Oct 1, 2008 | Dollars & Crosses
Alex Epstein on the roots of the financial crisis:
Too Big To Bail (March 18, 2008)
We need to phase out “too big to fail” and replace it with a free market in banking, which would reward sound long-term lending and borrowing practices and punish irresponsible ones. Otherwise, the next financial market fiasco is just a matter of time. Any doctrine that encourages overly-risky investing, and punishes sound risk-taking is unfair and destructive. We need to phase out “too big to fail” and replace it with a free market in banking, which would reward sound long-term lending and borrowing practices and punish irresponsible ones. Otherwise, the next financial market fiasco is just a matter of time.
Subprime Meltdown and Project Lifeline: Collaboration or Intimidation? (March 9, 2008)
What today’s market desperately needs is for lenders and borrowers to bear the full consequences of their own bad decisions, and for the government to stop manipulating the market, violating property rights, and inviting future disasters.
Take Responsibility for Your Decisions: An Open Letter to Borrowers and Lenders (June 5, 2008)
Throughout the housing crisis, we have heard demands from spokesmen for desperate homeowners, banks, and investors for every variety of government bailout. But there is one group from whom the nation has not heard: the millions of Americans who, like me, had nothing to do with the crisis, who entered into mortgage contracts they could meet or who refused to buy at exorbitant prices, but who will be forced to pay the bills for these bailouts. If we had a spokesman, this is what I wish he would say.
The Injustice of “Doing Something” about Subprime (November 7, 2007)
As we witness large numbers of defaults on subprime loans–loans extended to those with no credit or bad credit–many are calling for the government to do something to stop the suffering. At the same time, many recognize that a bailout of struggling homeowners would be wrong. Thus, we see a growing list of proposed solutions that purport to save the day without a bailout: “borrower assistance” programs to refinance defaulting mortgages, crackdowns on “predatory lending” practices, or laws restricting mortgages the government deems too risky. In fact, regardless of how these proposals are described, all embody the essence of a bailout: they absolve individuals of responsibility for their bad decisions–and force those who did nothing wrong to pay the price.
Sep 28, 2008 | Dollars & Crosses
Here is a letter by John Allison, President & CEO of BB&T, that was sent to every member of Congress.
Dear Senator/Congressman/Representative:
BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and southeast states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.
We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.
Attached are the issues that we believe are relevant from the perspective of healthy banks. Your consideration of these issues is greatly appreciated.
[Signature]
Key Points on a “Rescue” Plan From A Healthy Bank’s Perspective
- Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
- There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
- While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
- Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
- A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
- This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
- The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
- Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.
- It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
- The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
- Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
- The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
- The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
- Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?
And in a report by Bloomberg on “Allison’s Alternative”:
Allison is retiring in December after 19 years leading BB&T, the 14th-biggest U.S. commercial bank, with assets of $136.5 billion. BB&T avoided subprime lending, option adjustable-rate mortgages and complex debt securities that have slammed Wachovia Corp., Washington Mutual Inc. and other lenders. Still, BB&T more than tripled the money it set aside for loan losses in the second quarter, mainly because of loans to builders and developers in Georgia, Florida and the Washington, D.C., metropolitan area.
Rather than buying distressed assets, the U.S. government could offer a “significant” tax credit for home purchases, or even purchase vacant lots or houses under construction, Allison said. The market should be allowed to eliminate “irrational competitors,” he said. “There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom,” Allison wrote. “It is important that any rules post-`rescue’ punish the poorly run institutions and not punish the well-run companies.”
He said the mortgage crisis was caused primarily by Freddie Mac and Fannie Mae. The government-chartered companies, which own or guarantee more than 40 percent of the $12 trillion of U.S. home loans, “distorted normal market-risk mechanisms,” and were abetted by a Federal Reserve that made the wrong decisions on interest rates, Allison wrote.
Sep 25, 2008 | Dollars & Crosses
South Dakota is most free, New York most economically oppressed
San Francisco – The Pacific Research Institute (PRI), a free-market think tank based in California, today released the U.S. Economic Freedom Index: 2008 Report, a ranking of economic freedom in the 50 states. Published in association with Forbes, the Index scores states based on 143 variables, including regulatory and fiscal obstacles imposed on businesses and residents.
South Dakota, which ranked 15 in 2004 (the last time the Index was published), has assumed the notable spot as the nation’s most economically free state, while New York consistently remains the most economically oppressed state, ranking 50 in all three editions of the Index.
The net migration rate for the 20 freest states was 27.36 people per 1,000, while it was a low 1.17 people per 1,000 for the 20 most economically oppressed states. “People are moving to the freest states and fleeing the least free states as our market-based migration metric of economic freedom predicts,” said Lawrence J. McQuillan, Ph.D., director of Business and Economic Studies at PRI and director of the project. “By measuring economic freedom and studying its effects, people will gain a fuller appreciation of the important imprint it makes on the economic and political fabric of America and will encourage new state legislation that advances economic liberty.”
The U.S. Economic Freedom Index: 2008 Report, by Lawrence J. McQuillan, Ph.D., Michael T. Maloney, Ph.D., Eric Daniels, Ph.D., and Brent M. Eastwood, Ph.D., updates the 2004 and 1999 editions using recent data that reflect changes in state policies. The Index score ranges from 1 (most free) to 50 (least free), and state rankings were derived from the index scores. The Index collected and ranked 143 indicators comprised of 209 underlying variables from five sectors (fiscal, regulatory, judicial, size of government, and welfare spending) for each state to measure how friendly, or unfriendly, each state’s government policies are toward free enterprise and consumer choice.
The Results
- South Dakota is # 1
As the most economically free state, South Dakota has no corporate income tax, no personal income tax, no personal property tax, no business inventory tax, and no inheritance tax. South Dakota’s business climate is thriving and companies are relocating and opening plants in the state. In 2007, the Small Business Survival Foundation ranked South Dakota as the best business climate for entrepreneurs. In 2008, Forbes magazine ranked Sioux Falls as the best smaller metro area for business and careers. Moreover, the state has faired well in other indexes measuring items such as inbound migration (United Van Lines) and the cost of doing business in the state (Milken Institute).
- Great Plains and Rocky Mountain States Most Free
South Dakota, Idaho, Colorado, Utah, Wyoming, Nevada, and Oklahoma rank among the top 10 most economically free states in the nation.
- Northeast States Most Economically Oppressed
The states that are the least economically free are clustered in the densely populated states of the Northeast including Pennsylvania, New Jersey, Rhode Island, and New York.
- Most Improved States in the Upper Midwest
An economic-freedom renaissance has been undergoing in the Upper Midwest. South Dakota made a big leap in relative economic freedom from 2004 to 2008 advancing 14 places, even bigger were Minnesota, Illinois, and Wisconsin, jumping 18, 19, and 20 places, respectively. Lawrence J. McQuillan, Ph.D., explains that “when one state reforms it puts pressure on its neighbors to improve or be at a competitive disadvantage for attracting people and capital.”
- States with Biggest Drops
States heading in the wrong direction include Texas which fell 14 spots; Alaska, Delaware, and North Carolina each dropping 12 spots; and Arizona falling by 10 places.
You can download the entire document here.
Sep 25, 2008 | Dollars & Crosses
Writes Craig Biddle in 2008 Presidential Elections: McBama vs. America:
As the 2008 presidential election nears, and while John McCain and Barack Obama struggle to distinguish themselves from each other in terms of particular promises and goals, it is instructive to observe that these candidates are indistinguishable in terms of fundamentals.
On the domestic front, McCain promises to “take on” the drug companies, as if those who produce and market the medicines that improve and save human lives must be fought; he promises to ration energy by means of a cap-and-trade scheme, as if the government has a moral or constitutional right to dictate how much energy a company may purchase or use; he promises to “battle” big oil, as if those who produce and deliver the lifeblood of civilization need to be defeated; he promises to “reform” Wall Street, as if those who finance the businesses that produce the goods and services on which our lives depend are thereby degenerate; he seeks to uphold the ban on drilling in ANWR, as if the government has a moral or constitutional right to prevent Americans from reshaping nature to suit their needs; and so on.
Obama promises to socialize health care (under the tired euphemism of “universal health care”), as if insurance companies, doctors, and patients have no right to use or dispose of their property or to contract with one another according to their own judgment; he promises to increase the minimum wage, as if employers and employees lack those same rights; he promises to pour taxpayer money into “alternative energy,” as if the government has a moral or constitutional right to confiscate money from productive citizens in order to subsidize tilting windmills; he promises to force oil companies to fund government handouts to Americans, as if the owners of oil companies have no right to their property or profits; he promises to bail out homeowners who cannot pay their mortgages, as if the government has a moral or constitutional right to make some people pay for the financial mistakes or hardships of others; he promises to “incentivize” students to do “community service” by offering them taxpayer-funded college tuition, as if the government has a moral or constitutional right to do so; and so on.
Read the rest here.
Sep 25, 2008 | Dollars & Crosses
Washington, D.C.–In a talk delivered last week at the Costa Mesa Hilton in Orange County, California, Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, explained the reasons for the resurgence of big government in America and called for a moral revolution to reduce government to its proper size and function.
According to Dr. Brook, the current level of government involvement in the economy is almost unprecedented in American history. As Dr. Brook noted, even though the current housing and financial crisis was brought about by government regulations, controls, and widespread interference with the markets, all we hear from the left and the right are calls for more government regulations, controls, and interference with the markets.
In Dr. Brook’s view, these calls for bigger and bigger government are due, not to any alleged failures of the market, but to a longtime cultural hostility to its moral basis: the selfish pursuit of profit.
Capitalism and markets, observed Dr. Brook, are all inherently about self-interest and the pursuit of profit. Capitalism encourages and enables selfishness, and as long as our culture looks at profit and self-interest as vices, he argued, big government will always be preferred to free markets.
Dr. Brook also made the point that capitalism has always been defended pragmatically, on the basis that it creates wealth and economic growth–which it does; but it’s time, he said, to defend capitalism on principle, on the basis of its morality, on the basis that it protects the rights of individuals to pursue their own values and allows them freedom to act in their own self-interest.
As Dr. Brook explained, the current crisis is indisputable evidence that we need a massive reduction in the size of government, in the number of regulations and in the level of taxation. But first, he said, we will have to reject the morality of altruism, which holds that self-sacrifice, not self-interest, is the good–and adopt a new morality of rational self-interest, one that says that pursuing our own personal values and goals under freedom is a good thing; and that only a morality compatible with capitalism and private markets will save us from this crisis and prevent an even worse one in the future.
Dr. Brook’s talk is available for free at: http://www.aynrand.org/site/PageServer?pagename=reg_ls_big_government
Sep 25, 2008 | Dollars & Crosses
Most of us were taught in school that laissez-faire capitalism was tried in the 1800s–and failed. Without government regulations and antitrust law, we learned, businessmen used “anti-competitive” tactics to become giant, unchallengeable monopolies. The most famous monopoly was John D. Rockefeller’s Standard Oil Trust, which supposedly used its “market power” to squelch innovative competitors and jack up consumer prices at will. But did this really happen? Did laissez-faire really fail? No, argues Alex Epstein. In this talk Epstein will tell the real story of Rockefeller’s rise to market dominance–and explain how his success was the result not of shady practices, but of his company’s incredible ability to bring the cheapest, best oil to millions of Americans. Epstein will argue that the case of Standard Oil raises many questions about Americans’ commonly held beliefs on monopolies, competition, and government. Is antitrust law really necessary to protect us against monopolies and promote competition? Was the government right to punish Microsoft for “monopolization,” and is it justified in investigating Google and Yahoo for “anti-competitive” behavior? Epstein will address these questions and more in his 45-minute talk, followed by a question-and-answer period.
What: a talk in defense of laissez-faire capitalism that will tell the real story of Rockefeller’s rise to market dominance in the oil industry
Who: Alex Epstein, fellow at the Ayn Rand Center for Individual Rights, a division of the Ayn Rand Institute
Where: Smith Building Room 105. Georgia Tech Campus, Georgia Institute of Technology, Atlanta, Georgia 30332
When: Monday, September 29, 2008, at 8 pm
Alex Epstein has a BA in Philosophy from Duke University and is an analyst focusing on business issues at the Ayn Rand Center for Individual Rights. He was the editor and publisher of The Duke Review for two years. He is a contributing writer for The Objective Standard, a quarterly journal of culture and politics. His Op-Eds have appeared in such publications as the Detroit Free Press, Houston Chronicle, San Francisco Chronicle, Philadelphia Inquirer, Chicago Sun-Times, Atlanta Journal and Constitution, Arizona Republic, Canada’s National Post, Indianapolis Star, Orange County Register, Tampa Tribune, and the Washington Times. Mr. Epstein has been interviewed on numerous nationally syndicated radio programs on business topics such as income inequality, media and internet regulation, oil industry profits, social security and the FDA.
