Anthony Randazzo is a policy analyst and the resident economics junkie for Reason Foundation in Washington D.C. He specializes in finance, fiscal policy, regulatory policy, government reform, and privatization policy. His career includes stints at The Policy Center in New York, webzine World on the Web, and Florida's leading eminent domain law firm, Fixel, Maguire & Willis. His work has been featured in Reason magazine, The Detroit News, Chicago Sun-Times, and various online publications. Randazzo graduated from The King's College, in New York City with a B.A. in politics, philosophy, and economics.
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Anthony Randazzo
A ‘Job Creation’ Stimulus Is a Terrible Idea
by Anthony Randazzo
I agree with Paul Krugman on at least one thing: the continued prospects for high unemployment in America is a bad thing. In his NYT column Monday, Krugman the Keynesian wrote:
The damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills, and even when the economy recovers they tend to have difficulty finding a job, because they’re regarded as poor risks by potential employers. Meanwhile, students who graduate into a poor labor market start their careers at a huge disadvantage — and pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.
Unemployment is currently 10.2 percent, and if you factor out the part-time workers it is 17.5 percent. Banks aren’t lending to the limited demand from manufacturers, further depressing employment opportunities. And the recovery outlook right now is bleak. Krugman is right, we have to do something.
His plan, however, is not the answer. Not even close.
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Treating Wall Street Like the Mafia
by Anthony RandazzoPerhaps Senate Banking Committee Chairman Chris Dodd (D-Conn.) thinks of himself as a modern day John Sherman. In 1890, Ohio Sen. Sherman set out on a mission to establish “just competition” laws and level the economic playing field. His quest culminated in the dismantling of monopolies—such as American Tobacco and Standard Oil—and the passage of new laws prohibiting malicious competitive practices. In a similar way, Dodd now seeks the power to tear apart any company he considers a risk to the national economy. But unlike Sherman, Dodd isn’t out to create the best possible conditions for competition to thrive. He’s out for blood.
Dodd’s plan for overhauling Wall Street regulations, released mid-November, includes a proposed new organization: the Agency for Financial Stability (AFS). This new regulator would be tasked with identifying and addressing “systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms.” This represents one piece of the most extensive proposal to reform financial services regulation—topping even the ridiculousness of the Obama plan and Barney Frank plan. Which is saying a lot.
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Former Bear Stearns Hedge Fund Managers Found Not Guilty of Fraud
by Anthony Randazzo
In a somewhat surprising decision yesterday, former Bear Stearns hedge fund managers Ralph Cioffi and Matt Tannin were found not guilty by a jury of their peers in federal court. Nearly a month to the day after their trial began, the jury ruled that Cioffi and Tannin did not mislead investors nor commit fraud. The AP reports:
A jury in federal court in Brooklyn deliberated about eight hours over two days before finding Ralph Cioffi and Matthew Tannin not guilty of conspiracy and other charges in an alleged scheme that cost 300 investors about $1.6 billion and nearly caused the demise of Bear Stearns itself. The firm avoided bankruptcy in a rescue buyout by JPMorgan Chase & Co.
Both men had been charged with three counts of securities fraud and two counts of wire fraud. Cioffi was also charged with insider trading.
After the verdict, some jurors told reporters that they concluded that the evidence against Cioffi and Tannin was flimsy and contradictory. Other suggested the pair were being blamed for market forces beyond their control.
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Gasparino Skewers Government Policy As a Major Contributor to the Financial Crisis
by Anthony RandazzoOne of the last people you’d expect to be a catalyst for the near collapse of history’s most advanced financial system is the secretary of Housing and Urban Development. Though not the masterminds of the nation’s economic woes, Andrew Cuomo and Mel Martinez were willing musclemen for the Congressional and White House driven mandates that housing be made more affordable to all through government subsidy.
Those mandates, policy stemming back to the 1960s, were driven by compassion, but have turned out to be the chief cause for the current rampant rates of default, foreclosure, and economic pain striking particularly hard at low-income families.
Such is the story Charlie Gasparino tells in his new book, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System. Gasparino notes that Cuomo as much as boasted in the late 1990s about forcing Fannie Mae and Freddie Mac to expand their subprime mortgage portfolios. Not slowing down, the George W. Bush appointed Martinez carried the ball forward with great speed, presiding over a period of time where Fannie and Freddie grew to hold a combined $1 trillion in subprime mortgages.
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Avoiding an American Lost Decade
by Anthony RandazzoIn February of this year, I wrote a study (co-authored with Mike Flynn) about the lessons of the Japanese “Lost Decade.” At the end of the 1980s, Japan faced a very similar situation to ours: an asset bubble burst, the economy went into recession, and the financial sector stumbled. In that study we argued (as did others in separate publications) that if American didn’t properly learn the lessons of the Lost Decade, that we too would suffer a similar long night of economic malaise. Unfortunately, the warning has not been heeded.
Japan spent most of the 1990s screwing around with monetary policy, increasing taxes on its citizens, and spending trillions on stimulus projects. Sound familiar? The result was 10-years of stagnant economic growth, out of control unemployment, and national debt rising to double the rate of GDP, all while the rest of the world laughed at the nation that appeared to be returning to empire status. And that is where we are headed.
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Three Guiding Principles for Reforming Wall Street
by Anthony RandazzoIn the wake of the massive bank bailouts, nearly everyone is calling for some kind of financial regulatory system overhaul. The Obama administration has outlined what it would like to see and Congress is currently holding hearings on how to best reform the regulatory structure. But the lobbying began long ago.
Big banks are squaring off against smaller banks in the debate over consolidating national banking regulatory powers. All banks are lining up against financial institutions like hedge funds on the regulation of products like derivatives. Even the regulating agencies are competing against each other in hopes of garnering more power.
Unfortunately, if Congress makes choices on political criteria alone, reforms are likely to damage the country’s economic recovery.
Instead, there are three guiding principles that lawmakers should bear in mind when writing new regulations for Wall Street.
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Consumer Financial Protection Agency: Big Brother Protecting You to Death
by Anthony RandazzoWhen I first learned to drive as a teenager, my mother let me take the wheel on trips to the local grocery store. She was there in the passenger seat, arms flailing every time a squirrel or a piece of sagebrush came across the road, her left forearm pressing my chest back against the seat. It was instinct. She wanted to brace me for the impact of a crash. The only problem was that I needed both arms free to keep the van from crashing in the first place. While I appreciated my mother’s concern, I hated the thought that she might protect me to death.
Which is the same attitude every American should have when it comes to the new consumer financial protection laws President Barack Obama and Rep. Barney Frank (D-Mass.) want to impose on businesses.
Obama first proposed the idea of a Consumer Financial Protection Agency (CFPA) in June as a part of his grand plan to overhaul Wall Street regulations. But it has come under considerable attack recently for fear it would smother businesses and end up hurting consumers. As I write for Reason Online, in its current form, the CFPA will pile on burdensome new rules, restrict innovation, hurt small businesses, increase the cost of doing business, spawn a massive bureaucracy, and create severe conflicts between state and federal law. Frank’s proposed version would even allow the new agency to write and enforce laws beyond the scope of existing legislative authority. (more…)
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Bailout May Be Helping to Generate Up to Half of Bank’s Profits
by Anthony RandazzoWe will never know how many, if any, of the major banks would have failed without the TARP bailout package passed a year ago. Several banks were strong-armed into taking the money. We can be reasonably sure that Citigroup and Bank of America wouldn’t be the institutions they are today without some government hand-holding—actually, it is more like continuous CPR while giving blood and donating a kidney.
However, while we can’t know the counterfactual, we can assess how the liquidity infusions have decreased credit risk, lowering the cost of capital, and compare these savings to profits. And the stunning numbers show that up to nearly half of all profits from the top 18 banks are the result of Uncle Sam subsidizing the cost of credit.
Every day financial firms borrow money to conduct business. Just like with individuals and families, there is a cost to the credit in the form of an interest payment or fee. However, with a virtual government guarantee of security, the big financial institutions have been able to borrow at artificially reduced rates. Lenders to financial institutions know Uncle Sam has the back of the big boys on Wall Street. They’re sure to get their money back, based on current White House and Fed policy.
The problem is that this gives large financial institutions a competitive advantage over smaller business. Those smaller firms have to pay more for their credit. They don’t have the government guarantee. They are more risky. And while it is true that smaller firms will always have to pay more money to borrow than the larger firms, the government guarantee has widened the gap between the cost of credit for the smalls and bigs.
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“Too Big To Fail” Is Becoming Obama’s Policy
by Anthony Randazzo 
President Obama recently reiterated his plan to fix the regulation of Wall Street and said it was time to “put an end to the idea that some firms are too big to fail.”
Amen.
But the president doesn’t need a new law or a new oversight committee, like the one he proposes, to end the concept of too big to fail. He could, and should, simply make a speech declaring that from this day forward, any company, no matter how big or small, will be allowed to fail. If Bank of America or AIG or Chrysler goes bankrupt, so be it. Obama should unequivocally proclaim, “There will be no more bailouts. Period.”
If given, that kind of speech would surely be the most popular thing Obama’s done since becoming president. Arianna Huffington and other liberals angry that ‘crony’ capitalists are getting corporate welfare would love it. Glenn Beck, Michelle Malkin, and fiscal conservatives who truly opposed President Bush’s $700 billion Troubled Asset Relief Program bailout would love it. Libertarians and independents would be ecstatic to see the end of a system that protects—and even rewards—businesses that make bad decisions. (Only Wall Street firms enjoying the taxpayer safety net would be upset.)
Unfortunately, while Obama hints at ending “too big to fail” policies, his financial reforms actually continue to encourage the reckless financial behavior that helped get us into this mess.
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Stimulating DC: Federal Government Adds 25,000 Workers With Recovery Cash
by Anthony Randazzo
The point of the American Recovery and Reinvestment Act was to encourage national economic growth. The point was to curb unemployment. The point was to help small businesses be what D.C. has forever claimed they are—the national economic backbone. The point was to stimulate the economy… not the federal government.
But that’s what we’ve got. A federal government stimulated and growing by the day.
The Recovery Act was doomed from the start. Increasing spending while cutting taxes is a great way to grow a deficit and create future economic problems, not save an economy. The stimulus money never really had a shot at creating 3 million jobs, as was promised, and have them be sustainable. But the stimulus is failing even by the flawed standards of its creators!
With national unemployment at 9.7%, the USA Today reported Thursday morning that the number of civilian workers in federal government has increased by 25,000 since December of 2008:
Fourteen of the top federal agencies responsible for spending under the American Recovery and Reinvestment Act say they’ve hired about 3,000 workers with stimulus money. That’s helped fuel the continued growth of the federal government, which increased by more than 25,000 employees, or 1.3%, since December 2008, according to the latest quarterly report. During that time, the ranks of the nation’s unemployed increased by nearly 4 million, Labor Department statistics show. Overall, there are about 2 million federal workers, the data show.
Thirteen agencies that report stimulus-related administrative expenses separately on their weekly spending reports say they’ve spent $186.8 million so far on salaries and other overhead. Those agencies have reported spending $46.1 billion in stimulus funds overall.
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Obama’s New Tax on the Poor, Just Redefined Away
by Anthony RandazzoDuring the campaign in 2008, President Obama made his tax message as clear as it could be: he wanted to tax the wealthy, and help the poor. He promised over and over that taxes on those making less than $250,000 would not go up. So why has the president proposed a health care tax on the poor?
A frequent line by candidate Obama in his stump speeches during the election went something like this:
“Let me be absolutely clear. If you are a family making less than $250,000 a year, you will not see your taxes go up.”
Despite this promise, we’ve already had the federal tax hike on cigarettes to fund children’s health care (S-CHIP), an excise tax that impacts the poor profoundly more than the wealthy because of the inverse relationship between smoking and income.
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We Can’t Even Trim $1.4 Million From Our Budget
by Anthony RandazzoRiding the wave of the GOP’s successful push to have Congress defund Acorn, Sen. Jim DeMint (R-SC) tried to push through another prudential budget matter: killing the John Murtha-Johnstown Cambria County Airport. His effort was not as successful.
On Thursday afternoon, the GOP brought a measure to the Senate floor to end federal subsidies for the airport Rep. John Murtha (D-PA) had built in Johnstown, PA, right in his home district. Over the past few years, the airport has received roughly $150 million in funds from the defense budget, and it got $800,000 in stimulus money.
But it just so happens the airport only sees about 6,700 passengers… a year. Luckily, Murtha is the chairman of that wonderful little defense committee, dutifully guiding money towards the airport build largely so he could get from Dulles back to his home easier.
Tyler Grimm wrote in The Wall Street Journal earlier this month:
The usually barren airport—there were several times during the day I paced the building for 15 minutes and did not see another human being—has a lot of unused advertising space. But you can’t miss the large picture of John Murtha among a collage of Lockheed Martin workers at the airport’s center. It’s a monument to earmarks: “Partnerships Make a World of Difference,” the ad reads.
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Obama’s Wall Street Regulations as Behavioral Control
by Anthony RandazzoAs Congress prepares to move forward on financial services regulation, it’s worth taking a step back to look at the proposals for what they really are: behavioral control mechanisms. This is not to say that regulation is inherently bad. A free market can only exist within a framework of rules for competition. And there are certainly some good aspects of the White House plan to reform Wall Street’s rules. But the core measures the president wants passed before the end of the year are simply the expansion of government to dictate terms of action to financial institutions and consumers.
First, the Consumer Financial Protection Agency (CFPA) is an attempt to control the behavior of financial institutions, and what they can or cannot offer. It is an attempt to govern the behavior of individuals who are apparently no longer capable of bearing responsibility for their own actions in choosing financial products. Wright and Zywicki write for FinReg21 that there is a “high likelihood of unintended consequences that will result from [CFPA] actions, including reducing competition and valuable consumer choice.”
Second, derivative regulation reform proposals would make it very expensive and complicated to write unique derivative contracts between firms, with rules designed to push the market towards using more standardized products. Why? Because standard contracts are easier to monitor, easier to control.
Third, the tiered structure for regulating financial institutions will create categories that allow the government to vary its regulatory rules based on the arbitrary perception of risk in the market by the regulators. Washington is looking to control how much risk firms can take, and what kinds of risks.
And fourth, the executive pay rules that passed the House and are now before the Senate Banking Committee, grant the government authority to restrict compensation packages it deems “threatening” to the financial sector. Not only is a grab at more control, this power would allow regulators to intimidate companies into setting pay by its terms without ever having to exercise the power.
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President Obama Believes in a Free Market, So Why Not Regulatory Policies That Would Promote It?
by Anthony RandazzoPresident Obama appeared at Federal Hall in New York yesterday to reiterate his support for a massive overhaul of financial services regulation. At the center of the speech the president laid out his economic philosophy:
I have always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of the government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make those markets more vibrant — and that will allow us to better tap the creative and innovative potential of our people. For we know that it is the dynamism of our people that has been the source of America’s progress and prosperity.
If this were the philosophy actually driving regulatory reform, it would be the biggest ray of sunshine in an otherwise cloudy field of government-expanding reforms (health care, energy, and college loans to name a few). Unfortunately, the plan the White House sent over to Congress in June does not line up with this statement from the president.
Instead, the bills now floating around the Rayburn House Office Building and Rep. Barney Frank’s Financial Services Committee propose reforms that will stifle innovation and restrict opportunities to create wealth. The White House plan, as proposed, would not create an even playing field for competition, but would give big firms a competitive advantage by labeling them too big to fail. Ultimately, the regulation reform proposals represent a massive power grab from Washington.
The president criticized the doctrine of too big to fail (TBTF) yesterday, but his plan will create a tiered structure naming the biggest firms systemic risks to the system because of their size and interconnectedness. The proposed resolution authority would essentially act as a built-in bailout mechanism for those firms. So instead of ending TBTF, the president’s plan actually codifies the policy, essentially turning Wall Street’s biggest institutions into government-sponsored entities in the mold of Fannie Mae and Freddie Mac before the crisis.
Firms knowing they are TBTF with government protection will have a greater incentive to take risks. Lenders, knowing the TBTF firms have the backing of the government, will offer the cheapest of credit to JP Morgan Mae and Citi Mac, creating an uneven market. That’s not the level playing field the president wants.
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