Friday, February 20, 2009

Conservative View On Obama’s Judicial Nominees

Obama’s Judicial Nominees, by Ed Whelan
Bench Memos/NRO, Friday, February 20, 2009

In this essay, Princeton professor (and—disclosure—Ethics and Public Policy Center board member) Robert P. George argues that the real-world constraints in the fields of national security and economics make it all the more certain that President Obama will deliver to “the left, fully and without dilution, victory on the moral and cultural issues”, especially through the courts:
What Obama’s judicial nominees will have in common is a belief that
judicial power may legitimately be used, and should be used to achieve
left-liberal moral and political goals. Their belief lacks any basis in the text
of the Constitution, the logic of its provisions, or its structure and original
understanding, but never mind. Some will propose moving quickly, others more
cautiously and gradually, but all will subscribe to one version or another of
the idea that the “majestic generalities” of the Constitution (free speech, due
process, equal protection) need to be given content by judges reading into them
ideas such as abolishing the legal definition of marriage as the conjugal union
of husband and wife, extending legal abortion, requiring the public funding of
abortion, and invalidating parental notification and informed consent laws and
laws affording conscience and religious liberty protection to pro-life
physicians, healthcare workers, and pharmacists.

The Obama judges are likely to revive the idea (championed by influential
liberal legal scholar Ronald Dworkin but rejected in the mid-90s by the Supreme
Court) that there is a constitutional right to assisted suicide, and expand
constitutional protection of pornography, including “virtual” child pornography
that is manufactured without the use of actual children. They will defend
preference-based affirmative action policies in hiring and employment as
constitutionally warranted efforts to achieve an allegedly compelling state
interest in racial, ethnic, and sexual “diversity.” They will likely place
further restrictions on religious activities and expression in public schools
and other governmental institutions by adopting a broad reading of the
“establishment clause” and a narrow reading of the “free exercise” clause of the
First Amendment.

Alas, that sounds accurate to me.

Libertarian: Assessing the President's Mortgage Plan

Assessing the President's Mortgage Plan, by Alan Reynolds
The Wall Street Journal, February 19, 2009

The president's new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.

The simplest yet arguably most potent part of the strategy is the plan to allow Fannie and Freddie to refinance conforming loans (up to $729,750) without the quaint requirement that the refinanced loan be no larger than 80% of the value of the house. This change provides access to today's low mortgage rates even to "underwater" borrowers — those who owe more that their houses are worth. Although such borrowers have no skin in the game, President Obama assumes or hopes that their reduced payments will result in fewer defaults.

A second part of the plan provides standardized rules for modifying mortgages (obligatory for banks that accepted Troubled Asset Relief Program money). Participating lenders would first have to cut interest rates sufficiently to limit mortgage payments to 38% of gross income — something more likely for those now paying 39%-40% than for those paying much more. The government would then match further interest-rate reductions to push mortgage payments all the way down to 31% of pretax income. In order to cut mortgage payments to 31% from 38%, $75 billion in taxpayer subsidies will be available to lenders to cover half the cost. Some will pay more in taxes so that others can pay less for housing. This is redistribution based on debt rather than income.

The plan also provides small bribes to mortgage servicers and borrowers for every assisted borrower who does not end up defaulting again (a big problem with past loan modification schemes). Treasury would also establish an insurance fund to protect participating lenders if house prices fell further.

Subsidizing select mortgages poses a fundamental rationing problem: Demand for subsidies rises to meet the available supply. If Joe and Sally get federal subsidies to cut their mortgage payments to 31% of their income, their neighbors will want subsidies too. To keep the expenses from ballooning well beyond $75 billion, there may have to be stern but arbitrary "means testing" to decide who is most deserving of a taxpayer-supported mortgage. And that will likely provoke resentment about how winners and losers are picked.

The third part of the plan is to get Fannie and Freddie to buy more mortgages with the hope of keeping mortgage rates down. Never mind that both organizations were considered insolvent last fall, when they held far fewer dubious IOUs than they do now. The plan instructs the Treasury — which is also getting skeptical reviews from Moody's — to invest another $200 billion in Fannie and Freddie preferred shares.

Last and least helpful, the president's proposed "cramdown" would "allow judicial modification of home mortgages for borrowers who have run out of options." That would require federal legislation, and Congress would be well advised to put that plan aside in order to give the president's new options a fair chance.

Any plan that compels mortgage holders to reduce the amount of money they are owed must in turn reduce the value of mortgage-backed securities held by banks, insurance companies, pension funds, Fannie and Freddie, and the Fed. By injuring the balance sheets of potential lenders, a cramdown would also injure potential borrowers.

The needless threat of inviting judges to rewrite mortgage contracts at whim helps explain why bank stocks generally fell on the plan's announcement, while financial shorts rose.

In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.

Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.

Persistance of Somali Piracy, U.S. Navy and other Responses

Persistance of Somali Piracy, U.S. Navy and other Responses. By J. Peter Pham
The Tank/NRO, Thursday, February 19, 2009

This week my “Strategic Interests” column for the World Defense Review provides an updated analysis of the piracy phenomenon off the coast of Somalia and international responses to it, warning that the challenge “is not just ongoing, but incidents of attempted hijackings may actually increase” despite the efforts to counter them.

After reviewing the unprecedented level of international political and security cooperation—including United Nations resolutions and other efforts, multilateral and bilateral agreements, the stand-up United States-led Combined Task Force 151, the extension of the U.S. Naval Forces Europe/U.S. Naval Forces Africa “Africa Partnership Station” to Africa’s eastern littoral, and the deployment of other naval forces to the region—my article turns its attention to the “less promising indicators” among the Somali, including the internal contradictions within the ineffectual “Transitional Federal Government” (TFG) of Somalia, the rise of nefarious influence of piracy in the institutions of the semi-autonomous Puntland region, the continuing resurgence of the Islamist extremism spearheaded by al-Shabaab, and the pressure that Somaliland is increasingly under. Thus I conclude:
No doubt considerable progress has been made in recent months in the
international community’s appreciation of the challenge represented by the
Somali pirates. However, much more remains to be done before the threat can be
diminished. Ultimately . . . the problem of Somali lawlessness at sea
will only be definitively resolved when the international community summons up
the political will to adequately address the underlying pathology of Somali
statelessness onshore. Absent a minimal framework of legitimate and effective
governance in what was formerly the territory of the unitary Somali state—and I
would include as an essential attribute of such governance some sort of coast
guard capability, probably externally supported, perhaps with its resources
divided between Somaliland (assuming the upcoming elections are held, their
conduct legitimate, and the aftermath stable) and Somalia proper (under United
Nations, African Union, or subregional tutelage until the TFG or whatever
alternative interim arrangement might emerge in its stead proves itself
effective and capable of handling such responsibilities)—the specter of piracy
will always be looming just over the horizon.

Deregulation and the Financial Panic - Loose money and politicized mortgages are the real villains

Deregulation and the Financial Panic, by Phil Gramm
Loose money and politicized mortgages are the real villains.
WSJ, Feb 20, 2009

The debate about the cause of the current crisis in our financial markets is important because the reforms implemented by Congress will be profoundly affected by what people believe caused the crisis.

If the cause was an unsustainable boom in house prices and irresponsible mortgage lending that corrupted the balance sheets of the world's financial institutions, reforming the housing credit system and correcting attendant problems in the financial system are called for. But if the fundamental structure of the financial system is flawed, a more profound restructuring is required.

I believe that a strong case can be made that the financial crisis stemmed from a confluence of two factors. The first was the unintended consequences of a monetary policy, developed to combat inventory cycle recessions in the last half of the 20th century, that was not well suited to the speculative bubble recession of 2001. The second was the politicization of mortgage lending.

The 2001 recession was brought on when a speculative bubble in the equity market burst, causing investment to collapse. But unlike previous postwar recessions, consumption and the housing industry remained strong at the trough of the recession. Critics of Federal Reserve Chairman Alan Greenspan say he held interest rates too low for too long, and in the process overstimulated the economy. That criticism does not capture what went wrong, however. The consequences of the Fed's monetary policy lay elsewhere.

In the inventory-cycle recessions experienced in the last half of the 20th century, involuntary build up of inventories produced retrenchment in the production chain. Workers were laid off and investment and consumption, including the housing sector, slumped.

In the 2001 recession, however, consumption and home building remained strong as investment collapsed. The Fed's sharp, prolonged reduction in interest rates stimulated a housing market that was already booming -- triggering six years of double-digit increases in housing prices during a period when the general inflation rate was low.

Buyers bought houses they couldn't afford, believing they could refinance in the future and benefit from the ongoing appreciation. Lenders assumed that even if everything else went wrong, properties could still be sold for more than they cost and the loan could be repaid. This mentality permeated the market from the originator to the holder of securitized mortgages, from the rating agency to the financial regulator.

Meanwhile, mortgage lending was becoming increasingly politicized. Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market.

As Mr. Greenspan testified last October at a hearing of the House Committee on Oversight and Government Reform, "It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of CRA." It was not just that CRA and federal housing policy pressured lenders to make risky loans -- but that they gave lenders the excuse and the regulatory cover.

Countrywide Financial Corp. cloaked itself in righteousness and silenced any troubled regulator by being the first mortgage lender to sign a HUD "Declaration of Fair Lending Principles and Practices." Given privileged status by Fannie Mae as a reward for "the most flexible underwriting criteria," it became the world's largest mortgage lender -- until it became the first major casualty of the financial crisis.

The 1992 Housing Bill set quotas or "targets" that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997.

By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%.

The results? In 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized. By 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back.

Blinded by the experience of the postwar period, where aggregate housing prices had never declined on an annual basis, and using the last 20 years as a measure of the norm, rating agencies and regulators viewed securitized mortgages, even subprime and undocumented Alt-A mortgages, as embodying little risk. It was not that regulators were not empowered; it was that they were not alarmed.

With near universal approval of regulators world-wide, these securities were injected into the arteries of the world's financial system. When the bubble burst, the financial system lost the indispensable ingredients of confidence and trust. We all know the rest of the story.

The principal alternative to the politicization of mortgage lending and bad monetary policy as causes of the financial crisis is deregulation. How deregulation caused the crisis has never been specifically explained. Nevertheless, two laws are most often blamed: the Gramm-Leach-Bliley (GLB) Act of 1999 and the Commodity Futures Modernization Act of 2000.

GLB repealed part of the Great Depression era Glass-Steagall Act, and allowed banks, securities companies and insurance companies to affiliate under a Financial Services Holding Company. It seems clear that if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass-Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified.

Moreover, GLB didn't deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.

When no evidence was ever presented to link GLB to the financial crisis -- and when former President Bill Clinton gave a spirited defense of this law, which he signed -- proponents of the deregulation thesis turned to the Commodity Futures Modernization Act (CFMA), and specifically to credit default swaps.

Yet it is amazing how well the market for credit default swaps has functioned during the financial crisis. That market has never lost liquidity and the default rate has been low, given the general state of the underlying assets. In any case, the CFMA did not deregulate credit default swaps. All swaps were given legal certainty by clarifying that swaps were not futures, but remained subject to regulation just as before based on who issued the swap and the nature of the underlying contracts.

In reality the financial "deregulation" of the last two decades has been greatly exaggerated. As the housing crisis mounted, financial regulators had more power, larger budgets and more personnel than ever. And yet, with the notable exception of Mr. Greenspan's warning about the risk posed by the massive mortgage holdings of Fannie and Freddie, regulators seemed unalarmed as the crisis grew. There is absolutely no evidence that if financial regulators had had more resources or more authority that anything would have been different.

Since politicization of the mortgage market was a primary cause of this crisis, we should be especially careful to prevent the politicization of the banks that have been given taxpayer assistance. Did Citi really change its view on mortgage cram-downs or was it pressured? How much pressure was really applied to force Bank of America to go through with the Merrill acquisition?

Restrictions on executive compensation are good fun for politicians, but they are just one step removed from politicians telling banks who to lend to and for what. We have been down that road before, and we know where it leads.

Finally, it should give us pause in responding to the financial crisis of today to realize that this crisis itself was in part an unintended consequence of the monetary policy we employed to deal with the previous recession. Surely, unintended consequences are a real danger when the monetary base has been bloated by a doubling of the Federal Reserve's balance sheet, and the federal deficit seems destined to exceed $1.7 trillion.

Mr. Gramm, a former U.S. Senator from Texas, is vice chairman of UBS Investment Bank. UBS. This op-ed is adapted from a recent paper he delivered at the American Enterprise Institute.

Memo to Bandwagon Obama Fans: Get Tough!

Memo to Bandwagon Obama Fans: Get Tough! By Maegan Carberry
Huffington Post, February 20, 2009 02:10 AM (EST)

If I hear one more person declare that Obama's "honeymoon is over" or that the Republican response to the stimulus proves that his quest for a bipartisan America was naïve and ineffectual, I will surely scream. What I'd really like to know is: Where were these wise naysayers circa summer of 2007? Toting Hillary signs? Blathering about Barack's enormous potential, but (voice lowers, candidly) proclaiming the nation just wasn't ready for a black president?

See, a couple years ago, some of us were hard at work executing the inklings of an ambitious vision that the majority said was impossible. It's a good thing my friends who spent A YEAR knocking on the doors of every home in Council Bluffs, Iowa, connecting on a person-to-person level and exchanging new ideas that inspired a community, then a state, then a party, then a nation to adopt a new mindset and make history didn't listen to contrarians who could only echo simple-minded soundbites. They understood, like most forward-thinking leaders, that real, lasting problem solving happens at the root cause and is built by meticulously gaining the trust and support of invested parties. (Including, dare we acknowledge it!, the Republican party.) Any other approach is subject to the whimsical ebb and flow of partisan politics, resulting in hard-fought legislation undone each election cycle. Who wants to bleed and sweat for change that isn't going to endure?

The limited vision some of my close pals, favorite pundits and fellow Obamamaniacs have displayed post-inauguration is beyond disappointing. It's as though, in our collective gloom about the economy and the dilapidated state of our nation's affairs, we've forgotten that the prize we sought during the election was always going to be another staggering, indefinite uphill battle. How many times did you say in conversation during the campaign, "Do you think whoever wins this thing is really going to want the job when he finally gets it?"

For the last couple weeks I have wanted to shake some people and remind them of the early days, when we were the only ones who believed in the senator from Illinois. I can remember recruiting people to attend events in LA in the spring of 2007 and being blown off and told I was a dreamer. I wore my campaign buttons religiously to spark conversations, most of which centered around Obama's supposedly far-fetched viability as a presidential contender. I recall being advised by mentors to jump off the hope train and position myself more strategically in alliances with Clinton staffers.

We had to have those conversations defending Barack every day. It was a year before SuperTuesday, when we rounded a corner and people started to open their minds and hear the message. Eventually, those conversations turned even Ohio and Florida from red to blue.

Of course I'm pissed that the Republicans, desperately in need of displaying a united front after getting their asses kicked, decided to err on the side of belligerence. It wasn't a particularly bold way to lead. In fact, their lackluster stimulus performance is reminiscent of a lil vote in 2002, in which no Democrats could be found to prevent the obviously ill-advised invasion of Iraq. I'd love to call them cowards and tell them there are now plenty of vacancies at the Hotel Guantanamo Bay if they'd like to secede from the union and start their own backwards society. That would not be helpful.

I will never forget how disempowering it was in 2000, when George Bush took office and started systematically slashing the accomplishments of the Clinton administration and undercutting the hard work that a generation of progressives put into the comparably glorious 1990s era. I was appalled that a leader could be so divisive, and I was amazed at the fleeting nature of political power.

I chose to support Barack Obama because he built his coalition for America's future from the bottom up. He focused not on party politics, but encouraged us to find common interests and work together whenever it was possible. He addressed the root cause of apathy in our disengaged collective citizenship, convincing individuals through the most successful grassroots viral marketing campaign in American history that they could be leaders in their own communities. The combined choices of anyone who, as a result of his leadership, has decided to be a solution-oriented person who will act on his beliefs is the real power of this administration. I did not traipse around Des Moines, Portland, Seattle, Denver, Austin, Chicago and Los Angeles with "Change We Can Believe In" signs just to throw my hands in the air, exasperated by a media-infused political squabble a month into this thing, and give up on the mission we signed up to execute. We have not even scratched the surface of what we can do yet.

The MSM continues to cover what politicians and other pundits are saying and doing. That's why the early days of Obama's presidency are being told in a narrative framed by a politics-as-usual perspective. Just like they missed the stories of what was really happening on the ground as the Obama campaign's dynamic field teams enlisted supporter after supporter, they're getting this story wrong too.

What's really happening is that the hype and bandwagon support that characterized the home stretch of the Obama campaign is scaling back to its dedicated core. The people who bought into the mania were destined to crash as abruptly as they clung to us when it was the hip thing to do. Secondly, the core is tired. We worked our asses off just to realize we have to do it again. Some dove into the new administration with as much energy as could be mustered, and others of us have just needed to mentally check out for a couple months and regroup. You know, think about our own long-neglected lives for a change instead of phone banking and knocking on doors every weekend.

If you fall in the latter half of the burned-out Barackers (and I certainly do), it's probably time to crawl out of hiding and come back to work. We were always the stewards of this undertaking, and our fearless leader needs us out in the field. As exhausting as it is watching this circus of cynics try to take him down after building him up, we can't possibly be as tired as he is.