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Does Ginsburg buy the ‘broccoli argument’?

By James Pethokoukis

March 26, 2012, 1:51 pm

Will Ruth Bader Ginsburg vote to toss out Obamacare’s individual mandate? It’s been assumed that the Supreme Court justice is a lock to find the provision constitutional. But then came this question during today’s oral arguments:

JUSTICE GINSBURG: Mr. Long, there’s another argument that has been made that I would like you to address, and that is all this talk about tax penalties is all beside the point because this suit is not challenging the penalty. This is a suit that is challenging the must-buy provision, and the argument is made that, if, indeed, “must-buy” is constitutional, than these complainants will not resist the penalty.

So what they’re seeking is a determination that that “must-buy” requirement, stated separately from penalty, that “must-buy” is unconstitutional, and, if that’s so, that’s the end of the case; if it’s not so, they are not resisting the penalty.

“Must-buy requirement” is how Ginsburg thinks of the mandate? That sounds like she might just accept the so-called broccoli argument against the mandate: If the government can require citizens to purchase health coverage, then hypothetically nanny-state feds could order you to buy broccoli. If she does, the mandate is in deep trouble.

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Categories:  Economic Policy, Law and the Constitution, Regulation   |   Tags: ,

Kenneth P. Green

EPA-induced refinery closures linked to high gas prices

By Kenneth P. Green

March 23, 2012, 1:48 pm

An article in Investor’s Business Daily puts a greater share of responsibility for high gas prices on EPA’s perpetual regulatory crusade, particularly its influence on refineries:

The untold story behind soaring pump prices is that major U.S. refineries are going out of business and creating at least regional shortages thanks in no small part to costly EPA rules. Over just the past six months, three refineries supplying about half the gasoline, diesel and jet fuel to the East Coast have closed, including two owned by Sunoco Inc. They say they simply cannot make money anymore. Philadelphia-based Sunoco’s refinery business in the Northeast has lost almost $1 billion over the past three years as U.S. demand for gas fell and the cost of foreign crude soared. But over the same period, it had to shell out “significant expenditures for environmental projects and compliance activities” to satisfy onerous EPA mandates, according to the company’s latest 10-K report. In fact, it’s spent more than $1.3 billion just to comply with stricter EPA rules, which carry stiff fines or penalties for violations. Sunoco fretted that these regulatory costs would grow exponentially under the Obama administration, which has hit some of its refineries with fines.

It’s long been known that refinery costs contribute significantly to gas prices. As I wrote in a recent article for The American:

Another factor that may have contributed to the increased price of gasoline is the reduction in the number of operating refineries in the United States over the last 30 years. The number and capacity of U.S. refineries peaked in 1981, and, since then, 171 plants have closed, although the remaining plants have increased output to offset a loss of production. Though most of this reduction has been caused by the low profit potential of refineries, others see a significant cause in “extremely tight environmental restrictions, not-in-my-backyard community opposition, and the high cost of new construction.” Refinery profit margins have played a role in recent gasoline price hikes. The EIA suggests that “The sizable jump in retail prices this year reflects not only the higher average cost of crude oil compared to previous years, but also an increase in U.S. refining margins on gasoline (the difference between refinery wholesale gasoline prices and the average cost of crude oil) from an average of $0.34 per gallon in 2010 to $0.45 per gallon in 2011 and $0.42 per gallon in 2012.”

Though EPA’s official position is that every action they take is all benefit and no cost, facts—and gas prices—are stubborn things.

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Categories:  Energy and Environment, Regulation   |   Tags: , ,

So which president deserves credit for the rise in U.S. energy production?

By James Pethokoukis

March 23, 2012, 12:34 pm

OK, so The New York Times has this big, blow-out piece today, “U.S. Inches Toward Goal of Energy Independence.” A few stats I gleaned from it:

– In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005.

– Not only has the United States reduced oil imports from members of the Organization of the Petroleum Exporting Countries by more than 20 percent in the last three years, it has become a net exporter of refined petroleum products like gasoline for the first time since the Truman presidency.

– The natural gas industry, which less than a decade ago feared running out of domestic gas, is suddenly dealing with a glut so vast that import facilities are applying for licenses to export gas to Europe and Asia.

– National oil production, which declined steadily to 4.95 million barrels a day in 2008 from 9.6 million in 1970, has risen over the last four years to nearly 5.7 million barrels a day.

– The Energy Department projects that daily output could reach nearly seven million barrels by 2020. Some experts think it could eventually hit 10 million barrels—which would put the United States in the same league as Saudi Arabia.

Here is the nut graph:

How the country made this turnabout is a story of industry-friendly policies started by President Bush and largely continued by President Obama — many over the objections of environmental advocates — as well as technological advances that have allowed the extraction of oil and gas once considered too difficult and too expensive to reach.

To say the least. Vice President Cheney’s energy task force helped produce the Energy Policy Act of 2005, which stopped the EPA from regulating fracking under the Safe Drinking Water Act and granted the Interior Department “the power to issue drilling permits on millions of acres of federal lands without extensive environmental impact studies for individual projects … That new power has been used at least 8,400 times, mostly in Wyoming, Utah, and New Mexico, representing a quarter of all permits issued on federal land in the last six federal fiscal years.”

In addition, Team Bush “opened large swaths of the Gulf of Mexico and the waters off Alaska to exploration. … These measures primed the pump for the burst in drilling that began once oil prices started rising sharply in 2005 and 2006. With the world economy humming — and China, India, and other developing nations posting astonishing growth — demand for oil began outpacing the easily accessible supplies.”

Oh, and I would like to get some industry feedback on how Obama “largely continued” Bush’s pro-energy policies ….

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Categories:  Energy and Environment, Regulation   |   Tags:

Alex J. Pollock

Will the CFPB protect consumers from the government?

By Alex J. Pollock

March 22, 2012, 4:55 pm

How does the government do at protecting consumers from itself when it comes to financial products? A friend in the mortgage business made the following as ironical suggestions, but they are in fact serious, real problems of consumer protection. The Consumer Financial Protection Bureau (CFPB) needs to get on these immediately:

1.    The CFPB should be heavily regulating the predatory consumer financial products offered by all state lotteries. This should include appropriate large print disclosures of the dangers they pose to financial health if used habitually.

2.    The CFPB needs to reform the disclosures of the Social Security program. Consumers should be clearly informed in short, honest disclosures that they are likely to have very low or even negative returns on the money they are forced to put into Social Security. There should also be large type and prominent disclosures that the Social Security program is (a) insolvent; and (b) will in the future require either higher contributions for the same benefits, or lower benefits for the same contributions: and that either way, the percentage return on the consumers’ money will be even lower. There should be a prominent box comparing the expected returns on Social Security to those of long-term government bonds and high quality corporate bonds.

If it fails to address these issues, the CFPB could hardly claim a commitment to real consumer financial protection or defend its own integrity.

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Categories:  Economic Policy, Regulation   |   Tags: , ,

Best place for business? Hong Kong, again

By Daniel Hanson

March 22, 2012, 10:36 am

If you want to attract business to your country, you have to have the right parameters for business to operate. Specifically, your country has to offer access to markets and freedom to use this access to the greatest degree possible. Bloomberg ranked the best countries for doing business recently, and their results are insightful. The top ten countries are listed below.

The index measures six factors—the cost of setting up a business; degree of economic integration; cost of labor and materials; cost of moving goods; less tangible costs like corruption, property rights violations, inflation, and taxes; and readiness of the consumer base. In sum, these six factors left the United States in third place, with Hong Kong at the top and Brazil at the bottom. The list ranked only the top 50 economies in the world.

Hong Kong has a sterling reputation, offering a corruption-free government, low taxes, and access to growing Asian markets. Hong Kong beats the U.S. on a number of important factors, like corporate income tax rates. Hong Kong charges 16.5%, less than half of the U.S.’s 35% rate. This is why many countries, like GE, Boeing, and GM, have made Hong Kong the center of their Asian operations.

A few other items of note:

  • A substantial gap exists between the competitiveness of the upper Eurozone countries—the Netherlands (2), Germany (6), France (8), and Austria (9)—and the embattled southern European countries, which don’t make an appearance until substantially later—at 20 (Italy), 21 (Spain), 26 (Ireland), and 29 (Portugal).
  • The U.S. ranks highly in large part because of its resilient consumer base. Even with high costs in other areas, the U.S. makes the grade because of their large group of conspicuous consumers.
  • Hong Kong’s free market ways continue to be praised and respected. After decades of open markets, Hong Kong is still business friendly and the main access point to Asian markets. Other indices of economic freedom—like the Heritage/WSJ and Frasier Institute’s indices—also rank Hong Kong number 1.

Countries that have a lot going for them—like the U.S. with its vast resources and huge consumer base—can learn a lot from places like Hong Kong. Despite not having a lot of obvious economic advantages, Hong Kong has been a pro-business haven for decades thanks to government staying out of the way. Imagine what southern Europe would look like right now absent a sovereign debt crisis and bloated welfare state.

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

Nick Schulz

Supreme knockdown of the EPA

By Nick Schulz

March 21, 2012, 2:16 pm

The Supreme Court just sided with Mike and Chantell Sackett of Idaho in their fight against the EPA. Property rights advocates should be thrilled. It’s also a victory for the Pacific Legal Foundation and their talented attorney Damien Schiff.

I had the good fortune of meeting the Sacketts recently. It is difficult to overstate just how outrageous their treatment was by the EPA. Take a look at the following video from Nick Gillespie’s team at Reason to understand what happened to them.

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Categories:  Energy and Environment, Regulation   |   Tags: ,

Joseph Antos

No, Paul Ryan’s new budget does not end Medicare

By Joseph Antos

March 20, 2012, 4:29 pm

Contrary to claims from opponents, the budget plan released today by House Budget Chairman Paul Ryan does not spell the end of Medicare. The plan lowers Medicare spending by $210 billion over the next decade—a modest reduction for a $6.6 trillion program. That sets the stage for the shift to premium support, which gives seniors a choice of competing health plans including traditional Medicare. A recent AEI study shows that competition could reduce federal spending by another 4.2 percent a year while maintaining basic benefits and without raising taxes—and without exposing the elderly to the risk of higher health care costs.

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Categories:  Regulation   |   Tags: , ,

How to fix IPAB? More IPAB!

By James Pethokoukis

March 20, 2012, 3:02 pm

So while Paul Ryan is proposing a Medicare reform plan that uses competition to reduce costs and improve quality—you know, just like in the rest of the economy—the liberal Center on Budget and Policy Priorities has a new paper out trying to calm fears about IPAB, Obamacare’s bureaucratic rationing board. I’m not sure it was successful:

None of this is to suggest that IPAB leaves no room for improvement. In particular, changes could be made that would allow IPAB to focus less on short-term savings and more on proposals to slow the growth of costs in the long run. In addition, since health care cost growth fundamentally is a system-wide problem rather than a Medicare-specific problem, Congress could allow IPAB to make binding recommendations to reform payments and slow cost growth in the private sector as well as in Medicare. While Medicare has frequently been the key leader in developing innovative ways to reduce costs, such as developing the prospective payment system for hospital care that was later adopted by private insurers, IPAB could be improved to help accelerate that trend. In these ways, IPAB could play an expanded role in promoting payment and delivery reform throughout the health care system.

Oh, so an even better version of IPAB would be one that was more powerful and could levy mandates over the entire healthcare economy, public and private? This sounds like just the scenario Jim Capretta has been warning about:

Obamacare established what’s known as the Independent Payment Advisory Board, or IPAB, supposedly to find cost “efficiencies” in Medicare. In truth, the IPAB’s mandate is to enforce what amounts to a cap on overall Medicare spending. The only tool at its disposal to do so is price setting for suppliers of services and products to Medicare patients. It will impose arbitrary, across-the-board payment-rate reductions to hit budget targets, which will have the predictable result of driving willing suppliers of services out of the marketplace.

As the years go by, if Obamacare is allowed to stand, tens of millions of American will become enrolled in publicly subsidized coverage. The costs to the Treasury will be steep — and will lead to calls for greater cost control. That’s when Democrats will push for the next step — to extend the IPAB’s authority beyond Medicare to the insurance plans subsidized by Obamacare. We will nearly be at the bottom of the slippery slope to a Canadian-style health system.

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Categories:  Economic Policy, Regulation   |   Tags: , ,

Would Paul Ryan’s Medicare reform plan actually work?

By James Pethokoukis

March 20, 2012, 2:22 pm

In his new budget proposal, Representative Paul Ryan revises his approach to transition Medicare from an open-ended, fee-for-service plan into a premium support plan like the one he created with Senator Ron Wyden. Now, there is nothing particularly radical about this idea of using Medicare dollars to choose among private plans or, in this case, private plans plus a traditional Medicare option. Democrats, both in the past and present, have supported just such an idea. And Obamacare would subsidizes individuals to choose among private plans in its exchanges.

But one common liberal gripe about Ryancare is that it’s too stingy on the federal Medicare subsidy. As Yuval Levin wrote about Ryancare 1.0:

But the most politically potent critique of the plan has also been the most substantively serious. It has focused on the rate at which the premium-support payment would grow, and on seniors’ fears that their costs would rise. The concern, voiced by some congressional Democrats and by liberal health care experts like former Clinton budget director Alice Rivlin, has been that the competitive pressures unleashed by the Ryan plan would not be sufficient to cause health care costs to grow only at the rate of inflation​—​which is far lower than their growth rate in recent years​—​so that the premium-support payment would not keep up with the cost of insurance, and seniors would face a steady increase in out-of-pocket costs over time to cover the gap.

So Ryancare 2.0 switches to a competitive bidding process. Avik Roy:

The basic idea behind competitive bidding is that, say, on a county-by-county basis, you let private plans and traditional Medicare offer plans with the same actuarial value compete, to see who can offer the same package of benefits the most efficiently. Each plan in a given county will name a price for which they are willing to offer these services, and seniors are free to pick whichever plan they want. However, the government will only subsidize an amount equal to the bid proposed by the second-cheapest plan. If you want a more expensive plan, you have to pay the difference yourself.

So the bet here is that competition works — indeed, Yuval calls it the “confident market solution” — though Ryan does include a backstop, putting a cap on Medicare spending growth at nominal GDP plus 0.5%. But there is a good chance that competitive bidding would be successful. A GAO study on competitive bidding is encouraging. And as a recent AEI study found:

Our research shows that competitive bidding—a key feature of the Wyden-Ryan plan—could save Medicare $339 billion over ten years while maintaining basic benefits and without raising taxes. Crucially, the elderly would not be exposed to the risk of higher health care costs, as in approaches that would set fixed voucher payments toward the purchase of medical insurance. … Competitive bidding would save a substantial amount of money, helping solve Medicare’s fiscal crisis. We estimate the savings at 5.6 percent of Medicare costs, compared with the fully implemented PPACA. This estimate is likely to be conservative because it is based on the second-lowest bid, not the lowest bid that we prefer. In addition, we assume that competitive bidding will not create incentives for health plans to be more efficient; factoring in the increased efficiency likely to result makes our estimates even more conservative.

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Categories:  Economic Policy, Regulation   |   Tags: , ,

Here, in one graphic, is what’s wrong with American healthcare

By James Pethokoukis

March 19, 2012, 8:12 am

Talk about a vicious cycle. The above chart (from must-read healthcare blogger Avik Roy) comes as close as anything I’ve seen to explaining in a picture what is wrong with the American healthcare system. It shows how government policy creates a dysfunctional healthcare market by insulating consumers from the true cost of their healthcare decisions, raising demand/overconsumption of high-end services/costs, prompting more government intervention (like Obamacare) … and more insulation. Rinse and repeat. Here is Arnold Kling on “insulation”:

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small. Real insurance, such as fire insurance, provides protection against rare, severe risk. Real insurance is characterized by:

– low premiums

– infrequent claims

– large claims

American health insurance—including employer-provided insurance and Medicare—is the opposite. Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.

The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. Families that are in the individual insurance market face sticker shock when they confront health insurance premiums. Many choose to remain uninsured. Employers are finding health care expenses an increasing burden. A noticeable gap has arisen in the past twenty years between the growth of total employee compensation and the growth of wages. Take-home pay is stagnant or shrinking, as much of the growth in compensation is diverted to health care.

Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits. Many studies that compare groups with similar conditions show that those with the largest levels of health care spending fare no better in terms of outcomes than those that spend less.

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CBO: Obamacare could cost $2.1 trillion through 2022

By James Pethokoukis

March 15, 2012, 11:24 am

The process of finding out just what’s in Obamacare continues!

According to a new government report, it turns out that more people than first expected will end up getting healthcare through the subsidized insurance exchanges and Medicaid rather than through their employers:

In the original analysis of the impact of the legislation, CBO and JCT estimated that, on balance, the number of people obtaining coverage through their employer would be about 3 million lower in 2019 under the legislation than under prior law. As reflected in CBO’s latest baseline projections, the two agencies now anticipate that, because of the ACA, about 3 million to 5 million fewer people, on net, will obtain coverage through their employer each year from 2019 through 2022 than would have been the case under prior law.

The results acknowledge that if a business chooses not to offer insurance coverage under the ACA, some workers might enroll in Medicaid or CHIP or be eligible to receive subsidies through the insurance exchanges. And as a result, the cost of those programs would increase.

Right now, the updated baseline CBO forecast sees the gross cost of Obamacare through 2022 as $1.8 trillion, a number which includes this new estimate of employee coverage. When you include new taxes, the net cost is $1.3 trillion. (Back in 2010, the ten-year, gross cost was a mere $940 billion, as the bill was structured to back end spending. But now instead of six years of spending estimates, we have nine.)

But under one CBO-JCT scenario, the gross costs through 2022 could be $2.1 trillion if even more businesses than expected decide not to offer health insurance and more people need government subsidized coverage.

But no worry, say the government bean counters, $386 billion in addition taxes (for a total of $895 billion) will cover the difference. First, there would be higher penalty payments by employers and individuals. Second, since health benefits are generally not taxed but wages and salaries are, a shift in the mix of compensation would raise federal revenues.

The discovery process continues …

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Scott Gottlieb

Study: Obama healthcare reform raising costs, forcing workers out of existing plans

By Scott Gottlieb

March 13, 2012, 9:03 am

 

The Willis Report of Employers is out and it has some major implications for Obamacare:

– Employers report that their healthcare costs have increased by about 2-5%—mainly due to new mandates in the new health law such as requirements that young adults can continue coverage under their parents’ policies, first dollar coverage of routine services, and the removal of annual lifetime limits for “essential health benefits.”

– More than half of the employer respondents expect to pass on these ACA-endowed rising costs to employees.

– Moreover, fewer than 30% of employers say they were able to maintain grandfathered status of their healthcare plans. This rapid loss of grandfathered status far outpaces Obamacare’s original estimates of what would happen. The preamble to the June 2010 regulations noted that by the end of 2011, the Obama administration expected 78% of employers would retain grandfathered status. By the end of 2012, they forecast that 62% would still be grandfathered, and by the end of 2013, 49% would retain their grandfathered status.

The new report states: “The accelerated loss of grandfathered status suggests that employers have had to make many plan changes to offset cost increases, and perhaps employers have been more willing to give up grandfathered status in order to take other steps to control costs.”

The upshot: If you like your health plan, you won’t be able to keep it.

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

Are special tax breaks OK for bailed-out GM but not AIG?

By James Pethokoukis

March 12, 2012, 8:21 am

From Ben White over at Politico:

A group of four former members of the Congressional Oversight Panel for TARP – Elizabeth Warren, Damon Silvers, Mark McWatters, and Kenneth Troske – today will condemn what they say is an estimated $17.7 billion in special tax breaks given to bailed out insurer AIG: “Congress should not allow … AIG to avoid paying taxes for years into the future in addition to the $182 billion bailout the company has already received … When a company changes ownership, long-standing tax laws limit the extent to which it can offset future taxes with past losses. “Beginning in late 2008, however, the Treasury Department quietly issued a series of notices that exempted AIG from those limits. … ‘AIG gambled recklessly on mortgage-backed securities and lost,’ said Warren, former chair of the Panel. ‘When the government bailed out AIG, it should not have allowed the failed insurance giant to duck taxes for years to come.”

Oh, Warren & Co. are against special tax breaks for bailed-out companies. Interesting. I am curious what this group, particularly Warren—who is running for U.S. Senate in Massachusetts—think about the $13 billion tax break Uncle Sam is giving General Motors. According to bankruptcy expert David Skeel, Treasury Department estimates of the cost of the bailout “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.”

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Fed double standard: Manipulated interest rates are dangerous

By Daniel Hanson

March 2, 2012, 10:10 am

Regulators from the United States, Canada, Japan, and the European Union are collectively investigating the traders from banks that offer submissions comprising the Libor rate. The rate, which is used to set prices on hundreds of trillions of dollars worth of securities, is created using submissions from 9 major London banks.

Today’s Bloomberg notes:

Staff responsible for submissions to the London interbank offered rate regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks, according to money-market traders with direct knowledge of procedures at three firms. The talks became common practice after money markets froze in 2007, making it difficult for individual bankers to gauge the cost of borrowing from other lenders, said the traders, who asked not to be identified because they weren’t authorized to speak about the subject.

“A few hundred people, mostly based in one city and sitting in close proximity to each other, set an index rate for trillions of dollars of securities with little or no oversight,” said Mark Sunshine, chief executive officer and chairman of Veritas Financial Partners, a Florida-based firm that provides loans to businesses and real estate companies. “That cannot continue. The mechanism itself, the oversight and the penalties if violated, are woefully inadequate.”

Apparently, regulators and market watchers are uncomfortable with a cabal of top investors manipulating interest rates. It’s as though they realize that central planning is a bad way to do economics because small groups of people can’t know adequately what’s happening in the rest of the economy.

Yet apparently an exception is made for the Fed, which is actively engaged in massive interest rate manipulation. Rather than allowing interest rates to accurately reflect risk and time preferences, the Fed has vigorously moved to keep interest rates artificially low, and has pledged to keep doing it through at least 2014.

The logical leap that remains unexplained in this policy is how back-room central planning is inappropriate for market participants (i.e., big banks) while interest rate manipulation from 12 people in Washington is lauded.

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

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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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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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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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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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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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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