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    Posted by Lexington Green on 13th April 2011 (All posts by )

    [I received the following press release today. I hope many of our readers will attend.]

    CHICAGO – Thousands of concerned citizens are set to gather at noon on April 18 at Daley Plaza at 50 W. Washington to protest out of control spending, unsustainable deficits and the unprecedented growth of government. People will come together in downtown Chicago, where the tea party movement began, to hold politicians of both parties accountable, stop runaway spending and defend freedom and individual liberty.

    “We are very concerned with the direction of our country and our state,” said Chicago coordinator Steve Stevlic. “The decisions made in Washington and Springfield over the next two years will set a path for a generation. We feel the best way to improve the economy, create jobs, and build a sustainable future for our children and grandchildren is to reform government
    and restore liberty.”


    What: Chicago Tax Day Tea Party: Reform Government. Restore Liberty.
    Where: Daley Plaza, 50 W. Washington St., Chicago
    When: Noon on Tax Day, which is Monday, April 18

    Illinois 8th District Rep. Joe Walsh, who has gained national notoriety for refusing his congressional pension and healthcare benefits, sleeping in his office and opposing the Continuing Resolutions that have funded government at 99 percent of current spending levels
    Herman Cain, Businessman, Presidential Candidate
    Grover Norquist, President, Americans for Tax Reform
    Jonathan Hoenig,
    John Tillman, CEO, Illinois Policy Institute
    Cisco Cotto, WLS-AM 890 Host
    Dan Proft, WLS-AM 890 Host
    Adam Andrzejewski, Founder, For the Good of Illinois
    Alex Cortes, Let Freedom Ring,
    Dr. Arie Friedman, Docs 4 Patientcare

    Media Contact: Steve Stevlic, Chicago Tea Party Patriots or (708) 289-5443


    The Core Values of the Tea Party Patriots are:

    Fiscal Responsibility
    Constitutionally Limited Government
    Free Markets

    For more information on the Tea Party Movement in Chicago, Illinois and nationally, please visit:


    Posted in Announcements, Chicagoania, Economics & Finance, Politics, Public Finance, Taxes, USA | 3 Comments »

    Chicago And Illinois – Home of the Unions

    Posted by Carl from Chicago on 12th April 2011 (All posts by )

    Sigh – compared to Indiana and Wisconsin where the legislators are “on the run”, in Chicago and Illinois it is just the usual “tax and spend”. Unions here don’t have to worry about any pesky regulations or laws that might limit their behavior because they own the city and the state and can pretty much do as they please. I’m sure that has nothing to do with the fact that Illinois has among the most under-funded pensions in the US and that our governor is making noise about having the Federal government backstop our pension obligations, as you can see here:

    Gov. Pat Quinn included the backstop proposal in the 2012 state budget he released last week. Critics said it would amount to a federal bailout of underfunded state pension programs and pronounced it dead on arrival in Washington. “Hell no–not happenin’,” a House Republican aide said.
    But one expert said policymakers could consider the idea in the future, as states lobby Congress and the White House for help in tackling their growing pension obligations. A federal guarantee would allow Illinois and other states with fiscal problems to sell pension bonds at lower interest rates.
    Illinois faces an $80 billion pension shortfall. Quinn’s proposed budget said “significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the required state contributions.” Quinn claims previous state pension reforms will save Illinois taxpayers billions of dollars.

    While the Federal government backstop of state pension debt went nowhere, it clearly is a strategy that will be tested at some point in the future, since Illinois has not implemented any of the policy changes necessary to sufficiently fund our obligations or reduce future requirements. Our unions will be on the vanguard of bankrupting Illinois to the point where there is no choice but to apply for Federal aid while the state is flat on our back.

    Posted in Big Government, Chicagoania, Economics & Finance, Public Finance | 6 Comments »

    USA, Inc from the view of Kleiner Perkins.

    Posted by Michael Kennedy on 14th March 2011 (All posts by )

    Powerline today has an analysis of the USA as if it were a firm applying for funds from Kleiner, Perkins. The presentation has a number of slides, some of which I will reproduce here. The link to the full presentation doesn’t work, unfortunately.

    [Jonathan adds: Click on the large charts to display them at full size.]

    The net worth of the US is on the right side scale. The trend is pretty obvious. The small improvement is probably a sign of some recovery in the past year.

    Spending has followed historical events, such as World War II. The trend, however, is not good. After 1930, spending on entitlements began and has grown out of control.

    Defense spending is blamed by leftists but there has not been a lot of defense spending since Vietnam.

    Taxes have followed a steady trend line until Obama was elected. The sharp rise has not helped as costs far outstrip revenue.

    What, then, is the problem ?


    Entitlements plus interest alone will exceed revenue by 2027. That’s 16 years from now.

    The left wants to raise taxes.

    How high must tax brackets go ?

    How do we compare to other countries ?

    Better than some and not so good as others.

    Can the left stop denying reality and start to discuss it?


    Here is the response I got:

    I am certain that not everyone here is as stupid as I am.

    I try very hard to keep factual information from you. To wit, here is some bad analysis of our fiscal situation.

    Of course, I could be wrong and I’m not this dumb. But probably not.

    [fixed it for you. If you’re not even going to acknowledge our good faith attempts to allow you to comment while simply requiring that you not insinuate everyone’s stupidity then we can only assume you don’t mind the same treatment in return – mod.

    Posted by: Mike K

    They constantly use fake versions of my signature, which of course the moderators could stop. It fits their pattern. Modifying my comments is also standard and they actually think this is clever.

    No, I am not optimistic.

    Posted in Big Government, Business, Conservatism, Economics & Finance, Politics, Public Finance | 18 Comments »

    Union Rule

    Posted by Michael Kennedy on 12th March 2011 (All posts by )

    The situation in Madison Wisconsin has been so well covered by Ann Althouse on her blog, that I have not felt it necessary to mention it. Yesterday, the situation began to change. This is what union rule would look like:

    The state Senators had passed the limited budget bill that included only the collective bargaining provisions. The Democrats had blocked the fiscal portions of the bill by fleeing the state two weeks ago. Walker has had this option since they left but he and Majority Leader FitzGerald, were negotiating with the Democrats in hopes the standoff could be ended. The negotiations (not reported by the MSM, of course) broke down when it became apparent that the Democrats are nationalizing this controversy. Walker then encouraged the Senate Republicans to go ahead with Plan B. They did and the law was signed by Walker yesterday.

    Why has this issue been so inflammatory? There are even leftist academics who are advocating serious violence.

    My prediction: 10 years from now public higher education, at least in many states, will have ceased to exist. 20 years from now state governments will realize that they still own the buildings and property on their former state university campuses and start charging us rent to use them. 25 years from now citizens will complain that they can’t afford to send their children to college–any college. But by then the peasant class will be so firmly established that it won’t really matter.

    Welcome to the 19th century.

    Read the rest of this entry »

    Posted in Civil Society, Economics & Finance, Elections, Law Enforcement, Politics, Public Finance, Video | 11 Comments »

    “Decision-Making in the Pressure Cooker: Lessons Learned from the Collapse of Lehman Brothers”

    Posted by Lexington Green on 24th February 2011 (All posts by )

    Presented by the Lumen Christi Institute and the Catholic Lawyers Guild.

    Thursday, March 3, 5:30 PM, Jenner & Block, 353 North Clark Street.

    Info here.

    Register here.

    The speaker whom I am most interested in hearing is Luigi Zingales. I mentioned his essay Capitalism After the Crisis in this post. Zingales was one of the economists who urged Congress to hold hold hearings on the Paulson bailout plan, and as we know that did not happen. I just read his essay Learning to live with not-so-efficient markets, which I commend to your attention. A compendium of his recent writing, entitled “MY LOSING BATTLE AGAINST THE LEVIATHAN (Public interventions of a desperate free-market economist” can be found here.

    Posted in Announcements, Big Government, Business, Chicagoania, Economics & Finance, Education, Management, Markets and Trading, Public Finance, USA | 1 Comment »

    Pushback by the Usual Suspects

    Posted by Dan from Madison on 15th February 2011 (All posts by )

    I have been chronicling Scott Walker’s (governor of Wisconsin) bold first moves. He has been in office for a very short time and has really been pressing his advantage. The advantage is the wave of people that voted him in, along with giant Republican majorities in the state House and Senate. Honestly, I don’t know what the unions and other Democratic allies can do to stop Walker.

    But they are trying.
    Read the rest of this entry »

    Posted in Politics, Public Finance | 5 Comments »

    Political Ragnarök, or, Obama’s Boldly-Played Budget Battle Bet-The-Ranch Blowout

    Posted by Lexington Green on 14th February 2011 (All posts by )

    Newt Gingrich led the GOP to a massive victory in the 1994 elections.

    He and Clinton went nose to nose, Clinton won.

    The battle was the Federal Government shutdown of late 1995.

    I remember it well. The country was outraged by the shutdown, Clinton successfully blamed the Republicans, his popularity went through the roof, Gingrich became a pariah, and the GOP gave up on any reform agenda and went native in DC. It was an unconditional, unmitigated victory for Clinton.

    Obama has sent a budget to Congress. Obama’s budget makes no effort whatsoever to cut spending.

    Obama is not “failing to lead” as some people are claiming. That is all wrong.

    All suggestions to that effect are all wrong. Obama knows exactly what he is doing.

    Obama is setting up a confrontation and he plans to win.

    Obama is betting that he can force the GOP to make their proposed cuts, which he can blame them for, which he can truthfully say he does not support. Then he can attack the Republicans for making the cuts. He will appeal to the people who are suffering from the cuts, and strip away GOP support. They will be angry and mobilized.

    Obama then plans to force the GOP into a funding crisis just as Clinton did. Obama plans to destroy the GOP reform wave of 2011 just as Clinton destroyed the GOP reform effort in 1995.

    Obama’s team attempted to use the Tucson massacre in the same fashion that Clinton used the Oklahoma City bombings, to discredit the GOP. Obama is acutely aware of the Clinton playbook. This is another re-run.

    If Obama wins, then the GOP / Tea Party effort is over and the Democrats have won the whole ball game. Obama gets reelected, the GOP is finished as a political party, and we have a mess for some number of years while a new party forms. But odds are it will be too late by then. A majority of people will be dependent on the Government.

    It is that serious. Obama’s brazen, no-cuts budget proposal is not a sign of weakness.

    It is a bold chess move that demands a strong response.

    Obama has chosen to make this budget the big confrontation. This is the decisive political moment. Obama is prepping the battlefield.

    Will the GOP win, lose, fold, get clobbered and not know what happened? Or will they call Obama out, see him and raise him, and make their case to the American people? Do the American people really care about the fiscal insanity and national bankruptcy? Or will the people who personally lose from the budget cuts have all the energy and outrage? Does the GOP have the courage to push ahead, no matter what?

    Lenin said there are decades where nothing happens, then there are weeks where decades happen. We are heading into months where decades are going to happen.

    Stay tuned.

    UPDATE: Instapundit responds: “It’s not 1995 anymore, though.” Yes. True. I agree. It is better now. But, is it better enough? Boehner is not an eccentric visionary like Gingrich, and I cannot see him and McConnell getting punked by Obama the way Clinton did to Gingrich. Obama is not nearly as good as Clinton. The GOP members are, I think, much wiser and more realistic than the hopeful but ultimately naive class of 1994. The new crew is committed to reform, and they have the example of 1995 in front of them. May they learn the right tactical lessons. Plus, things are just way worse now. There is more at stake.

    Interesting times, baby.

    UPDATE II: Powerline gets it:

    Obama’s game is transparent, isn’t it? He is playing a game of chicken. He puts forward a series of proposals that he knows are more or less insane; but he also believes that Republicans will come to his rescue. They, not being wholly irresponsible, will come up with plans to reform entitlements–like, for example, the Ryan Roadmap. Ultimately, some combination of those plans will be implemented because the alternative is the collapse, not just of the government of the United States, but of the country itself. But Obama thinks the GOP’s reforms will be unpopular, and he will be able to demagogue them, thus having his cake and eating it too. Is that leadership? Of course not. But it is the very essence of Barack Obama.

    (Emphasis added.) Yes. That’s it. That’s the trap.

    Let’s see the GOP, and the Tea Party, and everyone else who wants this mess really fixed work this problem, avoid the trap, and turn the table on Obama and his allies.

    Thinking caps on, team.

    UPDATE III: Good pushback in the comments. Message: 1995 =/= 2011. OK. Groovy. So, let’s see a good outcome here. It is doable.

    UPDATE IV: Cool: Stanley Kurtz link, mostly agreeing with me. He says my “vision of permanent Republican meltdown is overdrawn.” Maybe so. But I would rather the GOP and the Tea Party overestimate the hazard of the coming confrontation with Obama than not be aware it exists, as seemed to be the case in the initial round of responses to Obama’s budget proposal. Obama’s budget is not a failure of leadership, or a lack of imagination, or something that happened in a fit of absence of mind. It is a deliberate political play, with a goal of creating useful issues for 2012, breaking up and defeating the GOP opposition, reversing 2010, getting reelected, and continuing to expand the power and scope of government. Will it work? I hope not. But if we take it seriously for what it is, the odds of it working are greatly reduced. (I very much want to read Kurtz’s book Radical-in-Chief, but right now the pile of books in front of it is ceiling-high.)

    UPDATE V: Good post from Keith Hennessey (via/Instapundit). Hennessey says:

    The President is choosing both a policy path and a campaign strategy. He is betting that having no proposal to address the looming fiscal crisis is better for his reelection prospects than having one.

    This is exactly right. Hennessey also says:

    The President has made his strategic choice: we are headed toward a two year fiscal stalemate in a newly balanced Washington.

    But this is wrong. It will not be a stalemate. It will be an open conflict. 1995 was not a stalemate, it was a duel, and Gingrich and the GOP lost. The GOP in 2011 will have to propose cuts, and Obama is going to attack them for each and every one, and blame them for every bit of hardship that any cuts impose on anyone. The President is betting that Mancur Olson is right, and that focused opposition will defeat inchoate and widespread public interest, as usual. Is 2011 “different”? Is it “different” enough? Cue portentious music: On that question turns the fate of our Republic.

    Posted in Elections, Leftism, Obama, Politics, Predictions, Public Finance, USA | 55 Comments »

    Mitch Daniels at CPAC

    Posted by Lexington Green on 11th February 2011 (All posts by )

    My man Mitch. Do, please, RTWT. It is all good. Some snippets:

    We believe that government works for the benefit of private life, and not the other way around. We see government’s mission as fostering and enabling the important realms – our businesses, service clubs, Little Leagues, churches – to flourish. Our first thought is always for those on life’s first rung, and how we might increase their chances of climbing. …
    We have broadened the right of parents to select the best place for their children’s education to include every public school, traditional or charter, regardless of geography, tuition-free. And before our current legislature adjourns, we intend to become the first state of full and true choice by saying to every low and middle-income Hoosier family, if you think a non-government school is the right one for your child, you’re as entitled to that option as any wealthy family; here’s a voucher, go sign up. …
    An affectionate thank you to the major social welfare programs of the last century, but their sunsetting when those currently or soon to be enrolled have passed off the scene. The creation of new Social Security and Medicare compacts with the young people who will pay for their elders and who deserve to have a backstop available to them in their own retirement. …
    Medicare 2.0 should restore to the next generation the dignity of making their own decisions, by delivering its dollars directly to the individual, based on financial and medical need, entrusting and empowering citizens to choose their own insurance and, inevitably, pay for more of their routine care like the discerning, autonomous consumers we know them to be. …
    The second worst outcome I can imagine for next year would be to lose to the current president and subject the nation to what might be a fatal last dose of statism. The worst would be to win the election and then prove ourselves incapable of turning the ship of state before it went on the rocks, with us at the helm. …

    Mitch is my front-runner.

    Is it too early to put up a yard sign?

    UPDATE: Audio.

    Posted in Big Government, Business, Civil Liberties, Civil Society, Conservatism, Economics & Finance, Elections, Energy & Power Generation, Health Care, International Affairs, Libertarianism, Politics, Public Finance, Speeches, Taxes, USA | 9 Comments »

    Wisconsin Makes A Move On Illinois Business

    Posted by Dan from Madison on 31st January 2011 (All posts by )

    Our new Governor (Wisconsin) Scott Walker has signed legislation giving businesses that relocate to Wisconsin two years “free” – no corporate OR personal income taxes:

    MADISON (WKOW) — Governor Scott Walker has signed a bill that gives income tax breaks for companies that relocate to Wisconsin.

    The bill will forgive corporate and personal taxes for two years for companies that move to the state. The company could not have been located in Wisconsin for at least two years in order to qualify

    I think they mean personal income taxes such as if you were running the company as a pass through like an LLC. I assume that is what they are talking about. Any way you slice it, this is fantastic news.

    This got through the legislature with lightning speed, helped out by the fact that all three of our branches are Republican controlled now up here behind the cheddar curtain. I also read today that the public employee unions are getting ready for some very bad news for them in the near future.

    We have just begun with the Walker administration, but I am very hopeful and happy by this stroke. Walker also sent back the Obama buck$ that would have started out the sham “high speed” rail network that would have been a boondoggle for the ages.

    We may as well pick off what is left of the Illinois corpse before other states do.

    Hopefully Walker will end up being a star like some other up and comers such as Mitch Daniels of Indiana.

    Posted in Obama, Politics, Public Finance, Taxes, Transportation | 14 Comments »

    “The Man is Hiding the Stash” Fallacy

    Posted by Shannon Love on 28th January 2011 (All posts by )

    At Belmont Club, Richard Fernandez says of the Marxist Piven’s philosophy:

    The problem with Piven’s theory is that events in Europe have shown those “major economic reforms” to be unsustainable, if not actually ruinous. However, she appears to believe that the European crisis is only apparent, being the result of the Man hiding the Stash. Find that stash and things become sustainable again.

    I think this fallacy deserves its own name because I think this is the central economic fallacy of leftists in general. Whether we are talking about unions, public workers, redistributionists, etc., there is always the implicit idea that somewhere there is this big pile of money that the rich business people are hoarding away like a squirrel with its winter store of nuts. Leftists tell everyone that all problems can be solved if we just use the force of the state to threaten the squirrels to give up their nuts.

    The problem is that rich people don’t own a lot of nuts, they own nut producing trees, i.e., rich people don’t have a stash of cash, they own assets that can, if managed properly, produce a stream of income. Worse, for the leftists, those assets usually provide jobs for the majority of the population, so you really can’t alter their use too much. If you cut the tree down to get the nuts, what are going to eat next year?

    Read the rest of this entry »

    Posted in Economics & Finance, Leftism, Political Philosophy, Public Finance | 18 Comments »

    Something New or Deja Vu?

    Posted by onparkstreet on 27th December 2010 (All posts by )


    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)

    “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,



    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.)

    Posted in Afghanistan/Pakistan, Arts & Letters, India, International Affairs, Military Affairs, National Security, Public Finance, War and Peace | 4 Comments »

    Senators Kerry and Lugar – Senators to the World!

    Posted by onparkstreet on 29th November 2010 (All posts by )

    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.

    Posted in Afghanistan/Pakistan, Big Government, International Affairs, Military Affairs, National Security, Politics, Public Finance | 3 Comments »

    Fixing the US Housing Finance System

    Posted by Kevin Villani on 29th November 2010 (All posts by )

    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).


    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:

    Read the rest of this entry »

    Posted in Economics & Finance, Politics, Public Finance, Real Estate, Urban Issues | 4 Comments »

    It Works Until It Doesn’t

    Posted by Carl from Chicago on 25th November 2010 (All posts by )

    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.

    Read the rest of this entry »

    Posted in Economics & Finance, Europe, Public Finance | 9 Comments »

    Bailouts don’t provide ROI

    Posted by Bruno Behrend on 18th November 2010 (All posts by )

    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.

    Posted in Big Government, Business, Morality and Philosphy, Public Finance | 7 Comments »

    “Quantitative Easing” Equals “$600 Billion Tax Increase”

    Posted by Shannon Love on 13th November 2010 (All posts by )

    Although most economists are loathe to admit it, inflating the currency really serves as a form of stealth taxation. The entire goal of inflation is to allow the issuer of the currency to buy things with the full initial value of the money being inflated while simultaneously reducing the value of the money held by everyone else. In other words, inflation transfers the value represented by monetary tokens (bills, banking computer data, etc.) from the people who hold old tokens (the bills in your wallet) to the people printing the money (in America, the Fed).

    Now, toss in this little bit of goodness:

    The Fed usually [sic] manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market. These purchases are to be finished by the end of June, the Fed said.

    Stop laughing at the “manages the economy” bit and focus on the emphasized text. What is really going on here?

    What is really going on is that the Fed is stealing $600 billion dollars of real value from your pocket and using that value to fund the US Federal government through Treasury bonds. The real transfer of real value goes: You–>Fed–>Government.

    It’s a damn tax increase craftily carried out using the finance system.

    Read the rest of this entry »

    Posted in Economics & Finance, Public Finance | 34 Comments »

    Food for thought

    Posted by onparkstreet on 24th October 2010 (All posts by )

    Though medical education is not inexpensive, academic leaders often ignore the fact that the funds to support it properly are already available, if they choose to use the funds for this purpose. Student tuition, appropriations from state legislature to public schools, and certain portions of endowment income have always been intended for the education of medical students. Traditionally, deans have appropriated these funds for purposes not directly related to education – an animal care facility here, the establishment of a new research program there. Academic leaders bemoan the lack of funds to support faculty teaching time, even as they spend tens of millions of dollars to build new “teaching and learning centers” or expand the administrative bureaucracy.

    N. ENGL J MED 351;12 WWW.NEJM.ORG SEPTEMBER 16, 2004 (link to pdf)

    I thought of the above when reading the following at Instapundit:

    The real problem is that higher education isn’t providing enough of a benefit to its graduates, not that universities aren’t extracting enough money from the students. But read the whole thing. Including this: “And, of course, while professors are expensive, they’re not the main expense. Administrators outnumber faculty at most universities these days. But I suspect that won’t get the scrutiny it deserves.” Speaking of cost centers. Much more on administrative bloat, here.

    None of this is exactly new knowledge. The response, however, has been as slow as, well, bureaucratic molasses.

    Update: Thanks for the link, Professor Reynolds!

    Posted in Academia, Civil Society, Education, Public Finance, Society | 3 Comments »

    Avoiding the Stalemate State

    Posted by TM Lutas on 20th October 2010 (All posts by )

    Get ready for a lot of stories bemoaning the coming period of political gridlock in the federal government. Jacob S Hacker and Paul Pierson offer up a typical sample of the genre in The American Prospect. But it doesn’t have to be that way if the GOP in the House acts in a pro-government/small-government way.

    A united GOP in the House could insist on a new paradigm for passing legislation, passing all the good stuff first. Yes, it gets less passed, but isn’t that the point? The House can, legitimately, say that it’s not shutting down the government. It can bang out funding for the essential programs in each department in the spring, pass (or not) the middle tier popularity programs in the summer, and then present the real stinkers in the fall, right before elections.

    There would be no government shut down. The Parks people could not shut down Mt. Rushmore and the George Washington Monument because their operations would be funded. Programs that could not get a majority to vote for them would be shut down but that happens every year. It’s how the system is supposed to work.

    The political choices for Democrats would be very unattractive. Their attempts to stuff in budget stinkers into the must-pass bill will be turned back with the reasonable explanation that the program is funded in a different bill and that it will get a vote, but not here. Once the early bills pass, government shutdown is averted.

    Is the GOP going to be smart enough to create a better way to fund the government? I hope so. What concerns me is that nobody else seems to be talking about appropriation sequence passage reform.

    Thanks to Bastiches in the comments who gave a pointer that led me to a September 30 speech by John Boehnor which I had not seen to now. The relevant section:

    While the culture of spending stems largely from a lack of political will in both parties to say ‘no,’ it is also the consequence of what I believe to be a structural problem. As Kevin McCarthy often says, structure dictates behavior. Aided by a structure that facilitates spending increases and discourages spending cuts, the inertia in Washington is currently to spend — and spend — and spend. Most spending bills come to the floor prepackaged in a manner that makes it as easy as possible to advance government spending and programs, and as difficult as possible to make cuts.

    Again, this is not a new problem. But if we’re serious about confronting the challenges that lie ahead for our nation, it’s totally inadequate.

    I propose today a different approach. Let’s do away with the concept of “comprehensive” spending bills. Let’s break them up, to encourage scrutiny, and make spending cuts easier. Rather than pairing agencies and departments together, let them come to the House floor individually, to be judged on their own merit. Members shouldn’t have to vote for big spending increases at the Labor Department in order to fund Health and Human Services. Members shouldn’t have to vote for big increases at the Commerce Department just because they support NASA. Each Department and agency should justify itself each year to the full House and Senate, and be judged on its own.

    It isn’t exactly what I’m talking about (the level of granularity is different and the sequencing idea is entirely absent) but it’s a very close cousin and that is much appreciated. This speech helps the tea party because even if Boehnor is not serious about the proposal now (tough to tell without actual reform legislation text), focused public pressure to support this would lead him and the rest of the GOP to run to the front of the parade. And if he is serious? We might end up with an actual small government party again under this kind of leadership. We certainly could use one.

    In either case, this remains a good pressure point between now and January for small government activists to press for reform. And now it has the advantage that soon-to-be-speaker Boehner has come out on the right side.

    Posted in Politics, Public Finance | 21 Comments »

    How Politicians and Regulators Caused the Sub-Prime Financial Crisis of 2007 and the Subsequent Crash of the Global Financial System in 2008, and Likely Will Again

    Posted by Kevin Villani on 9th August 2010 (All posts by )

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

    Download the paper (1 MB pdf).

    That the US financial system crashed and almost collapsed in 2008, causing a globally systemic financial crisis and precipitating a global recession is accepted fact. That US sub-prime lending funded the excess housing demand leading to a bubble in housing prices is also generally accepted. That extremely imprudent risks funded with unprecedented levels of financial leverage caused the failures that precipitated the global systemic crash is a central theme in most explanations. All of the various economic theories of why this happened, from the technicalities of security design (Gorton, 2009) to the failure of capitalism (Stiglitz, 2010) can be reduced to two competing hypotheses: a failure of market discipline or a failure of regulation and politics.

    While still sifting through the wreckage and rebuilding the economy in mid July, 2010, the Congress passed the 2,315 page Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to prevent a reoccurrence of this disaster. The disagreement in the debates regarding the appropriate policy prescription reflected the lack of a consensus on which of these two competing hypotheses to accept. The risk was that, following the precedent established in the Great Depression, politicians will blame markets and use the crisis to implement pre-collapse financial reform agendas and settle other old political scores. By having done just that, this Act  worsens future systemic risk.

    That there was little or no market discipline is obvious. Contrary to the deregulation myths, regulation and politics had long since replaced market discipline in US home mortgage markets. Regulators didn’t just fail systemically to mitigate excessive risk and leverage, they induced it. This didn’t reflect a lack of regulatory authority or zeal, as politicians openly encouraged it.

    The politically populist credit allocation goals that promoted risky mortgage lending, whether or not morally justifiable, are fundamentally in conflict with prudential regulation. The system of “pay-to-play” politically powerful government sponsored enterprises (GSEs) was a systemic disaster waiting to happen. The recent advent of the private securitization system built upon a foundation of risk-based capital rules and delegation of risk evaluation to private credit rating agencies and run by politically powerful too-big-to-fail (TBTF) government insured commercial banks and implicitly backed TBTF investment banks was a new disaster ripe to happen. Easy money and liquidity policies by the central bank in the wake of a global savings glut fueled a competition for borrowers between these two systems that populist credit policies steered to increasingly less-qualified home buyers. This combination created a perfect storm that produced a tsunami wave of sub-prime lending, transforming the housing boom of the first half decade to a highly speculative bubble. The bubble burst in mid-2007 and the wave crashed on US shores in the fall of 2008, reverberating throughout global financial markets and leaving economic wreckage in its wake. 

    By the time the financial system finally collapsed bailouts and fiscal stimulus were likely necessary even as they risked permanently convincing markets that future policy will provide a safety net for even more risk and more leverage. Given this diagnosis, how to impose market and regulatory discipline before moral hazard behavior develops is the most important and problematic challenge of systemic financial reform.

    The public policy prescription is simple and straightforward. Prudential regulation remains necessary so long as government sponsored deposit insurance is maintained, which seems inevitable. Prospectively the traditional regulatory challenge of promoting market competition and discipline while safeguarding safety and soundness remains paramount. But the prudential regulation of commercial banks needs to be de-politicized and re-invigorated, with greater reliance on market discipline where public regulation is most likely to fail due to inherent incentive conflicts. This means sound credit underwriting and more capital, including closing the off balance sheet loopholes typically employed by big banks and eliminating the incentives for regulatory arbitrage. Universal banking should remain, but divested of hedge fund and proprietary trading activity. In addition, firms that are “too big to fail” (TBTF) are probably too big to be effectively controlled by regulators and should either be broken up or otherwise prevented from engaging in risky financial activities by reducing or eliminating their political activities.

    Most importantly, the two main sources of TBTF systemic risk and subsequent direct government bailout cost, Fannie Mae and Freddie Mac, no longer serve any essential market purpose. The excess investor demand for fixed income securities backed by fixed rate mortgages that fueled their early growth is long gone and now easily met by Ginnie Mae and Federal Home Loan Bank securities alone, as fixed nominal life and pension contracts have largely been replaced by performance and indexed plans. Fannie Mae and Freddie Mac should be unambiguously and expeditiously liquidated subsequent to implementing an adequate transition plan for mortgage markets.

    Download the paper (1 MB pdf).


    Kevin Villani is former SVP/acting CFO and Chief Economist at Freddie Mac and Deputy Assistant Secretary and Chief Economist at HUD, as well as a former economist with the Federal Reserve Bank of Cleveland. He was the first Wells Fargo Chaired Professor of Finance and Real Estate at USC. He has spent the past 25 years in the private sector, mostly at financial service firms involved in securitization. He is currently a consultant residing in La Jolla, Ca. He may be reached at kvillani at san dot rr dot com.

    Posted in Economics & Finance, Markets and Trading, Politics, Public Finance, Real Estate, Urban Issues | 17 Comments »