Americans are about to lose more of their liberty, in a very big way. Like the oil leaking away from the deep well in the Gulf of Mexico, American financial liberty will be steadily draining off with few ideas on how to stop the leaking once it has begun.
First the housing markets panicked, then the Paulson Treasury panicked, and then the financial markets panicked. Now panic has hit Congress. Ignoring that the housing-financial crisis was set up and fomented by bad government regulatory programs, Congress is on the verge of enacting legislation that will give to government regulators authority to control any financial activity in the United States.
You may think that I am exaggerating a bit here, getting carried away by rhetoric. I wish that I were. Looking at the provisions of the legislation that the Senate is now debating and is scheduled to pass in the near future, I cannot think of a single financial transaction that government agencies would not be able to control. By control, I mean set rules as to how the transaction would be structured, to whom it could be offered, by whom it could be offered, how it could be advertised, how it would be priced, or even whether it could be offered at all.
Let us consider a simple financial service: a home equity line of credit, or HELOC. With a HELOC a customer can borrow money from the bank up to the amount of equity that the customer has in his house. The attractiveness of the HELOC is that you do not have to sell your house in order to use the equity in it to help pay for college, fund needed remodeling, or even start a small business. With the loan backed by the equity in the house, the borrower gets a far lower interest rate than he would without that collateral.
The legislation would create a new, totally independent federal bureau of consumer regulation. This new bureau—headed by a one person consumer czar endowed with power that would make an old Russian despot jealous—could determine, for example, that it would be “unfair” or “abusive” if the amount of money that a customer could borrow under a HELOC were reduced by the bank when the value of the customer’s house declined. I am not making this up. At a recent Federal Reserve meeting self-appointed consumer advocates, who would dominate the new bureau, complained that banks during the housing bust were lowering HELOC amounts for no good reason other than that home prices declined, neglecting that what makes a HELOC affordable is that it is backed by the value of the house. The value of the house goes down, so must the value of the collateral and the loan amount secured by the collateral. The law would not require, however, that the new consumer bureau be guided by common sense.
Other provisions of the proposed law would allow government agencies to break up any company in America, or make it set aside any reserves, or give up any line of business—and allow the agencies to play favorites by acting one way with one company and very differently with another—as long as the agencies claimed that their actions were appropriate to deal with systemic risks. The agencies would be the sole judges of what makes for a systemic risk. Or, to look at the authority another way, the federal financial agencies would be able to define what they consider to be “safe” financial conduct and effectively ban everything else, and steer individuals and businesses into government-identified safe financial activity.
In case the recent financial panics tempt you to think that all of this is a good idea, remember that we have tried this all before, and very recently. The example—housing—is staring us in the face. Maybe policymakers in Washington are too close to it all to notice.
In the housing fiasco, the government determined that mortgages were very safe (as demonstrated by Federal Housing Administration programs that allow homeowners to have a negative equity position on day one of their new government-guaranteed mortgages), that investing in mortgages was safe (hence the creation of government-sponsored Fannie Mae and Freddie Mac, to encourage investment in mortgage securities), that packaging mortgage securities was safe (as demonstrated by AAA ratings for packages of securities, awarded by credit rating agencies that were franchised by the Securities and Exchange Commission), and that housing assets on bank balance sheets were safe and worthy of incentives by regulatory standards that allowed banks to hold relatively little capital for their mortgage loans.
So, given how well the government identified safe financial activity in the housing markets we can expect the government officials to be equally mistaken in identifying other forms of safe financial activity. Even as I write this, government officials are working on new plans to establish rules to require banks to stock up on various types of government debt. These rules are based upon the near-sighted assumption that government debt is safe—ignoring the rising flood of Greek government debt, held back only temporarily by sandbags filled with fiat money from other European governments.
On the wall in my family room I have a framed $500 government bond. Only one coupon from it has been clipped, a semiannual payment for $15 in interest. The next coupon is payable on July 1, 1865, by the government of the Confederate States of America. That coupon and all the rest of the coupons through 1894 remain unredeemed. The proposal by Congress to exchange American financial freedom for the wisdom of government to identify safe financial activity has the crackle of Confederate money.
Sunday, May 16, 2010
Saturday, May 1, 2010
Of Politics and Principles
The debate and development of public policy in the greatest republic in history has been my career. Discerning between good and bad ideas, detecting valid and erroneous arguments, is part of my daily job. The success of a republic, however, requires that all citizens have competence in judging right and wrong in the debate of public issues. All do not have to be experts in all the details of every issue for a republic to work, but they do need to be able to judge enough to know to whom they should entrust the duty to represent them and attend to the details of governance—and to know when to withdraw that trust.
With public debate becoming increasingly confusing but also, apparently, increasingly prone to slogan and devoid of substance, with emotion seeming to take up more space than information, with error and deception playing a progressively more prominent part in discourse, how do citizens whose careers are more focused on producing goods and services and the things that make an economy work figure out who is right and who is wrong? Without leaving their day jobs for politics, how do they choose the right people whose lawmaking can dramatically affect everyone else’s day jobs, as well as their hearth, home, and health?
I believe that the answer is that every citizen of the Great Republic, as Winston Churchill called the United States, needs to be familiar with and dedicated to the founding principles of the Republic. The consideration of every public issue should be based upon an appeal to this foundation. That approach may not resolve every issue, but it will ensure that we do not stray very far into error. In fact, for most of the key issues of today an appeal to the founding principles would quickly disperse the foggy talk that makes up so much of contemporary public debate.
Those founding principles are embedded in our Constitution, but they are perhaps most clearly presented in the Declaration of Independence. I present a few examples of founding principles that would serve as reliable guides in considering such issues as healthcare, financial regulation, and taxation and public spending.
The Declaration begins by invoking “the Laws of Nature and of Nature’s God.” Our concept of government rests upon the idea of truth and laws that are as immutable as God Himself. Trust that those who say that truth is relative and law is founded on whatever man or Congress or the Supreme Court want it to be are leading you far astray, regardless of how attractive a ribbon they put around their poisonous policy packages. If law is relative, then government is a mere matter of the will of whoever can sway the crowd today. There is no protection for the minority—and all will find themselves in a minority of some kind whose rights need protecting.
The Declaration, in words that hopefully all Americans still find familiar, proclaims the “self-evident” truths that, “all men are created equal, that they are endowed by their Creator with certain unalienable Rights . . .” Among those immutable truths on which our system of government was founded is the focus on the individual, that the individual has worth, has importance, has rights that cannot be taken away. These rights can be usurped by tyrants—and at the time when the Declaration was written and approved by the representatives of the new nation nearly all of mankind labored under tyrannies—but that does not eliminate these rights, it only violates them. Our nation was created to protect the rights of the individual. Reject politicians whose formulas are invoked to violate your individual rights, especially when they justify the taking of individual rights by an appeal to benefiting the group. Remember, at the head of every group is a leadership who in fact enjoys and wields the “rights” of the “group” as the spokesmen for the group. They derive their power, vampire like, from the blood of the members of the group, from individuals whose rights are violated to empower the group leadership.
In direct relationship to these individual rights, the Declaration explains, “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed . . .” Withhold your consent from those who would seek to govern with plans that rather than protect your rights would limit your rights. Resist those whose plans assert that government should be given the decision over your daily choices. Resist those who assert that all must be “regulated” and who believe that finding that something “is not regulated” is a justification to regulate it, that is, to impose government decision-making over the power of your individual decisions. Your right to choose is the reason the government was created, to protect your individual rights, not usurp them.
On reflection, it is all too easy to find regulations and programs in our government and laws that are inconsistent with the Declaration and the founding principles of our government. The immutable rights remain, however they may be currently violated. That should alert us to the danger in which we live, but it should not be cause for despair. Rather we should be motivated, as were our nation’s founders, to reassert the principles on which our nation was founded. The tools for doing so, embedded in our Constitution, are still available to us.
With public debate becoming increasingly confusing but also, apparently, increasingly prone to slogan and devoid of substance, with emotion seeming to take up more space than information, with error and deception playing a progressively more prominent part in discourse, how do citizens whose careers are more focused on producing goods and services and the things that make an economy work figure out who is right and who is wrong? Without leaving their day jobs for politics, how do they choose the right people whose lawmaking can dramatically affect everyone else’s day jobs, as well as their hearth, home, and health?
I believe that the answer is that every citizen of the Great Republic, as Winston Churchill called the United States, needs to be familiar with and dedicated to the founding principles of the Republic. The consideration of every public issue should be based upon an appeal to this foundation. That approach may not resolve every issue, but it will ensure that we do not stray very far into error. In fact, for most of the key issues of today an appeal to the founding principles would quickly disperse the foggy talk that makes up so much of contemporary public debate.
Those founding principles are embedded in our Constitution, but they are perhaps most clearly presented in the Declaration of Independence. I present a few examples of founding principles that would serve as reliable guides in considering such issues as healthcare, financial regulation, and taxation and public spending.
The Declaration begins by invoking “the Laws of Nature and of Nature’s God.” Our concept of government rests upon the idea of truth and laws that are as immutable as God Himself. Trust that those who say that truth is relative and law is founded on whatever man or Congress or the Supreme Court want it to be are leading you far astray, regardless of how attractive a ribbon they put around their poisonous policy packages. If law is relative, then government is a mere matter of the will of whoever can sway the crowd today. There is no protection for the minority—and all will find themselves in a minority of some kind whose rights need protecting.
The Declaration, in words that hopefully all Americans still find familiar, proclaims the “self-evident” truths that, “all men are created equal, that they are endowed by their Creator with certain unalienable Rights . . .” Among those immutable truths on which our system of government was founded is the focus on the individual, that the individual has worth, has importance, has rights that cannot be taken away. These rights can be usurped by tyrants—and at the time when the Declaration was written and approved by the representatives of the new nation nearly all of mankind labored under tyrannies—but that does not eliminate these rights, it only violates them. Our nation was created to protect the rights of the individual. Reject politicians whose formulas are invoked to violate your individual rights, especially when they justify the taking of individual rights by an appeal to benefiting the group. Remember, at the head of every group is a leadership who in fact enjoys and wields the “rights” of the “group” as the spokesmen for the group. They derive their power, vampire like, from the blood of the members of the group, from individuals whose rights are violated to empower the group leadership.
In direct relationship to these individual rights, the Declaration explains, “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed . . .” Withhold your consent from those who would seek to govern with plans that rather than protect your rights would limit your rights. Resist those whose plans assert that government should be given the decision over your daily choices. Resist those who assert that all must be “regulated” and who believe that finding that something “is not regulated” is a justification to regulate it, that is, to impose government decision-making over the power of your individual decisions. Your right to choose is the reason the government was created, to protect your individual rights, not usurp them.
On reflection, it is all too easy to find regulations and programs in our government and laws that are inconsistent with the Declaration and the founding principles of our government. The immutable rights remain, however they may be currently violated. That should alert us to the danger in which we live, but it should not be cause for despair. Rather we should be motivated, as were our nation’s founders, to reassert the principles on which our nation was founded. The tools for doing so, embedded in our Constitution, are still available to us.
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