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Archive for September 14th, 2010

I am pleasantly shocked to see that a healthy majority of respondents favor partial privatization of Social Security. I knew support was reasonably strong several years ago, but I feared that the financial crisis would have made Americans more leery of financial markets. I also wondered whether the idea was discredited by its association with the Bush Administration. But a new Pew survey shows very good results, so maybe Republicans will feel more comfortable about developing a “secret plan” for Social Security reform.

…a majority favors a proposal to allow some private investments in Social Security… The latest Pew Research/National Journal Congressional Connection poll, sponsored by SHRM, conducted Sept. 9-12 among 1,001 adults, finds that 58% favor a proposal that would allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets; 28% oppose this proposal. Majorities across all age groups — except for those ages 65 and older — favor this proposal. …Support for the general concept is comparable to support for a similar plan advocated by former President George W. Bush in 2004. As he sought reelection in the fall of 2004, 58% of registered voters that September favored allowing younger workers to invest a portion of their Social Security; 26% said they opposed this change. However, after Bush won reelection and debate about the proposal began, support weakened. By March 2005, the public was largely split (44% favor, 40% oppose) and the proposal was not enacted.

P.S. The same poll shows that people are not sympathetic, however, to reforming Medicare, however, so the Social Security silver cloud does have a dark lining.

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The Census Bureau will be releasing new poverty-rate numbers on Thursday and the numbers are expected to show a big move in the wrong direction. Much of the coverage will be on how much the poverty rate increases, with 15 percent being a likely amount according to some estimate. There also will be lots of discussion about the political implications, as this Associated Press story illustrates.

The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama’s watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 — the recession-ravaged first year of the Democrat’s presidency — are to be released in the coming week, and demographers expect grim findings. It’s unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase — from 13.2 percent to about 15 percent — would be another blow to Democrats struggling to persuade voters to keep them in power.

But the real story should be the degree to which the federal government’s War on Poverty has been a complete failure. Taxpayers have poured trillions of dollars into means-tested programs, yet the data show no positive results. Indeed, it’s quite likely that the programs have backfired. As shown in the chart, Census Bureau data reveal that the poverty rate was steadily falling in the 1950s and early 1960s, but then stagnated once the War on Poverty began. It’s possible that there are alternative and/or additional explanations for this shocking development, but government intervention may be encouraging poverty by making indolence more attractive than work.

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George Melloan’s column in the Wall Street Journal discusses the new Basel capital standards and correctly observes that 22 years of global banking regulations have not generated good results. This is not because requiring reserves is a bad thing, but rather because such policies do nothing to fix the real problem. In the case of the United States, easy money policy by the Fed and a corrupt system of Fannie Mae/Freddie Mac subsidies caused the housing bubble and resulting financial crisis. Yet these problems have not been addressed, either in the Dodd-Frank bailout bill or the new Basel rules. Indeed, Melloan points out that Fannie and Freddie were exempted from the Dood-Frank legislation.

There’s something to be said for holding banks to higher capital standards, even at the cost of more constrained lending and slower economic growth. But the much-bruited idea that Basel rules will make the world freer of financial crises is highly doubtful, given current political circumstances. The 2008 financial meltdown was not primarily the result of lax regulation but of co-option and abuse of the U.S. financial system by the political class in Washington. The federal government’s “affordable housing” endeavors, beginning in the 1990s, allowed and even forced banks to make highly risky mortgage loans. Those loans were folded into mortgage-backed securities (MBS) sold in vast numbers throughout the world, most promiscuously by two government-sponsored enterprises, Fannie Mae and Freddie Mac. The Federal Reserve contributed a credit bubble that caused house prices to soar, a classic asset inflation. When the bubble began to deflate in 2007, the bad loans in mortgage securities became poisonous. The MBS market seized up, and financial institutions holding them became illiquid and began to crash. The Lehman Brothers collapse was the biggest shock. The only way Basel standards might have helped prevent this would have been if they had been applied to Fannie and Freddie as well as to banks. They weren’t. President Bill Clinton exempted the two giants from Basel capitalization rules because they were the primary instruments of a federal policy aimed at helping more lower-income people become homeowners. This was a laudable goal that ultimately wrecked the housing and banking industries. Washington has learned nothing from this debacle, which is why the next financial crisis is likely to have federal policy origins and may come sooner than we think. Fannie and Freddie—now fully controlled by Uncle Sam and exempt from the Dodd-Frank financial “reform” legislation—are still going strong, guaranteeing and restructuring loans while they continue to rack up huge losses for taxpayers. …The record since the Basel process began 22 years ago doesn’t generate faith in banking regulation either. Basel rules didn’t prevent the collapse of Japanese banking in 1990, they didn’t prevent the 2008 meltdown, and they are not preventing the banking failures that plague the financial system even today.

P.S. The bureaucrats and regulators who put together the Basel capital standards were the ones who decided that mortgage-backed securities were very safe assets and required less capital. That was a common assumption at the time, so the point is not that the Basel folks are particularly incompetent, but rather that regulation is a very poor substitute for market discipline. Letting financial firms go bankrupt instead of bailing them out would be a far better way of encouraging prudence.

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