aei

Government Promoted the Risky Non-Traditional Mortgages that Triggered the Financial Crisis

by Hans Bader on July 26, 2011 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Regulation, Zeitgeist

Ed Pinto, who was an executive at Fannie Mae long before it went into the toilet and nearly took the financial system down with it, notes that “the financial crisis resulted from an unprecedented accumulation of weak and risky Non-Traditional Mortgages (NTMs)” promoted by both the government and the government-sponsored mortgage giant Fannie Mae. “Each type of NTM featured increased borrower leverage and risk.”

In Government Housing Policy: The Sine Qua Non of the Financial Crisis, he describes in detail how government housing policy explicitly promoted massive increases in leverage and moral hazard by both borrowers and investors and chronicles the central role played by Fannie Mae and Freddie Mac as the clearly-acknowledged kings of moral hazard and leverage. As he points out, government involvement included the facts that (1) Congress, at the behest of community advocacy groups, forced Fannie and Freddie to replace conservative underwriting with flexible underwriting knowing that banks would follow suit; (2) Fannie vowed to transform the housing finance system using flexible underwriting, in an effort to protect its charter privileges bestowed by Congress; and (3) HUD, after a decade of effort, proudly took credit for a revolution in affordable lending. This revolution then led directly to the 2008 financial crisis, which precipitated a $160 billion bailout of Fannie Mae and Freddie Mac, the nation’s two government-sponsored mortgage giants.

(Unlike the private banks, which repaid their bailouts with interest, Fannie Mae and Freddie Mac are not expected to repay taxpayers, and their bailout tab may rise to $1 trillion, according to Bloomberg News. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. In May 2010, the administration and its congressional allies blocked efforts to reform Fannie Mae and Freddie Mac.)

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Rent Seekers Keep it Phony

by Angela Logomasini on April 8, 2010 · 1 comment

in Environment, Nanny State

Why does industry sometimes (all too often) support government regulation? You would think they would prize their freedom. But think again. Many businesses are willing to use the government to get a competitive advantage, an activity economists call rent seeking. And, unfortunately, some will even work in tandem with unscrupulous activists to spread misinformation about a competitor’s product and then call for government bans.

Consider the the website “Keep it Organic.” Its stated purpose is to “provide you with important facts about organic foods and beverages, information about current trends in the organic industry and we hope, an objective look at the organic market as it relates to consumer interests.” The posts on the site all attack the use of bisphenol A in food packaging, claiming it taints food and deprives it of the label “organic.” Headlines include: “Plastic Chemicals Make their Way from Oceans to Food Chain to Humans,” “‘TIME’ reports on ‘The Perils of Plastic,’” and “Chemicals Found in Water Can Make you Fat.” Yes, it sounds like the same old hype we get from many green activists.

But “Keep it Organic” is an industry website. If you scroll down to the bottom it reads: “Copyright © 2006 GPI.” Follow the link to GPI and it brings you to the Glass Packaging Institute. Wow. They didn’t simply employ activists to sully their competitors–aluminum and steel can producers whose containers are lined with BPA–they were willing to get their own hands dirty. But their apparent ownership of the Keep it Organic site is oh, so subtle. They even list themselves under the “Recommended Links” section along with a bunch of outside groups that include environmental activists.

The GPI website is just the tip of the iceberg when it comes to phony campaigns and claims about BPA. My colleagues Iain Murray and Michael Fumento have highlighted other political forces that are moving this issue, despite science to the contrary. A study on the topic published by Jon Entine at the American Enterprise Institute does a wonderful job documenting the crazy extent that activists–including some scientist-activists who were recently awarded federal grants to do research for NIH–have gone to push forward BPA bans. It is a must read for anyone with an interest in this topic.

Unfortunately, such hype is having considerable influence on policymakers. Senator Diane Feinstein (D-Calif.) has a bill that may come to the senate floor next week–S. 593–that could ban BPA uses for food containers. This is a dangerous policy because BPA resins line steel and aluminum cans to protect our food supply from deadly pathogens. True, we could switch many products to glass packaging, as GPI wants–but breakage and resulting food waste is an obvious drawback. The smarter approach is to stick with the science, and the science weighs heavily in BPA’s favor as a safe and effective product for use in food packaging, as documented in our CEI-Casscade Policy Institute study.

Thoughts on David Frum’s AEI Exit

by Fred Smith on March 29, 2010

in Odds & Ends, Politics as Usual, Zeitgeist

Frum, like many intellectuals, suffered from the desire to gain respect from his fellow intellectuals. But, as Schumpeter noted long ago, the class interest of intellectuals is statism.

Schumpeter’s reasoning in “Can Capitalism Survive?” is rooted in envy. Intellectuals would grow envious of the entrepreneurial class – “If we’re so smart and moral, why are they so rich? – and seek to transform envy into theories of de-legitimization. Racism, sexism, environmental destruction, inequalities, exploitation of the developed world along with other associated Robber Baron style rewritings of history are the narratives they develop.

Since the narratives that inform the citizenry of most policy issues are devised and disseminated by intellectuals, the dominant narratives will be anti-capitalist, anti-business, and especially anti-entrepreneurial. That sets the stage for the growth of the state which creates many well-paying niches for intellectuals – mostly on the left, with a few on the right.

That combination of psychological and economic incentives means that most intellectuals see a large and growing government as key to their class interest.

Even conservative intellectuals seek respect from their fellow intellectuals. Intellectuals – having no obvious product save words and media appearances – are often insecure. Since most intellectuals are statists, the David Frums of the world are drawn into that ideology. AEI is not a statist institution – why they put up with him is unclear.

That point is made clear when one considers his defenders. Anne Applebaum’s “he was right” viewpoint is typical. She would have the Republican party follow the lead of David Cameron of the Tory party, endorsing European values, carbon energy rationing, redistribution policies – the whole non-sustainable welfare, regulatory state.

That would be insane.

Banning Bake Sales

by Angela Logomasini on October 21, 2009 · 1 comment

in Health and Illness, Precaution & Risk, Regulation

The American Enterprise Institute held a panel discussion yesterday on food safety. They discussed congressional proposals aimed at addressing contaminants in our food, such as pathogens like Salmonella and E. Coli. Panelists actually agreed on a few things … well, actually, they agreed on what they don’t know.

First, no one could answer the question as to whether legislation would significantly reduce risks, nor could anyone determine where the real risks lie. And no one could provide an adequate justification for increased government action because food safety has not declined in recent years—it is more likely improving.

Nonetheless, David W. K. Acheson of Leavitt Partners (a former FDA official) and the Consumer Federation of America’s Carol Tucker Foreman strongly supported increased federal action simply because they “believed” it would work. Walter Olson of the Manhattan Institute and Overlawyered.com noted some serious, potential pitfalls, such as reduced competition, destruction of small businesses, and the expansion of crazy regulations on bake sales and other food-related activities. He used the disaster created by the Consumer Protect Safety Improvement Act (CPSIA) as an example.

Michelle Worosz professor from Auburn University argued that we need more information before regulating. Worosz is correct about holding off. However, we can’t simply wait for better information because we will never have it.

By definition, public officials are too far away from process to make reasonable one-size-fits-all decisions about myriad, varied, ever-changing, and situation-specific problems. As F.A. Hayek pointed out, it is a fatal conceit to believe otherwise. Only the multitude of individuals in a dynamic market process–which holds each accountable–produces desired results. Regulators, on the other hand, simply second-guess all those private decisions. They might have good or bad motivations—but it doesn’t matter. They simply don’t have the information they need, nor can they design a one-sized fits all rule that will address all problems.

Despite claims to the contrary, private parties are also more accountable. They must live with the consequences of their own choices, and businesses in particular must address the impacts they have on others. After all, no one profits from making their customers sick. Businesses are held liable in courts or suffer substantial losses of market share where problems, or the perception of problems, exist. They act more quickly than government, and their solutions are more precise.

In contrast, regulators can pass misguided rules based largely on political tides rather than good information. They often do more harm than good and are expensive, yet few people trace the problems back to government. Then regulators go back to Congress for bigger budgets to fix the problems they created. They don’t lose their jobs or go out of business when they make fatal mistakes. This is, as Olsen points out, pretty much what’s happening with the CPSIA law.

Indeed, the disciplines of the marketplace explain why our food supply is amazingly safe and getting better considering all the opportunities for contamination from farmyard to table. And no government regulator will do any better in correcting problems as they emerge. In fact, this is why we don’t have the government growing and distributing our food. If we did, we probably would all starve!

Photo attribution: Rachel Kramer Bussel’s photostream, on Flickr.

License to Print Money. Literally.

by Iain Murray on November 13, 2008

in Bailout Watch, Economy

The threat of deflation is so big in the UK, where they have found their version of the financial crisis worsened by the weakness of sterling and the size of government, that a former Treasury adviser is suggesting they need to think about printing money.

Meanwhile, Rich Lowry quotes AEI’s Peter Wallison about Hank Paulson’s latest u-turn:

The problem is that these shifts in direction have caused investors and others to lose confidence that Paulson knows what he’s doing, and that in itself could be causing some of the distress in the markets. The whole idea of TARP was to increase confidence, and that’s now been frittered away. If you go to Congress with a plan, it better be the plan you are actually going to carry out, or you better have a good explanation for why it isn’t going to be implemented. If Paulson has lost faith in his original plan, he has to explain why, and his failure to do so is probably worse than his constantly shifting objectives. When you’re Treasury Secretary, you don’t have the luxury of saying “Oh, never mind.”

We here have never thought that Paulson knew what he was doing, except helping out his cronies in Wall Street. If we don’t get some people in government willing to bite the bullet (and that is unlikely), we may well end up having to print money too.