Tuesday, June 22, 2010

Press Briefing

Jun 23, 2010

Implementing the Affordable Care Act

The "government needs to be removing itself from the private sector"

The White House Blog - The Affordable Care Act -- Benefits and Weights Being Lifted

$100,000 Is Plenty for Deposit Insurance - Raising the cap will enhance the ability of weak banks to expand their deposit base and cause trouble for the FDIC

America and the Middle East in a New Era

Obama's Moratorium, Drilled. WSJ Editorial
A federal judge instructs the White House on the rule of law
WSJ, Jun 23, 2010

As legal rebukes go, it's hard to get more comprehensive than the one federal judge Martin Feldman delivered yesterday in overturning the Obama Administration's six-month moratorium on deep water drilling in the Gulf of Mexico.

In a remarkably pointed 22-page ruling, the judge made clear that even Presidents aren't allowed to impose an "edict" that isn't justified by science or safety.

Oil-services companies brought the case, which is supported by the state of Louisiana, arguing that the White House ban was "arbitrary and capricious" in exceeding federal authority, and Judge Feldman agreed. He noted that even after reading Interior Secretary Ken Salazar's report on safety recommendations (which included the ban), and Mr. Salazar's memo ordering the ban, "the Court is unable to divine or fathom a relationship between the findings and the immense scope of the moratorium."

Quite the opposite, said the judge, "the Report makes no effort to explicitly justify the moratorium." It does "not discuss any irreparable harm that would warrant a suspension of operations" and doesn't provide a timeline for implementing proposed safety regulations. There is "no evidence" that Mr. Salazar "balanced the concern for environmental safety" with existing policy, and "no suggestion" that he "considered any alternatives." The feds couldn't even coherently define "deep water." Ouch.

As these columns have argued, the judge said that the illogic of the moratorium is that "because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger." Because this will cause "irreparable harm" to jobs and to domestic energy supplies, such a sweeping ban couldn't stand.

The judge also went out of his way to express "uneasiness" over the Administration's claim that its safety report (which recommended the ban) had been "peer reviewed" by experts. Those experts have since publicly disavowed the ban, explaining that the ban was added to the report only after they had signed off on an earlier draft. White House green czar Carol Browner dismissed their complaints, saying "No one's been deceived or misrepresented."

But Judge Feldman directly contradicted Ms. Browner, describing the report's claim of "peer review" as "factually incorrect." Moreover, the Administration's "hair-splitting explanation" of what the experts did or didn't support "abuses reason, common sense, and the text at issue."

The judge's other public service was to list the environmental groups that had joined the Administration's defense against the suit. They included the Natural Resources Defense Council, whose president, Frances Beinecke, has been appointed by President Obama to his deep water drilling commission. Ms. Beinecke ought to resign.

The Administration says it will appeal, but the thorough-going nature of the judge's ruling suggests the Administration will need a much better legal and substantive case to prevail. It would do better to use the ruling as an excuse to drop its purely political ban and stop compounding the spill's damage to the people and economy of the Gulf.

Bosnia and Herzegovina: Promoting Security By Destroying Conventional Weapons

Orszag Adieu - The 'cost curve' bent the budget director

Geithner & Summers: Our Agenda for the G-20 - Countries should work to stabilize debt levels, enact new financial regulation, and reduce their dependence on fossil fuels

Blowouts Will Not Always Be Prevented - We are curiously unwilling to acknowledge known risks

Why McChrystal Has to Go - It is intolerable for military officers to mock senior political officials, including ambassadors and the vice president

Fire McChrystal Pronto

IER Statement on Court Order Overturning Obama Admin. Deepwater Drilling Ban

The White House Blog: Building Regional Energy Innovation Cluster

Daddy Was Only a Donor - A new study paints a troubling portrait of children conceived by single mothers who chose insemination

China Currency 2.0: Yes, Change Really Is Coming

Conservatives: Time to Dump the Afghanistan Timeline

Moral Hazard and China's Banks - Beijing could face its own banking crisis unless more market discipline is introduced

Moral Hazard and China's Banks. By VICTOR SHIH
Beijing could face its own banking crisis unless more market discipline is introduced.WSJ, Jun 22, 2010

Some policy makers in Beijing have taken to crowing that their economic model is superior to the West's because China didn't suffer a banking crisis. They're wrong in at least one critical respect: moral hazard. In China, just as in the West, banks and businesses have grown accustomed to gambling with other people's money on the assumption that the government will bail them out if they lose.

The key fact governing most credit and investment decisions today is that everyone believes the central bank would bail out any financial institution, large or small. The central government has consistently repaid depositors in the event of bank closures. The promise is different from, and worse than, traditional deposit insurance in that banks don't pay a premium for the benefit—it just happens.

This causes ripples throughout the financial system. Depositors and investors are at ease with placing much of their savings into financial institutions because of the central bank's blanket guarantee, allowing these institutions to provide ample liquidity to firms. The guarantee also minimizes the chance of a panic, thus enforcing everyone's confidence in the system.

Two other regulations help bolster a deceptive sense of security. First, the China Banking Regulatory Commission imposes a large basket of prudential targets on all banks, including capital-adequacy ratio, debt-asset ratio and nonperforming-loan ratio requirements, as well as a long list of lending rules. Furthermore, the Communist Party sends inspectors to monitor the banking regulators.

The guarantee and intrusive regulations make the system less secure, not more. Given the ultimate backstop, profits from risky behavior can be so high that banks are willing to share some of the spoils with corrupt regulators who can help them circumvent bothersome rules. In one recent case, the vice president of the China Development Bank was convicted of receiving bribes to grant loans against regulations. In another case, a banker in southern Guangdong province bribed local police to arrest an auditor evaluating the bank branch's books.

This kind of behavior would be difficult in a system with a freer media and an independent judiciary. But China's system depends mainly on top-down monitoring, where a borrower need only elicit the help of a powerful official. As an added benefit, if the loan fails, borrowers can work with banks to roll over loans with the regulators' full blessing.

As a consequence, financial-system risks build up over time at an unknown pace. Small crises are not allowed to emerge to inform the public of accumulating systemic risks—unlike in the United States, where a growing number of small bank failures can serve as a canary in a coal mine.

The only way to avert a future crisis of confidence is to tackle moral hazard. First, the central bank's blanket guarantee should be removed from small financial institutions that engage in reckless lending. Depositors must learn to be suspicious of banks doing the bidding of ambitious local authorities.

Second, while it may be difficult to take similar steps for large banks because of systemic risks, these institutions should be required to disclose when large-scale borrowers restructure or roll over major loans. Instead of only reporting the identities of the largest borrowers overall, listed banks should disclose the identities of their largest borrowers in every province or even city so that investors can conduct their own due diligence.

Third, regulators also need to rethink the incentives their rules create. The current system of imposing target caps on nonperforming loans encourages bankers and local regulators to collude to hide them. These targets should be scrapped in favor of higher capital-adequacy ratios and much stricter restrictions on borrowers' ability to roll over loans or to convert short-term loans into long-term loans. If losses arise, banks should be encouraged to simply recognize them and move on.

China's moral hazard problem manifests itself somewhat differently from that in the West, but the end result is the same: If all financial institutions are perceived as too big to fail, while misguided regulations give a false impression of safety, plenty of bankers and investors will be happy to take advantage.

Mr. Shih is a professor of political science at Northwestern University and the author of "Factions and Finance in China: Elite Conflict and Inflation" (Cambridge University Press, 2008).