In signing the Dodd-Frank Financial Reform Act President Obama claimed to much applause, “And finally, because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. (Applause.) There will be no more tax-funded bailouts -- period. (Applause.) If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so we don’t have another AIG.” Yet there is a…
Thank you to my friend Adam Levitin for engaging me on my critique of the CFPB’s recently-issued—but potentially invalid—“Ability to Pay” and “Qualified Mortgage” rules. One thing I particularly enjoy in engaging with Adam is that I can follow the logic of his argument and the data to which he is relying, which makes such dialogues useful because it makes it possible to clarify the relevant issues rather than obscuring them. That’s not always the case and I appreciate Adam’s clarity of exposition.
Allow me to summarize my original post. My goal was to assess the CFPB’s claim that its extraordinary independence from standard oversight and accountability procedures is justified in light of its claim to be an “evidence-based policy-making” body, constrained by the “data” and thus it needn’t be constrained by other typical accountability measures such as a bipartisan agency structure, Presidential removal power, or effective congressional oversight through the appropriations process.
New mortgage rules released by the CFPB show why heightened oversight is necessary.
The Consumer Financial Protection Bureau is one of the most powerful and least accountable regulatory agencies in American history. Immune from budgetary oversight by Congress and headed by a single director who cannot be removed by the President, the agency wields unconstrained, vaguely-defined powers to regulate virtually every consumer and small business credit product in America. The Bureau has defended its extraordinary independence by claiming that its regulations will be “evidence-based” on unbiased, unimpeachable economic evidence, and thus is above the usual political concerns that justify bipartisan commissions and engaged congressional oversight.
Last week’s issuance of its new rules on residential mortgages (summarized here), however, shows why the new regulator can’t be trusted to regulate itself. The rules impose new burdens on lenders to ensure borrowers’ “ability to pay” their loans and create a safe harbor for so-called “qualified mortgages” that are perceived as especially safe by regulators, such as fixed rate mortgages and—don’t laugh—loans issued according to Fannie Mae and Freddie Mac’s underwriting criteria.
Enacted swiftly in the wake of the financial crisis, the 2,319 pages of the Dodd-Frank Financial Reform legislation contain a thicket of rules overhauling the entire American financial system, creating a bevy of new regulatory entities. But that is only the tip of the iceberg—for even then, this does not include the thousands of rule-makings, studies, and enforcement actions that will be triggered by Dodd-Frank, nor does it consider all of the international implications of the legislation. Those looking for a roadmap that lays out the basic ideas that animate Dodd-Frank and its key provisions should turn to David Skeel’s book,…
The recent announcement that two California counties are considering using the eminent domain power of the Fifth Amendment to seize underwater mortgages from their owners provides a useful opportunity to revisit the Supreme Court’s extraordinarily wrong-headed decision in Kelo v. City of New London, one of the most publicly-maligned decisions in recent Supreme Court history. Events post-Kelo have confirmed what was evident at the time: that defining “public use” so broadly to permit politicians to seize private property from one person and give it to another is misguided. Indeed, by unleashing politicians and special interest factions to use the political process…
It is now cliché to recite that a conservative is a liberal who has been mugged by reality. Reading Neil Barofsky’s Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street one keeps expecting that at some point he will draw the obvious conclusion from his sordid tale of serving as the Special Inspector General for the Troubled Asset Relief (SIGTARP): that political opportunism, personal ambition, and special-interest influence will be inherent in any government activity, especially bailouts specifically designed to pick winners and losers in the marketplace, and if you don’t want politics, dishonesty, and…
Last month marked the one-year anniversary of the Consumer Financial Protection Bureau (CFPB). At the time the Bureau was created I predicted that it would be a bureaucratic train wreck: an institution that is almost perfectly designed to manifest all of the worst pathologies that scholars of regulation have identified over the past several decades. Unfortunately, its operations to date have confirmed those fears.
The institutional structure of the CFPB is novel in American history—not merely an independent agency, it is an independent agency tucked inside another independent agency (the Federal Reserve). Its decision-making is not only independent of any review by the President or Congress, but also from the Federal Reserve itself.
This episode of Liberty Law Talk is a conversation with George Mason School of Law Professor Todd Zywicki about the blatant violations of the federal bankruptcy code and the breach of the rule of law by the Chrysler bailout. Professor Zywicki stresses that the Chrysler bailout abandoned the bankruptcy code's clear and known rules regarding creditor interests that derive from the code's 19th century origins. This allowed for the sinister use of the public trough by special interests that benefited from the bailouts. Moreover, Professor Zywicki highlights the fallout in corporate bond markets from the subversion of the legitimated process…
Comparing Friedman and Hayek’s Defenses of Liberty
The early 1960s were bleak for champions of the free society. True, we had yet to experience the onslaughts of Johnson’s Great Society, the Nixon Administration, and the Vietnam War. But the Cold War raged and following the Eisenhower administration the welfare state was entrenched and growing.
But from the rubble emerged within just two years of each other two remarkable books—first F. A. Hayek’s The Constitution of Liberty in 1960 and just two years later Milton Friedman’s Capitalism and Freedom. In these two books rest the roots of an intellectual counter-revolution that would transform not only the United States but the world over coming decades. Both books are simultaneously remarkable feats of scholarly and intellectual force on one hand but also inspiring in their vision for the blessings of a free society on the other. Although authored by two titans of the economics profession—in fact, Friedman received his Nobel Prize in economics two years after Hayek received his—both books were written to reach an audience beyond the ivied walls of the academy.
Yet while the books share many remarkable coincidences beyond their timing and the distinction of their respective authors, they differ in several subtle but important ways in the agenda that they establish for how to conceive of the project of building the free society. In this brief essay I will focus my attention on what I perceive to be an important methodological difference at the heart of the distinction between Capitalism and Freedom (CaF) and The Constitution of Liberty (CoL) and the systems that the two authors establish for preservation of the free society. Following that I will rashly venture to offer my opinion on the bottom line question concerning these two 50 year old books: if forced to choose, which of the two books should one read and use as a guide to understanding the intellectual and institutional foundations of a free society.
One common assertion arising from the onset and resolution of the 2008 financial crisis is the belief that it proves the purported need and propriety of the government acting in a swift and discretionary manner and not have its hands tied by the constraints of the rule of law. Yet a close examination of the most recent crisis as well as those of the past reveals the exact opposite truth: adherence to the rule of law is actually more important during periods of economic crisis, both to restore short-term economic prosperity during the crisis as well as for the long-term systemic impact.
There are four reasons why this is so. First, adherence to the rule of law is necessary for economic prosperity in general, but even moreso during economic crisis. Second, adherence to the rule of law is necessary to restrain the opportunism of politicians and special interests that use the opportunity presented by the crisis to piggyback their own narrow interests, often with no relationship to the real problems. Third, once discretion is unleashed during the crisis history tells us that the dissipation of the crisis does not promote a return to the rule of law—in fact, there is a “ratchet effect” of government discretion as the post-crisis period brings about a consolidation of governmental discretion rather than new limits on it. And finally, the mere potential for discretionary action promotes moral hazard, thereby creating the conditions for still further rounds of intervention. Thus, while little is lost in the short run by tying the government’s hands from discretion, more importantly the only way to promote long-term economic growth and preserve freedom in the long run, and to avoid precisely the circumstances that then justify future arbitrary government intervention is to constrain government discretion in the short-run.