free lunches and the rule of law

"Nothing is free in this world."  That is one of the quotes I heard growing up on almost a daily basis.  Usually it was from my father, once again reminding me of something that I needed to do.  However, there may be no more of an apt quote to describe wealth creation in our society.  Contracts and business relationships are based on a symbiotic relationship between two parties: each offers something the other desires, and the parties offer to provide something the counter-party desires in return.  At the end of the day, each side is better off as they receive a benefit that they could not provide to themselves, and in order for the transaction to occur that benefit must at least be equal to the value of the payment in the mind of each party.  Hence, these transactions are often wealth generating, as each party is in a position they think that they are better off, and therefore more wealthy, than they were prior to the transaction.

In my opinion the Obama Administration does not recognize the market as a wealth creation mechanism or at the very least underestimates its importance.  Private transactions are the engines of economic growth, and if Obama were truly interested in turning around the job market and reinvigorating the economy he would put into place polices that further increase the incentives to do business such as lowering marginal tax rates, reorganizing and simplifying federal agencies in order to decrease complexity in industry and lower the barriers to entry, and begin addressing long term budgetary issues no so that markets will be reaffirmed in their belief of the long term solvency of the federal government (keeping low the cost of credit).

However, all of these policies have tradeoffs, be it decreased federal revenue, loss of some services or decreased payouts to those receiving entitlement payments (although it is worth to note that most of these savings would be at the expense of future benefits, not those currently on social security and medicare).  Many countries are already taking such measures, and they aren't your traditional list of unfettered capitalists: the United Kingdom, Germany and even partially France.  However, back in the good old U.S. Obama has made federal government spending in the form of jobless benefits, stimulus, and other spending programs the key to his economic development strategy.  According to Obama and the neo-Kenyesians who push this strategy, the U.S. economy's main problem is lack of demand, and that by pouring money into the system in the form of government contacts and welfare, demand will be boosted and the economy will grow.  This is partly the policy justification for the stimulus back in 2009, the continued extensions of jobless benefits and the current push to provide bailouts to that state governments so that they are not forced to make tough political decisions such as whether to fire teachers or raise taxes.  Obama continually dismisses the negative effect this spending has on the budget (which is completely financed through borrowing as the deficit is in the trillions of dollars) claiming that the extra debt is hardly a drop in the bucket compared to our total liabilities.  Therefore Obama is basically selling the position that the spending is all gain and no pain: we will experience growth now and the cost will be little more than interest payments down the road.

This brings me back to the adage, "Nothing in this world is free." Obama's policies seem to run afoul of this rule, and luckily more and more people are beginning to notice it.  Despite the administrations claim that the stimulus has created around 2.5 million jobs, which it has no way of supporting or justifying, there is little sign that it has had an overall positive effect on he economy.  The administration prefers these types of policy choices, whereby they can tout benefits immediately and push any potential liability down the road.  Well by this logic, why do we ever stop stimulating the economy? If wealth can be created simply by government spending, we should have government spend as much money as possible.  It's the elusive free lunch! The truth is that this type of spending dose little to encourage long term investment - the engine of wealth creation - and its adverse effects are simply kicked down the road.  This is endemic in many of Obama's policy choices: the healthcare bill, extension of jobless benefits, and all the other debt financed spending.  You know the day of reckoning for this debt is coming when even Western Europe is getting serious about fiscal restraint. Mr. Obama, there is a reason your European colleagues have rejected you calls for a new round of stimulus: even they no longer buy the hype that you can spend your way to growth.

On a slightly unrelated note, I also wanted to briefly discuss an issue that has become more and more troubling.  Since coming into office President Obama has done more to circumvent the rule of law there perhaps any president since FDR.  First, there was the Chrysler and GM bailouts, where Mr. Obama first "put his boot on the heel"of secured creditors in order to appease his union constituency (I documented it at the time here, here, here, here and here).  The bankruptcy system in this country is the envy of the world, and although it may sound counter-intuitive that is a very good thing.  Banks freely lend to businesses and homeowners because they have a mechanism to have that loan repaid even if the borrower defaults.  Usually this insurance takes the form of a security interest in property, whereby the bank will legally be allowed to take title upon default.  However, the system will only work if security priority rules are objective, straightforward and made prospectively.  Without this type of certainty, the lenders will not have faith in the system, and lending will dry up.  Just ask any entrepreneurs in Africa or Eastern Europe about their access to credit in countries that don't have such rules.  The economic growth of these countries suffers enormously as a result.

The GM and Chrysler bailouts were one example were the rule of law in credit allocation was eroded, and the BP shakedown for a cool $20 billion is another.  First, and let me make clear, it is completely BP's liability to compensate those who were adversely affected by this oil spill.  No one challenges this point.  In order for capitalism to properly function, an negligent or intentionally injured third party must be compensated when another party's actions have caused it economic damage.  This forces companies engaged in risky enterprises to take risk into consideration and price it into any business plan.  Just making BP pay these damages will incentivize other oil companies to either beef up their safety and security measures, purchase more insurance or a combination of both.  This is a good thing and example of the market's ability to absorb new information and price assets accordingly.  However, I absolutely do not agree with the President's choice to force BP to set aside $20 billion for claims to be distributed by a third party.  Although this may have been a smart business decision by BP (showing the public it s serious about its obligations, providing a low overhead way of distributing damages and otherwise forgoing at least part of what will be millions in legal fees by settling with some people quickly), BP's original announcement came after a meeting between its Chairman, Mr. Obama and Attorney General Holder.  I'm sure the threat of criminal investigations didn't come up in that meeting.  No I bet there was no quid pro quo at all.  Why would the Justice Department want to investigate the BP Chairman of the Board at all? How could a swedish director have any type of criminal liability for an explosion that happen in the Middle of the Gulf of Mexico?  The reality is there is no possible way to impose criminal liability on a director for this type of accident, although the threat of such an investigation is one hell of a bargaining tool...


What's more is the fact that Mr. Obama is once again rewriting the rules for creditors in an attempt to put politics ahead of the rule of law.  BP could not possibly come up with $20 billion cash without severely affecting its liquidity and cash flow.  Therefore it is making payment in roughly $1.5 billion quarterly installments.  However, until the total is paid, BP was forced to allow the federal government to put a lien on approximately $20 billion of BP's assets.  This may sound fair, but in reality this is giving the Feds first crack at BP's assets should a bankruptcy occur.  This secured interest is now on par with other secured creditors and I have no doubt that in the event of a bankruptcy the feds would be fully repaid at the expense of older creditors.  Although it may sound innocuous and just for the claims of those who have been damaged by the spill to be given a higher priority than creditors, this is simply not how our system works.  Congress designed the secured credit system as a way to ensure the adequate allocation of credit and it has worked exquisitely over time.  Capital from all over the world flows to the U.S. because of the protections it is provided and the impartiality of the courts that uphold the rules.  By turning the law on its head and giving the damages of tort victims higher priority than creditors, some faith and belief in the system is lost, and the rule of law eroded away.  Although innocuous in the short term, over time this trend will have devastating effects on our financial system.  Creditors will begin to price this uncertainty into the price of credit, making it more expensive.  Politically risky activities will begin to find it harder and harder to find credit at all.  This culture of ignoring the dictates of the rule of law, coupled with our increasing debt will, if let unchecked, eventually destroy credit allocation as we know it in this country.  Don't think the U.S. will be a financial powerhouse for ever, as money is the most fungible of all assets, and the flow in to the U.S. is surely vulnerable if the risk of loss is too high.  To protect against this, we must maintain the rule of law and not succumb to the political allocation of capital and economic rights that is more akin to Iran or Venezuela.

campaign finance: protecting people who can't think for themselves

So I just wanted to say a couple of words about the DISCLOSE Act that is currently being debated in Congress.  According to its authors, the DISCLOSE Act is designed to remedy the so-called problems created by the Supreme Court last year in their landmark Citizens United ruling.  Here is the narrative according to Nancy Pelosi:

The DISCLOSE Act is essential to ensuring that the American people – and our democracy – are not overwhelmed by special interest money and influence in our elections. In its decision in the Citizens United case, the Supreme Court opened the floodgates to unrestricted special interest campaign donations. Congress must act to ensure that the bank accounts of Wall Street and insurance companies will not drown out the voices of America’s voters. This legislation restores transparency and accountability to our campaigns, and ensures that Americans know who is really behind political advertisements. This bill requires corporations to stand by their ads in the same way candidates do, and prevents foreign-owned entities from participating in our elections. It prevents the use of taxpayer dollars to sway elections, and sets high standards for financial disclosure by outside groups seeking to influence our democratic process.

In reality the court in Citizens United said this: the government cannot penalize or prevent a corporation, union or person from spending their own money, independent from any candidate, on television ads, books, articles, movies or any other kind of speech.  The limits on the amount of money people and corporations can contribute directly to a candidate is still valid, and special interests cannot use money to bribe candidates.  All the court said was that if a corporation wished to make a commercial that addressed a particular issue or candidate, then that is their right under the first amendment.  And what is wrong with that?  Shouldn't we encourage the free flow of ideas?  In effect, the Court said that this type of speech, where the corporation is the speaker and the general public is the listener, cannot be attacked by the government.

So in effect the Democrats are scared to death that these corporations are going to have too much influence because they can explain their message directly to YOU!  For this type of communication to be a bad thing, then the dems must assume one thing: that the public is so stupid and easily misled that they cannot be allowed to hear the ads at all, lest they fall under the control of corporate brainwashing!  Seriously, they are so worried by the fact that information about candidates and issues will come from sources other than the politicians themselves that they scrambling to get an ad hoc DISCLOSE bill passed by July 4th.

There is also a great deal of obvious hypocrisy regarding both the Democrats reasoning for needing campaign finance laws and in the proposed implementation of the DISCLOSE Act.  First, Democrats claimed that the Court was flat out wrong in Citizens United and that Congress does indeed have the ability to restrict corporations from using their own funds on political ads.  According to dems, corporations are not persons and have no right to free speech.  Well according to that logic the federal government would be able to censor MSNBC, the New York Times (both owned by corporations) and even other business associations like LLCs, partnerships and closely held corporations.  This logic should be abhorrent to anyone who values the first amendment.  The reason these media companies aren't screaming out loud is that they are currently exempt from the regulations, but that could change on a whim because what Congress giveth, Congress can taketh away.  However, they are perfectly happy right now with their monopoly on reporting and presenting political issues, and want to make sure it stays that way.

Secondly, the DISCLOSE Act does a great deal to hinder who is able to present ads, putting restrictions on corporations who, although incorporated in the U.S., have at least 20% foreign ownership.  This would include thousands of companies including the likes of Verizon and Shell, for instance.  However, foreign unions such as the Service Employees International Union (SEIU) are not blocked out.  They will still be able to say what they want.  Additionally, unions would be exempt from the requirement that anyone who negotiates contracts directly with the federal government from placing ads.  That's right, now the public employees unions, who negotiate directly and often with the government over compensation, work rules and benefits, would still be allowed to place the ads despite this obvious conflict of interest.  Contrast this with a complete ban on spending by corporations who deal directly with the government.  Now personally I would be in favor of letting these groups do what they wish, but the blatant, partisan favoritism shows exactly where the democrats true intentions lie.  They are attempting to use the act for their own advantage, burdening  traditional Republican supporters, while advantaging their own.  A new era of transparency and post-political attitudes indeed.

my boy rand paul

So first of all I haven't updated this thing in over a month, and I have lots of excuses.  I was taking my last few finals in law school, and I also don't currently have a functioning computer.  I am hoping to write several posts in the next week as there is a lot to talk about including potential NCAA football conference realignment, Elena Kagan's upcoming confirmation hearings, and the gulf oil spill has even made some people speculate that the Senate will move on cap and trade this session.  I will address these issues at a different time.

For now I just want to say a few words about my boy Rand Paul.  Anyone who new me during the 2008 election cycle knows that that I was a steadfast Ron Paul supporter.  I obviously knew that he had no chance at obtaining the GOP nomination, but I still thought his campaign did a great job of bringing about a resurgence of the libertarian leaning edge of the republican party.  In fact, I personally credit with Ron Paul for providing at least part of the spark that his given rise to the tea party movement.  Naturally, now that his son (who holds many views that are in tune with his father) is running for Senate in Kentucky, I am fully supporting and following his campaign.

A few weeks ago, Paul committed what many people are calling a huge mistake.  He went on the Rachel Madow Show and said that he did not support portions of the 1964 Civil Rights Law that prohibited discrimination by private individuals and businesses.  He also reaffirmed his belief that the portions of the act that prohibited state and local governments from discriminating based on race (basically prohibiting Jim Crow laws) were necessary, just, and fully appropriate.  Many members of the media jumped on these comments, and although they stopped short of calling him a racist, they claimed the comments showed that he was too radical to hold public office.

First, I must state that I personally agree with what Rand articulated on MSNBC.  I don't believe it is the role of government to mandate who a private actor can or must serve.  However, that does not a racist make.  I believe in letting private actors set their own rules, and allowing the actors to make rational decisions based on the incentives provided to them.  In fact, I think you could make an argument that this would be a better policy.  Not only would individual actors in this scenario have more liberty and freedom, but a public understanding that the government is not the primary tool for eradicating racism could potentially do more to help stop racism than the law itself.

First, let's imagine a scenario where the 1964 Civil Rights Act did not address private discrimination.  Obviously, then any business or restaurant could discriminate an not serve someone based on race.  I believe that a majority of people (including potential customers and suppliers) would find this abhorrent.  In fact, I'm sure many people would not do business with such an institution.  These types of boycotts were already taking place and had been somewhat effective prior to the 1964 Act (for example look at the Montgomery Bus Boycott which nearly bankrupted the line).  Now, after the Act is passed and Jim Crow is dead, it is my belief that that these types of private demonstrations and boycotts would have become even more effective.  With out the state government's racist laws propping up these private discriminators, there would have been far fewer ways for boycotts and sit-ins to be disrupted.  Additionally, I believe far more people would take up the cause of supporting such a cause if they believed that such an action was the only way to remedy the situation.

Now many will argue that racism was so institutionalized in the South that private boycotts would not have been enough.  We needed strong federal intervention to break the spines of the evil racists.  Unfortunately that is an untestable hypothesis as we can't know what would have occurred in that scenario. I don't live in the South (I live in Texas! ha) so I'm not sure how many people are still out there denying black people a seat at the lunch counter, but my general inclination is to say its better than it was.  However, how much is attributable to laws prohibiting private discrimination rather than a shift in attitudes brought about by the fact that these horrors were being put in the lime light is debatable.  Regardless, even if we assume that more discrimination would occur it almost certainly would be limited to smaller business in restaurants that only have one location that serve mostly a racist clientèle.  Obviously it would be unfortunate that people would be denied service in these places based on their race, but are these few disruptions worthy of the long arm of government meddling with the affairs of private actors?  The Civil Rights Act has probably cost billions in attorney's fees and court costs to enforce, and has surely led to many dubious claims over time that burden the justice system and drive up the costs of litigating and of just doing business.  Do the benefits outweigh the costs? Debatable.  But just cause you go one way on that issue does not make extreme, a racist or unfit for office as some of Paul's haters have contended.

immigration

So pretty much out of nowhere immigration has become the hot topic in Washington.  Before Arizona passed its own version of immigration control, no one in Washington was really talking about the issue.  My own cynical opinion is that the Democrats saw immigration as a way to steer the debate away from their unpopular policy debacles (stimulus, auto bailouts, health care, and what is slowly becoming a handout for big banks - financial reform).  With the so-called "jobless economic recovery" and voters pissed as hell at government in general, the Democrats looked poised to suffer monumental losses in November.  In this environment I'd probably want to change the subject as well.  Whether changing the issue to immigration is a smart political move is yet to be seen.

Very few issues are as divisive as immigration.  This has almost always been the case throughout the history of American politics.  Historically, many Americans born here have always felt an aversion to allowing more people to enter "their" country.  This was true in the nineteenth century - Irish, Italian, Asian and Eastern European immigrants were treated extremely harshly by traditional Protestant white majorities that dominated the country at the time.  Not much has changed today other than the fact that many of the people's whose ancestors once belonged to these oppressed groups now wish to limit immigration, themselves, while the majority of the anti-immigration sentiment is now focused on Mexicans.  This idea that we shouldn't allow anymore immigrants into the country when we have so many other problems of our own is what I like to refer to as the "Labor Union View of Population." 

I don't mean to say that labor unions around the U.S. espouse a policy view that we should close our borders.  In fact the opposite is true.  Many influential unions see a large amnesty as a tremendous opportunity to expand their ranks.  Currently many illegal immigrants compete directly with union labor in a variety of industries such as farming, construction and other day-laborer jobs.  Part of the reason some of these workers do not join unions themselves is because of their undocumented status.  Amnesty could change all of that.  But I regress.  The reason I term the anti-immigration view the "Labor Union View" is because in my opinion most Americans who hold anti-immigrant views do so for the same basic reason why a worker joins a labor union: to restrict the size and diversity of the labor pool.  Labor unions operate by restricting the supply of workers an employer has to choose from.  By imposing rules that only union members can be eligible for a job, the price of such labor rises.  Many anti-immigration components feel the same way.  By limiting the amount of immigrants into the country, the total supply of labor will decrease, thereby increasing the price of labor.  Remember the old South Park adage, "THEY TIRK ERRR JEEERBBBSSS?!?" (see clip below)



Now first of all I do not want to make you think that this is the only reason why some anti-immigration view holders do not support a comprehensive immigration reform bill.  I think there is a lot of merit to the argument that the control of our own borders is an urgent national security issue.  Unfortunately we live in an age where thousands of people around the world wish to do innocent, American civilians harm simply because of the way we live our lives.  We have an obligation as a people to stand up to these people that challenge our free and open society.  This means that we must do everything in our power to prevent attacks within our border against our fellow citizens.  However, in my opinion this national security issue is often used by as a smokescreen by politicians whose ultimate goal is to simply close the border. I also believe the argument that we should not reward those people who break our laws by granting them amnesty is deserving of merit.

There is also no doubt that some prejudice is involved as well.  These prejudicial views combined with the idea the immigrants will come in here and take away good well-paying, all-american jobs leads to a political culture that simply demonizes any type of comprehensive immigration reform.  This view point is simply wrong on the policy and wrong on the facts.  Immigration can be a tremendous source of growth in our economy, but only if it is coupled with other pro-growth initiatives along the way.  We must move away from the idea of "Zero-Sum" economics that dominates the immigration debate.  Just because an immigrant comes here and takes a low paying manual labor job does NOT mean that there is one less job for an native born American.  When an employer hires an immigrant for less money than he would have to pay native american to do the same work, the companies overall efficiency has increased.  These savings are eventually reinvested either in the business itself, or passed on to shareholders who can use the money to fund other productive ventures elsewhere in the economy.  This creates real job growth, not the artificial spikes in demand that are the dominant effect of short-term government "stimulus."

 So what would effective reform look like?  First, the emphasis of any policy must incentivize well-educated, hard-working immigrants to come to America.  These are keystone innovators of any society, and technology driven economy like the United States needs these types of thinkers in greater numbers in order to prosper.  The most important proposal I could make in this category would be to be institute a rule that any foreign graduate from a U.S. university with a science or engineering background should be offered a permanent green card and the opportunity to work towards citizenship.  By increasing the number of innovators we can harness the economic growth associated with these individuals over the course of their lives.  I don't think many people could make a strong argument why such a policy is against U.S. interests.

Secondly, I believe that some type of amnesty is necessary.  As I have written many times before, inherent economic realities often provide very strong incentives to break laws that limit the individual's ability to economically prosper.  Take for instance the market for illegal drugs.  The penalties associated with the traffic of these substances is very harsh, in fact much harsher than any anti-immigration laws, but every year millions of Americans take risks anyway to sell and purchase the drugs.  Regardless of the basis for such demand, the economic incentives provided by its mere existence almost forces many poor Americans into entering drug trade.  When the rewards of success are so high, even the chance of criminal punishment does not substantially decrease the average expected value of engaging in such an enterprise.  This is also the case regarding illegal immigration.  The incentives provided by the good working conditions and economic opportunities available in the U.S. make it economically rational to break U.S. immigration laws even taking into account the chance of apprehension.  Therefore illegal immigration will continue regardless of any attempt to truly secure the border because the incentive to break the law is too high.

In this situation, I believe that the prudent and cost-effective strategy would be for the government to attempt to facilitate the actions of economically rational actors in a way that still protects vital national interests such as preventing terrorists from coming into the country.  It makes no sense for government to attempt to completely eliminate a segment of a natural market (in this case outlawing a section of the natural labor market), as it is impossible.  As long as the underlying economic rational remains (which in this case will remain as long as the U.S. economy is prosperous) , people are going to pursue their economic best interests regardless of the penalties that are put into place.  Even the strict criminal penalties instituted in Arizona do not provide enough incentive to overcome the rational economic decision making that immigrants have made in my opinion.  As long as the worse the U.S. government can do is to send them back home, there is little incentive not to try to enter the country.

Therefore I believe the best immigration policy the U.S. can establish would be one that liberalizes the rules for permanent residency.  However, in a country with as many government "social safety net" programs as the U.S., allowing this sort of unfettered immigration could easily lead to abuses.  Obviously I am for the reduction, if not the complete elimination, of many of these wasteful programs that incentivize people to be unproductive.  However, I am in the minority so many of these programs are unfortunately here to stay.  Therefore I would propose that in exchange from dramatically liberalizing and increasing the immigration quotas, the new immigrants would be required to waive any right to participate in a list of certain government programs.  This would include medicaid, the new health care entitlement, and other types of welfare subsidies.  In exchange for giving up access to these handouts, we should end the cap on the number of new immigrants we allow into the country.  If someone does not have a criminal history and wishes to enter the U.S. to work, then we should allow it provided that he or she agrees to give up his ability to simply live off the state.  It is a fair compromise, but I doubt anyone in Congress, especially the Democrats who are simply trying to liberalize immigration so that there will be more wards of the state, would even consider this proposal. 

In conclusion, my basic premise is that illegal immigration is mainly caused by rational economic decision making of these immigrants.  When something is a rational economic decision even in circumstance where the government is attempting to completely ban it (undocumented immigration, drugs, prohibition) then it is nothing more than a tremendous waste of government resources to enforce such a policy.  If there is one thing I firmly believe it is that if a market for some good or service naturally exists (in the case of immigration it is a strong market for labor in the U.S.), then government prohibition of such a market does nothing but push it underground where the rule of law no longer applies.  This gives economic power to those who openly disobey the law and should not be the policy of our government.  Instead we should recognize that we cannot unilaterally eliminate a natural market in our free society, so instead we should attempt to structure the market in such a way that maximizes the benefits to everyone involved.  In the case of immigration I would argue that the best way to do this would be to encourage people who want to work hard to come here and do just that, while still instituting important checks regarding their background.  Are some people that have broke the law in the past or potential terrorists going to slip through the cracks in this type of liberalized system?  Most definitely yes.  However, I believe that is part of the price you must pay in a free and open society.  The economic benefits of liberalization outweigh these risks by an order of magnitude, and I believe that terrorists will get around even the most stringent rules if they really wanted to.  Remember that we have thousands of miles of open border with Canada.  Instead, by eliminating the possibility that immigrants are coming here for a handout, these immigrants could be a tremendous source of growth for years to come.  That would be good for all Americans.

why the current financial reform proposals are fundamentally flawed

Last night GOP senators blocked an attempt by the Democratic majority to bring Chris Dodd's (D-CT) financial reform bill the the floor of the Senate so that it could be debated and voted upon.   Majority Leader Harry Reid has already said that he would bring the bill back to the floor for another cloture vote this afternoon.  Democrats are attempting to characterize this GOP opposition as purely political: according to their storyline the Republicare in the bed with the likes of Goldman Sachs and are only attempting to block reform so that they can increase their campaign contributions.  This blatant partisan attack does little more that distract from the substance of the bill, and I have no doubt that the Democratic attacks are designed to do just that.  Anyone who has followed the housing and financial markets over the past decade understands that one of the major causes of the financial crisis were some of the policies enacted by Dodd's Banking Committee and his counterpart in the House, Barney Frank (D-MA).  Obviously neither man admits any of this, and their financial reform bill does nothing to stop many of the practices that led to the housing bubble.  So, in the interest of having a informed debate, rather than one of rhetoric, I will lay out may objections to the current financial reform proposal and explain how I would address the problem instead.

From what I can tell, Dodd's bill has three major sections: 1) The creation of a Consumer Financial Protection Agency that will regulate the so called "predatory lending practices" that dooped so many people into buying homes they couldn't afford and spending to much money on their credit cards; 2) Ends the over-the-counter treatment of most derivative investment contracts (CDOs, MBSs, etc.) by forcing them to be traded on an exchange; and 3) Creating a "Resolution Authority" within The FDIC that would be capable of dissolving banks, bank holding companies and other financial institutions deemed to be a systematic risk if they fail.  Man that is some exciting stuff.  Now you can see why it is so easy for the Democrats to claim that this is major reform because 98% of Americans have no idea what any of these things mean.

Starting with number one, my basic beef with the Consumer Financial Protection Agency is that it even if one was in place prior to the recession, it probably would have done very little to help stop the financial crisis.  We all now agree that many people were taking on more loans that in retrospect they could not afford.  This was based on the faulty presumption that the housing market would continue to climb in value, and that even if borrowers were paying very high interest rates after the teaser rate of a sub-prime or Alt-A loan expired, this imbalance would more than be made up for by the increase in equity owned by the homeowner based on the home's increased value.  Presumably he could use this increased equity to refinance if payments could not be met.  Well guess what?  The market fell out, and now many homeowners owe more than the total equity value of their house.  This makes defaulting a rational decision in many cases. 

So according to the Democratic pundits the Consumer Protection Agency would have stopped these bad loans from happening and all would be well.  BULLSHIT.  If there is one thing that is true about all governmental regulators it is that they are backward looking.  All regulators were created because of some event in the past that caused a large amount of financial hardship.  The regulators attempt to stop that specific type of situation from happening again.  The sub-prime crisis was a novel problem in the financial markets.  The very large majority of people, including many sophisticated investors who are much smarter and more savvy than any potential regulators, did not see it coming and lost A LOT of money.  When people lose that much money, then it is a sign that the downturn was very hard to foresee.  It is easy in hindsight to try and stop things that have happened in the past, but in reality it is impossible to predict the problems that will arise in the future.  The next "crisis" will probably have nothing to do with the mortgage market, and even if it did the CFPA would probably fail to stop it anyway.  This really is about a government power grab, so that the government can set all the applicable rates and provisions of almost any financial deal.  They will outlaw certain kinds of loans, favor others, and basically attempt to micromanage decisions that should be made of individual, case-by-case basis.  As is always the case, lobbyists will have a field day because their clients will want to get tight with the regulators so that their offerings will get preferred treatment over that of a competitor.  This will inevitably lead to crony capitalism at its worst.

Secondly, I really think that derivative contracts have gotten a bad name from all of this.  Yes, I ONE HUNDRED PERCENT AGREE that the proliferation of mortgage backed securities and credit default swaps (which were instruments that were intended to spread risk) led to a situation were counter parties were dependent on each others' solvency.  However, why, fundamentally, is this a bad thing?  Because it leads to "too big to fail" says Paulson/Bernacke/Geithner/Summers.  No it does not.  Period.  No one, and I mean no one, is too big to fail.  Let's look at what happened to Lehman Brothers.  They failed.  They went bankrupt.  Did it have an extremely negative impact of financial markets?  Of course.  Credit was extremely hard to find, people started calling debts and most firms had short term liquidity issues.  Did it lead to the end of the world?  No.  That is because we have a bankruptcy system in this country for a reason.  Just because Lehman was forced to take huge losses and dissolve does NOT mean that the good assets of the company went away.  Lehman provided many profitable services and products even up to and after its bankruptcy.  These sectors were sold off during their bankruptcy to help pay off creditors and finance losses in other business areas.  To this day I am not convinced that AIG/Goldman Sachs/CitiBank bankruptcies would have led to the end of the world.  Are you?  Would things have been bad for a while?  Yes, but they are also very bad right now.  But what happens when you allow of a market correction rather than a bailout is that you get the bad assets out of the system immediately.  Instead, we prolonged the problem and helped pass it on to our kids through ridiculous amounts of debt.  In a non-bailout world, the smart firms who could afford to buy up Goldman's bad assets in  bankruptcy would be the ones with market share today, and the moral hazard of bailouts would be eliminated.  Nothing sends a better signal to market actors to rethink their positions than the knowledge that they bare both the risk of failure and are entitled to the benefits of success.  Instead, we rewarded failed firms that that in retrospect misused many derivatives to the detriment of firms that did not.  No amount of regulation of derivatives would do more to temper there use than allowing firms that use them in ultimately unprofitable ways to fail, just like any other multiparty contracts. 

Additionally, derivatives serve many important roles in the financial system such as providing a hedge to risk.  A lot has been made about Goldman's supposed "fraud."  That type of "fraud" (selling a security to two sides: one side with a long position, one side with a short position) helps drive markets to their true value by increasing total information built into the product prices.  Even if people were using derivatives to bet against the housing market, that is a good thing.  It shows that people believe prices are overvalued, helping to deflate the bubble earlier than it would have been absent the derivative trades.  Rather than forcing all derivatives to be traded on exchanges, counter-party solvency and fear of default would provide enough incentive for firms to contract accordingly.  That is only true, however, if firm failure is an option.

Lastly, and in my mind most importantly, is the resolution authority granted to the FDIC.  First, you just read my take on too big to fail, but that doesn't mean that we currently have a perfect mechanism for dissolving failing financial firms.  We don't.  But the best place to do that is in a bankruptcy court, which can provide at least a little bit of insulation from political interests interfering with the process.  But anyway if all the bill did was to create this resolution authority for the purposes of liquidating of a firm entering resolution, that wouldn't be too bad.  However, the Dodd bill gives the FDIC clear authority to engage in loan guarantees during a crisis for any company deemed to be systemically important to the financial system.  This is a bailout authority for creditors in addition to the resolution authority!!!!!  The FDIC can accept any collateral it chooses to borrow up to 90% of the assets value to provide guarantees for for these companies creditors.  And nowhere in the bill does it say that these guaruntees must be made equally and fairly for all creditors.  WE ARE JUST ASKING FOR THE SAME KIND OF FAVORITISM SHOWN TO CREDITORS IN THE CHRYSLER/GM BAILOUTS.  This is simply unacceptable.  Obviously it makes legislators' jobs very easy to simply leave it to the FDIC to determine how and when to exercise this authority, but this puts the the U.S. taxpayer on the hook for the mistakes of political favorites.  For example, take CitiBank.  If the FDIC had used this authority to bailout Citi's creditors it could have borrowed up to $1 trillion. 

Finally, it is absolutely ridiculous that the role of Fannie Mae and Freddie Mac played in the financial crisis is completely ignored in the bill.  Together the two firms have already borrowed $125 billion from the feds and the Congressional Budget Office predicts they ultimately will drain $380 billion.  This is far more than any of the TARP expenses for all the financial firms and auto makers combined.  And we probably have no chance of ever being repaid.  Almost of these losses were realized because of a misplaced government mandate that Fannie and Freddie provide loan guarantees to spur home ownership among low income individuals.  These companies were a moral hazard in the housing market.  They were implicitly backed by the government and were more than willing to back some of the riskiest loans in the housing market.  But alas, they are ignored in the legislation..  Hopefully, the CFPA will crack down on Fannie and Freddie's predatory lending practices.

uncensored

the look on chris demarco's face says it all

TIGER YOU ARE THE MAN!!!!