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Posts Tagged ‘Regulation’

I’m a bleeding heart libertarian in that I get most upset about statist policies that make life harder for disadvantaged people so that folks with more money can get undeserved goodies.

  • For instance, I despise anti-school choice leftists because they value political support from teacher unions more than they value opportunity for poor kids.
  • And I get very agitated that about the Export-Import Bank, which is a form of corporate welfare that transfers money from the general population to the rich.

Another example is occupational licensing, which occurs when politicians require newcomers to jump through expensive and/or time-consuming hoops before getting “permission” to provide a good or service. These licensing rules create unjust profits for established businesses by hindering competition, and they are especially burdensome for poor people, all of which is explained in this superb video from the Institute for Justice.

But if there’s a sliver lining to that dark cloud, it’s this image that I will add to my collection of libertarian humor. To be fair, I don’t know if it counts as purely libertarian humor, but I saw it on Reddit‘s libertarian page and it definitely makes the right points.

If you like libertarian humor, both pro and con, click here, here, and here for other examples.

P.S. Let’s close by sharing some good news on a serious topic.

Unlike the short-sighted politicians in the United States, the crowd in Australia seems a bit more level-headed on the issue of competitive corporate taxation. Here are some excerpts from a story in the U.K.-based Guardian.

The Turnbull government has given big business exactly what it wants – a substantial tax cut. It has also extended the Abbott government’s small business tax package by giving small and medium businesses more tax cuts and incentives. …“Our corporate tax rate is high by international standards and well above the average for OECD countries and those in the Asian region,” the budget papers say. “This will make Australian companies more internationally competitive in a tough global market place.” The government plans to cut the corporate tax rate significantly, from 30% to 25%. …The cut will be phased in over 10 years… The treasurer, Scott Morrison, says treasury modelling suggests the measures will grow the economy by 1% over the long term. He says they will lead to higher living standards, via increased business investment and more jobs.

I certainly don’t think “significantly” is a word to describe a modest five-percentage-point reduction in the rate, but kudos to Aussie politicians for moving in the right direction. I also like the part about “treasury modelling,” which suggests that the Australians also have a sensible approach on the issue of static scoring vs. dynamic scoring.

So perhaps now you can understand why Australia is my choice if (when?) the welfare state collapses in the United States (though I’m still of the opinion that the Swiss are the world’s most sensible people).

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If you look at the methodology behind the major measures of economic liberty, such as Economic Freedom of the World and Index of Economic Freedom, you’ll notice that each nation’s regulatory burden is just as important as the overall fiscal burden.

Yet there doesn’t seem to be adequate appreciation for the importance of restraining red tape. I’ve tried to highlight the problem with some very depressing bits of information.

Unfortunately, these bad numbers are getting worse.

We start with the fact that there’s a natural tendency for more intervention in Washington because of the Obama Administration’s statist orientation.

That’s the bad news. The worse news is that this tendency to over-regulate is becoming more pronounced as Obama’s time in office is winding down.

I’ve already opined on the record levels of red tape emanating from Washington, but it’s getting even worse in the President’s final year.

Here’s what the Wall Street Journal recently wrote about the regulatory wave.

…government-by-decree that is making Mr. Obama the most prolific American regulator of all time. Unofficially, Mr. Obama’s Administration has once again broken its own record by issuing a staggering 82,036 pages of new and proposed rules and instructions in the Federal Register in 2015. …That would not only eclipse Mr. Obama’s record of 81,405 set in 2010; it would also give him six of the seven most prolific years of regulating in the history of the American republic. He’s a champion when it comes to limiting economic freedom, and American workers have the slow growth in jobs and wages to prove it. …His Administration is also in a class by itself in issuing de facto rules as “notices” or “guidance” that are ignored by businesses at their peril. …And there’s much more to come.

Amen. The WSJ is correct to link the regulatory burden with anemic economic performance.

As I point out in this interview, red tape is akin to sand in the economy’s gears.

By the way, I can’t resist emphasizing that the Nordic nations, much beloved by Bernie Sanders and other leftists, generally are more free market than the United States on non-fiscal issues.

In other words, they have a more laissez-faire approach on matters such as regulation.

Now let’s try to quantify the cost of all this red tape.

The Washington Examiner reports on some new research.

The price of the Obama administration’s regulatory burden hit just shy of $200 billion last year, or $784 million for every day his government was open for business, according to a new analysis by American Action Forum.

To make matters worse, as I noted in the interview, I very much suspect the bulk of that new regulation was not accompanied by cost-benefit analysis. So the supposed benefits will be small and the actual costs will be high.

Let’s move from the general to the specific. The Heritage Foundation has a list of the worst regulations from last year. Here are some of the highlights, though lowlights would be a better term.

  • …a ban by New Jersey on sales of tombstones by churches — adopted in March at the behest of commercial monument makers.
  • Certain New York restaurants now have to include warnings on their menus about the sodium content in many popular dishes.
  • The Occupational Safety and Health Administration…expanded its mandate in June by declaring that businesses should allow employees to use whichever restroom corresponds to their “gender identity.”
  • …the Environmental Protection Agency and Army Corps of Engineers expanded their own jurisdiction to regulate virtually every wet spot in the nation.

And there are plenty more if you really want to get depressed.

But let’s not dwell on bad news. Instead, we’ll close by highlighting a potentially helpful bit of regulatory reform north of the border. Here are some blurbs from a story in the Washington Examiner.

…look to Canada for lessons from its experiment with regulatory budgeting. What is regulatory budgeting? It’s a process that seeks to use traditional budget concepts to better manage regulatory costs. The goal is to require government departments and agencies to prioritize and manage “regulatory expenditures,”… Regulatory budgeting imposes hard caps on departments and agencies and requires that new regulatory policies fit within their respective budgets. It may not be a silver bullet to the U.S. government’s regulatory profligacy, but with strong political leadership and a proper design, it can arrest the growth of new regulations and bring greater accountability, discipline and transparency to the process. …Departments and agencies are given a “baseline” calculation of regulatory requirements and the costs they impose on individuals and businesses, and then are expected to live within their respective budgets. This means — at least, in the case of the federal experiment — that any new regulatory requirements be offset by eliminating existing ones with equivalent “costs.” An independent, third-party panel verifies the government’s year-over-year compliance.

And it appears this new system is yielding dividends.

Over the past two years, the federal government estimates the system has saved Canadian businesses more than C$32 million in administrative burden, as well as 750,000 hours spent dealing with “red tape.” Most importantly, regulatory budgeting has gradually contributed to a more disciplined regulatory process by rewarding departments and agencies for finding lower-cost options and for making existing requirements smarter and less burdensome.

Hmmm…, maybe I should consider escaping to Canada rather than Australia if (when?) America falls apart.

In addition to this sensible approach on regulatory reform, Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

Though things are now heading in the wrong direction, which is unfortunate for our northern neighbors.

P.S. While the regulatory burden in the United States is stifling and there are some really inane examples of silly rules (such as the ones listed above), I think Greece and Japan win the record if you want to identify the most absurd specific examples of red tape.

P.P.S. Though I suspect America wins the prize for worst regulatory agency and most despicable regulatory practice.

P.P.P.S. Here’s what would happen if Noah tried to comply with today’s level of red tape when building an ark.

P.P.P.P.S. Just in case you think regulation is “merely” a cost imposed on businesses, don’t forget that bureaucratic red tape is the reason we’re now forced to use inferior light bulbs, substandard toilets, second-rate dishwashers, and inadequate washing machines.

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I wrote a couple of days ago about the “Panama Papers” issue and touched on the key issues. I explained that this non-scandal scandal is simply another chapter in the never-ending war by high-tax governments against tax competition, fiscal sovereignty, and financial privacy.

Here are a few of the other points I made: .

I touched on some of these topics in this interview with Neil Cavuto.

Let’s look at what some others have written on this issue.

Veronique de Rugy of the Mercatus Center looks at some reactions from onshore politicians, which range from illogical to extremist.

The French finance minister, for instance, already put Panama back on the list of countries that aren’t sufficiently willing to help enforce onerous French tax law. That’s despite France’s removal of Panama from its list of uncooperative states and territories in 2012 after reaching a bilateral agreement on precisely that issue. President Barack Obama, on the other hand, recognizes that most of the activities reported in the stolen pages are legal. As such, he wants to do something that might be even more radical than what France has done. He proposes making it illegal to legally reduce one’s tax burden. Falling back on some generic and zero-sum concept of tax fairness, he told reporters that we “shouldn’t make it legal to engage in transactions just to avoid taxes” and that he wants to enforce “the basic principle of making sure everyone pays their fair share.”

So France wants to punish Panama, even though Panama already has agreed to help enforce bad French tax laws. Meanwhile, President Obama reflexively wants to punish taxpayers who have the temerity and gall to not voluntarily over-pay their taxes (an issue where Donald Trump actually said something sensible).

As an economist, Veronique highlights the most important issue (assuming, of course, one wants more prosperity).

If you want more global trade and more global investments, international bureaucracies such as the Organisation for Co-operation and Economic Development and governments around the world shouldn’t make it harder to operate international businesses and engage in cross-border investment and business.

Then she looks at discouraging developments from her home country.

For years, France has punished its entrepreneurs and businesses with high taxes and terrible laws. As a result, last year alone, some 10,000 French millionaires called it quits and moved abroad. However, rather than reform its tax laws and streamline its government, it wants to put its grabby hands on some cash… But it won’t work in the long run. France and other high-tax nations can try very hard to destroy tax competition, financial privacy and the sovereignty of countries with better tax structures, but they still won’t be able to afford their big and broken welfare states. …That’s the real financial scandal.

Amen. This is a simple matter of math and demographics.

The Wall Street Journal also has opined on the controversy, wondering about the fact that some folks on the left are fixating on legal tax avoidance.

The papers…purport to document the dealings of the Mossack Fonseca law firm, which appears to have helped wealthy clients establish shell companies in Panama, a rare remaining bastion of bank secrecy. …The fact that an individual created such a company, or opened bank accounts in Panama, is not proof of any wrongdoing… That’s not stopping the media from jumping to conclusions, many are oddly focusing on tax avoidance.

There’s a reason for the fixation on tax avoidance, of course. Politicians realize that they need to demonize legal tax if they want to impose big tax hikes by shutting down loopholes (both the real ones and the fake ones).

In any event, the editors agree that the real issue from Panama Papers is the presumably dodgy accumulation of assets by politicians.

The mistake now would be to narrow the focus prematurely, zeroing in on tax avoidance that is a hobbyhorse of the political class but in this case is a distraction. The real news here are the incomes and far-flung bank accounts of the political class.

The WSJ is right.

I touch on that issue in this interview with CNBC, explaining that it should be a non-story that international investors use international structures, but hitting hard on the fact that politicians so often manage to obtain a lot of wealth during their time in public “service.”

The bottom line is that if we’re going to have a crusade for transparency, it should focus on government officials, who have a track record of unethical behavior, not on the investors and entrepreneurs who actually earn their money by using capital to boost growth.

I should have dug into my files and provided a few examples of the hypocritical American politicians who have utilized tax havens. Such as…ahem…the current Secretary of the Treasury.

Speaking of hypocrisy, Seth Lipsky of the New York Sun identifies another strange example of double standards, in this case involving privacy.

The New York Times…defended Apple when the iPhone maker refused to help the FBI break into the iPhone that had been used by the Islamist terrorists who slew 14 innocent people in San Bernardino. It even praised Apple for refusing to help. Yet it’s joining in the feeding frenzy over what are coming to be known as the Panama Papers…calling for major investigations into money laundering and tax evasion.

I was sympathetic to Apple’s legal argument, even though I also wished the company would have helped the FBI (albeit without giving the government any details that could have been used to create a backdoor into all of our iPhones).

But Mr. Lipsky is right that the privacy-loving defenders of Apple have a remarkably inconsistent approach to the issue.

Where were most of the do-gooders…when the FBI was frantically trying to gain access to the infamous iPhone? It might be able to tell us to whom the killers had been talking and whether they were planning more attacks. …Apple…got cheered by all the right people. The Gray Lady…praised Apple for refusing to help. …So why are the do-gooders who are so protective of iPhone data when it belongs — or relates — to terrorists nonetheless so delighted about the disclosure of data when the data belong to the rich? Or relates to their property? Property rights, it seems, just don’t interest the do-gooders. They don’t believe individuals have a right to property or to due process before their stuff is taken.

This is a great point.

What it basically shows is that leftists (“do-gooders” to Seth) have more sympathy for medieval butchers who kill innocent people than they have for over-burdened taxpayers who actually want to preserve their money so it is used to promote prosperity rather than to fatten government budgets.

By the way, I can’t resist sharing another excerpt.

…tax havens can serve a benign purpose. They put pressure on law-abiding governments to keep taxation within non-abusive limits, something that is increasingly rare in the age of socialism.

Bingo. This is why everyone – especially those of us who aren’t rich – should applaud low-tax jurisdictions.

Just imagine how high taxes would be if politicians thought all of us were captive customers!

Let’s look at one final interview on the topic. But I’m not sharing this BBC interview because I said anything new or different. Instead, I want to use this opportunity to grouse about media bias. You’ll notice that I was out-numbered 2-to-1 in the discussion (3-to-1 if you include the host).

But I’m not upset I was in the minority. That’s so common that I barely notice when it happens.

What did irk me, though, was the allocation of time. Both statists got far more ability to speak, turning a run-of-the-mill example of bias into an irritating experience.

On the other hand, I did get to point out that the OECD bureaucrat was staggeringly hypocritical since she urges higher taxes on everyone else when she (like the rest of her colleagues) gets a tax-free salary. So maybe I should be content having unleashed that zinger.

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For all his faults, you have to give President Obama credit for strong convictions. He’s generally misguided, but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional freedoms.

That being said, his desire to “fundamentally transform” the United States leads him to decisions that run roughshod over core principles of a civilized society such as the rule of law.

Consider, for instance, the Obama Administration project, known as “Operation Choke Point,” to restrict banking services to politically incorrect businesses such as gun dealers.

It doesn’t matter than these companies are engaged in legal activities. In pursuit of its ideological agenda, the White House is using regulatory bullying in hopes of getting banks to deny services to these businesses.

For more information, click here to read about recent efforts to end this thuggish initiative. Also, here’s a very short video explaining the topic.

Well, there’s an international version of Operation Choke Point.It’s called “de-risking,” and it occurs when banks are pressured by regulators into cutting off banking services to certain regions.

The Wall Street Journal has a column on this topic by two adjunct professors from Fordham Law School.

…a widespread trend in banking called “de-risking.” Reacting to pressure by various government regulators…, banks are rejecting customers in risky regions and industries. Throughout 2014 J.P. Morgan Chase dropped more than 100,000 accounts because they were considered risky… Between 2013 and 2014, Standard Chartered closed 70,000 small and medium-size business accounts, and ended hundreds of relationships with banks in Latin America and Central Europe. …In yet another form of de-risking, the European Central Bank reports that banks have steadily cut their correspondent relationships—that is, the other banks they work with in sending money around the globe. HSBC alone closed more than 326 correspondent bank accounts between 2010 and 2012. …the banks’ actions are understandable. They face unprecedented regulatory penalties, unclear legal standards, high litigation costs and systemic risks to their business. In 2012 HSBC settled with the Justice Department, paying $1.9 billion in fines for such failings as “ignor[ing] the money laundering risks associated with doing business with certain Mexican customers.” …A bank with a single mistaken customer relationship could be put out of business. Banks have concluded that they will be punished anytime money reaches criminals, regardless of their own efforts. It’s better to drop all supposedly risky customers.

The authors explain that there should be “safe harbor” rules to protect both banks and their customers. That’s a very sensible suggestion.

And there are easy options to make this happen. I’m not a big fan of the Financial Action Task Force, which is an OECD-connected organization that ostensibly sets money-laundering rules for the world. Simply stated, the bureaucrats at FATF think there should be no human right to privacy. Moreover, FATF advocates harsh regulatory burdens that impose very high costs while producing miserly benefits.

That being said, if a nation is not on the FATF blacklist, that should be more than enough evidence that it imposes very onerous rules to guard against misbehavior.

Unfortunately, bureaucrats in the United States and Europe don’t actually seem interested in fighting money laundering. Or, to be more precise, it appears that their primary interest is to penalize places with low tax rates.

Many Caribbean jurisdictions, for instance, are being victimized by de-risking even though they comply with all the FATF rules. And this means they lose important correspondent relationships with larger banks.

To address this issue, the Organization of American States recently held a meeting to consider this topic. I was invited to address the delegations. And since other speakers dealt with the specific details of de-risking (you can watch the entire event by clicking here), I discussed the big-picture issue of how low-tax jurisdictions are being persecuted by harsh (and ever-changing) demands. Here are my remarks, with a few of my PowerPoint slides embedded in the video.

Now for the most remarkable (and disturbing) development from that meeting.

Many of the Caribbean nations offered a rather innocuous resolution in hopes of getting agreement that de-risking is a problem and that it would be a good idea if nations came up with clear rules to eliminate the problem.

That seems like a slam dunk, right?

Not exactly. The U.S. delegation actually scuttled the declaration by proposing alternative language that was based on the notion that other countries should put the blame on themselves – even though these nations already are complying with all the FATF rules! You can read the original declaration and proposed changes by the U.S. by clicking here, but this is the excerpt that really matters.

Wow, what arrogance and hypocrisy by the Obama appointees. These jurisdictions, most with black majorities, are suffering from ad hoc and discriminatory de-risking because the Administration doesn’t like the fact that they generally have low taxes.

But rather than openly state that they favor discrimination against low-tax nations, the political hacks put in place by the Obama White House proposed blame-the-victim language, thus ensuring that nothing would happen.

P.S. Perhaps the most surreal part of the experience is the strange bond I felt with the Venezuelan delegation. Regular readers know I’m not a fan of the statist and oppressive government in Caracas. But the Venezuelan delegation apparently takes great pleasure in opposing the position of the U.S. government, so we were sort of on the same side in the discussion. A very bizarre enemy-of-my-enemy-is-my-friend situation.

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I’m not a fan of international bureaucracies. Simply stated, they routinely promote statism, which translates into less freedom and prosperity.

But not all international bureaucracies are created equal. Most of my ire is directed at the International Monetary Fund and the Organization for Economic Cooperation and Development for the simple reason that those two institutions actually have some ability to subsidize or coerce bad policy.

The United Nations, by contrast, is largely ineffective and corrupt (or absurd, as seen by the effort to make taxpayer-funded birth control a “human right”). So while its even more left-leaning than the IMF and OECD, it doesn’t do as much damage.

Though that may change if the UN succeeds in its multi-year plan to seize control of the Internet, something that may happen because of feckless choices by the Obama Administration (if you think his FCC scheme to turn the Internet into a public utility is misguided, you’ll love what’s now happening).

Let’s review the situation. Here’s some background information from an article by James Glassman.

…the Internet has been governed by the people who use it. In a bottom-up process remarkably free of political interference, the system brings together businesses, engineers, research institutions, civil society groups, and governments to make decisions by consensus. …this “multi-stakeholder model,” as it’s called, actually works, with real transparency and accountability. Rooted in the principles of seamless cross-border networks and freedom of expression, the Internet has been adopted faster than any other means of communication in history.

But the attitude of politicians and bureaucrats seems to be that if something works, it’s time to break it.

…the Internet’s good-governance model faces a serious threat. …the United Nations General…will consider new ways to govern the Internet, and authoritarian countries are pushing to give governments a bigger stake in decision-making. …Regimes like those in Russia, China, and Iran are themselves under serious threat, with their own Internet users criticizing government and uncovering corruption. What they want is a U.N.-style model, where every country has a vote, and those votes will boost the power of the governments casting them. One result could be a balkanized Internet where threatening speech, or commercial competition, is squelched at the border.

That’s not good news, as I can personally attest having been severely limited in my Internet access during a recent trip to China.

Surely the United States will oppose this agenda, right? That may have been true years ago, but not now.

…the United States has been a fervent supporter of the multi-stakeholder process. But last year, the Obama administration announced it would give up…now ICANN is up for grabs. It could end up being not just a manager of addresses but the main governing institution for the entire Internet.

And that means the heavy foot of government.

Consider the filing by the Group of 77 plus China — a coalition…that…says “… the overall authority for Internet related public policy issues is the sovereign right of States.” …Russia’s filing is even worse: “We consider it necessary [the document’s italics] to consecutively increase the role of governments in the Internet governance…”

The bottom line is that decisions by the Obama Administration have made it more likely that governments will compromise the efficiency and openness of the Internet.

In past meetings of this sort, the U.S. has managed to keep the authoritarians at bay, but the administration’s ICANN decision — another case of attempting to lead from behind — won’t help. ICANN is a tempting prize for China and other countries. …The real problem is that with WSIS+10, the United Nations has gained official acceptance as the arbiter of Internet governance. …the conference itself amplifies the danger of a takeover by forces that see a free Internet as an existential threat.

Glassman’s article was published in December. It’s now March.

What’s happened over the past few months?

We have a new column in the Wall Street Journal by Gordon Crovitz, and the developments have been in the wrong direction.

Two years after President Obama decided to give up U.S. protection of the open Internet, his administration is now considering how to give away power to other governments, most of which want a closed, censored Internet. …The plan was supposed to ensure that U.S. control could never be replaced “with a government-led or intergovernmental organization solution.” Yet it does precisely that, giving foreign governments new powers over the Internet Corporation for Assigned Names and Numbers, or Icann, and a path to full control. …Robin Gross…filed a dissent with Icann against upgrading the government role “from an advisory to a decisional role over Icann’s policies, operations and corporate governance matters.”

And here’s what this may mean.

The main risk of government control is to the root zone of the Internet, currently protected by the U.S. government through its contract with Icann. If authoritarian governments can get access to the underlying website names and addresses globally, they could disable sites they don’t like everywhere in the world, not just in their own countries. In secret planning discussions last year leaked to me, the Russian representative told other authoritarian governments that full government control over Internet stakeholders is a topic that “needs to be further examined” only after the U.S. withdraws, creating a vacuum of power.

So is there any way of stopping Obama from surrendering the Internet?

Crovitz explains that there is hope.

Congress has used budget bills to defund any action by the Obama administration to end the U.S. contract with Icann, at least through this September. …A new president should decide the wisdom of abandoning the Internet before it is given up with no chance of return. The Obama administration doesn’t like to acknowledge American exceptionalism, but the open Internet reflects the American values of free speech and open innovation. The Internet as we know it won’t survive if other governments get their way.

I suppose a key issue is whether Congress can extend the funding ban until next year, at which point there may (or may not!) be a President interested in protecting the Internet.

P.S. If the busybodies at the United Nations simply need a topic to keep them occupied, perhaps they should deal with the ongoing scandal of sexual abuse by their own bureaucrats.

Here are but a few of the recent examples of UN personnel abusing their position:

  • Just in the last few weeks, more children have come forward to allege sexual abuse by UN peacekeepers in the Central African Republic.
  • In Haiti, UN personnel traded goods for sexual favors, exploiting several hundred women and girls.
  • In the Ivory Coast, ten UN peacekeepers reportedly gang raped a 13-year-old girl.
  • In Liberia, UN peacekeepers gave goods and presents in exchange for sex.
  • In Bosnia, some UN personnel not only patronized brothels featuring kidnapped women and victims of war, but also allegedly helped procure women for brothels.

This is just the tip of the iceberg.

P.P.S. I confessed years ago to a fantasy involving the United Nations.

P.P.P.S. But when I read about the UN’s efforts for gun control, global taxation, UN-imposed taxes, a world currency, the Law of the Sea Treaty, tax harmonization, restrictions on American sovereignty, and climate-change statism, my real fantasy is to raze the building.

P.P.P.P.S. I actually participated in a conference at the UN a few years ago, sort of a personal Daniel-in-the-lion’s-den experience.

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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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I try to avoid certain issues because they’re simply not that interesting. And I figure if they bore me – even though I’m a policy wonk, then they probably would be even more painful for everyone else.

But every so often, I feel compelled to address a topic simply because the alternative is to let the other side propagate destructive economic myths.

That’s why I’ve written about arcane topics such as depreciation and carried interest.

In this spirit, it’s now time to write about “Glass-Steagall,” which is the shorthand way of referring to the provision of the Banking Act of 1933 that imposed a separation between commercial banking and investment banking.

This regulatory barrier has been relaxed over the years, in part by the Financial Services Modernization Act of 1999 (often known as Gramm-Leach-Bliley).

Our friends on the left are big fans of Glass-Steagall. They think the law fixed a problem that helped cause the Great Depression and they think its partial repeal is one of the reasons for the recent financial crisis.

Bernie Sanders, for instance, has made Glass-Steagall reinstatement one of his big issues, probably in part because Hillary Clinton’s husband signed the 1999 law that eased that regulatory burden.

That may or may not be smart politics for Senator Sanders, but it is based on economic illiteracy. Let’s look at what the experts say.

Peter Wallison of the American Enterprise Institute, for instance, offers some very important insights about Glass-Steagall and the financial crisis.

The so-called “repeal” of Glass-Steagall in 1999…had absolutely nothing to do with the financial crisis. The 1999 changes in one sector of Glass-Steagall Act made only one change in existing law: it permitted affiliations between commercial banks and investment banks. But by the time of the 2008 crisis, none of the large investment banks (like Goldman Sachs, Morgan Stanley or Lehman Brothers) had affiliated with any of the large commercial banks (like Citi, JP Morgan Chase or Bank of America). Commercial banks and investment banks had remained fierce competitors with one another right up to the time of Lehman Brothers’ bankruptcy. The simplest way to think about the financial crisis is that the largest investment banks and commercial banks got into financial trouble by acquiring and holding risky mortgages or mortgage backed securities based on these risky loans. This was permitted for both of them before Glass-Steagall was “repealed,” and it was permitted afterward. In other words, if Glass-Steagall had never been touched by Congress in any way, the financial crisis would have unfolded exactly as it did in 2008.

Bingo.

If the leftists are right and the partial repeal of Glass-Steagall was bad and destabilizing, shouldn’t they be able to point to some real-world evidence? To any real-world evidence? To a shred of real-world evidence?

Megan McArdle, writing for Bloomberg, also is baffled by the anti-empirical emotionalism of the Glass-Steagall crowd.

…those intrepid souls who continue to fiercely agitate for the return of the Glass-Steagall financial regulations…have become a powerful force in the Democratic Party. …there is a small problem It’s very hard to think of the mechanism by which the repeal of this rule made any significant contribution to the meltdown. …The problems appeared first at Bear Stearns, and then Lehman Brothers, straight investment banks and lenders like Countrywide.

By the way, there’s a bipartisan consensus on this matter.

Catherine Rampell of the Washington Post certainly couldn’t be called a libertarian or conservative, yet she also is flummoxed by the fixation on Glass-Steagall.

the Glass-Steagall Act…’s become the left’s litmus test for whether a politician is “tough” on Wall Street. …But Glass-Steagall had nothing to do with the 2008 financial crisis. …If the repealed provisions of Glass-Steagall had still been on the books, almost none of the institutions at the epicenter of the crisis would have been covered by it. Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley were basically stand-alone investment banks. AIG was an insurance company. Fannie Mae and Freddie Mac were government-sponsored entities that bought and securitized mortgages. Washington Mutual was a traditional savings-and-loan. And so on. Glass-Steagall, or the lack thereof, is a red herring.

Steven Pearlstein of the Washington Post – another columnist who has never been accused of being in love with free markets – is similarly baffled. And for the same reasons. The facts simply don’t match the left-wing narrative.

Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left. The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there. Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender. Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

The inescapable conclusion is that Glass-Steagall had nothing to do with the financial crisis.

Instead, the main causes of the 2008 meltdown were bad government policies, such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie Mac.

But even if you’re a leftist and want to say that the crisis was caused by “greed,” the various institutions that got burned by “greed” were not giant investment bank/commercial bank conglomerates.

Let’s cover two more issues. First, my colleague Mark Calabria points out that one of the core beliefs of the left simply isn’t true. Commercial banking isn’t always a safe and boring line of business (which therefore has to be protected from the vagaries of investment banking).

…the bizarre implicit assumption behind Glass-Steagall: that somehow commercial banking is risk free.  Anyone ever hear of the savings-and-loan crisis of the late 1980s and early 1990s?  No investment banking angle there.  How about the 400+ small and medium banks that failed in the recent crisis? According to the FDIC, not one of them was brought down by proprietary trading.

Second, let’s dispel the notion that the Great Depression was caused by – or exacerbated by – the pre-Glass-Steagall mixing of commercial banking and investment banking.

Stephen Miller of the Mercatus Center debunks this myth.

The narrative justifying the Banking Act of 1933 always derived from myths that large securities dealing banks caused the banking crisis during the Great Depression. The myths hold that: (1) securities dealing banks were more unstable and contributed to the Great Depression, and (2) securities dealing banks pushed people to purchase what turned out to be low-quality assets that performed poorly during the Great Depression. However, both myths have been disproven. For instance, on the first myth, a 1986 Rutgers University study found that banks involved in securities dealing were less likely to fail. …none of the 5,000 banks that failed during the 1920s had securities dealing affiliates. From 1930 to 1933, more than 25 percent of all national banks failed, but the number of failures among those with securities dealing affiliates was less than 10 percent. On the second myth, …a 1994 study in the American Economic Review found evidence to the contrary — that the public understood this conflict of interest, which resulted in commercial banks that dealt securities prior to the Great Depression tending to underwrite high quality assets. These banks tended to do better during the Great Depression.

Oh, and by the way, the Great Depression wasn’t caused by deregulated markets. The real blame belongs to all the policy mistakes made by Herbert Hoover and Franklin Roosevelt.

So here’s the bottom line.

Glass-Steagall is a meaningless distraction, but restoration of that law nonetheless attracts support from know-nothings who have a religious-type belief that financial markets are intrinsically evil.

P.S. Financial markets are imperfect, of course, but they’re only evil when investors and institutions want private profits and socialized losses.

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