May 26, 2020 9:38AM

In Memoriam R.H.T.

I don't think of myself as an especially lucky fellow. I've never bought a lottery ticket, or wagered more than a few bucks at a time (and that only in my impetuous youth) on horses, slots, or roulette. So far as I'm concerned, I can no more escape Murphy's Law than defy gravity. Yet I don't doubt for a moment that I've been lucky in my friends, and never more so than when Dick Timberlake befriended me.

That lucky event happened sometime in 1982, when I was a grad student at NYU. I got a call from the late Elizabeth Currier inviting me to give a talk on the real bills doctrine at the annual meeting of the Committee for Monetary Research and Education at Arden House.

In those days I read just about every book about money or banking I could lay my hands on. One that I very much liked was Dick's book on The Origins of Central Banking in the United States which, if I recall correctly, had a photo of Dick—it may be the very one shown here—on its fly-leaf. If you either know Dick or glance at the photo you'll understand why I might have recognized him at once among the other conference participants. In fact, since Dick was well over six feet tall, and almost always wore the same seersucker suit and some sort of tartan tie, I'd have had to be blind to miss him!

Naturally I introduced myself, and we small-talked for a bit. Then I asked the inevitable question, "What are you working on these days?"

"I'm writing about bank clearinghouses, and the emergency lending they did before the Fed came along," he said.

"Oh," I said, "that's really interesting! So, do you agree with Sprague about the importance of reserve equalization?" (One of the other books I'd read was O.M.W. Sprague's 1910 History of Crises Under the National Banking System.)

From that moment, Dick and I were best buddies. Later that day Dick heard me go after the real bills doctrine. Good Chicago product that he was, Dick thoroughly detested the real bills doctrine, so I suppose that helped to cement our friendship. (It did not endear me, alas, to some others at the CMRE. But that's a story for another time!) Some months after, having written a paper on the same subject, I sent a copy to Dick for his comments. Before long it came back in the mail, red ball-point markings throughout. Dick's advice was like gold—he was a fantastic writer. But I especially remember his reading me the Riot Act when it came to "unsubstantiated" thises and thats. To this day, I cannot see either in an MS without breaking-out my own red pen.

Dick and I stayed in touch as I completed my work at NYU and went on to teach at George Mason. There I managed, after just three years, to be promoted to professor non-grata and granted an indefinite (albeit unpaid) sabbatical, which I decided to spend at the University of Hong Kong. For all I know, I might still be languishing there, if not in some dismal Chinese "re-education camp," had Dick (and Larry White, my NYU mentor) not come to the rescue.

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May 26, 2020 8:40AM

The Fed’s Corporate Lending Facilities: A Case of Pseudo Markets

When the Federal Reserve announced on March 23 that it would purchase eligible corporate debt, syndicated loans, and exchange-traded funds (ETFs) via a special purpose vehicle (SPV), backstopped by the Treasury, moribund markets jumped. Highly leveraged companies like Carnival, Ford, and Boeing, which were unable to obtain funds in the bond market, suddenly found themselves able to borrow at rates that discounted the true credit risks. BlackRock, which will be managing the SPV, recorded a record inflow of nearly $4 billion to its iShares iBoxx High Yield Corporate Bond ETF in April, and also attracted investors to its iShares U.S. Investment-Grade Corporate Bond ETF.

Real versus Pseudo Credit Markets

Although the Fed's intent is to provide temporary liquidity to large U.S. firms, the promise of supporting corporate bond prices and making loans to highly leveraged companies undermines corrective market forces: real markets are supplanted by pseudo markets in which the central bank will be subsidizing distressed companies and politicizing the allocation of capital. Initially private investors may purchase more corporate debt, but if corporations use that credit to pay off existing debt, and do not invest in productive capital, losses may continue. Private investors then will have an incentive to offload their holdings to the SPV, effectively socializing those losses. Moreover, the Fed's financing of those purchases will further expand its balance sheet and make it difficult to exit the corporate debt market without creating additional financial turmoil. Perhaps that is why the Fed has been slow to roll out the SPV.

Those who value private, free markets recognize that the Fed's promise to revitalize corporate debt markets is, in reality, a step toward market socialism. In a dynamic market economy, private investors have many options and will take prudent risks based on expected future profits. If investors decide to buy bonds rather than stocks, they will do so only if the interest rate offered exceeds the opportunity cost of tying up their capital in one use relative to their next best alternative. With millions of investors and constantly changing circumstances, market interest rates will adjust to new information: some investors will gain, others will lose. That is the logic of the market.

Freely competitive markets ensure that relative prices reflect opportunity costs and that capital is allocated according to consumer preferences. Whenever governments or central banks interfere with that free-market process, the allocation of capital will diverge from that preferred by consumers—and there will be a loss of economic and individual freedom.

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May 26, 2020 8:25AM

SCOTUS Continues To Delay Qualified Immunity Cert Petitions

As I discussed last week, the Supreme Court was scheduled to consider ten different qualified immunity cert petitions at its May 21st conference, including three petitions calling for qualified immunity to be reconsidered entirely. Thursday came and went without further reschedulings, and I was expecting that we would learn about the results from this conference when the Court issued orders today. (I discussed these developments — and the problems with qualified immunity generally — with Jordan Rubin and Kimberly Robinson on this week’s “Cases and Controversies” podcast.)

But on Friday, the Court pushed back the question once again. In all ten of the remaining qualified immunity cases, the Court redistributed the petitions for the May 28th conference. Just as a procedural matter, this is somewhat unusual. It’s not uncommon for the Court to “relist” important petitions before deciding whether to grant or deny them, but “relist” decisions are generally announced in the Court’s set of orders following each of their conferences (i.e., the orders we were expecting next Tuesday). But here, the Court announced the redistribution of the petitions immediately, rather than waiting for Tuesday. I honestly have no idea what that indicates, and it’s also possible that things are just working differently now that the Justices are doing all their work remotely.

Nevertheless, the bottom line is that the waiting game continues. As of now, ten qualified immunity petitions are scheduled for consideration at the May 28th conference, which means that we would expect to learn about a possible cert grant on Monday, June 1st. Further delays are definitely possible at this point, but the Justices’ attention on this issue remains undeniable. Stay tuned! 

May 25, 2020 4:01PM

My Coronavirus Tale

The hospital at which I work offered antibody serology tests to all medical staff last Wednesday. The test detects IgG, the immunoglobulin that appears in the blood serum of people infected with COVID-19 sometime beyond 14 days from the time of infection. The hospital uses the Abbott Labs Architect serology test, which shows 99.6 percent specificity and 100 percent sensitivity, meaning false negatives and false positives are highly unlikely. A positive IgG test means the person tested was previously infected with COVID-19.

In many medical centers, clinical researchers are transfusing seriously ill COVID-19 patients with plasma containing the IgG from previously infected patients, known as “convalescent serum,” with very encouraging results

The following day I received a phone call from the hospital’s medical officer informing me I tested positive. I cannot recall ever having any symptoms: no fever, cough, unusual fatigue, loss of sense of smell or taste, etc.

In my medical practice I interact with numerous patients who may or not be contagious. Our clinicians and staff take all of the recommended precautions (masks, frequent handwashing, disinfecting surfaces, screening patients for fever and/​or symptoms). Based upon the IgG findings, I likely became infected with COVID-19 at least 3 or 4 weeks ago, possibly even a couple of months ago.

When I told my wife about my positive test result she went the following day to a local Labcorp testing center to get the same test. Labcorp used the same Abbott Labs Architect test on her blood. The results came back today as NEGATIVE.

Apparently, this is not an uncommon finding. In fact, a recent peer‐​reviewed study published in the journal Respiratory Medicine suggests that asymptomatic carriers may not be nearly as contagious as we originally believed. This may help explain why not everyone quarantined on the Diamond Princess and other cruise ships became infected.

On further reflection, this all makes sense intuitively. If a person is asymptomatic then they are not coughing, sneezing, or otherwise engaging in activities that help spread the virus. In fact, from an epidemiological and teleological perspective, asymptomatic patients should probably make very poor vectors to propagate a virus species.

An important caveat: this is an anecdotal report of a single case study. But it does provide food for thought.

May 22, 2020 11:16AM

Private School COVID-19 Permanent Closure Tracker— May 22, 2020

33 private schools have announced that they are closing permanently at least in part due to the COVID-19 economic downturn. That is up from 26 on our special Monday, May 18 update.

We have adjusted how we collect enrollment data, using a combination of media reports, Private School Review, and direct contact with schools. 5,690 students attend the schools that are closing, up from 5,217 on Monday. Were all of these students to go to public schools, and had none been part of publicly connected school choice such as voucher programs or scholarship tax‐​credits, the new cost to the public purse would be roughly $88,000,000 ($15,424 per student multiplied by 5,690).

Private school permanent closure 5/22/20

As always, the list is expected to grow as schools learn more about the impact of the economic downturn on enrollment and income for the coming school year. We will ordinarily post an update on Cato’s blog every Friday, but if the list reaches 100 schools we may transition to an online, searchable format. You can contact CEF director Neal McCluskey if you need more current numbers, if you know of permanent closures not on the list, or if you believe schools have been listed by mistake. We also welcome suggestions for improving the list.

May 22, 2020 8:33AM

FinCEN’s Suspicious Statistics

It’s difficult to outdo the crypto community when it comes to making bold quantitative claims that, stripped out of context, mislead the incautious. But Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco recently came close.

In remarks last week to the annual (and, alas, virtual) Consensus conference for crypto professionals and enthusiasts, Blanco declared that, “since 2013, FinCEN has received nearly 70,000 Suspicious Activity Reports (SARs) involving virtual currency exploitation.” That impressive figure was bound to get attention—and it did. The speech is also likely to reinforce the widespread view that cryptocurrency is a hotbed of financial crime. But Blanco omitted to say that, in 2019 alone, financial institutions filed more than 2.3 million SARs regarding all sorts of transactions, and that, according to FinCEN’s own statistics, virtual currency SARs make up just 0.56 percent of all such reports filed since 2014.[1]

Whom to believe—Blanco, or his agency’s numbers? Were FinCEN an obscure or unimportant agency, the answer might not matter very much. But as the U.S. Treasury Department’s illicit finance watchdog, FinCEN is a crucial enforcer of financial regulations—ones which, according to a 2018 survey, community bankers consider the costliest to comply with. Yet, despite FinCEN’s significance, the SAR database (FinCEN’s main resource for law enforcement) is bloated and opaque, and the usefulness of its contents impossible for outsiders to evaluate. Blanco ostensibly believes that crypto is a source of growing mischief. But absent major improvements to FinCEN’s database and reporting, that hunch will remain unverifiable.

To be sure, Blanco’s agency is relatively underresourced despite its leading role in writing and enforcing the Bank Secrecy Act’s many rules. Its 333 employees and $118 million budget look paltry in comparison with another Treasury agency, the Office of the Comptroller of the Currency (3,699 employees and $1.09 billion), and independent financial regulators such as the Consumer Financial Protection Bureau (1,465 and $510 million) and the Securities and Exchange Commission (4,350 and $2.5 billion). Although FinCEN delegates BSA‐​related supervision to the primary regulators of different financial institutions, only it has overall authority for enforcement of the statute.

Perhaps owing to its limited resources, FinCEN has tended to deputize financial institutions to perform the oversight that other regulators undertake directly. For example, BSA regulations require banks and others to collect, verify, and maintain an up‐​to‐​date record of their customers’ personal information, such as their name, address, date of birth, and taxpayer identification number. They must also develop due diligence policies designed to subject risky customers to additional scrutiny. Since May 2018, FinCEN has also required financial firms to collect beneficial ownership information from their corporate accountholders, so that they might include it in their SARs.

Shifting the bulk of the BSA’s burden to the private sector serves to conceal its weight. But the regulations are onerous, whatever view one holds of their impact on financial crime. According to FinCEN’s own conservative estimate, over the next decade financial institutions may spend as much as $1.5 billion just to comply with its May 2018 rule. That figure only reflects direct compliance costs: staff training, longer account opening processes, and so on. The indirect costs of FinCEN’s regulations may, however, be even greater. For instance, their adverse impact on banks’ willingness to take on customers FinCEN might deem risky is substantial. Residents of border states who hold foreign passports, conduct cross‐​border business, and deal in cash are particularly affected. While these residents may fit the BSA’s archetype of a money launderer, most are not criminals. But banks may shun them all because serving them isn’t worth the extra due diligence cost.

Banks’ strong desire to avoid considerable penalties and reputational damage makes them eager to avoid falling foul of BSA regulations. But this precautionary zeal comes at the cost, not only of lost business, but of resources that might be employed much more productively elsewhere. One example of waste is so‐​called “defensive reporting”: among the 2.3 million SARs filed in 2019, more than 11 percent (262,987) bore the tag “Other Other Suspicious Activity,” hinting that the reports were filed only as a precaution.

Such precaution may be warranted in certain cases. Perhaps a few defensive SARs have even helped to bring financial criminals to justice in the past. It’s difficult to know because FinCEN doesn’t make such information publicly available. Still, many experts point out the alarming rate of “false positive” reports, a finding that should concern advocates of greater financial inclusion because SARs are a decisive factor in banks’ decision whether to close customer accounts. And while some of the SARs with imprecise tags like “Other Other” include additional, more specific classifiers, many don’t. Again, one can’t know the exact proportion of each because FinCEN’s public database doesn’t list information on individual reports.

In forums public and private, FinCEN officials often state that criminal financial activity is on the rise, that they need all the information they can get from financial institutions, and that every single report counts. But most of the time, FinCEN’s word is all the supporting evidence outsiders can hope for. That must change. If, as Director Blanco has repeatedly suggested, financial malefactors are warming up to cryptocurrency, FinCEN should be the first to take this trend seriously by listing “virtual currency” (the agency’s preferred term) as a discrete SAR category. FinCEN should also take a leaf out of the CFPB’s book and release regular reports about suspicious activity trends across the financial system, as the Bureau does for consumer finance trends. Despite mounting SARs, FinCEN has published very little in the last 15 years on the growth of new payments instruments. Yet greater provision of information and data may help not only to alert market participants to rising threats, but to clear up the cloud of suspicion that presently hovers over the crypto industry.

If Blanco is serious about demonstrating his agency’s efficiency and value, he must be transparent with policymakers and the public. Any other approach is likely to hobble beneficial financial activity, without deterring those who seek to undermine our security.


[1] The SARs database on FinCEN’s website yields 12,533,814 reports since 2014. Data for 2013 are unavailable.

[Cross‐​posted from Alt​-​M​.org]

May 21, 2020 8:45PM

Two Things Nearly Everyone Gets Wrong About the Michael Flynn Case

I've been reading, writing, and tweeting about the Michael Flynn prosecution quite a bit lately, and I've been getting significant feedback from people who strongly dislike Flynn and think he's about to get away with committing a serious crime due to sinister political machinations behind the scenes. As explained in this post, I take no strong position on Flynn's character or whether he did or did not commit any crimes—most Americans have, so he'd be in good company.  But I think many in the "lock him up" crowd are making two fundamental errors that are in urgent need of correction. 

Those errors, which turn out to be inextricably intertwined, are: (1) Flynn is plainly guilty of lying to FBI agents, so the attorney general's motives in dropping the case against him must necessarily be suspect; and (2) given the character of the defendant and the alleged crime, the Flynn case must necessarily be a poor vehicle for spotlighting the pernicious role of coercive plea bargaining in our criminal justice system—as Pulitzer-Prize-winning columnist George Will did yesterday. As explained below, these errors are momentous, and they have been embraced by many influential bloggers, law professors, and other opinion leaders who help shape public perceptions about the legal system. I hope some of them will see this post and read it in the spirit of good will with which it is offered. 

The first point—that the decision to drop the Flynn prosecution must necessarily have been made for crass political reasons—appears to be based on an incomplete understanding of the evolving fact record together with uncharacteristic confidence in the integrity of a coerced plea. The essential facts are these:

Michael Flynn was charged with making false statements to FBI agents during a January 24, 2017 interview at his White House office regarding conversations Flynn had had in the preceding weeks with Russian Ambassador Sergey Kislyak. (Flynn was also charged with making false statements in connection with certain filings under the Foreign Agents Registration Act, but I'll put that to one side for now; among other things, Flynn never pleaded guilty to those crimes, and DOJ's attempt to prosecute another high-profile figure, Gregory Craig, for similar violations failed miserably and would likely have failed against Flynn as well.)

Represented by lawyers from the large D.C. law firm Covington & Burling (who it now appears had a serious conflict of interest), Flynn initially asserted his innocence. Crucially, Flynn's attorneys pressed the prosecutors from the Special Counsel's Office to turn over the memorandum of interview or "302" prepared by the agents who questioned him regarding his communications with Kislyak. Throughout November 2017, SCO prosecutors repeatedly rebuffed those requests even as they ratcheted up the pressure on Flynn to plead guilty in exchange for a recommendation of no jail time. But Flynn continued to maintain his innocence, and his attorneys continued pressing for production of the 302 and other discovery—which the government continued to withhold.

It has been reported, credibly in my judgment, that the stalemate was brought to a head when the SCO leaked to certain reporters that a guilty plea from Flynn would ensure that Flynn's son, who was under investigation as Flynn senior's business partner (and also happened to be the father of Flynn senior's four-month-old grandchild) would not be prosecuted. This is the sort of despicable tactic one associates with tyrants and dictators; but to our infinite discredit, it appears to have become a routine feature of American prosecutions as well.

In any event, we do know that something caused Flynn to suddenly change his mind in late November of 2017 and agree to plead guilty to a single charge of lying to FBI agents. He signed a "statement of the offense" to that effect (along with the alleged FARA violations) on November 30, and appeared in court to enter his guilty plea—on the charge of lying to FBI agents only—the next day, December 1, 2017.

Notably, despite having pleaded guilty more than two years ago, Flynn has not yet been formally convicted of that crime because the conviction does not technically happen until the sentence is pronounced. And for various reasons, that has not happened yet.

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