The size of government tends to grow naturally if not checked. There are many reasons for keeping the government lean and mean (a distant memory, but still a good standard)—personal liberty, personal responsibility and the moral qualities it fosters, economic dynamism, progress and efficiency, and the list goes on. Government bureaucrats, however public spirited and well meaning, are simply not driven by the spirit that animates the private competitive entrepreneur and those he or she manages. Both the
public sector and the private sector respond to the incentives they face. One of the government’s more effective tools for “regulating” the private sector is to fashion laws and regulations that create incentives for private sector behavior that serves the long run public interest. That is what Adam Smith’s invisible hand of self interest and competition do quite well on their own most of the time but there can be gaps (externalities) the government can sometimes fill.
It is difficult to get the incentives right in the public sector. Political leaders may have the public interest at heart but getting reelected must come first and their constituency may have special interests other than the national interest. Bureaucrats rarely advance their careers by standing up or standing out. When government interference with and involvement in economic activity exceed the essentials, it often starts us down a slippery
slop of catering to special interests that is increasingly hard to resist. Three recent examples, illustrate this point.
In the area of financial sector supervision, some have charged that the government has not regulated bank and financial sector behavior tightly enough thus contributing to, if not causing, the financial sector crisis of last year and the recession of last year into this one. While “appropriate” supervision is desirable, America’s financial supervisors (just for banks this included the Federal Reserve, Office of the Comptroller of the Currency, FDIC, Office of Thrift Supervision, and fifty state supervisors) suffer a number of weaknesses typical of government.
Banking supervisors did not foreseeing the housing and financial crisis any better than anyone else (how could they!!). “In May 2006, the nation’s fourth-largest bank, Wachovia, signed a deal to buy Golden West, one of the largest mortgage lenders in California…. The next month the board [of Governors of the Federal Reserve] unanimously approved the deal. The Fed wrote in its approval that it had “carefully considered” the warnings about Golden West and concluded that Wachovia had sufficient capital to absorb losses and effective systems for assessing and managing risks…. Two years after Wachovia closed its
deal for Golden West, regulators told the company it could no longer survive on its own. A hasty sale to Wells Fargo was arranged with the help of billions of dollars in federal tax breaks.” The Federal Reserve and other banking supervisors did not lack adequate
supervisory authority in this instance. The problem was that they did not use the authority they had satisfactorily. New powers (though a few may be useful) would not over come these weaknesses.
Regulators rightly work closely with those they regulate, but are too easily captured by the perspective and interests of the regulated. In the extreme, regulars can fail to use regulatory tools and measure available or even mandated. The FDIC is required by law to intervene when a banks capital falls to less than 2 percent of its risk weighted assets. The fact that the FDIC’s deposit insurance fund is in danger of running out is proof that it has
failed to fulfill this mandate. 
A quit different example comes from the area of military procurement. Obviously we need a strong military and get a much better deal for the taxpayer by developing and buying military systems and hardware from the private sector. But consider how difficult it is for the government to judge objectively what is needed and who can prove it best. I already commented on Lockheed Martin’s attempt to keep the unwanted and unneeded F-22 in the military budget http://tinyurl.com/yfvzdv5. The Defense Department finally won on this one with the passage of the defense appropriation bill Dec 20th without the F-22. The battle for the new U.S. Air Force tanker plane contract rages on (again) between Boeing’s and Northrop Grumman’s offerings. It is a brave Congressman who considers the
national interest over the jobs impact in his congressional district. Boeing, for example, once produced almost all of its airplanes and their parts in the Seattle Washington area. The move of its headquarters to Chicago and the scattering of its manufacturing and assemble plants to as many locations around the country as possible was certainly not motivated by economic efficiency.
These obvious challenges to efficient government have now hit a new low. “Insurance giant Mutual of Omaha will see less of a hit from a $10 billion-a-year industry-wide tax on health insurance providers, under the terms of a deal worked out between Senate Democratic leaders and Sen. Ben Nelson (D., Neb.). This was part of the price Senate Majority Leader Harry Reid arranged for us taxpayers to pay in order to buy Senator Nelson’s vote for the Healthcare bill now almost sure to pass the Senate (Nelson was the 60th vote needed to block a filibuster). “Reid was buying the votes of senators whose understanding of the duties of representation does not rise above looting the nation for local benefits.” Richard Cohn, who supports the bill, noted that “The bill has turned out to be a mosh pit of selfishness.” “Reid didn’t even attempt to offer a reason why Medicaid in Nebraska should be treated differently from, say, Medicaid across the Missouri River in Iowa. The majority leader bought a vote with someone else’s money…. Why doesn’t every Democratic senator demand the same treatment for his or her
state? Eventually, they will.” “As news of the agreements proliferated, Republican senators went to the floor to protest. “This will not stand the test of the Constitution, I hope, because the deals that have been made to get votes from specific states’ senators
cannot be considered equal protection under the law,” argued Sen. Kay Bailey Hutchison (Tex.). Her Texas colleague, Sen. John Cornyn, took issue with White House strategist David Axelrod‘s claim that such deals are “the way it will always be.”
The problem is hardly limited to health care “reform.” Despite promises not to interfere with the business decisions of GM after the government took over its ownership, Congress could not restrain itself from forcing GM to keep open some of the dealerships GM wanted to close. “One United Bank in Massachusetts got aid after Rep. Barney Frank (D-Mass.) inserted language into the bailout bill that effectively directed Treasury to give the
bank special consideration.” “Reid said when asked about the fairness of it all. ‘So this legislation is no different than the defense bill we just spent $600 billion on.’ That would be the bill with more than 1,700 pet-project earmarks. ‘It’s no different than
other pieces of legislation,’ Reid continued.”
Sadly he is right. Obama the candidate promised to end earmarks. Under Obama
the President they have gotten worse. There is only one way to roll back and
keep such abuses in check, which threaten to bleed us to death from a thousand
little cuts, and that is to keep the government lean and mean—keep it out of as
much of the economy and our private lives as possible. And eternal vigilance.
Appelbaum and David Cho, “Fed’s
Approach to Regulation Left Banks Exposed to Crisis” The Washington Post, December 21, 2009,
 While it is
common for banks reporting capital of 2 percent to actually have negative
capital once intervened and the fuller picture is known, all the evidence is
that the FDIC has been negligent.
Vaughan, Dow Jones Newswires, December 19, 2009.
sale: One senator (D-Neb.). No principles, low price.” The Washington Post, December 23, 2009,
Bailed-out Community Banks Failing to Pay U.S. Dividends”, The Washington Post, December 22, 2009,
Yegor Gaidar died December 16, 2009 at the age of 53, not far below the shocking national average in Russia of under 59 for males. Gaidar was a controversial and pivotal
figure in Russia’s transformation from a failing centrally planned economy to a
struggling, largely market economy. Boris Yelsin appointed Gaidar as Russia’s
(rather than the Soviet Union’s) First Vice-Premier and Minister of Economics
from 1991 until 1992, and Minister of Finance from February 1992 until April
1992. Yeltsin appointed him Acting Prime Minister from June 15, 1992 until
December 14 when the Russian Parliament refused to confirm him. In that short
period Gaider freed prices to be determined by the supply and demand forces of
the market, and launched a dramatic drive to privatize state owned enterprises.
He was, in short, a champion of “shock therapy.”
I had the pleasure of spending three days with him on the
Dalmatian Coast of Croatia in June 1999 while attending the Croatian National
Bank’s annual monetary conference in Dubrovnik organized by my friends Marko
Skreb (then governor of the Croatian National Bank), and Bob Mundell (who
receive the Nobel Prize for Economics several months later) and my IMF
colleague Mario Blejer (who two years later served as the Deputy Governor then
Governor of the Central Bank of Argentina). I had lunch with Mr. Gaidar on one
of those days and found him surprisingly sensitive to and, I thought, perceptive
of the thinking of the Russian man on the street.
Because of its large and growing inefficiencies, the Soviet
centrally planned economy was rapidly collapsing in the 1980s and the downturn
in oil prices (the USSR’s primary export) in the late 1980s sealed its doom.
Gaidar and others (including the IMF) concluded that the quickest way to
restructure the Russian economy was to liberalize it quickly (the big bang). A
more gradual approach ran the risk that the political old guard would stop needed
reforms midway (as to some extent it now has been by President/MP Putin). The
collapse of the Russian economy and living standards was more sever than Gaidar
or we at the IMF had anticipated.
The efficacy of a big bang was much debated at the time but
primarily from the perspective of the appropriate sequencing of liberalization.
Few of us sufficiently appreciated the time required to develop the
institutional, legal, knowledge infrastructure upon which capitalism relies to
achieve its efficiencies, dynamism, and growth. We laughed at the strange
mixture of goods offered in the little kiosks that sprung up everywhere (trade
was the first thing to benefit from liberalization—production took much
, assuming they would learn
. Street merchants (those who were able to round up enough money to buy
import consignments) offered for sale whatever they could get a hold of. A
typical booth might offer, tooth paste, combs, toilet paper, ladies underwear,
More than these challenges, which were daunting, was the
failure to replace the system of social services attached to jobs in state
enterprises as these enterprises collapsed. They were the sources of schooling,
medical care, pensions and recreational facilities for their employees. People
were not only thrown out of work but where cut off from everything else
provided by their employers. For a while many firms furloughed employees rather
than fire them so that they could continue to receive the services that were
provided with their jobs. But the government lost its source of revenue as
firms lost money (the state was financed by the profits of these firms rather
than taxes) and when it could only continue to pay for these services by
printing money, it robbed the elderly of the value of their pensions with the resulting
hyperinflation. Average Russians, and especially older ones, were devastated.
Another serious miscalculation concerned the mass
privatization of state owned companies. To some extent the existing rulers were
bought off by giving them state resources at bargain prices. They gave up power
for resources in the expectation of riches. We tended to think that it was less
important for Russia’s future how resources got into private hands than to
subject them to the competitive discipline of the market as quickly as possible.
The Russian public saw this as unfair, which further eroded public support for
Gaidar’s reforms. This impression was further strengthened when Yeltsin bought
political support and campaign financing for his successful reelection campaign
from what came to be known as the Oligarchs by selling them large state firms
at low prices. Thus the transition to a market economy caused more pain than
necessary and lost essential public support. Enter Mr. Putin.
The Washington Post called Gaidar a hero for his big bang,
though many Russians, such as my friend Denis whose comments you have seen here
before, hated him: “hero????? He was a bustard for most of Russians whom he
dragged into poverty and chaos and misery orchestrated by American
neo-conservatives……he will go to Hell!
I will pray for that…..”
who was one of three principal foreign advisers to Mr. Gaidar as he carried out
“shock therapy” in Russia in the grim winter of 1992… said Mr. Gaidar was
unjustly blamed for the hyperinflation that wiped out the life savings of many
Russians. The main cause, Mr. Äslund said, was budget deficits, over which Mr.
Gaidar had little control.”
Leon Aron, director of Russian Studies at the American
Enterprise Institute, described Gaidar the last time he saw him as “deeply
depressed—by the direction Russia was taking; by his inability to do anything
about it; and by the vicious calumny spread by the Kremlin about Russia’s
freest years, the 1990s, and about his reforms, which literally saved the
country from the famine everyone expected in 1992…. As if Dostoevsky’s Great
Inquisitor was right when he told the imaginary Christ: you have come to make
people free, but they don’t want to be free. I know that this is not so, and I
know, too, that deep down, Egor did not believe this. But it must have been so
hard to keep faith. The last eight years have gradually killed him. He died of
a broken heart.”
Poor Mr. Gaidar and poor Russia. We must be patient with
Russians and hope that they find their ways to the better lives they dream of.
 An email
response to the Post editorial.
Banks should never be pressured to lend. Their first
obligation should be to protect their depositors’ money.
For several years in Iraq I worked with the central bank of
Iraq to fight off pressure from the government of Iraq (and some loose canon’s
in the U.S. Government) to force banks to lend more. Their lending record was
indeed pathetic. From the beginning of 2005 through the end of 2008 bank
lending as a share of total bank assets rose from a pitiful 5% to a mere 8%. For
comparison, U.S. banks’ lending was about 60% of their total assets at the end
Iraq desperately needed (and still needs) to create jobs and
to many it looked like the banks were failing to do their part to help finance
the enterprises that are the basis of real jobs. There was also a dispute over
whether the Central Bank of Iraq was keeping interest rates too high when
setting the rates it paid banks to deposit funds with the Central Bank (they
were actually lower than the inflation rate, i.e., negative in real terms). I
mention all this because it sounds to me like the same loose canons are still
roaming the halls of the U.S. Treasury. In a note to the U.S. Treasury at the
time, I noted that we should be thankful that the banks were not making loans
they did not consider safe. The “security situation” in Iraq was by no means
the only risk of lending. Contract enforcement was highly uncertain. Many of
the laws on which lending is based and secured did not exist or were seriously
deficient. Reliability of court enforcement of existing laws was far from
established. Policy, I argued, should focus on making it safe to lend rather
than forcing banks to lend.
Fast forward to Monday’s meeting between President Obama and
the big bankers. The Washington Post’s front page article proclaimed: “Obama
calls on banks to ramp up lending.” Sam Stein in the December 13 Huffington
Post headlined his column: “[Larry] Summers: Obama will Persuade Bankers
Because ‘We Were There From Them.’” But “Bank executives say they itch to make
profitable loans, as many as possible, but are struggling to find qualified
borrowers. They also say that the administration is asking for increased
lending even as it pursues financial reforms that will limit the ability of
banks to make loans.” The Post’s
editorial Monday it stated that; “in a recent survey by the
National Federation of Independent Business, tight credit ranked well down the
list of small firms’ concerns, after poor sales, taxes and regulation.”
This is all pretty depressing stuff. The economic and
financial crisis of the last two years started with a housing price bubble
fanned by the federal government pressuring banks to lend more to marginally
qualified homebuyers. So, assuming the government would stand behind the risks
it was asking banks to take, subprime loans exploded (especially when the
Government Sponsored Enterprises, Fannie Mae and Freddie Mac started buying a
lot of them). When the housing price bubble burst, banks and other investors in
Mortgage Backed Securities suffered much larger losses than they had bargained
for. Covering these losses absorbed funds banks might otherwise lend and
reduced their capital. Everyone woke up to the fact that many were over their
heads in debt. Their attempts to reduce it (deleverage) made normally liquid
financial assets hard to trade. Even after the Federal Reserve relieved this
liquidity squeeze, some banks no longer had sufficient capital to continue
lending given the prudential capital adequacy requirements of the regulators
(and good sense).
Some banks avoided these toxic assets and managed the risks
they took prudently; some did not. The market is supposed to reward the
virtuous and punished the profligate, and thus keep the system healthy. Banks
needing more capital to continue lending can almost always find it in the
market at a price that reflects the market’s assessment of their fundamental
soundness. However, the government stepped in and bailed them all out (if they
were big enough), thus proving the high risk takers right. Ops, then there was Lehman
Brothers, which was allowed to fail, catching the market off guard.
So the government has been rewarding bad behavior (excessive
risk taking) in the market some of the time, but not all of the time. It is
thus encouraging more bad behavior while keeping the market guessing about what
it will or will not do. Do we really want to start this cycle over again?
The economy cannot recover in a sustainable way until
households reduce their excessive indebtedness (which must be done over time)
and their lower rates of consumption are replaced by increased exports and
domestic investment. The so-called “weaker dollar” (a depreciated exchange
rate) is helping to increase exports, as is the gradual recovery of demand from
the rest of the world. An increase in investment will come (financed by the
increased savings from households) when entrepreneurs have sufficient
confidence that they can make money in the future from doing so. The government
seems to be doing every thing under the sun to keep them guessing. How much
will they be taxed? What risks will be underwritten by government bailouts? The
incentives the government has created are seriously distorting economic
decisions in the market and promoting a return to excessive risk taking. We
urgently need certainty from the government about the rules of the game and if
those rules don’t provide incentives for proper behavior our recovery will lay
a weak foundation for the future.
Remember Richard C. Reid, the would be shoe bomber? Here
is Judge William Young’s sentencing statement. I do not agree with the Judge’s
speculation that the shoe bomber hated our freedom. I don’t actually know
anything about him or his motivation specifically but there is strong evidence
that almost all suicide terrorist attacks since 1980 (if not earlier) were in
reaction to foreign occupation of the terrorists’ homelands (See Prof Robert
Pape’s book “Dying to Win: The Strategic Logic of Suicide Terrorism”). But the
good judge has spoke eloquently and powerfully and is worth reading.
Ruling by Judge William Young, US District Court.
Prior to sentencing, the Judge asked the defendant if he
had anything to say. His response: After admitting his guilt to the court
for the record, Reid also admitted his ‘allegiance to Osama bin Laden, to
Islam, and to the religion of Allah,’ defiantly stating, ‘I think I will not
apologize for my actions,’ and told the court ‘I am at war with your country.’
Judge Young then delivered the statement quoted below:
January 30, 2003, United States vs. Reid.
Judge Young: ‘Mr. Richard C. Reid, hearken
now to the sentence the Court imposes upon you.
On counts 1, 5 and 6 the Court sentences you to life in
prison in the custody of the United States Attorney General. On counts 2,
3, 4 an d 7, the Court sentences you to 20 years in prison on each count, the
sentence on each count to run consecutively. (That’s 80 years.)
On count 8 the Court sentences you to the mandatory 30
years again, to be served consecutively to the 80 years just imposed. The
Court imposes upon you for each of the eight counts a fine of $250,000 that’s
an aggregate fine of $2 million. The Court accepts the government’s
recommendation with respect to restitution and orders restitution in the amount
of $298.17 to Andre Bousquet and $5,784 to American Airlines.
The Court imposes upon you an $800 special assessment.
The Court imposes upon you five years supervised release simply because the law
requires it. But the life sentences are real life sentences so I need go no
This is the sentence that is provided for by our
statutes. It is a fair and just sentence. It is a righteous
Now, let me explain this to you. We are not afraid
of you or any of your terrorist co-conspirators, Mr. Reid. We are
Americans. We have been through the fire before. There is too much
war talk here and I say that to everyone with the utmost respect. Here in
this court, we deal with individuals as individuals and care for individuals as
individuals. As human beings, we reach out for justice.
You are not an enemy combatant. You are a
terrorist. You are not a soldier in any war. You are a terrorist.
To give you that reference, to call you a soldier, gives you far too much
stature. Whether the officers of government do it or your attorney does it, or
if you think you are a soldier, you are not—– you are a terrorist. And
we do not negotiate with terrorists. We do not meet with
terrorists. We do not sign documents with terrorists. We hunt them
down one by one and bring them to justice.
So war talk is way out of line in this court. You
are a big fellow. But you are not that big. You’re no warrior. I’ve
known warriors. You are a terrorist. A species of criminal that is guilty
of multiple attempted murders. In a very real sense, State Trooper
Santiago had it right when you first were taken off that plane and into custody
and you wondered where the press and the TV crews were, and he said: ‘You’re no
You are no big deal.
What your able counsel and what the equally able United
States attorneys have grappled with and what I have as honestly as I know how
tried to grapple with, is why you did something so horrific. What was it
that led you here to this courtroom today?
I have listened respectfully to what you have to say. And
I ask you to search your heart and ask yourself what sort of unfathomable hate
led you to do what you are guilty and admit you are guilty of doing? And,
I have an answer for you. It may not satisfy you, but as I search this
entire record, it comes as close to understanding as I know.
It seems to me you hate the one thing that to us is most
precious. You hate our freedom. Our individual freedom. Our
individual freedom to live as we choose, to come and go as we choose, to
believe or not believe as we individually choose. Here, in this society,
the very wind carries freedom. It carries it everywhere from sea to shining
sea. It is because we prize individual freedom so much that you are here
in this beautiful courtroom, so that everyone can see, truly see, that justice
is administered fairly, individually, and discretely. It is for freedom’s
sake that your lawyers are striving so vigorously on your behalf, have filed
appeals, will go on in their representation of you before other judges.
We Americans are all about freedom. Because we all
know that the way we treat you, Mr. Reid, is the measure of our own liberties.
Make no mistake though. It is yet true that we will bear any burden; pay
any price, to preserve our freedoms. Look around this courtroom.
Mark it well. The world is not going to long remember what you or I say
here. The day after tomorrow, it will be forgotten, but this, however,
will long endure.
Here in this courtroom and courtrooms all across America
, the American people will gather to see that justice, individual justice,
justice, not war, individual justice is in fact being done. The very President
of the United States through his officers will have to come into courtrooms and
lay out evidence on which specific matters can be judged and juries of citizens
will gather to sit and judge that evidence democratically, to mold and shape
and refine our sense of justice.
See that flag, Mr. Reid? That’s the flag of the
United States of America . That flag will fly there long after this is
all forgotten. That flag stands for freedom. And it always will.
Mr. Custody Officer. Stand him down.
Hello to all our lovely group members.
We are trying to spread the word on facebook about Toccata Classics and were wondering if you would mind inviting anyone with the same passion for music as us to the group.
As an incentive we’ll be running a great competition in the near future 🙂
Thanks a lot.
My mom died Sunday November 22 and I returned to Bakersfield
the next day to help make funeral arrangements and to keep my dad company. My
mom’s real life, the one she loved, had ended some months earlier, so the end
of this unwanted phase was as big a relief to us as to her.
There are advantages and disadvantages to living on opposite
coasts from the rest of my family (my parents, brother, sister, and children).
My mother’s decline and death and the tasks we all face when members of our
families die was an occasion that brought us all closer together emotionally as
well as occasionally physically. My brother, who is the only one of my siblings
who lives in Bakersfield, had been the most disconnected from the family and
became the rock we all relied upon. My sister and I increased our phone
conversations (I hate the phone and she hates email). We are closer and our
relationships stronger going forward.
My dad and I sat together for many hours each day and ate
many meals together at Rosewood, the retirement facility in which he lives and
my mother had died. We reviewed documents, spoke to the mortuary and to his
church, and contacted insurance companies, banks, pension administrators, the
fund administrator, etc all between incoming and outgoing calls from and to
friends of my parents’. My father would occasionally get frustrated with
automated answering systems (turning those calls over to me), but generally
every place we dealt with was well prepared to assist us through the required
steps at the time of a death.
My mother is—was—a planner and she had spared us any doubts
about how she wanted her funeral and every thing about it conducted. This was
indeed much appreciated by us. Mom had even prepared her own and my dad’s
obituaries as much to insure that we had the relevant facts at hand as to
insure it said what she wanted said. Some revisions were naturally necessary.
For example, being six years younger than my dad, mom assumed that he would die
first. “Warren preceded her by (?) years,” was changed to “She is survived by
her husband Warren,…”
One evening, sitting next to each other, dad in his usual
rocker and I in my mother’s, dad suddenly launched into a renaissance of his
own life. He told me of a life of greater trials and disappointments than my
mom’s. But he is a quiet and loving man, who did not mind at all living in mom’s
shadow. With better health as a youth he would have lived a very different
life. He never complained but now he wanted me to know of some of his bad luck
and promise unfulfilled. This will be another story at another time.
Mom’s funeral was lovely. We celebrated her life and
furthered the emotional adjustments required of us. We were thankful that her
strong wish to die at this point had been granted. But there were moments,
often provoked by some little act of tidying up, that forced our hearts to
focus on what we had all lost. One such was removing the colorful sign on mom
and dad’s apartment door that read: “Happy Anniversary – Sue & Warren
Coats, 68 years and still sweethearts!!” My struggle to remain composed while
removing that sign was matched only by my effort to smile when I replied to a
nice old lady waiting next to me for the elevator in Rosewood who asked
(recognizing me—sort of—from an earlier visit): “Do you live here or are you