Daily Read 2/3/10

The ever-helpful Keith Hennessey on how the stated goal of the President's Fiscal Commission in his budget "is using clever language to make it sound like a balanced budget goal." One of the perils of having a very intelligent President is they have a greater capacity for "clever language." Hennessey also calculates what Obama considers an "acceptable level" of debt. Using Obama's numbers, he concludes "the President is defining 71-72% of GDP as an acceptable level of debt...Debt-to-GDP last exceeded 70% in 1950 as we were paying off the debt from World War II." Is this an "acceptable level"?

This week's Economist has a series of articles on financial reform. One article "Garrottes and sticks", the author highlights that Washington is under intense political pressure to do something, but is not sure what. "The administration is “trying to legislate by shouting,” Steve Bartlett of the Financial Services Roundtable, an industry group, told NPR radio, pointing out that when Mr Obama unveiled the Volcker rule he devoted more words to trashing banks than to outlining the plan. But bashing banks is good politics: a majority of Americans say Wall Street should not have been bailed out."

In Buttonwood's column "Not what they meant", he reviews the unintended (negative) consequences of past financial "reforms," and says "capital, like water, tends to flow around obstacles. Try to dam its movement at one point, and slowly but remorselessly it will find its way around." His prediction for the unintended consequence in this round of "reform"? That more and more capital will flow to the unregulated parts of the market, hedge funds will become bigger and even more influential -- "something the authorities may regret when the next crisis comes along."

The next Economist article "Off target" repeats the likely benefit to unregulated (or less-regulated) financial firms. "If banks are forbidden to indulge in proprietary trading, their employees may decide to decamp to the hedge-fund industry. Indeed, bank traders have been typical founders of hedge-fund start-ups. But once that initial spate of spin-offs has occurred, where will budding hedge-fund managers be able to prove their mettle? The best training ground will be at the existing hedge-fund groups."

Washington needs to tread carefully as it panders for votes by punishing banks, or the cure may end up worse than the disease.

Robert Samuelson in Newsweek (via RCP) says "a crude consensus has formed over what caused the financial crisis", but is "vastly simplified." "Unless we get the story of the crisis right, we may be disappointed by the sequel." In a classic boom-bust cycle, America became enamored with the idea of ever-rising house prices, and, thinking the housing market was not risky, "people took actions that made it more risky. The pleasures of prosperity backfired. They bred carelessness and complacency. If regulation was lax, the main reason was that regulators -- like the lenders, investors and borrowers they regulated -- shared the conventional wisdom." As Obama pounds the pulpit saying "never again!", Samuelson cautions "it's neither possible -- nor desirable -- to regulate away all risk." Although some changes need to be made in our banking system, "a single-minded focus on the blunders of Wall Street may also distract us from other possible sources of future crises, including excessive government debt and borrowing."

John Stossel on how "Big, complicated government gives [politicians] opportunities to do favors for their friends." (RCP) Even if this particular story is not true, the overall point that larger government is inherently less transparent, and creates larger incentives to lobby for favors still stands.

Gateway Pundit has coverage of Las Vegas Mayor Oscar Goodman's threat to "give him the boot back to Washington," if Obama comes to visit. Although he's probably over-reacting to Obama's recent comments that people should not blow their college savings in Vegas, Goodman is in the unfortunate position of being mayor of a city that is very dependent on an industry that is on Obama's "naughty" list. And, although Obama says his repeated negative comments about Vegas are about saving money, this WSJ article from July 2009 pointed out that government conferences were being moved out of Vegas, even if they were cheaper, to avoid political backlash. I'm not particularly pro-gambling, but much of Vega's economy comes from holding conferences, not from casual gamblers.

"It's now official: In 2009 the number of unionized workers who work for the government surpassed those in the private economy for the first time." "Government unions offer what is close to lifetime job security and benefits, subject only to gross dereliction of duty. Once a city or state's workers are organized by a union, the jobs almost never go away...which explains why the AFL-CIO and SEIU have become advocates for higher taxes and government expansion in cities, states and Washington." (WSJ)