January 2012

A Bounty on Your 401(K)

by Hans Bader on April 6, 2009

in Bailout Watch, Economy, Legal, Personal Liberty, Politics as Usual, Regulation, Stimulus to Nowhere

The Obama Administration’s mortgage bailout for irresponsible borrowers (including wealthy borrowers with modest mortgage payments) provides a bounty for reckless sub-prime mortgage lenders like Countrywide to rip off your retirement plan. Countrywide sold its junky mortgages on Wall Street, where they ended up being owned by mutual funds that probably are in your 401(K). But it continued to service the mortgages and make money doing so.

Now, the Obama Administration is offering Countrywide $1000 to cut each of those mortgages — which it doesn’t even own — and $1000 a year for subsequent years in which it continues to service those reduced mortgages. So Countrywide is busy modifying thousands of mortgages it services, which aren’t even its property anymore — even though binding contracts say it can’t do that. When investor Bill Frey stood up to Countrywide earlier and sued it, he was demonized by Congressman Barney Frank, who spawned the mortgage crisis by blocking needed reforms and promoting risky loans in the name of “affordable housing.” Now, a bill pending in Congress would abrogate those binding contracts to enrich Countrywide at the expense of America’s savers. (The bill is being pushed by liberal Congressional leaders with the support of the left-wing groups ACORN and the National Community Reinvestment Coalition).

You may also have been ripped off if your mutual funds bought shares of the mortgage giant Freddie Mac, which the Obama Administration forced to incur $30 billion in losses to cut the principal and interest on the mortgages of delinquent and at-risk borrowers. My retirement plan contained shares of the mutual fund Legg Mason Value Trust, which owned a ton of shares in Freddie Mac.

Bailed-out mortgage borrowers are now defaulting by the thousand on their new, taxpayer-subsidized loans, which isn’t surprising, given that many of them ran up so much non-mortgage-related debt that they can’t afford even the small, reduced mortgages they received courtesy of the taxpayer.

Mortgage servicers have an incentive to modify mortgages at taxpayer expense to make them lower than necessary even if a responsible borrower could easily afford them. Why? because no borrower is going to refinance to get rid of a low mortgage. But many of them will refinance later on to pay off a high mortgage. So mortgage services will use taxpayer bailout money to cut interest and principal on mortgages that a responsible borrower could easily afford, in order to keep borrowers from paying off their mortgage.

The bill to allow mortgage servicers to abrogate the contractual rights of investors is backed by ACORN. ACORN, a beneficiary of the economy-shrinking $800 billion stimulus package, helped spawn the mortgage crisis by promoting “liar loans.” It has also engaged in extensive financial fraud and vote fraud. The Obama Administration has chosen ACORN to help conduct the 2010 census, which will be used to reallocate seats in Congress.

Obama’s $250 billion bailout for irresponsible borrowers is yet another breach of his campaign promise to enact a “net spending cut,” which seems to be just as forgotten as his broken promise not to raise taxes “in any form” on anyone making less than $250,000 a year.

The newest altruist: Fidel Castro

by Julie Walsh on April 6, 2009

in Energy, Global Warming

“The financial crisis is not the only problem. There’s another worse one, because it has to do not with the means of production and distribution but with our very existence. I’m referring to climate change. Both are here and will be discussed simultaneously,” Castro said in the latest of his commentaries on current events.,” according to the Latin American Herald Tribune.

He’ll fit right in with the altruistic designers and promoters of the Waxman-Markey bill, which is “modeled closely on the recommendations of the U.S. Climate Action Partnership (USCAP)”  industry lobbying organization.

“Newspapers are dying; Are universities next?”

by Wayne Crews on April 3, 2009 · 3 comments

in Culture, Economy, Odds & Ends, Tech & Telecom

Wikinomics warns that non-elite colleges risk the same plight now facing newspapers. Rarely do the dominant industries lead innovation, and in the case of the papers:

[L]eaders of old paradigms have the greatest difficulty embracing the new. Why didn’t Gannett create The Huffington Post? Why didn’t NBC invent YouTube? Why didn’t AT&T launch Twitter? Yellow Pages should have built Facebook and Microsoft should have come up with Google. And Craigslist would have been a perfect venture for the New York Times.

As for the universities:

But less-selective private colleges and regional public universities, by contrast - the higher-education equivalents of the city newspaper - are in real danger. To survive and prosper... universities need to integrate technology and teaching in a way that improves the learning experience while simultaneously passing the savings on to students in the form of reduced tuition.

One thing for sure. The smartest students want to get an “A” without having ever gone to the lectures. They understand that there are better ways of learning than being the passive recipient of a one-way, one size fits all, teacher-focused model where the student is isolated in the learning process. When the cream of the crop of an entire generation is boycotting the formal model of pedagogy, the writing is in the wall.
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Crucial Military Votes Excluded in New York Special Election

by Hans Bader on April 3, 2009 · 13 comments

in Legal, Personal Liberty, Politics as Usual, Sanctimony

The outcome of a special Congressional election in New York’s 20th Congressional District will likely turn on the illegal exclusion of up to 1,000 overseas military ballots, which otherwise would have tipped the race in favor of James Tedisco (R). Tedisco and Scott Murphy (D) are in a dead heat, with 77,225 votes each.

Democrats on the state elections board blocked GOP attempts to allow overseas military voting in the special election. Overseas ballots take weeks to reach voters and be returned unless special measures are taken to speed things up. But the elections officials refused to do anything to speed things up, or mail the ballots out early enough. The result is that perhaps 90 percent of the ballots will be tossed in the trash without ever being counted. (Military ballots are cast mostly for Republican candidates).

The exclusion of these ballots violates a federal law known as UOCAVA, but the Justice Department filed only a “Potemkin Village” lawsuit in response, seeking a brief, cosmetic extension of time for returning the ballots — an extension that will result in only a handful of the wrongfully-excluded military ballots being counted. The Justice Department could easily have sought and obtained broader, more meaningful relief, as it did on several occasions during the Bush Administration. But it didn’t want to, for partisan political reasons.

So much for Obama’s campaign promise to defend “the right of every American to vote.” (Obama’s Justice Department is also not interested in protecting the voting rights of white people denied the right to vote by black political bosses in predominantly-black counties).

This is just one facet of the continuing politicization of the Justice Department, which is now blessing unconstitutional bills that even liberal legal scholars admit violate the plain language of the Constitution.

And it is reflects just one broken promise in a long line of broken promises from Obama. Obama has violated his campaign pledge of a “net spending cut” through an unprecedentedly-large federal budget that will generate $4.8 trillion in increased deficits, a trillion-dollar toxic-asset program, and an $800 billion, economy-shrinking “stimulus” package.

And Obama’s promise not to raise taxes in “any form” on anyone making less than $250,000 per year has been broken by his SCHIP excise tax increase and his proposed $2 trillion cap-and-trade carbon tax.

That G20 Communique

by Iain Murray on April 3, 2009 · 1 comment

in International, Regulation, Trade

Yesterday’s communiqué from the leaders of the G20 – a motley collection of democracies and dictatorships – has some good points, but in general it represents a new version of what economist Friedrich Hayek called “the fatal conceit.” It believes that government has all the answers, and demonstrates that the world’s leading governments recognize few boundaries. As such, not only does the communiqué promise far more than it can deliver – something the voters in G20 democracies should remember – but it may also impede global economic recovery.

The communiqué holds that, “We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared” and to “do whatever is necessary.” In clause after clause, this pro-government rather than pro-prosperity declaration embraces new burdens on a limping financial sector in the form of expanded global regulation, and effectively requires that all look toward government before acting in the future. At no point does the communiqué recognize that government action can and does distort market action to the point of significant harm.

The only “growth” being sustained in today’s political environment – and further embraced here – is the open-ended stimulus culture that has already led to an orgy of “sharing” of citizens’ wealth; in a world increasingly at ease with the word “trillion,” we are not suffering from a lack of sharing. The “unprecedented fiscal expansion” is not, as British Prime Minister Gordon Brown said, an injection of new money (except for some sales of gold reserves) but mostly a redistribution of existing taxpayer money to politically-favored recipients.

An effective communiqué would have acknowledged that wealth is not automatic, that it must be created before it can grow and expand – or be shared. Individuals acting together in voluntary enterprise form the foundation of wealth creation and job growth, but that is nowhere articulated here. Leadership would require the G20 representatives to explain precisely how they plan to unravel tax and regulatory barriers to the creation of new wealth, infrastructure, jobs and new financial innovations. Instead, the document stands as yet another open-ended promise for redistribution of a shrinking pie, and aggressive new political dominance of economic life.

This is not to say that the communiqué is wholly bad. Even as they seek to increase the reach of government by a massive expansion of the International Monetary Fund (by its own figures, the IMF budget is now greater than the GDP of all but 16 countries), the G20 leaders had no choice but to recognize the harmful effects of protectionism. The sections lauding free trade are welcome, and stand as a rebuke to Congressional leaders who have introduced protectionist language in recent bills. If there is one glimmer of hope in the G20 communiqué, it is that the vitality of trade may counteract the dead hand of government control.

Climate alarmists call for more groupthink

by Marlo Lewis on April 3, 2009

in Global Warming

Nothing is more Orwellian than quoting Orwell to attack freedom of thought and discussion. Today’s ClimateWire (subscription required) provides a case in point. “Scientists need to stop doublespeak on climate, [PR] experts say,” reports Christa Marshall. By doublespeak, Orwell meant a political orthodoxy so pervasively embraced as a party line that everybody sheepishly repeats and even believes manifest falsehoods: Ignorance Is Strength, Freedom Is Slavery, War Is Peace.

But to the PR experts cited by Marshall, “doublespeak” means that the world’s scientists, journalists, and government agencies do not all speak about climate change with one voice.

Because of this “doublespeak,” say the experts, “The dangers of global warming are not getting through to the public.” I have a better explanation. Blaming SUVs for hurricane Katrina sets off the public’s B.S. detector, as do implausible scenarios of sea levels rising 20 feet and the climate “tipping” into an Ice Age in our lifetimes or those of our children.

Be that as it may, when these PR experts (who presumably would be happy to have university departments, science journals, and government agencies pay them for their services) say that scientists must do a better job of communicating with the public, what they really mean is that scientists must do a better job of scaring people.

What Orwell would resent most is their demand that every scientist, scientific organization, and agency speak in unison. Although outrageous, this attempt to collectivize scientific discourse–this campaign to turn climate science into a party line–is hardly surprising or new. In fact, it is the arguably the very purpose for which the IPCC was established in the first place.

Regulation of Local, Non-Interstate, Non-Commercial Conduct OK’d

by Hans Bader on April 2, 2009 · 1 comment

in Odds & Ends

Congress’s power under the interstate commerce clause has been interpreted by a legion of court rulings to reach even non-commercial, local conduct that doesn’t cross state lines! Some of those rulings smack of judicial activism.

Here are some examples of rulings allowing even local, non-interstate activity to be regulated under the interstate-commerce clause:
(1) Wickard v. Filburn, 317 U.S. 111 (1942) (Supreme Court rules that farmer’s growing of grain on his own farm, for purposes of consumption, was subject to regulation under the interstate Commerce Clause);
(2) Gonzales v. Raich, 545 U.S. 1 (2005) (Supreme Court rules that consumption of locally-grown medical marijuana not even sold, miuch less sold across state lines, can be banned under the interstate Commerce Clause);
(3) Perez v. United States, 402 U.S. 146 (1971) (Supreme Court rules that local loan-sharking activity can be banned under the interstate Commerce Clause);
(4) NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937) (Supreme Court rules local workplaces can be regulated under the interstate Commerce Clause).
(5) Hodel v. Virginia Surface Mining & Reclamation Assn., 452 U.S. 264, 275 -283 (1981) (Supreme Court rules that local land-use can be regulated under the interstate Commerce Clause).

The mark-to-market relief rally

by John Berlau on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Odds & Ends

The events leading to the Dow’s climbing over 8000 today can be properly called the Mark-to-Market Relief Rally. More than any expected action of the bureaucrats and politicians at the G20, the decision today of the Financial Accounting Standards Board (FASB) to relax strict application of mark-to-market accounting mandates, urged on by members of Congress of both parties, it what’s giving investors something to cheer for.

In this era that supposedly signifies the return of big government, it is heartening that on this issue, Republicans and Democrats worked together to push for this common-sense free-market reform that will do much to get our economy going and could save taxpayers billions in avoiding the need for bailouts.

In CEI’s recently released “Bipartisan Agenda for Economic Liberalization,” we advise Congress to “make accounting regulators accountable” and to “require regulators to suspend mark-to-market accounting mandates such as Financial Accounting Standard 157 until better guidance is developed for illiquid markets.” Thanks to members of Congress such as Paul Kanjorski, Ed Perlmutter, and Peter DeFazio on the Democratic side and Spencer Bachus, Scott Garrett, and Michelle Bachmann (here’s her statement on today’s action) on the GOP side pushing FASB to reform the rules, a significant step has been taken toward this objective being achieved.

By itself, this change will not make the price of mortgage assets higher or lower. Rather, it will allow price discovery to occur. Mark-to-market distorted the market by forcing banks to take losses on mortgage assets even if the underlying loans were still performing, based on the last fire sale price of similar assets. Respected banking analyst Richard Bove pointed out that because of mark-to-market, Bank of New York Mellon had to value its portfolio of commercial mortgage-backed securities with a 1 percent default rate as if it had a 25 percent default rate. This resulted in a $70 billion loss of liquidity to the financial system from this bank alone. (Bove’s analysis doesn’t seem to be available online, but is described in this brilliant article on the investor site MotleyFool.com by Liz Peek.)

With the expected change to mark-to-market today, whether banks hold or sell toxic assets should not be a concern. Either way, this rule change will help keep toxic assets from weighing down banks’ “regulatory capital” and unnecessarily tightening the lending they do. And it will save taxpayers billions by letting the market simply value the assets at prices similar to what government programs such as Treasury Secretary Tim Geithner’s Public Private Investment Partnership seek to buy them for.

The concerns about FASB’s independence is also misplaced. Rather, the concern should be that this quasi-private board, whose edicts are embedded in federal regulations and have a profound affect on the economy, is unaccountable to the American people. Many accountants, economists, and other experts have long criticized mark-to-market for being pro-cyclical, resulting in assets being valued too high during a boom, as when Enron utilized mark-to-market to manipulate its earnings, and causing a downward spiral during a bust. Yet FASB refused to take those concerns under consideration until Congress pushed it to.

Saying that only accountants can determine accounting policy in federal regulation is like saying that only members of the military can make policy regarding war. Today’s change in mark-to-market rules is a good first step toward restoring the accountability of big accounting bodies like FASB and the Public Company Accounting Oversight Board.

If there is anything regrettable about today’s action, it is that Hank Paulson and Tim Geithner didn’t push through this reform sooner and save the economy all this consternation and taxpayers all those billions. CEI has been advocating mark-to-market reform almost from the time that the current FASB rule (Financial Accounting Standard 157) was implemented in late 2007, and here is a link to an op-ed I wrote for the Wall Street Journal in September 2008 on how the mark-to-market mandate was a significant factor in spreading the credit contagion.

Could carbon capture and storage keep the lights on in a carbon-constrained future?

by Marlo Lewis on April 2, 2009

in Energy, Global Warming

Only if the costs decline dramatically, a recent Congressional Research Service report suggests, as I discuss here. Currently, the costs of carbon capture and storage (CCS) are too high to justify continuing investment in coal-based power–the source of 50% of U.S. electricity–under increasingly stringent caps or taxes on CO2 emissions.

In addition, the storage component of a CCS system must be very nearly leak proof or it will flunk federal environmental impact assessments. As Cal Tech chemist Nathan Lewis observes, “The collective leak rates of the reservoirs must be significantly lower than 1%, sustained over a century-to-millennium time-scale. Otherwise, after 50 to 100 years of sequestration, the yearly emissions will be comparable to the emission levels that were supposed to be mitigated in the first place.”

Finally, even if economical and leak-proof, CCS must overcome the NIMBY forces who seem bent on blocking any and all energy projects, from wind farms to desert solar concentrator arrays. According to an MIT report (see p. ix), the pipeline network required to transport all the CO2 from U.S. coal power plants to underground storage sites would rival the U.S. oil or natural gas pipeline networks in size. 

So, can CCS keep the lights on in a carbon-constrained future? Only if three conditions are met: costs fall dramatically, the storage sites are virtually leak proof, and NIMBYs get out of the way.

Markets Rally on Hopes of Regulatory Relief

by Hans Bader on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Global Warming, Precaution & Risk, Regulation, Stimulus to Nowhere

The stock market has gone up by 280 points so far today, fueled by FASB’s vote to relax rigid mark-to-market accounting rules, which require financial institutions to value assets at their current fire-sale prices, and magnify boom-bust economic cycles.

The market may also be getting a boost from the Senate’s earlier vote undercutting the Obama Administration’s proposed $2 trillion cap-and-trade carbon tax, which would impose burdens on the economy akin to Herbert Hoover‘s disastrous 1932 Revenue Act at the beginning of the Great Depression.

The market’s rise contrasts with its fall in the weeks after passage of Obama’s $800 billion stimulus package, which Obama falsely claimed was needed to avert “disaster” and “irreversible decline.” Obama made that claim even though the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package would shrink the economy over “the long run.”

Many commentators have called for relaxation or repeal of mark-to-market accounting rules to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has until recently ignored inexpensive possible ways of mitigating the financial crisis like reform of “mark-to-market” accounting rules.

The Obama administration’s footdragging on accounting-regulation reform is inconsistent with the rationale for its trillion-dollar toxic-asset buy-up program, which defies mark-to-market concepts in a much more extreme way than a mere relaxation of mark-to-market accounting rules. The Treasury Secretary claims taxpayers won’t lose a full trillion under Obama’s toxic-asset program, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why did he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules were right — in which case taxpayers will end up losing a trillion dollars — or they were wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, a major donor to liberal politicians, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout.

Obama’s record-breaking tax and spending increases violate his campaign promises to enact a “net spending cut” and not to raise taxes “in any form” on anyone making less than $250,000 a year.

Ironically, Obama’s “cap-and-trade” carbon tax might have the perverse effect of increasing, rather than reducing, greenhouse gas emissions. Cap-and-trade is a pernicious “form of tax farming.”

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