Investment Advice Is Bad

Note: Please see the opening note there. It applies here too.

A large number of papers, journals, websites, and even television channels are devoted to the subject of dispensing investment advice to the general public regarding which stocks or other securities to buy or to sell. If one finds such discussions entertaining, these may be good venues to visit. However, if one expects to earn money, all of these are completely useless. All that almost everybody needs to know about investing in capital markets follows here:

How to Eliminate the Capital Gain Deferral Distortion

And now for the thrilling conclusion of the blockbuster series of posts on the capital gain tax deferral distortion! We have seen how it arises, how some common-sense fixes cannot work, how bond taxation addresses it imperfectly, and how it can be exploited to shield even current investment returns from taxation.

More Fun With Capital Gains Tax Deferral

Recent posts have described how capital gains tax deferral allows investors to reduce their effective tax rate asymptotically to zero, how this distorts investment decisions, how market-to-market cannot fix the problem, and how bond taxation partially deals with the problem. Before the eagerly anticipated revelation how the tax code could fix this distortion to come in a future post, let me describe another method by which this deviation can be further exploited.

How Bond Taxation Addresses the Deferral Distortion

A previous post discussed the economic distortion caused by deferral of capital gains tax, another, why market-to-market cannot fix this distortion. This post shows how the tax code tries, but does not entirely succeed, in addressing this issue with regard to bonds.

Mandatory Mark-to-Market Cannot Fix Capital Gains Tax Deferral Distortion

A previous post discussed the issue of the deferral of capital gains tax and why, if there is going to be a capital gains tax, this deferral distorts economic decision-making. The issue of this post is whether mandatory mark-to-market taxation can fix the problem.

Economic Distortion of Capital Gains Tax Deferral

One under-appreciated feature of capital gains taxation are the substantial implicit benefits of deferral—capital gains are only taxed once they are realized (i.e., generally when the investment is cashed out), not when in any economic sense they are earned. Effectively, deferral renders any sufficiently long-term capital gain tax-free, regardless of what the statutory rate is.

To understand this counter-intuitive—after all, aren't long-term gain still taxed before you can ever get the cash?— conclusion, consider the following hypothetical:

Australia Does Retirees No Favor

Matthew C. Klein over at Bloomberg View argues that the most recent move does:

The biggest pension fund in Australia is planning to directly manage 30 percent of its assets by 2018, rather than outsource the task to expensive external managers who rarely justify their high fees with superior returns. This should help the fund cut costs and boost retirement benefits.

While the basic premise—actively managed funds usually don't justify their high fees—is correct, this proposed reform is likely to make things worse rather than better, at least for the putative beneficiaries, for two reasons:

Tim Worstall Gets Econ of Insurance Wrong

Tim Worstall is a British economic commentator with a free-market bent who writes for Forbes and the Adam Smith Institute. His usual beat is the economic fallacies of some other, less insightful British econ commentators and his denunciations to them are often highly amusing, if a little salty.

In a recent post on the economics of insurance, I think he screwed the pooch. He tries to explain why writing insurance which are unprofitable on insurance basis might still be a good business:

Thank You, Citibank and Uncle Sam!

I live in a pleasant 9,000 sq ft, 8 bedroom house in Northern Virginia, about 10 miles from the White House and my work. Recently I refinanced the mortgage on this house. Let's look at the economic implications.

Against Postal Savings Accounts and Other In-Kind Benefits for the Poor

The oft-sensible, always-reasonable Reihan Salam thinks that Postal Savings Accounts for the poor might be a swell idea:

But a public option for prepaid debit might be a reasonable, cost-saving idea.

Here’s one conceptual approach: Mitch Daniels has advanced the idea that government should work to increase the net disposable income of households. That implies focusing on tax restraint, delivering value for money in public services, and seeing to it that transfer to the poor aren’t wasted. When astroturf groups pop up to oppose the expansion of Walmart and other chain retailers in urban neighborhoods, they’re not just attacking the interests of Walmart shareholders and low to moderate income households that could use the lower prices. They’re also working against the taxpayers who transfer resources to low income households to keep those households out of poverty. The dollars skimmed by higher cost retailers were meant to make it easier for poor households to channel resources towards economic advancement.

I certainly don’t have a settled view on this. But I do wonder if a “public option” on prepaid debit is preferable to a command-and-control ban on payday lending, to name just one example of an anti-usury initiative.

This proposal seems to fail in a number of ways under standard economic scrutiny.

First, by any reasonable measure the market for issuing such cards is fully competitive. In other words, there are any number of existing private financial institutions which could issue such cards with little or no barrier to entry.

So why don't they? Perhaps there is some obscure regulation that prevents it. If so, let's just repeal that regulation and be done.

Much more likely they don't because it would not be profitable. If you at the same time believe that (a) banks can do it, (b) it would be profitable, but (c) they don't do it because they are so greedy, please have the nearest professional check you for other symptoms of high-level cognitive dissonance.

Second, just because it would be unprofitable doesn't mean the federal government can't do it, heavens knows. But why should it? Why not just give the cash to the poor directly and let them decide whether they want to spend it on fees for prepaid debit cards or something else they value more highly?

Third, the only plausible response to that argument is that the poor are foolish and would spend the money on something much less valuable to them than prepaid debit card fees.

That is conceivable, but I have my doubts. Most (generally non-poor) advocates who make that argument seem to have a very difficult time distinguishing between what they think poor people should value more highly and what the advocates subjectively value.

Moreover, most of these advocates don't really seem to believe in that premise itself. If they did, they would certainly support paying for a new specific poverty program (like government subsidized debit cards) out of the budgets of existing poverty programs granting cash or cash-like benefits to poor people (like food stamps).

After all, if these advocates really believe that poor people are too foolish to spend their own cash as well as the government can do it for them, that would be a net gain and, if these advocates—as they claim—really have the interest of the poor at heart, they would favor the specific program even if the funding came out of the budget of a cash-like program.

Instead, they almost never do which, on their premises, seems unexplainable.

One plausible alternate set of beliefs for these advocates is that they do not really believe in the unequaled advantages of the specific benefit for the poor they argue for or that the poor are too foolish to recognize this advantage. They just believe in greater redistribution to the poor. That argument often being unsuccessful in the public sphere, they instead resort to elaborate arguments for various specific in-kind benefits and focus on the details on why just this benefit would be particularly wonderful. While I disclaim the power of reading men's mind, that set of beliefs is at least consistent with observed behavior.

And, unfortunately, the trick sometimes works to sprinkle fairy-dust even in the eyes of well-meaning, reasonable conservatives like Reihan Salam who sometimes are overeager to display their reasonableness to the other side.

PS: He is of course right on Walmart. That is one reason I said that he is reasonable and well-meaning.

Mortgages, Promises, Contracts, and Strategic Default

In a recent article and response in the City Journal, Is Strategic Default a Menace?, Prof. Luigi Zingales (previously criticized here) of the University of Chicago's School of Business and Prof. Brent T. White of University of Arizona Law School, debate the propriety, morality, and legality of strategic mortgage default—the increasingly popular, but still surprisingly rare, practice of home owners whose mortgage balance exceeds their house's fair market value to just walk away: stop making mortgage payments and forfeiting the house to the bank holding the mortgage.

What surprises at first is that a scholar, deeming himself qualified to publicly opine on a subject, would prove both capable of either sowing or displaying so much confusion about such a non-trivial, but perfectly cognizable subject and willing to propound so many statements and principles that would to a reasonable, logical observer seem outside the realm of defensible discourse. What surprises even more is that two scholars—at least one associated with one of the most distinguished universities in the world and at least one a qualified lawyer—would be willing to do so repeatedly.

But let's start by clearing away some of the underbrush.

First, almost all housing defaults observed in excess of what would be observed in an ordinary recession of the same length and severity in fact are strategic. If unforeseen and unforeseeable circumstances, such as a cyclical job loss or sudden illness, render an owner unable to meet its mortgage obligations default may be unavoidable, not a strategic choice. But that the fair market value of a piece of real estate may have also dropped dramatically has no impact whatsoever on the owner's ability to make its payments. Every home owner who walks away from a mortgage because real estate values dropped below expectations made a strategic choice to game the system—either today or when entering into the mortgage contract based on the assumption that payments would only be made if housing prices just kept increasingly rapidly forever.

Second, a mortgage is not a promise, but a contract. As every first year law student knows, and Profs. Zingales and White ought to know, a promise does not a contract make. A promise creates a general, moral obligation; a contract creates something which is both more and less: an exact legal obligation (or to be precise, at least a pair of such obligations) enforceable through the judicial system. These are not the same and treating them as one and the same, as in particular Prof. Zingales is inclined to do, creates nothing but confusion and false conclusions.

Having disposed of these preliminaries and identified the right categories, let's analyze mortgages and strategic default:

The legal obligations created by a home mortgage contract are many and vary greatly from jurisdiction to jurisdiction, but there are only two big ones which, with one crucial exception, are the same everywhere:

1. The bank obligates itself to provide the necessary funds for the purchase of the home. The bank fulfills its obligation right at the beginning of the contract term and failure to do so may occur anecdotally but does not appear to be a frequent or pressing social concern; in cases where this obligation is broken legal remedies are clear and pretty uncontroversial.

2. The home owner obligates itself make agreed-upon periodic payments to the bank, until the principal amount and agreed-upon interest, is paid off or to surrender the collateral, that is the house, to the bank. It is here that the important distinction between jurisdictions enters: In some (so-called non-recourse jurisdictions), that is the entire legal obligation of the home owner. In others (unsurprisingly called recourse jurisdictions), the (former) home owner is also obligated to pay the balance between the value of the home when surrendered and its remaining legal obligation.

Now it can fairly be debated whether it is wiser for a jurisdiction to be recourse or non-recourse, or whether this is something that the mortgagor and mortgagee should just agree upon on a case-by-case basis as they enter the contract (the latter is what this author would counsel—not that this policy opinion matters for anything that follows). What cannot be fairly debated is whether both parties knew or should have known what kind of mortgage contract they entered into. Whether the jurisdiction where the home is located is recourse or not is well-settled law. It rarely changes. Even more rarely does it change retroactively to affect contracts which were entered before the legal change. In fact, I am unaware of any instance of retroactive change in recent decades (that is, any which could have affected any of the mortgages involved in the current crisis).

So both sides, bank and homeowner, knew or ought to have known exactly what they obligated themselves to do when they signed the contract. Moreover, the market for mortgage contracts is highly competitive from both sides: there are many competing banks and many competing home buyers. In such a competitive market, you'd expect any advantage given to one side (such as non-recourse to home owners) to be counter-balanced by a statistically equal advantage given to the other side (such as higher interest rates in otherwise identical circumstances). So, if non-recourse has a value to home owners, they paid and the banks received a corresponding premium for the option to default strategically (in financial terms, a variable strike-price put option on the collateral).

Hence, Prof. Zingales has no just basis for morally or legally condemning home owners who exercise the option to default strategically in non-recourse states. They bought that option when they entered upon the mortgage. They paid for it with every mortgage payment they made. They broke no promise when they exercised that option. They did not even violate their legal obligations. By returning the house, they fully lived up to them. (Vandalism or theft of fixtures which have legally become part of the property—as has been reported to occur in some cases—is of course not excused by this. Trashing the property of belonging to somebody else is morally and legally wrong, regardless of whether it is the repossessing bank's or your neighbor's.).

Now Prof. Zingales may argue that banks dramatically under-priced the put option which is part of any non-recourse mortgage contract. Perhaps he is right. Perhaps bank managers, quantitative analysts, and policy makers all made this investment error. If so, they deserve to be demoted or fired, the investors which failed to oversee them properly to take a financial bath, and their regulators to take the appropriate level of condemnation.

However, bankers' failures to understand and properly price their contracts is no more excuse to let them out of their obligations than it is in any other case. If we are willing to hold all legally competent adults to the terms of the deals they freely entered, and a viable law of contract requires that we do, it seems bizarre to take outrage at applying this same principle not just to the penniless and semi-literate, but also sophisticated bankers who priced mortgages in non-recourse states. If they made a bad deal, that was a business misjudgment and they and all whom they are answerable to, including top management and investors, will have to live with.

In response, Prof. Zingales (and perhaps Prof. White, if he gave the matter some thought), might argue that no sane lender will write a mortgage in a non-recourse state without a very healthy down-payment cushion and high interest rates. Hence the young and the poor, who reportedly have the largest difficulty in coming up with sufficient down payments, will be locked out of the housing markets and just have to live in rental housing until they have accumulated a sufficient down payment.

So be it. Perhaps this will convince populist legislatures who enacted non-recourse laws in order to protect the poor and downtrodden against avaricious bankers to change their minds when they realize that the price for that protection is reduced homeownership by that same favored group. Or perhaps not, as legislatures find this price worth paying. But in either case, we are far more likely to get decent policy on recourse if legislatures will finally be held accountable for both side of a policy, rather than being empowered to view non-recourse as a free lunch.

So much for Prof. Zingales—on to Prof. White who advocates strategic default for owners of homes worth less than their mortgages. As argued above, that is fair enough in non-recourse jurisdictions. But Prof. White makes no distinction between recourse and non-recourse jurisdictions and the different obligations homeowners incur in different states.

He justifies strategic default in recourse states as follows:

In [recourse] states, the lender may also opt to pursue a deficiency judgment—a court order that the borrower pay the difference between the funds received by the lender from a foreclosure sale and the balance remaining on a debt. ... Of course, lenders don’t often pursue borrowers for deficiency judgments, even in states where they can do so, because it’s usually not economically worthwhile.

In other words, because the bank's legal expenses of enforcing the contractual obligation may be too high to be worthwhile, it is acceptable to ignore the obligation! One can scarcely believe that a progressive legal scholar would endorse such a principle, if indeed it is a principle, rather than a convenient good-for-one-use only verbal distraction.

Does Prof. White counsel businesses to violate their contractual obligations whenever they can get away with it because the other side cannot economically obtain a judgment against them? How about a bank which takes unauthorized nuisance fees out clients' accounts? A dry cleaner who demands a couple extra dollars beyond the agreed price in return for the cleaned clothes? A landlord who groundlessly declines to return a deposit? A diner who dashes rather than pay his check? In all of these cases, there need be no criminal intent to deceive or trickery—just a strategic decision to keep the money because one can and it is not worth suing over. Does that make the practices right?

To ask these questions is to answer them. Of course he would not endorse such practices (or at least my searches missed any articles he has written in their defense). Violating contracts is commendable if done by members of groups favored by Prof. White; it is an outrage if done to members of groups favored by Prof. White. Such an instrumentalist perspective on morality or law is destructive to both. Prof. White's students and readers would do well to keep that in mind when evaluating his statements.

The Victims of the Housing Bubble and Mortgage Crisis

A week ago—I apologize for my tardiness—Arnold Kling posted on EconLog:

I know that it's axiomatic that poor people are helpless victims. But in the case of these mortgages, that is a really hard sell. The banks did not take from poor people. They gave to poor people. If you were lucky enough to get one of these exotic mortgages when house prices were still going up, then you got to reap a nice profit on your house. If you were not so lucky, you lost...close to nothing. I'm sorry, but if you borrowed up to 100 percent of the value of the house or more, then all you really lost were your moving expenses.

What about predatory lending? As I understand it, the idea of predatory lending is to saddle the borrower with an expensive mortgage so that you can foreclose on the property and sell it at a profit. How many times did that happen? Have you read of a single instance in the past three years where the bank made a profit on a foreclosure?

I am always ready to feel sorry for poor people because of their poverty. But I cannot feel sorry for somebody who was given a basically free option on a house and the option didn't happen to come into the money.

I have no value to add except to quote this obvious, important, unspeakable insight. That is a little, but only a little, more than nothing. The only reason an insight remains both obvious and important is that it is unspeakable. Repeating it renders it on iota less unspeakable.

Hey, Sequoia Fund!

In yesterday's commentary on Mr. Lowenstein's blovitations in the New York Times, we inexcusably neglected to mention the funniest tidbit in the entire piece, one which he rightly saved for last:

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine

So here's our proposition for the Sequoia Fund: We'll perform Mr. Lowenstein's duties as outside director for half of what you compensate him right now. Also, we know what a lot of those finance-y words actually mean, so we promise not to get that dazed-and-confused slowly-turning-to-anger look that old Rodge always gets whenever you mention one of those concepts.

Deal? Contact us at the e-mail address on this site!

Who Needs Roger Lowenstein?

The New York Times, despite being headquartered in one the world's principal financial centers, once again delivers itself of a lecture [to] the public on sciences which he has still the very alphabet to learn, to wit finance and its purpose. Today's lecturer is Roger Lowenstein and his subject is Who Needs Wall Street?

The piece opens unpromisingly enough:

Mike Mayo is a veteran of six Wall Street banks. In the wake of the street’s disaster, he found refuge at a boutique brokerage and has lately taken to startling his peers with the question "What part of Goldman Sachs is good for the country?"

How Mr. Mayo's serial unemployment qualifies him to ask that question, much less to implicitly answer it in the negative, is not explained. Nor is it why any private person or enterprise should be under an obligation to explain its right to live and work to the satisfaction of the populace or the New York Times. Perhaps Mr. Mayo's peers—he is not mentioned again—would be equally startled should he query them as to why Batman always sells pink ice cream. But let's pass over that.

Because some people have savings and others need capital, some unifying force must bring the two together. Royalty once taxed its citizens and chartered corporations.

Mr. Lowenstein in turn might be startled to learn the meaning of chartered and how little it involved taking tax payers funds out of the royal purse and giving it to corporations. The investors have always been with us.

Goldman, which, from its founding in 1869 through recent decades, epitomized, with only rare slip-ups, the best of American finance. Serving the client was its lodestar, and its bankers were pillars of society, more conversant in literature than in the vagaries of, say, mortgage securities.

One hopes that Mr. Lowenstein employs a different standard for what "epitomizes ... the best of American" medicine. Or perhaps, he would consider the physician who can quote baseball statistics with abandon—fine achievement that though may be—superior to one familiar with the vagaries of his trade—organs and grubby stuff like that.

Most famous was the trading that stemmed from complex derivatives (like mortgages) with only a remote connection to the underlying product.

At the point at which the author refers to "mortgages" as "complex derivatives", it would behoove any sentient being to conclude that Mr. Lowenstein knows not whereof he speaks and stops reading. We recommend the same to you, in particular as we did not and offer a few more amusing highlights.

Among the crimes and misdemeanors confessed to by the new evil Goldman is:

"In our market-making function, we are a principal. We represent the other side of what people want to do." He went on to say that when Goldman sells a security that subsequently goes up (i.e., on which the other party makes money), "we wish we hadn’t sold it."

One can only hope that all securities Mr. Lowenstein ever bought subsequently fell in price and all he ever sold rose. Otherwise he very much ought to be as ashamed of himself as he thinks Goldman should be of itself.

Modern markets are more likely afflicted with too much trading. Think of oil and its dizzying fluctuations. As the volume from speculators and momentum traders dwarfs that of long-term investors, prices gyrate further from fundamental value.

It seems hard to believe, but Mr. Lowenstein seems to be unaware of the very first law of speculation: A speculator who buys high and sells low will not remain a speculator long. The only way to speculate successfully is to buy low, thereby increasing low prices, and selling high, thereby decreasing high prices. In other words, the only way to make money speculating is to dampen swings. If Mr. Lowenstein is looking for a scapegoat for volatility, he better look elsewhere.

The casino charge is most plausibly leveled at credit-default swaps, the bête noire of A.I.G., Greece and others.

The charge that the CDSs are at the root of the Greek crises, raised by the New York Times here not for the first time, has been refuted too often to need it done another time here. The only rational explanation for its repetition is that New York Times financial writers cannot tell the difference between currency swaps (which the Greek government did use to hide its corrupt public finances) and credit default swaps (which could not have caused the crises but did help in uncovering it).

Such swaps let traders bet on the odds of default (of a corporate or, indeed, a sovereign bond). If swaps traded in Las Vegas — if bets against, say, Goldman’s bonds swamped the casino, causing Goldman’s lenders to refuse it credit — an uproar would ensue. This actually happened to banks in 2008.

Of course trading in Goldman CDS is perfectly legal and doubtlessly does occur without any uproar. The reason it has not made the papers is that—to damn with faint praise—Goldman management is more honest, ethical and trustworthy than that of the Greek state.

The social utility of credit-default swaps is ostensibly the insurance function. (Fear that a bond will default? Buy a swap that pays out in the event.) But most traders do not own the bond, and they have nothing to "insure." Like the fellow who takes a policy on his neighbor’s house, they are simply betting on disaster.

No, the purpose of the market in CDS is to attract and summarize the best available information on the riskiness of a bond. The only way to do that is to allow anybody in the possession of such knowledge (and sufficient capital to back their bet) to trade CDS. That managements, corporate or governmental, would rather not have this information leak out is a reason to encourage the trading of naked CDS, not to outlaw it.

Swaps are used by banks as a hedge against risky loans, but the effect is problematic. The danger of hypertrading is that it affords an illusion of a continuously available exit; investors feel less need to scrutinize their assets. So it is with bankers. If every loan can be traded away, why worry about risk? Thanks to swaps, banks write more suspect loans and, over all, society is more exposed.

Yes, this is doubtlessly the effect that would occur if all investment managers, entrusted by their clients with billions of dollars in capital, thought as shallowly as New York Times finance columnists and, also, every CDS had only one side. Neither of these being the case, the conclusion does not follow. As long as somebody else has to buy the risk somebody else sells and the price of that transfer reflects the magnitude of that risk, the concern over a debt's risk has not disappeared; it has merely shifted.

The question is whether the social balance would improve if Wall Street were less devoted to games of chance.

Certainly—if you believe that investment should be abolished or put into the hand of central planners. But as long as individuals can reach their own conclusion about the likelihood of outcomes in the uncertain future and back their conclusions with their own money, we'll have Wall Street, uncertainty, and chance.

Left-wing Hate Speech

Thomas Frank delivers himself of the usual progressive advice to Barack Obama in the pages of the WSJ:

What you need to do now is pick a fight, preferably one that forces the obstructionists of the right to take the side of privilege. You need a battle that will expose their populism and their protest for the pretenses they are. Your target is obvious: the financial industry, from Wall Street to the credit card companies. Yes, taking them on will cost you campaign contributions for 2012, but take Wall Street down a few pegs and Americans might start to remember what it was their grandparents loved about Democrats all those years ago.

In all my years of reading right-wing punditry I have never heard any of the groups conventionally deemed to be the go-to scapegoats of the right (ethnic minorities, gays and lesbians, welfare recipients) or even Al-Qaeda denounced as readily and unashamedly as progressives gleefully demagogue banks and the rich. Much less have I read in any respectable publication that the soundest strategic counsel to the Right would be to focus public scorn on a particular despised minority and ride the wave of hatred to electoral success.

Yet, progressives like Mr. Frank do so shamelessly and will at the same time claim the mantle of dispassionate reason and adopt an attitude of vast superiority to the slavering Republican-voting hordes with their hate-filled minds.

How does that work?

Thaler on Mortgages: Sentiment over the Liberal Order

Richard Thaler, of Libertarian Paternalism fame, has a generally sensible piece in the New York Times, Will More Borrowers Walk Away From Their Mortgages.

Two points however bear refuting:

[The] norm [to keep paying a mortgage even on underwater property] might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.

That is in equal parts sentimental and pernicious. If it is ok to exercise the put option to Morgan Stanley, it is also ok to do it with the local banker. You, I, Morgan Stanley, and the local banker are all equally responsible under the law for our promises and the contracts we enter. That there should be one law for favored in-groups, like the local banker you may run across in the grocery store, and another, lesser law for outsiders and strangers, like Morgan Stanley, is profoundly subversive to continued existence of the liberal order. That we have largely overcome such distinctions in the law is a fundamental pillar of a commercial republic. Throwing it overboard would be dangerous and wrong.

Eric Posner, a law professor, and Luigi Zingales, an economist, both from the University of Chicago, have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices—if there is one—when the house is eventually sold.

This is equally ruinous to the rule of law. If such a modification was to the advantage of both sides, there should be nothing to prevent it from happening now. That this is not happening shows that it is not in the interest of at least one side. That it is eagerly embraced by the politically attuned suggests that the large and politically powerful group—homeowners—who would benefit at the expense of a small and despised minority—Wall Street banks and their investors.

So, shorn of rhetorical pretense, the Posner/Zingales proposal is no more than a expropriation of property held by the politically powerless for the benefit of the politically powerful. It is disappointing that distinguished economists such as they should need to be reminded that such proposals—even if they are not enacted!—undermine the rule of law and push nations along the road to ruin.

A "Financial Crisis Responsibility Fee" on sub-prime borrowers

The administration proposes to impose a punitive ex-post-facto tax "Financial Crisis Responsibility Fee" on banks who received TARP bailouts--regardless of whether they wanted, needed, or have repaid the funds. Wall St. Weighs a Challenge to a Proposed Tax, New York Times at B1 (Jan. 17, 2010). Of course, bailout recipients with sufficient links to the Democratic Party, such as the union-owned automakers and retired-politico-operated Fannie Mae and Freddie Mac, are exempt.

But haven't we been told that the financial crisis was caused by all those irresponsible sub-prime mortgages? So, surely, sub-prime borrowers should not escape their share of the blame. So let's make them pay another percent or two of interest on their mortgages, regardless on whether they are current on their mortgages, have repaid them, or discharged them in bankruptcy. That is not the deal they signed up for? Well, no, but then neither is it the one the TARP recipients signed up for.