James Pethokoukis

Politics and policy from inside Washington

One more from the crony capitalism beat

Jan 27, 2011 22:16 UTC

From the great Jerry Bowyer in Forbes:

The fact that Immelt is a Republican is as beside the point as the fact that Daley is a Democrat. Increasingly our nation is divided, not between Rs and Ds, but between TIs and TBs: tribute imposers and tribute bearers. The imposers are gigantic banks, agri-businesses, higher education Colossae, government employees, NGO and QUANGO employees and the myriad others whose living is made chiefly by extracting wealth from other people. The bearers are the rest of us: the people who extract wealth from the earth, not from others.

Does anyone seriously believe that Bill Daley, son of the founder of Chicago’s great political machine, is something other than a crony capitalist? That he became president of a Baby Bell phone company, created by government fiat, protected by state public utility regulators because of his knowledge of telecommunications technology and not because of his association with power? Does anyone believe that when JPMorgan purchased a regional Chicago bank, which required both federal and especially state regulatory approval, that Daley’s political credentials were irrelevant?

The Daleys of the world, the Rubins of the world, the Rahm Emmanuels of the world who rotate out of commerce secretary, treasury secretary, White House chief of staff positions and into positions at the top of investment banks, government-regulated utility monopolies and various GSEs are our nomenklatura. They are the members of our permanent ruling class. They are tribute imposers. The fact that they wrap themselves in the rhetoric of street-level populism just means that they are poseurs in addition to being imposers.

Are the Republicans, like Immelt, just as bad? No, but they are almost just as bad. And almost just as bad is not nearly good enough.

The latest on states declaring bankruptcy

Jan 27, 2011 20:34 UTC

Some Republicans are against the idea, but a couple of heavy hitters — Jeb Bush and Newt Gingrich — continue to be for it. Here is a bit from their LA Times op-ed:

First, as with municipal bankruptcy, it would have to be completely voluntary.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc.

Third, the new law should allow for the restructuring of a state’s debt and other contractual obligations.

When California refused to bail out Orange County, the county entered bankruptcy and emerged within 18 months. Within three years, the county returned to an investment grade rating, and it repaid 100% of the principal of the vast majority of its investors by 2000 without raising taxes.

Fourth, the federal judge reviewing the state’s reorganization plan would have the power only to accept the plan as permissible under the federal bankruptcy law, or reject it as inconsistent with that law.

Fifth, the new law should provide for triggering mechanisms to initiate the bankruptcy process that respect the sovereignty of the people of a state.

An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions. If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union workforces, pensions and work rules.

Also, Moody’s has begun to take a closer look at state pension obligations, creating new metrics that combine debt and pension liabilities:

statesmoodys

COMMENT

Battle required similar to 8 hours and she or he brought about many of them. Consequently your girlfriend push hit a brick wall and she or he simply had to go to nearly every creek to fight more normal water. Your sweetheart didn succeed, however , your sweetheart produced daylights of your showing. Throughout sleep of which night time, Odn seen that an analogous approach could be helpful to create small children caught up in the tummy all through childbirth. It is really not obvious out of the post how come Odn ended up being pondering troublesome births, however , they sought the reasoning with the support involving his lady as well as obstetrician. Skip forward so that you can at present, and also a polished type of the look ready designed for really serious observations..

Crony capitalism update

Jan 27, 2011 20:08 UTC

The alliance between Big Money, Big Business and Big Government is something I will be giving a hard look over the coming a year. Two great pieces. First, Tim Carney on Obama and Immelt:

Subsidies are GE’s lifeblood, and Immelt’s own words make that clear. In his op-ed announcing his appointment, Immelt called for a “coordinated commitment among business, labor and government,” and wrote that, “government should incentivize … investment in innovation.” He also advocated “partnership between business and government on education and innovation in areas where America can lead, such as clean energy, are essential to sustainable growth.”

This is Immelt’s style. Days after Obama’s inauguration, the chief executive officer wrote to shareholders of a post-bailout “reset” in the global economy. “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.”

Sure enough, wherever Obama has led, GE has followed. Obama has championed cap and trade in greenhouse gasses, and GE has started a business dedicated to creating and trading greenhouse gas credits. As Obama expanded subsidies on embryonic stem cells, GE opened an embryonic stem-cell business. Obama pushed rail subsidies, and GE hired Linda Daschle — wife of Obama confidant Tom Daschle — as a rail lobbyist. GE, with its windmills, its high-tech batteries, its health care equipment, and its smart meters, was the biggest beneficiary of Obama’s stimulus.

To get these gears in sync isn’t cheap: The company has spent $65.7 million on lobbying during the Obama administration — more than any other company by far. So much for Obama’s war on lobbyists.

For much of the media, the nuances will be lost: You’re either pro-business or anti-business. But the distinction is crucial between making a profit through subsidy, regulation, and bailouts on one hand, and competition and innovation on the other hand. The latter creates wealth. The former consumes it.

And Mickey Kaus:

Shouldn’t Republicans hold hearings on the general threat of Putin-like corporatism—i.e., an insidious alliance between big government and favored corporate and labor interests? a) They could call GE CEO Jeffrey Immelt to testify and embarrass him about the myriad ways in which his slightly creepy role as CEO and presidential adviser might allow him to benefit his company and squash competitors; b) They could grill the various regulators who might be tempted to favor the auto manufacturers that the government bailed out (and which, in GM’s case, it still owns about a third of). Maybe some GM competitors would even be brave enough to testify. (Exhibit No. 23: Will GM and Chrysler claim all the remaining billions of “green” retooling loan money from Obama’s Department of Energy? Entrepreneurial startups need not apply?) c) They could question whether these bureaucrats and others are also doing favors for other Obama constituencies, like labor unions, or Google; d) They’d appear transpartisan–this is an issue where left and right populists unite. Do they love corporate-government alliances at Daily Kos? It’s also one of the legitimate worries at the heart of TeaPartyism. e) Hearings might help: There is no obvious answer to some parts of the corporatism dilemma, such as the too-big-to-fail part. If lots of firms are now too big to fail—or else their markets are unstable—and if during a downturn the government winds up investing political and economic capital in specific companies, what are you going to do? Bail the companies out and then let them collapse again?

The right response to America’s Sputnik Moment?

Jan 27, 2011 19:56 UTC

I am a little late on this, but AmSpec’s John Guardiano is dead on:

Kennedy didn’t think America was “as strong as [it] should be.” And the reason, he surmised, was that the heavy hand of big government was too onerous. The feds, he realized, were stifling initiative and entrepreneurship. He knew the solution was to cut marginal tax rates. And so he did just that.

Kennedy cut the top marginal rate from 91 percent to 70 percent. He also cut tax withholding rates, instituted a new and more generous standard deduction, and increased deductions for child care and other familial expenses. The result: the economic boom of the 1960s.

FCIC report: 10 causes of the financial crisis

Jan 27, 2011 18:40 UTC

The other dissent (written by Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas) to the main Financial Crisis Inquiry Commission report identifies 10 causes for the meltdown. They run through them in a WSJ op-ed:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10).

Me: I really like that they looked globally to try to find the common elements between the crises here and there. It is pretty hard to ignore this graphic:

housing

COMMENT

The list of “causes” should have included comparisons to previous great financial manias. This would have observed that since the 1825 example the final phase ran some 12 to 16 months against an inverted yield curve.

The problem during such a boom is not rising interest rates. This confirms that the boom is on. The problem arrives when the curves reverses to steepening, with T-bill rates declining.

This fateful reversal started in May 2007, which was the 15th month of inversion.

The rest, as the saying goes, became history. There are two “rules” that worked. Short rates plunge during the initial bear market and economic contraction. The notion that “cuts” in the Fed rate will reignite a boom is not supported by history.

The other “rule” is that the post-bubble recession starts virtually with the bear market. Using NBER determinations, the 1873 bubble ended in September and the recession started that October. The 1929 bubble ended in that September and the recession started that August. The 2007 bubble ended in October and the recession began in that December.

There are other “rules” but that would take a lot of space.

Posted by Subtle | Report as abusive

FCIC report: So why did U.S. have a financial crisis?

Jan 27, 2011 16:40 UTC

The Financial Crisis Inquiry Commission report is out, and it also includes two separate dissents. There’s a metaphor contained in the dissent by Peter Wallison of the American Enterprise Institute which does a pretty good jobof  describing the majority take and his critique of it:

In a private interview with a few of the members of the Commission
(I was not informed of the interview), Summers was asked whether the mortgage
meltdown was the cause of the i nancial crisis. His response was that the i nancial
crisis was like a forest i re and the mortgage meltdown like a “cigarette butt” thrown
into a very dry forest. Was the cigarette butt, he asked, the cause of the forest
i re, or was it the tinder dry condition of the forest?
44
h e Commission majority
adopted the idea that it was the tinder-dry forest. h eir central argument is that the
mortgage meltdown as the bubble del ated triggered the i nancial crisis because of
the “vulnerabilities” inherent in the U.S. i nancial system at the time—the absence
44
FCIC, Summers interview, p.77.470 Dissenting Statement
of regulation, lax regulation, predatory lending, greed on Wall Street and among
participants in the securitization system, inef ective risk management, and excessive
leverage, among other factors. One of the majority’s singular notions is that “30
years of deregulation” had “stripped away key safeguards” against a crisis; this
ignores completely that in 1991, in the wake of the S&L crisis, Congress adopted the
FDIC Improvement Act, which was by far the toughest bank regulatory law since
the advent of deposit insurance and was celebrated at the time of its enactment as
i nally giving the regulators the power to put an end to bank crises.
h e forest metaphor turns out to be an excellent way to communicate the
dif erence between the Commission’s report and this dissenting statement. What
Summers characterized as a “cigarette butt” was 27 million high risk NTMs with
a total value over $4.5 trillion. Let’s use a little common sense here: $4.5 trillion in
high risk loans was not a “cigarette butt;” they were more like an exploding gasoline
truck in that forest. h e Commission’s report blames the conditions in the i nancial
system; I blame 27 million subprime and Alt-A mortgages—half of all mortgages
outstanding in the U.S. in 2008—and a number that appears to have been unknown
to most if not all market participants at the time. No i nancial system, in my view,
could have survived the failure of large numbers of high risk mortgages once the
bubble began to del ate, and no market could have avoided a panic when it became
clear that the number of defaults and delinquencies among these mortgages far
exceeded anything that even the most sophisticated market participants expected.
h is conclusion has signii cant policy implications. If in fact the i nancial
crisis was caused by government housing policies, then the Dodd-Frank Act was
legislative overreach and unnecessary. h e appropriate policy choice was to reduce
or eliminate the government’s involvement in the residential mortgage markets, not
to impose signii cant new regulation on the i nancial system

In a private interview with a few of the members of the Commission (I was not informed of the interview), [Obama economic adviser Larry] Summers was asked whether the mortgage meltdown was the cause of the financial crisis. His response was that the financial crisis was like a forest i re and the mortgage meltdown like a “cigarette butt” thrown into a very dry forest. Was the cigarette butt, he asked, the cause of the forest fire, or was it the tinder dry condition of the forest?

The Commission majority adopted the idea that it was the tinder-dry forest. Their central argument is that the mortgage meltdown as the bubble deflated triggered the financial crisis because of the “vulnerabilities” inherent in the U.S. financial system at the time—the absence of regulation, lax regulation, predatory lending, greed on Wall Street and among participants in the securitization system, inef ective risk management, and excessive leverage, among other factors. One of the majority’s singular notions is that “years of deregulation” had “stripped away key safeguards” against a crisis; this ignores completely that in 1991, in the wake of the S&L crisis, Congress adopted the FDIC Improvement Act, which was by far the toughest bank regulatory law since the advent of deposit insurance and was celebrated at the time of its enactment as finally giving the regulators the power to put an end to bank crises.

The forest metaphor turns out to be an excellent way to communicate the difference between the Commission’s report and this dissenting statement. What Summers characterized as a “cigarette butt” was 27 million high risk [non-traditional mortgages] with a total value over $4.5 trillion. Let’s use a little common sense here: $4.5 trillion in high risk loans was not a “cigarette butt;” they were more like an exploding gasoline truck in that forest. The Commission’s report blames the conditions in the financial system; I blame 27 million subprime and Alt-A mortgages—half of all mortgages outstanding in the U.S. in 2008—and a number that appears to have been unknown to most if not all market participants at the time. No financial system, in my view, could have survived the failure of large numbers of high risk mortgages once the bubble began to del ate, and no market could have avoided a panic when it became clear that the number of defaults and delinquencies among these mortgages far exceeded anything that even the most sophisticated market participants expected.

This conclusion has significant policy implications. If in fact the financial crisis was caused by government housing policies, then the Dodd-Frank Act was legislative overreach and unnecessary. The appropriate policy choice was to reduce or eliminate the government’s involvement in the residential mortgage markets, not to impose significant new regulation on the financial system

COMMENT

Regarding the FCIC’s report, there is another looming issue that contributed to economic crisis & as yet goes unexplored.

Robert Wood Johnson Foundation (RWJF) activism was a major contributing factor to the home foreclosure meltdown and subsequently our economic crisis. More here:

http://cleanairquality.blogspot.com/2009  /03/worldwide-economic-meltdown-and.htm l

Posted by mwernimont | Report as abusive
  •