It’s “Summit Not Jobs Day” here in California City, a place formerly known as Washington, D.C!

Here’s the report from one perceptive observer looking in from London, courtesy of the Weekly Standard’s online columnist Gary Andres:

“From his perch in London, Streeter agrees. "The Obama administration is behaving as though California were its model for growth," he wrote in The American. "Increasing unfunded liabilities, proposing a $1 trillion in new health care spending, responding to the economic crisis with new regulatory agencies but balking on the core causes of the problem."

He's right. Expanding government and ballooning debt will ultimately backfire, creating disincentives for the entrepreneurs and innovators that spur real economic growth and create jobs.

Streeter maintains that the UK has also pursued the California model and entrepreneurs are leaving in droves. Civic duty to pay taxes and just "take it," as layer upon layer of new regulations are heaped upon wealth creators wears thin, he says.

Texas, on the other hand, with its more entrepreneurial political culture, created 70 percent of the new jobs in the United States in 2008, according to the Trends article.

Think about it, one state created 7 out of 10 jobs!

Will the Obama Administration listen at all?

Not according to David Obey, the powerhouse Head of All Spending, a.k.a. Chairman of the House Appropriations Committee:

"It's like shouting out into outer space, nothing's coming back from the other side of the Hill, nothing's coming back from the other end of Pennsylvania Avenue," he laments."

What is going on in that Jobs Summit Meeting? Some information has leaked out! See below!

She wants most of all to do away with the doctrine of "too big to fail." But do we dare live without it? That question is too big, and Ms. Gelinas fails to answer it. But who can blame her? She's hardly alone. Liberals and conservatives are united in their distaste for bailing out big banks with taxpayer money, and the "moral hazard" that arises from it. Yet when a crisis hits, there's always a bail-out.

Indeed, bank bail-outs of one kind or another are woven into the very fabric of our economy. For example, FDIC insurance of bank deposits is a bail-out for small depositors that no one today seriously questions. Ms. Gelinas writes admiringly of it as a salutary Depression-era innovation. Yet she opposes guarantees for large investors who buy a bank's bonds, even though deposits and bonds are fundamentally identical transactions -- both are ways of lending money to a bank.

On what principled basis should we want government to bail out one, but not the other? A typical argument might be that small savers deserve to be bailed out but large institutional investors do not. But why, exactly, other than it has a nice populist ring to it? And how do we account for the fact that institutional investors such as money market funds are only acting on behalf of small savers to begin with?

It would seem almost as though there are only two truly principled answers -- to bail out everybody, or to bail out nobody. Anything in between is, at best, a form of social engineering, and at worst, political favoritism. Yet as a moral matter, we can't bail out everybody, because a society in which all financial risk is collectively underwritten by government guarantees is too socialist. Nor, as a practical matter, can we bail out nobody, because a society in which all risk is borne by individuals isn't socialist enough for modern American tastes.

Without coming to grips with such questions of basic principles, Ms. Gelinas finds herself saying very much the same kind of thing we hear from the Fed, the Obama administration, and the Congress. In the future there must be a "resolution authority" for winding down large financial institutions, neither an outright bankruptcy nor a bail-out, somehow protecting the economy from systemic contagion while at the same time, as Ms. Gelinas puts it, investors take "their warranted losses." The problem is that God created the word "warranted" to make such ideas sound sensible, when in fact they have no substance at all. Ms. Gelinas has no better idea than Barney Frank what is "warranted" and what is not. And for not knowing, when the next crisis arises, as it inevitably will, we'll be right back where we started : forced under pressure to bail-out another firm feared too big to fail.

So the fallback strategy for Ms. Gelinas, just as for Representative Frank, Senator Chris Dodd and other lawmakers currently creating the post-crisis financial regulatory regime, is to create regulations that will keep financial firms from failing in the first place. You wouldn't think this would be pleasant work for an advocate of free-market capitalism such as Ms. Gelinas, with the very first sentence of her book stating that the recent crisis and recession were the result of "overwhelming government interference." Yet Ms. Gelinas tears into it with gusto. As the book progresses, we are exposed to a hagiography of the New Deal social engineers and their "elegant" regulations, and the word "unregulated" starts appearing repeatedly as term of opprobrium. By the end, before she reveals her recommended regulatory regime, she states, "We know that regulations work because regulations did work; they just weren't enough."

Ms. Gelinas wants derivative securities to be traded on organized exchanges much as futures contracts already are, with trades settled and margin requirements set by a central clearinghouse.. It's a good idea, to the extent that by centralizing trades with a clearinghouse it simplifies the inter-firm complexities that make even small firms potentially "too interconnected to fail." But like all regulations, there would be a cost in innovation -- only standardized derivatives can be exchange-traded.

Ms. Gelinas wants to require banks to hold more capital against their positions in markets, that is, to use less leverage. A common enough idea, but Ms. Gelinas has a twist on it -- she wants "uniform capital requirements," which would mean banks would have to hold the same amount of capital against all investments, regardless of their riskiness. This would protect firms from undercapitalizing positions in extremely risky investments, such as sub-prime mortgages, out of a false belief that they were low-risk. But this one-size-fits-all regime works only if we require banks to treat all investments as though they were potentially high-risk. Under such a regime, no bank would ever waste its scarce capital holding Treasury bills or other low-risk investments -- which would have the perverse consequence of putting the bank entirely into risky investments.

Ms. Gelinas wants to require that banks be capitalized, in substantial proportion, through long-term funding sources such as bonds -- rather than short-term ones such as overnight repurchase ingredients. This would make it more difficult in a crisis for panicked investors to start a run on a troubled bank. This makes sense on the face of it, but it would remain a matter of arbitrary social engineering to promulgate the exact requirements.

Most of what Ms. Gelinas wants is the same thing that the Obama Administration, Senator Dodd and Representative Frank want. She would surely bristle at that statement, arguing that there are important differences in the details. But it's hard to say, because the multi-thousand page draft legislation coming from Dodd and Frank is fraught with details, while Ms. Gelinas has the luxury of skimming over the surface from the pages of a slender volume.

The problem, details or no, is that no set of encoded rules of business conduct can possibly anticipate new risks that may arise in the futures, especially when businesses of all kinds -- quite properly -- innovate in unpredictable ways specifically aimed at avoiding existing regulation. The solution to that problem emerging in the House of Representatives is the Kanjorski Amendment, named for Representative Paul Kanjorksi , that would empower the government to break up financial firms -- even healthy ones -- if they are deemed for any reason to potentially pose a systemic risk.

This opens the door to limitless and arbitrary control of financial firms by government -- and according to the proposed legislative language, with virtually no judicial appeal. This is the future we deserve so long as we believe that the problem with financial regulations is that "they just weren't enough."<

Posted by Donald L. Luskin at 11:57 PM | link  

Monday, November 30, 2009

Posted by Donald L. Luskin at 10:57 PM | link