Hooray For Newspapers - Again

Dean and I have both complained about newspapers not performing the political function envisioned by the founders. Just when we think all hope is lost, they uncover stories about pensions being the source of San Diego's budget woes, publicizing teacher impact on test scores, and uncovering the outrageous salaries for public officials in Bell, CA. Now the LA Times is confirming what we all thought, public officials in D.C. think themselves above the laws that ordinary Americans must obey. Not just Geithner, but 41 other White House aides owe the federal government $831,000 in taxes and federal employees owe the feds a whopping $1 billion. From the LA Times:

The Post's T.W. Farnum did some research and found that out of the total sum, just 638 workers on Capitol Hill owe the IRS $9.3 million in back taxes. As in, overdue. The IRS gets stiffed by the legislative body that controls its budget. How Washington works.
. . . Privacy laws prevent release of individual tax delinquents' names. But we do know that as of the end of 2009, 41 people inside Obama's very own White House owe the government they're allegedly running a total of $831,055 in back taxes. That would cover a lot of special chocolate desserts in the White House Mess.

Exit question "Can you define Ruling Class?"

Financial Reform?

Financial reform appears to be next on the Obama agenda. This is going to be present a tough political issue for a movement dedicated to smaller government that remains within its constitutional bounds. The bank bailouts, followed by reports of fat bonuses for top banking executives makes them a ripe target for retributive justice through by means of increased regulation. However, the nature of the reform matter deeply. First, we have to ask ourselves if the current regulatory regime is actually inadequate. Initially, it appears obvious that the current system failed. But while that is true, it doesn't mean that the current laws failed in their entirety. The Senate banking committee has conducted a yearlong investigation into the failure of Washington Mutual. I don't always believe everything I read from the Senate, this has some interesting facts:

A year-long Senate probe presented at a hearing Friday concluded that the OTS had identified a pattern of errors, poor risk management and even fraud at Washington Mutual. Yet it took no action to stop the bank from dumping toxic mortgages into the financial system because the bank was a huge moneymaker that paid fees amounting to 15 percent of the agency's budget, the panel said.
.....
Yet OTS examiners refused to lower Washington Mutual's asset quality ratings even though its practices were unsatisfactory because "WAMU was making money and loans were performing," Thorson said. This assessment runs counter to OTS guidelines, which state that demonstrating profitability is not sufficient if an institution has a high exposure to risk, Thorson said.

In this case, there was an office with a specific responsibility to regulate the quality of the banks' loans, but failed. But why do we need such oversight? Because WaMu could package the loans and sell them as securities, while continuing to rake in fees on servicing the loans. Fannie and Freddie played a big role here in enabling this behavior by securitizing mortgages. They did not see their role as anything other than increasing the number of mortgages. Look what happens when that goal was challenged:



Enter bailout nation, in which the government has apparently pledge unlimited funds to bailout not just the dud loans of the nation's banks but apparently the banks themselves as well as their parent corporations.

So what is happening with the legislation? The biggest issue is that "too big to fail" is alive and well, as one might expect in legislation built under Chris "Countrywide" Dodd's tutelage. From the Wall Street Journal:

The Dodd bill, instead, still gives regulators the authority to rescue essentially the entire financial industry. While much debate has centered around the FDIC's new "resolution" authority for failing firms, there's been almost no discussion around a separate FDIC program under which the agency can guarantee corporate debts. To Mr. Dodd's credit, this provision has improved slightly. In an earlier draft, the Fed and the new systemic risk council could have applied FDIC debt guarantees even if the FDIC itself opposed such bailouts.

Now the FDIC has to be on board, but the core problem remains—an even more explicit taxpayer backstop than anything Fannie Mae and Freddie Mac enjoyed during the housing bubble, and one that's available to a virtually unlimited number of firms. Federal regulators can create a "widely available program" to guarantee the debts of not just banks, but their parent companies as well, and all of their affiliates.

Fannie and Freddie were rolling the dice with an implied backstop, but this legislation would allow regulators, without a vote of Congress, to explicitly put the full faith and credit of the U.S. government behind Goldman Sachs, JP Morgan and Morgan Stanley, among others. This list could have more than 8,000 names on it, because any bank or company that owns a bank, or is a affiliated with a company that owns a bank, is eligible.

Sorry this post got so long, but I wanted to air out a big part of the problem. Big Government's regulation and unaccountable bailout are at the root of the financial crisis. I remind the constitutional professor that occupies the oval office of Article 1, Section 9 of the United States Constitution:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

Time to oppose this legislation with some simple arguments:

END THE UNCONSTITUTIONAL BAILOUTS.

TOO BIG TO FAIL? TOO BAD.

Pelosi, Tea Parties and Financial Reform

I am sure that most of my readers have seen the HotAir column linking to the video where Pelosi alternately trashes the Tea Partiers as "astroturfing Republican hijackers" and then claims to have something in common with them:

But, you know, we share some of the views of the Tea Partiers in terms of the role of special interest in Washington, D.C., as — it just has to stop.

So Democrats are somehow above taking money and cutting deals with special interests? This is her claim? My rebuttal, Take Geithner . . . please! He is but one of many Democrats with ties to special interests that are in positions of authority with regards to financial regulation.

At least 25 senior Obama administration officials previously held executive or board-of-director posts with some of the globe’s biggest financial houses, according to a new analysis for Portfolio.com by the Center for Responsive Politics (CRP), a campaign-finance watchdog group. (To see a full list of the officials with previous jobs on Wall Street, click here.)

Now the Bush administration was not better, and neither were any previous administrations. I'm not sure that you can adequately populate government staff without individuals knowledgeable about the industry. However, this often leads to a condition known as regulatory capture, where the regulators appear to be regulating for the benefit of the industry, not the general public. To some extent this process is inevitable, see Public Choice theory. Now this doesn't excuse Pelosi for her continued mendacity and slander against our movement, but it points out the complexity of the situation.

So how can we bring about financial reform? Much of what we are protesting in the Tea Party is the close ties between Big Business, especially Wall Street and Big Government the end result of which is taxpayer bailouts of risky behavior. The end result is the exact opposite of justice, the stockholders and the taxpayers get screwed and the bankers get bonuses. We don't begrudge the bonuses, we just don't think we should pay for them through the bailouts.

I am still working out a Tea Party position on bailouts that is cogent and deals with this complexity in a simple way. Here are some things to think about. First, we should demand that politicians allow at least some big banks to fail. The bankers have called the government's bluff and keep raking in the chips. Second, we should say, ok, if you're going to be too big to fail, fine, you're going to have to keep increasing your reserves so that you don't fail. (No time to fully flesh this out today, but I think reserve requirements should scale up once a firm reaches a significant market share. This will act as a brake on unbridled growth by one institution as well.)

Third, we should demand transparency for all financial assets. In October 2008, I had a chance to talk to some municipal bond traders. We were arguing about the need for a bailout, me contra, as you might expect. Since we got dug in our positions; I asked a different question, because even then it was obvious that the mortgage backed security free-fall was the real killer, roiling the markets. I asked if there had been transparency and good information about the underlying value of the assets backing the securities, would this problem have occurred. They agreed that it would not have because market forces would have come into play earlier, so their would have been more time for big firms to adjust.

In summary, we should demand an end to "too big to fail." We should demand transparency in the way that assets are priced. Finally, we should demand that banks can't take risks when their risks are subsidized, such as through deposit insurance. I welcome the comments of those more knowledgeable in this field than I.