Public Finance

Something New or Deja Vu?

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FROM THIS WEEK’S HEADLINES:

Despite tensions, Turkish diplomats are keen to point out when they started their trilateral meetings the then leaders of Pakistan and Afghanistan would not even talk to one another. On Thursday night the Afghan and Pakistan presidents dined together.

“Turkey-Afghanistan-Pakistan summit in Istanbul, Turkey, Friday, Dec. 24, 2010. ” – VOA (via Small Wars Journal)

FROM THE HISTORY BOOKS:
“Dear Mr. Prime Minister:

I send you this personal message because I want you to know about my decision to extend military aid to Pakistan before it is public knowledge and also because I want you to know directly from me that this step does not in any way affect the friendship we feel for India. Quite the contrary. We will continually strive to strengthen the warm and enduring friendship between our two countries.

Our two Governments have agreed that our desires for peace are in accord. It has also been understood that if our interpretation of existing circumstances and our belief in how to achieve our goals differ, it is the right and duty of sovereign nations to make their own decisions. Having studied long and carefully the problem of opposing possible aggression in the Middle East, I believe that consultation between Pakistan and Turkey about security problems will serve the interests not only of Pakistan and Turkey but also of the whole free world. Improvement in Pakistan’s defensive capability will also serve these interests and it is for this reason that our aid will be given. This Government’s views on this subject are elaborated in a public statement I will release, a copy of which Ambassador Allen will give you.

What we are proposing to do, and what Pakistan is agreeing to, is not directed in any way against India. And I am confirming publicly that if our aid to any country, including Pakistan, is misused and directed against another in aggression I will undertake immediately, in accordance with my constitutional authority, appropriate action both within and without the UN to thwart such aggression. I believe that the Pakistan-Turkey collaboration agreement which is being discussed is sound evidence of the defensive purposes which both countries have in mind.

I know that you and your Government are keenly aware of the need for economic progress as a prime requisite for stability and strength. This Government has extended assistance to India in recognition of this fact, and I am recommending to Congress a continuation of economic and technical aid for this reason. We also believe it in the interest of the free world that India have a strong military defense capability and have admired the effective way your Government has administered your military establishment. If your Government should conclude that circumstances require military aid of a type contemplated by our mutual security legislation, please be assured that your request would receive my most sympathetic consideration.

I regret that there has been such widespread and unfounded speculation on this subject. Now that the facts are known, I hope that the real import of our decision will be understood.

With best wishes,

Sincerely,

DWIGHT D. EISENHOWER”

Letter to Prime Minister Nehru of India Concerning U.S. Military Aid to Pakistan. February 25, 1954

Long term strategy-wise, the American foreign policy establishment appears to get “stuck” in habits and patterns and grooves and constituencies and conventional wisdoms and all of that. I suppose that’s life in a big old messy democracy, eh? Or is it possible to do better? (By the way, this is not “blame America” time here at ChicagoBoyz. India, Pakistan, America, Turkey – what have you – all have “agency” and are responsible for individual national actions.)

Senators Kerry and Lugar – Senators to the World!

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Because I’m loads of fun, I decided to pay a visit to Senator Lugar’s website. I searched for the names “Kerry Lugar” which turned up the following:

Senator Lugar considers a secure Pakistan to be vital in the protection of United States security interests in Afghanistan and throughout the Middle East and South Asia. From January 2003 to December 2006, Senator Lugar served as Chairman of the Senate Foreign Relations Committee and has been the Republican leader since January 2007. In this capacity, he has exercised close oversight of U.S. policy in Pakistan and participated in more than 15 hearings related to ongoing affairs in the country from 2003 to the present.

Goodness! That is impressive! Wait a minute, what’s that you say?

Since 1951, the United States has given significant funding to Pakistan. Since September 11, 2001, U.S. funding has been intended for the following five purposes: to cover the extra cost to Pakistan’s military of fighting terrorism; provide Pakistan with military equipment to fight terrorism; to provide development and humanitarian assistance; covert funds (such as bounties or prize money); and cash transfers directly to the Pakistani government’s budget.
 
Pakistan (sic) one of only four countries to receive direct cash transfers. Between 2002 and 2008, this “thank you” to Pakistan for help in fighting terrorism cost the U.S. taxpayer $2,374,000,000. By its nature, these cash transfers became Pakistani sovereign funds, precluding U.S. oversight.

“U.S. Aid to Pakistan—U.S. Taxpayers Have Funded Pakistani Corruption,” Belfer Center

Oh dear. Well, that is unfortunate. Perhaps the close oversight needs some tweaking?

Again from the Senator’s website, I find a link to something called PUBLIC LAW 111–73—OCT. 15, 2009 – the ENHANCED PARTNERSHIP WITH PAKISTAN ACT OF 2009. The linked .pdf has lots of stuff like the following in it:

OPERATIONS RESEARCH.—The term ‘‘operations research’’ means the application of social science research methods, statistical analysis, and other appropriate scientific methods to judge, compare, and improve policies and program outcomes, from the earliest stages of defining and designing programs through their development and implementation, with the objective of the rapid dissemination of conclusions and concrete impact on programming.

That sure is a lot of words. You know what has fewer words in it? This: By its nature, these cash transfers became Pakistani sovereign funds, precluding U.S. oversight.

I suppose Instapundit does have a point: “I’d say that if the GOP has started issuing seats like titles of nobility, without caring what the voters think, then that’s beyond redemption. Nobody should be immune to a primary challenge.”

I guess not.

(Look, I can’t read “legalese” so I have no idea if the Enhanced Partnership With Pakistan Act Of 2009 will be able to avoid the problems of the past. Maybe I am being unfair. What I’d like to know from our readers is the following: once the cash is transferred to the civilian government, how can we know what it is being used for?)

Update: I changed “legalize” to “legalese”. Didn’t catch it the first time. I’m sure there are other errors. My writing skills are a bit shaky. I’m trying to improve them so if you see mistakes could you please point them out in the comments? I’ve got busy days and blogging is the lowest priority. I love it, but it’s low priority compared to other stuff.

Fixing the US Housing Finance System

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This is a summary of a working paper available at the links for which comments are welcome. (An earlier post on related topics appeared here.)

Download the paper (500KB pdf).

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The Administration will soon propose legislation to address the future of the US housing finance system, and it’s a sure bet that this will include re-incarnating Fannie and Freddie in some form. Prominent Republican politicians have also recently called for “privatizing” these entities. This is sheer folly. The problem with keeping Fannie and Freddie or an alternative government sponsored capital market hybrid that seeks to limit and/or price government backing is that policymakers have always done just that! It was investors, not policy-makers, who conferred “agency status” on Fannie and Freddie in spite of their prior ill designed privatizations.

Regardless of whether you believe they were leaders or followers in the sub-prime lending debacle—and the evidence overwhelmingly favors the former view–they have always represented a systemic risk and are inherently inconsistent with a competitive financial system. There are significant roles for government in a competitive market oriented housing finance system, but this isn’t one of them.

Public deposit protection is here to stay. Nobody is suggesting getting rid of the Federal Deposit Insurance Corporation, but public protection requires appropriate regulation.

Whether homeownership subsidies such as the mortgage interest deduction are appropriate is an ongoing debate. Nobody is suggesting getting rid of all homeownership subsidies, but credit subsidies for low-income borrowers and other politically preferred groups should be budgeted, targeted and separated from finance.

Discrimination in lending that is not based on the ability to pay is illegal. Nobody is suggesting relaxing current anti-discrimination laws and regulations, but competition often mitigates all forms of inappropriate lending discrimination better than regulation.

Capital market financing will remain necessary. Nobody is suggesting getting rid of the FHA/Ginnie Mae program or the almost equally massive Federal Home Loan Bank System, but reforms of these programs are necessary after the housing markets recover.

Private label mortgage securitization contributed to the sub-prime lending debacle. Nobody condones the abuses, but private label securitization worked well until regulatory distortions encouraged securitizers to bypass the private mortgage insurance industry, the traditional gatekeepers responsible for preventing excessively risky lending.

A competitive market oriented system serves qualified home borrowers and lenders best but has few political constituents. Politicians much prefer the deferred off budget costs of Fannie and Freddie but the long run costs of delivering subsidies that way far exceed the benefits.

The four steps necessary to restore a stable competitive market oriented housing finance system are:

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It Works Until It Doesn’t

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The Euro came into being in 2002, replacing many national European currencies with a common currency. There are 16 members, with the largest economies being the Germans, French, Netherlands, Italy and Spain. The launch of the Euro was done successfully and it brought down transaction costs and financing costs across the Euro area, and was part of a broader movement of labor and services across the region (not as simple as the currency conversion, however).

The Euro was originally at around 80 cents to the dollar; it has gone as high as $1.50 to 1 USD and currently ranges around $1.30 – $1.40. This appreciation has been significant, caused both by policies that weakened the USD and strengthened the Euro.

While the Euro has been a successful currency and has brought benefits to the region’s economies, particularly the weakest economies (like Greece, Spain, Italy, Ireland, and Portugal, the “PIIGS”), recently the region has had difficulty with high budget deficits and the specter of outright default in these weaker countries.

While all parties benefit from having the Euro, some parties benefit more than others, and are “free riders” – particularly the weak Mediterranean countries that would never have such low financing costs and ability to easily raise funds in the bond markets without the implicit backstop of the German, French and Dutch treasuries.

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Bailouts don’t provide ROI

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News reports are rolling in regarding the TARP paybacks and stock sales on GM.  Some are saying that these bailouts  are “turning a profit” for taxpayers.  Here is one example.

G.M. Prices Its Shares at $33 in Return to Stock Market

American taxpayers’ ownership of General Motors was halved on Wednesday, and billions of dollars in bailout money was returned to the federal government, as a result of the nation’s largest initial stock offering ever.

The offering, which raised $23.1 billion, is bigger and more ambitious than had once seemed possible. But the recently bankrupt automaker will have to build on its revival for the government to recoup its entire $50 billion investment and validate the Obama administration’s decision to keep G.M. from collapsing.

The idea that these policies were beneficial, simply based upon some of the money being returned through IPOs, needs to be placed into context.

Let’s start with this. Since 2007,  revenues to the Fed. government have collapsed.  This collapse was precipitated by a dramatic slowdown, which, in turn, was based upon a variety of factors.  The key is that many of these factors could have been addressed prior to the collapse.

Instead, American governance is a freak show where we have an above the surface gridlock on any good policy, with a below the surface greasing of every stupid policy under the sun.  This culminated in bursting asset bubbles, bailouts of rent-seekers, and a slew of morally hazardous policies that replace self-governance with “Czarism.”

Into this tragi-comedy of political idiocy, unemployment, and huge deficits, defenders of the bailouts point to a paltry few pennies returned to the treasury as a sign of “success” while ignoring the billions (or trillions, even) in lost revenues based upon bad government policies.

This is ridiculous. GM’s $33/share price is based upon a czarist edict waiving away taxes on bailed out entities.  What some tout as a “return on investment” reads more like a scene out of Atlas Shrugged, where some people get bailed out based upon the “aristocracy of pull.”

There are far too many Republicans, conservatives, and libertarians who operate under the false theory that the well of our moral, social, financial and intellectual capital will never run dry. I think they are wrong.

The GM situation is evidence of deep decline, not of a “bailout” having worked.