Topic: Finance, Banking & Monetary Policy

Fed Ed Failure File Just Got Fatter

In the aftermath of Betsy DeVos’s confirmation hearing—but really, anytime someone’s talking about federal education policy—it is important to look at evidence. Today we’ve got several items to add to the evidence pile, none of them good for fed ed.

The first is a new report on the School Improvement Grants program, an initiative aimed at turning around troubled schools with various possible interventions ranging from replacing principals to closing schools. What did the report find? The multi-billion dollar undertaking “had no impact on math or reading test scores, high school graduation, or college enrollment.”

Next, to higher education. A Wall Street Journal article today reports that the U.S. Department of Education widely overstated the repayment rate of student loans. Indeed, when the Journal recalculated the numbers, “the data revealed that the Department previously had inflated the repayment rates for 99.8% of all colleges and trade schools in the country.” The problem, according to an education department spokesperson cited in the article: a programming error.

Finally, we come to Navient, a company that exists largely on a contract to service student loans for the U.S. Department of Education. Yesterday the Consumer Financial Protection Bureau (CFPB)—itself a big federal fiasco—announced that it was suing Navient for deceptive and exploitative practices it allegedly undertook to cut costs and maximize revenues.

The CFPB isn’t entirely known for its own straight shooting, so Navient should get the benefit of the doubt. But it is certainly plausible that this government-privileged company takes advantage of its largely captive clientele. And who is Navient’s mother, by the way? Why none other than Sallie Mae—the company was spun off from Sallie in 2014—which was originally a government-sponsored enterprise like Fannie and Freddie, created by Washington to buy and service student loans in 1972.

In her confirmation hearing, Betsy DeVos pretty consistently indicated an aversion to federal power. The evidence is on her side, and growing every day.

The World’s Most – And Least – Miserable Countries in 2016

In what follows, I update my annual Misery Index calculations. A Misery Index was first constructed by economist Art Okun as a way to provide President Lyndon Johnson with a snapshot of the economy. 

The original Misery Index was just a simple sum of a nation’s annual inflation rate and its unemployment rate. The Misery Index has been modified several times, first by Robert Barro of Harvard and then by myself. My modified Misery Index is the sum of the unemployment, inflation, and bank lending rates, minus the percentage change in real GDP per capita. A higher Misery Index score reflects higher levels of “misery,” and it’s a simple enough metric that a busy president without time for extensive economic briefings can understand at a glance.

Below is the 2016 Misery Index table. For consistency and comparability, all data come from the Economist Intelligence Unit (EIU).

A Monetary Policy Primer, Part 9: Monetary Control, Now

Having considered the Fed’s pre-crisis approach to monetary control, with its emphasis on interest-rate targets reached with the help of open-market operations, we must now come to grips with the quite different methods it has been employing since, and how the switch to them came about.

The story of that switch must surely rank among the great tragicomedies of monetary history, for despite what many Fed officials have suggested, the Fed wasn’t forced to abandon conventional interest rate targeting  for reasons entirely beyond its control. Instead, it was compelled to give-up old-fashioned rate targeting in part because of its own, obstinate refusal to practice such targeting responsibly.

Explaining what happened isn’t easy, so brace up!

A Monetary Policy Primer, Part 8: Money in the Latest Great Muddle

In the first, 1922 edition of Money, his own now-classic primer on monetary economics, the great Dennis Robertson included a chapter he called “Money in the Great Muddle,” about the blow World War I dealt to England’s once (relatively) rock-solid monetary system, and to other monetary arrangements worldwide. To Money’s fourth (1947) edition, Robertson added a new chapter concerning the Great Depression and its monetary aftermath, calling it “Money in the Second Great Muddle.”

So it is with a bow to Sir Dennis — and a rueful awareness of the likelihood of still other muddles to come — that I have chosen the title for my own primer’s assessment of monetary policy surrounding the upheaval known as the Great Recession.

A primer on American monetary policy is, needless to say, no place for a detailed account of the the causes of that calamity. It ought, nonetheless, to say something about the part that monetary policy, and the Fed’s monetary policy decisions in particular, played in it.

Some Preliminaries

To get a handle on the Fed’s contribution to the crisis, one must be willing to do what all too many commentators on monetary policy seem incapable of doing, to wit: set aside the temptation to treat central banks as being congenitally prone to create too much money, or predisposed to create too little. The sad truth is that central banks are perfectly capable of creating too much money on some occasions, and too little on others, and that it isn’t at all unusual for them to sway intemperately from one off-kilter stance to the other, with scarcely a pause in between.

New SEC Chief Criticized Foreign Anti-Bribery Law. Good.

“Trump’s pick for SEC chair criticized U.S. anti-bribery enforcement in 2011 as too zealous,” gasps one tweet reacting to President-elect Donald Trump’s selection of Sullivan & Cromwell attorney Jay Clayton to head the Securities and Exchange Commission. In a subhead, the WSJ says Clayton “criticized SEC and [Department of] Justice handling of Foreign Corrupt Practices Act as overly aggressive.”

Good! Clayton is right to voice such criticisms. As I’ve argued in this space, the 1977 FCPA “is a feel-good piece of overcriminalization that oversteps the proper bounds of federal lawmaking in at least four distinct ways, any of which should have prevented its passage”: it is extraterritorialvicariouspunitive, and vague. It is not clear that a more carefully drafted law would have been a good idea; my Cato colleague Jeffrey Miron writes that while curtailing Americans’ involvement in overseas corruption may be a well-intentioned goal, FCPA “discourages U.S. companies from doing business abroad in the first place,” is readily circumvented in many situations, fails to distinguish between the most corrosive forms of bribery and those in which favors to officials are “an attempt to get around laws that make little sense in the first place”—such as restrictions on entering markets—and leaves some countries to welter in poverty if they cannot fix a local culture of baksheesh.

All of this was made worse by the Obama administration’s decision to step up the pace of FCPA prosecution, which ran into a series of rebukes from federal judges throwing out high-profile cases. Allegations of FCPA violations led to a great furor about Wal-Mart’s operations in Mexico that mostly fizzled later, while other prosecutions have been based on purported corruption oddly reminiscent of practices that go on right here in the U.S. without anyone prosecuting, such as Western banks’ alleged practice overseas of hiring young relatives of influential persons, something that has been known to happen in politics and the media here in Washington, D.C.

Don’t back down, Mr. Clayton.

Supreme Court Should Protect Consumers from the Consumer Financial Protection Bureau

Imagine that your company’s board chairman, against the wishes of the board of directors and in contravention of the corporate charter, hires an interim CEO. Despite that illegal action, the interim CEO disciplines you in some manner. Would that discipline be any more legitimate if, two years later, the board finally agrees to hire the CEO, who then retroactively approved his own previous actions?

This is what’s happened at the highest levels of government. When Congress created the Consumer Financial Protection Bureau as part of the larger Dodd-Frank financial reform, it specified that the director was to be appointed by the president “by and with the advice and consent of the Senate.” This placed what’s called an Appointments Clause limitation on the director’s position.

Nearly five years ago, President Obama named Richard Cordray the CFPB director—after Elizabeth Warren’s expected appointment met significant political resistance—during what the president erroneously believed was a Senate recess. (You’ll recall that the Supreme Court unanimously invalidated the National Labor Relations Board appointments Obama made at the same time.) Cordray was only confirmed as the director, in a larger compromise with the Senate, nearly two years later.

In the interim, the CFPB filed an enforcement action against Chance Gordon regarding his provision of mortgage-relief services, and Cordray later ratified it. Gordon challenged the enforcement action as emanating from an unconstitutional authority, but the lower courts ruled against him, finding that the post hoc ratification resolved any Appointments Clause deficiencies. Now Gordon has petitioned the Supreme Court for review.

Cato has filed an amicus brief in support of Gordon, urging the Court to take up the case. Congress created the CFPB with the advice-and-consent requirement for a reason: the agency has vast power with virtually no accountability mechanisms, such that the Appointments Clause provision is one of the few meaningful checks on its activities. Furthermore, Congress did not authorize the CFPB to bring enforcement actions without a duly appointed, Senate-confirmed director.

Advice and consent is “more than a matter of etiquette or protocol,” the Supreme Court held in Edmond v. United States (1997), it’s a structural safeguard intended to curb executive power. Also, when Dodd-Frank first gave the CFPB its sweeping authority to define unfair, deceptive, or abusive acts or practices, it specified that these enforcement powers could not be exercised before a director had been validly appointed. Cordray’s later ratification of his own actions can’t cure the original unconstitutional sin of an unsanctioned prosecution. Only Congress could authorize the CFPB’s use of its awesome powers without first having a fully confirmed boss in place—which Congress purposely did not do.

Allowing Cordray to ratify the agency’s otherwise illegal past conduct would prejudice Gordon’s rights, and those of many other similarly situated individuals and companies. The lower courts have effectively allowed the CFPB—an agency that already possesses massive enforcement powers—to circumvent the Appointments Clause (in violation of Article II) while, at the same time, seizing the ultimate authority over the legal effect of judicial orders (in violation of Article III).

As James Madison observed in Federalist 47, “The accumulation of all powers legislative, executive and judiciary in the same hands . . . may justly be pronounced the very definition of tyranny.” The Supreme Court should take up Gordon v. CFPB to prevent this sort of dangerous accumulation of power from happening in the future.

Aleppo Falls, Pound Strengthens, Inflation Subsides

The fog of war, coupled with the output from multiple propaganda machines, makes it difficult to determine which side has the upper hand in any conflict. After the fall of Aleppo, it appears that President Bashar al-Assad’s forces are getting the upper hand. But are they?

The best objective way to determine the course of a conflict is to observe black market (read: free market) exchange rates, and to translate changes in those rates via purchasing power parity into implied inflation rates. We, at the Johns Hopkins-Cato Institute Troubled Currencies Project, have been doing that for Syria since 2013.

The two accompanying charts—one for the Syrian pound and another for Syria’s implied annual inflation rate—plot the course of the war. It is clear that Assad and his allies are getting the upper hand. With their recent victory in Aleppo, the black-market exchange rate has moved in Assad’s favor and, likewise, inflation has continued to fall.