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Posts Tagged ‘Bailout’

Back in 2013, I did an assessment of economic policy changes that occurred during the Clinton Administration.

The bottom line was that the overall burden of government declined by a semi-significant amount. Which presumably helps to explain why the economy enjoyed good growth and job creation in the 1990s, especially in the last half of the decade when most of the pro-growth reforms were enacted.

The chart I prepared has been very helpful when speaking to audiences about what actually happened during the Clinton years, so I decided to do the same thing for other presidents.

A week ago, I put together my summary of economic policy changes during the Nixon years. At the risk of understatement, it was a very grim era for free markets.

A few days ago, I followed up with a look at overall economic policy during the Reagan years. That was a much better era, at least for those of us who favor economic liberty over statism.

Now it’s time to look at the record of George W. Bush. It’s not a pretty picture.

I think the TARP bailout was the low point of the Bush years, though he also deserves criticism for big spending hikes (especially the rapid rise of domestic spending), additional red tape, special-interest trade taxes, and more centralization of education.

On the plus side, there was a good tax cut in 2003 (the 2001 version was mostly Keynesian and thus didn’t help growth), as well as some targeted trade liberalization. Unfortunately, those good reforms were swamped by bad policy.

As has been the case for other presidents, my calculations are based solely on policy changes. Presidents don’t get credit or blame for policies they endorsed or opposed. So when fans of President Bush tell me he was better on policy than his record indicates, I shrug my shoulders (just like I don’t particularly care when Republicans on Capitol Hill tell me that Clinton’s good record was because of the post-1994 GOP Congress).

I simply want to show where policy improved and where it deteriorated when various presidents were in office. Other people can argue about the degree to which those presidents deserve credit or blame.

In the case of Bush, for what it’s worth, I think he does deserve blame. None of the bad laws I listed were enacted over his veto.

Incidentally, I was torn by how to handle monetary policy. The artificially low interest rates of the mid-2000s contributed to the housing bubble and subsequent financial meltdown. Should I have blamed Bush for that because of his Federal Reserve appointments?

On a related note, the affordable lending mandates of Fannie Mae and Freddie Mac were made more onerous during the Bush years, thus exacerbating perverse incentives in the financial sector to make unwise loans. Was that Bush’s fault, or were those regulations unavoidable because of legislation that was enacted before Bush became President?

Ultimately, I decided to omit any reference to the Fed, as well as Fannie and Freddie. But I double-weighted TARP, both because it was awful economic policy and because that was a way of partially dinging Bush for his acquiescence to bad monetary and housing policy.

If there’s a lesson to learn from this analysis of Bush policy, it is that party labels don’t necessarily have any meaning. The economy suffers just as much if a Republican expands the burden of government as it does when the same thing happens under a Democrat.

P.S. I haven’t decided whether to replicate this exercise for pre-World War II presidents. If I do, Calvin Coolidge and Grover Cleveland presumably would look very good.

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Puerto Rico is getting lots of attention because Hurricane Maria caused a tremendous amount of economic damage.

That leads to an important discussion about the role of government – particularly the federal government – when there is a natural disaster (and a secondary discussion about the silly Keynesian argument that disasters are good for prosperity).

But let’s focus today on a man-made disaster. Puerto Rico is the Greece of America, and it was a fiscal mess well before the hurricane hit. Indeed, there’s already been partial-bailout legislation from Washington.

The Wall Street Journal opined wisely on the topic, starting with the observation that we shouldn’t feel too much sympathy for investors who purchased bonds from the island’s profligate government.

…they knew what they were getting into. Lenders piled into Puerto Rican bonds that paid high yields that are “triple tax-exempt”—they can’t be taxed by federal, state or local governments in the U.S. Yet lenders also knew that the Puerto Rican government was heading toward a debt crisis. The economy has been contracting for a decade, and the commonwealth has $48 billion in unfunded pensions on top of $72 billion in bond debt. Creditors bet that the high yield was worth the political risk, but the music was bound to stop. One lesson of the last decade that creditors don’t want to learn, even after Detroit and Greece, is that sovereign debt to lousy governments is high risk. The abrogation of debt contracts that will now take place is regrettable, but there is a price for betting on politicians.

It would be a nice lesson if investors learned not to trust governments, especially the ones most prone to destructive statist policies.

But that doesn’t address the underlying problem of how to generate growth in Puerto Rico. The answer, needless to say, is free markets and small government.

…the territory will have to grow faster. This is where bankruptcy alone is inadequate. Puerto Rico will have to cut taxes on investment, rationalize welfare programs that deter working, and pare back labor protections that make France look like Hong Kong. If Mr. Rossello won’t do it, then the control board will have to. Puerto Rico will continue to flounder even with reduced debt if labor participation remains stuck at 40% and unemployment is in the double digits.

Unfortunately, the government has been doubling down on bad policy.

Investor’s Business Daily delves deeper into the issue of how big government is strangling prosperity.

The key is to create the correct incentives for the island’s people to encourage — rather than discourage — their policymakers to implement necessary and difficult reforms. This is particularly true with regard to pension reform. …Emphasis should instead be put on the many necessary changes to Puerto Rican labor laws, welfare programs and business and tax regulations which could spur more private sector business and job creation, encourage more people to work, and allow economic growth to resume. …Changes to U.S. laws and regulations discouraging labor force participation in Puerto Rico, such as the high minimum wage and easier eligibility for Social Security disability benefits for Spanish speakers, would also help greatly. And most importantly, Puerto Rico’s lingering pension crisis must be solved, both because of its fiscal significance and because it illustrates the lack of political courage and imagination by the government and the oversight board. …economic activity in Puerto Rico is now so severely depressed by a heavy government presence.

And even the most establishment-leaning Economist noted that government dependency is a major problem.

The island is distinguished by its poverty and joblessness, which are far worse than in any of the 50 states. The territory’s economy, moreover, has fallen further behind the national one over the past three decades. Bad government—not just locally, but also federally—is largely to blame. …Puerto Rico’s annual income per person was around $12,000 in 2004, less than half that of Mississippi, the poorest state. More than 48% of the island’s people live below the federally defined poverty line.

Why is income so low and why is there so much poverty?

Simply stated, idleness is being heavily subsidized. The welfare state reduces labor supply on the mainland. And the same thing happens in Puerto Rico.

Half the working-age men in Puerto Rico do not work. …Many things have gone wrong. Most important, however, is that the United States government assumed too big a role in the Puerto Rican economy, and its largesse enabled the commonwealth’s government to do the same. …the island’s economy is now lost in a thicket of bad incentives…an oversized welfare state…transfers…make up more than 20% of the island’s personal income. These federal handouts…by Puerto Rican economic standards, they are huge. And the more a man or woman earns through paid work, the more they decrease. …federal disability allowances are much higher than the United States average as a share of wages and pension income. Unsurprisingly, therefore, one in six working-age men in Puerto Rico are claiming disability benefits. …For many people, …the money that can be earned through federal transfers and a little informal work is more than the market wage—and requires much less effort.

In other words, Puerto Rico is just another layer of evidence on the well-established link between government and poverty.

And when people do have jobs, all too often they are employed by a bloated and inefficient government bureaucracy.

Puerto Rico’s bloated government… Around 30% of the territory’s jobs are in the public sector. Among other things, a big and coddled bureaucracy undermines Puerto Rico’s educational achievements…nearly half those on the education department’s payroll are not teachers; quality has fallen because of low accountability and mismanagement. …As he walked through Aguadilla’s town hall recently, Mr Méndez…says, is that “All they want to do is find security only. They have no ambition…Everybody wants to work for the government.” Manuel Reyes, of the Puerto Rico Manufacturers Association, also sees little hope that the government’s role will shrink.

It’s almost as if Puerto Rico is a perfect storm (no pun intended) of bad policy.

The solution is – or should be – obvious. And it’s the same one I suggested for Greece. Allow the government to default on existing debt, but only in exchange for pro-market reforms such as a long-run spending cap, privatization, a freeze on the size and compensation of the island’s bloated bureaucracy, and elimination of destructive regulation.

For all intents and purposes, Puerto Rico should become the Hong Kong of America. The island does have substantial autonomy and local policymakers have demonstrated that they sometimes are willing to do the right thing (they made Puerto Rico a legal tax haven for U.S. citizens). Now it’s time to make a great leap forward.

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I’ve put forth lots of arguments against tax increases, mostly focusing on why higher tax rates will depress growth and encourage more government spending.

Today, let’s look at a practical, real-world example.

I wrote a column for The Hill looking at why Greece is a fiscal and economic train wreck. I have lots of interesting background and history in the article, including the fact that Greece got into the mess by overspending and also explaining that politicians like Merkel only got involved because they wanted to bail out their domestic banks that foolishly lent lots of money to the Greek government.

But the most newsworthy part of my column was to expose the fact that “austerity” hasn’t worked in Greece because the private sector has been suffocated by giant tax hikes.

…the troika…imposed the wrong kind of fiscal reforms. …what mostly happened is that Greek politicians dramatically increased the nation’s already punitive tax burden. The Organization for Economic Cooperation and Development’s fiscal database tells a very ugly story. …on the eve of the crisis, the tax burden in Greece totaled 38.9 percent of GDP. This year, taxes are projected to reach 52.0 percent of economic output. Every major tax in Greece has been dramatically increased, including personal income taxes, corporate income taxes, value-added taxes, and property taxes. It’s been a taxpalooza… What’s happened on the spending side of the fiscal ledger? Have there been “savage” and “draconian” budget cuts? …there have been some cuts, but the burden of government spending is still a heavy weight on the Greek economy. Outlays totaled 54.1 percent of GDP in 2009 and now government is consuming 52.2 percent of economic output.

For what it’s worth, the spending numbers would look better if the economy was stronger. In other words, Greece’s performance wouldn’t be so dismal if GDP was growing rather than shrinking.

And that’s why tax increases are so misguided. They give politicians an excuse to avoid much-needed spending cuts while also hindering growth, investment and job creation.

Let’s close by reviewing Greece’s performance according to Economic Freedom of the World. The overall score for Greece has dropped slightly since 2009, but the real story is that the nation’s fiscal score has dramatically worsened, falling from 5.61 to 4.66 on a 0-10 scale. In other words, during a period of time in which Greece was supposed to sober up and become more fiscally responsible, the politicians engaged in an orgy of tax hikes and Greece went from a failing grade for fiscal policy to a miserably failing grade.

Here’s a the relevant graph from the EFW website. As you can see, the score has been dropping for a decade, not just since 2009.

This is remarkable result. Greek politicians should have been pushing the nation’s fiscal score to at least 7 out of 10, if not 8 out of 10. Instead, the score has gone in the wrong direction because of tax increases.

Though I don’t expect Hillary and Bernie to learn the right lesson.

P.S. For more information, here’s my five-picture explanation of the Greek mess.

P.P.S. And if you want to know why I’m so dour about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies?

P.P.P.S. Let’s close by recycling my collection of 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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At the risk of understatement, Obamacare is a mess.

It’s been bad for taxpayers, bad for consumers, and bad for healthcare.

It’s even been bad for some of the special interest groups that backed the legislation. The big insurance companies supported the law, for instance, because they thought it would be good to have the government force people to buy their products.

And these corrupt firms even got a provision in the law promising bailouts from taxpayers if the Obamacare system didn’t work.

Given the miserable track record of the public sector, that was probably a crafty move.

But the companies mistakenly assumed their sleazy pact with Obama, Pelosi, and Reid was permanent. Fortunately, their Faustian bargain appears to be backfiring.

Senator Marco Rubio has led the fight to stop bailouts for the big insurance companies.

Here are some excerpts from his recent column in the Wall Street Journal.

Six years after being signed into law, ObamaCare is a costly and unsustainable disaster. …ObamaCare is also bringing out corporate America’s worst crony-capitalist impulses. The health-insurance lobby has teamed up with trial lawyers to sue the federal government—through individual lawsuits and a $5 billion class action—for not following through on a sweetheart bailout deal buried in the law. This provision of ObamaCare would have required taxpayers to bail out insurers.

But in a rare victory for taxpayers, the Florida Senator got the law changed to restrict bailouts.

My conservative colleagues and I sounded the alarm about the likelihood of a taxpayer-funded bailout of health insurers (and were mocked as Chicken Littles for it). …When it came time to pass a spending bill at the end of 2014, we succeeded in making it the law of the land that the ObamaCare bailout program could not cost taxpayers a single cent—which ended up saving taxpayers $2.5 billion. In December of last year, we came back and repeated the feat. Now I am urging leaders in both the House and Senate to make this a priority and stop the bailout a third time.

As you might imagine, there’s a counterattack by the corrupt insurance companies that conspired with the White House to impose Obamacare on the nation.

…the health-insurance companies are suing to try to get their bailout…professional attorneys from the Congressional Research Service…said that the administration’s practice of making other payments to insurers under the ObamaCare reinsurance program “would appear to be in conflict with the plain text” of the law. …Health insurers can hire all the high-paid trial lawyers they want, but they will run into a constitutional buzz saw: America’s founding document grants Congress the power of the purse… Health-insurance companies need to wake up to the reality that this…money they are fighting for, and that the Obama administration is trying to weasel a way to somehow give them, belongs to taxpayers. Taxpayers get to decide—through me and others in Congress—whether to bail them out. And the people have spoken: No, we will not bail out health insurance companies for ObamaCare’s failures.

Amen to Senator Rubio.

Let’s hope Congress continues to oppose bailouts, and let’s also hope the White House isn’t successful in somehow giving our money to the big insurance companies.

Speaking of which, here’s what Investor’s Business Daily wrote about the bailout controversy.

Right when you think Washington can’t get any worse, it does. That much was evident at a recent U.S. House of Representatives committee hearing into the Obama administration’s bailout of private health insurance companies. It’s a textbook case of government officials ignoring federal law to put special interests before the interests of American taxpayers and families.

Here’s how the mess was created…and how the Obama White House chose to respond.

Thanks to the Affordable Care Act’s labyrinthine mandates, health insurance companies have collectively lost billions of dollars on the exchanges, leading to an increasing number of them limiting their participation in or exiting the exchanges altogether. As a result, many insurers have demanded larger subsidy payments. …responding to insurance industry demands — in November the Obama administration promised to “explore other sources of funding” for payments to insurers. Yet rather than work with Congress, the administration flouted the law entirely — and in this case, that means using tax dollars to bail out insurers left on the exchanges. CMS simply decided to ignore the law.

Unfortunately, ordinary people don’t have that option.

They simply pay more to get less.

Meanwhile, Americans rightly wonder who’s looking out for them. Premiums have actually risen faster in the five years after passage of the Affordable Care Act than in the five years before, while deductibles average nearly $3,000 for the most popular exchange plans.

Isn’t that typical.

Big government makes life worse for the average person while the special interests get special deals.

Speaking of special deals, let’s look at another Obamacare rescue for a privileged group.

Bob Moffit of the Heritage Foundation explains the contortions needed to keep health insurance subsidies flowing to Capitol Hill.

…one scandal is truly bipartisan: How key administration and congressional officials connived to create, under cover of the Affordable Care Act, also known as Obamacare, special health insurance subsidies for members of Congress.

Here’s the background.

Rushing to enact the giant Obamacare bill in March 2010, Congress voted itself out of its own employer-sponsored health insurance coverage—the Federal Employees Health Benefits Program. …But in pulling out of the Federal Employees Health Benefits Program, they also cut themselves off from their employer-based insurance contributions.

Subjecting themselves and their staff to Obamacare may have been smart politics, if only to avoid the charge of hypocrisy, but that created a different problem.

Obamacare’s insurance subsidies for ordinary Americans are generous, but capped by income. No one with an annual income over $47,080 gets a subsidy. That’s well below typical Capitol Hill salaries. Members of Congress make $174,000 annually, and many on their staff have impressive, upper-middle-class paychecks. …Realizing what they had done, congressional leaders sought desperately to get fatter taxpayer subsidies in the Obamacare exchange system. …The standard excuse was that, without a special “sweetener,” a Capitol Hill “brain drain” would ensue; the best and brightest would flee to the private sector to get more affordable employment-based coverage.

Gee, it would have been a shame if the people who have screwed up public policy had to get jobs in the private sector (or, more likely, the parasitic lobbying sector).

But the law oftentimes is not an obstacle when the Obama White House wants something to happen.

…at a July 31 closed-door meeting with Senate Democrats, President Barack Obama had promised he would “fix” the mess they made of their health coverage. So, on Aug. 7, 2013, just as Congress was getting out of town for the August recess, the Office of Personnel Management ruled that members of Congress and staff enrolled in the exchange program would get Federal Employees Health Benefits Program subsidies, even though they were no longer in the program.

But how exactly did the White House evade the law?

…the Office of Personnel Management declared that Congress and staff were eligible to enroll in the Washington, D.C., “SHOP” Exchange, a health insurance exchange reserved for small businesses with fewer than 50 employees. The exchange offers special insurance subsidies to participating small businesses. The problem was, of course, that Congress is not a “small business,” at least under any clinically sane definition of the term, and no section of the Affordable Care Act provided for any congressional exemption from the ban on large employer participation in the SHOP exchanges.

By the way, as a former staffer on Capitol Hill, I do have some sympathy for the lower-level folks who didn’t create the Obamacare mess and would suddenly be in a position of having to pay all their health costs out of pocket if the law was obeyed.

But that’s not a reason to engage in legal chicanery.

As part of tax and entitlement reform, by all means let’s shift to a system where we address the third-party payer crisis by having most health care expenses directly financed by consumers (reserving insurance for large, unpredictable expenses). That new system should include all people, including politicians and their staff.

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I wrote last year about why Puerto Rico got into fiscal trouble.

Like Greece and so many other governments, it did the opposite of Mitchell’s Golden Rule. Instead of a multi-year period of spending restraint, it allowed the budget to expand faster than the private sector for almost two decades.

As the old saying goes, that’s water under the bridge. Since we can’t un-ring the bell of excessive spending in the past, what’s the best option for the future?

The House of Representatives has approved a rescue plan that is getting mixed reviews.

Desmond Lachman of the American Enterprise Institute is supportive but not enthusiastic about the proposal.

The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem… However, …the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.

The legislation creates a board with some power to force fiscal and economic reforms.

…a seven-member oversight board…is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.

So if there’s no taxpayer money involved, why do people say the legislation is a bailout?

Because the proposal allows Puerto Rico to defer payments on existing debt and then to restructure at least some of that debt. And “restructure” is a politically correct way of saying “partial default.”

So Puerto Rico will be bailed out to the extent that it will be able to stiff bondholders to some degree.

…it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due.

Lachman views that as the least worst of the possible options, so this indirect bailout is not an argument against the legislation. At least from his perspective.

He’s more worried about the fact that much more needs to be done to restore growth on the island.

…it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

Writing for Forbes, Ryan Ellis has a much more optimistic assessment of the overall deal.

…the bill is a big win for limited government conservatives. It has no taxpayer bailout of Puerto Rico–not a single dime of taxpayer money is sent down there. …Puerto Rico will have to work their own way out of $72 billion in debt and defaults. They will be helped by an “oversight board”…modeled after the D.C. control board from the 1990s and 2000s, and their job is to approve fiscal plans and budgets, conduct audits, etc.

But Ryan acknowledges that “work their own way out of” is just another way of saying that there is likely going to be a partial default.

The oversight board…will first try to get the 18 classes of bondholders to agree to a voluntary debt restructuring with the Puerto Rican government and government sponsored enterprises. If that fails, the control board will recommend a debt restructuring plan to be enforced by a non-bankruptcy federal judge.

That being said, he’s confident that the legislation won’t be a template for profligate states such as Illinois and California.

Congress is exercising its Constitutional authority to provide all “needful and useful” laws to govern possessions, which is a separate power from the federal bankruptcy clause. There’s no risk of “contagion” to other states.

Though he agrees with Lachman that there’s very little hope for a growth spurt.

It lacks the necessary pro-growth reforms needed for Puerto Rico to get out of its decade-long depression, reverse migration back to the island, attract capital, and create jobs.

Which is why Ryan likes the ideas being pushed by Congressman McArthur of New Jersey. He’s especially fond of territorial taxation for American companies that do business on the island.

The solution is to enact the same type of international tax reform we want to do in the rest of the world–the U.S. companies pay tax in Puerto Rico, but don’t have to pay a second tax to the IRS just to bring the money home. That’s what the rest of the world does, and it’s called “territoriality.” It’s a basic principle of conservative tax reform to move from our outdated “worldwide” tax system to a “territorial” one. There is no better place to start than Puerto Rico.

That would be a good step, and it would be a nice bookend to the very good law Puerto Rico already has for high-income taxpayers from the mainland.

Other conservatives have a less sanguine view of the legislation. Here are excerpts from a coalition statement.

People, companies, states, and territories don’t just “go” broke. Willful prior activity is required. …Puerto Rico has a long history of financial mismanagement brought about by progressive politics and crony capitalism.

Amen. Puerto Rico got in trouble because of bad policy. And the bad policy wasn’t just excessive spending. There have also been grossly misguided interventions such as price controls.

So it’s quite understandable that signatories to this statement are not overly excited that Puerto Rico will have a route for partial default.

Progressive politicians, who are already seeking an indirect bailout – in the form of upending the existing legal structure to allow bankruptcy ‐‐ in the U.S. Congress, argue that a bailout or bankruptcy will help the people of Puerto Rico.

They correctly list several procedural reforms and also point out that there are some obvious policy reforms that should be undertaken.

Sensible economic reforms include allowing Puerto Rico (1) to set its own minimum wage law, including not having a minimum wage law; (2) to be exempt from U.S. overtime rules (which have just been greatly expanded by presidential fiat); and (3) to be exempt from the Jones Act, a protectionist measure that regulates U.S. shipping practices.

Sadly, the legislation is very tepid on these non-fiscal reforms.

So what’s the bottom line? Should the law get three cheers, as Ryan Ellis argues? Two cheers as Desmond Lachman prefers? Or only one cheer (or maybe no cheer), which seems to be the position of some conservative activists?

My answer depends on my mood. When I’m going through a fire-breathing-libertarian phase, I’m with the conservatives. Puerto Rico spent itself into a ditch so they should suffer the consequences.

But when I’m in my long-time-observer-of-Washington mode, I try to imagine the best possible (or least-worst possible) outcome, then I think Paul Ryan and the Republicans did a decent job.

In other words, this is like the fiscal cliff deal back in late 2012. Disappointing in many respects, but not as bad as I would have predicted.

The key question now is whether Republicans insist on putting good people on the oversight board.

And that’s not a trivial concern. I remember thinking the 2011 debt limit fight led to a decent outcome because we got sequester-enforced caps on discretionary spending (not as good as a comprehensive spending cap, but still a good step).

And we even got a sequester in early 2013. But then later that year, and last year as well, Republicans joined with Democrats to bust the spending caps.

That doesn’t bode well for any policy that requires long-run fiscal discipline. Though maybe GOPers will be tougher this time since the spending restraint will be imposed on people who don’t vote in congressional elections.

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Politicians specialize in bad policy, but they go overboard during election years.

It’s especially galling to hear Bernie Sanders and Hillary Clinton compete to see who can make the most inane comments about the financial sector.

This is why I felt compelled last month to explain why the recent financial crisis had nothing to do with the absence of “Glass-Steagall” regulations.

Today, I want to address Dodd-Frank, the legislation that was imposed immediately after the crisis by President Obama and the Democrat-controlled Congress.

I’m tempted to focus on the fact that the big boys on Wall Street, such as Goldman-Sachs, supported the law. It’s galling, after all, to hear politicians claim Dodd-Frank was anti-Wall Street legislation.

But there are more important points to consider, including the fact that the law doesn’t prevent or preclude bailouts.

Writing for today’s Wall Street Journal, Emily Kapur and John Taylor identify key problems with the Dodd-Frank bailout legislation.

Sen. Sanders and others on both sides of the aisle have a point. The 2010 Dodd-Frank financial law, which was supposed to end too big to fail, has not. Dodd-Frank gave the Federal Deposit Insurance Corp. authority to take over and oversee the reorganization of so-called systemically important financial institutions whose failure could pose a risk to the economy. But no one can be sure the FDIC will follow its resolution strategy… Neel Kashkari, now president of the Federal Reserve Bank of Minneapolis, says government officials are once again likely to bail out big banks and their creditors.

Most important, they propose a new Chapter 14 of the bankruptcy code so that insolvent institutions – regardless of their size – are liquidated.

The solution is not to break up the banks or turn them into public utilities. Instead, we should do what Dodd-Frank failed to do: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code… Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. …the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations. …Other reforms, such as higher capital requirements, may yet be needed to reduce risk and lessen the chance of financial failure. But that is no reason to wait on bankruptcy reform. A bill along the lines of the chapter 14 that we advocate passed the House Judiciary Committee on Feb. 11. Two versions await action in the Senate. Let’s end too big to fail, once and for all.

Amen. When big institutions go under, shareholders and bondholders should be the ones to bear the costs, not taxpayers.

Unfortunately, unless a new Chapter 14 of the bankruptcy code is created, it’s quite likely that regulators and politicians will simply opt for more TARP-style bailouts if big firms get in trouble.

So Dodd-Frank didn’t really do the one thing that was necessary.

But it did do a lot of things that make the system more costly and clunky.

Hester Pierce of the Mercatus Center explains that Dodd-Frank expanded regulation based on the theory that regulators can understand and plan the financial sector.

Dodd-Frank—built on the premise that markets fail, but regulators do not—places great faith in regulators to identify and stop problems before they develop into a crisis. …Dodd-Frank, despite language to the contrary, keeps the door open for future bailouts. …Dodd-Frank includes many provisions that are not related to financial stability, but fails to deal with key problems made evident by the crisis. …Dodd-Frank’s drafters chose to leave many key decisions to regulators. The contours of systemic risk, for example, were left to regulators to define. Moreover, because the prevailing narrative of the crisis focused on market failure, Dodd-Frank expanded regulators’ authority to shape the financial system. In addition to their substantial rule-writing responsibilities, under Dodd-Frank regulators now play a central role in monitoring, planning, and managing the financial markets.

Most worrisome, Hester notes that Dodd-Frank has provisions that benefit the big firms and may make them more likely to get bailouts.

Dodd-Frank gives FSOC broad powers to designate nonbank financial institutions and financial market utilities (such as derivatives clearinghouses) systemically important. …Designated firms are likely to be perceived as the firms the government is likely to rescue… Dodd-Frank was supposed to mark the end of taxpayer bailouts of financial firms. This pledge is undermined in several ways by the statute’s other provisions and the regulatory-centric approach that cuts across the whole statute. …The pressure on regulators to conduct bailouts is likely to be particularly strong with respect to systemically important institutions. …Regulatory failure played an important role in the last crisis by concentrating resources in the housing sector, encouraging reliance on credit-rating agencies, and driving financial institutions to concentrate their holdings in mortgage-backed securities. Dodd-Frank gives regulators more authority and broad discretion to shape the financial sector and the firms operating within it. When the regulators fail at this ambitious mission, they will again face internal and external pressure to cover those failures with a taxpayer-funded bailout.

Two other Mercatus experts, Patrick McLaughlin and Oliver Sherouse, show that regulators were among the biggest beneficiaries of the law. The law has led to a massive explosion in red tape.

The statute, which itself was 848 pages long, directed dozens of regulatory agencies to revise or create new regulations addressing the financial system in the United States. Those agencies responded with hundreds of new rules that will govern financial markets, on a scale that vastly exceeds any previous regulation of financial markets, and dwarfs the regulations that accompanied all other legislation enacted during the Obama administration. …Dodd-Frank…is associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions. In fact, it is associated with more new restrictions than all other laws passed during the Obama administration put together.

Here’s a rather sobering chart from the report.

Amazingly, the red tape generated by Dodd-Frank is roughly equal to all the regulation generated by every other law that’s been imposed during the Obama years.

Including the notoriously Byzantine Obamacare legislation.

All these new rules actually create a competitive advantage for big financial institutions.

Peter Wallison of the American Enterprise Institute has a must-read study on how Dodd-Frank imposes disproportionately heavy costs on small banks and small businesses.

…the reason for the slow recovery is the Dodd-Frank Act, enacted in 2010, which placed heavy regulatory costs and new restrictive lending standards on small banks. This in turn reduced the ability of these banks to finance small businesses, particularly the start-up businesses which are the engine of employment and economic growth. Large businesses have not been subject to the same restrictions because they have access to the capital markets, and their growth has been in line with prior recoveries. …recoveries after financial crises tend to be sharper than other recoveries, not slower as some have suggested. It is likely that, without the repeal or substantial reform of Dodd-Frank, the U.S. economy will continue to grow only slowly into the future. ……whatever regulatory costs are imposed on banking organizations— whether they be $2 trillion banks like JPMorgan Chase, $50 billion banks or $50 million banks— the larger the bank the more easily it will be able to adjust to these costs.

What’s especially frustrating is that the law was imposed because of a fundamental misunderstanding of what caused the crisis.

…the incoming administration of Barack Obama and the Democratic supermajority in Congress blamed the crisis on insufficient regulation of the private financial sector. This narrative, although factually unsupported, gave rise to the Dodd-Frank Act, which imposed significant new regulation on the US financial system but did virtually nothing to reform the government policies that gave rise to the financial crisis. …In developing and adopting the Dodd-Frank Act, Congress and the administration did not appear to be concerned about placing additional regulatory costs on the financial system.

Here’s the bottom line. Regulation is no replacement for market discipline.

And bankruptcy needs to be part of that discipline. After all, capitalism without bankruptcy is like religion without hell.

P.S. To give you an idea of how unserious politicians are, the Dodd-Frank law didn’t end bailouts, but it did create new racial and sexual quotas. So I guess we can take comfort in the fact that the bureaucracy will reflect all of America the next time they rip off taxpayers.

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Remember the odious, immoral, and corrupt TARP bailout?

Well, it’s becoming an issue in the 2016 presidential race, with some folks criticizing Donald Trump for siding with Bush and Obama on the issue.

I suppose I could make a snide observation about the absurdity of Trump being perceived as an anti-establishment candidate when he supported a policy that had unanimous support from political insiders.

But I would much rather focus on the policy implications. So when Neil Cavuto asked me to comment on Chris Christie’s rejection of bailouts, I took the opportunity to stress (once again) that it wasn’t a TARP-or-nothing choice and that there was a sensible, non-corrupt, way of dealing with failing financial firms. Simply stated, only bail out depositors and let bondholders and shareholders take the hit.

For the geeks who are reading this, you’ll recognize that the policy I’m advocating is often called the FDIC-resolution approach.

And it’s worth noting that this was used at the beginning of the financial crisis. As I pointed out in the discussion, two of the big financial institution that first got in trouble – WAMU and IndyMac – were liquidated.

But once Bush’s execrable Treasury Secretary, Hank Paulson, took control of the process, decisions were made to rescue the fat cats as well as the depositors.

The bottom line is that a lot of establishment figures, including GOPers like Dick Cheney and Mitt Romney, argue that TARP was necessary because the financial system needed to be recapitalized.

Yet that’s also what happens with the FDIC-resolution approach. The only real difference is whether financial institutions should be rescued along with depositors.

Well, my view is that capitalism without bankruptcy is like religion without hell.

P.S. The other guest in the interview made a very good point about America becoming “bailout nation.” I fully agree. To the extent that we have private profits and socialized losses, we’ll have bigger and bigger problems with moral hazard. After all, if you’re in Las Vegas and someone else is covering your losses, why not make high-risk/high-reward bets.

P.P.S. If anyone cares, my driveway is finally clear. A special thanks to the family next door. Not only were they smarter than me (as I wrote yesterday, they parked their cars near the end of their driveway), they’re also nicer than me. They came over and helped me finish when they were done!

Actually, I like to think I’d be equally thoughtful. I’ll have to look for a chance to repay their good deed.

By the way, I should add that the father next door works for a social conservative organization, which is one more piece of evidence for my view that so-cons and libertarians should be allies.

Tim Carney explains that natural alliance much better.

P.P.P.S. In hopes of convincing some of my leftist friends, I can’t resist making one final point.

When government gets to pick winners and losers, it’s highly probable that those who get the handouts, bailouts, and subsidies will be rich, powerful, and politically connected. Heck, just think of the Ex-Im Bank.

As noted by my former colleague, Will Wilkinson, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

I realize that statists won’t agree with me that it’s wrong for the federal government to redistribute from rich to poor. But I hope they’ll be on my side in fighting against redistribution from poor to rich!

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