I believe that due to American Exceptionalism, the United States is on the verge of another dramatic period of economic growth. Our nation is far from perfect; but we learn from our mistakes, change dramatically, and move on. After three years of failed socialist efforts by governments around the world to deficit spend their way out of economic recession; America is re-embracing our exceptional belief that sovereignty belongs to the individual and not our political ruling class.

America’s new commitment to deficit reduction was made clear by the stark contrast this morning between President Obama’s address to the American people on negotiations with Republicans to cut $4 billion in budget deficits through spending reductions or tax increases; versus the anarchy of Europe’s efforts to address the Greek sovereign debt crisis. Just as the President was emphasizing that debt reduction was important for U.S. jobs growth; Athens rioters were burning down the Greek Finance Ministry as punishment for their socialist leaders accepting another $150 billion bailout from Germany and France, after Greece squandered last year’s $100 billion bailout.

The protests are being led by Greek Communists affiliated with PAME, the consortium of 280 trade unions that dominate Greek politics and whose member’s salaries are being paid by the bailouts. The protestors erected gigantic banners on the Acropolis hill overlooking Athens, stating: “People Have The Power and Never Surrender – Organize – Counter Attack”.

To an American outsider, watching the trade unionists bite the hand that has been feeding them at the rate of $300 million per day seems like a bazaar sense of entitlement. But an examination of the consequences to German and French banks if there is a default by Portugal, Italy, Ireland, Greece or Spain (the PIIGS of Europe); demonstrates the socialist borrowers have achieved “too-big-to-fail” dominance over their German and French lenders. As compared to U.S. banks below; leverage is twice as high for French banks and two and a half times for German banks:
IMF Estimates Average of Bank Leverage by Country

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the Barack Obama’s ATM comments this week, and his administration’s failed outreach to business.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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Erick Erickson: Barack Obama Thinks an ATM Ate Your Job
White House’s Daley seeks balance in outreach meeting with manufacturers
GLOBAL MARKETS: European Stocks Slip; Banks Suffer On Greece Worries
Merkel, Sarkozy Agree Greek Aid Must Involve Investors
Why the Sign Must Say: No UBS in the USA

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With the mauling of the Democrats, their ideology, and policies, in addition to some RINOS in the primaries, let’s hope the new Congress heard Americans loud and clear on Tuesday and the United States government is no longer a punchline, and will return to sound fiscal and free market policies without the need for earmarks, bribes, pork, class warfare, and rhetoric to sell and brand bills.

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Since the dawn of the financial crisis, author and investor Nassim Taleb has been a favorite of the Huff Post crowd. When Arianna Huffington guest-hosted CNBC’s Squawk Box last year, he was one of the few guests she brought on the show. Well, Taleb went up to Canada last week and gave a speech slamming Obama’s economic policies. Of course, he gave the speech in French. From Bloomberg:

U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.”

“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”

Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”

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The more details that emerge about the Obama-Dodd financial “reform” bill, the worse it smells. The bill is most certainly an attempt to give the government vastly more power and control over the economy. And despite the vocal, condescending, even mocking protestations from Democrats and their allies, this bill does in fact contain unlimited bailout authority for the Fed. It’s right there in the bill for the world to see.

But it is increasingly evident that there may be something more sinister going on behind the scenes that is driving this debate.  The President trotted up to New York to give a big televised speech and scolded Wall Street for “resisting reform” saying that if we are to prevent another crisis, we must pass his bill.

The whole charade amounted to little more than political theater.  Big Wall Street banks actually WANT this bill.  Executives for Citigroup and Goldman Sachs (two firms that both received bailout funds) have both made statements in favor of Obama’s financial reform bill.

So, one must ask, if this is so draconian on Wall Street, why do they want it so badly?  The answer to this question is in the details of the bill: Not only does this bill not rein in big Wall Street banks, its actually a very big gift to Big Banks and other special interests—gifts that will cost Main Street, the taxpayers and consumers.

The large financial institutions at the root of the financial crisis wouldn’t even be regulated by the CFPA. Their oversight would remain at the porn-surfing Securities and Exchange Commission. But of course the bill is full of burdensome regulations for smaller institutions with which they will struggle to comply and also remain profitable.  The larger banks that are covered will not only have the resources to adapt but will also likely grow even larger by swallowing up smaller institutions that can’t make it.

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Yesterday, Republicans held firm against bailouts to big banks and Wall Street.  They held firm against creation of a super regulatory bureaucracy.  They held firm against a massive government intervention in our economy.  All in all it was a good day.

But a word to the wise:  DO NOT SNATCH DEFEAT FROM THE JAWS OF VICTORY.

Republican leaders have been making noises about a compromise measure for a week.  Now is not the time to get weak.

The Democrats continue to deny the bill is a bailout.  But they are slowing losing that battle.

NPR said:

“A vote for reform is a vote to put a stop to taxpayer-funded bailouts,” Obama said in his speech in New York on Thursday.

I cannot find any experts — of any party — who are willing to agree with Obama on this one.

“We’re not seeing a very forceful step on the too-big-to-fail problem,” said Carmen Reinhart, an economist at the University of Maryland. “If there’s any doubt that the crisis may be systemic, we will bail out again.”

So, if a major bank says, “Hey, save us or the economy will go under,” the government’s going to save the bank. Full stop.

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Sen. Chris Dodd’s financial regulatory reform bill, on which the Senate is slated to take a cloture vote this afternoon, has been the subject of much criticism of late, primarily for what opponents say amounts to a de facto institutionalization of “too big to fail” with regard to the biggest power players in the financial sector.

However, Capitol Confidential has learned that there is another, equally troubling aspect of the bill that observers say is going unnoticed in the debate surrounding Dodd’s proposals: Its hammering of community banks.  Relatively small institutions compared to the names often cited in the news, community banks typically operate in small towns, urban neighborhoods or the suburbs.  Their remit usually involves funding small businesses that require credit in order to operate payrolls and to expand, and lending to families financing home purchases or college.   Many of those familiar with the banking industry, overall, say that community banks bore little to no responsibility, on balance, for the financial meltdown that occurred in 2008.  Nonetheless, an analysis of the Dodd bill indicates that if it passes, community banks will be subject to a whopping 27 new regulations that one individual who has worked with banks professionally and is closely tracking the legislation says “could threaten to put many community bankers out of business, thus reducing competition in the banking sector overall, and diminishing consumer choices.”

That individual further asserts that while the bigger, Wall Street banks will likely be able to adapt to the bill (though their efficiency and ability to compete internationally could take a knock), the community banks will not—potentially making the system more risk-prone, also.

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Liberal pundit Michael Kinsley once defined a political gaffe as an instance of a politician accidentally telling the truth. House Financial Services Committee Chairman Barney Frank, D-Mass., recently made a gaffe that fits Kinsley’s definition to a tee.

In a debate with Ralph Nader on MSNBC’s “The Ed Show,” in which Nader was accusing Frank of being too timid on the financial regulation bill then moving through the House, Frank responded, “We are trying in every front to increase the role of government in the regulatory area.”  Conservative blogs took note of Frank’s use of the word “every front”, as did Rep. Paul Ryan (R-Wis.), and earned a brusque “tsk- tsk” from The New Republic’s Jonathan Chait.

This is an example of “the conservative misinformation feedback loop in action,” Chait exclaimed. Frank was only talking about banking, Chait claimed, and “not confessing to a plan to expand government in every area.”

Actually, in prefacing his comments, Frank moved the topic from Nader’s point about derivatives to the broader issue of how “the right wing took control of government and ruined it” and how it is supposedly benefitting from its “own incompetence.”  But if one still doesn’t want to take this as Frank’s confession of wanting to increase government intervention “in every front,” one need look no further than the bill by Frank that passed the House in December and Chris Dodd’s Senate “financial reform” bill that Democrats are trying to ram through the Senate.

In the debate, Democrats never tire of accusing Republicans of siding with “Wall Street banks.”  But last week Republicans made headway when Senate Minority Leader Mitch McConnell pointed out that the bill $50 billion resolution fund would institutionalize bailouts for big banks, whether these banks failed themselves or acted as creditors to too-big-to-fail institutions.  Even an editorial in the Washington Post stated that “Mr. McConnell is partly right” and that “creditors might fund systemically important firms on artificially advantageous terms, thus enabling them to grow bigger and riskier.”

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As long as the Democrats continue to control Congress, we’ll have to endure an endless procession of initiatives for the federal government to take over industry after industry. Health insurance and college loans went under federal hegemony with passage of a single bill, known as “ObamaCare.”

Now, a new bill, referred to by the name of its chief sponsor, the ethically challenged Sen. Chris Dodd of Connecticut, aims to consolidate a federal takeover of the nation’s entire network of financial institutions.

As Peter Wallison of the American Enterprise Institute notes:

Does the bill, as [Republican Senate leader Mitch] McConnell said, “institutionalize too big to fail?” Of course. There can’t be any reasonable doubt about this. The bill authorizes the Fed to regulate all non-bank financial institutions that are “systemically important” or might cause instability in the U.S. financial system if they failed. . . .

The market will see immediately that the government has created Fannie Maes and Freddie Macs in every sector of the financial system where these large companies are designated for Fed regulation, including insurance companies, hedge funds, finance companies, bank holding companies, securities firms, and any other kind of financial institution the government wants to regulate. Since these firms will be too big to fail, they will be seen in the market—as Fannie and Freddie were seen—as ultimately backed by the government and thus safer firms to lend to than small firms that are not government backed. This will permanently distort the financial market, favoring large companies over small ones, and eventually force a consolidation of each market where these firms exist into a few large competitors operating under the benign supervision of the government.

In other words, this is another huge step toward fascistic corporatism, completing a de facto government takeover of today’s nominally “private” financial firms. These corporations would be reduced to the status of politically managed public utilities.

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Surprise, surprise. Sen. Chris Dodd’s financial-regulation proposal raises the possibility of substantial progress on the road to ending “too big to fail” (TBTF) and bailout nation for banks and other financial institutions.

How the Dodd bill will play out in the final details remains to be seen. But when you read the Dodd fact sheet, there are a few key items to like.

First, under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called “funeral plans.” Then, in terms of these orderly shutdowns, the bill would create an “orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.” Good.

Then comes the “liquidation procedure.” This spells out that the Treasury, FDIC, and Federal Reserve must all agree to put companies into the orderly liquidation process. “A panel of three bankruptcy judges must convene and agree — within 24 hours — that a company is insolvent,” the bill goes on to say. It also states that the largest financial firms will be assessed $50 billion for an upfront fund that will be used if needed for any liquidation. This is a kind of debtor-in-possession safety net for the bankruptcy-liquidation process. Also good.

Finally, under the heading of bankruptcy, the bill stipulates that most large financial companies are expected to be resolved through the normal bankruptcy process. This is the key. However, it is not an airtight case for bankruptcy. It is possible that a government-resolution process could keep big banks alive or in conservatorship, such as with Fannie and Freddie. That would be wrong. Very wrong. In fact, one of the flaws in the Dodd bill is that there is no mention of Fannie and Freddie.

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While the media and most of the public are consumed by the health care death march, the Senate is deep in negotiations to pass a sweeping re-regulation of the financial sector. As the public knows, ObamaCare is an attempt to regulate 1/6th of the US economy. The financial ‘reform’ proposal, though, will impact the other 5/6ths of the economy. In many respects, the financial services ‘reform’ is much more damaging to the economy and our future competitiveness. Worse, its passage is being aided by Bob Corker.

Sen. Bob Corker (R-TN) has snatched defeat from the jaws of victory with his complete capitulation and total surrender on the Financial Services bill.  The bill, passed by the House with a $4 trillion bailout provision, making bailouts the permanent policy of the United States government, was on it’s last legs until Corker came to the rescue.  Now the Washington Post and other are reporting that Corker and ethically-challenged, retiring Sen. Chris Dodd (D-CT) are on the verge of a deal to breathe life back into the regulatory and bailout scheme.

Let’s be clear – the President and the hard left want this bill. David Reilly of Bloomberg described the measure as Barney Frank’s $4 trillion gift to the banks. Reilly wrote:

Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:

– For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

– Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

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Federal Reserve Chairman Ben Bernanke is up for Senate confirmation for another term. It isn’t going well.

The voters are getting angry at The One. A majority disapprove of how he’s handling health care “reform” AND the economy. The AP reports that the billions spent on road construction has done nothing to lower unemployment. The “most popular government program” in years, Cash-4 -Clunkers was actually, predictably, a flop. Unemployment is way higher than they said it would be if we didn’t rush through the borrow and spend porkulus bill.

So, what to do to keep the rabble from voicing their displeasure? Blame someone else! Obama wants to tax the big bad banks. He says it’s to get our TARP money back and to reduce undue risks by the greedy bankers. The One wants you to believe that the big banks are the kind of guys who would take the last piece of pizza from the birthday boy at Chuck-E-Cheese (see above photo).

Obama has been strident in his criticism of bankers, calling them “fat cats” last month in an interview that aired on the eve of their visit to the White House. With public anger over the bailout still strong, Obama has embraced populist rhetoric in an effort to shame bank executives into paying back the government more quickly and their executives less lavishly.

At the White House on Monday, Obama spokesman Robert Gibbs jabbed at the perceived disconnect between Wall Street executives and their customers. The spokesman said the disparity angered his boss.

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Muscling through a rough cold, Francis shares his thoughts on an interesting piece on the Too Big to Fail concept in the latest issue of National Affairs on today’s edition of Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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National Affairs: Too Big Not To Fail

The catastrophe that struck America’s financial system in 2008 was not inevitable. Rather than a failure of markets, it was a failure by government to understand its proper role in markets — and the product of an unwise (and unnecessary) abandonment of a sensible system of rules and boundaries that had served American finance well for six decades.

Beginning in the 1980s, and continuing over the quarter-century that followed, Washington afforded the world of big finance a terrible ­luxury: freedom from the fear of failure. Managers and lenders at financial companies came to understand that the larger and more complex their firms got, the more immunity from market discipline they would enjoy — since they could depend on government guarantees when necessary to protect the broader economy from their mistakes. The government thus countenanced and subsidized an untenable financial system. And it inevitably got more of what it paid for: reckless risk building up to disaster.

The errors laid bare by the financial crisis clearly call for regulatory reform. But in designing that reform, we should avoid the temptation to seek heavy-handed new approaches — and should instead look to the long-term success of the system of rules whose decay brought about the crisis.

A must read piece by Peter Wallison in today’s Wall Street Journal:

It’s hard to imagine a worse piece of financial regulatory legislation than the bill Barney Frank and the administration put before the House Financial Services Committee last month. But Sen. Chris Dodd’s effort, introduced last week, clears this hurdle

Much attention has focused on the fact that his “Restoring American Financial Stability Act” differs from the administration and Frank proposals by creating an entirely new agency to function as a “systemic regulator” of nonbank financial institutions, instead of the Federal Reserve. Far more important, however, is the regulatory and bailout powers it gives to the government. Here the Dodd bill follows the same flawed ideas advanced by the administration and Mr. Frank, but in some ways make things worse.

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For anyone who thinks that big Wall Street and Big Government aren’t joined at the hip, promoting policies and laws that keep each other fat and happy often at the expense of the American taxpayer, consider the career of Robert Rubin.

Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place.

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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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As 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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