Reason Foundation

NYC Parking Under Bloomberg: Bright Potential, Blighted Past

Posted on February 3, 2012, 7:41pm | Harris Kenny

This morning Juan Gonzalez of the New York Daily News writes:

The firm that built and manages the new Yankee Stadium parking garages can’t repay $237 million in tax-exempt bonds the Bloomberg administration arranged for it four years ago, new financial records show.

Bronx Parking Development Company LLC is running perilously low on cash reserves and faces a looming default by the end of the year, according to a report filed Friday by a trustee for the firm’s bondholders.

Time is running out, in other words, to avoid one of the biggest failures in decades of bonds issued by a New York City agency.

The simple fact is that Bloomberg and his aides made a costly mistake when they succumbed back in 2005 to the Yankees’ demand for a 9,000-space garage system. It was all part of the deal for the team to build a new stadium in the Bronx.

But Yankees fans have shunned the garages, where gameday self-parking rates soared last year to $35 — up from $23 previously and more than double the original $14 charge. Valet parking now goes for $48.

Gonzalez also notes that Mayor Bloomberg's aides say any losses will have to be borne by the bondholders, and deny pledging to back the bonds through the Mayor's office or through the city's Industrial Development Agency. This tune rings all too familiar. Economic development deals that seem "too good to be true" often are. However, there is a kernel of optimism in that the Mayor's office is considering leveraging additional city parking assets that actually would create value for residents and motorists.

This past spring, the New York Economic Development Corporation issued a request for expressions of interest asking for ideas on how “to develop new sources of revenue (and restrain costs).”  Marc LaVorgna, a spokesman for the Mayor, explains, “We’re seeking a partner to help us reduce the costs or bring in revenue and one area is parking meters.” Bloomberg News Service also found that last year the city earned over $140 million in revenue from its 49,989 parking meters and 48,854 ticket issuing muni-meters, while collecting $575 million in parking violation fines.

Bloomberg clarified his interest in privatization during a February appearance on WOR 710 AM saying “We’re not going to turn over the right to set parking rates or set the fines or that sort of thing, but installing and maintaining equipment, there’s nothing magical about that.” The city is also considering privatizing six city-owned vacant lots.

The botched sweetheart deal for parking lots by Yankees Stadium was a mistake, and indeed it serves as a cautionary tale. However, Bloomberg's new approach to managing parking assets has been done effectively around the world and should not be lumped in with the Yankees Stadium deal.

Take Vancouver, whose officials are effectively leveraging both dynamic pricing and public-private partnerships to improve parking infrastructure. Donald Shoup, parking guru and professor of urban planning at the University of California at Los Angeles, recently described Vancouver's parking to Jeff Lee of The Vancouver Sun saying:

"The reason for getting the right price is that the wrong price does so much harm. Nothing is so poorly managed as parking. Vancouver and Canadian parking companies are at the forefront of [accurate pricing for parking]."

Lee also interviewed Neil Podmore, vice-presdient of business development for Vancouver-based PayByPhone, Podmore described Vancouver's parking saying:

"I think Vancouver has actually been ahead of San Francisco and L.A. for a long time. They realized that on-street parking was a valuable commodity, that it ought to be broadly market-based and they haven't thrown a lot of money into technology..."

"There is a big question in the industry as to whether you need to invest $10,000 per parking space in order to get near-real-time-based parking. Vancouver hasn't gone that way so they've been efficient with the money they spend for the money they get."

While policymakers in cities like Vancouver, San Francisco, Chicago, and Indianapolis are implementing innovative improvements to their parking infrastructure, policymakers in New York City and elsewhere would be wise to catch up before it's too late.

(Video) Fed Doing Harm... to Savers

Posted on February 3, 2012, 5:57pm | Anthony Randazzo

Last night on Freedom Watch I questioned Fed Chairman Bernanke's ability to be self reflective after he suggested to Congress that they take care to "do no harm." While that is great advise and all, right now the Fed is actually causing harm, primarily to savers with its never ending zero interest rate policy: 

Backing up this view is a column from MarketWatch.com's Chuck Jaffe in how savers shouldn't expect anything good for the next few years. He writes:

Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take its full bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising... In short, it will be at least 2015 before money-fund holders get anything approaching a meaningful return.

See his interview on Mean St. below:

California Bill Proposes Licensing for Pet Groomers

Posted on February 3, 2012, 5:14pm | Adam Summers

It appears that California truly has gone to the dogs. The state is facing a $9.2 billion budget deficit, a $10 billion unemployment insurance fund deficit, and unfunded pension obligations in the range of $400 billion to $500 billion, yet the busybodies in the state legislature are seeking to add another occupation to the long list of those burdened by unnecessary state regulation: pet grooming. As I noted in a 2007 study, Occupational Licensing: Ranking the States and Exploring Alternatives, California already "leads" the nation by requiring licenses for some 177 occupations, almost double the national average. The new bill, SB 969, proposed by state Sen. Juan Vargas (D-San Diego), would establish licensing standards for dog groomers and dog grooming schools under the Veterinary Medical Board. Violations of the regulations could result in fines of $500 to $2000 and/or imprisonment of 30 days to a year in jail.

The bill would establish minimum age and education requirements for potential licensees (18 years old and at least a 10th grade education), impose licensing fees, and charge the licensing board with developing standardized written and practical demonstration tests for applicants. In addition, it would require an inspection of every licensed pet groomer in the state each year and mandate that licensees maintain detailed records for two years ("including a list of any chemicals used while performing the services and any medical conditions discovered during the performance of services"). Moreover, as a San Diego Union-Tribune article about the bill notes, the legislation has drawn criticism from groomers because it would also force them to individually cage animals that would be calmer if they were not confined.

The Orange County Register today ran an editorial that effectively illustrates the fallacies of licensing pet grooming. As I told the Register,

"Licensing pet groomers is not the answer to poor-quality grooming services. Imposing a top-down state bureaucracy will likely not improve pet safety or grooming quality, but it will result in less competition, less choice for consumers, and higher prices. Higher prices will arise from the reduced competition and the need for practitioners to offset the cost of compliance with unnecessary regulations. When there is less competition, there is less pressure on practitioners to offer the best prices and service quality."

The artificially higher prices caused by licensing would have some other unintended consequences, such as encouraging people to save money by clipping their pets' nails or cutting their hair themselves. Since the average person is not as trained as a pet groomer (licensed or not), this will result in more pain—not less—for pets.

If dog groomers want to get together and form their own voluntary certification organization, that is great. They could set their own standards and have the organization certify those that meet those standards. This would signify to customers that the certified practitioners offer a higher standard of service while still maximizing the freedom and choice of both consumers and groomers that elect not to be certified.

There will always be some bad pet groomers, with or without licensing. In cases where pets are injured or the groomer otherwise does not meet reasonable standards of service, there are already laws on the books against negligence, fraud, breach of contract, and causing harm to people or property. Licensing would simply create an illusion of competence (and an army of bureaucrats) while increasing prices and reducing competition and consumer choice.

Related Research and Commentary:

» Occupational Licensing: Ranking the States and Exploring Alternatives

» "California Licenses Most Jobs in Nation" (Los Angeles Business Journal)

» "Lawyer Licensing Laws Lead to Higher Prices, Less Consumer Choice and Access to Legal Services"

» "Occupational Licensing and the Beard Trimming Turf War in Texas"

» "State Licensing Mandates for Movers in Illinois Increase Prices, Reduce Job Opportunities"

New at Reason: The Revamped HAMP and Some Corrections for the Record

Posted on February 3, 2012, 4:35pm | Anthony Randazzo

Over at Reason.com, I have a piece today commenting on the revamped HAMP (coming on the heals of "new" new changes to HARP) program announced by the White House last week. Some of the changes include:

• Second homes are now eligible to get a modification. This means investor owned homes. The guidelines will say rental homes only, but all you have to do is claim you lan to rent out the home, you don't even have to have a tenant. So if you bought a vacation home in 2006, or you were flipping houses and got stuck with a couple, you just claim it is to rent out, maybe even post an ad on Craigslist, and poof!, you have a rental property eligible to get modified.
• HAMP is getting extended to December 31, 2013.
• Payments for lenders and servicers that modify mortgages will triple to 18 cents to 63 cents on the dollar. 
• Fannie and Freddie will get an extra incentive push from the White House if DeMarco lets it happen. 

This is wrong on so many levels, but the quick and dirty critique is—the program has failed to match private modifications without subsidies by a measure of nearly 3 to 1 (900,000 for HAMP and 2.6 million for non-HAMP mods); nearly half of the HAMP trial mods have failed dragging out the shadow inventory; and under no circumstances should taxpayers be bailing out investors!

Correcting the Record

On a related note, some of the coverage of the new HAMP details has been inaccurate. Correcting one example: There is a story in the Palm Beach Post from last Friday claiming that HAMP has widely been panned as a failure since it has modified "less than 1 million" homes. Since HAMP has modified 909,953 as of January's report that is technically correct. But then article says that "The [new] program will be paid for through HAMP's already allocated $29 billion budget, of which between $9 billion and $10 billion has been spent or is earmarked for current modifications.

First off, the budget for HAMP is $29.9 billion so the rounding is off. Second, and more importantly, according to the Special Inspector General report on TARP published January 26, as of December 31, 2011, HAMP had expenditures of $1.8 billion and had been allocated $22.7 billion. That is substantially different than the Palm Beach Post story.

The article continues saying, "Many economists agree writing down principal balances on underwater mortgages is the best way to corral the housing crisis and reduce foreclosures." Really? Five paragraphs later the writer concedes, "at least one economist argued the government should just let the market reset itself and stop coming up with new housing subsidies that he believes are delaying a recovery," before going on to quite Arnold Kling. This is nonsense. For every economist supporting principal modifications I will find you one in opposition. The way the article frames it mods are definitely the way to go and Wall Street is just getting in the way. There are very logical reasons to oppose forced mods and this view is left out of the article by the author. 

The article author also says the acting FHFA director is "Anthony DiMarco", when his name is in fact Edward J. DeMarco. For the most part, these are homework errors and lead to the improper framing of the story. 

Atlanta Streetcar Costs Increase by $22 Million

Posted on February 3, 2012, 2:38pm | Baruch Feigenbaum

Earlier this week, Secretary of Transportation Ray LaHood flew to Atlanta to celebrate the ground-breaking of the Atlanta Streetcar. 

Before he handed out balloons and threw a parade, he should have take an objective look at the latest cost estimates. 

I previously disclosed the faulty economic analysis that USDOT used to justify the project. The price-tag of the project has increased according to The Atlanta Journal-Constitution,

The city now estimates the cost at $84.7 million plus $9 million to move water and sewer pipes along the route.

The U.S. Department of Transportation estimates the cost to be $94 million, up from $72 million at the time of the federal grant award last year.

“About $9 million of the added cost comes from a decision to use newer and more expensive streetcars that could last 20 years longer than the refurbished models initially envisioned,” said Duriya Farooqui, Atlanta’s chief operating officer. “The newer cars ride lower and comply with the Americans With Disabilities Act, while the older ones would have required ramps that could have interfered with local businesses,” she said.

It was common knowledge that water and sewer pipes would need to be moved. Yet the city omitted this information from its application for the TIGER Grant. The city also knew about the complications with the compliance of older streetcars with the Americans With Disabilities Act. Proper planning would have factored those costs into the project’s total costs. 

There are two reasons why Atlanta did not disclose these costs in its grant application for federal funds. The first is that the city had no idea that it needed to move water and sewer pipes or that it needed to comply with the American with Disability Act. Mayor Kasim Reed and other leaders should have known about these requirements. 

The second and more likely reason is that the more efficient the project, the more likely that the project will receive funding. City officials figured since some city would get the funds, the best option was to make its grant application as inviting as possible so that Atlanta was that city. The city did not disclose the total project cost. The mayor rightly calculated that the city council would have to approve spending more money on this project; otherwise the city would have to forfeit the grant. 

While the city of Atlanta will pay the additional costs, the funds could have supported other transit projects. Instead of improving transit services for local residents, the money will be spent according to Ray LaHood on, “…A magnet for tourism.” 

This funding is for a 1.3 mile one-way trip scheduled to take about 10 minutes. The average speed will be 7.8 miles per hour while costing riders $2.50 per trip and costing taxpayers much more in subsidies. 

Gaming the system is one of the many problems with the TIGER Grant Program. Despite recommendations from the Department of Transportation Inspector General and the U.S. Government Accountability Office, DOT has not disciplined applicants for submitting incomplete information. This problem is one of many reasons that the TIGER Grants are a poor program that should be abolished. DOT will award a fourth round of TIGER Grants this year.

How is it a good idea for the Federal and Local Governments to spend almost $100 million on this transit line?

Senate Approves Lawmakers Insider Trading Ban. Whatever.

Posted on February 3, 2012, 11:01am | James Groth

After a “60 Minutes” report brought to the attention of the American public that Congress was capitalizing on non-public information, lawmakers quickly collaborated with one another and proposed two bills banning insider trading by members of Congress and their staff. One in the House and one in the Senate. The House bill had floated around for six years largely ignored until it was immediately embraced by 270 House members the week after the public became informed.  The Senate bill took about two weeks to craft following the “60 Minutes” report. Isn’t it amazing how quickly our representatives can act when the issue threatens their lives and jobs?

This whole hoopla over Congressional insider trading is a non-issue. I wrote an op-ed in the Washington Times about this bill being largely a public relations campaign, a sorry and despicable attempt by members of congress to regain America’s trust by drafting and passing a law that at first glance looks like our representatives protecting our interests, but in reality accomplishes next to nothing and may even disrupt existing insider trading laws.

Congress has a public approval rating below 15 percent, and this bill reeks of desperation.

One of the creators of the Senate bill, Sen. Scott Brown, Massachusetts Republican, had this to say:

"We can send the message to the American people that we're trying to re-establish the trust that seems to have been lost with them, and who knows, maybe we'll be in double figures in terms of the approval rating pretty soon."

Co-sponsor of the House bill, Rep. Tim Walz, Minnesota Democrat, had this to say:

"If this thing doesn't move and doesn't happen, hepatitis will be more popular than the U.S. Congress, I can guarantee you that.”

The only thing that was accomplished throughout this lawmaking process was media time for our representatives to return to the pulpit, clamor to regain our trust, and most importantly, waste our time while not devoting much needed attention to real issues like deficit reduction, tax reform, a slew of government housing issues, relentless money printing, and the list goes on.

At least some sense came from one Congressman who voted no to the legislation. Sen. Tom Coburn, Oklahoma Republican, had this to say:

“The assumption here is that some of our colleagues are doing insider trading on the stock market. Nothing could be further from the truth. The real insider trading is the horse-trading that goes on in this body that is not always in the best interest of the country.”

Well said.

President’s “New” New Refi Plan Turns Out to Be Secret Stimulus

Posted on February 2, 2012, 2:38pm | Anthony Randazzo

Last week on the blog we noted that the President sounded like he was proposing a secret stimulus in his State of the Union by talking about helping out the housing market and suggesting a new refinance program (or “new” new refi program since HARP 2.0 was just a few months ago). It looks like our fears were mostly justified.

As expected, the new refinance program proposal is only going to apply to homeowners current on their mortgage. That means you’ve made your last six payments and only missed one payment in the six before that. While there are certainly families that are on the edge of defaulting that a refinance could help, most of the refis will go to households that can make their mortgage payments. 

Thus, this does not help struggling homeowners.

Instead, the program puts money in the pockets of Americans eligible to qualify that they can use for whatever they want. Maybe it gets put towards housing, or maybe a shopping spree at JC Penny, maybe in Game Stop, maybe for the college trust fund. However the money is used though, it amounts to a stimulus.

From there we can debate whether or not the stimulus program proposal is a good idea—some Keynesians might says yes because it could boost demand at JC Penny and Game Stop; Austrians would say no since it is just transfer payments at the end of the day given that the money has to come from somewhere else in the economy—but it can not be denied that it would be stimulus. 

The one caveat (there always is one): If homeowners decide to refinance into 20-year mortgages instead of 30-year mortgages, and apply the savings from the lowered payments to be able to do this, the President’s proposal includes covering closing costs. In this case, the program would be purely designed to funnel money into housing, not quite the thing as a blanket stimulus, but perhaps more of a specified spending program… designed to stimulate the housing market. 

Once again it has to be said that this plan requires Congressional approval, which is unlikely. As a result we’ll refrain form breaking the program down section by section to show how, even if you set the stimulus idea aside, it has a lot of problems (see a quick run down of HARP 3.0 details here). If Congressional Republicans do show some interest in the program idea though, we will provide a full analysis on the landmines scattered through out the White House proposal. 

Misunderstanding 'Opt Out'

Posted on February 2, 2012, 2:15pm | Steven Titch

It's gratifying to see some logic being used to attack the techno-panic about Google's new privacy policy. It seems the biggest complaint is that there is no opt-out. If you want to use Google's services, you have to agree to its privacy policy, which will allow it to consolidate the information it gathers about you across its 60-odd platforms. This in turn helps it target advertising--the way Google supports all those free services--at users who will most likely respond to it.

Still, this seems to rankle people, including a bunch of Congressmen who this week sent Google a nasty letter demanding there be some kind of opt-out.

Now you can opt-out by choosing not use Google's personalized services, like its calendar and email, and simply visit YouTube and use Google Maps anonymously, that is, without using any Google log-in. Of course you forfeit some value and functionality in doing so, but that's the trade off. This also rankles people, including a the same Congressmen who this week sent Google that nasty letter.

To be momentarily charitable, it's possible that this knee-jerk reaction stems from the fact that there are certain aspects of Internet services you can opt out from, such as allowing web sites provide your email address provided to third parties. But when the grand scheme of business relationships is considered, these specific opt-outs are exceptions. Most of the time, there are some binding stipulations when you agree to use any tangible or virtual service.

A good example is non-smoking rooms at hotels. When you request a no smoking room, even if you're a smoker, the hotel's guest policy requires you to abstain from smoking in your room or face a hefty cleaning fee. You can't request the non-smoking room and "opt out" of the condition  to pay a cleaning fee if you smoke.

Note the smoker is not turned away into the night. What the smoker must settle for, however, is a room where the carpet doesn't smell as fresh and the upholstery isn't as clean. To complain that this is an inconvenience doesn't get much sympathy, much less an obnoxious letter from Congress.

For more on the absurdity of the Google outcry, see this video at Technology Liberation Front that came by way of Forbes.

Virginia Needs to be Cautious and Not Ruin Its Public-Private Partnership Track Record

Posted on February 2, 2012, 10:50am | Robert Poole and Shirley Ybarra

The Virginia Legislature is considering bills in both the House and the Senate (House Bill 1248 and Senate Bill 639) to establish a Virginia Toll Road Authority. Given the structure of toll facility operations in Virginia, serious consideration should be given to possible unintended consequences of this legislation.

The Commonwealth has eight toll facilities within its borders, but the Virginia Department of Transportation (VDOT) only operates two: the George P. Coleman Bridge in Gloucester County and the Powhite Parkway Extension Toll Road in Chesterfield County (near Richmond). The remaining six toll facilities are operated by other entities including private entities such as Dulles Greenway (totally privately owned and operated) and Pocahontas Parkway (the first capital project under the Virginia Public Private Partnership Act of 1995). Other public entities have financed and continue to operate and pay debt service on their bonds. These include the Chesapeake Bay Bridge-Tunnel, the Chesapeake Expressway, the Downtown Expressway/Powhite Parkway and the Boulevard Bridge. The Dulles Toll Road is now operated by the Metropolitan Washington Airport Authority.

Virginia is considered one of the leaders in public-private partnerships completed and underway since the passage of the Public Private Partnership Act of 1995 (PPTA). Numerous projects have been undertaken bringing innovative financing and new ideas to the Commonwealth such as the new Express Lanes on the Capital Beltway. Other states have used the PPTA as their model for legislation as they moved to join the era of public-private partnerships.

The main purpose of the bill appears be to set up an authority that can consider creating new toll facilities. The legislation would allow the authority to issue bonds that are backed by toll revenues and are not backed by the full faith and credit of the Commonwealth, which is standard practice in toll finance. In other words the bonds of the authority would be "off the books of the Commonwealth." However, if the new project is viable, why wouldn't a private entity consider this project under the existing PPTA?

Of particular concern is that the toll authority might decide to compete with the private sector for potential public private partnership (PPTA) projects, using its governmental status to gain a "leg up" on the private sector. For example, several years ago in Texas a long-established toll agency intervened in a public-private partnership procurement at the last minute, after the winning bidder had already been selected, and used its political clout to prevail. It subsequently persuaded the legislature that public sector toll agencies would, from now on, have the right of first refusal on any new toll roads within its metro area-regardless of whether its proposal offered the best value.

That kind of favored status has caused a number of world-class toll road companies to avoid Texas, depriving that state of needed expertise and investment. By contrast, Virginia continues to attract the cream of the crop of infrastructure investment funds and experienced toll road developer/operators for projects like the Beltway Express Lanes and the Mid-Town Tunnel in the Hampton Roads area.

Given that kind of risk, and the demonstrated willingness of investors to develop toll projects under the PPTA, the proposed state toll authority looks like a solution in search of a problem.

San Francisco Chronicle: California running out of money again

Posted on February 1, 2012, 6:52pm | Harris Kenny

Update: John Gramlich of Stateline (a project of The Pew Center on the States) reports that California lawmakers are already hungrily eying the potential revenue windfall from Facebook's $5 billion initial public offering (IPO) this week. According to Gramlich, Facebook's IPO could generate as much as $1 billion in direct new revenue. While this good news may be encouraging to a state weary with bad news, it won't meaningfully solve any problems. Decades-long fiscal mismanagement can't be solved in one fell swoop.

Wyatt Buchanan of the San Francisco Chronicle reports:

California will run out of cash by March 1 if the Legislature does not take immediate action, Controller John Chiang told budget leaders at the Capitol in a letter Tuesday.

The controller recommends borrowing and delaying some payments to deal with the shortfall, which he projects will last seven weeks. Absent that kind of action, which lawmakers and the administration of Gov. Jerry Brown say is assured, the state would probably have to send IOUs and delay tax returns.

"Although this cash-management plan relies on still more borrowing, payment delays and deferrals, we believe this is the most prudent and responsible course of action considering we have about four weeks before the advent of a cash shortfall," Chiang wrote in a letter to the chairmen of the Assembly and Senate budget committees.

He called the plan to borrow and put off some bills the "ideal way" to avoid IOUs and tax-refund delays.

Anyone familiar with California policy shouldn't be surprised by today’s news since California’s fiscal situation can be described as nothing short of a nightmare. Buchanan continues:

The controller said the overarching problem is that, as of the end of the calendar year, the state was spending $2.6 billion more than was included in the budget while tax revenue coming into state coffers was $2.6 billion below projections.

He said $3.3 billion must somehow be found if the state is going to bridge the seven-week cash shortfall period, but the situation could get worse if there is more overspending and further reductions in tax income…

Chiang said the state will fall below a $2.5 billion "cushion" of cash on hand on Feb. 29, and the next day it would be in the red. The problem would grow to a $730 million deficit by March 8, and the overall cash shortfall would last until sometime around April 13, he said.

Not everyone is deterred by Chiang’s warnings. State Sen. Mark Leno (D-San Francisco), who is chairman of the Senate Committee on Budget and Fiscal Review, told Buchanan, “(the projected shortfall is) a very short-term cash-management situation. All budgets are, by nature, an educated guess.” This is news to California’s millions of families and businesses who know the state expects them to pay their bills on time.

Fortunately there are many reforms that California policymakers can pursue when they decide to get the state's fiscal house in order. Below are links to some recent Reason Foundation research on this subject:

>> Jerry Brown Continues to Push High-Speed Rail Boondoggle while California Drowns in Debt by Adam Summers

>> California’s Employment Dysfunction by Harris Kenny

>> California, Illinois Continue to Make Other States Look Good by Harris Kenny

>> California's High-Speed Rail Fibs by Adrian Moore

>> The Detailed Concerns of the CA HSR Peer Review Group by Adrian Moore

>> Jerry Brown's Budget Proposal Gets Plenty of Reaction by Adrian Moore

For more, see Reason Foundation's California Research Archive here.

Raising Taxes on the Rich, or Effective Public Policy?

Posted on February 1, 2012, 5:17pm | Anthony Randazzo and Paul Revere

Over the last few weeks and months, the progressive rhetoric supporting raising taxes on the wealthy has shifted. While the claim used to be that deficit reduction and economic growth could only happen in tandem with raising taxes now the claim is that raising taxes on upper-income earners is the fair thing to do. 

For example, in the 2012 State of the Union address, President Obama used this rhetoric when talking about the “Buffett Rule”: 

“Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes… Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.” 

One of the problems of the “tax the rich to pay their fair share” movement has been the failure to define fairness. What is the fair share of the wealthy to pay? What is the fair share of the common man to pay for that matter? By what framework do we determine how taxes should be paid (income, consumption, etc.) much less how much should be paid?

Obama in the State of the Union has now at least offered a definition to debate about. It is reflective of the rhetoric repeated elsewhere in the media echo chamber (see Daily Kos, The Washington Post and The New York Times) and it essentially says that at least $300,000 of every $1,000,000 earned is a fair tax rate, no matter how that income is earned. 

Note: We will set aside for now the question of what types of income should be taxed if any, since that is a debate for another day, and focus on the numbers argument. 

What would happen if we went back to the Clinton-era tax rates on the wealthy, with a top tax bracket of 39.6 percent? According to CBO’s static analyses, $70 billion would be collected annually (or $700 billion over 10 years). This is less than 2 percent of the fiscal year 2011 federal budget, and about 5.38 percent of the FY2011 deficit. 

More importantly, what would happen if we listened to the President and taxed millionaires at 30 percent? We’d bring in less than $250 billion, which is less than 1% more than what the average millionaire currently pays. For those that still think taxing the rich more to reduce deficits is the answer, this millionaire tax means less than $10 billion more in federal revenues. It simply would not be enough to make a difference in our massive budget holes. 

Meanwhile, the reality is that upper-income earners already pay more federal taxes than lower-income Americans both as a percentage of income and as a percentage of the total taxes collected. This has been true since 1979. And according to a FactCheck.org summary of a Congressional Budget Office report, in 2005 “The top 1 percent of all households got 18 percent of all personal income and paid nearly 28 percent of all federal taxes in 2005, according to the Congressional Budget Office (CBO). The top 1 percent now pay a significantly larger share of taxes than before President Bush’s tax cuts, and also have a larger share of income.”  Let us repeat: the 1 percent paid more in taxes in 2005 after the Bush tax cuts took effect than before they were enacted. 

We would suggest that tax loopholes and federal subsidies are objectively unfair. By nature they single out specific classes, individuals, or businesses and give them advantages that others do not have (usually for social policy reasons). Two things we could do to make the tax code actually fairer while increasing both federal revenues and economic growth would be:

1. 1. Cutting out federal tax loopholes. According to William Galston of The Brookings Institution, the top ten tax code loopholes (consisting of over half of the loopholes in Fiscal Year 2011) are expected to cost $4.337 trillion from 2012 through 2016.
2. 2. Cutting out federal subsidies. According to Chris Edwards of The Cato Institute, federal subsidies topped 2,000 in January 2010. Energy subsidies totaled $37 billion in 2010, and corporate welfare equaled $92 billion, for just two examples.

The federal tax code needs a complete revamp, and the ideal solution would be to end all income taxes and replace them with some kind of consumption tax system. However, as pointed out by Robert Samuelson in Newsweek, "It's easy to imagine a better income tax... Don't hold your breath. Tax simplicity sounds good, but—politically—complexity wins hands down."

Reuters' Definition of "Lower Income"

Posted on February 1, 2012, 2:33pm

While describing a Congressional Budget Office report that projects government spending on healthcare programs will "more than double over the next decade," David Morgan of Reuters writes:

Medicare, the federal healthcare program for the elderly, accounts for about half the projected growth, with Medicaid at roughly one-third and the remainder attributed to new federal subsidies to help lower income Americans purchase insurance under President Barack Obama's 2010 healthcare overhaul.

Far from being limited to "lower income Americans," these new federal subsidies established under Obamacare will be given to individuals with incomes up to 400% of federal poverty guidelines. Using the 2011 poverty guidelines, this means the subsidies will go to households with annual incomes up to $55,590 for a family of three, $89,400 for a family of four, or $104,680 for a family of five.

For comparison, the median household income in 2011 was $49,445.

Editor's Note: This guest post was written by James D. Agresti, president of JustFacts, a nonprofit research institute based in New Jersey. Send comments to anthony.randazzo@reason.org.

French Style Light-Rail Will not Work in the U.S.

Posted on February 1, 2012, 11:51am | Baruch Feigenbaum

While many U.S. politicians chase the streetcar named Desire, French presenters explained why French style light-rail will not work in the U.S. The presentation entitled “State-of-the-Art Light-Rail: Lessons from France” occurred at last week’s Transportation Research Board Conference organized by the National Academy of Sciences. Several French rail practitioners detailed the differences between France and the U.S. 

While the French have some of the most successful light-rail trolley systems in the world, success is a relative term. Success in light-rail equates to losing somewhat smaller amounts of money compared to the large losses of U.S. operators such as Houston’s METROrail.

According to the speakers, French light-rail impacts land use and land value, creates jobs, spurs economic development, and affects long-term transportation patterns. The following ten factors have created successful light-rail in France.

1) Leadership: Creates a political system where mayors have six-year terms

2) Funding: Enables payroll taxes to fund the capital and operating costs of trains

3) Urban Form: Encourages high-density cities

4) Auto-culture: Increases the cost of owning a car

5) Pro-transit Planning: Includes protection from NIMBYists

6) Experience: Uses consultants for operations and implementation

7) Culture: Takes pride in identity and ownership of projects

8) Flexible Design: Designs different looking trains for each city

9) Inter-operation: Enables easy transfers between buses and rail

10) Utilities: Requires utilities to relocate pipes with no compensation 

The light-rail transit committee deserves credit for an objective session explaining the positives and negatives of this trolley technology. Many politicians do not want to admit the truth that French style light-rail seldom works well in the U.S. 

While I recognize that this technology works better in France than in most places in the world, I question whether this type of technology is transportation. Trolley-style light-rail is more about improving land use, increasing land value, and enabling urban revitalization than moving people from point A to point B. Increasing land values and enabling urban revitalization can be positives but like all other non-transportation causes, they should not be funded with transportation funds or pitched as solutions to transportation problems. 

Some of the factors that create successful French rail such as increased governmental powers and added economic distortion are negatives which should not be copied in the U.S. French light-rail is funded by a payroll tax; this tax is not a user fee. There is no relationship between one’s salary and one’s use of transit. Urban form should be decided by the free-market not the government’s desire to increase tax collections. Raising the cost of owning a car is acceptable if it eliminates hidden auto subsidies. However, when it penalizes auto owners it creates problems. Planning should be neutral not pro-transit or pro-highway. Utility companies should be appropriately compensated for relocation. They should not be forced to move something with no compensation.

Additionally, French style light rail is slow. France’s average light-rail speed is 15 miles per hour. In comparison, U.S. Heavy-rail systems average speeds range from 25 miles per hour in New York City to 35 miles per hour in San Francisco. How slow are U.S. trolley systems? Read on. 

If French light-rail is problematic, why are U.S. systems worse? Let me count the ways. First, many of the French political and cultural characteristics are absent in the U.S. Mayors do not have long-terms and there is less pride in civic identity. Second, many of the increased government powers in France are not popular in the U.S. (thank goodness) including high payroll taxes, control over urban form, anti-auto culture, pro-transit planning, and government requirements of private utilities. 

Third, the demographics of U.S. urban areas are very different from France. In France, wealthier residents live in the central city and the poorer residents in suburbs. Urban Revitalization in France is encouraged by the wealthier homeowners who accept the resulting higher taxes. In most U.S. cities, poorer residents live in the central city. Many of these residents are happy with their neighborhoods. If the city increases property taxes, many established residents can no longer afford their homes. Most of these minority residents are forced to leave their communities even though they have lived there for generations. 

Fourth, U.S. light rail is even slower than French light rail. According to the presenters, the average streetcar light-rail train in the U.S. averages between 5 and 10 miles per hour depending on whether dwell time is included. Many Americans can get to their destination faster by foot than by taking this trolley-style light-rail. Not surprisingly the French indicated that all train systems with an average speed below 12 miles per hour (including dwell time) are not practical in France because they are too slow. Trolley-style rail in the U.S. is slow compared to other types of rail. The average U.S. trolley train is 3-5 times slower than the average heavy-rail train. Fifth, the economic issues are more pronounced than in France. While fares on heavy-rail systems in New York City and the District of Columbia only cover 50% of their operating costs, this is better than the typical 20 % of cost returned on any U.S. light-rail systems. Because of different land-use rules, most U.S. systems will never reach the 40% farebox recovery levels of the French system. 

French style light-rail may never work well in the U.S. I am not convinced it works well in France. But even if it is successful in France, the U.S. is a very different country. This “solutionism” where one particular plan is right for every city in every country regardless of circumstances does not work.

Threat of Muni Bankruptcy Hangs Over Providence, Rhode Island

Posted on January 31, 2012, 6:50pm | Harris Kenny

The threat of municipal bankruptcy hangs over Providence, Rhode Island, Dan McGowan of GoLocalProv reports:

“Concerns are mounting over whether (Providence, Rhode Island) can remain afloat in light of cash flow problems, a $22.5 million budget shortfall and a court ruling that sided with retirees over the city in a healthcare dispute.

Now economic advisors and former mayors are saying Providence is nearing a breaking point and all options to solve the cash-strapped city’s financial woes must be on the table, including a tax hike, a cash advance from the state or a potential bankruptcy.

The city took another blow Monday when Judge Sarah-Taft Carter ruled it could not switch retirees over to Medicare after they turn 65 because they were guaranteed lifetime health coverage from the city. While the decision came as no surprise to the Taveras administration, it does leave about $8 million in assumed savings in the fiscal year 2012 budget at risk.

‘Mayor Taveras is extremely concerned and disappointed with the decision,’ said city spokesman David Ortiz. ‘He and his staff are still reviewing the 47-page decision and reviewing our options.’

Taveras acknowledged over the weekend that a potential supplementary tax raise was one option for addressing the city’s immediate financial problems and he suggested that a ten year cost-of-living-adjustment (COLA) freeze for retirees is something he is considering as part of tackling the city’s massive unfunded pension liability.”

(HT Reuters.com contributor Cate Long via Twitter)

Providence appears poised to join the ranks of other high profile U.S. municipal bankruptcies, which I outline in a previous blog post here. The situation in Providence is reminiscent of the municipal bankruptcy in Central Falls, Rhode Island last year since both cities are grappling with unsustainable public employee benefits. As former Mayor and City Council President John Lombardi told GoLocalProv: 

“I’ve been trying to tell everyone this for many, many years and they thought it was personal,” Lombardi said. “It was never personal. I talked about this back in 1994. Had the previous administrations had the intestinal fortitude, we could have taken care of this years ago.”

In November I described the situation in Central Falls on Reason Foundation’s Out of Control Policy Blog here:

Falling revenue combined with spending was problematic, but it was the (Central Falls') underfunded public employee pension fund that drove Central Falls into bankruptcy and receivership. Rosy pension predictions were flat wrong and the controversial government accounting standards board (GASB) metrics may lead to similar problems for other municipalities.

Standing in contrast is Jefferson County, Alabama and Harrisburg, Pennsylvania where local politicians got in over their heads approving high-risk projects that went sour. Jefferson County filed the largest municipal bankruptcy in U.S. history this past November. Meanwhile, Harrisburg’s City Council filed for Chapter 9 bankruptcy, which a federal judge denied. The ruling is being appealed and the city is currently under state receivership. 

The takeaway from both Central Falls and Providence is that these governments are operating in a fundamentally unsustainable manner. The trope that policymakers shouldn’t “kick the can down the road” has been especially popular recently, however current events (notably in Europe) suggest an increasing number of governments have now reached the end of the road and face no choice but to get their books in order. 

For more of Reason’s work on municipal bankruptcy, see my previous posts here and here. For more on this topic, see Reuters.com’s MuniLand blog, which is a daily must-visit for anyone interested in municipal public finance issues. 

Ethanol Mandates and Energy Security

Posted on January 31, 2012, 3:58pm | Adam Peshek

In my op-ed yesterday at the Daily Caller, I discussed the misguided policy of cellulosic ethanol mandates, writing:

The question is: Why is the government pouring billions of dollars into the production of nonexistent fuels for “energy independence and security” when the private sector --- through projects like the Keystone XL pipeline --- has the ability to make America energy secure without government handouts?

This is an example of lawmakers who think they can outsmart the private market and overzealous regulators put in charge of enforcing unrealistic laws. The Energy Indepence and Security Act (EISA) set a goal of 250 and 500 million gallons of cellulose to be produced by 2011 and 2012, respectively. So far, no company has been able to produce the fuel commercially. As a result, the EPA decided to reduce the quotas to 6.6 and 8.65 million gallons. Though certainly an improvement (less than 2 percent of the original 2012 quota) oil companies were still fined $6.8 million for not meeting their 2011 target. The fines will increase this year if companies don’t mix the unavailable fuel.

Lawmakers in Congress attempted to give a private company the ability to do this when they passed a measure requiring President Obama to make a decision on the Keystone pipeline. Instead, the President chose to deny the application of the $7 billion project that would transport Canadian crude oil between Alberta, Canada and Port Arthur, Texas via a 1,700-mile, privately constructed pipeline. When it comes to energy security, Canadian Prime Minister Stephen Harper called this project between close trade partners and allies a “no-brainer.”

President Obama called for an “all-of-the-above strategy that develops every available source of American energy” in his State of the Union address last week. His Administration would be wise to allow the development of available, shovel-ready energy projects instead of enforcing sources of American energy that don’t exist.

Fed Laughter

Posted on January 31, 2012, 12:21pm | Anthony Randazzo

This is... well, funny?

The blog, The Daily Stag Hunt, tracked the times “laughter” was recorded by the Fed’s stenographer during the FOMC meetings. In 2001, the FOMC averaged 16.5 moments of guffaws per meeting. In 2006, there were, on average, 44 outbreaks of laughter.

For those of you keeping score at home, that would be a lot of laughter as the world started collapse in around all of us. Guess it is not that funny. See the whole story at CNBC.

Freedom of Speech on the Internet is the 'Paramount Concern'

Posted on January 31, 2012, 12:19pm | Steven Titch

More thoughts on the unintentional consequences of the SOPA and PIPA, and the significance of their defeat, from former Sen. Ted Kaufman. Full version at the The Cagle Post.

Initially, concern about Internet counterfeiting and piracy looked like just another battle about money, with Hollywood studios, the recording industry, and book publishers on one side and Google, Facebook, and most of Silicon Valley on the other. This kind of thing happens all the time, not just in Washington but in state capitols and local councils. The moneyed interests line up on both sides, and employ well-paid advocates to argue their cases. Buckets of money go to the winners, but seldom do average people who will be affected by the results get a chance to exert much influence....

What became evident was that this was not just a battle over money. It was most profoundly about freedom of speech.

It has always amazed me how we Americans take freedom of speech for granted. I spent thirteen years on the Broadcasting Board of Governors, appointed by Presidents Clinton and Bush, The Board oversees all non-military U.S. government broadcasting abroad, including the Voice of America.

I saw time and again how governments around the world frustrate freedom of speech and freedom of the press. There are still countries that throw dissidents in jail and close media outlets. But more often, governments use more nuanced methods.

They enact laws to define who can be a journalist and what constitutes libel, and control what is permitted on the Internet.

The existing SOPA and PIPA bills would have made it easy for businesses to limit speech with no prior notice or judicial hearing. They could have shut down websites by filing a notice alleging the site was "dedicated to the theft of U.S. property." Perhaps some web pages should be closed, but this is a very slippery slope. Maintaining real freedom of speech on the Internet must be our paramount concern.

The Battle Over Spectrum Intensifies

Posted on January 31, 2012, 11:56am | Steven Titch

The bureaucrats at the Federal Communications Commission are set to make their play at picking wireless winners and losers, aiming to get Congressional approval to set conditions for winning bidders of the next round of spectrum auctions.

Unlike previous auctions, which involved largely unused frequency bands, this time the FCC must re-allocate portions of the 700 MHz spectrum currently in the hands of broadcasters. The FCC needs Congressional approval to move forward with a plan to transfer those licenses.

While the Senate and House both have no problem with the transfer itself, the FCC has won key allies in the Senate, including Sen. John Kerry, in an effort to win more expansive power in setting auction rules, mostly to favor bidders who pledge to honor pet ideas of the progressive Left, like network neutrality. The House, on the other hand, simply wants the FCC to do its circumscribed job of spectrum allocation and brooks no such central planning adventures.

Here's how The Hill sums it up:

The proposed law would authorize the FCC to auction airwaves, or spectrum, that currently belong to television broadcasters, splitting some of the revenue with the stations that choose to participate. The spectrum is potentially worth billions of dollars to wireless carriers, which are struggling to meet the growing data demands of smartphones and tablet computers.

The House GOP version of the legislation would restrict the FCC's ability to impose conditions on the companies that buy the spectrum and would prohibit the FCC from designating the spectrum it reclaims from broadcasters for unlicensed use. Unlicensed spectrum, which can be used by any company for free, powers technologies such as WiFi, garage-door openers and remote controls.

All the concern for the unlicensed aspect in this auction (such as today's forum) is a feint in the direction of public interest arguments. There's no spectrum crunch for home WiFi and garage doors. The FCC, rather, is looking for a back door way to impose network neutrality on wireless service. Net Neutrality, while a great theory, is unworkable in practice, especially in 4G wireless, which this round of spectrum will support. It is even arguable that 4G wireless technology itself is a network neutrality violation, because of the sophisticated way it can adjust bandwidth and throughput based on second-to-second capacity demands.

What's disingenuous about making special rules for bidders who "promise" to follow politically favored technology models is that, in the end, engineering and physics trump bureaucratic vanity. If the FCC gets the power to set technology conditions, within a year or two the "winners" will be back asking for "exemptions." The consumer harm is that companies that know how wireless networks should be properly engineered will be hobbled at the expense of companies who only know how to tell the current regulators what they want to hear. Can you say Solyndra?

Freddie Didn't Bet Against Homeowners, It Gambled With Taxpayer Money

Posted on January 31, 2012, 9:12am | Anthony Randazzo

This is one of the last places you will find me defending Freddie Mac, but as much as I would like to pile on to the recent story that Freddie "bet against homeowners" the reality is that the nature of the story completely misses the point: Freddie gambled with taxpayer money.

It all started yesterday with a story from ProPublica, who normally does great work, and NPR claiming: 

Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.

Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.

The problem with this story can be best communicated in the form of a Jeopardy question (I'll take Really Simple Finance Concepts for $2,000)...

Answer: A bet that pays off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.

Question: What is a... mortgage.

Yes, in fact, all mortgage investments are worth more at higher interest rates. All mortgage investments lose value if they get refinanced, and thus prepaid. Finance 101 teaches that if interest rates go down, then investors in mortgages with fixed-rates make money. If people refinance those mortgages, then the investors lose money.

So why all the news stories (beyond the banality of news cycle driven journalism)? What exactly did Freddie do? Well, The New York Times writes it one way:

Beginning in 2010, Freddie bought several billion dollars’ worth of “inverse floater” securities — essentially the interest-paying portion of a bundle of mortgages — for its investment portfolio while selling the far less risky principal portion. Fannie and Freddie are supposed to be decreasing the size of their investment portfolios.

To read this you would think that Freddie never before made investments with interest-rate risk, and that their portfolio was growing. In fact, almost every mortgage Freddie Mac owns has interest-rate risk—since almost every mortgage investment everywhere has interest rate risk. Furthermore, their total portfolio decreased 4% in 2010 and 4.1% in 2011. This is much slower then they should be reducing their portfolios, and it reflects how the government is trying to use the GSEs to help homeowners, but the point is that the story framed by the New York Times is misleading.

Here is a more clear way of understanding what they did:

Freddie creates a security (MBS) backed by mortgages it guarantees which was divided into two parts. The larger portion, backed by principal, was fairly low risk, paid a low return and was sold to investors. The smaller portion, backed by interest payments on the mortgages, was riskier, and paid a higher return determined by the interest rates on the underlying loans. This portion, called an inverse floater, was retained by Freddie Mac.

In 2010 and 2011 Freddie Mac's purchase (retention) of these inverse floaters rose dramatically, from a total of 12 purchased in 2008 and 2009 to 29. Most of the mortgages backing these floaters had interest rates of 6.5 to 7 percent.

In structuring these transactions, Freddie Mac sells off most of the value of the MBS but does not reduce its risk because it still guarantees the underlying mortgages and must pay the entire value in the case of default. The floaters, stripped of the real value of the underlying principal, are also now harder and possibly more expensive to sell, and as Freddie gets paid the difference between the interest rates on the loans and the current interest rate, if rates rise, the value of the floaters falls.

So, the reality remains that the conflict of interest inherent in holding an investment that makes more money when less prepayments occurs for both inverse floaters as well as any standard mortgage. Even if all you are getting is the interest stream then a prepayment wipes out all of the investment where as a prepaid whole mortgage investment would get the principal back. The thing is, though, that Freddie already got the principal back so on net the investment is not a substantially greater conflict of interest.

What is different though about inverse floaters is that they carry more risk. That part of the story above should not be missed. So even though the portfolio had decreased in quantity, the risk profile of the portfolio contained riskier investments. Freddie Mac in effect reduced the refinancing risks for buyers of its MBS, and took on a disproportionate amount of refinancing risk itself. That is gambling with taxpayer money to help out mortgage investors. So the Federal Housing Finance Agency, Freddie Mac’s regulator, asked Freddie to stop at some point last year.

In a statement released late yesterday, FHFA noted it had “concerns regarding the controls, including risk management, surrounding the inverse floaters” given that the investment strategy was putting taxpayer money on the line (every three months the Treasury Department covers all net losses for Fannie and Freddie as an ongoing bailout).

FHFA did not ask Freddie to "stop betting against homeonwers" as a ProPublica and NPR story falsely reported last night. In fact, FHFA explicitly clarified that the investments had no bearing on recent changes, announced last fall, to the Home Affordable Refinance Program, in which Freddie maintained stricter controls than Fannie on homeowners who owed less than 80 percent of their homes’ value.

In one sense the Freddie bet with taxpayer money was small. FHFA pointed out that only $5 billion of Freddie's $650 billion portfolio was held in inverse floaters. But a $5 billion bet with taxpayer money is still a problem. 

So what does this story boil down to?

The story amounts to a big to-do in educating America that mortgage investment makes the most money when people pay higher interest rates. The same as every other type of lending.

The story highlights the need to address Fannie and Freddie, who have been in conservatorship for over three years now. At the very least we should be forcing the GSEs to sell off their investment units and just be securitizers in the near-term—though Congress and the White House have been too cowardly to even discuss that.

The story amounts to paraded evidence that a private company seeking to make money might have some conflicts of interest if it also has a mission to fulfill some kind of social obligation (the essence of the government-sponsored enterprise model). Not really a newsflash there either, and we can avoid these conflicts of interest by getting rid of the two companies operating with the conflict of interest built right into their mission, but again, Capitol Hill seems to be primarily focused on their Bert Lahr impressions these days.

The story is NOT evidence of any kind of collusion at Freddie Mac that they purposely have made refinancing difficult in order for their special inverse floater investment to cash in—THAT would have been a story. But Jesse Eisinger and Chris Arnold, the Pro-Publica and NPR writers who "broke" this story, reported that:

No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are "walled off" from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.

Unfortunately, the way that story came out looks like it was just another tool for pushing an agenda for increased refis and forced principal modifications. The battle has raged for a while now: FHFA says that principal modifications would hurt taxpayers by causing losses at the GSEs and any other parties invested in mortgages or providing insurance for mortgages. The White House says it wants to fulfill a social mission and modify mortgages to address the massive negative equity problem. The Federal Reserve says that it thinks taxpayers may come out ahead with principal mods if the benefit to homeowners is greater on net than the losses to taxpayers generally... but that really shouldn't be a bet left to the Fed to make. 

Who were the economists criticizing Freddie for "betting against homeowners" in the lead story yesterday? NPR relied on Alan Boyce, a former bond trader who co-wrote a paper outlining a streamlined mortgage refinance program, and Christopher Mayer, who co-wrote the Boyce paper and is co-author of another detailed paper considered by the White House for how to pursue a principal modification program. Talk about conflict of interest.

Boyce said, "Freddie Mac prevented households from being able to take advantage of today's mortgage rates — and then bet on it." Ironically, this quote is from a NPR article that explicitly notes there is zero evidence to suggest this actually happened. But worse, Mr. Boyce knows that any mortgage investment owned by Freddie Mac with interest-rate risk would lose value on a prepayment, and he ignores that they too should be classified as "betting against homeowners" under his logic. 

PIMCO's Scott Simon says he is "shocked" that Freddie did this because the trades "put them squarely against the homeowner." Really Mr. Simon? As the head of a team that deals in mortgage-backed securities, then he invests all the time in mortgage products that are "against the homeowner" because most mortgage investments have interest-rate risk. That is kind of the point. You make a loan and collect the principal plus interest in return. Or, in the case of PIMCO or Freddie Mac, you buy the rights to getting the mortgage principal repaid plus the interest. If you buy the payment stream on a 30-year fixed-rate mortgage that has 6.5% interest payments on it, but five years after the mortgage was made it gets prepaid (either because of a refinance or home sale), then you lose out on those other 25 years of 6.5% interest payments. 

That is basic mortgage investing. 

The reality is that homeowners move roughly every 7 to 8 years, meaning that most mortgages are going to get prepaid eventually. The bet is that the mortgages you invest in will hold out for longer than others. Because there is a time factor involved.

As long as the government wants Freddie to help support homeownership, it is going to face the conflict of needing to make money from taxpaying homeowners as well as make what they pay for homeownership lower. 

Greek Debt Talks Stall, Again. What About Portugal?

Posted on January 30, 2012, 5:47pm | James Groth

After another attempt failed to get commitment from private investors on forgiving a portion of their Greek debt, the Institute of International Finance (IIF) maintains that a deal will be finalized shortly. Considering that the IMF, ECB, and a host of other European leaders have been claiming that a deal is “imminent” for the past three months now, this once again is as believable as MF Global assuring investors one week before collapse that it “is in its strongest position ever.” What’s worse is that while this circus of negotiations continues, Portuguese bonds and spreads are blowing-up.

Below is a chart of Portuguese 10-year bond yields over the past two years. Just today, yields rose 14.3 percent to an all-time high 17.4 percent yield.

Portugal is now in the same predicament as Greece and will have to go through the same bailout and debt reduction procedures as is currently occurring in the Hellenic Republic.

Greece is trying to lock down a $170 billion bailout from the IMF which will allow it to hobble along for the remainder of the decade. Reports surfacing last week say the figure needs to be at least $190 billion. Either way, in order to receive the funding, Greece must get a voluntary agreement from the private holders of its debt to commit to taking at least a 70 percent haircut (loss) on their holdings and take as the 30 percent remainder new 30-year Greek bonds with a coupon of somewhere between three and four percent. 10-year Greek bonds currently yield 34 percent.

Why anyone would choose to accept such a deal is beyond comprehension and may be why the talks have stalled for so long. It’s a terrible deal. Remember, the commitment from private investors is voluntary.

Private bondholders know exactly how much they stand to gain and lose by choosing to accept or decline a deal. Many of the bondholders are holding derivative contracts on their bonds and may actually benefit from a Greek default. Certainly none of them will cave to the scare tactics that holding out for a default would cause a financial meltdown, and regardless, even if they suspected a meltdown would ensue, I can imagine some of the hedge fund managers drawing pride from being responsible.

None of this would even be happening if markets were simply allowed to function. Greece would default, bond holders would line up for their share of the claims, derivatives would pay out, banks would take losses, Greece would design a budget sufficient to gain new funding at a market rate albeit with significant cuts, and voila, problem solved. Instead there is this political maneuvering from the IMF, ECB, and heads of State claiming where rates need to be set, who’s entitled to a bailout, and why a ten-year-old monetary union needs to be upheld because of regional peace for all reasons. As if free trade and free movement of labor had nothing to do with the last 60 years of peace in Western Europe.

So the unending political pandering and breakdown of securities market law continues and will double once the situation in Portugal hits the fan. Portugal is issuing debt this week, and when their government realizes where their financing costs have risen to, they’ll be whining for the same treatment their Mediterranean neighbor received.

They may want to be careful what they wish for. Over the weekend, Germany asked that Greece relinquish control over its budget to a central European authority and hinted that others in distress who would be receiving bailouts do likewise. That’s the last thing any nation would want, ceding decision making authority to an institution with limited knowledge beyond a ledger, and to boot it would come at the price of nearly a decade of painful austerity.

Muni Broadband: The Idea that Won't Die

Posted on January 30, 2012, 5:17pm | Steven Titch

The state of Georgia is looking to stop further development of taxpayer funded broadband projects with a new bill that would require cities to solicit commercial service providers and hold a special election before creating a city-owned cable-phone and Internet service operation.

According to Government Technology:

This bill [SB 313], sponsored by Senate Majority Leader Chip Rogers, R-Woodstock, would also mandate that local governments not pay for a community broadband system using tax revenue or any other revenue attained through a government service. Municipalities would also be prohibited from raising taxes or fees levied on private broadband providers to cover the costs of a public network.

“This bill will allow for robust competition in the communication marketplace and encourage continued economic growth throughout our state,” said Rogers in a statement. “By extending our long-standing commitment to policies that encourage private investment and market-driven competition, we are putting the needs of our citizens above those of government.”

It's not surprising to see Georgia moving in the direction. Many states, includign Pennsylvania and North Carolina, already have. That's because state legislators have watched how cities, for which the state is ultimate loan guarantor, sink loads of borrowed funds into these projects only to have them fail to pan out. What is surprising is that it took this long. Georgia is home to the nation's biggest municipal broadband debacle, in Dalton, Ga., which lost $171 million, or $5,320 per capita, on an ill-fated plan to build it's own cable system. Newnan and Marietta, Ga., also made the top 10 list of muni failures, costing taxpayers in those cities $48.1 million and 25.9 million, respectively.

Still Considering Strategic Defaults

Posted on January 30, 2012, 8:07am | Anthony Randazzo

I received an email this weekend from a reader asking about the effectiveness of strategic defaults. Even though this has been long debated, the continued weakness in housing has kept the discussion alive. The reader posed a scenario that many are facing today: "Consider a family whose home is worth less than 50 percent today than when they bought it. They believe that the house will never recover to the value it was in 2007. If they walk away now they reduce their losses to their downpayment. They would also save the mortgage payments for the 6-9 months it would take the financial institution to take possession of the house. The money saved would allow them to move and rent till the job market becomes more stable."

Furthermore the reader paints a justification scenario as well: "A [strategic default] strategy would put the burden of the losses on those financial institutions that sold insurance to back the mortgages. I guess that is Fannie and Freddie, and some of Buffett's holdings."

While underwater homes are frustrating, there is a good deal in this email to be challenged. Since most of the moral argument in opposition to strategic defaults has been long articulated (that article is from 2009), I will stick to some reminders on the practical side of the argument against strategic default.

It can be very unwise to walk away from a home unless you absolutely have to. In most states (including Florida, where the reader is from) banks have the right sue the homeowner for any losses they incur on the foreclosed mortgage. For instance, if you your home was worth $300,000 in 2005 when you got a mortgage for the full amount, but is only valued at $200,000 today, and you walked away from the mortgage leaving the bank to foreclose, the bank could sell the home for $200,000 at auction and sue you for the difference of $100,000. (Here is a full list of recourse states.)

Walking away from a mortgage also has the potential to irreparably destroy your credit, making it difficult to buy any home in the future or get substantial credit. It may sound great to pocket a few months worth of mortgage payments, but it won't matter if you can not get a mortgage in the future. Nor will it come close to making up for the deficit the bank can sue for.

If you can use your life savings (other than money in retirement accounts, which banks can not access if they sue you for the unpaid mortgage balance) to pay for a short-sale or cover the deficit after a sale, then you'd be better off doing that and keeping the bank from coming after you then just crossing your fingers. If, on the other hand, you're facing a spread between mortgage owed and house value beyond your savings and assets, then it might just be best to move on if you have to and, if the bank comes after you, consult a bankruptcy lawyer. 

Moving on to the attitude towards who takes the losses, while the "Buffetts" of the world did buy some mortgage investments, many mortgages are financed by institutional investors, and some of those are pension funds. Calpers, for instance, has been one of the world's largest investors in mortgages (the book value of the CMOs they were invested in by June 2006 was more than $3.5 billion). Yes, many of the losses will filter through to firms like AIG, but many also will hit the pension funds of ordinary Americans.

Furthermore, even when losses are taken by the CDS issuer (the people who sold insurance on the mortgage-backed securities), like AIG, there are thousands of Americans who work for those companies. These and other non-AIG employees also owned lots of stock in AIG, so it is false to believe that when a company takes losses on something mortgages that only the fat cat bosses feel the pain. This doesn't mean we should bail those companies out, but it does mean we should recognize the real people who do lose out when losses hit the idea of a company and not consider this a way to justify walking away from a home.

Finally, Fannie Mae and Freddie Mac have lost nearly $200 billion since they were taken over by the government in 2008. All of those losses have been covered by taxpayer money from the US Treasury. So walking away from your home thinking that the losses will just be felt by Fannie and Freddie means putting the losses on the taxpayers as a whole.

Housing prices will never inflate back to their inflation-adjusted 2007 levels (unless the government propagates another bubble) and that means a lot of losses to be felt remain in the system today. What homeowners should consider is the local area housing prices and their own particular circumstances: if home prices are mostly stable in your area then being underwater only becomes a problem if you want to refinance or move. Continuing to pay a mortgage is not throwing money away because you will have more equity in the home when you do move. It only is throwing that money away if you decide in the future to walk away from the home and not sell it.

Global Warming...Cooling...Or Just Climate Change?

Posted on January 29, 2012, 8:24pm | Samuel Staley

Dr Nicola Scafetta, of Duke University in North Carolina, is the author of several papers that argue the Met Office climate models show there should have been ‘steady warming from 2000 until now’.

‘If temperatures continue to stay flat or start to cool again, the divergence between the models and recorded data will eventually become so great that the whole scientific community will question the current theories,’ he said.

He believes that as the Met Office model attaches much greater significance to CO2 than to the sun, it was bound to conclude that there would not be cooling. ‘The real issue is whether the model itself is accurate,’ Dr Scafetta said. Meanwhile, one of America’s most eminent climate experts, Professor Judith Curry of the  Georgia Institute of Technology, said she found the Met Office’s confident prediction of a ‘negligible’ impact difficult to understand."

So, if the Earth is not warming, and it might be cooling, but we really don't know, what's going on? Apparently, the only thing we really do know is that the Earth is changing. The policy implications are actually pretty straightforward in a climate change world, rather than a warming or cooling world: focus on mitigation and adaptation.

For more on Reason Foundation's work on climate change, check out our studies on transportation, innovation, and other related topics at our climate change page on reason.org.