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Archive for the ‘Bailout’ Category

When debating and discussing the 2008 financial crisis, there are two big questions. And the answers to these questions are important because the wrong “narrative” could lead to decades of bad policy (much as a mistaken narrative about the Great Depression enabled bad policy in subsequent decades).

  1. What caused the crisis to occur?
  2. What should policy makers have done?

In a new video for Prager University, Nicole Gelinas of the Manhattan Institute succinctly and effectively provides very valuable information to help answer these questions. Particularly if you want to understand how the government promoted bad behavior by banks and created the conditions for a crisis.

Here are some further thoughts on the issues raised in the video.

Deregulation didn’t cause the financial crisis – Nicole explained that banks got in trouble because of poor incentives created by previous bailouts, not because of supposed deregulation. As she mentioned, their “risk models” were distorted by assumptions that some financial institutions were “too big to fail.”

But that’s only part of the story. It’s also important to recognize that easy-money policies last decade created too much liquidity and that corrupt subsidies and preferences for Fannie Mae and Freddie Mac steered much of that excess liquidity into the housing sector. These policies helped to create the bubble, and many financial institutions became insolvent when that bubble burst.

TARP wasn’t necessary to avert a meltdown – Because the video focused on how the “too big to fail” policy created bad incentives, there wasn’t much attention to the topic of what should have happened once big institutions became insolvent. Defenders of TARP argued that the bailout was necessary to “unfreeze” financial markets and prevent an economic meltdown.

But here’s the key thing to understand. The purpose of TARP was to bail out big financial institutions, which also meant protecting big investors who bought bonds from those institutions. And while TARP did mitigate the panic, it also rewarded bad choices by those big players. As I’ve explained before, using the “FDIC-resolution” approach also would have averted the panic. In short, instead of bailing out shareholders and bondholders, it would have been better to bail out depositors and wind down the insolvent institutions.

Bailouts encourage very bad behavior – There’s a saying that capitalism without bankruptcy is like religion without hell, which is simply a clever way of pointing out that you need both profit and loss in order for people in the economy to have the right set of incentives. Bailouts, however, screw up this incentive structure by allowing private profits while simultaneously socializing the losses. This creates what’s known as moral hazard.

I’ve often used a simple analogy when speaking about government-created moral hazard. How would you respond if I asked you to “invest” by giving me some money for a gambling trip to Las Vegas, but I explained that I would keep the money from all winning bets, while financing all losing bets from your funds? Assuming your IQ is at least room temperature, you would say no. But our federal government, when dealing with the financial sector, has said yes.

Good policy yields short-run pain but long-run gain – In my humble opinion, Nicole’s most valuable insight is when she explained the long-run negative consequences of the bailouts of Continental Illinois in 1984 and Long-Term Capital Management in 1998. There was less short-run pain (i.e., financial instability) because of these bailouts, but the avoidance of short-run pain meant much more long-run pain (i.e., the 2008 crisis).

Indeed, this “short termism” is a pervasive problem in government. Politicians often argue that a good policy is unfeasible because it would cause dislocation to interest groups that have become addicted to subsidies. In some cases, they’re right about short-run costs. A flat tax, for instance, might cause temporary dislocation for some sectors such as housing and employer-provide health insurance. But the long-run gains would be far greater – assuming politicians can be convinced to look past the next election cycle.

Let’s close by re-emphasizing a point I made at the beginning. Narratives matter.

For decades, the left got away with the absurd statement that the Great Depression “proved” that capitalism was unstable and destructive. Fortunately, research in recent decades has helped more and more people realize that this is an upside-down interpretation. Instead, bad government policy caused the depression and then additional bad policy during the New Deal made the depression longer and deeper.

Now we have something similar. Leftists very much want people to think that the financial crisis was a case of capitalism run amok. They’ve had some success with this false narrative. But the good news is that proponents of good policy immediately began explaining the destructive role of bad government policy. And if Nicole’s video is any indication, that effort to prevent a false narrative is continuing.

P.S. The Dodd-Frank bill was a response to the financial crisis, but it almost certainly made matters worse. Here’s what Nicole wrote about that legislation.

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I wrote in May 2011 that the situation in Greece was hopeless because nobody with power and/or influence wanted the right policy.

So I wasn’t bashful about patting myself on the back later that year when it quickly became obvious that bailouts weren’t working.

Ever since then, I’ve tried to ignore the debacle, though I periodically succumb to temptation and highlight the wasteful stupidity of the Greek government.

Having shared all sorts of bad news, I now feel obliged to point out that the situation isn’t hopeless.

Just last year, I explained that the right reforms could rescue Greece. And just in case you think I’m laughably naive, others have the same view.

Writing for the U.K.-based Telegraph, Ivan Mikloš, and Dalibor Roháč explain how Greece can enjoy and economic renaissance.

Greeks have to stop seeing themselves as victims… True, Greece’s international partners need to bear their share of responsibility for the economic catastrophe that has been unfolding in the country. However, it is not its creditors that are holding Greece back – rather, it is the lack of domestic leadership and ownership of economic reforms.

And what gives Mikloš and Roháč the credibility to make this assertion?

Simple, they’re from Slovakia and that nation faced a bigger mess after the collapse of the Soviet Empire and the peaceful breakup of Czechoslovakia.

As Slovaks, we have learned a fair bit about these matters. Once home to much of Czechoslovakia’s heavy industry – exporting arms and heavy machinery to the former Soviet bloc – Slovakia bore a disproportionate share of the costs incurred by the transition from communism in the early 1990s. …At the time of the country’s break-up, in 1992, the per capita income in Slovakia, expressed in purchasing power parity, was merely 62 per cent of that in the Czech Republic.The years that followed were not happy. The lingering sense of victimhood fostered nationalism and authoritarianism, as well as cronyism and corruption… By the time of the parliamentary election of 1998, Slovakia was on the brink of a financial meltdown.

But the election didn’t result in victory of crazed leftists, as we see with Syriza’s takeover in Greece.

Instead, the Slovak people elected reformers who decided to reduce the size and scope of the public sector.

The new government, formed by a coalition of pro-Western parties, restructured the banking sector, brought the public deficit under control… The parliamentary election of 2002 opened a unique window of opportunity. Slovakia’s novel tax reforms, spearheaded by domestic reformers under the auspices of Prime Minister Mikuláš Dzurinda, were seen by the IMF at the time as far too radical. However, the new, simpler, and leaner tax system, alongside other structural reforms, incentivized investment and turned Slovakia, nicknamed the “Tatra Tiger”, into the fastest-growing economy in the EU.

And a handful of other EU nations have followed the right path.

In 2008, instead of devaluing its currency – as recommended by the IMF – Latvia slashed public spending, cutting the salaries of civil servants by 26 per cent. The economy rebounded quickly to a growth rate of 5 per cent in 2011.

Here’s the bottom line.

Today, Slovakia’s per capita income rivals that of the Czech Republic. Together with Poland and the Baltic states, these countries have been catching up with their advanced Western European counterparts.

And the lesson for Greece should be clear, both politically and economically.

The purpose of economic reforms should not be to please the Troika, but to restore durable, shared prosperity. Deep, domestically led reforms need not be a form of political suicide, either. In 2006, after eight years of deep – and sometimes painful – reforms, Slovakia’s leading reformist party recorded its best electoral result in history. Similarly, many of the radical reformers in the Baltic states did well in subsequent elections. And a Greek leader who turns his country into a “Mediterranean Tiger” will most certainly not go down in infamy.

Unfortunately, the slim odds of good policy being adopted in Greece are partly the fault of the United States.

Or, to be more accurate, the Obama Administration is being very unhelpful by urging bailouts instead of reform.

Here’s some of what is being reported by the U.K.-based Guardian.

The Greek television channel, citing a senior German official, described the US treasury secretary, Jack Lew, imploring his German counterpart Wolfgang Schäuble to “support Greece” only to be told: “Give €50bn euro yourself to save Greece.” Mega’s Berlin-based correspondent told the station that the US official then said nothing “because, as is always the case according to German officials when it comes to the issue of money, the Americans never say anything”.

I’m not a big fan of Wolfgang Schäuble. The German Finance Minister is a strident opponent of tax competition, and some of his bad ideas are cited in the CF&P study that I wrote about yesterday.

But I greatly appreciate the fact that he basically told Obama’s corrupt Treasury Secretary to go jump in a lake.

And I’m also happy that Congress has done the right thing so that Obama and his team don’t have leeway to bail out Greece either directly or indirectly.

P.S. Since we ended on some good news, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention.

That seems like a rather strange negotiating position. Sort of like a bank robber holding a gun to his own head and saying he’ll shoot himself if the teller doesn’t hand over money.

At first glance, it seems the Greeks are bluffing. Or being suicidally self-destructive.

And maybe they are posturing and/or being deluded, but there are two reasons why the Greeks are not totally insane.

1. The rest of Europe does not want a Greek default.

There’s a famous saying, attributed to J. Paul Getty, that applies to the Greek fiscal fight. Simply stated, there are lots of people and institutions that own Greek government bonds and they are afraid that their investments will lose value if Greece decides to fully or partially renege on its debts (which is an implicit part of Greece’s negotiating position).

So while Greece would suffer if it defaulted, there would be collateral damage for the rest of Europe. In other words, the hypothetical bank robber has a grenade rather than a gun. And while the robber won’t fare well if he pulls the pin, lots of other people may get injured by shrapnel.

And to make matters more interesting, previous bailouts of Greece have created a rather novel situation in that taxpayers are now the indirect owners of a lot of Greek government debt. As you can see from the pie chart, European taxpayers have the most exposure, but American taxpayers also are on the hook because the IMF has participated in the bailouts.

The situation is Greece is akin to a bankruptcy negotiation. The folks holding Greek government debt are trying to figure out the best strategy for minimizing their losses, much as the creditors of a faltering business will calculate the best way of extracting their funds. If they press too hard, the business may go bust and they get very little (analogous to a Greek default). But if they are too gentle, they miss out on a chance of getting a greater share of the money they’re owed.

2. Centralization is the secular religion of the European elite and they want Greece in the euro.

The bureaucrats at the European Commission and the leaders of many European nations are emotionally and ideologically invested in the notion of “ever closer union” for Europe. Their ultimate goal is for the European Union to be a single nation, like the United States. In this analogy, the euro currency is akin to the American dollar.

There’s a general perception that a default would force the Greek government to pull out of the euro and re-create its own currency. And for the European elite who are committed to “ever closer union,” this would be perceived as a major setback. As such, they are willing to bend over backwards to accommodate Greece’s new government.

Given the somewhat blurry battle lines between Greece and its creditors, what’s the best outcome for advocates of limited government and individual liberty?

That’s a frustrating question to answer, particularly since the right approach would have been to reject any bailouts back when the crisis first started.

Without access to other people’s money, the Greek government would have been forced to rein in the nation’s bloated public sector. To be sure, the Greek government may also have defaulted, but that would have taught investors a valuable lesson about lending money to profligate governments.

And it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is today.

But there’s no point in crying about spilt milk. We can’t erase the mistakes of the past, so what’s the best approach today?

Actually, the right answer hasn’t changed.

And just as there are two reasons why the Greek government is being at least somewhat clever in playing hardball, there are two reasons why the rest of the world should tell them no more bailouts.

1. Don’t throw good money after bad.

To follow up on the wisdom of J. Paul Getty, let’s now share a statement commonly attributed to either Will Rogers or Warren Buffett. I don’t know which one (if either) deserves credit, but there’s a lot of wisdom in the advice to stop digging if you find yourself in a hole. And Greece, like many other nations, has spent its way into a deep fiscal hole.

There is a solution for the Greek mess. Politicians need to cut spending over a sustained period of time while also liberalizing the economy to create growth. And, to be fair, some of that has been happening over the past five years. But the pace has been too slow, particularly for pro-growth reforms.

But this also explains why bailouts are so misguided. Politicians generally don’t do the right thing until and unless they’ve exhausted all other options. So if the Greek government thinks it has additional access to money from other nations, that will give the politicians an excuse to postpone and/or weaken necessary reforms.

2. Saying “No” to Greece will send a powerful message to other failing European welfare states.

Now let’s get to the real issue. What happens to Greece will have a big impact on the behavior of other European governments that also are drifting toward bankruptcy.

Here’s a chart showing the European nations with debt burdens in excess of 100 percent of economic output based on OECD data. Because of bad demographics and poor decisions by their politicians, every one of these nations is likely to endure a Greek-style fiscal crisis in the near future.

And keep in mind that these figures understate the magnitude of the problem. If you include unfunded liabilities, the debt levels are far higher.

So the obvious concern is how do you convince the politicians and voters in these nations that they better reform to avoid future fiscal chaos? How do you help them understand, as Mark Steyn sagely observed way back in 2010, that “The 20th-century Bismarckian welfare state has run out of people to stick it to.

Well, if you give additional bailouts to Greece, you send precisely the wrong message to the Italians, French, etc. In effect, you’re telling them that there’s a new group of taxpayers from other nations who will pick up the tab.

That means more debt, bigger government, and a deeper crisis when the house of cards collapses.

P.S. Five years ago, I created a somewhat-tongue-in-cheek 10-step prediction for the Greek crisis and stated at the time that we were at Step 5. Well, it appears my satire is slowly becoming reality. We’re now at Step 7.

P.P.S. Four years ago, I put together a bunch of predictions about Greece. You can judge for yourself, but I think I was quite accurate.

P.P.P.S. A big problem in Greece is the erosion of social capital, as personified by Olga the Moocher. At some point, as I bluntly warned in an interview, the Greeks need to learn there’s no Santa Claus.

P.P.P.P.S. The regulatory burden in Greece is a nightmare, but some examples of red tape are almost beyond belief.

P.P.P.P.P.S. The fiscal burden in Greece is a nightmare, but some examples pf wasteful spending are almost beyond belief.

P.P.P.P.P.P.S. Since we once again have examined a very depressing topic, let’s continue with our tradition of ending with a bit of humor. Click here and here for some very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing. If you like funny videos, click here and here. Last but not least, here’s some very un-PC humor about Greece and the rest of Europe.

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I periodically try to explain that there’s a big difference between being pro-market and pro-business.

Simply stated, policy makers shouldn’t try to penalize businesses with taxes, mandates, and regulations.

But neither should politicians seek to subsidize businesses. That’s why I’m against bailouts, subsidies, and other distortions that provide special favors for politically connected companies.

I have nothing against companies earning money, to be sure, but I want them to earn their profits in the marketplace rather than lining their pockets by using the coercive power of government to rig the rules of the game.

But I don’t just have disdain for companies that stick their snouts in the public trough. I also have little regard for the politicians that enable this sordid type of business by trading campaign cash for corporate welfare.

I realize that’s a strong assertion, but I can’t think of any legitimate reason to support handouts for big companies. And I get especially angry when giveaways are facilitated by politicians who claim to support free markets.

Let’s look at two examples, the Export-Import Bank and the Obamacare bailout for big insurance corporations.

I’ve previously argued that the Export-Import Bank is a squalid example of corruption and I’ve shared a video that explains why it’s economically foolish to subsidize a handful of big exporters.

To augment those arguments, here’s some of what Professor Jeffrey Dorfman of the University Georgia recently wrote in a column for Real Clear Markets. He correctly warns that certain GOP politicians are to blame if the Export-Import Bank stays alive.

The Export-Import Bank is everything that Republicans should stand against. It is crony capitalism at its worst. It is corporate welfare, taxing American families to boost corporate profits. It ever forces firms to potentially subsidize a competitor. There is simply no need for this government agency. Republicans in Congress should make a stand and show voters that Republicans believe in free markets and small government, even if some big businesses complain. The Ex-Im Bank should not be reauthorized. …Over the last decade or so, the Democrats have increasingly become the party of big business, stealing that crown away from Republicans because of the Democrats’ willingness to engage in crony capitalism and actively pick winners and losers in our economy. While Republicans are still thought of as the pro-business party, and other actions by the Democrats are clearly anti-business (Obamacare, environmental over-regulation), large multinational corporations like Boeing and GE have donated money to Democrats and generally profited from their political alliances with them. If Republicans want to make gains among (lower) middle-class voters, one of the things that could help is to convince voters that they are on the side of the people and not big corporations. The Ex-Im Bank reauthorization is a perfect opportunity to do just that. …Income redistribution is wrong especially when the money is going to big and profitable companies.

Ryan Ellis of Americans for Tax Reform agrees. Writing for Forbes, he looks at both the policy and politics of Export-Import Bank handouts.

The ExIm bank is an export subsidy program, giving money to certain companies…in the hopes that gives them a leg up in international trade.  It’s been criticized for decades by free traders and those who simply oppose corporate welfare spending out of Washington. …the ExIm bank will sunset on its own on September 30th.  All Congress has to do is let nature take its course, and this corporate welfare program simply goes away forever.

Sounds like we should have a guaranteed victory from free markets over intervention, right?

Don’t count your chickens before they hatch.  Ryan explains that Republicans may shoot themselves in the foot by trying to rescue this reprehensible example of cronyism.

Charging in at the last minute to save ExIm only makes the House GOP look beholden to K Street.  It also looks like they are flip-flopping from where they were back in the summer.  …ExIm reauthorization…is likely to take a GOP grassroots focused on President Obama’s failures and full of midterm election intensity, and turn them inward toward criticism of the House GOP leadership instead. If things go badly with this CR gambit, the House GOP will have given themselves a self inflicted wound just as they are trying to get out of town and not screw up what should be a good year for their candidates.

How nauseating.

I realize that the Export-Import Bank is a relatively minor issue and that I should mostly care about whether politicians do the right think on big topics such as entitlement reform. After all, that’s what really counts if we want to avoid fiscal catastrophe.

But I can’t stop myself from foaming at the mouth when self-proclaimed supporters of free markets undermine the argument for economic liberty with cronyist deals.

Obamacare is another example of big business being against free markets. We already know that the big pharmaceutical firms cut a special deal with the Obama White House.

The big insurance companies also had their snouts in the trough. Not only did they get legislation that mandated the purchase of their products, but they also got language that provides bailouts if they aren’t able to profit from Obamacare.

What’s really amazing, though, is that some Republicans are willing to go along with Obamacare bailouts for those major companies.

The good news is that Florida Senator Marco Rubio is in the right side. Here’s some of what he wrote about bailouts for health insurance companies for Fox News.

 …section 1342 of the ObamaCare law…established so-called “risk corridors”. According to this provision, taxpayers will make up the difference for health insurance companies whose plans lose money under ObamaCare. Last November, as it became clearer what this section of the law actually meant, I introduced legislation repealing it and protecting taxpayers from being forced to cover insurers’ ObamaCare losses. …In recent weeks, the public has learned that senior White House officials have been working closely with insurers behind the scenes to make sure that their earlier bailout deal, which helped assure ObamaCare’s passage in 2010, would stand and that a taxpayer-funded bailout was still, in fact, on the table. …On this ObamaCare bailout, as with so many issues, Washington politicians are misleading average Americans and planning to stick them with the bill. This is government favoritism and corporate cronyism at its worst. …It’s time to repeal and replace it, but at the very least, we should make it the law of the land that health insurers won’t be bailed out by taxpayers.

I’ll also add a moral argument.

As far as I’m concerned, I want the health insurance companies to suffer major losses. I want the business community to see that it’s a mistake to get in bed with big government.

Though I guess I’m actually making a practical argument. I may be motivated by morality, but the companies hopefully will do a cost-benefit analysis and decide that it’s too risky to strike deals with the political class.

By the way, Republicans often do the wrong thing because they’re afraid that voters favor the statist agenda of dependency.

But that’s not the case for Obamacare bailouts for health insurances companies. Here’s some polling data on the issue that showed up on my Twitter feed.

Let’s close by sharing some of what the editors at National Review wrote about both the Obamacare bailout and Export-Import Bank subsidies.

Congressional Republicans keep saying they oppose Obamacare. Yet they’re refusing to take the simplest and easiest action against it. …Some Republicans say that the insurance companies should not be penalized for the defects of the law. Why not? They have freely chosen to participate in the exchanges, and they should bear the risks of that decision — which include the risk that Congress might decide not to shovel tax dollars at them. The alternative, after all, is to punish taxpayers. …The debate over the Export-Import Bank is one test of Republican sincerity about ending corporate welfare. These taxpayer subsidies are another: If Republicans can’t take on corporate welfare when doing so advances one of their party’s most popular and basic commitments, when will they?

Amen. Both of these issues are tests for the GOP.

Actually, they should get added to a long list of issues that tell us whether Republicans have any sincerity (or brains) in the fight against statism.

o No tax increases, since more money for Washington will encourage a bigger burden of government and undermine prosperity.

o To stop bailouts for Europe’s decrepit welfare states, no more money for the International Monetary Fund.

o Reform the biased number-crunching methodology at the Congressional Budget Office and Joint Committee on Taxation.

o No more money from American taxpayers to subsidize the left-wing bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

P.S. If you’re in the mood for some dark humor, here’s the federal government’s satirical bailout application form.

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I periodically comment about government corruption, often in the context of trying to make the general point that shrinking the size and scope of the public sector is the most effective way of reducing sleaze in Washington.

Now let’s get specific. I’ve already cited Obamacare, the tax code, and the Export-Import Bank as facilitators of corruption. Let’s augment that list by looking at government intervention in the financial sector.

We’ll start with some findings on the effectiveness of lobbying. In some new research, two professors at George Mason University’s Mercatus Center found that being active in Washington is beneficial for top executives, but it doesn’t help a company’s bottom line.

Here’s how the Washington Examiner summarized the study.

What is the return on investment in lobbying? Does a PAC contribution actually pay for itself? There are so many cases of a lobbyist winning an earmark, or a PAC contribution immediately preceding a subsidy, that it’s hard not to see politics as a good investment. …But for every company that hits the jackpot after lobbying campaign, scores of others end up throwing away money on lobbyists — and scores of executives whose PAC contributions don’t help the company a bit. Business professors Russell Sobel and Rachel Graefe-Anderson of the Mercatus Center at George Mason University collected the data and dug into the bigger question: Do lobbying expenditures and PAC contributions increase corporate profits, on average? Their answer: No… When Sobel and Graefe-Anderson crunched numbers, conducted regressions, and controlled for firm size, industry and other factors, they arrived at data “suggesting that any benefits gained from corporate political activity are largely captured by firm executives.” In short, when a CEO and a lobbyist decide to get their company more involved in politics, the CEO and the lobbyist benefit, while not helping the company.

These findings at first struck me as counterintuitive. After all, there are plenty of companies, such as General Electric and Archer Daniels Midland, that seem to obtain lots of unearned profits thanks to their lobbying activities.

But don’t forget that government – at best – is a zero-sum game. So for every company, industry, or sector that “wins,” there will be lots of companies, industries, and sectors that suffer.

And speaking of industries that benefit, there was one exception to the Mercatus Center findings.

The only exception was the banking and financial sectors, where they found “positive and significant correlations between firm lobbying activity and three measures of firm financial performance,” including return on investment and return on equity.

At this stage, let’s be careful to specify that lobbying is not necessarily bad. If a handful of business owners want to join forces to fight against higher taxes or more regulation, I’m all in favor of that kind of lobbying. They’re fighting to be left alone.

But a big chunk of the lobbying in Washington is not about being left alone. It’s about seeking undeserved benefits by using the coercive power of government.

And this latter definition is a good description of what the financial industry has been doing in Washington. That’s bad for taxpayers, but it’s also bad for the financial sector and the overall economy. Here are some of the conclusions from a recent study published by the New York Federal Reserve Bank.

…there have been many concerns with banks deemed “too big to fail.” These concerns derive from the belief that the too-big-to-fail status gives large banks a competitive edge and incentives to take on additional risk. If investors believe the largest banks are too big to fail, they will be willing to offer them funding at a discount. Together with expectations of rescues, this discount gives the too-big-to-fail banks incentives to engage in riskier activities. …The debate around too-big-to-fail banks has given rise to a large literature. … we study whether banks that rating agencies classify as likely to receive government support increase their risk-taking. …The results of our investigation show that a greater likelihood of government support leads to a rise in bank risk-taking. Following an increase in government support, we see a larger volume of bank lending becoming impaired. Further, and in line with this finding, our results show that stronger government support translates into an increase in net charge-offs. Additionally, we find that the effect of government support on impaired loans is stronger for riskier banks than safer ones, as measured by their issuer default ratings. …the level of impaired loans in a bank loan portfolio increases directly with the level of government support. …riskier banks are more likely to take advantage of potential sovereign support.

Isn’t that wonderful. Our tax dollars have been used to increase systemic risk and undermine economic growth. Though none of us should be surprised.

Since this has been a depressing column, let’s enjoy some morbid TARP humor.

Here’s a cartoon from Robert Ariail about the cronies who got rich from the Bush-Obama bailouts.

Good to see Hank Paulson getting ripped. At the end of the Bush Administration, I attempted to convince the White House that “FDIC resolution” was a much better way of recapitalizing the banking system. I was repeatedly told, though, that Paulson was in charge and there was no way of stopping him from bailing out his former cronies on Wall Street.

Oh well, at least I tried.

Here’s another cartoon about the real victims of TARP. Like the first cartoon, it’s an oldie but goodie and it’s a good illustration of how government is a zero-sum scam.

But let me re-emphasize a point I made above. Taxpayers aren’t the only ones to lose. The entire economy suffers from bailouts and subsidies. Such policies distort the allocation of capital and lead to slower long-run growth.

That may not be easy to measure, but it matters a lot.

Here’s a video explaining how such policies create moral hazard.

This is a good time to recycle the famous poster about supposed government solutions.

P.S. Not all financial institutions are corrupted by government. The nation’s 10th-largest bank, BB&T, did not want and did not need a bailout. But as the bank’s former CEO (and, I’m proud to say, current Cato Institute president) explained in his book, thugs from Washington threatened to use regulatory coercion if BB&T didn’t participate.

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I thought TARP was the sleaziest-ever example of cronyism and corruption in Washington.

The Wall Street bailout rewarded politically well-connected companies, encouraged moral hazard, and ripped off taxpayers. Heck, it was so bad that it makes the sleaze at the Export-Import Bank seem almost angelic by comparison.

But I may have to reassess my views.

One of the provisions of Obamacare allows the White House to give bailouts to big health insurance companies. You’re probably wondering why these big firms would need bailouts. After all, didn’t Obamacare coerce millions of people into becoming involuntary customers of these companies? That should give them lots of unearned profits, right?

But here’s the catch. The President wasn’t being honest when he repeatedly promised that Obamacare would reduce premiums for health insurance. And since the Democrats don’t want consumers to get angry about rising costs (particularly before the 2014 elections), they want health insurance companies to under-charge.

Avik Roy of Forbes explains in greater detail how the White House is coercing health insurance companies to limit premium increases before the mid-term elections. Here are some excerpts.

Hidden in the midst of a 436 page regulatory update, and written in pure bureaucratese, the Department of Health and Human Services asked that insurance companies limit the looming premium increases for 2015 health plans. But don’t worry, HHS hinted: we’ll bail you out on the taxpayer’s dime if you lose money. …The White House is playing politics with Americans’ health care—and they’re bribing health insurance companies to play along. The administration’s intention is clear: Salvage the 2014 midterm elections. …Technically, the regulations don’t force health insurance companies to tamp down their premium spikes. But the White House isn’t asking nicely. …Under Obamacare, insurers are so heavily regulated that they have to play nice with the bureaucrats who call the shots. …If insurance companies don’t give in, regulators have powerful ways to make life hard for them. A shrewd CEO doesn’t need to look far to see what might happen if his company opts out.

But before you feel sorry for Big Insurance, remember that these corrupt companies supported Obamacare and fully expect to get bailed out by taxpayers. Here are some blurbs from an article last month in the Weekly Standard.

Most Americans don’t think it’s their job to bail out insurance companies who lose money under Obamacare, but that’s exactly what’s poised to happen. Obamacare’s risk-corridor program — which President Obama has been using as a slush fund to placate his insurance allies and keep them quiet about his lawlessness — shifts financial risk from insurers to taxpayers. According to the House Oversight Committee, health insurers expect Obamacare’s risk corridors to net them nearly $1 billion, at taxpayer expense, this year alone. …It was a win-win that would boost Obamacare in its early days — to the benefit of those who’ve gained extraordinary power at the expense of Americans’ liberty, and of those whose product has become mandatory for Americans to purchase.

In other words, we have a stereotypical example of Mitchell’s Law. Government screws up something, and then uses that mess as an excuse to impose more bad policy!

This Lisa Benson cartoon is a perfect summary of what’s happening.

P.S. If you’re in the mood for some dark humor, here’s the federal government’s satirical bailout application form.

P.P.S. Switching to a different topic, it’s time for me to rectify a mistake. When I first created the Moocher Hall of Fame last year, I didn’t include the “Octo-moocher” as a charter member. After all, having 14 kids while living on the dole didn’t seem particularly noteworthy.

But now we’ve discovered that she could afford her kids. She just wanted other people to pick up the tab.

Octomom Nadya Suleman pleaded no contest Monday to a single count of misdemeanor welfare fraud for failing to disclose income she was receiving from videos and personal appearances while collecting more than $26,000 in public assistance funds to care for her 14 children.

This may not be as impressive as the deadbeat who got handouts while living on a $1.2 million yacht, but still worthy of membership.

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When you support limited government and individual freedom, you don’t enjoy many victories. Particularly if you’re relying on the U.S. Senate.

But it occasionally happens.

The Senate held firm and stopped Obama from getting a fiscal cliff tax hike at the end of 2010.

The Senate overwhelmingly voted against a VAT.

The Senate unanimously rejected a Greek bailout.

To be sure, some of these votes were merely window dressing, but it’s still better to have symbolic victories rather than symbolic defeats.

Today, however, I want to report on a real victory against statism. The Senate Majority Leader, Harry Reid, has been forced to give up on his effort to ram through an expansion of IMF bailout authority as part of legislation giving money to Ukraine.

This is the second time that this White House initiative has been blocked.

Here are some blurbs from a report in Politico.

Senate Majority Leader Harry Reid will drop a provision to reform the International Monetary Fund from a bill to help Ukraine… Reid acknowledged that while the Ukraine package would likely have passed the Senate, it was “headed to nowhere” in the GOP-led House. …the administration did not hide its disappointment Tuesday afternoon over the removal of the IMF language. “We are deeply disappointed by the news that Republican opposition has forced the Senate to remove the [IMF] reforms from the Ukraine assistance package,” said Treasury Department spokeswoman Holly Shulman. …Backers of including the IMF reforms in the Ukraine deal note that it will help boost the organization’s lending capacity. …The United States is the lone holdout country that has not ratified the IMF deal, which was struck more than three years ago. But many congressional Republicans have raised concerns about potential taxpayer risk with the IMF agreement.

It goes without saying that the IMF won’t give up, and the Obama Administration is still pushing to expand the international bureaucracy’s bailout authority.

The battle will continue. Lew and ObamaIn preparation for the next skirmish, Desmond Lachmann at AEI debunks the White House’s empty talking points.

Next week, Treasury Secretary Jack Lew will make his case before the House Financial Service Committee for linking IMF reform to U.S. bilateral aid for Ukraine. If the past is any guide, he will do so by putting forward a set of disingenuous arguments in favor of his case. …The principal argument that Secretary Lew must be expected to make is that IMF quota reform is essential for large-scale IMF Ukrainian financial support. This argument glosses over the fact that under the IMF’s lending policy under “exceptional circumstances”, which has been resorted to on many occasions since the 1994 Mexican tequila crisis, the amount that the IMF can lend a country bears little relation to the size of that country’s IMF quota.  …Ukraine is reportedly currently seeking around a U.S. $15 billion IMF economic adjustment loan. If Mr. Lew were to be candid, he would inform Congress that such an amount represents only around 800 percent of Ukraine’s present IMF quota or less than half the amount of quota that the IMF recently committed to several countries in the European economic periphery. He would also inform Congress that the IMF presently has more than U.S. $400 billion in uncommitted loanable resources. This would make the IMF’s prospective loan to Ukraine but a drop in the IMF’s large bucket of available resources even without IMF reform.

Lachmann goes on to make additional points, including the fact that IMF bailouts create very real financial risks for American taxpayers.

The U.S. Treasury never tires of assuring Congress that large-scale IMF lending poses no risk to the US taxpayer. It bases its argument on the fact that the IMF enjoys preferred creditor status and that to date no major country has defaulted on its IMF loans. However, the Treasury conveniently glosses over the fact that IMF loan repayment experience with past IMF lending on a small scale might not be a good guide to what might happen on IMF loans of an unprecedentedly large scale. To understand that there now might be a real risk to the US taxpayer from IMF lending, one only need reflect on the IMF’s current Greek lending experience. Greece’s public debt is now mainly officially owned and it amounts to over 175 percent of GDP. It is far from clear that the European Central Bank will go along with the idea that the IMF enjoys senior status over the ECB in terms of Greece’s loan repayments.

His point about risks to taxpayers is right on the mark. In effect, the IMF is like Fannie Mae and Freddie Mac. For years, defenders of intervention in the housing market argued those government-created entities didn’t cost a penny. Then they suddenly cost a lot.

The same will happen with the IMF.

Lachmann closes by asking the right question, which is whether there’s any reason to expand the IMF’s authority.

I think that’s the real issue. And to answers that question, let’s go to Mark Hendrickson’s column in Forbes.

He starts by noting that the IMF has “re-invented” itself to justify its existence, even though it supposedly was created for a world – which no longer exists – of fixed exchange rates.

Bureaucracies are masters of mission creep. They constantly reinvent themselves, cleverly finding ways to expand in size, scope, power, and budget. The IMF has perfected this art, having evolved from its original purpose of trying to facilitate orderly currency exchange rates as countries recovered from World War II to morphing into a global busybody that makes loans—with significant strings attached—to bankrupt governments.

And what do we get in exchange for being the biggest backer of IMF bailouts?

What has the American taxpayer received in return for billions of dollars siphoned through the IMF to deadbeat governments? Nothing but ill will from abroad. First, the IMF’s policy of lending millions, or billions, to fiscally mismanaged governments is counterproductive: Such bailouts help to prop up inept and/or corrupt governments. Second, bailouts create moral hazard, inducing private corporations and banks to lend funds to poor credit risks, confident that IMF funds will make them whole. Third, typical IMF rescue packages demand…higher taxes in the name of balancing the budget.

It would be far better, Professor Hendrickson explains, if reckless governments had to immediately accept the market’s judgement whenever they overspent.

…it doesn’t take expert economists to figure out when a government is overspending. Markets will discipline spendthrift governments by ceasing to make funds available to them until they institute needed reforms. Without a bailout fairy like the IMF, government leaders will quickly learn that if they wish the government to remain viable, they must spend within available means. By telling governments what they “have” to do when it’s obvious they need to make those reforms anyhow, the IMF gives the recipient government a convenient scapegoat. It blames the pain of austerity on meddlesome foreigners, and since the U.S. is perceived as the real power in the IMF, we get painted as the bad guys. The bottom line: IMF use of our tax dollars buys us a ton of resentment from abroad.

He also points out that the IMF makes a habit of suggesting bad policy – even for the United States.

the IMF has waged war against American taxpayers and workers. Last October, the IMF released a paper suggesting both higher tax rates (mentioning a “revenue-maximizing” top marginal tax rate of around 60 percent) and possibly the confiscation of a sizable percentage of private assets to restore fiscal balance to the federal government. The IMF also has been one of the leading forces discouraging “tax competition” between countries. …It is using American tax dollars to lobby the American government to increase the flow of tax dollars from our Treasury to the IMF. We shouldn’t be surprised, then, that the IMF released a report on March 13 warning of the perils of “income inequality,” and suggesting tax increases and wealth redistribution as ways by which Uncle Sam might address the problem.

So what’s the bottom line?

If the IMF really wanted to improve the economic prospects of the world’s people, it would recommend reductions in government spending and taxation. Indeed, the overwhelming evidence is that vigorous economic growth is highly correlated with a country’s government shrinking as a share of GDP. What are the chances that the IMF will ever advocate such policies? Not very, as we realize that the IMF’s very existence depends on government taxes. …In a better world, there wouldn’t be an IMF. For the present, though, the best we can hope for is for enough members of Congress to understand that the IMF’s interests are opposed to those of the American people and to refuse any requests that the IMF makes for increased funding.

The Wall Street Journal is more measured in its rhetoric, but it basically comes to the same conclusion.

Republicans are reluctant to grant more leverage to European countries, which they blame for relaxing rules on Greece’s bailout in order to rescue the continent’s banks. …An internal audit last week also found that the fund’s growth forecasts were “optimistic” for countries like Greece and Ukraine that were granted larger loans under its “exceptional access” framework. Republicans fear the IMF is becoming a discount borrowing window for spendthrift governments trying to postpone reforms. IMF economic advice is often lousy—raise taxes and devalue… Congress ought to debate whether the IMF has outlived its usefulness as it evolves from a tool for Western interests into a global check-writing bureaucracy.

Amen. Which is why the United States should shut the Treasury door to the IMF. If other nations want to subsidize bad policy and promote bigger government, they can do it with their own money.

P.S. Here’s a list of other IMF transgressions against good public policy (all partially backed by American taxpayers).

Endorsing government cartels to boost tax and regulatory burdens.

Trying to undermine flat tax systems in Albania and Latvia.

Encouraging a “collective response” to over-spending in welfare states.

Pushing for higher tax burdens in Greece.

Seeking the same destructive policy in Cyprus.

Advocating for more centralization and bureaucratic rule in Europe.

Urging higher taxes in El Salvador.

Supporting “eurobonds” so that taxpayers from other nations can subsidize the profligacy of welfare states such as Greece, Italy, and Spain.

Pushing an energy tax that would mean $5,500 of added expense for the average American household.

Reflexively endorsing every possible tax increase.

Aiding and abetting Obama’s “inequality” agenda with disingenuous research.

And remember, these pampered bureaucrats get lavishly compensated and don’t have to pay tax on their bloated salaries.

P.P.S. But let’s be fair to the IMF. The bureaucrats have given us – albeit unintentionally – some very good evidence against the value-added tax.

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