Ever since the bailout of Continental Illinois Bank in 1984, bank bailouts have been an unpopular device invoked to protect the financial system from risks posed by troubled banks deemed “too big to fail.” Many taxpayers believe that bank bailouts are an abuse of taxpayer funds, especially when bank managers are allowed to keep their jobs, stocks, severance pay, and pensions. Free-market enthusiasts, on the other hand, dislike bailouts because they thwart the corrective action that market forces would otherwise bring about. Members of Congress have heard these complaints. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010, prohibits taxpayer-funded bailouts, but it also suffers from a fundamental flaw: it leaves the financial system exposed to meltdowns.

Among other provisions, Dodd-Frank gives the Federal Reserve new authority to deal with bank and nonbank financial institutions that it believes are “systemically important,” i.e., firms previously viewed as “too big to fail,” explains New York University professor of finance Roy C. Smith in an article for the Summer 2011 issue of The Independent Review. If the Fed deems that an illiquid financial institution poses a “grave threat” to the financial system and warrants special regulatory action, the targeted firm can lobby the Financial Stability Oversight Council to block the Fed. But by then it may be too late for the targeted firm: because bailouts are off the table, the market may react to the Fed’s announcement with a run on the targeted firm, with undesirable consequences for the rest of the banking system. “The run will spread instantly throughout the banking industry, as such runs did after the Lehman episode in September 2010, and without the capacity for bailouts several firms rather than only one might end up in bankruptcy,” Smith writes.

(Continued from previous post).

During the 1932 campaign, Franklin Roosevelt had a reputation as a mealy-mouth politician who made many promises but held his real plans close to his chest. The following cartoons capture that well:

Of course, we now know that with his First Inaugural address (listen here), FDR took on the role of economic savior, with biblical language implicitly drawing a comparison to Jesus chasing lenders from the Temple (although Roosevelt carefully used the passive tense):

“The money changers have fled their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”

Robert Higgs noted here on July 6th that FDR defaulted on the national debt by “going off the gold standard.” Moreover, FDR was (and is) much praised for his courageous action in favor of the “little guy” and against “sound money” bankers. FDR did this with a stroke of the pen (Executive Order) and by later asking Congress to confirm that he had the power to devalue the debt by 41%. Even critics conceded that FDR had balls; they only questioned whether he had “brains.” (H.L. Mencken blasted New Deal measures that came at the expense of those who worked and saved: “Every American who helped to earn and amass what is left of the wealth of this country is worse off now . . . .” “As for the risk [New Dealers] take, they have nothing to lose but their ‘brains.'”)

“Going off the gold standard” thus constituted a massive write-down of debt for the government, with the promise of an “inflation cure” to get “idle money” circulating again. Could our government do something so radical again? With the national debt nearing $15 trillion, we have witnessed unprecedented measures by the Federal Reserve to print money. We only wait for some wit to coin the term “a trillion here, a trillion there and pretty soon you are talking real money.” The Fed has done its part to devalue the currency, create economic uncertainty, and feed our growing government appetite for debt.

But back to the lessons of the New Deal. Consider an even more radical measure modeled after FDR’s actions: President Barack Obama follows FDR’s example by invoking World War I-era legislation (as amended) to exchange old dollars for new “Obama Dollars.” (In the 1930s, pundits referred to the new Federal Reserve notes as “Roosevelt Dollars”). FDR relied on the “Trading with the Enemy Act” (1917, amended 1933) which is still in force and “gives the President the power to oversee or restrict any and all trade between the U.S. and its enemies in times of war.” FDR wasn’t at war in 1933 but he likened the depression to a war. Crafty devil.

Warren Buffet says, “I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of Congress are ineligible for reelection.”

On the one hand, I’m fairly confident Buffett is correct that if such a law were passed, the deficit would shrink to below 3% of GDP.  On the other hand, I’m presuming Congress would have to pass that law.  How likely is that?

The Republicans are talking about a balanced budget amendment to the Constitution.  They also seem to like the idea of term limits (that is, until they’ve actually been elected).  Buffet’s plan combines the two ideas.  I’d love to see Buffett’s idea go viral, pushing Congress to enact it… but I don’t foresee that happening.

We’re often told that the budget can’t be cut without all of us sacrificing. This is used as a rationale to raise taxes. But it need not be that way.

After all, aren’t we also told that everyone benefits from the government? Surely the poor do, or so we hear. And the middle class? Of course we all are blessed to have the federal government be as active and large as it is. That’s what it’s mainly there for, all the politicians tell us.

The rich too must benefit immensely from the government. Why else are they always browbeaten into “giving back”? Surely if society is all in this together, certainly if the government represents some sort of proxy of the collective will, then when do-gooders talk of giving back to society, they at least in large part are implying that the rich do in fact benefit, in great deal, from the government.

Indeed, we are reminded that every group benefits from the government. If not for government, workers would toil in factories for 20 hours a day at less than minimum wage, and businesses would collapse amid the economic instability caused by their own lack of foresight and greedy orientation toward the present. If not for government, very few would enjoy a higher education, a horrible fate that would plague all of society. Without government, parents would have no one to help them raise their kids, and kids themselves would be at a loss, and childless adults would have no future to look forward to. If not for government, the West would be without sufficient support of its agriculture, the South would suffer from lack of economic protection, the North would lose its industrial advantages, the East would be deprived of much of its cultural lankmarks, and the whole middle of the country would have inadequate institutional linkages to the rest of America.

Without government, no one but the richest Americans would be able to afford a home, while banks simultaneously signed the poor up to high risk mortgages to get them into homes they couldn’t afford. Without government, everyone would be doomed to a lifetime of tobacco addiction, whereas tobacco farmers would be missing the subsidies that keep these great Americans afloat. Without government big corporations would have no one to bail them out and small businesses would never be able to compete. Without government police wouldn’t have any jobs, criminals would be missing their chance at rehabilitation, and the rest of us would suffer. Without government Americans would be threatened by foreigners and foreigners wouldn’t be liberated by American bombs and military occupations. We’d be at constant war or would lose the chance to fight for freedom, doomed as we would be to live at peace. Muslims would be subject to hate crimes and the rest of us would be attacked by Muslims.

Without government immigrants wouldn’t be able to go on welfare and American citizens would have nothing protecting them from immigrants going on welfare. Without government young people would have no role models, the elderly would have no voice, and adults in the middle would lack a safety net.

Without government car manufacturers would all go belly up and car buyers would have no one to protect them from the manufacturers. Without government there would be no money for scientific research; all that would be funded is the arts that appeal to the masses. Yet there would be no money in the arts since only the hard sciences would be profitable. Consumers wouldn’t get what everyone clearly wants from the market, while at the same time they would only be offered what was made to suit popular demand.

No one would deliver our letters and we would be flooded with junk mail if not for government. Our phone lines wouldn’t operate and we’d get telemarketing calls on those lines that don’t operate all day and night. There would be no roads, and yet if they did exist, they’d be congested always with drunk drivers and lunatics. There would no longer be any advanced industry at all, and the advanced industry that ceased to exist would spew poison into the air without limit. No one would have anything to eat and obesity would reign supreme. No one could afford pharmaceuticals and everyone would be addicted to prescription drugs.

All classes of people would suffer, since government is obviously there for the own good of all classes. It is fair to say we all benefit from government, so here’s a plan to make us all sacrifice relatively proportionally, a plan to address the budget shortfall: Cut the government across the board in one fell swoop. Indeed, cut everything by 50% just for good measure. It’s the even-handed thing to do.

In a shockingly unusual turn of events, a federal court in Louisiana has reached a just decision. This man-bites-dog decision involves my neighbors, the Benedictine brothers of St. Joseph Abbey and Seminary, about whose difficulties I wrote recently. The Louisiana funeral directors’ cartel was attempting to shut down the monks’ sale of the simple wooden caskets they make at the abbey to support themselves and their activities.

The court ruled:

Before the Court was the issue of whether it is unconstitutional to require those persons who intend solely to manufacture and sell caskets be subject to the licensing requirements for funeral directors and funeral establishments. After considering all testimony and evidence presented at trial and the relevant law, the Court finds that this requirement is in contravention of the Due Process Clause and the Equal Protection Clause of the United States Constitution.

There is no rational basis for the State of Louisiana to require persons who seek to enter into the retailing of caskets to undergo the training and expense necessary to comply with these rules. Simply put there is nothing in the licensing procedures that bestows any benefit to the public in the context of the retail sale of caskets. It appears that the sole reason for these laws is the economic protection of the funeral industry which reason the Court has previously found not to be a valid government interest standing alone to provide a constitutionally valid reason for these provisions.

It is a rare and wondrous event when a U.S. court reaches a just decision. Celebration is in order.

Hillary Clinton, whose State Department has been involved in overseeing renditioning, who ran for president in 2008 on a more pro-torture platform than John McCain, has condemned Turkey for human rights abuses. In particular, Turkey has cracked down on journalists and has plans to restrict internet freedom.

In 1998, responding to the internet gossip about her husband’s sex scandals in the Oval Office, Clinton lamented that the World Wide Web had no “kind of editing function or gatekeeping function,” presumably wishing there were such functions to be handled by the federal government. She elaborated:

I don’t have any clue about what we’re going to do legally, regulatorily, technologically—I don’t have a clue. But I do think we always have to keep competing interests in balance. I’m a big pro-balance person. That’s why I love the founders—checks and balances; accountable power. Anytime an individual or an institution or an invention leaps so far out ahead of that balance and throws a system, whatever it might be—political, economic, technological—out of balance, you’ve got a problem, because then it can lead to the oppression people’s rights, it can lead to the manipulation of information, it can lead to all kinds of bad outcomes which we have seen historically. So we’re going to have to deal with that.

One could note that this was thirteen years ago and perhaps Clinton, although she was in a sense very close to power back then, was not actually in charge of a major governmental department as she is now. In any rate, maybe she has changed her tune. We should remember, even insofar as this is true, that her instinct was to want to control the internet to prevent unseemly discourse about the president’s love life. Although all excuses for censorship fall apart upon closer examination, hers did not even rise to the level of superficial urgency that comes to mind in evocations of the incitement of riots or yelling fire in a crowded theater.

Yet we have a fresher example of Clinton’s authoritarian impulse on the question of free speech on the ‘net—one that relates directly to the question of the journalistic freedom that she finds so imperiled in Turkey: Last November, she condemned WikiLeaks for its truth telling about U.S. diplomatic vagaries and the ugly side of America’s allied regimes, and she vowed to take “aggressive steps” against those abusing internet freedom in such ways that she did not approve. You see, the internet, like all technology, is a double-edged sword, presumably one to be regulated by the benevolent planners in DC:

[A]mid this unprecedented surge in connectivity, we must also recognize that these technologies are not an unmitigated blessing. These tools are also being exploited to undermine human progress and political rights. Just as steel can be used to build hospitals or machine guns and nuclear energy can power a city or destroy it, modern information networks and the technologies they support can be harnessed for good or ill. The same networks that help organize movements for freedom also enable al-Qaeda to spew hatred and incite violence against the innocent. And technologies with the potential to open up access to government and promote transparency can also be hijacked by governments to crush dissent and deny human rights.

What’s more, the threats to internet liberty have only mounted under the Obama administration, although I personally believe it is loath to go all out and trample America’s remaining frontier of true freedom. The backlash would be immense. Yet the president has surrounded himself with folks who have more than toyed with the idea of systematic, centrally administered, strategically implemented acts of covert political thought control.

We live in interesting times, and our rulers are especially brazen in their two-faced pronouncements of loving liberty while demanding more control. But Clinton’s State Department hypocrisy is simply par for the course for the U.S. empire and its audacious diplomatic posturing. The U.S. government kills civilians by the thousands with cluster bombs and other assorted ghoulish means, then condemns other regimes for doing the same, even to a smaller degree. The U.S. government rules a nation with the world’s largest prison population in both real and absolute terms, dispenses torture, spies on its citizenry, and abuses civil liberties and human decency in myriad ways while sanctimoniously admonishing other nation-states for their sins, usually with the implication that only it, the U.S. government, can and should promote human rights worldwide. With Clinton the hypocrisy is particularly conspicuous and ghastly, yet she is only the latest in a long line of elites at the reins of American military and political hegemony to manifest such disingenuous finger-pointing.

I’m seeing a lot of press right now on negotiations to attempt to raise the federal government’s debt ceiling to prevent a default, which supposedly would occur on August 2.  The story is getting much more ink than is warranted by its importance.

First, I fully expect the debt limit to be raised so that we “dodge the bullet” on this one.  Despite their differences, one thing President Obama and the Republicans in Congress have in common is that they don’t want the federal government to “default.”

Second, what if I’m wrong on that first point and there is no agreement in early August?  I can’t foresee exactly how this would be handled.  Maybe a bit more creative accounting (technically, we already hit the debt ceiling on May 16, and were able to avoid default by creative accounting that’s supposed to carry us into August), or maybe even a postponement of some payments.  Technically, that would be a default, but after some short-run disruption things will return to normal after the president and Congress find themselves on the same page.  Nobody will lose any money because of a US default.

Third, note that there is a big difference between the looming “default” in the US case and in the Greek case.  With Greece, they don’t have the money or borrowing power to make good on their outstanding debt.  The US government does, and it’s just a technicality that could possibly lead to a “default.”  But the US has the resources to pay its debts, unlike Greece, so unlike the Greek case, where I fully expect that Greek bondholders won’t get 100% of their money back unless it comes from the Germans, even if there is a short-term disruption, everyone knows the US debts will be paid.

While I think the default story is getting more press than it deserves, I’m not upset about the Republicans attempting to get spending concessions as a part of the debt ceiling negotiations.  The larger issue is that while the US is not in the same situation as Greece right now, unless the federal government enacts substantial spending cuts — and essentially, that means reform of our entitlement programs — Greece’s fate will loom in our future.  And unlike Greece, Germany won’t be there to bail us out.

Blinded by rage after 9/11, Mark Anthony Stroman shot three men he thought were Arabs. In the process he murdered a Muslim from Pakistan and a Hindu immigrant from India. He also shot Rais Bhuiyan at close range, putting 38 pellets into his face, robbing Bhuiyan of sight in one eye. Now this victim, the type of man that so many Americans wish would just leave the country, taking their alien religion and culture with them, is petitioning to save Stroman’s life.

Very few men are capable of this type of pure mercy. When asked how he could work hard to prevent the execution of the man who did this to him, Bhuiyan said:

I was raised very well by my parents and teachers. They raised me with good morals and strong faith. They taught me to put yourself in others’ shoes. Even if they hurt you, don’t take revenge. Forgive them. Move on. It will bring something good to you and them. My Islamic faith teaches me this too.

Bless Rais Bhuiyan, whose merciful character is a model for all Americans. If only more of us had had this attitude after 9/11 and resisted the blood-lust of war, recognizing those terrorist attacks should not be blamed on religion or a national collective but rather the thirst for revenge against the U.S. for its very own long train of abuses against the Muslim world, thousands of Americans and hundreds of thousands of foreigners would still be alive today. Our economy might be doing well. Our national character would be much more admirable.

We need more people like Bhuiyan in this country, and less of the fear and hatred that make life uncomfortable for Arabs, Muslims, and others who stick out as being different from the modal stock of this nation. Thanks to Robert Higgs for the link.

I cannot vouch for this chart, which is described as showing the findings of a survey of investors by Citi, but if it is even in the neighborhood of the truth, it would appear to be additional evidence of regime uncertainty–major-policy uncertainty, fear of significant government foul-ups, call it whatever suits you best.

I have not been conducting a systematic search for such evidence recently, but I am struck nevertheless by the frequency with which I stumble upon it without even trying to find it.

HT: Angel Martin