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  • Author: Gerald P. O'Driscoll Jr.
  • Publication Date: 05-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: In the past, the federal government has introduced moral hazard in the banking system through deposit insurance. Banks underpriced risk because of the federal guarantee that backed deposits. After banking crises in the 1980s and 1990s, deposit insurance was put on a sound basis and that source of moral hazard was mitigated. In its place, monetary policy has become a source of moral hazard. In acting to counter the economic effects of declining asset prices, the Federal Reserve has come to be viewed as underwriting risky investments. Policy pronouncements by senior Fed officials have reinforced that perception. These actions and pronouncements are mutually reinforcing and destructive to the operation of financial markets. The current financial crisis began in the subprime housing market and then spread throughout credit markets. The new Fed policy fueled the housing boom. Refusing to accept responsibility for the housing bubble, the Fed's recent actions will likely fuel a new asset bubble. The cumulative effects of recent monetary policy undermine the case for free markets.
  • Topic: Economics, Government, Markets
  • Political Geography: United States
  • Author: T.J. Rodgers
  • Publication Date: 08-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: Since the passage of the Sarbanes-Oxley Act in 2002, the Financial Accounting Standards Board has passed rules that it promises will make corporate accounting more transparent. In fact, its revised Generally Accepted Accounting Principles have made it difficult for investors — or even CEOs — to understand a company's financial report.
  • Topic: Economics, Government, Markets
  • Political Geography: United States
  • Author: Arnold Kling
  • Publication Date: 09-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: The Fannie Mae-Freddie Mac crisis may have been the most avoidable financial crisis in history. Economists have long complained that the risks posed by the government-sponsored enterprises were large relative to any social benefits.
  • Topic: Economics, Government, Financial Crisis
  • Political Geography: United States
  • Author: Randal O'Toole
  • Publication Date: 10-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: Rising gas prices and concerns about greenhouse gases have stimulated calls to build more rail transit lines in urban areas, increase subsidies to Amtrak, and construct a large-scale intercity high-speed rail system. These megaprojects will cost hundreds of billions of dollars, but they won't save energy or significantly reduce greenhouse gas emissions.
  • Topic: Development, Economics, Government
  • Political Geography: United States
  • Author: Michael F. Cannon
  • Publication Date: 10-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: Democratic presidential nominee Sen. Barack Obama (IL) has proposed an ambitious plan to restructure America's health care sector. Rather than engage in a detailed critique of Obama's health care plan, many critics prefer to label it "socialized medicine." Is that a fair description of the Obama plan and similar plans? Over the past year, prominent media outlets and respectable think tanks have investigated that question and come to a unanimous answer: no.
  • Topic: Economics, Government, Health, Markets
  • Political Geography: United States
  • Author: Lawrence H. White
  • Publication Date: 11-2008
  • Content Type: Policy Brief
  • Institution: The Cato Institute
  • Abstract: As policymakers confront the ongoing U.S. financial crisis, it is important to take a step back and understand its origins. Those who fault "deregulation," "unfettered capitalism," or "greed" would do well to look instead at flawed institutions and misguided policies. The expansion in risky mortgages to under qualified borrowers was encouraged by the federal government. The growth of "creative" nonprime lending followed Congress's strengthening of the Community Reinvestment Act, the Federal Housing Administration's loosening of down-payment standards, and the Department of Housing and Urban Development's pressuring lenders to extend mortgages to borrowers who previously would not have qualified.
  • Topic: Economics, Government
  • Political Geography: United States
  • Author: Sharon Squassoni
  • Publication Date: 10-2008
  • Content Type: Policy Brief
  • Institution: Carnegie Endowment for International Peace
  • Abstract: Expectations for nuclear energy have grown dramatically. More than thirty nations now have plans to build nuclear power plants for the first time. A nuclear renaissance, however, is not a foregone conclusion. A major expansion would require significant policy and financial support from governments. Key questions need solid answers beforehand: Can nuclear power help reduce dependence on foreign oil or contribute significantly to needed reductions in carbon emissions? Is nuclear power economically competitive? Can safety be assured and is an acceptable solution for nuclear waste at hand? Can nuclear power be expanded in such a way as to adequately control the added risks of proliferation? To minimize some of the risks of nuclear expansion—whether related to economics, safety, security, or proliferation—the United States should consider several actions: help strengthen the rules of nuclear commerce and transparency, deemphasize the element of national prestige with respect to nuclear energy, help other countries undertake clear-eyed assessments of all available options for generating electricity, and limit the acquisition of sensitive nuclear technologies like uranium enrichment and spent-fuel reprocessing.
  • Topic: Energy Policy, Environment, Government
  • Political Geography: United States
  • Author: George Perkovich
  • Publication Date: 10-2008
  • Content Type: Policy Brief
  • Institution: Carnegie Endowment for International Peace
  • Abstract: The next American president should emphasize the goal of a world without nuclear weapons and really mean it. The verification and enforcement mechanisms that would be required to achieve this would augment U.S. and global security at a time when the nuclear industry will likely expand globally. Without a clearer commitment to the elimination of all nuclear arsenals, non–nuclear-weapon states will not support strengthened nonproliferation rules, inspections, and controls over fissile materials. The accounting and control over nuclear materials that would be necessary to enable nuclear disarmament would greatly reduce risks that terrorists could acquire these materials. If nuclear deterrence would work everywhere and always, we would not worry about proliferation. If nuclear deterrence is not fail-safe, the long-term answer must be to reduce the number and salience of nuclear weapons to zero.
  • Topic: Government, Nuclear Weapons, Peace Studies, Weapons of Mass Destruction
  • Political Geography: United States, America
  • Author: Max Watson
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: Chatham House
  • Abstract: Today's market turbulence and global imbalances prompt the question whether economic and regulatory policies are poorly designed or just badly implemented. The question is urgent for Europe, which has its own asset booms and imbalances to worry about as well as the backwash of US problems. The imbalances in Europe's economies in large part reflect favourable shocks, such as falling interest rates and growing financial integration. But the 'growth crisis' in Portugal underscores the fact that there can be hard landings, even without a financial crisis, if fiscal policy is unwise and if productivity fails to take off. The current global imbalances and turbulence also have a common backdrop in the long period of unusually easy liquidity and low risk premia during which today's problems built up. This suggests that central banks should be prepared more often to 'lean against the wind' in times of asset price exuberance, and that politicians should not cut taxes or boost spending permanently on the back of revenue gains that result from transient financial booms. Banks and supervisors have many lessons to draw. Some involve going 'back to basics' on issues such as liquidity, off-balance-sheet operations, and the ability to close and reopen banks. Others require a careful look at incentives – in executive pay, rating agency roles and loan production systems. Supervisors also need to take better account of boom-bust cycles when they assess risks, and address cross-border issues in EU banking. Moral hazard has been partly addressed by pain inflicted on bank managements and shareholders. But at the macro level it may be building up as policy-makers act to limit losses in a setting where they cannot trace the ultimate fallout from risks. In future, their discretionary interventions need to be truly exceptional and much more symmetrical, or the money supply and the public debt will ratchet up amid serious resource misallocation.
  • Topic: Economics, Government, Financial Crisis
  • Political Geography: United States, Europe
  • Author: John H. Makin
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: In October 1907, J. P. Morgan stemmed a financial panic by coercing other banks to join him in providing credit to Wall Street brokerage firms teetering on the edge of bankruptcy.[1] This year, over the weekend including March 15—the ominous Ides of March—James Dimon, head of JPMorgan Chase, was the one to act. With the Federal Reserve squarely behind him and assuming the risk, he prevented a Bear Stearns bankruptcy by agreeing to purchase the firm, providing it with a decent burial, at a price of $2 per share. Bear Stearns's stock had been valued at over $160 per share just a year ago. The $2 price virtually wiped out the value of that stock, one-third of which is owned by its 14,000 employees. This was clearly not a bailout for Bear Stearns shareholders, and whether or not the steps taken by the Fed on March 16 were sufficient to arrest a further collapse of available credit and the economy remains to be seen. As long as house prices keep falling, the underlying problem for credit markets and the economy remains.
  • Topic: Economics, Government, Markets
  • Political Geography: United States