January 2012

Government Expands Fannie and Freddie Bailout and Lavishes Money on their CEOs

by Hans Bader on December 28, 2009 · 1 comment

in Bailout Watch, Economy, Features, Legal, Politics as Usual, Stimulus to Nowhere, Zeitgeist

On Christmas Eve, when it hoped no one would notice, the Obama administration lifted the $400-billion limit on bailouts for government-sponsored mortgage giants Fannie Mae and Freddie Mac, and showered their executives with $42 million at taxpayer expense. (Earlier, Freddie Mac’s CFO received $5.5 million).

Under the Bush administration, federal regulators took over Fannie and Freddie in the name of stopping their risky practices. But the Obama administration has increased their purchases of risky mortgages in a vain attempt to inflate the economy. Worse, it forced them to run up to tens of billions in losses to bail out deadbeat and at-risk mortgage borrowers, and then tried to conceal those losses, in conduct reminiscent of Enron.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages that were issued by banks and mortgage companies, and thus creating an artificial market for junk. They put up with Clinton-era affordable housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone –  to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

The federal government has a double standard when it comes to huge executive pay.   It has no problem paying exorbitant sums of money to people who head failed government agencies like Freddie Mac and Fannie Mae.   (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public).

The federal government does, however, have a problem with big compensation packages at private banks like Bank of America and Citibank, even for talented new executives.  Obama’s pay czar, Ken Feinberg, a major donor to liberal politicians like Senator Chris Dodd (who recommended Feinberg for the job after he gave Dodd more than $9000), is now chopping compensation more at basically self-supporting institutions like Bank of America than at completely-bailed out entities like Chrysler.  (Many expect Chrysler to go under despite a $70-billion bailout.   Chrysler is owned mostly by the United Auto Workers union, which received majority ownership from the Obama administration at taxpayer expense, through a politicized bankruptcy process).

Feinberg’s actions have already left taxpayers worse off by forcing Citigroup to get rid of a profitable subsidiary. As finance professor Roy C. Smith noted in The Washington Post:

Feinberg’s actions . . . are not going to improve either the government’s chances of getting its money back or the prospects of repairing these damaged companies. Because of his recommendations, Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.

Many competent executives whose pay is threatened by the pay czar are now leaving for other firms.  (The pay czar’s political patron, Senator Dodd, received sweetheart loans from the reckless, bankrupt subprime lender Countrywide, and a massive gift from Edward Downe, in the form of a luxurious “cottage” in Ireland he received in a “cut rate real estate deal” for hundreds of thousands of dollars less than fair market value.)

Banks will now be pressured to make even more risky, low-income loans. Obama has sent to Congress his proposal to create a politically correct entity called the Consumer Financial Protection Agency, tasked with enforcing the Community Reinvestment Act. Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s proposals would empower the new agency to enforce the Community Reinvestment Act, which was a key contributor to the financial crisis, without regard for banks’ financial safety and soundness.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants (”GSEs”) Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort payoffs from banks.

EPA’s Tailoring Rule: A Temporary, Legally Dubious, and Incomplete Antidote to Massachusetts v. EPA’s Legacy of Absurd Results

by Marlo Lewis on December 28, 2009 · 1 comment

in Global Warming, Legal

Today, I submitted a comment on EPA’s proposed Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule.  The gist of my argument is as follows:

In Massachusetts v. EPA, the Supreme Court legislated from the bench, authorizing and indeed pushing EPA to control emissions of greenhouse gases (GHGs) for climate change purposes. This is a policy decision of immense economic and political magnitude that Congress never intended or approved when it enacted and amended the Clean Air Act (CAA or Act).

Regulating GHGs under the CAA leads inexorably to “absurd results,” including an economically-chilling administrative quagmire. To prevent GHG regulation from overwhelming agency administrative resources and stifling economic development, EPA proposes to suspend, for six years, the “major” source applicability thresholds for the CAA pre-construction and operating permits programs. That is, EPA proposes to amend the Act. This violation of the separation of powers compounds the constitutional crisis inherent in the Court’s substitution of its will for that of the people’s elected representatives.

The small-business protections proposed in the Tailoring Rule are temporary, legally dubious, and incomplete. Even if courts uphold the Tailoring Rule, despite its flouting of clear statutory language, it will not avert the most absurd result of the Court’s misreading of the CAA:  regulation of carbon dioxide (CO2) and other greenhouse gases under the National Ambient Air Quality Standards (NAAQS) program.

EPA runs enormous political risks leading the charge for GHG regulations not approved by Congress. It is in the Agency’s best interest not to oppose legislative action to overturn the endangerment finding and Mass. v. EPA.

The full text of my comment is available here.

Terrorist Charged After Trying to Blow Up Plane; Government Undermines Airline and Railroad Security

by Hans Bader on December 27, 2009 · 3 comments

in Employment, Labor, Mobility, Politics as Usual, Precaution & Risk

An alleged terrorist from Nigeria has been charged with plotting to blow up an airliner.  He carried explosives onto a plane and set them on fire.   Only the quick action of passengers put out the fire and prevented an explosion.  He was allowed on the plane despite the fact that he was on a terror watch list.

Despite this utter failure, Homeland Security Secretary Janet Napolitano claims that “the system worked” because no one died. Her agency is now planning to make overseas air travel much more onerous, by banning passengers from getting out of their seats during the last hour of a flight (even though a passenger who did just that that foiled the terrorist attempt) and by restricting carry-on luggage and items like blankets on flights.

In the aftermath of 9/11, Congress shifted airline security screening to the inept Transportation Security Administration (TSA), which fails to detect explosive ingredients and fake bombs, in performance tests.  A study found that the TSA is more than twice as likely to fail to detect a bomb as the private security firms it replaced. And TSA’s failure rate is three or four times as high as the few remaining private firms still allowed to handle airline security.

In tests, TSA failed to detect fake bombs 60 percent of the time at Chicago’s O’Hare airport, and 75 percent of the time in Los Angeles. Yet the Obama administration plans to make TSA even more bureaucratic by introducing collective bargaining, which will make it even harder to get rid of incompetent employees.

Rather than having the federal government take over airline security screening, the feds should have stepped up policing of the private companies that performed it, to weed out bad companies and promote the best.

Bush initially objected to Congressional demands for a federal takeover, but then knuckled under for political reasons.  Ironically, even in European countries governed by Socialist parties, airline security and screening is generally in the hands of private companies, because private companies are usually more diligent and innovative and less bureaucratic and inefficient.

The Obama administration is also undermining the security of railroad passengers by gutting an expert, highly-rated, anti-terror agency at Amtrak, which Amtrak’s unions hate, despite its efficiency, because it is not unionized.  Political cronyism is also playing a role in the gutting of Amtrak’s Office of Security Strategy and Special Operations (OSSSO).  Ultimately, OSSSO’s “highly-specialized officers” will likely be replaced by unionized employees with ”alarmingly low pass rates” in “basic” classes.

Flu Watch Dec. 24 – The U.S. Epidemic is Over

by Michael Fumento on December 27, 2009

in Health and Illness, Odds & Ends

The Big Scare of 2009 is over, folks. The U.S. swine flu epidemic has ended.

“The proportion of deaths attributed to pneumonia and influenza (P&I) was below the epidemic threshold,” according to the Centers for Disease Control and Prevention website Fluview and this chart shows it.

New infections continued to drop this week to only 306 reported by CDC-monitored labs, compared to 1,370 just three weeks before and 11,470 at the height of the epidemic. That’s a plummet of over 97% from the height. Deaths and hospitalizations have plummeted to merely 20 and 313 respectively, compared to 85 and 982 just a week earlier and compared to 189 and 4,970 at the peak in October.
Remember that according to CDC estimates, about 257 Americans die of seasonal flu per day during flu season. Mind you, the swine flu deaths are actual while the seasonal flu ones are estimates so it’s not a completely apples-to-apples comparison.

Only 7 states still report widespread activity, down from 11 last week. The American College Health Association did not report new numbers this week, presumably because of the Christmas holiday.

Repeat, the swine flu epidemic is over.

So where do we go from here? No, unfortunately not to zero. Instead we’re at what’s called an “endemic” level. We can expect infections, hospitalizations, and deaths to continue at something the same rate as this last week until the end of flu season in April.

Judging by what we’ve seen so far in the U.S. and the experiences in New Zealand and Australia, we are in for an extremely mild flu season overall. That’s because swine flu is more contagious than the far deadlier seasonal flu, essentially muscling it aside. People inoculated with swine flu infection don’t get the seasonal flu.

So while you may recall all those “excess” deaths we were supposed to be getting from swine flu (30,000 to 90,000 according to the President’s Council of Advisors on Science and Technology and “89,000 to 207,000″ according to flu book author John Barry, we will actually get far fewer flu deaths overall both worldwide and in the U.S. because of swine flu.

While the media are finally beginning to admit that the World Health Organization’s swine flu “pandemic,” made possible only by completely redefining the definition, may be the mildest in history, they are not willing to admit that we will actually have fewer flu deaths internationally because of this alleged pandemic.

Yes, folks, the WHO and the media really did pull a fast one on us.

Climategate Op-Ed in Detroit News

by Daniel Compton on December 23, 2009 · 1 comment

in Energy, Environment, Global Warming, International, Regulation, Zeitgeist

Here is my op-ed published in the Detroit News on December 23.

Climategate: What e-mail really means

Daniel Compton

By now, most people are aware of the scandal surrounding the leak of thousands of e-mails and other documents from the University of East Anglia’s Climate Research Unit (CRU). Among these is an e-mail exchange involving several of the world’s leading climate scientists, dated October of 2009, in which the admission is made that even their best models cannot account for the last decade of temperature data. “The fact is that we can’t account for the lack of warming at the moment and it is a travesty that we can’t,” said Kevin Trenberth, one of the world’s preeminent climate scientists and lead author of the 2001 and 2007 IPCC reports.

Significantly for public policy, the admission implies that efforts to reduce carbon dioxide emissions — including the EPA’s endangerment finding, all forms of cap-and-trade-style legislation, and any possible resolution to emerge from the recently convened Copenhagen conference –have no basis in science .

Trenberth’s statement is compelling on its own, but the subsequent discussion is even more illuminating. Later in the same e-mail thread, fellow climate scientist Tom Wigley replies that he does not agree with Trenberth’s assertion. Trenberth then responds to Wigley, clarifying and expounding upon his earlier claims:

“How come you do not agree with a statement that says we are no where close to knowing where energy is going or whether clouds are changing to make the planet brighter. We are not close to balancing the energy budget. The fact that we can not account for what is happening in the climate system makes any consideration of geoengineering quite hopeless as we will never be able to tell if it is successful or not! It is a travesty!”

This comment requires some scientific translation for its significance to be fully understood. The “energy budget” is the total energy gains and losses incurred by the Earth. The overwhelming majority of the energy entering the Earth comes from the Sun. Some of that energy is reflected back out into space by the atmosphere, clouds, and the Earth’s surface, while the remaining energy is absorbed, and is later reradiated as heat. The amount of energy the Earth gains is approximately equal to the amount it loses, which is why global temperatures remain relatively stable from day to day.

We have fairly good estimates of how much energy is entering the Earth, and we know from the laws of thermodynamics that energy cannot cease to exist, so “balancing the energy budget” simply entails accounting for where all that energy is going. “Global warming” refers to the condition in which the Earth as a system is taking on slightly more energy than it is losing for a sustained period, causing it to heat up over time. Therefore, it is highly significant when one of the world’s leading climate scientists asserts that we are “no where close to knowing where energy is going” and “not close to balancing the energy budget”.

In this context, “geoengineering” refers to any deliberate effort to affect net energy gains or losses to achieve a desired result, such as a cooler planet. The energy income of the planet is approximately static, and also well beyond our control, so affecting net energy flow necessarily involves changing systemic energy losses.

Greater atmospheric concentrations of greenhouse gases, like carbon dioxide (CO2), can reduce energy loss, so reducing CO2 emissions is one method of geoengineering. Indeed, Trenberth, in a letter published in the February 2009 issue of Physics Today defined “geoengineering” to include all efforts to “reduce emissions … or reduce the amount of carbon dioxide in the atmosphere.” Therefore, using his own definition of “geoengineering,” Trenberth’s remark could be interpreted thus:

The fact that we can not account for what is happening in the climate system makes any consideration to reduce emissions … or reduce the amount of carbon dioxide in the atmosphere quite hopeless as we will never be able to tell if it is successful or not!

All policy actions that would be required under the EPA endangerment finding, cap-and-trade legislation, and any global climate treaty amount to attempts to reduce carbon dioxide emissions. Thus, by his own admission, Kevin Trenberth appears convinced that all these efforts are quite hopeless indeed.

Daniel Compton is a research associate at the Competitive Enterprise Institute and contributor to OpenMarket.org

Why Won’t Al Gore Debate?, Part 2

by Christine Hall on December 22, 2009 · 1 comment

in Environment, Global Warming

CEI has a gift for Al Gore, arriving just in time for the holidays.  You may recall that CEI last month rushed to the cause of Lord Christopher Monckton, in his public challenge to Al Gore to debate global warming.  Inspired by Saturday Night Live’s famous effort to entice a Beatles reunion for only $3000, CEI settled on this considerably less improbable goal.  In CEI’s original YouTube video-message, we offered Mr. Gore a check for $500, plus proceeds from a pledge-a-dollar-to-debate campaign, plus the “street cred” earned by such a fearless debate.  Surely, it’s a win-win proposition for Gore.
Alas, in the wake of the burgeoning Climategate email scandal that called into question the work of the ”leading scientists” sounding the global warming alarm, Mr. Gore failed to respond to our lucrative debate challenge.  So, today, CEI has again sweetened the pot – we are now offering, not just the $500 check plus the extra donations ($200, so far), but also a $25 pre-paid gas card! (Especially in these difficult economic times, who would want to pass up over $700 in extra pocket change – and just in time for the holidays!)
Now that we’ve upped the ante, how much longer can Al Gore resist?  What do you think?

Health care bill’s hidden tax on pain relievers, Pedialyte, and prenatal vitamins

by John Berlau on December 22, 2009 · 4 comments

in Features, Odds & Ends, Zeitgeist

If you want to see how Obamacare will hit you and your family in the wallet, look no further than the inside of your medicine cabinet. Open the cabinet door and you may see an antihistamine such as Claritin for allergies, pain relief medicine such as Tylenol or Excedrin, Pedialyte to prevent your kids from becoming dehydrated when they are sick, and prenatal vitamins if you and your spouse are expecting another one.

All of these items in your cabinet have two things in common. One is that they are classified as “over the counter” (OTC) medicines and available without a doctor’s prescription. The other is that if you pay for any of these items with money in your flexible spending account (FSA) or health savings account (HSA) – and according to this guide from FSA administrator Benesyst , all of these are eligible expenses — you will face an effective tax increase of up to 40 percent on these items in the health care bill that passed the U.S. House of Representatives and is poised to pass the U.S. Senate.

Both bills restrict individuals with these pre-tax accounts to buying a “medicine or drug only if such medicine or drug is a prescribed” one. And ironically, this tax that will raise health care costs substantially by creating incentives for the use of more expensive prescription drugs even when OTC drugs are just as safe and effective.

Both FSAs and HSAs allow Americans to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee’s salary, and money in the account must be used by the end of the year.

In 2003, the Treasury Department and the Internal Revenue Service ruled that OTC medicines could be could be paid for by FSAs and the newly enacted HSAs. In a press release that sounded unusually compassionate for the IRS, the agency stated:

“Drugs are increasingly becoming available over-the-counter without prescription. Many health plans no longer cover the cost of these drugs as over-the-counter. While an over-the-counter drug is less expensive than the prescription drug, the cost to many consumers increases because the price paid by the consumer for the over-the-counter drug is greater than the co-payment by the consumer when the drug was covered by insurance. This is especially an issue for individuals who remedy chronic health problems by regularly taking an over-the-counter medicine.” Then-Treasury Secretary John Snow added in the release, “Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow.”

Specifically, the government ruled that since the tax code written by Congress did not specifically require that “only medicines or drugs that require a physician’s prescription be taken into account” for health expenses, OTC medicines were eligible. The ruling made clear that although health accounts could not purchase items for general health such as toothpaste, they could be used for medicines that treat specific conditions, such as an “antacid, allergy medicine, pain reliever and cold medicine.” Companies that administer FSAs and HSAs have developed extensive lists of a variety of OTC items that are covered. The Benesyst guide fills two pages with an alphabetical list of eligible expenses that includes everything from analgesics to wound care.

But Section 9004 of the pending Senate bill and Section 531 of the House bill that passed in November changes the tax code so that “distribution for medicine” from HSAs and FSAs are “qualified only if for prescribed drug or insulin.” Yes, the bills are merciful enough to allow diabetics to purchase insulin under these tax plans, but if you or your family members need Pedialyte, prenatal vitamins or numerous other over the counter health items, you will see a tax hike that could be huge.

Since HSAs and FSA contributions are exempt from both income taxes and 15.3 percent payroll tax for Social Security and Medicare, and since these together can reach more than 40 percent of an employee’s salary, the effective tax increase on these medicines could be more than 40 percent.

And this tax change will almost certainly cost the health care system billions more dollars in unnecessary spending both to the government and private insurance plans. The Joint Committee on Taxation estimates that the tax hike will bring in $5 billion in revenues over ten years – itself a drop in the bucket when compared to the bill’s new trillion-dollar entitlement – but that estimate doesn’t take into account behavioral changes as a direct result of this provision.

OTC drugs are much cheaper those available for prescription, but they could now be more expensive to individual consumers given that prescription drugs would still be eligible for favored treatment in the tax plans, and that insurance companies would be mandated to cover many of them. Consequently, any time a consumer has the slightest headache, the financial incentive would often be to see a doctor and get a prescription rather than go to the store and get medicine off the shelf.

This could mean that billions will be wasted on the additional costs for prescription drugs in instances when OTC medicines could be just as safe and effective at treating the illness. A 2005 study in the American Journal of Managed Care found that the Food and Drug Administration’s clearing of antihistamines such as loratadine (Claritin) for over-the-counter sale saves about $4 billion a year in health care costs. Ironically, the liberals and Democrats who normally rail against big pharmaceutical companies are now creating a huge windfall the firms that make expensive prescription drugs by penalizing users of OTC medicines.

The rallying cry for opponents of Obamacare has been “Hands off my health care.” In addition, they now could say, “Hands off my medicine cabinet.”

Regulation of the Day 89: Purple Dye

by Ryan Young on December 22, 2009

in Deregulate to Stimulate, Economy, International, Personal Liberty, Regulation, Regulation of the Day, Trade

Ancient Roman consuls – equivalent to our presidents – wore togas edged in purple to mark their high status. As Republic became Empire, new emperors were said to “ascend to the purple.”

Purple clothing was a status symbol for most of human history. It was the ancient equivalent of the Mercedes-Benz. Originally discovered in the glands of shellfish (reputedly by Heracles’s dog!), it took 12,000 of the creatures to get just 1.5 grams of dye. Purple garments could be as rare and costly as gold in some places.

Modern innovations such as inexpensive synthetic dyes, the Minnesota Vikings, and purple M&Ms have taken away the color’s exotic reputation. But no worry. Federal regulators are doing what they can to bring it back.

Alpinil Industries, a dye manufacturer in India, sells its carbazole violet pigment 23 cheaply. Too cheaply, it seems. Even commoners can afford to buy products colored with their purple hues!

Irate American competitors convinced the government in 2004 to put an anti-dumping duty on Alpinil’s purple dye. That raised the price to match pricey American-made dyes. Purple would once again be reserved for the rich.

Now that the tax has been in place for five years, the Department of Commerce is wrapping up an investigation to see if it has been working as intended. A repeal would be best for consumers. Don’t expect to see it happen, though.

The benefits are concentrated to a few dye manufacturers, who have a strong incentive to lobby to keep the status quo. Meanwhile, the costs are diffused onto millions of consumers, none of whom have much incentive to spend thousands of dollars in an effort to save themselves a few pennies.

The Financial Crisis Made Easy, Radio Edition

by Evan Banks on December 21, 2009

in Bailout Watch, Economy, Odds & Ends, Stimulus to Nowhere

Some of OpenMarket.org’s readers may know that I’m in the middle of earning a Master’s of Journalism here in D.C. I’m concentrating in Broadcast and Online Production, and for those concerned that journalism is dying a slow death, I’m living proof that a new generation of journalists are being bred with the Internet in mind–but that’s another story for another day.

As one of the requirements of a Public Affairs Reporting class, I’ve written a piece on last year’s financial crisis specifically exploring the role of the Federal Reserve and the Community Reinvestment Act and attempting to give, in layman’s terms, a reasonable account of what happened that the average person would be able to understand.

I’m a firm believer that one should not have to be a banker to make sense of the financial crisis, and as a journalist I have to concede that news organizations could and should have done a much better job explaining what happened. Unfortunately, it seems that when it comes to explaining things like collateralized debt obligations, credit default swaps and market derivatives it’s far easier to revert to intellectual sloth, blaming greedy investors and “capitalism gone wild.”

I’ve reproduced the piece’s script, which was designed for a radio broadcast, here in its entirety, complete with its anchor introduction and cueing (and yes, all good broadcast reporters write their own introductions). You’ll have to forgive some of the elements of the broadcast style (such as putting a source’s title before their name), but one of the advantages of the format is its clear, concise points and fast pacing. This story would be about five minutes long if it were played on the air. And as a side note, even though I work at a think-tank, I’ve tried to make the piece as politically neutral as possible.

The Financial Crisis Made Easy

Anchor1: The Federal Reserve is coming under closer scrutiny for its actions during last year’s credit crisis.

Anchor2: Experts are also taking a closer look at a law that makes it easier for low-income families to get home loans.

Anchor1: As Evan Banks reports, some are saying that the Fed and the Civil-Rights era law played a major role in last year’s financial crisis, while others blame greedy investors and bankers for the housing bubble.

—

Federal Reserve Chairman Ben Bernanke may be saying that the recession is over, but there is still much debate over what caused last year’s crisis in the first place.

Some are saying the central bank itself was at the root of the crisis.

Established in 1913 by Woodrow Wilson, the Fed’s duties include monitoring and managing the nation’s money supply and setting interest rates by buying and selling government-backed bonds.

Its end goal is to create and maintain a stable economic setting for private commerce to flourish.

However, economist Steven Horwitz believes that by artificially lowering interest rates after nine-eleven, the Fed overstimulated the housing market.

SOT (stands for sound on tape) (:10) “Look at the banking industry like a traffic light at an intersection. When the lights turns red, banks don’t lend. The Fed, through monetary and fiscal policy, makes all the lights turn green.”

Horwitz says that the only problem with green lights all the time is that eventually it causes a traffic accident.

As more and more people bought homes at low interest rates, home values skyrocketed, creating a housing bubble that burst last year.

The resulting sharp decline in home values was the trigger that brought the nation’s banking system to its knees last fall.

Some say that the Community Reinvestment Act, a law passed in 1977, also contributed to the crisis.

The law is the culmination of an effort to stop discrimination in loans made to low-income individuals and businesses, a practice known as redlining.

However, the Competitive Enterprise Institute’s Michelle Minton says that as the Community Reinvestment Act matured in the mid-nineties, it’s scope and regulatory powers broadened.

SOT (:17) “The Community Reinvestment Act was an attempt to strong arm banks into going against their better judgment and writing loans without thinking about the profit consequence. The game really changed as the feds made CRA compliance a requirement for bank mergers.”

Minton says that the law encouraged banks to make risky loans to individuals that couldn’t pay the money back—individuals the banks would not otherwise have loaned to.

When these high-risk individuals couldn’t pay back their mortgages and the banks repossessed their homes, the entire system came crashing down like a set of dominoes.

With fewer people paying their mortgages and banks unable to re-sell more and more foreclosed houses, property values across the board dropped.

For many homeowners it made increasingly less sense to continue paying off a loan that was higher than their house was worth.

Combine falling home values with so-called ninja loans- loans requiring no proof of income, no job, and little or no down payment on the home, and the recipe was perfect for walk-outs and abandoned homes.

Finally, as a direct result of mortgage revenues drying up, investors and banks across Wall Street that had heavily invested in real estate started going belly-up.

With investments, retirement plans and stocks dropping across the board, the crisis hit home and came full-circle.

Former Chair of the Federal Housing Board Bruce Morrison points a finger directly as these risky lending practices, saying they inevitably lead to defaulting mortgages.

He warns against policy-driven lending:

SOT (:15) “Deciding that risk doesn’t exist because you have an objective is a really bad thing to do, and so we need to learn about risk and how to measure it better than we have and have more honest discussions about which risks we ought to take and who are to take them and who will underwrite them.”

On the other hand, the National Community Reinvestment Coalition’s John Taylor says that it’s silly to blame poor people for bursting the nation’s housing bubble.

Taylor points out that the housing crisis affected everyone, not just the poor and minorities:

SOT (:07) “You’d be surprised at the whiteness of these people. This was not just about minority communities.”

The Federal Reserve’s response to the crisis involved authorizing the Treasury to print large amounts of new money and lowering the interest rate even further.

The Fed also stood behind former President Bush’s Troubled Asset Relief Program, the national plan to bail out banks deemed by the Fed to be “too important to fail.”

Last week Citigroup returned the remainder of unused TARP funding along with its loaned federal monies, making it the last Wall Street bank to exit the program.

Some, though, are still wary of a society that makes liberal use of credit and bailout money.

Stamm Mortgage Management founder Mark Stamm says that he fears a future where contracts and loan obligations are meaningless.

He says that a bailout mentality will cripple the American economic apparatus in the end, perhaps irrecoverably:

SOT (:12) “That’s going to be the biggest bad thing that happens as a result of this. credit cards? You don’t really need to pay ‘em. Mortgages? You don’t really need to pay ‘em.”

Regardless of whether the Community Reinvestment Act, the Federal Reserve, both, or neither was at fault in last year’s financial fiasco, both sides agree that public regulators and private banking firms must be more transparent in their mortgage dealings.

A bill introduced by Texas representative Ron Paul that would audit the Federal Reserve is currently going through a committee and has 317 cosponsors.

Paul’s Federal Reserve Transparency Act of 2009 would allow Congress and the American public to see, for the first time in history, the day-to-day decisions on the Fed’s books.

At this time no efforts are being made to repeal or change the Community Reinvestment Act.

Evan Banks, [news organization here].

Regulation of the Day 88: College Football’s Playoff System

by Ryan Young on December 21, 2009

in Culture, Deregulate to Stimulate, Economy, Nanny State, Regulation, Regulation of the Day, Zeitgeist

“College football is bringing big bucks to K Street as lawmakers take aim at dismantling the Bowl Championship Series,” says a story in Politico.

A six-figure sum is being spent lobbying what really shouldn’t be a government issue. Millions more are being spent on other issues affecting college sports.

There’s even a PlayOff PAC that gives money to politicians who take an active stance on college football playoff reform.

True, the BCS playoff system could definitely use an overhaul. But that’s a job for the NCAA. Not Congress.

On the other hand, legislators do considerably less harm when they spend their time on college football instead of, say, health care or fiscal stimulus.

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