David R. Henderson  

Sense from Frank Rich

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Yes, you read that correctly. Frank Rich, the partisan New York Times columnist, has a good column today. In it, he delves into what he calls "[T]he tsunami of populist rage coursing through America." Here's one of the best sections:

In reality, Daschle's tax shortfall, an apparently honest mistake, was only a red flag for the larger syndrome that much of Washington still doesn't get. It was the source, not the amount, of his unreported income that did him in. The car and driver advertised his post-Senate immersion in the greedy bipartisan culture of entitlement and crony capitalism that both helped create our economic meltdown (on Wall Street) and failed to police it (in Washington).

There are a few things here I disagree with. I'm quite willing to accept that Daschle's tax mistake was honest, but it's too strong to say that it's "apparently honest." How would Rich know? Also, I don't think failure to police was a big issue unless he's referring to the unwillingness to rein in Fannie Mae and Freddie Mac. But what I think is accurate is the "crony capitalism" part.

Two other good lines:

Obama's brilliant appointees, we keep being told, are irreplaceable. But as de Gaulle said, "The cemeteries of the world are full of indispensable men."

Rich also tries to read the tea leaves about the various economic advisors and possible conflicts between them.

He's way off on a couple of things, though. He writes:

Back then, Summers and Gensler joined hands with Phil Gramm to ward off regulation of the derivative markets that have since brought the banking system to ruin.

Not quite. As Less Antman shows in a forthcoming article in The Freeman, what Summers, Rubin, Gramm, and Greenspan did was block CFTC chair Brooksley Born's attempt, during the Clinton Administration, to have the minimal regulation that went with having credit default swaps publicly traded. Yes, there would have been regulation, but these credit default swaps would have been allowed to be publicly traded. Instead, Summers et al kept the game with the big boys, with the horrible results that everyone now knows about.

Finally, Rich trots out the old misinformation about Herbert Hoover, writing:

The neo-Hoover Republicans in Congress, who think government can put Americans back to work with corporate tax cuts but without any "spending," are tone deaf to this rage.

Hoover, of course, more than doubled the income tax rates at every level. This was one of the factors, though not the main one, in making the Great Depression "great." Because the income tax was paid only by very-high-income people, this was a substantial increase in taxes only on them. Also, Hoover increased corporate income taxes. For all their other faults, which are legion, the Republicans in Congress, as far as I know, are not advocating that income tax rates be increased, let alone doubled. Moreover, as Rich himself points out, some of them are advocating cuts in corporate income taxes.


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COMMENTS (11 to date)
John V writes:

Don't forget all of Hoover's spending projects.

Spending went way up under Hoover.

Such misinformation about Hoover's record is as egregious as getting the date of D-Day wrong.

It's all right there to read about and they continue to pretend it all played out otherwise.

Lord writes:

It wasn't that Hoover did nothing, but that he did the wrong things. He insisted on the gold standard. He insisted on balancing the budget which was the reason for those tax increases. He raised tariffs to do the same. Where he stood by was in the most critical area though, the financial system, where he did nothing to prevent it from imploding. Not everything Hoover did was wrong. Hoover Dam was a worthwhile investment. It is just these were outweighed by his inactions and his wrongs.

Franklin Harris writes:

You know, maybe you're just trying to be nice, but it seems like this "good" Frank Rich column still has a lot more wrong with it than right.

There's a lot more bad than good in Rich's column. Some of it downright silly, such as:

Voters turned on Sarah Palin not just because of her manifest unfitness for office but because her claims of being a regular hockey mom were contradicted by her Evita shopping sprees.

The only thing that turned on Sarah Palin was the economy.

Here's a better article about the financial crisis and why we should be outraged, by Peter Wallison.

David R. Henderson writes:

Thanks, John V and Franklin Harris. On the margin, I was trying to be nice. But that's not the main thing. What I liked was that Frank Rich would understand why so many Americans would be upset that Daschle got a car and driver simply for engaging in "the aristocracy of pull." He didn't say it quite that strongly, but if you're used to reading columns from him that have no insight, this was a big step. He's like a C student who, on one part of the exam, says something really well and you're pretty sure he didn't plagiarize.

"As Less Antman shows in a forthcoming article in The Freeman, what Summers, Rubin, Gramm, and Greenspan did was block CFTC chair Brooksley Born's attempt, during the Clinton Administration, to have the minimal regulation that went with having credit default swaps publicly traded. Yes, there would have been regulation, but these credit default swaps would have been allowed to be publicly traded."

Umm, no. I remember that episode very well, and Born's concept release, while not advocating any specific regulations, was very clear that the CFTC was contemplating a comprehensive regulatory scheme for OTC derivatives. It solicited comment on the full range of possible regulations -- most importantly, whether certain end-users in OTC transactions really constituted "appropriate persons" under the existing CFTC exemption. It also solicited comment on potential capital requirements, which the banks also feared. The CFTC's regulatory authority back then would have allowed it to do pretty much whatever it wanted to OTC derivatives -- in no way could anyone consider it "minimal regulation." I obviously haven't seen Antman's article, but I sincerely hope that's not his argument.

In any event, credit default swaps were practically nonexistent in 1998, so the people who claim that Born was somehow prescient on credit default swaps simply don't know what they're talking about. (I'm looking at you, New York Times.)

Less Antman writes:

@economics of contempt

I'd characterize my argument a little differently, although no author can be certain how his words will be interpreted. I'll just have to deal with any misunderstandings resulting from imprecise writing on my part as they come up.

Although I did, in one sentence, express my libertarian preference for regulation limited to the enforcement of contracts and the regulation of Messrs. Profit and Loss, I didn't argue that Born was aiming for such minimal regulation. I think David only meant to acknowledge the political reality that some regulation was going to accompany any liberalization of trading, though he can speak for himself.

The key point of my forthcoming article as it relates to this post is that Born's efforts (which I indicated, as you did, never crystallized into specific proposals) could have led to public trading of derivatives, and blocking her prevented such trading, so that it remained exclusively in the hands of big banks, insurance companies, and hedge funds (I also addressed the destructive effects of the Basel capital requirements, and how they caused CDSs to be associated with a financial disaster).

There is no stronger regulation than prohibition, and public trading of CDSs would have, far more accurately than credit ratings, provided ongoing, precise, public, and constantly updated information on the risks associated with the loans they protected. It also could have reduced the exposure of some of the big players who failed (the title of the article is Too Big To Succeed).

The battle was not settled until the final days of the Clinton administration, after Born had resigned, with the passage of the Commodity Futures Modernization Act of 2000, signed by Clinton in December 2000. That trading was minimal in 1998 doesn't diminish the relevance of these early actions to the 21st century crisis they produced. I don't think anyone is arguing that Born was prescient. I'm only arguing that regulated public trading of CDSs would have been superior to NO public trading of CDSs, which is what we ended up with.

Still, one reason for public discussion is to improve on the imperfect knowledge each of us have, and I hope my April 2009 article leads in that direction. Speculation on alternative universes is always problematic, but I think you'll find my article to be appropriately modest on that score.

Bob Murphy writes:

Lord wrote:

It wasn't that Hoover did nothing, but that he did the wrong things. He insisted on the gold standard. He insisted on balancing the budget which was the reason for those tax increases. He raised tariffs to do the same.

Have you actually looked at the pattern of federal spending under Coolidge and then Hoover? Hoover took Coolidge's unbroken string of surpluses and then turned them into unprecedented peacetime federal deficits. It's true, he finally chickened out in 1932 and jacked up taxes, but that's only after two years of "stimulus" (and other nonsense like holding up wage rates) led to the worst economy in US history.

And how do you know that the Hoover Dam was a good idea?

Mr. Antman,

I'm glad to hear it was just a simple misunderstanding -- that's what I suspected, since the concept release was explicitly neutral on specific policies. (Of course, the fact that Born put the full range of possible regulations on the table just scared the dealer banks even more, especially since Born was widely seen as a fierce litigator with no love for the Street.)

I actually don't think that CDS have been a major contributor to the financial crisis, though that's not to say that the CDS market doesn't have problems (it does). The CDS market is in reality two very different markets: one consisting of single-name and index CDS, and the other consisting of CDS on CDOs and various forms of ABS. The second market is what brought down AIG and almost brought down the monolines. It's fair to say that CDS on CDOs/ABS have been a major contributor to the financial crisis, but those contracts are so completely different from single-name and index CDS contracts that they're not really considered part of the "CDS market" proper. Selling CDS on a CDO is almost literally equivalent to buying the underlying CDO (or ABS); what's more, CDS on CDO/ABS contracts aren't actively traded. So it's probably more accurate to say that AIG and the monolines were brought to their knees by the CDO and ABS markets, rather than the CDS market.

The single-name and index CDS market, by contrast, has actually held up remarkably well -- much better than I anticipated, to be honest. The gross notional outstanding numbers have been blown way out of proportion ($62 trillion!!). The DTCC says that net notional outstanding is only about $2.6 trillion. And the CDS market was one of the only markets that remained open throughout the Bear Stearns and Lehman debacles, even though the dealer banks are the market-makers, and they were the ones getting savaged. But there's definitely no denying that the lack of transparency in the CDS market has been harmful. The opacity is definitely why the Street was so blindsided by AIG's sudden collapse (everyone knew AIG was struggling, but no one thought they'd actually default).

I've never thought about whether the CDS market would be better off today if it had been forced onto an exchange back in 1998-99. I suspect the answer is yes, but I'd have to think about it. I bet the cash settlement auctions wouldn't have been allowed. (I agree that Basel II has been a disaster, that's for sure.)

I look forward to reading your article.

Lord writes:

"Hoover took Coolidge's unbroken string of surpluses and then turned them into unprecedented peacetime federal deficits. "

No, the economy did that. Coolidge has to take some of the blame for that.

Jeremy, Alabama writes:

The vignette about Geithner's tax evasions may not be your main point, but:

If it was "honest", either

a) he is too stupid to understand taxes, OR
b) taxes are too complicated to understand.

I don't see any other interpretation. Geithner's appointment should be an anassailable argument that the tax code must be simplified.

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