America’s Hidden Trillion-Dollar Tax

From Investor’s Business Daily

We need a breather to take it all in: TARP, a $787 billion stimulus bill and a projected $1.845 trillion budget deficit. But lost among all the spending commotion is yet another trillion-dollar poker hand — federal regulation.

Compliance costs from thousands of regulations — pouring out from over 60 departments, agencies and commissions — amounted to $1.17 trillion in 2008. The federal government spends an additional $49.1 billion just to administer and enforce its rules. This figure is on par with federal income tax revenue ($1.2 trillion) and Canada’s entire 2006 GDP ($1.265 trillion).

How To Hide Trillions

When doing business becomes so expensive, there tends to be a lot less of it. Of course, businesses pass on their costs, so regulation becomes a hidden trillion-dollar tax on consumers. This is bad policy at any time.

During a recession, it’s economic hara-kiri.

The numbers are up as well as the costs. The 2008 Federal Register reached a record 79,435 pages, up 10% from the previous year.

Even as the economy dipped into recession, agencies issued 3,830 new final rules. As you read this, 4,004 new federal regulations fill the pipeline, 753 of which affect small businesses.

“Economically significant” is the bureau-speak description for rules costing at least $100 million per year. There are 180 of them in the 2008 Register, up 13% from 2007 — which was itself up 14% from 2006.

Anti-Stimulants

Some rule makers are more active than others. Out of 61 rule-making agencies, just five — the departments of Treasury, Agriculture, Commerce and Interior, and the Environmental Protection Agency — account for 46% of all rules in the pipeline.

This economy needs stimulus. Taxing and spending are anti-stimulants — and so is regulating. The administration’s fiscal “stimulus” amounts to taking money out of the economy and putting it back in. That is like ladling water out of the deep end of a pool only to pour it back in at the shallow end — all the while paying somebody to make the pointless transfer.

Worse, today’s deficits are tomorrow’s tax increases. And more spending is usually followed by more regulation. The Bush spending explosion was accompanied by more than 30,000 new regulations.

What the economy needs instead is a deregulatory stimulus. There are three fronts in the battle to achieve it.

The first is disclosure. The more that policymakers and the public know about over regulation, the more likely they are to do something about it.

To that end, our organization, the Competitive Enterprise Institute, issues the annual Ten Thousand Commandments report. Official Washington needs its own such report card. Each year’s federal budget, or the annual Economic Report of the President, should include in-depth chapters exploring the regulatory state.

The second front is installing sunset provisions. Like a carton of milk, every newly created regulation should have an expiration date, beyond which it gets discarded unless renewed by Congress. Obsolete rules should not be on the books at all.

The third front involves Congress reasserting its lawmaking authority.

Article I, Section 1 of the Constitution says, “All legislative powers herein granted shall be vested in a Congress.” Much of that power has been given away to federal agencies. Congress passed 285 laws last year, compared with 3,830 final rules from agencies. The alphabet soup of agencies should answer to Congress for the regulatory burdens they impose.

Congress Should Step Up

At the very least, Congress should take the time to review the most onerous rules. Overdelegation allows Congress to shift blame to the agencies for excessive or unpopular regulations.

But the people’s elected representatives should perform their rightful duty and approve all new laws, not just 285.

In this age of trillions, we cannot afford the regulatory state as it now stands. It is a hidden trillion-dollar tax on consumers, on top of what they already pay.

A deregulatory stimulus is in order, the sooner the better. In the game of government poker, perhaps it is time to fold.

U.S. May Convert Banks’ Bailouts to Equity Share

From the New York Times

WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.

Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.

Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.

In his budget proposal for next year, Mr. Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion.

The most immediate expense will come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC program “This Week.” Mr. Emanuel asserted that the government had enough money to shore up the 19 banks without asking for more.

“We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective,” Mr. Emanuel said. “If they need capital, we have that capacity.”

If that calculation is correct, Mr. Obama would gain important political maneuvering room because Democratic leaders in Congress have warned that they cannot possibly muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.

The administration said in January that it would alter its arrangement with Citigroup by converting up to $25 billion of preferred stock, which is like a loan, to common stock, which represents equity.

After the conversion, the Treasury would end up with about 36 percent of Citigroup’s common shares, which come with full voting rights. That would make the government Citigroup’s biggest shareholder, effectively nudging the government one step closer to nationalizing a major bank.

Nationalization, or even just the hint of nationalization, is a politically explosive step that White House and Treasury officials have fought hard to avoid.

Administration officials acknowledged that they might still have to ask Congress for extra money. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks and may need to provide more money before the financial crisis is over.

Treasury officials say they have more money left in the rescue fund than might be apparent. Officials estimate that the fund will have about $134.5 billion left after the Treasury completes its $100 billion plan to buy toxic assets from banks and after it uses $50 billion to help homeowners avoid foreclosure.

In practice, the toxic-asset programs are not expected to start for another few months, and it could be more than a year before the Treasury uses up the entire $100 billion. Likewise, it will be at least a year before the Treasury uses up all the money budgeted for homeowners.

But the biggest way to stretch funds could be to convert preferred shares to common stock, a strategy that the government seems prepared to use on a case-by-case basis.

Ever since the Treasury agreed to restructure Citigroup’s loans, officials have made it clear that other banks could follow suit and convert their government loans to voting shares of common stock as well.

In the stress tests now under way, regulators are examining whether the big banks would have enough capital to withstand an economic downturn in which unemployment climbs to 10 percent and housing prices fall much further than they already have.

As their yardstick, regulators are expected to examine a measure of bank capital called “tangible common equity.” By that measure of capital, every dollar a bank converts from preferred to common shares becomes an additional dollar of capital.

The 19 big banks have received more than $140 billion from the Treasury’s financial rescue fund, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of about 5 percent.

If all the banks that are found to have a capital shortfall fill that gap by converting their shares, rather than by obtaining more cash, the Treasury could stretch its dwindling rescue fund by more than $100 billion.

The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.

Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall.

TARP the Life Insurers? This Is Nuts

From Rasmussen Reports

Is bailout nation about to strike again? Sure looks like it. According to a bunch of front-page news stories, life-insurance companies are about to get TARPed. This is nuts.

The public is clamoring for an end to TARP and bailout nation. That’s a key message coming from the heartland tea parties that are cropping up spontaneously around the country. This is turning into a real populist uprising against rising taxes (especially state, local and property taxes), TARP and all the federal bailouts — and the trillions of dollars of deficits and debt being used for financing.

If Team Obama ignores this uprising, it has a political tin ear.

While commercial banks of all sizes are increasingly profitable and want to pay back their TARP money, the Treasury Department is now proposing to extend bailout funds to life-insurance companies, most of which are in no danger of failing. And for those that are in danger, surely it’s time for a bankruptcy proceeding instead of more taxpayer money.

We are already on the hook for banks, GM and Chrysler, and lube jobs for guaranteed government-backed GM warranties. And the banks themselves may go to war against an Obama administration that wants to maintain control over the big-bank sector and prevent these financial institutions from paying down TARP. It’s as if Team Obama is saying: “Don’t worry about the taxpayers. Just keep expanding government control over the economy.”

And now comes life insurance. But when will this country stop saving losers and start rewarding winners?

Meanwhile, no one has proven that life-insurance companies constitute true systemic risk to the financial system. No one. This is nothing but a bailout. Actually, it’s a precautionary bailout, since none of these insurers has failed.

Despite the stock market rally and proliferating signs of an economic comeback, a new TARP regime is being prepared in case insurers lose more money in their stock portfolios, or their bond investments, or their residential- and commercial-mortgage purchases. (By the way, corporate bonds — which are heavily owned by life insurers to pay out retirement contracts — are rallying big-time, with prices rising and yields declining.)

But for those insurers who may lose money on their investments, tough luck. A lot of these insurers own variable annuities, which are retirement products that guarantee minimum returns no matter what happens to the stock market. Most of these products won’t come due for 10 years or more. And the break-even point is something like 600 on the S&P 500 index, which is now above 850 and rising.

Not all life insurers would be eligible for bailout funds — only those that own federally chartered banks or thrifts, like Hartford Financial, Genworth, Prudential, MetLife and Lincoln National. But a recent Wall Street Journal article indicates that a number of life insurers are doing very well and still have triple-A gilt-edged ratings. These include MassMutual, New York Life, Northwestern Mutual and TIAA-CREF.

A senior executive at a large Midwestern insurance company e-mailed me to say he’s against an insurance-industry TARP: “Those that are in trouble, including Conseco, Genworth, Phoenix, The Hartford, etc., should go the way of the dodo bird. Imagine some Treasury bureaucrat investing your 401(k) or retirement-plan money, or worse, setting prices on your insurance policy.”

A recent Bloomberg accounting of the federal financial-rescue package puts the grand total at $2.5 trillion for taxpayers on the hook. That’s a lot of future debt. And that total does not include the Federal Reserve’s $1.7 trillion, which is about to grow by at least another $1.5 trillion. It’s unclear right now how much money the life insurers might get from TARP. And with members of Congress on recess — and undoubtedly hearing a mouthful from constituents who are fed up with bailout nation — it remains to be seen if our elected lawmakers will actually back up the Treasury’s life-insurance bailout.

But is there any limit to this administration’s intentions to interfere and perhaps control large swaths of our economy? And do these life-insurance mavens know what they’re getting into by going on the hook to Congress? And does anybody remember that free-market capitalism is about success and failure?

Just say no to expanded TARP for insurance companies or anybody else. That’s the real message of the homegrown tea-party revolts against bailout nation and the higher taxes, deficits and debt being used to finance it. Folks tried to tell Washington on the April 15 tax day that enough is enough. They can’t take it anymore.

Federal Government won’t let go…

Today The Washington Times ran an editorial that points out the government’s unwillingness to relinguish their control on banks that were forced to take tarp funds, by refusing to allow the banks to repay the money.

Editorial: The roach motel

Government bailout funds are the roach motel for financial institutions – they check in, but they can’t check out.

Banks that were forced to take bailout money are running into political obstacles that prevent them from repaying it. The White House is unwilling to give up the additional control over the banks – the ability to make operational decisions, fire executives and dictate pay scales – that the bailout funds allow. All this has happened as the Congressional Budget Office has raised the estimated cost of the Troubled Asset Relief Program to taxpayers by almost $200 billion to a total bill of $356 billion.

In many cases, this government dependency is not the fault of the banks because many were being run responsibly. According to Fox News judicial analyst and New Jersey Superior Court Judge Andrew P. Napolitano, banks with no financial problems were forced to sell stock to the government or face the threat of costly and harassing public audits. This happened to banks that had “no bad debt, no credit default swaps, no liquidity problems, and no subprime loans” and didn’t want or need any government funds. Judge Napolitano called the government actions what they are: “classic extortion.”

On March 27, in a meeting at the White House, President Obama claimed a little rough stuff is necessary because his administration “is the only thing between [the bankers] and the pitchforks,” Politico reported. In other words, if the president hadn’t quasi-nationalized the banks, mobs would be stringing up financiers from lampposts. Bankers had gone to the president to make their case that regulations on salaries would prevent them from retaining and hiring the best workers. In the meeting, one bank chief executive officer (who has remained anonymous) attempted to explain the obvious: “These are complicated companies. We’re competing for talent on an international market.” Mr. Obama told the bankers to get over it and then made his quip about pitchforks.

The president, however, bears much of the responsibility for bringing out the pitchforks. He has argued that only muscular government regulations can rein in “an ethic of greed, corner cutting, insider dealing, things that have always threatened the long-term stability of our economic system.” He repeatedly has blamed corporate executives for the lion’s share of what is wrong with the country. Mr. Obama has never allowed that government regulations either forced or encouraged banks to make risky loans and that regulations thus had a major role in causing this crisis.

Massive problems were created by the government’s policy – however well-meaning – to increase homeownership among those who couldn’t afford property. The Federal Reserve threatened banks with fines and other penalties if they didn’t give loans to borrowers without down payments or incomes. Freddie Mac and Fannie Mae were blameworthy for encouraging risky loans through subsidies and mislabeling risky loans they securitized. Yet Mr. Obama prefers to see it as all stemming from the greed of men in pinstripes.

With Mr. Obama’s focus on regulating financial-institution salaries, it is ironic that his top economic adviser, Lawrence H. Summers, was paid $5.2 million last year in compensation from one of those dreaded hedge funds, D.E. Shaw Group. He received this impressive sum for working only one day a week. Mr. Summers also was paid hundreds of thousands of dollars in speaking fees from financial institutions that are accepting bailout funds, including such firms as Citigroup Inc. and Goldman Sachs Group Inc. Overall, he received $2.7 million in speaking fees.

The president doesn’t seem to be bothered that Mr. Summers got large payments from the very financial institutions that Mr. Obama now castigates for salaries that supposedly are too large. Neither does there seem to be any concern about a conflict of interest even though Mr. Summers was making this money last year while simultaneously advising Mr. Obama on economic policy. Surely buying access to Mr. Summers could have been seen as a way of getting access to Mr. Obama. This doesn’t say much for Mr. Obama’s vaunted ethical standards.

The catalog of sins being compiled during this financial crisis would make a Third World plutocrat blush. The relationship between government and business is increasingly incestuous; bureaucrats with little or no private-sector experience are running banks and other companies; former industry executives-cum-government-officials are making decisions affecting their recent employers; ethics rules that apply to the private sector are irrelevant to the president’s advisers; and a blind eye is turned toward government extortion. All this has an awful resemblance to the way banana republics are run.

Obama Wants to Control the Banks

From Saturday’s Wall Street Journal:

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn’t much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street’s black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ’em what to do. Control. Direct. Command.

It is not for nothing that rage has been turned on those wicked financiers. The banks are at the core of the administration’s thrust: By managing the money, government can steer the whole economy even more firmly down the left fork in the road.

If the banks are forced to keep TARP cash — which was often forced on them in the first place — the Obama team can work its will on the financial system to unprecedented degree. That’s what’s happening right now.

Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can’t a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can’t special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit — until now.

Which brings me to the Pay for Performance Act, just passed by the House. This is an outstanding example of class warfare. I’m an Englishman. We invented class warfare, and I know it when I see it. This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration’s goal of controlling the financial system.

After 35 years in America, I never thought I would see this. I still can’t quite believe we will sit by as this crisis is used to hand control of our economy over to government. But here we are, on the brink. Clearly, I have been naive.

The Union Cudgel

From the WSJ:

Big Labor’s drive to eliminate secret ballots for union elections has united American business in opposition, so labor chiefs are putting on the brass knuckles: The new strategy is to threaten companies with government retaliation if they don’t stop lobbying against turning U.S. labor markets into Europe.

We wrote on February 13 about the letter from the labor consortium Change to Win to the Financial Services Roundtable, demanding that banks receiving Troubled Asset Relief Program money keep quiet about union “card check.” To its credit, the banking lobby hasn’t backed down. Now Big Labor is escalating, demanding in a February 23 letter to Secretary Timothy Geithner that Treasury muzzle the companies if they won’t muzzle themselves.

“Firms receiving significant TARP assistance continue to lobby against the interests of hard working taxpayers,” says the letter from Change to Win Chair Anna Burger. “For example, these firms continue to oppose legislation that would allow bankruptcy judges to modify mortgage loan terms, establish a Credit Cardholder’s Bill of Rights and protect consumers from corporations that bury mandatory arbitration clauses in fine print.”