April 3, 2008 by Tom Armstrong.

I’ve changed domains. My new address: Here.

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April 3, 2008 by Tom Armstrong.

From this excellent opinion in today’s WSJ:

By last week, Mrs. Clinton was in full Ghostbusters mode, claiming that John McCain’s speech on the housing problem “sounds remarkably like Herbert Hoover, and I don’t think that’s good economic policy.”

No, Senator, it surely isn’t. Around our offices, we’re still recovering from the fact that Hoover was the last Presidential candidate we’ve endorsed. We’ve been trashing Hoovernomics ever since. The issue this year, however, is who is really pursuing the Hoover model.

To hear Mr. Schumer and his fellow-traveling columnists tell it, Hoover’s great policy blunder was to do nothing, all the while insisting that everything was fine. But the problem with Hoover’s economic policy isn’t that it was passive but that it was actively destructive.

In 1930, he signed the Smoot-Hawley Tariff Act, setting off a wave of protectionist retaliation that undid the globalization of the preceding decades and did far more harm to the world economy than the stock-market crash ever did. Two years later, amid a bad recession, he undid the Calvin Coolidge-Andrew Mellon tax cuts, raising the top marginal income-tax rate to 63% from 25%. The recession became a Depression.

Now, since we’re talking Hoover, which Presidential candidate has a similar agenda of protectionism and tax increases? Hmmm.

Oh, that’s right. Just the other day, one of the candidates for President was saying she’d withdraw from Nafta if the Mexicans didn’t do what she demanded, and she wants “a pause” in free trade. She also wants to repeal the Bush tax cuts, more than doubling the rate on dividends back to 39.6% from 15%.

Her Democratic opponent agrees with her, except that he’d raise taxes even more, including by eliminating the $102,000 cap on income subject to the 6.2% payroll tax (12.4% when you include employers), and raising the capital gains tax to at least 25%, and maybe even 28%, from 15%. Add up all of Barack Obama’s tax increases and his proposals would get entirely too close to Hoover’s top marginal rate of 63%.

Maybe we should be afraid of Hoover’s ghost.

This is also an excellent article in today’s WSJ. Outtake:

In sum, Mr. Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later. Connecticut Senator Chris Dodd thinks $400 billion is more like it. Quavering Republicans should do the political math. The Mortgage Bankers Association tracks 46 million mortgage borrowers, and 42 million are paying on time. More than 20 million households own their homes outright and, having worked for years to pay for them, probably don’t want to pay for someone else’s. Neither do 35 million renters who didn’t take a flyer on nicer digs.

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April 3, 2008 by Tom Armstrong.

Take this quiz (15 questions) on general knowledge that I give my students at the beginning of each semester to find out. 70% is passing. Incidentally, the average score of my students at the beginning of the year is around 30 to 40%. Oh yeah, my picture on the test is just meant to reinforce to my students that I am always watching over them–and it might also have something to do with my super-massive ego.

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April 3, 2008 by Tom Armstrong.

Hurricane season is just around the corner, so Americans should know where to turn to if disaster strikes.

It’s not the Federal Emergency Management Agency. A new study suggests Wal-Mart, Home Depot and Lowe’s would be a lot more helpful.

The study, by Steven Horwitz, a professor of economics at St. Lawrence University in Canton, N.Y., stresses that successful disaster relief depends upon responders having detailed knowledge of a local area and the right incentives to act on that knowledge.

Examining federal and private responses to Hurricane Katrina, the study says why FEMA was destined to fail and why for-profit companies succeeded at disaster recovery.

Read it all here.

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April 2, 2008 by Tom Armstrong.

No Child Left Behind (NCLB) is some of the worst legislation passed in this country since LBJ’s “Great Society.” For newer readers, just check my older posts on this subject for more information (I wrote this one a few months ago). It is not just a bunch of left-wing teachers who do not like the thought of being held accountable in the classroom who loath NCLB. Even right-leaning think tanks like CATO have little to say for it.

This article (from the Goldwater Institute) explains more. Below is a summary:

It looks like Arizona is set to opt out of No Child Left Behind.  Arizonans need transparency and accountability in public schooling, but they do not need NCLB, says Matthew Ladner, vice president of research at the Goldwater Institute.

• Chief among the flaws of NCLB is the fact that it creates an entirely perverse incentive for states to lower their academic standards in order to meet a federal goal of 100 percent proficiency by 2014.
• A recent University of California Berkley study that found 10 of 12 states studied had lowered the standards for their state accountability tests.
• States have engaged in a “race to the bottom,” and sadly, Arizona is one of the leaders.

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April 2, 2008 by Tom Armstrong.

The psychology of victimhood and the politics of envy are powerful political tools and we see them being exploited this political season. Politicians telling Americans how bad off we are reminds me of one of Aesop’s Fables where a dog was carrying a piece of meat across a bridge. Looking down into the river, he saw his shadow, which appeared to him as another dog carrying a larger piece of meat. Attacking the “other” dog, he dropped his piece of meat into the river and it was gone for good. Aesop’s lesson is something to keep in mind as politicians offer their solutions to income inequality.

Read it all here.

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April 2, 2008 by Tom Armstrong.

From The Tax Foundation: 

Yesterday, members of the House Select Committee on Energy Independence and Global Warming spent the day beating up on oil industry executives for “excessive” profits and gouging consumers at the gas pump. Lost in the political theater is the fact that those “excessive” profits are net profits: that is, profits earned after taxes are paid to government. And while the oil companies have enjoyed a few good years, history shows that government has profited more from the domestic oil industry than has its shareholders.

Recent data from the Energy Information Administration shows that since 1981—the first year of the Windfall Profits Tax—total taxes from all oil industry sources exceeded the combined profits of all companies in every year but the past three. Between 1981 and 2006, government collected $1.65 trillion in total taxes after adjusting for inflation. That is 65 percent more than the combined earnings of the 16 largest domestic oil companies during the same period.

As the chart below shows, during most of that 25 year period, government tax collections were nearly twice industry profits in any given year. Indeed, in 2002, before the recent price spikes, the industry earned a collective $20.5 billion in profits. However, government collected more than $50 billion in combined income, property, severance, and excise taxes in the same year.

So, the lesson to members of the House committee is be careful of throwing stones when you live in a glass house.

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April 2, 2008 by Tom Armstrong.

From Cafe Hayek:

“Clinton Proposes Plan to Make Firms Inefficient” would have been a more accurate headline to this report at Newsweek.com.  I sent this letter in response:

Courting blue-collar votes, Hillary Clinton promises to use “tax incentives to persuade companies to ‘insource’ jobs in the United States” (”Clinton proposes plan to keep jobs in US,” April 2).  Because firms ‘outsource’ jobs only when doing so lowers firms’ costs of production, Mrs. Clinton’s proposal amounts to bribing American firms not to lower production costs whenever possible.  She wants to encourage American firms to produce inefficiently, which is to say wastefully.  In short, she wants us to be poorer than we would otherwise be.

Mrs. Clinton’s proposal is further evidence that good politics typically is bad economics.

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April 2, 2008 by Tom Armstrong.

The latest in the series of pointless gestures that constitute Congressional energy policy came yesterday, when executives from five major oil companies were paraded before Ed Markey’s House hearing on global warming. They served as political props for Members to denounce rising gas prices, ventilate Dick Cheney conspiracy theories and otherwise advertise their ignorance of the markets they purportedly oversee.

Read it all here.

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April 1, 2008 by Tom Armstrong.

Short profile of myself at my school’s Web site–which I am currently working on. The current Web site I developed for my school is here.

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April 1, 2008 by Tom Armstrong.

Below is the start of this RCM article:

Calvin Coolidge once said, “If you see 10 troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.” The 30th president’s words are particularly prescient in light of the regulatory fever sweeping Washington.

In the past week we’ve been treated to a Wall Street Journal headline titled “Ten Days That Changed Capitalism,” which seemingly heralded the end of the market-driven consensus that has mostly prevailed over the last twenty-five years, and just yesterday Treasury Secretary Henry Paulson rolled out a new financial regulation blueprint meant to “to improve the workings of our financial markets.”

To support the new regulatory mindset is to assume that economically-free countries, as opposed to those centrally planned, are frequently burdened with sclerotic growth and commercial failure. One would also have to take a giant intellectual leap backwards in the direction suggesting that government bodies free of the discipline wrought by the marketplace are somehow better suited to solve the problems before us. In truth, it is private interests, those that operate fully accountable to consumers and investors, who regularly adapt to all manner of changes in what is a highly fluid economy.

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April 1, 2008 by Tom Armstrong.

This MSN article has the list.

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April 1, 2008 by Tom Armstrong.

From today’s WSJ:

As policy makers plot out a grand redesign of financial-market regulation, one huge corner of the marketplace ought to get a lot of attention: credit-default swaps.

These financial instruments, which don’t trade on exchanges, are like disaster insurance on debt defaults. Investors who buy these swaps get a big payment if a bond or loan defaults. In return for the protection, the investor has to make regular payments to the seller of the swap.

The market has become immensely important, yet regulators still haven’t figured out how to deal with it. The Bush administration’s blueprint for new regulation curiously had almost nothing to say about it.

Credit-default swaps were a factor in the recent troubles of Bear Stearns. Hedge funds and other firms that were on the other side of credit-default swap trades with Bear tried to exit from their positions or pass them on to other brokers. That set off a broader panic about Bear’s health as a counterparty, which pushed the firm to the brink.

Swaps also played a deciding factor in the Federal Reserve’s dramatic intervention. If Bear went down, others could have been dragged down through their exposure to the firm through swaps.

Many firms have no way of knowing about problems of their counterparties in these trades.

Such swaps were written against $45 trillion of underlying debt as of the first half of 2007, according to the International Swaps and Derivatives Association. In many instances, there are far more of these swaps written than there is actual debt that swaps are meant to insure.

The market is important for other reasons. The explosion in these derivatives occurred at a time when corporate defaults were near record lows. Moody’s Investors Service expects the junk-bond default rate to climb to a range of 7% to 7.5% in the next 12 months from just 1.5% now.

“We haven’t gone through a massive default cycle,” says Gregg Berman, co-head of the risk management unit at RiskMetrics Group. “I do not believe the market is remotely prepared for the fallout if that happens.”

Swaps also present potential insider-trading problems for regulators to work out. In 2006 and early 2007, during the leveraged buyout boom, credit-default swaps at times soared in value before details of big deals were announced. Just last week, swap values were moving before news broke that the buyout of Clear Channel Communications was in jeopardy.

One problem for securities regulators: Because these can be considered private contracts, and not securities, it’s not even clear if traditional securities laws apply to them.

Large commercial banks do need to file regular reports on their derivative exposures with the Office of the Comptroller of the Currency. The Depository Trust & Clearing Corporation also has set up an information warehouse that stores records of CDS trades. And the Federal Reserve Bank of New York has been pushing dealers and other firms to confirm and process trades more quickly. Last week, large dealers unveiled plans to centralize settlement of their credit-derivative trades by September.

But credit-default swaps have become too important for the wattle and daub approach regulators have given them in the past few years.

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