January 2012

Geithner’s “bad bank” is a big bad idea: fix bad mark-to-market accounting instead

by John Berlau on February 10, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Politics as Usual, Precaution & Risk, Stimulus to Nowhere

The Obama’s administration $1 trillion plus bank bailout plan — on top of the $800 billion stimulus that just passed the Senate — will explode the national debt and rob from future generations while doing little about the tightening of credit and valuation of toxic assets. Like the Bush administration, the Obama team balked at doing anything substantial to provide relief from the mark-to-market accounting mandates that prominent liberals and conservatives agree are spreading the credit contagion.

Despite my hopes that Treasury Secretary Geithner ‘s plan would offer a change to mark-to-market rules we can believe in, as rumored in the financial press last week, the plan turns out to be “more of the same” Bush-Paulson big spending and big government bailout. As knowledgeable observers from conservative Steve Forbes to Democrat stimulus proponent Mark Zandi agree, mark-to-market relief is essential to unclogging the arteries of the credit system. As I wrote in the Wall Street Journal last fall, it is one of the major reasons for the credit contagion despite the fact that mortgage delinquency rate are still only 6 percent.

After soaring late last week on rumors of mark-to market relief late last week (and TheStreet.com directly attributed this rise to hopes of action on mark-to-market), the Dow fell down nearly 500 points, or 5 percent today. The markets anticipate that any government money will be weighted with the strings of overregulation and de facto nationalization.

By contrast, mark-to-market suspension or relief, which would cost taxpayers virtually nothing, would let the market value these assets with private money at what the government is now planning to pay for them. Financial institutions could buy these discounted securites at a true “market” price without worrying about a future mark-to-market paper loss eating away at their regulatory capital.

Without mark-to-market reform from the SEC and the bank regulatory agencies, the buying initiatives Secretary Geithner outlines today could actually make the problem worse. As I wrote last fall in Open Market of Paulson’s original plan to buy mortgage asset (which he abandoned in favor of buying bank stock, an equally bad idea), if the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further. If it sets the price too high, taxpayers will lose out.

It’s not too late for the Obama adminstration to use its political capital push to reform mark-to-market rules such as Financial Accounting Standard 157 that are acting as a stranglehold on the financial system. Changing accounting rules to allow banks to price assets more rationally during a liquidity crisis would indeed be a change we could believe in.

Everything I Know About Construction I Learned In Business School

by Nick Brown on February 10, 2009 · 3 comments

in Economy, Stimulus to Nowhere

Watching the news concerning all the jobs the stimulus bill will create, I began to notice a pattern.  Talking heads tell me that the stimulus will get construction workers back to building light rails, highways, and bridges, and put skilled laborers back in factories to build Caterpillar tractors, cars and trucks.

I even heard that the controversial health care reform element of the package (which has created an uproar in the last 24 hours) would help stimulate the economy by keeping a patient from being mixed up with different treatments and keep her healthy and at work—this kind of stunning insight isn’t exactly the kind of thing you hear in a macroeconomics course.

More to the point, the pattern in coverage paints a picture of the stimulus as a bill that provides jobs in construction or manufacturing.  This is undoubtedly appealing news for those who work in construction or skilled labor—the construction and manufacturing sectors have shed around 318,000 jobs in January.

But the tech industry also lost 265,000 jobs over the last several months.  What is this supposed job stimulus doing for them?  Were they supposed to sit around waiting until the construction and manufacturing sectors stimulated the economy?

For that matter, what about the banking sector, the out-of-work salesman, or managers from companies that no longer exist?     Are 50-year-old, out-of-shape computer programmers supposed to start laying asphalt?

The Keynesian economics coming out of the White House and now being put into action by lawmakers on Capitol Hill makes little sense.  Throwing money at a handful of industries won’t get everyone back to work next month, no matter how much hope we have.

If the stimulus bill is supposed to stimulate the economy, then it would need to stimulate all of the economy.  Of course the only way to do that is to start taking a hatchet—not Mr. Obama’s scalpel—to the tax code and to the hundreds of thousands of pages of federal regulations.  We haven’t seen enough “change” for something that radical to occur.

Me?  I’m just glad my MPA had a required course in masonry.

No Florida Insurance Bailout

by Richard Morrison on February 10, 2009

in Bailout Watch, Economy, Insurance, Regulation

It seems that the state of Florida has overpromised insurance coverage to its citizens in the case of a catastrophic storm, and now is coming to Congress for a bailout, lest a major storm bankrupt the state. Naturally, we had something to say about this in a press release today. The director of CEI’s Florida office, Christian Cámara:

Reliance on a Federal bailout as official state policy is reckless at best. Instead of lobbying Washington politicians for money, Commissioner [Kevin] McCarty and Governor Charlie Crist should return to Tallahassee and work together with the legislature to restore a healthy, competitive insurance environment to ensure that Florida is able to weather the aftermath of a storm. Taxpayers should not be forced to bailout neither Florida nor the politicians that have placed the state one storm away from economic meltdown.

Wise words if I do say so myself. Chief insurance guru and Senior Fellow Eli Lehrer also chimed in:

This is a really, really bad idea. We’ve already done far too many bailouts of private companies. State governments – particularly ones that make bad decisions – don’t need bailouts as well. Congress should say “No” to Kevin McCarty.

Here’s to hoping there’s at least one bailout that fails to get funding this session.

Book-Banning, 21st Century Style

by Iain Murray on February 10, 2009 · 6 comments

in Nanny State, Personal Liberty, Precaution & Risk, Regulation

Remember the fuss when it was revealed that Sarah Palin had enquired about removing books from her town library? It would have been so much simpler if she’d just regulated them away on health and safety grounds. Because that’s the effect of the Consumer Products Safety Improvement Act, possibly the most ridiculous example of regulatory overreach this side of the EPA.

As the Headmistress explains over at The Common Room blog, the Consumer Product Safety Commission has explicitly rejected the arguments of libraries and booksellers that common sense should apply, because:

…we know that the ink used in children’s books prior to the 1980′s did contain lead. We have not gotten the kind of information we need about all the components of children’s books to be able to issue them a blanket exemption. The industry has made assertions and done very limited testing, but the Act requires more, as it should, before we can exempt a children’s product from the lead content requirements of the law. We cannot act on the “everyone knows children’s books don’t contain lead” and “historically there has never been a problem with lead in children’s books” assertions, particularly when we now know that children’s books have indeed contained lead in the past. Our staff has asked the book industry to provide us with additional information. They need to provide all of the information that our staff believes is necessary in order for the Commission to act based on sound science and comprehensive market coverage.

Note the point about Congress passing a law encompassing “all products” for children under twelve, “and they are surprised to discover it included books.” No better example could there be of Congress abusing its powers of regulation, and no better example should there be for real regulatory reform in this country. We have, after all, ten thousand such commandments.

Tucker 1 Lovins 0

by Iain Murray on February 10, 2009 · 2 comments

in Energy, Environment, Global Warming, Sanctimony

Those who have been following the “alternative energy” fantasists for a while will recognize the name of Amory Lovins, the so-called “sage” (yet another pseudo-religious title utilized by liberal environmentalists for their heroes) of the Rocky Mountain Institute. They will also remember that he regularly advances marvelous-sounding schemes for re-imagining America’s energy mix, which never seem to go anywhere. He’s at it again, this time on the popular Freaknomics blog, where he suggests that renewable “micropower” is the future of energy:

Power plants also got irrationally big, upwards of a million kilowatts. Buildings use about 70 percent of U.S. electricity, but three-fourths of residential and commercial customers use no more than 1.5 and 12 average kilowatts respectively. Resources better matched to the kilowatt scale of most customers’ needs, or to the tens-of-thousands-of-kilowatts scale of typical distribution substations, or to an intermediate “microgrid” scale, actually offer 207 hidden economic advantages over the giant plants. These “distributed benefits” often boost economic value by about tenfold. The biggest come from financial economics: for example, small, fast, modular units are less risky to build than big, slow, lumpy ones, and renewable energy sources avoid the risks of volatile fuel prices. Moreover, a diversified portfolio of many small, distributed units can be more reliable than a few big units. Bigger power plants’ hoped-for economies of scale were overwhelmed by diseconomies of scale.

Thankfully, William Tucker, author of the excellent new book Terrestrial Energy, has responded in the comments section. His comment is worth reproducing in full:

Quite briefly, Lovins is drawing a false analogy between the miniaturization and distribution of computing and telecom instruments and the production of energy. Computers and telephones can be miniaturized and distributed according to Moore’s Law because they involve information. You can use less and less energy to store each bit. For that reason you can have as much computing power on your desktop today as Univac had in an entire room in the 1960s. Computers can be distributed because they have become so powerful.

But things don’t work that way with energy. A kilowatt is a kilowatt, whether it’s generated in your backyard or at a power station. You can “distribute” generation anywhere you want but you still have use the same amount of fuel or wind or whatever. We could replace central thermal stations with gas turbines on every street corner, but the fuel is going to be expensive and produce a lot more carbon emissions, which is something Lovins conveniently overlooks.

The real irony, however, is his suggestion that wind fits this small-is-beautiful scenario. Sure wind is “distributed.” After all, you need 125 square miles of 45-story windmills to generate the same 1000 megawatts that can be generated in one square mile at a central thermal station. You’ve got to put them somewhere! And that’s just their nameplate capacity. To produce 1000 MW of base load electricity, you’d need at least three or four 125-square-mile wind farms scattered at diverse locations around the country.

That’s the reason Lovins himself has suggested covering all of North and South Dakota with wind farms. Al Gore matches him by asking for 1/5 of New Mexico, the fifth largest state, for solar collectors. On top of this, they want to rebuild the entire national grid to 765 kilovolts in order to ferry all this electricity from the remote areas where it’s best generated to population centers. And Lovins calls 1000-MW power plants operating on the current transmission system “irrationally big!”

What Lovins never wants to acknowledge is the energy density of nuclear power. With nuclear, the energy produced from 500 square miles of windmills can be generated with a fuel assembly that would fit in the average living room. Why “distribute” all this generating capacity into big, ugly structures that litter the landscape and only work when the wind blows? Why not concentrate it all in one place? Then once every 18 months a single tractor-trailer can come in with a new set of fuel rods.

In one respect, though, Lovins may be right. Maybe we shouldn’t be building nuclear reactors to 1500 MW. Hyperion, a New Mexico company, has invented an 80-MW mini-reactor the size of a gazebo that can power a town of 20,000. You could put it in someone’s basement and no one would ever notice. While “alternate energy” has gotten more and more gigantic, nuclear is getting smaller and smaller.

Who would have thought it would be nuclear that is small and beautiful?

Indeed. As Mr Tucker explains at greater length in his book, the real problem with “renewable” energy is that it is just so distribute and dispersed that collecting in the quantity and quality we need it is a real problem, one that size alone can solve. Lovins’ argument is just about the reverse of reality.

UNITE-HERE to Disunite?

by Ivan Osorio on February 9, 2009

in Economy, Labor, Politics as Usual

UNITE-HERE, the 450,000-member textile and hospitality union, is embroiled in a “civil war,” according to its president, who is now openly considering breaking up the union. UNITE-HERE was created as a result of a 2004 merger between the United Needletrades, Industrial & Textile Employees (UNITE) and the Hotel Employees and Restaurant Employees (HERE). The New York Times explains the logic behind the merger:

On paper, the marriage made sense, besides making for the catchy Unite Here name. Unite — the descendant of two illustrious New York unions, the International Ladies’ Garment Workers Union and the Amalgamated Clothing and Textile Workers Union — had lots of money to organize workers, but few workers left to unionize because so many apparel jobs had moved overseas. At the same time, Here was starved for cash, but saw an ocean of hotel and restaurant workers to unionize.

The idea was that once the unions merged, Unite’s ample treasury — it owns Amalgamated Bank, the only union-owned bank in the nation — would underwrite a surge in organizing.

But now the marriage is on the rocks. The merged union, comprising two disparate industries, maintained a dual leadership structure — Bruce Raynor, who headed UNITE before the merger, became General President, while former HERE chief John Wilhelm became president of UNITE-HERE’s hospitality division.

Now Raynor is accusing Wilhelm of wasting what were UNITE’s resources and trying to take over the union. He and some of his allies filed a federal suit accusing Wilhelm of violating the union’s constitution and going beyond their authority. Wilhelm says that he has respected constitutional procedure, and in turn accuses Raynor of a power grab. The rhetoric is getting heated.

“We’re not going to allow them to hijack the resources that were put aside by generations of ladies’ and men’s garment workers,” Mr. Raynor said. “We’ll do whatever we have to do to show that we can’t be held captive by a bunch of thugs.”

Mr. Wilhelm said the executive board and committee had followed the union’s constitution.

“The notion that the merger should be disbanded because Bruce Raynor can’t be a dictator is a proposition that may make sense for Bruce Raynor, but it doesn’t make sense for the workers in our industries,” Mr. Wilhelm said.

According to the Times, the UNITE/Raynor and HERE/Wilhelm factions cannot even agree on whether the union should split into its previous component parts. But someone else sure does seem to think the breakup should take place:

On Jan. 30, Andy Stern, president of the powerful Service Employees International Union, wrote to Mr. Raynor and Mr. Wilhelm saying their merger had failed and suggesting that Unite Here or either of its original halves merge into his union.

But Mr. Stern’s own union has been riven by dispute. He has ousted the leaders of a local representing 150,000 health care workers in California, and they responded by founding a rival union that is trying to get many of those 150,000 workers to secede from the service employees and join them.

You’d think Stern would have enough on his plate.

Among the accusations and insults volleying back and forth between Raynor and Wilhelm, it’s hard to assess who has the stronger case, but one thing seems certain: Competing egos like these cannot be easily assuaged. This may drag on for a while.

As a side note, I couldn’t help but notice this quote:

“It’s terrible to have these civil wars going on right now in what are among the most dynamic unions in the country,” said Joshua B. Freeman, a labor historian at City University Graduate Center in New York. “It’s a terrible waste of energy and undercuts tremendous possibilities.”

Is there any other area of the social sciences where one can expect to hear such blatant advocacy?

For more on UNITE-HERE, see here.

For more on SEIU, see here.

Update: UNITE-HERE Executive Vice President Edgar Romney today announced that he and several other union officials have filed a resolution with the union’s General Executive Board to dissolve the 2004 merger and for a disaffiliated UNITE “[t]o explore a relationship with SEIU.”

Update 2: John Wilhelm, president of UNITE-HERE’s hospitality industry division, announced on Monday night that, “the General Executive Board of UNITE HERE voted by a substantial 62% to 38% margin to remain unified.” Now it’s time to watch for Raynor’s next move.

Stanford Economist Blames Government for Crisis

by Cord Blomquist on February 9, 2009 · 4 comments

in Culture, Economy, Zeitgeist

on February 20th Stanford economist John B. Taylor will be publishing a book analyzing the financial collapse.  According to the book’s current home on the web at Stanford’s Hoover Institution’s website, the book will:

The author tells how unusually easy monetary policy helped set the crisis in motion, as interest rates at the Federal Reserve and several other central banks deviated from historical regularities. He explains monetary interaction with the subprime mortgage problem, showing how the use of these mortgages, especially the adjustable-rate variety, led to excessive risk taking. In the United States this was encouraged by government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect. Looking ahead, the author suggests a set of principles to follow to prevent misguided actions and interventions in the future.

The book already has rave reviews from several leading intellectuals, like Anna Schwartz, who, with Milton Friedman, authored The Great Contraction, 1929–1933.  Schwartz writes:

If Milton Friedman and I had written as persuasive an analysis as this, one year—rather than 30 years—after the Great Depression began, the United States might have had a typical recession rather than the greatest downturn in history.

We at CEI eagerly await the arrival of what is sure to be a very illuminating book.

LibertyWeek 29: The Mother-in-Law of All Debts

by Richard Morrison on February 9, 2009 · 1 comment

in CEI Projects, Podcast

Welcome to Episode 29 of the LibertyWeek podcast, where your hosts Richard Morrison and Cord Blomquist are happy to slave away in front of hot mikes to bring you the best in news and views. After a brief celebration of twenty-five years of Yuri Andropov being dead, we focus on the 900 billion lb. gorilla in the room, the economic stimulus bill making its way through Congress. Alternate references to it as porkulous, the Stimulus to Nowhere and the Mother of All Debts are also acceptable. Having spent our way through future generations, we take a look at the new e-book reader, the Kindle 2, with a little help from our friends at Ars Technica. Moving on to Scandal Watch, we look into both the faux scandal and the actual conflicts of interest in the herstory of Labor Secretary-Designate Rep. Hilda Solis (D-CA). Finally, we give Michael Phelps some additional support and encouragement in a very special installment of Olympic News.

Listen here!

TARP Challenged in Federal Court

by Seth Bailey on February 9, 2009 · 1 comment

in Bailout Watch, Legal

Three businesses and five individuals recently brought suit against the Troubled Asset Relief Program (TARP) in the Eastern District of New York.  The case, Henry Builders et al. v. US, alleges that the TARP violated their Fifth and Fourteenth Amendment equal protection rights.  The plaintiffs sought to have their mortgages paid by the government as well and possibly the actual use of the TARP funds.

While the case was ultimately dismissed with prejudice, meaning that the same parties cannot be brought before the court again, the merits of the case were not reached.  The main argument, violation of equal protection, did not receive an opinion.  The plaintiffs challenge the TARP’s exclusive arrangement with financial institutions.  Perhaps the most important holding of the case held that financial institutions were not suspect classifications – a branch of equal protection law that requires more stringent review in addition to making it easier to overturn a law.  Instead, District Judge Vitaliano ruled that the plaintiffs did not have standing.

Article III of the Constitution requires standing in every case brought to the court under its case or controversy provision.  Plaintiffs must prove 1) an injury that is concrete and unique.  This injury can be either actual or imminent.  2) The injury must be causally connected to the complaint and 3) a victory in court would correct the injury.

The court ruled that the plaintiffs did not meet the first standing requirement.  The court explained that the claims, similar to suits brought by taxpayers in general, are “shared with millions of others” and, therefore, not unique. It remains unclear whether the case was dismissed on being brought as a taxpayer suit.  The court notes that the plaintiffs never attempted to apply for TARP funds.

While the plaintiffs would have almost certainly been denied an application, the statute is so ambiguous and if Paulson was in a good mood – no one knows.  Filing worthless pieces of paper sometimes comes in handy.  For instance in District of Columbia v. Heller (the case overturning the DC gun ban), Heller filed for a handgun permit from the District.  Although he was denied the permit that did not exist, this action gave Heller standing to pursue his case in court ultimately serving as the best for the most important Second Amendment decision ever decided.

If anyone has standing, it will most likely be from a competitor who did not receive bailout funding.  A company in this position may not even have to file for TARP money if the company is clearly ineligible on its face.

This is the first of many cases to challenge the TARP.  It does not signal a defeat to every challenge to the TARP.  When a court grants standing to a plaintiff, the merits of the case must be heard.  The TARP clearly violates the Founding Fathers’ vision of the Constitution – now lets hope the courts agree.

The COPs are back

by Seth Bailey on February 9, 2009

in Bailout Watch, Odds & Ends

Today has seen much activity and media coverage of the TARP’s Congressional Oversight Panel.  Today the Panel released a number of reports on their blog—once again blasting the TARP. “Treasury simply did not do what it said it was doing,” Ms. Warren said at a hearing before the Senate banking committee. The reports released include the third monthly report, a valuation report and a legal analysis. As previously written on OpenMarket, the COP only blows smoke.

They do, however, realize that the TARP is not working:

The Panel’s analysis revealed that in the ten largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66. This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.

This could have been avoided had the Treasury used the ability to buy assets at auction as authorized under s. 111(c) of the EESA.  Too many times in recent history have legislators proposed massive bills with little deliberation that deeply impact not only American citizens but also the world. This provision is written in the law!  Having extensive laws does nothing but create problems with enforcement and the creation of loopholes — for instance the Detroit bailout.

The Obama administration will be unveiling the next plan for spending tomorrow.  If there is going to be government spending, the government should certainly thoroughly consider the methods it may use in addition to their effectiveness.

Blind potshots with billions of taxpayer dollars only furthers the ideals of limited government.  The popularity of the bailout illuminates this fact.

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