Commentary Magazine


Topic: U.S. Treasury

A Significant Letter

The Wall Street Journal has an article this morning about an open letter sent to Federal Reserve Chairman Ben Bernanke, a letter signed by leading economists and investors.

The letter says this:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Given the list of influential individuals signing this letter, it is sure to set the financial world (and therefore the political world) abuzz. That is all to the good. We need a vigorous debate about the Fed’s plan to buy $600 billion in additional U.S. Treasury bonds. It will, after all, have the effect of monetizing the debt and devaluing the dollar, and it risks triggering inflation. And oh, by the way, it won’t create jobs.

It is exactly the wrong policy at exactly the wrong time.

Defenders of the Fed’s policy will undoubtedly argue that this letter (which was largely organized and coordinated by the economic website e21, which I’m delighted to be affiliated with) amounts to a political attack on the independence of the Fed. That assertion is silly. Are we to believe that in a free society, the Fed and its policies are somehow immune to criticism – that when the Chairman speaks, no contrary voices are allowed to be heard?

The letter to Chairman Bernanke doesn’t argue that the Fed doesn’t have the right or the power to pursue its policy; it is simply questioning the wisdom of those policies. And its policies are manifestly unwise. It will deliver another body blow to an economy that is already weak and reeling.

This debate reminds me nothing so much as the economic debates that took place in 1981, at the dawn of the Reagan presidency, when issues that were thought to be somewhat esoteric (like monetary policy) were at the heart of our economic and political conversations. We learned then that the right monetary policy can make a huge contribution to economic growth. And we are leaning now that the wrong monetary policy can do the opposite.

The Wall Street Journal has an article this morning about an open letter sent to Federal Reserve Chairman Ben Bernanke, a letter signed by leading economists and investors.

The letter says this:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Given the list of influential individuals signing this letter, it is sure to set the financial world (and therefore the political world) abuzz. That is all to the good. We need a vigorous debate about the Fed’s plan to buy $600 billion in additional U.S. Treasury bonds. It will, after all, have the effect of monetizing the debt and devaluing the dollar, and it risks triggering inflation. And oh, by the way, it won’t create jobs.

It is exactly the wrong policy at exactly the wrong time.

Defenders of the Fed’s policy will undoubtedly argue that this letter (which was largely organized and coordinated by the economic website e21, which I’m delighted to be affiliated with) amounts to a political attack on the independence of the Fed. That assertion is silly. Are we to believe that in a free society, the Fed and its policies are somehow immune to criticism – that when the Chairman speaks, no contrary voices are allowed to be heard?

The letter to Chairman Bernanke doesn’t argue that the Fed doesn’t have the right or the power to pursue its policy; it is simply questioning the wisdom of those policies. And its policies are manifestly unwise. It will deliver another body blow to an economy that is already weak and reeling.

This debate reminds me nothing so much as the economic debates that took place in 1981, at the dawn of the Reagan presidency, when issues that were thought to be somewhat esoteric (like monetary policy) were at the heart of our economic and political conversations. We learned then that the right monetary policy can make a huge contribution to economic growth. And we are leaning now that the wrong monetary policy can do the opposite.

Read Less

RE: Fed’s Plan to Rev Up Printing Press Gets Thumbs Down

The overwhelmingly negative response to the Fed decision to print up $600B to buy bonds is intensifying as Russia and China joined European nations in slamming the move. This report explains:

Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed’s decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.

Gold topped $1,400 an ounce on fears of inflation as investors voted thumbs down on Ben Bernanke’s plan. And the number of critics is growing, leaving the U.S. isolated:

Germany’s criticism echoes that from other countries, including Brazil and Japan, which have complained about potential spillover from the Fed’s action. Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries’ currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed’s action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

On Monday, China’s Vice Finance Minister Zhu Guangyao said the U.S. isn’t living up to its responsibility as an issuer of a global reserve currency. …

The top economic aide to Russian President Dmitry Medvedev said Russia will insist at the G-20 summit that the Fed consult with other countries ahead of major policy decisions.

Luxembourg Prime Minister Jean-Claude Juncker, who is chairman of the euro-zone finance ministers, also weighed in on the Fed move, saying: “I don’t think it’s a good decision. You’re fighting debt with more debt.”

These concerns are entirely justified. Moreover, one can’t help but appreciate the irony: the “cowboy” George W. Bush was lambasted for “going it alone” and making the U.S. a pariah in the world. But worldwide resentment over the U.S. is surging as Obama is forced to lamely defend his moves as “pro-growth” (which speaks volumes about the administration’s economic illiteracy, for not even his defenders would claim that currency devaluation=growth). We hear that the “blunt criticism of U.S. policy is in large part payback for a longstanding stance by Washington policy makers that the American economy should serve as a model for others. The heated rhetoric also stems from fears that the U.S. may be looking for a back-door way to set exchange-rate policy in a way that favors the U.S.”

Combined with the incessant shin-kicking of our allies (e.g., Eastern Europe, Israel, Honduras, Britain), this latest move certainly strengthens Obama’s critics here and abroad. They contend that through a combination of ill-conceived policies and rank incompetence, Obama is rendering the U.S. less influential and less respected, which is increasing instability in the world. All and all, it is a textbook example of the perils of deploying liberal statism at home and shrinking America’s stature overseas. Unfortunately, this is not a graduate course at Harvard or a symposium at the New America Foundation. It is all too real, and unless we arrest the panoply of bad policies, America and its allies will be poorer and less safe. We already are.

The overwhelmingly negative response to the Fed decision to print up $600B to buy bonds is intensifying as Russia and China joined European nations in slamming the move. This report explains:

Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed’s decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.

Gold topped $1,400 an ounce on fears of inflation as investors voted thumbs down on Ben Bernanke’s plan. And the number of critics is growing, leaving the U.S. isolated:

Germany’s criticism echoes that from other countries, including Brazil and Japan, which have complained about potential spillover from the Fed’s action. Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries’ currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed’s action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

On Monday, China’s Vice Finance Minister Zhu Guangyao said the U.S. isn’t living up to its responsibility as an issuer of a global reserve currency. …

The top economic aide to Russian President Dmitry Medvedev said Russia will insist at the G-20 summit that the Fed consult with other countries ahead of major policy decisions.

Luxembourg Prime Minister Jean-Claude Juncker, who is chairman of the euro-zone finance ministers, also weighed in on the Fed move, saying: “I don’t think it’s a good decision. You’re fighting debt with more debt.”

These concerns are entirely justified. Moreover, one can’t help but appreciate the irony: the “cowboy” George W. Bush was lambasted for “going it alone” and making the U.S. a pariah in the world. But worldwide resentment over the U.S. is surging as Obama is forced to lamely defend his moves as “pro-growth” (which speaks volumes about the administration’s economic illiteracy, for not even his defenders would claim that currency devaluation=growth). We hear that the “blunt criticism of U.S. policy is in large part payback for a longstanding stance by Washington policy makers that the American economy should serve as a model for others. The heated rhetoric also stems from fears that the U.S. may be looking for a back-door way to set exchange-rate policy in a way that favors the U.S.”

Combined with the incessant shin-kicking of our allies (e.g., Eastern Europe, Israel, Honduras, Britain), this latest move certainly strengthens Obama’s critics here and abroad. They contend that through a combination of ill-conceived policies and rank incompetence, Obama is rendering the U.S. less influential and less respected, which is increasing instability in the world. All and all, it is a textbook example of the perils of deploying liberal statism at home and shrinking America’s stature overseas. Unfortunately, this is not a graduate course at Harvard or a symposium at the New America Foundation. It is all too real, and unless we arrest the panoply of bad policies, America and its allies will be poorer and less safe. We already are.

Read Less

NY Times: Tax-Exempt Status Only for Groups That Agree with the Administration

In an astonishing (and absurdly long) front-page story today, three New York Times reporters breathlessly offer an account of the fact that West Bank settlements and settlers are supported by nonprofit American organizations despite the fact that the Obama administration, and administrations before it, oppose them (or most of them):

As the American government seeks to end the four-decade Jewish settlement enterprise and foster a Palestinian state in the West Bank, the American Treasury helps sustain the settlements through tax breaks on donations to support them.

A New York Times examination of public records in the United States and Israel identified at least 40 American groups that have collected more than $200 million in tax-deductible gifts for Jewish settlement in the West Bank and East Jerusalem over the last decade. The money goes mostly to schools, synagogues, recreation centers and the like, legitimate expenditures under the tax law. But it has also paid for more legally questionable commodities: housing as well as guard dogs, bulletproof vests, rifle scopes and vehicles to secure outposts deep in occupied areas.

There are three astounding aspects to these paragraphs, and to the story as a whole.

First is the open and explicit suggestion that tax-deductible dollars should only support policies with which the sitting administration agrees or wishes to foster. Taken to its logical conclusion, that would mean pro-choice organizations should not have a tax exemption during an explicitly pro-life administration, like George W. Bush’s, for example — or that an organization opposing the Iraq war or the government’s approach in terrorist interrogation should be stripped of its tax exemption.

Second is the notion that Americans who offer donations to settlers who are using them for self-defense — “guard dogs, bulletproof vests, rifle scopes and vehicles to secure outposts deep in occupied areas” — are doing something that is a) wrong and b) in contravention of U.S. policy. Is it U.S. policy that settlers should take no measures to protect themselves? No, it isn’t, and it is demented of the Times to suggest otherwise.

Third is the notion that tax-exempt dollars belong to the U.S. Treasury and are, in effect, given as a gift by the government to whomever receives them. The general proposition behind it is that any private-sector dollar not confiscated by the government is in essence a gift from the government. This is an idea gaining currency on the left in the United States, especially in regard to philanthropy (see David Billet’s piece on the subject in the magazine from last year), but aside from being wrong and offensive, it is certainly arguable. The Times piece simply asserts it as though it were fact.

The article quotes anonymous Israelis complaining about the U.S. aid, as well as former ambassador Daniel Kurtzer, who didn’t like the fact that Americans with a passionate interest in Israel took steps with their own dollars to upset his attempts to convince Israel and Israelis that the populace of the United States felt as he feels about these matters:

“It drove us crazy,” he said. But “it was a thing you didn’t talk about in polite company.”

Us? Polite company? Which polite company would that have been?

Don’t read the whole thing. Life is too short.

In an astonishing (and absurdly long) front-page story today, three New York Times reporters breathlessly offer an account of the fact that West Bank settlements and settlers are supported by nonprofit American organizations despite the fact that the Obama administration, and administrations before it, oppose them (or most of them):

As the American government seeks to end the four-decade Jewish settlement enterprise and foster a Palestinian state in the West Bank, the American Treasury helps sustain the settlements through tax breaks on donations to support them.

A New York Times examination of public records in the United States and Israel identified at least 40 American groups that have collected more than $200 million in tax-deductible gifts for Jewish settlement in the West Bank and East Jerusalem over the last decade. The money goes mostly to schools, synagogues, recreation centers and the like, legitimate expenditures under the tax law. But it has also paid for more legally questionable commodities: housing as well as guard dogs, bulletproof vests, rifle scopes and vehicles to secure outposts deep in occupied areas.

There are three astounding aspects to these paragraphs, and to the story as a whole.

First is the open and explicit suggestion that tax-deductible dollars should only support policies with which the sitting administration agrees or wishes to foster. Taken to its logical conclusion, that would mean pro-choice organizations should not have a tax exemption during an explicitly pro-life administration, like George W. Bush’s, for example — or that an organization opposing the Iraq war or the government’s approach in terrorist interrogation should be stripped of its tax exemption.

Second is the notion that Americans who offer donations to settlers who are using them for self-defense — “guard dogs, bulletproof vests, rifle scopes and vehicles to secure outposts deep in occupied areas” — are doing something that is a) wrong and b) in contravention of U.S. policy. Is it U.S. policy that settlers should take no measures to protect themselves? No, it isn’t, and it is demented of the Times to suggest otherwise.

Third is the notion that tax-exempt dollars belong to the U.S. Treasury and are, in effect, given as a gift by the government to whomever receives them. The general proposition behind it is that any private-sector dollar not confiscated by the government is in essence a gift from the government. This is an idea gaining currency on the left in the United States, especially in regard to philanthropy (see David Billet’s piece on the subject in the magazine from last year), but aside from being wrong and offensive, it is certainly arguable. The Times piece simply asserts it as though it were fact.

The article quotes anonymous Israelis complaining about the U.S. aid, as well as former ambassador Daniel Kurtzer, who didn’t like the fact that Americans with a passionate interest in Israel took steps with their own dollars to upset his attempts to convince Israel and Israelis that the populace of the United States felt as he feels about these matters:

“It drove us crazy,” he said. But “it was a thing you didn’t talk about in polite company.”

Us? Polite company? Which polite company would that have been?

Don’t read the whole thing. Life is too short.

Read Less

A Pernicious New Tax, A Disastrous Bill

A friend who works in finance writes:

Just hours before finishing the 2,000-page Dodd-Frank financial reform bill at 5:40am Friday morning, leaders of the Democratic majority snuck in a wholly new, unprecedented, and very damaging tax on U.S.-based institutions that provide critical capital to small and large businesses across the country.

Specifically, a new Financial Stability Oversight Council (will impose an “assessment” on almost all types of financial institutions with more than $50 billion in assets (excluding banks that have deposit insurance, as well as Fannie Mae, Freddie Mac, and other types of “government-sponsored enterprise”) as well as hedge funds that manage more than $10 billion.

Collection of the tax will begin at yet-to-be-determined time prior to September 2012.  The funds will be placed in a “Financial Crisis Special Assessment Fund” at Treasury and cannot be removed for 25 years, after which time they will be used to pay down the deficit.

The insidious maneuver is the clearest indication that supporters of the Dodd-Frank bill will gladly sacrifice the growth and prosperity of the U.S. economy if it means they can spitefully “stick it” to U.S. financial institutions one more time. With unemployment figures lingering at recent highs and a growing recognition that previous so-called “stimulus” measures have failed to have a meaningful impact on the U.S. economy, the Democratic majority’s new tax will confiscate nearly $20 billion from institutions that lend money and provide equity capital to all types of businesses — including start-ups, large manufacturers, healthcare providers, and small family-owned businesses.

In its wildest dreams, the government could not conceive of a more anti-stimulative policy: To take $20 billion from the firms whose role it is to allocate money to the fastest growing and most productive, job-creating firms, and have that money lie dormant in a vault at the U.S. Treasury for two-and-a-half decades.

And it gets much worse. The criteria used to determine how much any given firm will owe are so nebulous that it is impossible for a firm to calculate its share of the tax.  For instance, included among the sixteen or so factors used to calculate an individual firm’s tax obligation are the following:

  • “the nature, scope, and mix of the company’s activities;”
  • “the extent and nature of the company’s transactions and relationships with other financial companies;”
  • “the amount and nature of the company’s financial assets;”
  • “the company’s importance as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the financial system”
  • “the company’s importance as a source of credit for low-income, minority, or underserved communities and the impact the failure of such company would have on the availability of credit in such communities;”
  • “such other risk-related factors as the Council may determine to be appropriate.”

The uncertainty created by these completely ambiguous factors will invariably lead firms subject to this tax to reserve amounts that are several times what it may ultimately owe.  This will keep considerably more than the $20 billion from being put to productive use in the economy.  Banks, insurance companies, and investment funds are already hesitant to lend to businesses.  The tax will ensure that those capital providers sit indefinitely on the sidelines. Further, the imposition of last minute, middle-of-the-night tax increases make businesses even more apprehensive because they have no idea what government “surprises” lay in the future.

Can it get even worse?  Of course.  The largest hedge funds have achieved their size because they have demonstrated consistent success over one or more decades.  As responsible safe havens of capital, these investment funds attract a disproportionate amount of the money that public and private pension funds dedicate to the hedge fund sector.  The Dodd-Frank tax will flow directly from the investors of these hedge funds and punish hundreds of thousands (even millions?) of pensioners.

Similarly, the millions of investors and customers of the companies in the $50+ billion institutions will also feel the pain of the Dodd-Frank tax. Messrs Dodd and Frank seem to believe that you can punish a business without harming the millions of investors, customers and suppliers connected to that business. They suspend disbelief to not recognize that businesses are merely formal collections of people organized to provide services and goods to other people. Punitive measures against corporations do not impact the faceless corporation itself, but the millions of people whose livelihoods revolve around the services and goods provided by the corporation.

The Dodd-Frank tax also comes with exceptionally onerous information sharing obligations that allow regulators to perform on-site inspections and rummage through all of the firm’s books and records. There are no limitations; regulators are allowed to view anything deemed “necessary to determine appropriate risk-based assessments.” These burdensome requirements alone are sufficient to encourage financial institutions to pack up and move overseas.

Putting aside the tax issues for a moment, I see another cynical purpose for the new tax. The initial versions of both the House and Senate bills had bailout funds that would be stacked with money in advance of the next economic crisis. The money would sit patiently (and unproductively) and wait for a future economic crisis, at which time it would be used to support creditors of floundering Too Big To Fail firms. Due to public revulsion of bailouts, these “pre-crisis funds” ($150 billion in the House bill and $50 billion in the Senate bill) were eliminated in the final bill. However, it seems increasingly clear that the new Dodd-Frank tax is merely a clandestine attempt to reinstitute the pre-crisis fund.

The Dodd-Frank tax is being imposed on the exact same collection of businesses that were targeted in the House bill, and the assessments are being calculated based on the exact same criteria in the House and Senate bills. In fact, the only difference between the pre-crisis fund and the Dodd-Frank tax is a line that says the “Fund shall not be used in connection with the liquidation of any financial company under Title II [Orderly Liquidation Authority].”

But if it walks like a duck, swims like a duck, and quacks like a duck…you know the rest.  There is no getting around the fact that in both form and substance, the Dodd-Frank tax is the pre-crisis fund’s clone.  The meager line about not being used in an orderly liquidation can easily be removed by a future Congress or merely be ignored when the next crisis arrives.  Does anyone truly believe that if there’s a pool of money sitting at Treasury, that it won’t be used during an economic crisis? Besides, government funds are fungible and forever being misappropriated. How many times has government dipped previously “untouchable” pools of money, such as Social Security, to pay for a misguided government adventure?

This is noxious and injurious economic policy that will transform the fundamental relationship between business and government.  It will transfes billions of productive, job-creating dollars out of the economy, delaying additional growth for years.  And it is an insidious bait-and-switch tactic designed to re-insert, when no one is looking, a bailout fund that was previously rejected by the Senate and reviled by the public.

A friend who works in finance writes:

Just hours before finishing the 2,000-page Dodd-Frank financial reform bill at 5:40am Friday morning, leaders of the Democratic majority snuck in a wholly new, unprecedented, and very damaging tax on U.S.-based institutions that provide critical capital to small and large businesses across the country.

Specifically, a new Financial Stability Oversight Council (will impose an “assessment” on almost all types of financial institutions with more than $50 billion in assets (excluding banks that have deposit insurance, as well as Fannie Mae, Freddie Mac, and other types of “government-sponsored enterprise”) as well as hedge funds that manage more than $10 billion.

Collection of the tax will begin at yet-to-be-determined time prior to September 2012.  The funds will be placed in a “Financial Crisis Special Assessment Fund” at Treasury and cannot be removed for 25 years, after which time they will be used to pay down the deficit.

The insidious maneuver is the clearest indication that supporters of the Dodd-Frank bill will gladly sacrifice the growth and prosperity of the U.S. economy if it means they can spitefully “stick it” to U.S. financial institutions one more time. With unemployment figures lingering at recent highs and a growing recognition that previous so-called “stimulus” measures have failed to have a meaningful impact on the U.S. economy, the Democratic majority’s new tax will confiscate nearly $20 billion from institutions that lend money and provide equity capital to all types of businesses — including start-ups, large manufacturers, healthcare providers, and small family-owned businesses.

In its wildest dreams, the government could not conceive of a more anti-stimulative policy: To take $20 billion from the firms whose role it is to allocate money to the fastest growing and most productive, job-creating firms, and have that money lie dormant in a vault at the U.S. Treasury for two-and-a-half decades.

And it gets much worse. The criteria used to determine how much any given firm will owe are so nebulous that it is impossible for a firm to calculate its share of the tax.  For instance, included among the sixteen or so factors used to calculate an individual firm’s tax obligation are the following:

  • “the nature, scope, and mix of the company’s activities;”
  • “the extent and nature of the company’s transactions and relationships with other financial companies;”
  • “the amount and nature of the company’s financial assets;”
  • “the company’s importance as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the financial system”
  • “the company’s importance as a source of credit for low-income, minority, or underserved communities and the impact the failure of such company would have on the availability of credit in such communities;”
  • “such other risk-related factors as the Council may determine to be appropriate.”

The uncertainty created by these completely ambiguous factors will invariably lead firms subject to this tax to reserve amounts that are several times what it may ultimately owe.  This will keep considerably more than the $20 billion from being put to productive use in the economy.  Banks, insurance companies, and investment funds are already hesitant to lend to businesses.  The tax will ensure that those capital providers sit indefinitely on the sidelines. Further, the imposition of last minute, middle-of-the-night tax increases make businesses even more apprehensive because they have no idea what government “surprises” lay in the future.

Can it get even worse?  Of course.  The largest hedge funds have achieved their size because they have demonstrated consistent success over one or more decades.  As responsible safe havens of capital, these investment funds attract a disproportionate amount of the money that public and private pension funds dedicate to the hedge fund sector.  The Dodd-Frank tax will flow directly from the investors of these hedge funds and punish hundreds of thousands (even millions?) of pensioners.

Similarly, the millions of investors and customers of the companies in the $50+ billion institutions will also feel the pain of the Dodd-Frank tax. Messrs Dodd and Frank seem to believe that you can punish a business without harming the millions of investors, customers and suppliers connected to that business. They suspend disbelief to not recognize that businesses are merely formal collections of people organized to provide services and goods to other people. Punitive measures against corporations do not impact the faceless corporation itself, but the millions of people whose livelihoods revolve around the services and goods provided by the corporation.

The Dodd-Frank tax also comes with exceptionally onerous information sharing obligations that allow regulators to perform on-site inspections and rummage through all of the firm’s books and records. There are no limitations; regulators are allowed to view anything deemed “necessary to determine appropriate risk-based assessments.” These burdensome requirements alone are sufficient to encourage financial institutions to pack up and move overseas.

Putting aside the tax issues for a moment, I see another cynical purpose for the new tax. The initial versions of both the House and Senate bills had bailout funds that would be stacked with money in advance of the next economic crisis. The money would sit patiently (and unproductively) and wait for a future economic crisis, at which time it would be used to support creditors of floundering Too Big To Fail firms. Due to public revulsion of bailouts, these “pre-crisis funds” ($150 billion in the House bill and $50 billion in the Senate bill) were eliminated in the final bill. However, it seems increasingly clear that the new Dodd-Frank tax is merely a clandestine attempt to reinstitute the pre-crisis fund.

The Dodd-Frank tax is being imposed on the exact same collection of businesses that were targeted in the House bill, and the assessments are being calculated based on the exact same criteria in the House and Senate bills. In fact, the only difference between the pre-crisis fund and the Dodd-Frank tax is a line that says the “Fund shall not be used in connection with the liquidation of any financial company under Title II [Orderly Liquidation Authority].”

But if it walks like a duck, swims like a duck, and quacks like a duck…you know the rest.  There is no getting around the fact that in both form and substance, the Dodd-Frank tax is the pre-crisis fund’s clone.  The meager line about not being used in an orderly liquidation can easily be removed by a future Congress or merely be ignored when the next crisis arrives.  Does anyone truly believe that if there’s a pool of money sitting at Treasury, that it won’t be used during an economic crisis? Besides, government funds are fungible and forever being misappropriated. How many times has government dipped previously “untouchable” pools of money, such as Social Security, to pay for a misguided government adventure?

This is noxious and injurious economic policy that will transform the fundamental relationship between business and government.  It will transfes billions of productive, job-creating dollars out of the economy, delaying additional growth for years.  And it is an insidious bait-and-switch tactic designed to re-insert, when no one is looking, a bailout fund that was previously rejected by the Senate and reviled by the public.

Read Less

Flotsam and Jetsam

Well, after having a “total freeze” dangled before their eyes, of course the PA is not satisfied, hollering about Prime Minister Bibi Netanyahu’s “political maneuvering” and “deception” is announcing a halt to new West Bank settlements for 10 months (but no restrictions on ongoing projects or housing within Jerusalem). “The PA is also furious with the US administration for hailing the decision as a step forward toward resuming the peace process in the Middle East.” Well, that’s what comes from the Obami’s incompetent gambit. How is it that George Mitchell still has a job?

Copenhagen round two: “Obama has come home from Copenhagen empty-handed once before — when he flew in to lobby for Chicago’s pitch for the 2016 Olympics, only to watch the International Olympic Committee reject his hometown’s bid in the first round of its voting.”

A very unpopular decision: “By 59% to 36%, more Americans believe accused Sept. 11 mastermind Khalid Sheikh Mohammed should be tried in a military court, rather than in a civilian criminal court.” Among independents, 63 percent favor a military tribunal.

Karl Rove reminds us that “since taking office Mr. Obama pushed through a $787 billion stimulus, a $33 billion expansion of the child health program known as S-chip, a $410 billion omnibus appropriations spending bill, and an $80 billion car company bailout. He also pushed a $821 billion cap-and-trade bill through the House and is now urging Congress to pass a nearly $1 trillion health-care bill.” But no worries — Obama would like a commission to address our fiscal mess.

Charles Krauthammer writes on ObamaCare: “The bill is irredeemable. It should not only be defeated. It should be immolated, its ashes scattered over the Senate swimming pool. … The better choice is targeted measures that attack the inefficiencies of the current system one by one — tort reform, interstate purchasing and taxing employee benefits. It would take 20 pages to write such a bill, not 2,000 — and provide the funds to cover the uninsured without wrecking both U.S. health care and the U.S. Treasury.” And it might even be politically popular.

Iran has managed to do the impossible: draw the ire of the IAEA and make Mohamed ElBaradei sound realistically pessimistic: “We have effectively reached a dead end, unless Iran engages fully with us.” The White House pipes up with a perfectly meaningless comment: “If Iran refuses to meet its obligations, then it will be responsible for its own growing isolation and the consequences.” Which are what exactly?

Marc Ambinder spins it as “circumspect”: “The upshot from the administration: now is the time to get serious. The world is united in favor of tougher, non-diplomatic means to pressure Iran. But no word on when or how — just yet.” But let’s get real – it’s more of the same irresoluteness and stalling we’ve heard all year from the Obami.

If you might lose something, you begin to appreciate what you have: “Forty-nine percent (49%) of voters nationwide now rate the U.S. health care system as good or excellent. That marks a steady increase from 44% at the beginning of October, 35% in May and 29% a year-and-a-half ago. The latest Rasmussen Reports national telephone survey finds that just 27% now say the U.S. health care system is poor. It is interesting to note that confidence in the system has improved as the debate over health care reform has moved to center stage.”

Kim Strassel thinks the Copenhagen confab will be a bust in the wake of the scandal about the Climate Research Unit’s e-mails: “Instead of producing legally binding agreements, it will be dogged by queries about the legitimacy of the scientists who wrote the reports that form its basis.” And meanwhile “Republicans are launching investigations, and the pressure is building on Democrats to hold hearings, since climate scientists were funded with U.S. taxpayer dollars.”

Well, after having a “total freeze” dangled before their eyes, of course the PA is not satisfied, hollering about Prime Minister Bibi Netanyahu’s “political maneuvering” and “deception” is announcing a halt to new West Bank settlements for 10 months (but no restrictions on ongoing projects or housing within Jerusalem). “The PA is also furious with the US administration for hailing the decision as a step forward toward resuming the peace process in the Middle East.” Well, that’s what comes from the Obami’s incompetent gambit. How is it that George Mitchell still has a job?

Copenhagen round two: “Obama has come home from Copenhagen empty-handed once before — when he flew in to lobby for Chicago’s pitch for the 2016 Olympics, only to watch the International Olympic Committee reject his hometown’s bid in the first round of its voting.”

A very unpopular decision: “By 59% to 36%, more Americans believe accused Sept. 11 mastermind Khalid Sheikh Mohammed should be tried in a military court, rather than in a civilian criminal court.” Among independents, 63 percent favor a military tribunal.

Karl Rove reminds us that “since taking office Mr. Obama pushed through a $787 billion stimulus, a $33 billion expansion of the child health program known as S-chip, a $410 billion omnibus appropriations spending bill, and an $80 billion car company bailout. He also pushed a $821 billion cap-and-trade bill through the House and is now urging Congress to pass a nearly $1 trillion health-care bill.” But no worries — Obama would like a commission to address our fiscal mess.

Charles Krauthammer writes on ObamaCare: “The bill is irredeemable. It should not only be defeated. It should be immolated, its ashes scattered over the Senate swimming pool. … The better choice is targeted measures that attack the inefficiencies of the current system one by one — tort reform, interstate purchasing and taxing employee benefits. It would take 20 pages to write such a bill, not 2,000 — and provide the funds to cover the uninsured without wrecking both U.S. health care and the U.S. Treasury.” And it might even be politically popular.

Iran has managed to do the impossible: draw the ire of the IAEA and make Mohamed ElBaradei sound realistically pessimistic: “We have effectively reached a dead end, unless Iran engages fully with us.” The White House pipes up with a perfectly meaningless comment: “If Iran refuses to meet its obligations, then it will be responsible for its own growing isolation and the consequences.” Which are what exactly?

Marc Ambinder spins it as “circumspect”: “The upshot from the administration: now is the time to get serious. The world is united in favor of tougher, non-diplomatic means to pressure Iran. But no word on when or how — just yet.” But let’s get real – it’s more of the same irresoluteness and stalling we’ve heard all year from the Obami.

If you might lose something, you begin to appreciate what you have: “Forty-nine percent (49%) of voters nationwide now rate the U.S. health care system as good or excellent. That marks a steady increase from 44% at the beginning of October, 35% in May and 29% a year-and-a-half ago. The latest Rasmussen Reports national telephone survey finds that just 27% now say the U.S. health care system is poor. It is interesting to note that confidence in the system has improved as the debate over health care reform has moved to center stage.”

Kim Strassel thinks the Copenhagen confab will be a bust in the wake of the scandal about the Climate Research Unit’s e-mails: “Instead of producing legally binding agreements, it will be dogged by queries about the legitimacy of the scientists who wrote the reports that form its basis.” And meanwhile “Republicans are launching investigations, and the pressure is building on Democrats to hold hearings, since climate scientists were funded with U.S. taxpayer dollars.”

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“What Is Going To Be Done about China?”

Yesterday I suggested that President Bush use all the leverage we have to convince Beijing to disarm Kim Jong Il. The Chinese supply about 90 percent of North Korea’s oil, 80 percent of its consumer goods, and 45 percent of its food. Pyongyang, as we know, has no more loyal supporter in the councils of diplomacy than Beijing. Without China, Kim “could neither bark nor bite.” There would be no North Korean nuclear program, no North Korean missiles, and no North Korea. Jon S, a frequent contentions reader, has borrowed Lenin’s words and asked the critical question: “What is to be done?”

We must first properly understand the “correlation of forces,” if I may continue with Soviet-era lingo. In “China’s century” the general assumption is that the United States must step out of the way of the rising giant. After all, the argument goes, the central government in Beijing owns about $387 billion in U.S. Treasury obligations and holds the bulk of its $1.5 trillion in foreign exchange reserves in dollar-denominated assets. We cannot afford to irritate the Chinese, especially because they have already threatened to exercise the so-called “nuclear option” and dump their dollars. As Hillary Clinton asks, “How do you get tough on your banker?”

Clinton is wrong because she ignores the reality of the financial markets. If the Chinese sold their dollars, they would have to buy something, as a practical matter, euros and yen. The values of those currencies would then shoot through the ceiling. The Europeans and the Japanese, to bring their currencies back into alignment, would then have to buy dollars. In short, our debt would end up in the hands of our friends.

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Yesterday I suggested that President Bush use all the leverage we have to convince Beijing to disarm Kim Jong Il. The Chinese supply about 90 percent of North Korea’s oil, 80 percent of its consumer goods, and 45 percent of its food. Pyongyang, as we know, has no more loyal supporter in the councils of diplomacy than Beijing. Without China, Kim “could neither bark nor bite.” There would be no North Korean nuclear program, no North Korean missiles, and no North Korea. Jon S, a frequent contentions reader, has borrowed Lenin’s words and asked the critical question: “What is to be done?”

We must first properly understand the “correlation of forces,” if I may continue with Soviet-era lingo. In “China’s century” the general assumption is that the United States must step out of the way of the rising giant. After all, the argument goes, the central government in Beijing owns about $387 billion in U.S. Treasury obligations and holds the bulk of its $1.5 trillion in foreign exchange reserves in dollar-denominated assets. We cannot afford to irritate the Chinese, especially because they have already threatened to exercise the so-called “nuclear option” and dump their dollars. As Hillary Clinton asks, “How do you get tough on your banker?”

Clinton is wrong because she ignores the reality of the financial markets. If the Chinese sold their dollars, they would have to buy something, as a practical matter, euros and yen. The values of those currencies would then shoot through the ceiling. The Europeans and the Japanese, to bring their currencies back into alignment, would then have to buy dollars. In short, our debt would end up in the hands of our friends.

And there’s a couple more things that we need to remember about the balance of power between China and the United States. Beijing’s spectacular rise has occurred in a period of sustained worldwide prosperity, but that era is now coming to an end, as the ongoing plunge in global financial markets indicates. China, the world’s largest exporter, has built its economy on selling goods to the United States. Beijing’s trade surplus with us for last year will exceed a quarter trillion dollars when the figures are announced. In short, the stability of the modern Chinese state largely depends on prosperity and that prosperity largely depends on access to American markets, capital, and technology.

Therefore, Beijing’s leaders are not about to cross Washington if they thought we were serious about proliferation. So far, we have not vigorously enforced the trade promises that Beijing made to join the World Trade Organization in 2001. Should we do so, we could drive the Chinese economy into the tank—and Beijing’s leaders know that. It’s time to have a conversation with them about their support for rogues like Kim Jong Il.

Moreover, the United States has never made China pay any price for proliferant activities. We announce slap-on-the-wrist measures on state-owned enterprises every once in a while, but now it’s time to levy real penalties on the Chinese government, which controls those businesses. Until we do that, Beijing’s leaders will just laugh at us while continuing their support for the Kims of the world.

And there’s one more thing. The United States needs to speak clearly to the Chinese, both in public as well as in private, about behavior that is, by any standard, unacceptable. The world looks to Washington for leadership, and we have not been providing it.

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Sub-Prime Thinking

The Forgotten Man, Amity Shlaes’s compelling and highly readable reinterpretation of the Depression and the New Deal, is a timely reminder of the way in which government policy can have counterintuitive effects, sometimes of a disastrous nature. Shlaes suggests that, in the Depression era, misguided policies incited and then prolonged the financial crisis, saddling us with the hugely expanded federal government that struggles to manage our economy today.

How is the government doing at that task? Over the past few weeks, and especially over the past few days, financial markets worldwide have been roiled by a credit crisis. That crisis was sparked by a real-estate bubble and a lending boom that are in no small part an unintended consequence of U.S. government policy.

The government encourages home-ownership by offering a significant tax break for mortgage interest. This is one of the few deductions that is not subject to the dreaded alternative minimum tax, which has begun to squeeze the middle class. As with any other subsidy, the effect of the mortgage-interest tax break can be to encourage consumers to buy more housing, and more expensive housing, than they may need.

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The Forgotten Man, Amity Shlaes’s compelling and highly readable reinterpretation of the Depression and the New Deal, is a timely reminder of the way in which government policy can have counterintuitive effects, sometimes of a disastrous nature. Shlaes suggests that, in the Depression era, misguided policies incited and then prolonged the financial crisis, saddling us with the hugely expanded federal government that struggles to manage our economy today.

How is the government doing at that task? Over the past few weeks, and especially over the past few days, financial markets worldwide have been roiled by a credit crisis. That crisis was sparked by a real-estate bubble and a lending boom that are in no small part an unintended consequence of U.S. government policy.

The government encourages home-ownership by offering a significant tax break for mortgage interest. This is one of the few deductions that is not subject to the dreaded alternative minimum tax, which has begun to squeeze the middle class. As with any other subsidy, the effect of the mortgage-interest tax break can be to encourage consumers to buy more housing, and more expensive housing, than they may need.

At the same time, the highly-regulated lending industry was permitted to let the sub-prime mortgage sector grow wildly in the middle of a real-estate boom, with exotic adjustable-rate and interest-only loans enabling all sorts of unqualified buyers to purchase homes on the premise that rising prices would eliminate the risk of default.

These sub-prime loans were cut up and repackaged by investment banks as collateralized debt obligations, which became a favored instrument of unregulated hedge funds. But prices could not rise forever. Financial gravity has now set in. The two government policies that formerly were operating in parallel are now colliding.

As falling real-estate prices make the underlying collateral insufficient to pay off the debt, a number of lending institutions and hedge funds trading in collateral debt obligations have gone belly up, triggering a world-wide panic. The Federal Reserve, which several months ago was pooh-poohing the risks posed by real-estate weakness, has now been forced to step in and reduce the lending rates for banks.

This is a crisis, in other words, that few, including few in government, foresaw. It leads one to wonder what other major risks are lurking hidden in our financial system. Have we really faced the implications, for example, of the fact that China is such a major investor in U.S. Treasury Bonds?

I seldom agree with the New York Times‘s Paul Krugman, and I am not sure I agree with him today when he writes that “it’s hard to avoid the sense that the growing complexity of our financial system is making it increasingly prone to crises—crises that are beyond the ability of traditional policies to handle.”

But it is past time to think imaginatively about hidden dangers to our financial system.

Who should do such thinking? Shlaes’s The Forgotten Man makes it clear that when it comes to a financial crisis, government is the most important actor, and also the least reliable source of insight.

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China’s “Nuclear Option”

In the past few days two Chinese officials have threatened to employ the “nuclear option” against the United States: selling dollars and U.S. Treasury obligations to retaliate against possible American legislation. Congress is now considering bills meant to counter Beijing’s tight control of the value of its currency, the renminbi. China possesses somewhere in the vicinity of $1.3 trillion of foreign exchange reserves. Analysts believe that the Chinese government holds about $900 billion in dollar assets.

“I personally believe we have so many foreign exchange reserves that we should be smarter in setting the issues,” said Xia Bin, one of the officials, at the end of July. “It should at least be a bargaining chip in talks.” This is the first time that a senior economic adviser to Beijing publicly has suggested using China’s reserves for political leverage. He Fan, the other official, wrote in the China Daily on Tuesday about Beijing’s causing “a mass depreciation” of the greenback.

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In the past few days two Chinese officials have threatened to employ the “nuclear option” against the United States: selling dollars and U.S. Treasury obligations to retaliate against possible American legislation. Congress is now considering bills meant to counter Beijing’s tight control of the value of its currency, the renminbi. China possesses somewhere in the vicinity of $1.3 trillion of foreign exchange reserves. Analysts believe that the Chinese government holds about $900 billion in dollar assets.

“I personally believe we have so many foreign exchange reserves that we should be smarter in setting the issues,” said Xia Bin, one of the officials, at the end of July. “It should at least be a bargaining chip in talks.” This is the first time that a senior economic adviser to Beijing publicly has suggested using China’s reserves for political leverage. He Fan, the other official, wrote in the China Daily on Tuesday about Beijing’s causing “a mass depreciation” of the greenback.

We should thank Xia and He for revealing the thinking in the inner circles in Beijing. They provide a useful reminder that we need to pay down our debt and rebalance our economic relations with China. Yet let’s not panic and give into the bluster of China’s autocrats. Unfortunately for them, their holding of dollars is not much of a weapon. Imagine the worst-case scenario: Beijing tries to dump all of its dollars in one day. What would happen? The Chinese would have to buy something—say, for example, euros and yen. The values of those currencies would then shoot up through the ceiling. The Europeans and the Japanese, to stabilize their currencies, would then have to buy . . . dollars. In short, there would be a great circular flow of cash in the world’s currency and debt markets.

There would be turmoil in those markets, but it would not last long—two quarters at the most, perhaps even just a few weeks. And we would end up in just the same place that we are now, except that our friends, instead of our adversary, would be holding our debt. Global markets are deep and flexible and can handle just about anything.

Hillary Clinton once said we can’t argue with our Chinese bankers. I think we can.

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Weekend Reading

The recent dust-up between Hillary Clinton and Barack Obama has reminded some observers of what Clinton-style politics can look like in action. If, as former U.S. Treasury Secretary John Sherman once observed, the past is the best prophet of the future, it’s distinctly probable that American political discourse will remain quite lively for some time now, and possibly even after George W. Bush’s second term ends. For your weekend reading, contentions would like to offer a selection of incisive articles from COMMENTARY taking a hard look at the Clinton administration and the years of ease at home and swiftly growing unease abroad over which Bill Clinton presided. Enjoy.

Bush, Clinton, and the Jews—A Debate
Daniel Pipes & Martin Peretz, October 1992

Lament of a Clinton Supporter
Joshua Muravchik, August 1993

Clintonism Abroad
Joshua Muravchik, February 1995

A Party of One: Clinton and the Democrats
Daniel Casse, July 1996

What Saddam Hussein Learned from Bill Clinton
Harvey Sicherman, December 1996

Clinton, the Country, and the Culture
January 1999

The recent dust-up between Hillary Clinton and Barack Obama has reminded some observers of what Clinton-style politics can look like in action. If, as former U.S. Treasury Secretary John Sherman once observed, the past is the best prophet of the future, it’s distinctly probable that American political discourse will remain quite lively for some time now, and possibly even after George W. Bush’s second term ends. For your weekend reading, contentions would like to offer a selection of incisive articles from COMMENTARY taking a hard look at the Clinton administration and the years of ease at home and swiftly growing unease abroad over which Bill Clinton presided. Enjoy.

Bush, Clinton, and the Jews—A Debate
Daniel Pipes & Martin Peretz, October 1992

Lament of a Clinton Supporter
Joshua Muravchik, August 1993

Clintonism Abroad
Joshua Muravchik, February 1995

A Party of One: Clinton and the Democrats
Daniel Casse, July 1996

What Saddam Hussein Learned from Bill Clinton
Harvey Sicherman, December 1996

Clinton, the Country, and the Culture
January 1999

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