James Pethokoukis

Market failure or government failure? The BigGov party is promoting the former narrative, but the latter is more accurate in explaining how government created incentives for disaster. Mark Perry and Robert Dell lay it all out. Here is a sampling, but I urge you to read the whole thing:

1. Bank misregulation, in particular the international Basel capital rules, including a U.S. adaptation to them—the 2001 Recourse Rule—and the outsourcing of risk assessment by regulators to government-sanctioned rating agencies incentivized (not merely “allowed”) the creation and highly-leveraged systemic accumulation of the highest yielding AAA- and AA-rated securities among banks globally.

2. Continually increasing leverage—driven largely by Fannie Mae and Freddie Mac credit policies and the political obsession with taking credit for increased homeownership—into the U.S. mortgage system.

3.  The enlargement of the riskier subprime and Alt-A mortgage markets by Fannie and Freddie through the abandonment of proven credit standards (e.g., dropping proof of income requirements) during the 2004-2007 period, and their combined accumulation of a $1.6 trillion portfolio of these loans to meet the affordable housing goals Congress mandated. As of mid-2008, government entities had purchased, guaranteed, or compelled the origination of 19 million of the 27 million total U.S. subprime and Alt-A mortgages outstanding.6

4. The FDIC, Federal Reserve, Treasury Department, and Congress undertook explicit or implicit creditor bailouts for large financial institutions starting in the 1980s (First Pennsylvania, Continental Illinois, the thrift industry, the Farm Credit System, etc.) and continuing to 2008 (Bear Stearns). These regulatory decisions led to an absence of creditor discipline of financial institution leverage and risk-taking (especially at Fannie and Freddie) and the “too big to fail” expectation of a government bailout.

5. The increase in FDIC deposit insurance from $40,000 to $100,000 per account in 1980 combined with the unchecked expansion of coverage up to $50 million under the Certificate of Deposit Account Registry Service beginning in 2003. These regulatory errors of commission and omission reduced the incentives of business, institutional, and high net-worth depositors to monitor and discipline excessive bank leverage and risk-taking.

6. Artificially low and sometimes negative real federal funds rates from 2001 to 2005—a result of expansionary Fed monetary policy—fueled the subprime and Alt-A mortgage boom and widened the asset-liability maturity gap for banks (see chart below).

I think this Gallup chart is pretty stunning, especially when higher economic insecurity was supposed to push Americans toward a greater embrace of government. And it did for a bit, but that effect has more than reversed itself:

This is actually quite astonishing. A “staff discussion draft” from the Federal Trade Commission recommends ways the government can save journalism.  First, it lists a number of ways Washington can subsidize the media (to the tune of $35 billion a year):

– Establish a “journalism” division of AmeriCorps.

– Increase funding for the Corporation for Public Broadcasting.

– Establish a National Fund for Local News.

– Provide a tax credit to news organizations for every journalist they employ.

– Establish Citizenship News Vouchers (lets you direct money from tax return).

And here is where the money would come from, which I will quote directly:

Tax on broadcast spectrum. They argue “commercial radio and television broadcasters are given monopoly rights to extremely lucrative spectrum at no charge,” and this is a massive public subsidy. They therefore suggest the revenues generated by that spectrum be taxed at a rate of 7 percent, which should result in a fund of between $3 and $6 billion. In exchange, commercial broadcasters would be relieved of any obligations to engage in “public-interest programming,” which the broadcasters claim costs them $10 billion annually.

Tax on consumer electronics. A 5 percent tax on consumer electronics would generate approximately $4 billion annually.

Spectrum auction tax. They suggest there be a tax on the auction sales prices for commercial communication spectrum, with the proceeds going to the public-media fund.

Advertising taxes. They note a considerable amount of our broadcast spectrum has been turned over to disseminating commercial advertisements, and a 2 percent sales tax on advertising would generate approximately $5 to $6 billion annually. In addition, they suggest that changing the tax write-off of all advertising as a business expense in a single year to a write-off over a 5-year period would generate an additional $2 billion per year.

ISP-cell phone tax. They suggest consumers could pay a small tax on their monthly ISP-cell phone bills to fund content they access on their digital services. A tax of 3 percent on the monthly fees would generate $6 billion annually. They note, however, this is the least desirable approach because demand for these services is “elastic” and even a slight rise in price could result in people dropping the service.

Me: In this must-read  NYPost article, Jeff Jarvis calls the electronics tax an “iPad tax.” Besides of all the issues this raises concerning government influencing the media, I find it hard to believe voters would be willing to subsidize a broken business model.

The WSJ nicely sums up 2008:

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.

It bailed out two of the three U.S. auto makers. It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending. In two February stimulus bills enacted a year apart, the government committed $955 billion to rouse the economy. Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis. Just last week, the Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.

But voters don’t seem to be buying the idea that the government saved the economy. This from pollster Rasmussen (note the last sentence):

The number who believe that the stimulus plan has hurt the economy rose from 28% in September, to 31% in October, and 34% in November before jumping to 38% this month. The week after the president signed the bill, 34% said it would help the economy, while 32% said it would hurt.

The Political Class has a much different view than the rest of the county. Ninety percent (90%) of the Political Class believes the stimulus plan helped the economy and not a single Political Class respondent says it has hurt. (See more on the Political Class). The underlying reason for skepticism about the stimulus plan is that 50% of voters believe increasing government spending is bad for the economy. Just 28% believe that increased government spending helps the economy.

Me: Americans rightly think the economy is in terrible shape. The argument that the economy would be worse if not for government is a hard one to make for Team Obama … especially since government played a critical role in creating the housing and financial crises. Making all this worse is a 2010 economy that may be a muddle at best — so-so growth, unemployment still above 9 percent, rising interest rates and moribund housing.

From Ed Yardeni:

Meanwhile, the “Nanny State Deficit” soared to a record $740.9bn (saar). It is simply the gap between the social benefits provided by the government minus the payroll taxes paid by employees and employers to pay for them. This deficit was close to zero at the start of 2001, the start of the data in the monthly personal income release. Such benefits were equivalent to 34.1% of wages and salaries in May. That’s a record high and well above readings of 10% before the start of the Great Society in the mid-1960s.