC attempted to cure this constitutional defect by “ratifying” its administrative law judges’ prior appointments, thereby comporting with constitutional procedures. The problem is that the SEC’s Appointments Clause “solution” entails a violation of the Constitution’s Removal Clause. As a matter of constitutional law, the agency jumped from the frying pan into the fire.

In Free Enterprise Fund v. PCAOB, the Supreme Court held that “officers” of the United States may not be insulated from presidential control by more than one layer of tenure protection. Yet the SEC’s judges enjoy employment protections, and they are removable by SEC commissioners, who also enjoy employment protections. That is, the SEC’s administrative law judges are “officers” with at least two layers of tenure protections, and, therefore, run afoul of the Supreme Court’s reading of the Removal Clause in Free Enterprise Fund.

In its Lucia brief, the SEC acknowledged this constitutional quandary. Notwithstanding this concession, and although the SEC has the discretion to bring its enforcement proceedings in an original action before a federal district court, the agency reassigned Ms. Cochran’s case to a new administrative law judge. As a result, the SEC knowingly subjected Ms. Cochran to a second unconstitutional enforcement proceeding, which remains ongoing.

Enough is enough. In January, with the help of the New Civil Liberties Alliance, Ms. Cochran filed suit against the SEC in a federal district court in Texas. She argued that she should not have to undergo a second unconstitutional enforcement proceeding. To be clear, she’s not asking the court to void the SEC’s charges against her or otherwise diminish the SEC’s enforcement power. Ultimately, Ms. Cochran seeks only for a federal court—and not an unconstitutional administrative law judge—to try the SEC’s case against her. Simply put, she wants her day in a court that passes constitutional muster.

On March 25, 2019, the district court dismissed her case for lack of subject-matter jurisdiction, concluding that Congress intended to preclude district court jurisdiction over Ms. Cochran’s constitutional claims and channel those claims through the administrative process. Ms. Cochran has appealed the district court’s order to the U.S. Court of Appeals for the Fifth Circuit.

Cato, joined by the Cause of Action Institute and Competitive Enterprise Institute, yesterday filed a brief in support of Ms. Cochran. We argue that the district court misconstrued (and thereby trivialized) Ms. Cochran’s serious ongoing constitutional injury. In addition, we argue that parties like Ms. Cochran may never get any opportunity to seek or obtain redress for their constitutional injury, and even if they do it will be too late to undo or remedy the injury. Because this case alleges a colorable constitutional claim of ongoing ultra vires government action, and because Congress cannot have intended to strip district courts of jurisdiction over such a claim, the Fifth Circuit should allow Ms. Cochran’s case to proceed in the district court.

For more background on this case, see Cato’s briefs in Lucia v. SEC and Free Enterprise Fund v. PCAOB.

U.K.’s “Unexplained Wealth Orders” Give the State Too Much Power

I’ve got a piece in the Washington Examiner this morning on a remarkable new law enforcement tool in Britain:

It’s like, “Your papers, please,” but for things you own.

Authorities in Britain have begun trying out a new police power called unexplained wealth orders under a law that took effect last year. The police go to a court and say you’re living way above any known legitimate income. The judge then signs an order compelling you to show that your possessions (whether a house, fancy car, or jewelry) have been obtained honestly and not with dirty money. In the meantime, the boat or artwork or other assets get frozen, and you can’t sell them until you’ve shown you obtained them innocently.

The kicker: The burden of proof falls on you, not the government. If you don’t prove the funds were clean, Her Majesty may be presumed entitled to keep the goodies….

Related to the flipping of the burden of proof, the law says information dug up via one of the orders can’t then be used in criminal charges against the target.

…advocates want this to be the start of hundreds of seizure actions against other rich foreigners in the British capital.

Some are already calling for bringing a law like this to the United States, and maybe we’re halfway there already. Asset forfeiture laws, blessed by the Supreme Court, already let police seize your property on suspicion of involvement in a crime and make you go to court to get it back. We’ve been chipping away at financial privacy in this country for decades, through Know Your Customer, suspicious-activity reports, and FATCA (expatriate tax) rules.

Ironically — though recent enactments by Parliament may be changing this, too — Britain’s own peripheral territories and dependencies, including the Channel Islands, British Virgin Islands, Cayman Islands, etc. have long made a good business out of furnishing the rest of the world with the means of financial privacy.

The reversal of the presumption of innocence troubles many Britons, too. For the moment, use of the orders is limited to a few elite law enforcement agencies. One of those agencies, however, is Her Majesty’s Revenue and Customs — the tax collectors. It’s not wrong to worry about where this idea is headed.

Whole thing here.

Macroeconomic Forecasting Seems Pretty Hopeless

The yield on 10-year Treasury securities is currently 2.1 percent. Now look at the chart below from the Wall Street Journal showing expert predictions about what the current rate would be.

The Journal reports:

  • “Not a single respondent in January’s Wall Street Journal survey of economists predicted the yield on the 10-year Treasury note would fall below 2.5% this year.”
  • “In October, when yields on the 10-year Treasury were near their peak of around 3.2%, none of the more than 50 respondents in The Wall Street Journal’s monthly survey of economists predicted yields would dip below 2.75% by June 2019. The average forecast was 3.39%.”

Forecasts of interest rates appear pretty awful, and this is a market where vast profits are at stake so there are big incentives to get it right. I’ve noted (here and here) that economists are also lousy at predicting economic growth.

What are the policy implications? The economy is too complex and uncertain for even the best economists to predict, so politicians stand no chance. It seems unlikely that political schemes from Washington to manage and manipulate our future economy would work.

Furthermore, while businesses are forced to eat humble pie and change direction when the economy changes, the government is a rigid institution led by people who never admit their mistakes. So when politicians move economic resources around, the resources often get stuck in low-value uses for years on end.


Note: my critique here regards macroeconomic predictions. Microeconomic analysis is different.

A Benevolent Central Bank

It has become clear that Fed Chairman Jerome Powell will do whatever it takes to keep the expansion going.  In early January, the stock markets rallied after Mr. Powell softened his rhetoric and promised “patience” in setting the federal funds target range.  Initially, the Fed was to be on “autopilot” and proceed with two rate hikes this year.  That promise was called off because of slowing global growth and the fear that higher rates would cause a sharp fall in asset prices. 

Now the chairman has excited markets by announcing at the Chicago Fed conference that “we will act as appropriate to sustain the expansion”—meaning that a rate cut could be in the cards possibly as early as July.  That sentiment was expressed earlier by St. Louis Fed President James Bullard

Currently, the effective fed funds rate is above the 10-year Treasury rate of 2.07 percent—and the yield curve is inverted, normally a sign of impending recession.  To restore a positive slope to the yield curve, the Fed would have to pencil in two 25 basis point cuts in its policy rate target range, which now stands at 2.25 to 2.50 percent.

But what if the decline in long-term rates reflects a growing uncertainty about the impact of trade wars on productivity and growth, which is driving investors worldwide to hold U.S. government bonds as a safe haven?  When the demand for U.S. bonds increases, their prices rise and yields fall.  By lowering the fed funds target, the U.S. central bank would divert attention from the trade conflict and the uncertainty it generates.

Fear of a Gold Planet

Proposed nominees Stephen Moore and Herman Cain having dropped out of contention, discussion continues over the Trump administration’s possible next nomination to the Federal Reserve’s Board of Governors. The views of the latest candidate under consideration by the administration, Judy Shelton, have revived a question that commentators raised earlier about Moore and Cain: Should favoring some kind of gold standard disqualify a nominee from occupying one of seven seats on the Board? Here let me disclose that I worked with Judy Shelton on the Atlas Economic Research Foundation’s Sound Money Project. But the argument that follows is about the general status of arguments favoring the gold standard, and not about her specific candidacy in other respects. My answer will be: no, favoring a gold standard in a serious manner should not disqualify a nominee from holding a seat on the Board of Governors.

Journalist Sebastian Mallaby, author of a weighty biography of Alan Greenspan, seems to think that favoring the gold standard should disqualify a nominee outright. And this despite his pointing out that Greenspan – generally considered to have been qualified for the job of chairman — was well known to be a gold standard advocate at the time of his appointment in 1987. What has changed? Mallaby suggests that the relative merits of a gold standard have so diminished with the decline of inflation since 1987 that favoring the gold standard is no longer respectable. Mallaby also seems to take for granted that the credit boom (fostered by the Fed’s holding rates too low for too long), followed by bust, financial crisis, and the Great Recession of 2002-09, has done nothing to bolster the case for an alternative to our status quo of a discretionary fiat monetary system.

It must of course be granted that adopting a gold standard (or any other reform) in order to restrain inflation is less urgent when the inflation rate is lower. If the average inflation rate were our exclusive concern, and if we could trust the central bank to keep the inflation rate as low under a fiat standard as it was under the classical gold standard, then it would be pointless to reinstitute a gold standard. But while the inflation rate today is certainly lower than it was in the 1970s and 1980s, it is still not as low today as it was under the classical gold standard. The inflation rate was only 0.1 percent over Britain’s 93 years on the classical gold standard. It was only 0.01 percent in the United States between gold resumption in 1879 and 1913. By contrast, during the most recent ten years (April 2009 to April 2019) of the United States’ current fiat money system, the CPI-U price index rose 19.8 percent, for an annualized inflation rate of 1.8 percent. Over the last 50 years (since April 1969, shortly before President Nixon closed the gold window), the index has risen by 604 percent, at the compound annualized inflation rate by 4.0 percent. Although it has diminished in urgency, the case for a gold standard based exclusively on mean inflation remains.

The Fed’s Shifting Goalposts

When I published Floored! last October, I thought I’d said all I could say concerning the adverse consequences of the Fed’s then decade-old decision to adopt a “floor”-type operating system. In the new arrangement, the Fed pays interest on bank reserves, and uses changes in the rate it pays, instead of adjustments to the available quantity of bank reserves, to regulate other interest rates. Among other things, I explain in my book, as I’ve also done to some extent here at Alt-M, that decision contributed to the U.S. economy’s deep downturn in late 2008, that it undermined banks’ incentives to monitor each other’s safety, and that it has made it more tempting for politicians to treat the Fed as a giant piggy-bank to drawn upon for their pet trillion-dollar projects.

But it turns out I overlooked a serious shortcoming of the Fed’s floor system. Not that I’m kicking myself: I could hardly be blamed for overlooking a problem that wasn’t at all evident in the fall of 2018. But the problem has since become all-too obvious. I refer to the new operating system’s inability to get interest rates to go where it wants them to.

The Nice Limits of Modern Monetary Theory

In my Twitter feed the other day, I came across a link to a website “dedicated to explaining and promoting awareness of Modern Monetary Theory.” The site is called “We CAN Have Nice Things,” and its summary of MMT seems to me to represent reasonably well how MMT is understood by many of its fans, if not by MMT experts themselves. That summary also “nicely” shows just how cavalier MMT enthusiasts can be when it comes to describing MMT’s practical policy implications — and particularly the quantity of “nice things” we can have by heeding its advice. Whether MMT experts themselves are to blame for this is a good question. Perhaps they regret that their fans keep exaggerating their theories’ policy implications. But at least some of them seem to make similarly exaggerated, or at least highly speculative, claims.

The Green Land of Cockaigne

The exaggerations I have in mind occur in the “Nice” webpage’s opening paragraphs:

We CAN have nice things. We can provide a well-paying job for anyone who wants one. Medicare-for-All. Child care. Tuition-free public college and excellent public schools. Modern infrastructure including high-speed rail from city to city. We CAN have nice things that make our lives better.

We can (and must) implement a Green New Deal to de-carbonize the economy and address the climate crisis.

Because the US government issues its own currency, it can’t “run out of money” or go bankrupt. That means “We the People” can — and should — spend what we need to spend on what we want and need without worrying about “how to pay for it.”

To paraphrase: if governments would only take MMT insights into account, instead of heeding the advice of other clueless antediluvian economists, folks can all enjoy all sorts of extra goodies: better health, education, and welfare; better transportation; a cooler planet; and more besides. Nor need they pay for them. Instead the US government can. And it can do so without having to tax people more, and without burdening the economy with higher interest rates. The government must only take better advantage of the fact that it “issues its own currency.” It has, in other words, only to create the necessary paper and digital dollars.