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Cut out the middle man in federal property sales

By Luke Porter

February 16, 2012, 2:29 pm

In 2009, underutilized buildings cost taxpayers between $250 and $830 million dollars in maintenance costs alone. Last October, AEI’s Chad Hill and Matthew Jensen highlighted the inefficient property management of U.S. government agencies. They pointed out how the regulatory process that is used to sell government properties means it is often not worth the effort, but owning unused property still imposes huge costs on taxpayers. As they note:

For many agencies, there is no real incentive to sell unused property. Only six of the 10 largest property-holding agencies receive any of the proceeds from the sale of their buildings. The other agencies have almost no incentive to raise revenue from the sale of a property. What’s more, while private landowners might sell property to reduce their tax burden, the federal government is exempt from property taxation and has no such incentive.

Last Tuesday, the House finally passed the Civilian Property Realignment Act, which aims to “decrease the deficit by realigning, consolidating, selling, disposing, and improving the efficiency of Federal buildings and other civilian real property, and for other purposes.”

This bill is yet another example of a cosmetic fix that ignores underlying problems. Current regulations require all federal buildings to be offered to other federal agencies, homeless organizations, states, and local governments at discounts of up to 100 percent before a sale to a private organization can occur. The bill creates a Civilian Property Realignment Commission to provide recommendations on property sales to reduce inventory and operating costs and to incentivize agencies to sell by:

1.     Providing funding to help the preparation of an asset for disposal.

2.    Providing agencies with the ability to retain proceeds.

3.    Providing the opportunity to expedite the sale of properties.

These are all admirable goals, but they could be achieved much more simply. Rather than establishing another commission, a reform of existing regulations could yield a more efficient outcome by removing or reworking the existing barriers that limit federal property sales to the market. Liberalizing this process would reduce sale time and eliminate the need for extra funding to help prepare an asset for sale.

The decentralization of power from a commission to agencies themselves also ensures a more efficient outcome as agencies are significantly better placed to decide on their property requirements. The bill correctly realizes that allowing agencies to retain some of the proceeds from the sale of property will incentivize agencies to sell at a fair market value rather than a steep discount. Given that the commission is meant to streamline sales, presumably to the private sector, why not cut out the middle man?

Luke Porter is an intern with the economics department of AEI.

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Categories:  Economic Policy, Regulation   |   Tags:

Jon Entine

Plastic wars: 5 reasons to be concerned about the federal crackdown on phthalates

By Jon Entine

February 16, 2012, 8:08 am

No, this is not a post about great deals on credit cards, although a lot of money hangs in the balance. It’s about plying on consumer fears. And it’s about science literacy—the danger of making public policy based on out-of-context facts and ideology.

Through Friday, the Consumer Product Safety Commission’s Chronic Hazard Advisory Panel (CHAP) is holding public meetings in preparation for issuing a final report on restricting phthalates and phthalate substitutes.

Here’s the background. Found in children’s products and tubing, phthalates are used to make plastics like polyvinyl chloride more flexible. In 2008, President Bush signed into law the Consumer Product Safety Improvement Act (CPSIA), which set stricter regulations, particularly on the elements used to make consumer products.

To date, based on the public hearings, the CHAP appears to be bumbling its way through the science. Here’s five things that government regulators should keep top of mind:

(1) Stick to science. Focus on health risk not fear. U.S. regulators rely on risk-based analysis—documenting actual health dangers. Yet CHAP seems to be edging towards a precautionary model, reacting to anti-plastic public fear campaigns now in high gear.

(2) Not all phthalates are created equal. So-called low-density phthalates—DEHP, BBP, DBP, and DIBP—widely used in children’s toys and medical tubing, are less stable and release outgasses. In contrast, high-density phthalates such as DINP, DIDP, and DPHP are tightly bound, more stable and resilient. They offer significant benefits for millions of uses, many with no safe or effective alternatives. Don’t confuse the types.

(3) Measure costs and benefits of potential alternatives. CHAP appears tempted to regulate in a world with no trade-offs. The profile of each phthalate must be compared to the potential risks, known and unknown, of a substitute. Reformulating products are costly, and the consumer pays in the end.

(4) Consider regulatory precedents. The panel has previously seemed to ignore reviews by other regulatory bodies. For example, the EU has classified low phthalates as reproductive toxicants, but does not regulate tightly bound high plasticizers such as DINP, DIDP, and DPHP, which are considered safe. Will CHAP take an anti-science “one size fits all” approach?

(5) Weigh the evidence. It is not clear whether CHAP is considering the weight of the evidence presented and “all relevant data.” According to last year’s  report from the Centers for Disease Control and Prevention, phthalates do not pose a health hazard in any usual way in which someone might be exposed to soft plastics. “Phthalates are metabolized and excreted quickly and do not accumulate in the body,” it concluded. That report endorsed the findings in 2004 and 2010 studies by the Children’s National Medical Center and George Washington University School of Medicine that showed no adverse effects in organ or sexual functioning in adolescent children exposed to phthalates as neonates. Another recent study has found that even high levels of DEHP have shown no effect on the genital development of marmosets—let alone humans.

In sum, no studies using oral doses (as humans are exposed) have found evidence that plasticizers are toxic or are likely to cause cancer or have strong estrogenic effects, as critics often allege. Federal regulators need be careful about demonizing proven safe chemicals, and replacing them with potentially risky substitutes that have not been tested. Will CHAP follow the science?

Jon Entine, visiting fellow at AEI, is senior research fellow at STATS and the Center for Health and Risk Communication at George Mason University.

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Categories:  Energy and Environment, Regulation   |   Tags: ,

Kenneth P. Green

Cue the scaremongers!

By Kenneth P. Green

February 14, 2012, 4:22 pm

Courtesy of ABC, a bucket of cold water for Valentine’s Day:

Lipsticks, Perfumes May Be Hazardous to Health

Beware of lipstick-stained lips before puckering up this Valentine’s Day. They could be covered in lead.

Reuters first reported that a new study conducted by the FDA found that 400 lipsticks on the market tested positive for lead, according to the Campaign for Safe Cosmetics, a coalition that advocates for safer cosmetics and hygiene products.

Of course, after scaring the world’s women into cosmetic-phobia, we get the context:

Children’s products in the U.S. cannot contain more than 100 parts per million of lead. The highest offending lipstick contained 7.19 parts per million, the group said.

Right, so if you put on 14 coats of lipstick, and kiss for as long as a child might mouth a toy, you’d get the same quantity they might. Of course, you probably weigh considerably more than a young child, and what with the dose making the poison … well, you probably don’t have that much to worry about.

What does the FDA have to say?

Is there a safety concern about the lead levels FDA found in lipsticks?

No. We have assessed the potential for harm to consumers from use of lipstick containing lead at the levels found in both rounds of testing. Lipstick, as a product intended for topical use with limited absorption, is ingested only in very small quantities. We do not consider the lead levels we found in the lipsticks to be a safety concern. The lead levels we found are within the limits recommended by other public health authorities for lead in cosmetics, including lipstick.

So, damn the scaremongers! Put your pucker on!

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Categories:  General, Regulation   |   Tags:

Eastwood and Obama in ‘A Fistful of Bailouts’

By James Pethokoukis

February 6, 2012, 7:17 pm

Dirty Harry says if you didn’t support the taxpayer bailout of General Motors and Chrysler back in 2008 and 2009, you quit on America … punk!

That’s basically the message of the Clint Eastwood-narrated Super Bowl ad which told U.S. football fans that Detroit ”almost lost everything. But we all pulled together, now Motor City is fighting again. … Detroit’s showing us it can be done. And, what’s true about them is true about all of us.”

What’s it like to live in a country where state capitalism—rather than free-market, entrepreneurial capitalism—is ascendant? Well, it’s one where car commercials morph into reelection ads for the incumbent president. It’s clear Team Obama wants to make the bailout of the U.S. auto industry a big selling point to voters. (In Obamaland, American workers at U.S.-based factories of foreign automakers—like the 400,000 folks who work at plants, design centers, and dealership for Toyota, Honda, and Nissan—don’t really count as being part of the U.S. auto industry.)

Here’s what the president said recently at the Washington Auto Show: “When you look at all these cars, it is testimony to the outstanding work that’s been done by workers—American workers, American designers. The U.S. auto industry is back … And it’s good to remember the fact that there were some folks who were willing to let this industry die. Because of folks coming together, we are now back in a place where we can compete with any car company in the world.”

Obama: “Because of folks coming together …”

Eastwood: “But we all pulled together …”

You get the picture.

But not the entire picture, of course. The most effective propaganda doesn’t present outright falsehoods but merely half truths that form a distorted image. View, if you will, a stock chart comparing General Motors (red), Ford (green), and the S&P 500 index.

Looks like GM still has some work to do to earn investor confidence.

Then there’s the issue of the cost to taxpayers. We received some new info on this late last month:

The U.S. Treasury Department boosted its estimate of government losses in the $85 billion auto bailout by $170 million. In the government’s latest report to Congress this month, the Treasury upped its estimate to $23.77 billion, up from $23.6 billion. Last fall, the government dramatically boosted its forecast of losses on the rescues of General Motors Co., Chrysler Group LLC and their finance units from $14 billion to $23.6 billion. … The Treasury, which initially held a 61 percent majority stake in GM, now holds a 26.5 percent share, or 500 million shares in GM. To break even, the government would need to average $53 per share for its remaining stake. At current prices, the government would lose more than $14 billion on its GM bailout. … The government booked a $1.3 billion loss on its $12.5 billion bailout of Chrysler. As part of its $17.2 billion bailout, the Treasury still holds a 74 percent majority stake in Ally Financial Inc., the Detroit-based auto lender and bank holding company. Ally, formerly known as GMAC, put its IPO on hold indefinitely last year because of market weakness.

Oh, and on top of that $24 million you can add another $13 billion, according to bankruptcy expert David Skeel. He says Treasury estimates “omit the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.”

And what if Washington hadn’t forced taxpayers to ride to the rescue? Well, the Center for Automotive Research, an automaker and union-funded think tank, said back in 2008 that “a drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers” would cause a loss of nearly two million jobs over the next two years.

But Skeel disagrees:

If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. … Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. … Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.

Things like moral hazard and unintended consequences are of slight concern when you want to be the Motor City Messiah. But who knows, maybe GM will continue to prosper even though its Japanese competitors are now recovering from Japan’s megaquake, tsunami, and nuclear disaster. And maybe GM and Chrysler will eventually boost quality enough to get into the first division of automakers.

But given the history of bailed-out companies — such as Chrysler, for instance — there may be opportunity for Eastwood to star in a sequel.

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Categories:  Economic Policy, Fiscal Policy and Taxes, Regulation   |   Tags: ,

Peter J. Wallison

How Dodd-Frank is a big obstacle to closing down Fannie and Freddie

By Peter J. Wallison

February 6, 2012, 1:55 pm

On Friday, Treasury Secretary Geithner said that the Obama administration is preparing to move forward with closing Fannie Mae and Freddie Mac and bringing back a robust private housing market. Ironically, the secretary’s statement was made almost one year to the day after the administration released its white paper on reform of the housing market. Since then, there has been virtual silence on the administration’s plans, while the private housing market has continued to grow weaker. Many banks, large and small, are abandoning the mortgage business, and MetLife had to close down its own large mortgage business when it couldn’t find a buyer.

One of the options in the administration’s white paper was a fully private market; in response, I and my AEI colleagues Alex Pollock and Ed Pinto circulated our own white paper in March 2011 in the belief that a deal between the administration and House Republicans that produces a wholly free housing finance market was possible. Although House subcommittees have considered some important legislation that moves toward reviving the private market, it is unlikely that anything will get through this Congress without the administration’s support.

Accordingly, we welcome the Treasury secretary’s renewed interest, but it is important for him and the administration to understand that it will be extremely difficult to close down Fannie and Freddie without amending the Dodd-Frank Act in significant ways. Among them, and by no means all, are the following impediments to the return of a robust private market:

· Although Fannie and Freddie might be privatized or otherwise eliminated over time, a robust private market cannot develop as long as FHA is able to insure mortgages up to $729,500 and remains exempt from the 5 percent risk retention requirement in Dodd-Frank. No matter what standards are ultimately adopted for the Qualified Residential Mortgage, FHA will always be able to out-compete private securitizers as long as it does not have to bear this additional cost and is able to insure most mortgages issued in the United States.

· In addition, the 5 percent retention requirement strongly favors the biggest banks, which alone have balance sheets large enough to hold the retention amount and still carry on an active securitization business. This would be bad enough as a competitive matter, but given the fact that many of the large banks are now substantially reducing their mortgage financing activity, the continued application of the risk retention requirement will prevent the growth of any private sector substitutes for the GSEs or FHA.

· The Volcker rule, which has already drawn opposition in many other quarters, is also an impediment to the development of a private securitization market. That market depends heavily on the ability of lenders to hedge their interest rate risks while they are assembling a pool of mortgages for securitization. The Volcker rule applies to any firm that is affiliated with an insured bank, and prohibits proprietary trading, which is very difficult to distinguish from hedging transactions. Until there is a safe harbor for hedging transactions, the risks of running afoul of the Volcker rule may prevent many bank-affiliated securitizers from entering the private housing finance market.

It is good news that the administration is now willing to go forward with GSE reform, but if it is serious about privatizing or eliminating Fannie and Freddie it will have to propose some serious reforms in Dodd-Frank at the same time.

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Categories:  Economic Policy, Financial Services, Regulation   |   Tags: , , ,

Kenneth P. Green

If at first you don’t succeed, double down on dumb!

By Kenneth P. Green

February 1, 2012, 10:11 am

Over at RealClear Markets, I point out that California is re-running their (failed!) electric-car mandate from the 1990s:

Once again, the regulators in California have decided to lead the nation in terms of vehicle emission standards, proposing to require that 15.4 percent of all vehicles sold by 2025 must be electric cars, plug-in hybrid cars, or (currently non-existent) fuel cell cars.

In case you’re wondering why this all sounds familiar, it’s because California is re-running the same delusional program that it ran in 1990 (Yes, 22 years ago) when “Specifically, the Air Resources Board (ARB) required that at least 2 percent, 5 percent and 10 percent of new car sales be zero-emitting by 1998, 2001 and 2003 respectively.”

As I explain, this didn’t work out so well the first time, despite subsidies transferring wealth from the less-well-off to the more well-off:

Malcolm Currie, former CEO of Hughes Aircraft Company, which created the EV-1 technologies (and where, amusingly enough, I did my doctoral internship while he was CEO), argued “In addition to encouraging the development of new technologies, the mandate … will have a significant impact on our economy and jobs in the years ahead … Project California anticipates that as many as 70,000 of these [new jobs] can be in EV-related industrial clusters, as a result of building on the large anchor market in our state.”

We know how that worked out: currently, 98 percent of advanced battery production is in Asia.

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Credit ratings: Where ‘least wrong’ is the best we can hope for

By Daniel Hanson

January 30, 2012, 4:43 pm

U.S. regulators think they can do better than the major credit ratings agencies. As part of the Dodd-Frank Act, U.S. regulators are no longer allowed to use ratings from independent companies to judge the appropriateness of bank capital levels. Under the newest proposal from the Fed, the Comptroller of the Currency, and the FDIC, ratings would instead be assigned based on OECD classifications, which are even worse than the ratings agencies’ diagnoses.

This week, the U.S. Congress will hold hearings regarding the major credit ratings agencies’ supposed inability to predict the collapse of MF Global. Despite the fact that both Moody and S&P downgraded the brokerage prior to the collapse and “did not have any understanding” of the firm’s bets on European sovereign debt until less than a week before the collapse, expect lawmakers to crack down harshly on ratings agencies yet again.

This comes amid accusations that ratings agencies are, apparently, being too harsh on European nations thanks to a spate of downgrades in sovereign creditworthiness over the past months. These accusations piggyback on prior claims that the ratings agencies failed to anticipate the wave of defaults in subprime mortgages that precipitated the U.S. housing crisis. (Never mind that U.S. regulators didn’t anticipate them either.)

Surely the OECD ratings can’t be worse?

Except that they can be. The OECD currently rates all of the troubled countries of the Eurozone as entirely riskless investments and has done so since they started producing ratings. This stands in stark contrast to the ratings agencies. See below for a breakdown of ratings, and notice how the OECD has totally failed to grasp the magnitude of the current crisis.

By cutting out ratings agencies, regulators have correctly sensed the conflicts of interest in the status quo, but they have merely replaced one set of conflicts of interest with another. The OECD is a collective of governments who are leveraged to the hilt with sovereign debts they are struggling to service. In this instance, the ratings agencies are right to say these countries are in trouble. It appears that in this instance, least wrong is the best we can hope for.

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Categories:  Economic Policy, Europe and Russia, Regulation, U.S. Economy   |   Tags: ,

Roger Bate

Fake drug scandal, winding down?

By Roger Bate

January 27, 2012, 5:49 pm

The saga over the quality of medicines produced by Indian company Ranbaxy looks to be coming to a close. Back in 2004 and 2005, a Ranbaxy whistleblower contacted me to provide information about quality infringements at one of Ranbaxy’s plants. Despite FDA warnings and the WHO’s awareness of the problem, the problem was not fully resolved.

Ranbaxy is a good company and it is endeavoring to set things right. But its problems demonstrate the cost of not successfully inculcating good standards through all levels of management. My reading of the infringements made by Ranbaxy staff suggests that they may have saved the company at most a few thousand dollars from their regulation-infringing cost-cutting. Yet the loss of business has now run in the millions of dollars—and who knows what the cost of poor quality medicines has been to patients. It should be noted that none of the drugs the FDA tested failed quality control. But, as drug experts explain to me, there are some flaws it is hard to test for; it is possible dangerous products slipped through, especially if the production processes are careless.

The United States now sources 80 percent of its intermediate drug chemicals from overseas, a growing number from China. Chinese companies probably suffer worse quality control problems than most of the large Indian companies—but so far no whistleblowers have emerged. I expect many more Ranbaxy-type problems to crop up in the near future, with the likelihood of serious implications for at least some American patients.

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Categories:  Global Health, Health Policy, Regulation   |   Tags:

GOP debate strangely focuses on moon rather than mortgages

By James Pethokoukis

January 27, 2012, 3:15 pm

I’ve been eager for the GOP presidential debate to move to Florida. Finally, I assumed, America’s housing depression would get some time in the issue spotlight. Let’s briefly recall how housing is doing in the Sunshine State, courtesy of economist Jed Kolko of Trulia, the real estate data firm:

1) The housing bust took Florida down. Prices in most of Florida have fallen by at least 40% since their peak. Along with Nevada, Arizona and inland California, Florida was ground zero for the housing bubble, and now its residents are deep underwater.

2) Florida is in foreclosure purgatory. It takes more than two years for homes to go through the foreclosure process in Florida, longer than any other state except New York and New Jersey (which have far fewer foreclosures to begin with). That means 14.0% of Florida loans are stuck in foreclosure, compared with 6.3% in Nevada, 3.2% in Arizona, 3.2% in California and 2.7% in Michigan, according to LPS. This keeps Florida’s housing market in limbo and prevents Florida from benefiting from a plan to sell government-owned homes to investors after a foreclosure is complete.

But I did not get my wish. Although the housing crisis did come up last night, the conversation quickly derailed into a discussion about privatizing the GSEs, as well as some back-and-forth about what exactly Newt Gingrich was doing for Freddie Mac to earn his $1.6 million. Amazingly, there was no discussion of President Barack Obama’s plan, announced in his SOTU address, for a mass refinancing of U.S. mortgages.

Keep that in mind as you read what New York Fed President Bill Dudley had to say about housing today:

While house prices are no longer overvalued by historical standards, restrictions on access to credit and the large number of homes in the foreclosure pipeline means that home prices remain under downward pressure. The ongoing weakness in housing makes achieving a vigorous economic recovery more difficult for several reasons:

  •  The strong rebound in housing construction and related activities, such as furniture sales, that typically power economic recoveries following deep recessions is absent.
  • The decline in home prices has eroded household wealth, which then inhibits consumer spending. Since home values peaked in 2006, homeowners have lost more than half their home equity and many expect further declines.
  • The weakness in home prices has reduced credit availability because many households and small businesses use their homes as their primary source of collateral for loans.
  • The big drop in house prices has made it more difficult for borrowers to refinance, undercutting some of monetary policy’s ability to support demand.

Gosh, sounds like a subject worthy of discussion in a 2012 presidential debate. In a world where moderators cared more about policy than process, perhaps Wolf Blitzer would have asked something like this:

Gov. Romney/Speaker Gingrich/Sen. Santorum/Rep. Paul, Romney economic adviser Glen Hubbard has suggested a massed refi of U.S. mortgages. Former Reagan economic adviser Martin Feldstein suggests a $350 billion mortgage principal writedown. Conservative economist Luigi Zingales would reduce underwater mortgages by the amount home prices have fallen in the area, with homeowners and banks splitting future price gains. Do these ideas have any merit or it is better just to speed up foreclosures?

Love to hear their answers.

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Is Romney for a mass refinancing of U.S. mortgages?

By James Pethokoukis

January 26, 2012, 10:53 am

First, this exchange from CNBC’s Kudlow Report last night:

Kudlow: And also in terms of what President Obama said, he wants government action to close the inequality gap; that was a big part. Another thing he is going to do, he’s got this big mortgage plan where he would refi everybody’s mortgage that is not — they can be under water, but they have virtually no credit standards, probably a 4% interest rate.  … Now is that vote-buying? Is that election year vote-buying? Is that something that is going to fix housing?

Romney: Well, let’s see what the plan looks like. If it’s talking about multiple new trillions of dollars of government debt, that is something that is simply unacceptable.

Kudlow: There is a bank tax in there to finance it.

Romney: Again, let’s look at the numbers. Let’s see what kind of tax there is. If you’re talking about refinancing trillions of dollars of debt and the government is now going to be taking over responsibility for those mortgages, that would be a real problem. But let’s look at the details. Clearly, if there is a way of providing a break to homeowners to get lower interest rates, that is something which has always been part of the refinance story. If it can be done in a way that doesn’t add additional government obligation, that’s one thing. If instead it adds trillions of dollars in new debt to the federal balance sheet, that’s a very different thing. What about the investors who own the mortgage-backed securities who have to be repriced lower? They’re going to take a bath, pension funds are going the take a bath. In the speech, he put in one or two sentences about it. Let’s see what it shows. You have apparently more information about it than I do. I want to see what the plan shows, but clearly, you can’t go in and say we’re going to wipe out all the people who invested in mortgages and mortgage-backed securities. A lot of those are banks. Banks in some cases are in trouble already. You don’t want them to have to find themselves in even more distress.

Now, Romney could have said something like, “The way to boost housing is to boost the economy and speed up the foreclosure process so the market can clear.” But he didn’t say that. He said this: “Clearly, if there is a way of providing a break to homeowners to get lower interest rates, that is something which has always been part of the refinance story. If it can be done in a way that doesn’t add additional government obligation, that’s one thing.”

Rather than criticize the general idea of a mass refi plan, Romney chose to criticize Obama’s version of a mass refi plan. And one aspect he doesn’t like, it seems, is how government would refinance mortgages not already owned by the government, such as through Fannie and Freddie, thus taking on new risk and obligation. He doesn’t seem to like the broadness of the Obama plan, given the little we know of it. As Obama said in his SOTU address:

That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks.

But guess what? Romney economic adviser Glenn Hubbard has co-authored a mass refi plan that doesn’t give “every responsible homewoner” a new low-rate mortgage. But it would if they had a Fannie or Freddie mortgage.

Importantly, it wouldn’t “add trillions of dollars in new debt to federal balance sheet” — as Romney worries with the Obama plan — because the government already backs them through the GSEs. Here’s the core of the Hubbard plan, which might affect 30 million mortgage borrowers:

a) Every homeowner with a GSE mortgage can refinance his or her mortgage with a new mortgage at a current fixed rate of 4% or less, with the rate subject to change up or down with the price of Agency pass-through Mortgage-Backed Securities (MBS). For borrowers with an FHA or VA mortgage, rates would be higher, but these borrowers should be included in any large-scale refinancing program.

b) The homeowner must be current on his or her mortgage or become so for at least three months.

c) NO other qualification or application is required, other than intention to accept the new rate (that is, no appraisal, no income verification, no tax returns, etc.).

Hey, that sounds a lot like the Obama plan, except with the GSE limitation.

So does Romney favor a mass refi plan that is a) limited to folks with GSE mortgages since the government already owns the risk, and b) does not include a bank tax? (He also, it should be noted, seems worried about the impact on the owners mortgage-backed securities.) Hopefully, someone at the debate tonight will ask.

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Categories:  Regulation   |   Tags: , ,

Obama pulls trigger on January Surprise: a mass refinancing plan for U.S. mortgages

By James Pethokoukis

January 25, 2012, 12:13 am

I told you so. This was the housing policy bombshell from President Barack Obama’s State of the Union address:

And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

Thunderbolt. A mass mortgage refinancing plan with a new bank tax to pay for it. Obama’s description is sketchy, but here’s how ace analyst Jaret Seiberg of Guggenheim Washington Research Group sees this new plan playing out:

 The President is pushing an easy-to-execute plan to let borrowers refinance mortgages regardless of LTV. This is a much bolder initiative than expected, though we emphasize that it is a legislative proposal that cannot take effect unless Congress enacts it. Were this enacted into law, this would be a mass refinancing that we believe could help more than 10 million borrowers refinance their mortgages regardless of whether their loan is backed by the government or not. …

Hurt by a mass refinancing would be holders of MBS that is trading above par as prepayment rates would accelerate materially. … Our concern is that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates. … Our view is that only borrowers who have been current on their loans for at least six months – or possibly a year – will be eligible for the program. In other words, this is meant for borrowers who can afford their mortgages. It is not a mortgage modification initiative.

And CNBC describes it thusly:

The Obama administration is offering precious few details, promising more in the coming weeks, but several sources say the plan is to ask Congress to allow the government mortgage insurer, the Federal Housing Administration (FHA), to back refinances of underwater mortgages. No estimates were given as to how many borrowers such a plan could potentially help, only that this would be a voluntary, borrower-initiated plan, and not a blanket refinance of all borrowers. The costs, according to administration officials, would be modest, and the President would request that a portion of his financial crisis responsibility fee offset any of those costs, so there would be no addition to the federal debt.

And here’s what I wrote in early January:

 If President Barack Obama’s legally dodgy appointment of Richard Cordray to head the consumer finance agency should stick, it may open the door to more such actions. … And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process … that could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election. Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen.

And the economic impact? Well, 10 million borrowers saving $3,000 a year equals $30 billion a year in reduced mortgage payments. But the added lift to the economy could, conservatively, be closer to $40 billion year initially. (I am using calculations based on the impact of the Hubbard-Mayer plan I described in my original post.)

But surely questions will be raised if the FHA is the vehicle. As AEI’s Ed Pinto explains, the FHA’s capital position using private-industry standards shows the FHA to be deeply insolvent. The FHA is estimated to have a current net worth of –$17 billion and an estimated capital shortfall of $35–53 billion. Private regulators would shut it down rather than continuing to allow it to “grow” its way out of its insolvency. Republicans will have lots of questions and may balk if this smells like a moral hazard-inducing housing bailout. (It is just this sort of thing that launched the Tea Party movement, after all.) Then there’s the bank tax to deal with. This SOTU shocker may well be the talk of the markets today. Hopefully more details to come and soon …

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How would a private equity or venture capital firm look at USA Inc.?

By James Pethokoukis

January 23, 2012, 10:44 am

Some liberal pundits like Paul Krugman say Mitt Romney’s business experience isn’t relevant to being president since the federal government isn’t a corporation. And in some ways, he’s correct. A business can’t print money or raise taxes, for instance. Yet governments are subjected to the laws of economics, especially if they borrow a lot of money. Just ask the EU. And it is certainly possible to analyze a government like a business. They have expenses, revenues, debt, product lines, even one-time charges (such as TARP). And incentives matter, just as they do in the private sector.

Earlier this year, venture capital firm Kleiner Perkins Caufield Byers analyzed USA Inc. like it was a business in a must-read report. This graphic below sums up the findings. I can imagine a Romney administration doing a similar analysis and coming up with similar conclusions and potential fixes. I don’t agree with all of the solutions, but KPCB makes a good start.

 

 

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The next U.S. president’s economic agenda, as outlined by Harvard biz school alumni

By James Pethokoukis

January 19, 2012, 9:07 am

Harvard Business School recently surveyed 10,000 alumni about the state of U.S. economic competitiveness. Unfortunately, 71 percent said national competitiveness will decline over the next three years. That result actually tracks numerous public surveys finding the vast majority of Americans think the U.S. is headed in the wrong direction. More interesting is the evaluation of our strengths and weaknesses, summed up in the following graphic:

I think the red quadrant has it about right. The big problems are macroeconomic policy (soundness of government budgetary, interest rate, and monetary policies), political system (ability of the government to pass effective laws),  legal framework (modest legal costs; swift adjudication), regulation (effective and predictable regulations without unnecessary burden on firms), K-12 education system (universal access to high-quality education; curricula that prepare students for productive work), and complexity of the national tax code. And improving those things will make our perceived strengths, the stuff in the green quadrant, even stronger.

 

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Nick Schulz

Regulation is, in fact, a growing problem

By Nick Schulz

January 11, 2012, 3:39 pm

Liberal economists are right to point out that poor demand/sales have been a drag on the economy. Put aside for the moment whether or not that justifies more fiscal stimulus. They might be interested to learn that regulation is a growing problem for small companies. The gang at Dismal Scientist has the data ($):

They point out that:

The most small firms since the late 1990s have begun citing regulation as their biggest problem. Regulation is poised to surpass taxes in the survey, which is rare.

And while we’re at it, our aggie-philosopher Blake Hurst recently pointed out the incalculable damage done by foolish regulation.

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Kenneth P. Green

Fill ‘er up with rainbows and unicorn sweat!

By Kenneth P. Green

January 10, 2012, 2:48 pm

In 2006, President G.W. Bush rolled out a new energy program in his State of the Union Address. It was not one of his better moments. In only a few years, the United States would start fueling its vehicles with the equivalent of rainbows and unicorn sweat, er, cellulosic ethanol:

We must also change how we power our automobiles. We will increase our research in better batteries for hybrid and electric cars, and in pollution-free cars that run on hydrogen.

We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips, stalks, or switch grass. Our goal is to make this new kind of ethanol practical and competitive within six years.

This wishful thinking was codified by Congress in the 2007 Energy Independence and Security Act, which expanded a renewable fuel standard and included ethanol made from cellulose (aka, woody plant matter):

H.R. 6 would expand the renewable fuels standard to 9 billion gallons in 2008, and progressively increase it to a 36 billion gallon requirement by 2022. Additionally, H.R. 6 makes a historic commitment to develop cellulosic ethanol by requiring that by 2022 the United States produce 21 billion gallons of advanced biofuels, such as cellulosic ethanol.

Alas, presidential and congressional pronouncements to the contrary, the technology did not exist in 2006, nor does it exist today, to make cellulosic ethanol in any significant quantity, at anything resembling a competitive price, as the New York Times reports:

When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law.

But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist.

In 2012, the oil companies expect to pay even higher penalties for failing to blend in the fuel, which is made from wood chips or the inedible parts of plants like corncobs. Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year.

“It belies logic,” Charles T. Drevna, the president of theNational Petrochemicals and Refiners Association, said of the 2011 quota. And raising the quota for 2012 when there is no production makes even less sense, he said.

And what is the response of our current government to this silliness?

But Cathy Milbourn, an E.P.A. spokeswoman, said that her agency still believed that the 8.65-million-gallon quota for cellulosic ethanol for 2012 was “reasonably attainable.” By setting a quota, she added, “we avoid a situation where real cellulosic biofuel production exceeds the mandated volume,” which would weaken demand.

Right. So what’s most important about biofuel quotas is that they prevent us from over-producing a product that we can’t produce so we don’t weaken demand for the product that the government mandates we use. That’s logical.

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Yes, Obama really is considering a mass refi plan

By James Pethokoukis

January 9, 2012, 2:03 pm

I’m amazed there’s so much skepticism about my blog post suggesting the Obama White House would consider a $1 trillion, mass mortgage-refinancing plan through Fannie Mae and Freddie Mac. There really shouldn’t be. Here’s why:

1. The White House gave a total non-denial denial to Bloomberg: “The White House has no plans for a new mass mortgage refinancing program, an administration official with knowledge of the matter said.”

2. Obviously the politics are far from clear cut. Yes, the Tea Party folks and like-minded homeowners everywhere would probably see the plan as a government bailout of people who made dumb financial decisions. Yet this is also an administration that hates being known as one that bailed out Wall Street but not Main Street. Again, here is Jaret Seiberg of Guggenheim Securities’ Washington Research Group (bold for emphasis):

As we discussed last week, we believe the administration could recess appoint its own official to run FHFA in order to get the agency to run a refinancing program similar to what Federal Reserve officials want to see. Such a program—in our view—would be limited to GSE-backed loans. The idea would be to create a streamlined refinancing for any borrower with a GSE loan. … We acknowledge that there is political risk for the president to put his guy in charge of FHFA. But our view is that the political benefits of more refinancing relief would outweigh the damage of political attacks over the move.

3. That’s right, the Federal Reserve and Ben Bernanke suggested a similar plan in the central bank’s new white paper on housing:

Nonetheless, more might be done—for example, reducing even further or perhaps eliminating remaining LLPAs for HARP refinances (again, on the rationale that the GSEs already carry the credit risk on such loans); more comprehensively reducing putback risk; or further streamlining the refinancing process for borrowers with LTVs below 80 percent, a potentially large group of borrowers who face some (though not all) of the same obstacles confronting high-LTV borrowers. Fannie Mae has reduced putback risk for all loans (including those below 80 percent LTV as well as those above 80 percent LTV), while Freddie Mac has reduced putback risk for loans above 80 percent LTV but not those below 80 percent LTV. Harmonizing traditional refinancing programs for borrowers with LTVs less than 80 percent, so that these programs become operationally consistent with HARP, could facilitate more refinancing among this group of borrowers.

4. Also last week, Bill Dudley, the head of the New York Fed, argued for government intervention in the housing market to boost the economy. What sort of intervention? Well, one option would be … more refinancing through Fannie Mae and Freddie Mac:

Increasing refinancing would support the housing market by promoting aggregate demand and employment. Refinancing creates additional cash flow for borrowers to absorb any adverse income shocks and this reduces the likelihood of default, distress sales, and foreclosures.

However, there are significant obstacles to refinancing in current circumstances. Declines in home equity have been aggravated by tighter standards, high refinancing fees, burdensome administrative processes, and legal risks to the lenders refinancing the loan.

Because the taxpayer, via Fannie and Freddie, is already exposed to the risk of conforming loans defaulting, it makes no sense to make it expensive or difficult for borrowers with these loans to refinance. … I would like to see refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments. This could substantially increase the number of refinancings.

5. And as I said in the original post:

My sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen. The plan would be modeled after one originally devised by Columbia University economists Glenn Hubbard (a campaign adviser to Mitt Romney and AEI visiting scholar) and Christopher Mayer.

Connect the dots, people. The White House wants it. Bernanke wants it. Don’t count out mass refi plan this election year.

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Peter J. Wallison

The Left’s desperate grasp for greater regulation of the financial system

By Peter J. Wallison

January 6, 2012, 12:35 pm

In the week before Christmas, I was the subject of two articles on the op-ed page of the New York Times by Joe Nocera, a regular Times columnist. Both were pretty nasty, but the second one accused me, with the help of my AEI colleague, Ed Pinto, of propagating a “Big Lie” (hat tip, apparently, to Goebbels) that Fannie Mae and Freddie Mac were responsible for the financial crisis. Parenthetically, that’s actually not my position; my view, expressed fully in my dissent from the majority report of the Financial Crisis inquiry Commission, is that but for government housing policy—of which Fannie and Freddie were the principal implementers—there would not have been a financial crisis.

In any event, it’s relatively rare for anyone who is not a government official to be attacked in such personal terms in a major newspaper, let along twice in a week, and since then a number of people have asked me what I might have done to deserve that extraordinary treatment.

My answer is that the question of what caused the 2008 financial crisis is not a trivial or academic pursuit. It matters a lot whether we get it right. The view that the crisis was caused by Wall Street greed and insufficient regulation of the financial system—essentially the narrative that was propagated by the government and adopted by the major media right after Lehman Brothers’s bankruptcy—resulted in the adoption of the Dodd-Frank Act, legislation so extraordinarily broad that it amounts to a government regulatory takeover of the U.S. financial system. If the government’s housing policies were in fact the cause of the financial crisis, then the Dodd-Frank Act is illegitimate and should be repealed. For this reason, the left did not and does not want a debate about this question. When my dissent from the FCIC report was published, Nocera called it “loony.”

If you think this and his two articles in December are out of proportion to the importance of the issue, think again. If the Dodd-Frank Act is not a sufficient consequence of a failure to understand the causes of the financial crisis, try putting the issue in a broader context. The left wants greater political control of the economy. If the private sector’s actions were responsible for the financial crisis, there are strong grounds for subjecting the financial system and the economy generally to controls of all kinds. Avoiding another financial crisis caused by the private sector can be the basis for much more political control; the Dodd-Frank Act is only the beginning.

For the three years since the financial crisis, the story that it was caused by the greed and lack of regulation of the private sector prevailed. Now, for the first time, that narrative is being challenged, and it is being torn apart by facts (most recently the SEC’s suit against top officers of Fannie and Freddie) that are gradually seeping into the public consciousness. Nocera and others on the left instinctively understand that their continuing success in gaining regulatory control of the financial system and the economy depend on the American people’s continued acceptance of their narrative. Now that it is being challenged, they are getting desperate.

That, to me, explains Nocera’s extraordinary actions.

 

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Banter #37: An interview with AEI’s Nick Schulz about SOPA

By Stuart James

December 22, 2011, 3:33 pm

With the Stop Online Piracy Act (SOPA) looming in the House and the Protect IP Act (PIPA) being marked up in the Senate, the internet has become a hot button topic. AEI’s Nick Schulz sits down with us to explain why these bills are so controversial. We discuss how they could affect copyright laws and why he thinks they aren’t as bad as they seem. Later in the podcast we discuss the newly created .xxx domains and how they might change the internet. Finally Nick gives us a book recommendation. You can listen here and if you like what you hear please subscribe on iTunes here.

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Kenneth P. Green

EPA’s lying figures

By Kenneth P. Green

December 21, 2011, 3:55 pm

The Environmental Protection Agency has put another sparkly gift in our stockings this year, in the form of new rules to restrict the emission of mercury and other toxic substances from power plants. The ruling is expected to impose annual costs of $11 billion dollars, trigger the decommissioning of aging coal-fired power plants, damage local economies dependent on the plants, and further increase the costs of electricity which, as we recently discussed, have been skyrocketing under the delicate hand of the Obama administration.

But surely there must be benefits commensurate with such intrusive actions by the EPA, right? The EPA claims that the new rules will save thousands of lives and create jobs for people installing pollution control devices. Would EPA lie about a thing like that?

Well, yes. As my friend and colleague Susan Dudley points out in The Hill:

To a large extent the EPA gets its huge benefits by assigning high dollar values to reductions in emissions of fine particles (not air toxics or acid gases) that it models will occur as a side-effect of the required controls. These fine particles are already regulated through other EPA mandates, including standards the EPA updates regularly based solely on public health considerations.

In fact, Susan points out that:

These co-benefits comprise 99.996% of the total benefits the EPA estimates, and arise not directly from reducing toxic emissions, but from other things that the EPA thinks will happen as beneficial side effects.

Another smart fellow over at Heritage, David Kreutzer, analogizes about how EPA inflates its health-benefit claims by using dubious assumptions regarding how dangerous particulates are:

Suppose a study examined accidents in which four people each fell a distance of 50 feet. If two of the four died, the prediction of what is called a linear-dose response is that for every 200 feet that a population falls, two people will die. This would be averaged out among the population and the distance of falling. For instance, this linear-dose response would predict that for every 400 people who step off a six-inch curb, two will die from the impact. A cost-benefit calculation using this assumption would show that even a small city would save thousands of lives per day by cutting down all curbs. Though stepping out into the street may be dangerous for other reasons, dropping down six inches is not the cause of any fatalities. Nor would eliminating curbs reduce any of the other dangers of stepping into the street.

If you’d like to know more, check out the technical comments of my friend and colleague Anne E. Smith. Here’s a taste of her report:

•    Although EPA reports that the Proposed Rule will produce annual benefits ranging from $53 billion to $140 billion, these benefits have nothing to do with air toxics at all.

•    Effectively all of the $53 billion to $140 billion of estimated benefits is due to “co-benefits” from coincidental reductions of fine particulate matter (PM2.5), a pollutant that is separately and independently regulated under the Clean Air Act (CAA) as a criteria pollutant.

Figures never lie, but as EPA demonstrates, liars often figure.

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How government promotes income inequality

By James Pethokoukis

December 21, 2011, 11:03 am

To the extent rising incomes on Wall Street have contributed to the rise of U.S. income inequality, government played a big role by encouraging risk via a de facto policy of Too Big To Fail. A few words on this topic from Milton Friedman via “Capitalism and Freedom”:

 

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Kenneth P. Green

Costly energy standards are really just crony-capitalist taxes

By Kenneth P. Green

December 19, 2011, 3:28 pm

As I discussed back in August, Renewable Energy Standards (RES) are not what they’re cracked up to be. In fact, they’re little more than regressive taxes on electricity, mainly used to line the pockets of crony “clean” energy producers.

Over at Politico, Grover Norquist and Patrick Gleason point out just how large a tax that clean energy standards impose:

Renewable energy standards, by design, are intended to drive up energy costs—requiring utilities to use more expensive and often less reliable sources of energy. Not surprisingly, such laws have hit ratepayers hard. States that have a binding RES now have electricity costs that are 39 percent higher than states that don’t have a binding RES.

While Grover and the gang at Americans for Tax Reform do fall prey to a bit of fallacious thinking on energy (the dread “all of the above” thing), they’re not big on taxes, and are teaming up with state governments to try to remove renewable energy standards:

Legislators in states around the country are now working with Americans for Tax Reform to repeal renewable energy mandates in 2012. The iron is hottest to strike in states where Republicans recently took control of both the Legislature and the governorship—including Michigan, Wisconsin, Ohio, and Pennsylvania. Those Rust Belt states have high unemployment and need relief from heavy-handed laws that are driving up families’ utility bills and reducing employers’ job-creating capacity.

Given ATR’s tenacity, this can’t bode well for the wind and solar power sector, but it might help slow the growth of electricity prices that are going up with alarming speed.

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Kenneth P. Green

A light bulb reprieve?

By Kenneth P. Green

December 16, 2011, 2:21 pm

According to the Washington Times, the bill that’s being crafted to fund the government for the rest of the fiscal year includes provisions that would delay the implementation of rules that would effectively ban incandescent light-bulbs:

Congressional Republicans dropped almost all of the policy restrictions they tried to attach to the bill, but won inclusion of the light bulb provision, which prevents the Obama administration from carrying through a 2007 law that would have set energy efficiency standards that effectively made the traditional light bulb obsolete.

Stopping the bulb ban was a chief GOP priority coming into this year, with all of the candidates seeking to become chairman of the House Energy and Commerce Committee saying they would push through a repeal. That bill cleared the House but Democrats blocked its consideration in the Senate.

One could wish, of course, that the Republicans had been more successful in pushing EPA back on some of it’s bigger and more noxious efforts to over-regulate the economy to death, but the light-bulb reprieve would be welcome.

I’ve long felt that the light-bulb ban was a foolish idea, and worse, a pernicious one, being more than simply a violation of individual rights—it is an assault on a symbol that pro-technology, pro-market people value highly. The creation and spread of incandescent lighting is one of the greatest stories of energy entrepreneurship. It is a testament to the genius and determination of one of America’s greatest inventors, and has become a symbol of creativity and inventiveness. Incandescent bulbs should be celebrated, not castigated.

So I’ll be keeping my fingers crossed. But I’ll keep stockpiling bulbs just in case.

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Alex J. Pollock

A good step to reduce the Sarbanes-Oxley burden

By Alex J. Pollock

December 16, 2011, 12:15 pm

The Sarbanes-Oxley Act of 2002, a politically panicked overreaction to the scandals of that day, has been burdening American companies, with an especially disproportionate burden on smaller enterprises, for almost a decade. It is high time to reform it.

Fortunately, bills have been introduced in both the Senate and the House to amend a particularly bad part of the Sarb-Ox overreaction. Senators Jim DeMint and John Barrasso, the co-sponsors of S. 1962, point out that their bill “mirrors recommendations put forward by the President’s Council on Jobs and Competitiveness.” Congressman Ben Quayle and the House co-sponsors of H.R. 2941 cite their goal to remove “one of the many regulatory hurdles that prevent companies from going public.”

The notorious Section 404 of Sarb-Ox imposed significant cash expenses and compliance burdens on U.S. companies through its requirement for costly certifications of internal control systems by external auditors. The auditors became extremely risk averse and bureaucratic, which rapidly ran up their bills—this should have been, but was not, foreseen by the promoters of this provision. The expenses which were imposed turned out to be multiples greater than forecast by the SEC or intended by Congress. They were disproportionately heavy on smaller companies. The problem was even recognized by the regulation-loving Dodd-Frank Act of 2010, which included a partial fix.

The new short, clear, and to-the-point bills, both entitled “The Startup Expansion and Investment Act,” would make optional the adoption of the relevant Sarb-Ox provision (i.e. Section 404 (a)(2) and (b)) for companies with a market capitalization of less than $1 billion. Thus, smaller companies could decide to adopt these procedures and the external auditor’s certification, or opt out of them. A decision to opt out would have to be reported to investors in SEC filings, so the investors could express their view of the decision.

Such a voluntary regime for Section 404 would thus create the ability to test whether investors value the Sarb-Ox provisions or not. It would also reduce the oligopoly pricing power of the accounting firms, at least for smaller enterprises.

It is my view that these Section 404 provisions should be optional for all companies. But the current bills represent a big step forward and should be enacted.

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Paul Ryan’s Medicare reform plan: an antidote to financial Armageddon

By James Pethokoukis

December 16, 2011, 11:28 am

Here’s what Representative Paul Ryan of Wisconsin—the GOP’s leading economic wonk—is afraid of: First, the Great Reckoning finally arrives and America is engulfed by a sovereign debt crisis like the one currently blazing in Europe. Second, Washington’s response to such terrible turmoil—whether an embrace of higher taxes or inflationary money printing or both—makes the problem even worse and puts the Greatest Nation on Earth on a path of irreversible decline and irrelevance. Welcome to the Chinese Century.

It is in this context that Ryan’s new Medicare reform plan, co-authored by Senator Ron Wyden, an Oregon Democrat, must be viewed and evaluated. The proposal’s biggest economic and budgetary flaw—at least in the eyes of many economic conservatives—is that it fails to dismantle Medicare. Instead, Medicare would stick around and compete with subsidized private insurance plans for the health dollars of America’s seniors.

Red alert! Surely the manager of this system of managed competition—the Washington bureaucracy—would press its thumb on the scale in favor of Medicare, yes?

This is not a minor quibble. Indeed, Ryan’s original reform plan would have continued Medicare for current retirees and older workers only, certainly a preferable scenario since it is Medicare’s government monopoly that imperils America’s fiscal future.

But here is how I see things:

1. Under Wyden-Ryan, the true regulator isn’t Washington but Mr. Market. Seniors, having received a fixed amount of premium support, would choose among traditional Medicare and private plans competitively bidding with each other to provide the same package of benefits. The federal contribution to the cost-of-coverage for each senior would be benchmarked annually and regionally to the second-least expensive approved plan or fee-for-service Medicare, whichever is least expensive. Seniors that choose costlier plans would have to make up the difference. If they choose a cheaper plan, they would get a rebate for the difference.

It is a) the competitive bidding process and b) the cost transparency for seniors that would force the Medicare fee-for-service option to controls costs and maintain quality—or lose out to private options.

2. If you believe in the power of markets, competition, and choice to power innovation and productivity, then you need to support the direction Wyden-Ryan would take the system. While the plan does contain a spending cap, it exists only so the Congressional Budget Office can score the plan—the benefits of competition do not compute with the CBO—and to reassure credit markets that there is budgetary backstop.

3. And let’s be honest, any Medicare reform plan that starts out by dismantling Medicare for future retirees would be a non-starter with Democrats, just as nationalizing healthcare for current workers is a non-starter for Republicans today. Ryan and Wyden have created a plan that might actually make it into law and create a sustainable financial structure for Medicare—without massive tax increases or government rationing. Mitt Romney nailed it in last night’s Republican presidential debate when he called Wyden-Ryan plan “good news” and a “big day for our kids and grandkids” because the plan deals with America’s exploding debt, which has the “potential of crushing our future generations.”

4. Passage of Wyden-Ryan might prevent the Great Reckoning from happening. And if fiscal reform stalls and a debt crisis does occur, the plan would give Washington policymakers something to reach for besides a massive tax increase.

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RydenCare: Everything you need to know about the new Wyden-Ryan Medicare reform plan

By James Pethokoukis

December 15, 2011, 9:59 am

Yes, I am going with the portmanteau of “Ryden”  – combining the last names of Rep. Paul Ryan and Sen. Ron Wyden — because “Wyan” seems  kinda’ lame and sounds like “whine” when you say it. So RydenCare it is. My thoughts on the plan in a bit. (Sneak preview: I am very excited) But first here are some resources:

– The 13-page proposal from Ryan and Wyden

– Ryan and Wyden op-ed in the WSJ

– The WSJ editorial on RydenCare

– Thoughts on the plan from Yuval Levin

– Thoughts on the plan from Reihan Salam

– A chart from Ryan and the Bipartisan Policy Center on why reform is imperative:

 

 

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