A Reprint Of My 2010 Post, "Regulators Increase Systemic Risk" In Response To Janet Yellen

In response to Janet Yellen, a reprint of my April 28, 2010, blog post, "Regulators Increase Systemic Risk" on why we need to reverse some of the discretionary powers over banks given to the Fed after the 2008 financial crisis

A comment I wrote to the Wall Street Journal article, "Great Moments in Financial Regulation: Apple IPO deemed too risky" by Paul Atkins:

"Markets froze in the fall of 2008 because no one could be sure of the financial condition of financial institutions and their counterparties. For all the government's extraordinary intervention, the markets showed their greatest improvement after the Fed's imperfect stress tests were made public in early 2009."

It was not uncertainty about the condition of the financial institutions that caused the markets to crash. It was the uncertainty about government intervention that created the mess. The Government arbitrarily backstopped Bear but not Lehman. Unlike with the investment banks, the government can step in and takeover commercial banks at anytime by declaring them unsound.

Investors did not know or understand the government's game plan (if there was any at all) for dealing with the housing crisis effects on bank asset values and whether the banks were going concerns or going out of business concerns. Was the government going to close large banks or keep them open? What was the status of uninsured creditors and collateralized lenders? The private sector did not know or understand what contractual rights it had with troubled banks and companies, or whether the government would shut them down or allow them to continue.

Passing the stress test, even though it was a charade for the most part, meant the government was going to leave those banks alone. The markets began to breathe again because investors understood the government was backing away.

The markets froze in response to the government's action, not because the government was inactive, did too little or was ineffectual. Once the stress tests clarified that the government was done meddling in the banks, the markets began to clam calm down. The stress tests revealed more about the likelihood of future government action than it did about the condition of the banks. The stress tests added clarity to future government action; not clarity to the banks' balance sheets.

The Dodd bill will increase systemic risks and market failures because it will give more power and discretion to the regulators to act against financial institutions. Powers that allow government intervention in markets and financial institutions increase systemic risks exactly because regulators do not act as investors or perceive risk the same way investors and other market participants perceive risk. Government and regulators are an additional, unpredictable, non-diversifiable risk that restricts investors' options during a financial crisis.

When regulators intervene, investors lose the value of their investments in the financial institution. Since the financial crisis, all corporate bondholders, not just GM's and Chrysler's, mortgage lenders, and collateralized lenders face more systemic risk than before the crisis.

Giving more financial regulatory power to government will spread and increase the systemic risk in the financial sector. It will not lower systemic risk.

[See my previous post, "Obama's New Bank Restrictions Increase Systemic Risk: The VIX Rose 19 Percent"]

CBO’s Budget and Economic Outlook: 2017 to 2027

From Congressional Budget Office, "CBO’s Budget and Economic Outlook: 2017 to 2027," August 15, 2017, Presentation by Sam Papenfuss, Deputy Assistant Director for CBO’s Budget Analysis Division, at the National Association of State Auditors, Comptrollers and Treasurers annual conference:

CBO’s Budget and Economic Outlook: 2017 to 2027 from Congressional Budget Office

NY And Other Large Metropolitan Areas Have Highest Wage Inequality: Map

From MarketWatch, "Why there’s so much inequality in big U.S. cities" by Jillian Berman:

Run through a list of some of the most populated metropolitan areas in the country — New York City, San Francisco, Houston, Chicago — and they all have something in common besides their size. They’re extremely unequal.

In all of these cities, wages for workers in the top 10% of earners are six to seven times those of workers in the bottom 10%, according to a report published Thursday by the Federal Reserve Bank of New York. While income inequality has been ticking up nationally since the 1980s, it’s now particularly pronounced in large metropolitan areas, according to the New York Fed.

“Larger metropolitan areas tend to be more unequal than smaller metropolitan areas and that was not always true,” Jaison Abel, a research officer at the New York Fed, told reporters Thursday.

Source: MarketWatch

Consumption Inequality Much Lower Than Income Inequality

From MarketWatch, "Is inequality getting worse? That depends how you measure it" by Steve Goldstein:

Consumption inequality hasn’t grown as much as income inequality

Source: MarketWatch

Bruce Meyer of the University of Chicago and James Sullivan of the University of Notre Dame argue that consumption, rather than income, should be examined. Using income to measure inequality is a problem for a few reasons. For one, it’s measured before tax, it’s not person weighted (a family with one person is measured the same as one with six people) and it may underrepresent the impact of government transfers. Income measures also don’t capture consumption out of financial wealth as well as durables such as housing and cars.

Consumption, they say, may be a better way to measure well being, since it better reflects disparities in access to credit or accumulation of assets. Consumption also is more closely associated with other measures of poverty than income is.

Research paper abstract:

"Consumption and Income Inequality in the U.S. Since the 1960s" by Bruce D. Meyer, James X. Sullivan, NBER Working Paper No. 23655, Issued in August 2017:

Official income inequality statistics indicate a sharp rise in inequality over the past five decades. These statistics do not accurately reflect inequality because income is poorly measured, particularly in the tails of the distribution, and current income differs from permanent income, failing to capture the consumption paid for through borrowing and dissaving and the consumption of durables such as houses and cars. We examine income inequality between 1963 and 2014 using the Current Population Survey and consumption inequality between 1960 and 2014 using the Consumer Expenditure Survey. We construct improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts. While overall income inequality (as measured by the 90/10 ratio) rose over the past five decades, the rise in overall consumption inequality was small. The patterns for the two measures differ by decade, and they moved in opposite directions after 2006. Income inequality rose in both the top and bottom halves of the distribution, but increases in consumption inequality are only evident in the top half. The differences are also concentrated in single parent families and single individuals. Although changing demographics can account for some of the changes in consumption inequality, they account for little of the changes in income inequality. Consumption smoothing cannot explain the differences between income and consumption at the very bottom, but the declining quality of income data can. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.

Charitable Deductions Are Disincentives To Social Responsibility.

My published comment to The Wall Street Journal, "Charities Coax Lawmakers to Rethink Tax Plan: Nonprofits pitch idea of ‘universal’ tax deduction for charitable contributions, which would likely decline if Congress were to double standard deduction" by Richard Rubin:

Charitable deductions are disincentives to community and social responsibility.

Charitable deductions focus on organizational structure and not compassionate actions. If I invite and feed a poor person in my house on Thanksgiving, the tax deduction is not available. If I donate food or money to a food bank or church that feeds the same person, I get a deduction.

If I grocery shop or cook a meal for a needy, ill senior in my neighborhood, no deduction. If I donate to an organization that has volunteers who do the same thing, I get a deduction.

The required organizational structures add a middle layer of inefficiency and bureaucracy, which reduces the effectiveness, timeliness, and value of charitable giving.

When there is suffering, such as an earthquake, we do not need tax deductions to motivate us to send money, food, etc.

Eliminate charitable deductions. If the government takes too much money so we cannot donate as much as we like to charities, fight for lower taxes.

See my very similar, earlier post on this blog, "The Problem With Charitable Tax Deductions."

Ten Countries Use Merit-Based (Points-Based) Immigration Systems

From Federation for American Immigration Reform, "Merit-Based Immigration Systems", Fact Sheet | March 2017:

Merit-based immigration systems are in use in the following countries:

• Australia[4]
  
• Austria[5]
  
• Canada[6]
  
• Denmark[7]
  
• Germany[8]
  
• Hong Kong[9]
  
• Japan[10]
  
• New Zealand[11]
  
• South Korea[12]
  
• United Kingdom[13]

***[Footnotes:]

[4] Australian Skilled Migration Program https://www.border.gov.au/Trav/Work/Skil

[5] Criteria-Based Immigration to Austria, http://www.migration.gv.at/en/types-of-immigration/permanent-immigration-red-white-red-card.html  Quebec-Selected Skilled Worker Program http://www.cic.gc.ca/EnGlish/immigrate/quebec/index.asp

[6] Canadian Federal Skilled Worker Program http://www.cic.gc.ca/english/immigrate/skilled/apply-factors.asp  Quebec

[7] Danish Fast Track and Positive List Migration Schemes https://www.nyidanmark.dk/en-us/coming_to_dk/work/work.htm

[8] Germany recently implemented a limited, merit-based immigration scheme for “Highly-Qualified Workers” http://www.bamf.de/EN/Migration/Arbeiten/BuergerDrittstaat/Hochqualifizierte/hochqualifizierte-node.html

[9] Hong Kong Quality Migrant Admission Scheme http://www.immd.gov.hk/eng/services/visas/quality_migrant_admission_scheme.html

[10] Japanese Points-Based Preferential Immigration Treatment for Highly Skilled Foreign Professionals http://www.immi-moj.go.jp/newimmiact_3/en/

[11] New Zealand Migrant Category Resident Visa Program https://www.immigration.govt.nz/new-zealand-visas/apply-for-a-visa/about-visa/skilled-migrant-category-resident-visa

[12] South Korea F-2 Point System http://koreanconsulting.typepad.com/files/pointsystem.pdf

[13] U.K. Work Visas https://www.gov.uk/browse/visas-immigration/work-visas