Stuart Varney: Obama Wants to Control the Banks

http://online.wsj.com/article/SB123879833094588163.html

I worried that this would happen. I hoped it wouldn't. I should have known better.

Why are we letting this happen? Is this what we, collectively, really want? If not, then why do we seem to care so little?

Highlights:

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He's been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with "adverse" consequences if its chairman persists. That's politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can't a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can't special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit -- until now.

Which brings me to the Pay for Performance Act, just passed by the House. This is an outstanding example of class warfare. I'm an Englishman. We invented class warfare, and I know it when I see it. This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration's goal of controlling the financial system.

Gary Becker Interview in the Wall Street Journal

http://online.wsj.com/article/SB123759849467801485.html

A very interesting interview. It is well worth reading the whole thing. One particular part that caught my eye was Becker's comments on policy during the current economic crisis.

Yet the professor is no laissez-faire ideologue. He says we have to think about what the government can do to "moderate the hit to the real economy," and he says it should start with "the first law of medicine: Do no harm." Instead it has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

I am becoming increasingly convinced that the big lesson from this crisis once the dust has settled will be that government policy needs transparency. The take-away from the Asian financial crisis in the 1990's was that banks and finance needed transparency. This crisis is showing that governments need to convey information on the fundamental rules or principles which drive policy and when people get mixed signals or the signals are not easily interpretable, the result is an big uptick in uncertainty. So called pragmatic policy-making that evaluates each mini-crisis independently and lets one firm fail while another seemingly similar firm is bailed out is counterproductive.

The geniuses at Econosseur (disclosure: one of them has the office across the hall from mine) have posted a nice clip from a recent South Park episode that illustrates this rather nicely.

Kimberly A. Strassel: 'Greed' Is Not Good

From today's WSJ:

http://online.wsj.com/article/SB123751023925990683.html

Bankers are not the only ones who succumb to greed.

Highlights:

Once upon a time, Washington told the nation a story. It was a dark tale of economic distress brought on by villainous, greedy Wall Street bankers.

The storytellers loved this yarn. The public wanted some one to blame for their unemployment, their foreclosures, their falling 401ks, and Wall Street made an easy target. It was also so much simpler than the real story of societal credit mania, in which the Federal Reserve, Congress, regulators, credit-rating agencies, Fannie and Freddie, Wall Street -- and yes, many homeowners and consumers -- were all complicit.

...

This spectacle has left the financial community with one impression: Stay away. What healthy bank, what hedge fund, what private equity firm wants to take part in an Obama plan to sell off toxic assets, or to revive consumer lending, with the knowledge that they might be Washington's newest bonfire? Executives are already working to get out of TARP, fearful of political punishment. This despite a recession, falling house prices and growing bank losses.

As it happens, the administration has suggested the banks might need yet more public capital, not less. But just who in Congress is today prepared to vote to provide more funding, with greedy AIG on the public mind? It's too busy passing laws to levy 90% taxes on bank employees everywhere.

Even More on the AIG Bonuses

Well, the House of Representatives has voted to impose a retroactive 90% tax on bonuses that it explicitly voted to allow only a month ago. Our congressmen could argue that they didn't know this provision was in the legislation when they passed it. And that is almost certainly the truth. However, parking cop might say, "Ignorance of the law is no defense." If congress didn't know what was in the bill, perhaps they should not have voted on it until they knew what they were voting on. I can feel no sympathy for a group of people that behaves this way.

Perhaps a better phrasing more in line with today's events would be, "The law is no defense."

Earlier, I compared our political system to that in Iraq under Saddam Hussein. However, I think an even better comparison. Hugo Chavez's Venezuela. The US is on track to become the new Venezuela.

Perhaps it is time to stop blogging before the thugs come to visit me at my home.

On a more practical note. I assume these taxes must also pass the Senate and perhaps the world's greatest deliberative body will actually stop to deliberate and think about the matter. But, assuming the taxes do become law, is there grounds for the bonus recipients to sue on constitutional grounds? I don't know the answer, but the whole idea of retroactively taxing a selected minority seems opposed to the principles behind the constitution if it is not actually unconstitutional.

The precendent is also a very, very bad one. If bankers become politically popular someday and unions are not, what is to stop a pro-union congress from retroactively taxing unions on supposed moral grounds? Could a liberal leaning state legislature (perhaps like that in California) vote to impose taxes on the LDS church in retaliation for the money spent by its members on the Proposition 8 vote? To me the principle seems the same.

More on the AIG Bonuses

According to this AP report, the House of Representatives is set to vote today on a bill to tax away 90% of the bonuses awarded by AIG.

It was also reported yesterday, that the language of the stimulus bill that explicitly allowed these bonuses was inserted by Senator Chris Dodd. Dodd claimed, however, that the language was inserted at the insistence of officials in the Obama administration. The Obama camp, of course, denies this is the case.

So hit rewind for just a minute and think back to a month ago when the stimulus package passed. Recall that even the leadership of congress that was pushing this bill so heavily had not had a chance to read the whole thing before the vote. Is it any wonder that we end up with all sorts of unintentional consequences given how little vetting to which the package was submitted? I suspect that the AIG bonuses are only a small fraction of the problems that have been, are, and will be generated by that poorly thought-out piece of legislation.

I love this quote from the Bloomberg report:

Other Democrats who voted for the stimulus bill have ramped up criticism of AIG’s bonuses, including Massachusetts Representative Barney Frank, the chairman of the House Financial Services Committee, who told reporters, “I think the time has come to exercise our ownership rights.”

Why bother with the fiction of owernship rights? The congress can confiscate what it wants from whoever it wants by simply passing a well-targeted piece of legislation. The only difference between doing it this way and the way that Saddam Hussein would've done something similar is the political theater associated with a formal vote in an elected assembly.

I bothers me a great deal that whenever politicans are caught doing something immoral one of the pat defenses they roll out is that their actions were not illegal. Here we have a case where it is politically convenient to ignore the law and act in defense of higher morals. But, isn't such selective morality also immoral?

WSJ Editorial: Obama's AIG Panic

The editorial board raises some very good points.

http://online.wsj.com/article/SB123742023932678335.html

Highlights:

Senator Chris Dodd, down in the 2010 election polls after his sweetheart Countrywide mortgages, is busy rewriting the TARP compensation limits he only recently stuck in the stimulus bill. His last-minute measure explicitly exempted from compensation limits bonuses agreed to prior to the passage of the stimulus bill: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . ." So Senator Hedge Fund is suddenly morphing into Huey Long to save his career.

This is all too much even for Rep. Charlie Rangel, the House's chief tax writer, who says the tax code shouldn't be deployed as a "political weapon." He's right. AIG's managers may be this week's political target of choice, but the message to every banker in America, indeed every business in America, is that you could be next. At least we haven't yet seen the resolution that was proposed in the English parliament, in 1720 in the aftermath of the South Sea bubble, that bankers be tied in sacks filled with snakes and tipped into the Thames. But it's still early days.

...

The Beltway's banker baiting seems to increase in direct proportion to the government's incompetence in nurturing a financial recovery. Anger rises when Americans learn after three bailout revisions that they haven't been told the truth that the AIG nationalization was a conduit to save counterparties, and even hedge funds, that gambled on housing. Only two weeks ago, Federal Reserve Vice Chairman Donald Kohn told Congress he couldn't disclose who AIG's counterparties were. Americans also wonder why taxpayer guarantees should be provided to Citigroup, a three-time loser, but with little accountability for the board and managers who brought the company low.

Reviving a financial system is a long process that requires a combination of capital support, workout ability and discipline for mistakes. The public has to believe the end result will be a better, sturdier system in return for taxpayer support, while at the same time being assured that gamblers aren't saved from their own mistakes.

If this balance is beyond the ability of Mr. Obama's current economic team, he needs a better team. The worst mistake he can make is to deflect attention away from government's mistakes by joining the attack on the very bankers he needs to lead an economic recovery. That's how a deep recession becomes a Depression.

Lefrak and Shilling: Immigrants Can Help Fix the Housing Bubble

Now here is an interesting mix of policies. Allow immigrants who buy houses to become legal permanent residents of the US.

http://online.wsj.com/article/SB123725421857750565.html

Highlights

Excess inventory is the mortal enemy of house prices, which have already fallen 27% since the peak in early 2006. We predict another 14% drop through the end of 2010 if nothing is done to eliminate the surplus.

...

A better idea is to offer permanent residence status to the many foreigners who are clamoring to get into the U.S. -- if they buy houses of minimal values (not shacks). They wouldn't need to live in those houses, but in order to remove the unit from the total housing market, they couldn't rent them. Their temporary resident status granted upon purchase would become permanent after, perhaps, five years, if they still owned the houses and maintained clean records. The mere announcement of this program might well stop the ongoing collapse in house prices, especially in cities such as Las Vegas, Miami, Phoenix and San Francisco, where prices are down 40% -- but where many foreigners like to live.

WSJ Editorial: The Real AIG Outrage

The Wall Street Journal's take on the AIG mess from today's edition:

http://online.wsj.com/article/SB123725551430050865.html

Highlights:

Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.
...

The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.

The focus of our political class on the excesses of the private sector really is astounding in its hypocracy. Not that the private sector is entirely guiltless, but the amount of money wasted on AIG salary bonuses is chump change compared to the waste the government itself generates.

Today's In The Bleachers

North Korea Economy Watch: Kaesong Zone battered and bruised

http://www.nkeconwatch.com/2009/03/14/kaesong-zone-bruised-and-battered/

North Korea is a mess, of course. This blog entry illustrates why it is such a mess.

Megan McArdle: Obama too sunny?

This blog entry was included in James Taranto's Best of the Web Today and is worth a read.

http://meganmcardle.theatlantic.com/archives/2009/03/obama_too_sunny.php

Highlights:

Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse. Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury. Meanwhile, the administration is clearly prioritized a stimulus package that will not work without fixing the banks over, um, fixing the banking system. Unlike most fiscal conservatives, I'm not mad at him for trying to increase the size of the government; that's, after all, what he got elected promising to do. But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological without much scrutiny, with the heaviest focus on programs that will be especially hard to cut.

Peggy Noonan: A Tragedy of Errors, and an Accounting

An interesting contrast between the response of the Marine Corp to an avoidable plane crash in San Diego, and the mortgage meltdown.

http://online.wsj.com/article/SB123629513232645561.html

Highlights:

The day after the report I heard from a young Naval aviator in predeployment training north of San Diego. He flies a Super Hornet, sister ship to the plane that went down. He said the Marine investigation "kept me up last night" because of how it contrasted with "the buck-passing we see" in the government and on Wall Street. He and his squadron were in range of San Diego television stations when they carried the report's conclusions live. He'd never seen "our entire wardroom crowded around a television" before. They watched "with bated breath." At the end they were impressed with the public nature of the criticism, and its candor: "There are still elements within the government that take personal responsibility seriously." He found himself wondering if the Marines had been "too hard on themselves." "But they are, after all, Marines."

By contrast, he says, when the economy came crashing down, "nowhere did we see a board come out and say: 'This is what happened, these are the decisions these particular people made, and this was the result. They are no longer a part of our organization.' There was no timeline of events or laymen's explanation of how a credit derivative was actually derived. We did not see congressmen get on television with charts and eviscerate their organization and say, 'These were the men who in 2003 allowed Freddie and Fannie unlimited rein over mortgage securities.' Instead we saw . . . everybody against everybody else with no one stepping forth and saying, 'We screwed up…'" There is no one in national leadership who could convincingly "assign blame," and no one "who could or would accept it."

One of Easterly's points in his lecture here at BYU yesterday is that a key reason aid agencies fail is that there is no accountability. Does this principle extend beyond aid agencies?

Charles Krauthammer: Deception at Core of Obama Plans

Worth a read. If I were cynical I might begin to believe that the recession is not, in itself, a priority for the administration, but rather a convenient vehicle for pushing through a variety of social reforms that would otherwise be much more difficult for the general public to stomach. Fortunately, I belive in hope and not cynicism.

http://www.realclearpolitics.com/articles/2009/03/a_dishonest_gimmicky_budget.html

Highlights (emphasis is mine):

The "day of reckoning" has now arrived. And because "it is only by understanding how we arrived at this moment that we'll be able to lift ourselves out of this predicament," Obama has come to redeem us with his far-seeing program of universal, heavily nationalized health care; a cap-and-trade tax on energy; and a major federalization of education with universal access to college as the goal.

Amazing. As an explanation of our current economic difficulties, this is total fantasy. As a cure for rapidly growing joblessness, a massive destruction of wealth, a deepening worldwide recession, this is perhaps the greatest non sequitur ever foisted upon the American people.

At the very center of our economic near-depression is a credit bubble, a housing collapse and a systemic failure of the entire banking system. One can come up with a host of causes: Fannie Mae and Freddie Mac pushed by Washington (and greed) into improvident loans, corrupted bond-ratings agencies, insufficient regulation of new and exotic debt instruments, the easy money policy of Alan Greenspan's Fed, irresponsible bankers pushing (and then unloading in packaged loan instruments) highly dubious mortgages, greedy house-flippers, deceitful homebuyers.

The list is long. But the list of causes of the collapse of the financial system does not include the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates. Indeed, one could perversely make the case that, if anything, the proliferation of overeducated, Gucci-wearing, smart-ass MBAs inventing ever more sophisticated and opaque mathematical models and debt instruments helped get us into this credit catastrophe in the first place.

...

Clever politics, but intellectually dishonest to the core. Health, education and energy -- worthy and weighty as they may be -- are not the cause of our financial collapse. And they are not the cure. The fraudulent claim that they are both cause and cure is the rhetorical device by which an ambitious president intends to enact the most radical agenda of social transformation seen in our lifetime.

Policy Lessons from the Latest Recession

I have been pondering lately what I think the long-run lesson(s) from this recession will be. Of course, this is pretty hard to guess at right now. However, lack of knowledge or perspective has never been much of a barrier to pontification, so here goes.

The biggest lesson I have learned is that government policy can really mess things up. The home mortgage crisis, severe as it was, should not have caused a recession as serious and as deep as the one we are experiencing. John McCain was widely criticized late last summer when he said the fundamentals of the economy were strong. Ex post he was very, very wrong. But at the time what he said was pretty consistent with the evidence.

When the government (and I include the Federal Reserve under that blanket) decided that it had to move to shore up the banking system, one of the things it did was signal to the average consumer that the economy was in a lot worse shape than they previously thought. Couple that with the haphazard way in which policy was made, with few or no discernable principles determining which institutions were too big to fail and which were not, and you create an environment with a lot of uncertainty. The congress' on - off -on passage of the TARP bill was another example of policy being made in an environment of great uncertainty.

Current policy is still being made under this rubric. The stimulus package was passed without a single member of congress having read the bill. How much certainty does that inspire? There are similar problems with the budget.

We may be moving away from policy under extreme uncertainty. At least the president's address to congress cleared up the uncertainty about his policy priorities that were never addressed during the campaign. However, the policies are so clearly bad that we are begining to replace uncertainty about whether things will be good or bad with certainty that they will be bad.

Even that may not be true. If the policies are bad enough, then congress may actually fail to enact them.

The lesson I have drawn so far is that clear policy principles are really important. I suspect that even adherance to suboptimal policies early on would have been better than moving all over the map haphazardly.

Easterly on State-Promoted Industrialization

Easterly will be visiting BYU next week. His blog today has implications for the likely effectiveness of the Obama administration's attempt to drive the economy via the government.

http://blogs.nyu.edu/fas/dri/aidwatch/2009/02/asian_success_mythology.html

Highlights:

So my general claim is that heavy reliance on markets is associated with long-run success, using as data the Asian successes, the earlier European and North America/Australia/New Zealand successes, the failure of non-market central planning in the Communist Bloc, and the failures of statist policies in Latin America, the Middle East, and Africa. It is true that Asian successes used state intervention more than the earlier European examples, but on average state intervention does poorly across all countries, so we have no Popper-standard evidence that state intervention contributed to their success. So my claim is based on evidence, not ideology.

So I stand by my claim that the 66-year-old idea of state-promoted industrialization has failed, and that it was irresponsible of Collier and UNIDO to resurrect it as a “major conceptual breakthrough.”

Daniel Henninger: A Radical Presidency

http://online.wsj.com/article/SB123561433557778201.html

He sounds very, very worried. We now know for sure that the President is just as liberal as his voting record indicated. He is less and less the empty vessel into which one can read any motives one wishes and revealed more and more to be a typical left-wing liberal. I think Henninger is right to be worried.

Highlights:

He told Congress he does not believe in bigger government. I don't believe that. It's becoming clear that the private sector is going to be demoted into a secondary role in the U.S. system. This isn't socialism, but it is not the system we've had since the early 1980s. It would be a reordered economic system, its direction chosen and guided by Mr. Obama and his inner circle.

Gov. Bobby Jindal's postspeech reply did not come close to recognizing the gauntlet Mr. Obama has thrown down to the opposition. Unless the GOP can discover a radical message of its own to distinguish it from the president's, it should prepare to live under Mr. Obama's radicalism for at least a generation.

Taxing the Richest Won't Raise Enough Revenue

This has been known for years. But in the current political climate it bears repeating.

From the WSJ opinion page today, the following quote:

Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

Few of us realize how progressive our income tax is and how much of the largess the government doles out depends on the earnings of so few.

Today's Dilbert Cartoon

Today's is one of the best of all time. Hattip to Dave Spencer.

http://www.dilbert.com/strips/comic/2009-02-25/

A Unique Gift Idea

Have a Palestinian graffitti artist spraypaint whatever message you choose on Israel's security wall in the West Bank. The cost is 30 euro (about $40).

http://news.yahoo.com/s/nm/20090225/wl_nm/us_palestinians_israel_wall_1

http://www.sendamessage.nl/your-message-on-the-wall/?lang=eng

Holman W. Jenkins Jr.: How Democracy Ruined the Bailout

from Wednesday's Wall Street Journal

http://online.wsj.com/article/SB123491508784704057.html

Highlights:

"Never was it a good idea to have a financial crisis in the middle of a presidential election. Involving Congress was a mistake. Letting the technical matter of keeping the banks afloat become a political football was a terrible idea. Letting our willingness to deploy giant sums of taxpayer money become the measure of credibility was a disaster. Letting all this be sold on Capitol Hill amid shrieks about the country collapsing into a Second Great Depression was a confidence killer across the economy, which until that point had held up well."