Understanding the Age of Obama

By Victor Davis Hanson

Are you confused by all that has changed since President Barack Obama took office in January? If so, you're not alone. Perhaps, though, this handy guide to Age of Obama "logic" might be of some assistance.

1. The Budget. Wanting to cut $17 billion from the budget, as President Obama has promised, is proof of financial responsibility. Borrowing $1.84 trillion this year for new programs is "stimulus." The old phrase "out-of-control spending" is inoperative.

2. Unemployment. The number of jobs theoretically saved, or created, by new government policies - not the actual percentage of Americans out of work, or the total number of jobs lost - is now the far better indicator of unemployment.

3. The Private Sector. Nationalizing much of the auto and financial industries, while regulating executive compensation, is an indication of our new government's repeatedly stated reluctance to interfere in the private sector.

4. Race and Gender. Not what is said but who says it and about whom reveals racism and sexism. For example, an Hispanic female judge isn't being offensive if she states that Latinas are inherently better judges than white males.

5. Random violence. Some assassinations represent larger American pathologies, but others do not. When a crazed lone gunman murders someone outside the Holocaust Museum or shoots an abortion doctor, we should worry about growing right-wing and Christian extremism. But when an African-American Muslim convert brags about his murder of a military recruitment officer or an Islamic group plots to kill Jews and blow up a military jet, these are largely isolated incidents without larger relevance.

6. Terrorism. Acts of terror disappeared about six months ago. Thankfully, we live now in an age where there will be - in the new vocabulary of the Obama administration - only occasional "overseas contingency operations" in which we may be forced to hold a few "detainees." At the same time, ongoing military tribunals, renditions, wiretaps, phone intercepts and predator-drone assassinations are no longer threats to the Constitution. And just saying you're going to close the detention center at Guantanamo Bay is proof that it is almost closed.

7. Iraq. The once-despised Iraq war thankfully ended around Jan. 20, 2009, and has now transformed into a noble experiment that is fanning winds of change throughout the Middle East. There will be no need for any more Hollywood cinema exposés of American wartime crimes in Iraq with titles like "Rendition," "Redacted," "Lions for Lambs" and "Stop-Loss."

8. The West. Western values and history aren't apparently that special or unique. As President Obama told the world during his recent speech in Cairo, the Renaissance and Enlightenment were, in fact, fueled by a brilliant Islamic culture, responsible for landmark discoveries in mathematics, science and medicine. Slavery in America ended without violence. Mistreatment of women and religious intolerance in the Middle East have comparable parallels in America.

9. Media. The media are disinterested and professional observers of the present administration. When television anchormen and senior magazine editors bow to the president, proclaim him a god or feel tingling in the legs when he speaks, it is quite normal.

10. George W. Bush. Former President Bush did all sorts of bad things to the United States that only now we are learning will take at least eight years to sort out. "Bush did it" for the next decade will continue to explain the growing unemployment rate, the most recent deficit, the new round of tensions with Iran and North Korea, and the growing global unrest from the Middle East to South America.

Once we remember and accept the logic of the above, then almost everything about this Age of Obama begins to make perfect sense.

Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.

Venezuela's oil-dependent economy

Socialism on the never-never

Hard times on the streets of Caracas

Grab the chicken while stocks last

GLOBAL capitalism may be in crisis, but thanks to “21st-century socialism” Venezuela’s economy is “armour-plated” and the country’s poor have nothing to fear. That has been the message from Hugo Chávez, Venezuela’s president, and his ministers in recent months. If anyone is to suffer from the lower price of oil, the country’s mainstay, they insist it will be only “the oligarchy”. And serve them right: according to Mr Chávez, the rich are merely “animals in human form”.

The oil price has doubled from its December trough (although it is still only half its peak of a year ago), so one might expect Mr Chávez’s fighting talk to be reflected in resilient living standards. But inflation is close to 30%, real wages are falling and welfare schemes have suffered big cuts in their budget. The mood on the streets of poorer suburbs of Caracas, the capital, is glum.

“I go shopping whenever I can scrape together enough money,” says Pedro López, a bricklayer who has been out of work for the past three months. Officially, unemployment is stable at around 7%. But Mr López says: “It’s not just me. Lots of my workmates have been laid off too.” According to the Central Bank, the economy grew by 0.3% in the first quarter compared with the same months of 2008. Construction is supposed to have expanded by 3.6%. But some economists doubt the figures.

Public investment is under strain. This month, for example, the boss of Caracas’s metro system announced a review of a new line already under construction, with the probable scrapping of two stations. He argued that since these were in middle-class areas they would “benefit the oligarchy” who all have cars anyway. Other public-sector projects have slowed or stalled, seemingly for lack of funds.

Consumer confidence fell by 17% between December and May, according to Datanálisis, a market-research company. Food consumption among poorer Venezuelans may be declining, says Pavel Gómez, an economist at IESA, a Caracas business school. Opinion polls reveal a sharp rise in worries over the cost of living. The government’s answer to years of persistent inflation has been price controls and Mercal, a state-owned and subsidised grocery chain that offers a limited selection of staples at discounts of up to 40%. But Mercal’s sales fell by more than 11% in the first five months of this year, partly because of store closures and distribution problems.

“Every day, things get a little tighter,” said Migdalia Pérez, a community activist in Catia, a working-class district of 500,000 people in western Caracas. “And it’s been a while since we’ve had a Mercal around here.” Near Propatria metro station, a dozen Mercal employees sit idle by the door of the local branch. They insist it is being “refurbished”. Locals say it opens only when an occasional shipment of imported chicken arrives. Smaller corner shops known as Mercalitos which devote some shelf-space to subsidised goods are also closing down. “It’s not profitable,” says José Cabrita, who owned one. “They don’t allow you any margin.” He adds that supplies were erratic.

The most popular of Mr Chávez’s social misiones is Barrio Adentro, which includes a network of primary-health centres initially staffed by thousands of Cuban doctors. But many of these have also closed. Poorer Venezuelans must rely on rundown public hospitals, which have been starved of funds under Mr Chávez. Mr López, the bricklayer, says that when he broke his wrist in an industrial accident, “it took three months to fix it, and I had to buy the metal pins myself.”

Much of the money for the dozens of social misiones which Mr Chávez set up as a parallel welfare state came direct from PDVSA, the state oil company. But its oil output has been falling. When the oil price plunged last year, its direct transfers to welfare programmes fell to $2.7 billion, from $7.1 billion in 2007. That is because responsibility for the misiones has been handed over to the relevant ministries, according to Rafael Ramírez, PDVSA’s chairman. But since oil revenues pay for around half of the government’s budget, this has not prevented cuts in welfare spending.

On the face of things, the recent recovery in the price of oil to around $70 a barrel should enable Mr Chávez to muddle through without radical shifts in policy. But Venezuela’s generally heavy and sulphurous oil sells at a discount of around $10 a barrel. To sustain public spending at its peak level without deficits would have required Venezuelan oil to sell at an average of $90 a barrel last year, according to a calculation by Domingo Maza Zavala, a former governor of the Central Bank. The magic price would be higher still today, given inflation (the official exchange rate is pegged to the dollar) and the further expansion of the state through the nationalisation of private businesses.

So that points to a mixture of cuts and borrowing. Since public debt was low, at 20% of GDP last year, and Venezuelan banks have ever-fewer private clients, there is some room for further loans. The National Assembly duly authorised fresh government borrowing this month. But Mr Chávez’s hopes of remaining in power for decades to come depend, as ever, on the price of oil.

Reforming financial regulations in America

Better broth, still too many cooks

Barack Obama’s plan for regulatory reform is not bold enough

FINANCIAL regulation in America has two problems: there is both too much of it and too little. Multiple federal agencies oversee the financial system: five for banks alone, and one each for securities, derivatives and the government-sponsored mortgage agencies. They share these duties with at least 50 state banking regulators and other state and federal consumer-protection agencies. Yet all these regulators failed to anticipate and prevent the worst financial crisis since the Depression, because risk-taking flourished in the cracks between them. Toxic subprime mortgages were peddled by lenders with little federal oversight and shoved into off-balance-sheet vehicles. The greatest leverage accumulated in firms that avoided the capital requirements of banks.

On June 17th Barack Obama took aim at these weaknesses (see article). His financial white paper gets much right. First, it does not pursue what Dan Tarullo, one of the governors of the Federal Reserve, has called “reform by nostalgia”. Rolling back the deregulation of the past three decades would have wiped out the genuine benefits that innovation and competition have brought to Americans. Second, it recognises that many remedies do not require new regulators, but simply better regulations, such as beefed-up capital and liquidity buffers for banks and shifting much of the “over the counter” trade in derivatives to regulated exchanges and clearing houses.

In other respects the plan does not go far enough. It does too little to reduce the multiplicity of regulators that has long undermined their effectiveness. To be sure, regulatory competition is not all bad: it can check government overreach and nourish experimentation. Nor is a unified regulator a cure-all: Britain’s Financial Services Authority failed to do anything about British banks’ excessive dependence on short-term, wholesale funding. But most of America’s overlap is a useless holdover from the days when commercial and investment banks, thrifts, government-sponsored enterprises and commodity dealers did different things. This overlap encourages dodgy firms to shop around for the friendliest regulator, which is how the Office of Thrift Supervision (OTS) ended up overseeing so many big, failed companies. It slows down implementation of new rules, breeds turf wars, corrodes accountability and increases costs.

But under the new proposals only one agency, the OTS, will disappear. A new agency to protect consumers will take this area over from the bank regulators. But it will not assume similar duties now held by the Securities and Exchange Commission or Commodity Futures Trading Commission, and have little enforcement authority over thousands of state-regulated finance companies and loan brokers—a glaring shortcoming given that such firms were responsible for originating a large share of toxic mortgages and abusive loans.

The plan also complicates the role of the Federal Reserve, which has already been exposed to political attack by its unprecedented interventions in markets and the economy. The Fed should certainly revisit how it does its job. The financial crisis has amply demonstrated that maintaining low inflation does not guarantee economic stability. This has fired up interest, in Europe as well as America, in “macroprudential regulation”: the notion that regulators must supplement “micro” supervision of individual firms by looking across entire markets and industries for risks that threaten the whole system.

This is much harder in practice than in theory. By its very nature, risk-taking thrives in the shadows and crises take regulators by surprise. But if macroprudential regulation is to be done, the central bank is the logical body to do it. As lenders of last resort central banks pick up the bill in systemic crises, so they deserve a role in preventing them. The European Union is also proposing that European central bankers work with bank supervisors to detect and prevent systemic risk. Unlike the EU proposals, however, Mr Obama’s plan also makes the Fed directly responsible for the supervision of all firms deemed too big to fail in addition to its existing responsibility for bank holding companies and some banks. That introduces conflicts of interest and risks of regulatory capture: might the Fed be tempted to bail out a firm to save jobs, for example, or refrain from raising interest rates to stop a big firm from failing? If the Fed is to receive this expanded macroprudential role, it should be stripped of its microprudential duties.

Don’t let a crisis go to waste

Mr Obama’s aides have concluded that a more ambitious overhaul of America’s sprawling regulatory system would expend too much political capital with too little benefit. That bodes poorly for their willingness to face down special interests over the details of even this limited proposal. Who will have to hold more capital, and how much? Which firms will be designated as systemically important, and how will they pay for their implicit government backing? How to prevent banks shopping around for laxer rules abroad? Mr Obama’s aides are famously fond of saying that crises create opportunities. But the best opportunity in years for a complete redesign of America’s regulatory apparatus seems to be going to waste.

Iran and the world

Iran rises up

It looks increasingly as though the government will have to crack down or back down

THE sight of a million-odd demonstrators on the streets of Tehran, the like of which has not been seen since the revolution that unseated the shah in 1979, is bound to stir the hearts of freedom lovers the world over. That is especially true when the chief butt of popular anger, President Mahmoud Ahmadinejad, is a Holocaust-denying bully who seems bent on getting his hands on a nuclear weapon. Yet outsiders tempted to shout their support for the protesters should tread carefully for fear of achieving the opposite of what they intend.

After holding the country in a tight grip for 30 years, Iran’s clerical rulers are in disarray. The presidential candidate who was supposed to have come second in last week’s ballot, Mir Hosein Mousavi, seems likely, judging by all the chicanery, to have won (see article). The establishment is divided, with some stalwarts of the revolution siding with the demonstrators. Even the supreme leader, too spiritual to submit himself to popular ballot for the near-omnipotent post he has held for the past two decades, has become embroiled in the squalid electoral fray. He may ultimately even face the question of his, and the regime’s, survival.

No one can see into the back rooms of the clerical establishment or into the bunkers of the Revolutionary Guard. No one knows the real results of the vote. No one can predict how long the street protests will last or how ready the regime is to use force and the price it would pay in its own people’s blood. Yet something momentous has happened in a pivotal country in the most combustible part of the world. Having fatally misread its own people, Iran’s government must now decide whether to back down or to crack down.

The judgment of history

Iran is the fulcrum of an unstable region. If it behaved responsibly, the world would naturally look to it as the local power. Instead it meddles, often malevolently, with its neighbours.

That is not surprising, for it has been the victim of much meddling. The country has been buffeted between imperial rivals—Russian, Turkish, British and American—for more than a century. The West once took Iran’s oil for itself. Britain and America sabotaged its brief experiment with democracy in 1953, as Barack Obama admitted in his admirable speech to Muslims in Cairo earlier this month. A generation ago Iran was assaulted by an Arab army headed by Iraq’s Saddam Hussein, leaving a million dead. Persian prickliness, even paranoia, is understandable. Iran feels ringed by the forces of what it sees as its main enemy—America. The eagerness of Iran’s rulers for a nuclear capability, which they swear is only for civilian use but which most outsiders reckon would lead inexorably to a bomb, is shared by nearly all Iranians, even those on the streets, as a national birthright in a hostile world.

But an external threat cannot justify the crass debauchery of the presidential poll. Iran is not a democracy, but its system, which combines unelected religious authority with a subordinate elected civilian one, was designed to give people a chance to let off steam from time to time within carefully set electoral limits. And today there is a head of steam to vent. The young are bored and rebellious and short of work, women are oppressed, bazaaris fed up with economic bungling. Even some clerics reject Mr Ahmadinejad for his populist brand of Islam.

For this election, the limits were set very narrow. The supreme leader, abetted by largely unelected councils, allowed just four out of more than 400 candidates to face the voters in the presumption that his populist incumbent protégé would stroll to victory. Instead those disparate groups of discontented Iranians united behind the main challenger, Mr Mousavi. The ballot-rigging turned that support into a mass protest against the system itself. Given that all four official candidates were sworn to keep the largely theocratic system going, the government’s performance was stupid as well as pernicious.

Iranian demonstrators are a determined lot. Before the shah’s fall, protests went on for months. But what happens now will be decided as much by the depth of divisions within the ruling clerical establishment as by the stamina of angry crowds. The clerics are faced with a desperate dilemma. By letting air into a system that has stifled even basic freedoms, yielding to the demonstrators could undo the regime; and yet to use force risks turning Iran into any other cheap dictatorship. A regime that has long sought to claim both legitimacy and a monopoly on power may soon have to choose which of the two it most desires.

The best of all possible worlds

Watching Iranians pour onto the streets to demand change, those in the outside world who wish Iran well must hope fervently that it comes. Iranians are too sophisticated to be ruled for ever by a clutch of old men in turbans. The regime has been illiberal and authoritarian. It is often vicious in its suppression of opponents and its disregard for human rights. Iran has the highest rate of judicial executions per head in the world. Women are second-class citizens. Even so, Iran is nothing like the totalitarian, mass-murdering regimes of the Soviet Union or Nazi Germany. However many votes he rigged, Mr Ahmadinejad has a big constituency behind him.

The West must tread carefully—as Mr Obama has done (see article)—in its response to Iran’s unfolding crisis. It should condemn abuses of human rights and electoral malpractice, but it should avoid taking sides. Given Iranians’ understandable hostility to outside interference, endorsing Mr Mousavi would only strengthen Mr Ahmadinejad. And whoever ends up running Iran, the West will have to talk to its leaders about its nuclear programme.

A new president and a kinder regime in Iran would be a valuable prize. It would lower the regional temperature. In Iraq, where Iran meddles, blood is still being copiously spilt, albeit far less so than a few years ago. In Palestine and Lebanon, both zones of Iranian interference, it could help tilt the protagonists towards compromise. It could even improve Afghanistan. So, as Iran splutters and seethes, the world must watch and wait—and keep its offer of goodwill on the table.

Price Fixing in Ancient Rome

Mises Daily by Robert L. Scheuttinger and Eamonn F. Butler

As might be expected, the Roman Republic was not to be spared a good many ventures into control of the economy by the government. One of the most famous of the Republican statutes was the Law of the Twelve Tables (449 B.C.) which, among other things, fixed the maximum rate of interest at one uncia per libra (approximately 8 percent), but it is not known whether this was for a month or for a year. At various times after this basic law was passed, however, politicians found it popular to generously forgive debtors their agreed-upon interest payments. A Licinian law of 367 B.C., for instance, declared that interest already paid could be deducted from the principal owed, in effect setting a maximum price of zero on interest. The lex Genucia (342 B.C.) had a similar provision and we are told that violations of this "maximum" were "severely repressed under the lex Marcia." Levy concludes that "Aside from the Law of the Twelve Tables, these ad hoc or demagogic measures soon went out of use."[1]

The laws on grain were to have a more enduring effect on the history of Rome. From at least the time of the fourth century B.C., the Roman government bought supplies of corn or wheat in times of shortage and resold them to the people at a low fixed price. Under the tribune Caius Gracchus the Lex Sempronia Frumentaria was adopted, which allowed every Roman citizen the right to buy a certain amount of wheat at an official price much lower than the market price. In 58 B.C. this law was "improved" to allow every citizen free wheat. The result, of course, came as a surprise to the government. Most of the farmers remaining in the countryside simply left to live in Rome without working.

Slaves were freed by their masters so that they, as Roman citizens, could be supported by the state. In 45 B.C., Julius Caesar discovered that almost one citizen in three was receiving his wheat at government expense. He managed to reduce this number by about half, but it soon rose again; throughout the centuries of the empire, Rome was to be perpetually plagued with this problem of artificially low prices for grain, which caused economic dislocations of all sorts.[2]

In order to attempt to deal with their increasing economic problems, the emperors gradually began to devalue the currency. Nero (A.D. 54–68) began with small devaluations and matters became worse under Marcus Aurelius (A.D. 161–180) when the weights of coins were reduced. "These manipulations were the probable cause of a rise in prices," according to Levy. The Emperor Commodus (A.D.180–192) turned once again to price controls and decreed a series of maximum prices, but matters only became worse and the rise in prices became "headlong" under the Emperor Caracalla (A.D. 211–217).[3]

Egypt was the province of the empire most affected, but her experience was reflected in lesser degrees throughout the Roman world. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy again attributes the phenomenal rise in prices which followed to the large increase of the amount of money in circulation. The price of the same measure of wheat rose in Egypt from 6 drachmai in the first century to 200 in the third century; in A.D. 314, the price rose to 9,000 drachmai and to 78,000 in A.D. 334; shortly after the year A.D. 344 the price shot up to more than 2 million drachmai. As noted, other provinces went through a similar, if not quite as spectacular, inflation.[4] Levy writes,

In monetary affairs, ineffectual regulations were decreed to Combat Gresham's Law [bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offenses was death. Controls were set up along roads and at ports, where the police searched traders and travelers. Of course, all these efforts were to no purpose.[5]

The Edict of Diocletian

The most famous and the most extensive attempt to control prices and wages occurred in the reign of the Emperor Diocletian who, to the considerable regret of his subjects, was not the most attentive student of Greek economic history. Since both the causes of the inflation that Diocletian attempted to control and the effects of his efforts are fairly well documented it is an episode worth considering in Some detail.

Shortly after his assumption of the throne in A.D. 284, "prices of commodities of all sorts and the wages of laborers reached unprecedented heights. " Historical records for determining the causes of this remarkable inflation are limited. One of the few surviving contemporary sources, the seventh chapter of the De Moribus Persecutorum, lays almost all the blame squarely at the feet of Diocletian. Since, however, the author is known to have been a Christian and since Diocletian, among other things, persecuted the Christians, we have to take this report cum grana salis. In this attack on the emperor we are told that most of the economic troubles of the empire were due to Diocletian's vast increase in the armed forces (there were several invasions by barbarian tribes during this period), to his huge building program (he rebuilt much of his chosen capital in Asia Minor, Nicomedia), to his consequent raising of taxes and the employment of more and more government officials and, finally, to his use of forced labor to accomplish much of his public-works program.[6] Diocletian himself, in his edict (as we shall see) attributed the inflation entirely to the "avarice" of merchants and speculators.

$18 $15

A classical historian, Roland Kent, writing in the University of Pennsylvania Law Review, concludes from the available evidence that there were several major causes of the sharp rise in prices and wages. In the half century before Diocletian, there had been a succession of short-reigned, incompetent rulers elevated by the military; this era of weak government resulted in civil wars, riots, general uncertainty and, of course, economic instability. There certainly was a steep rise in taxes, some of it justifiable for the defense of the empire but some of it spent on grandiose public works of questionable value. As taxes rose, however, the tax base shrank and it became increasingly difficult to collect taxes, resulting in a vicious circle.[7]

It would seem clear that the major single cause of the inflation was the drastic increase in the money supply owing to the devaluation or debasement of the coinage. In the late republic and early empire, the standard Roman coin was the silver denarius; the value of that coin had gradually been reduced until, in the years before Diocletian, emperors were issuing tin-plated copper coins that were still called by the name "denarius." Gresham's law, of course, became operative; silver and gold coins were naturally hoarded and were no longer found in circulation.

During the fifty-year interval ending with the rule of Claudius Victorinus in A.D. 268, the silver content of the Roman coin fell to one five-thousandth of its original level. With the monetary system in total disarray, the trade that had been hallmark of the empire was reduced to barter, and economic activity was stymied.

The middle class was almost obliterated and the proletariat was quickly sinking to the level of serfdom. Intellectually the world had fallen into an apathy from which nothing would rouse it.[8]

To this intellectual and moral morass came the Emperor Diocletian and he set about the task of reorganization with great vigor. Unfortunately, his zeal exceeded his understanding of the economic forces at work in the empire.

In an attempt to overcome the paralysis associated with centralized bureaucracy, he decentralized the administration of the empire and created three new centers of power under three "associate emperors." Since money was completely worthless, he devised a system of taxes based on payments in kind. This system had the effect, via the ascripti glebae, of totally destroying the freedom of the lower classes — they became serfs and were bound to the soil to ensure that the taxes would be forthcoming.

The "reforms" that are of most interest, however, are those relating to the currency and prices and wages. The currency reform came first and was followed, after it had become clear that this reform was a failure, by the edict on prices and wages. Diocletian had attempted to instill public confidence in the currency by putting a stop to the production of debased gold and silver coins.

According to Kent,

Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretense of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward.[9]

The new coinage gave some stability to prices for a time, but unfortunately, the price level was still too high, in Diocletian's judgment, and he soon realized that he was faced with a new dilemma.

The principal reason for the official overvaluation of the currency, of course, was to provide the wherewithal to support the large army and massive bureaucracy — the equivalent of modern government. Diocletian's choices were to continue to mint the increasingly worthless denarius or to cut "government expenditures" and thereby reduce the requirement for minting them. In modern terminology, he could either continue to "inflate" or he could begin the process of "deflating" the economy.

Diocletian decided that deflation, reducing the costs of civil and military government, was impossible. On the other hand,

To inflate would be equally disastrous in the long run. It was inflation that had brought the Empire to the verge of complete collapse. The reform of the currency had been aimed at checking the evil, and it was becoming painfully evident that it could not succeed in its task.[10]

It was in this seemingly desperate circumstance that Diocletian determined to continue to inflate, but to do so in a way that would, he thought, prevent the inflation from occurring. He sought to do this by simultaneously fixing the prices of goods and services and suspending the freedom of people to decide what the official currency was worth. The famous edict of A.D. 301 was designed to accomplish this end. Its framers were very much aware of the fact that unless they could enforce a universal value for the denarius in terms of goods and services — a value that was wholly out of keeping with its actual value — the system that they had devised would collapse. Thus, the edict was all pervasive in its coverage and the penalties prescribed, severe.

The edict was duly proclaimed in A.D. 301 and, according to Kent, "the preamble is of some length, and is couched in language which is as difficult, obscure, and verbose as anything composed in Latin."[11] Diocletian clearly was on the defensive in announcing such a sweeping law, which affected every person in the empire every day of the week; he uses considerable rhetoric to justify his actions, rhetoric that was used before him and which, with variations, has been used in most times and places since.

He begins by listing his many titles and then goes on to announce that: The national honor and dignity and majesty of Rome demand that the fortune of our State … be also faithfully administered…. To be sure, if any spirit of self-restraint were holding in check those practices by which the raging and boundless avarice is inflamed … peradventure there would seem to be room left for shutting our eyes and holding our peace, since the united endurance of men's minds would ameliorate this detestable enormity and pitiable condition [but since it is unlikely that this greed will restrain itself] … it suits us, who are the watchful parents of the whole human race, [the term "parents" refers to his associate Augustus and two Caesars] that justice step in as an arbiter in the case, in order that the long-hoped-for result, which humanity could not achieve by itself, may by the remedies which our forethought suggests, be contributed toward the general alleviation of all.[12]

In The Common People of Ancient Rome, Frank Abbot summarizes the essence of the edict in the following words:

In his effort to bring prices down to what he considered a normal level, Diocletian did not content himself with half measures as we are trying in our attempts to suppress combinations in restraint of trade, but he boldly fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold [and also the wages that all sorts of workers could receive] and prescribed the penalty of death for anyone who disposed of his wares at a higher figure. [13]

The Results of the Edict

Diocletian was not a stupid man (in fact, from all accounts, he seems to have been more intelligent than all but a few of the emperors); he was therefore aware that one of the first results of his edict would be a great increase in hoarding. That is, if farmers, merchants, and craftsmen could not expect to receive what they considered to be a fair price for their goods, they would not put them on the market at all, but would await a change in the law (or in the dynasty). He therefore provided that

From such guilt also he too shall not be considered free, who, having goods necessary for food or usage, shall after this regulation have thought that they might be withdrawn from the market; since the penalty [namely, death] ought to be even heavier for him who causes need than for him who makes use of it contrary to the statutes.[14]

There was another clause prescribing the usual penalty for anyone who purchased a good at a higher price than the law allowed; again, Diocletian was well aware of the normal consequences of such attempts at economic regulation. On the other hand, in at least one respect the edict was more enlightened (from an economic point of view) than many regulations of recent years. "In those places where goods shall manifestly abound," it declared, "the happy condition of cheap prices shall not thereby be hampered — and ample provision is made for cheapness, if avarice is limited and curbed."[15]

(Those modern nations who have had to endure "retail price maintenance," "fair-trade laws" and the various price-fixing agencies such as the International Air Transportation Association could well learn a useful lesson from Diocletian, who at least made it always legal to lower a price.)

"Diocletian had failed to fool the people and had failed to suppress the ability of people to buy and sell as they saw fit."

Parts of the price lists have been discovered in about 30 different places, mostly in the Greek-speaking portions of the empire. There were at least 32 schedules, covering well over a thousand individual prices or wages.

The results were not surprising and from the wording of the edict, as we have seen, not unexpected by the emperor himself. According to a contemporary account,

then he set himself to regulate the prices of all vendible things. There was much blood shed upon very slight and trifling accounts; and the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.[17]

It is not certain how much of the bloodshed alluded to in this passage was caused directly by the government through the promised executions and how much was caused indirectly. A historian of this period, Roland Kent, believes that much of the harm was indirect. He concludes,

In other words, the price limits set in the Edict were not observed by the traders, in spite of the death penalty provided in the statute for its violation; would-be purchasers, finding that the prices were above the legal limit, formed mobs and wrecked the offending traders' establishments, incidentally killing the traders, though the goods were after all of but trifling value; hoarded their goods against the day when the restrictions should be removed, and the resulting scarcity of wares actually offered for sale caused an even greater increase in prices, so that what trading went on was at illegal prices, and therefore performed clandestinely.[18]

It is not known exactly how long the edict remained in force; it is known, however, that Diocletian, citing the strain and cares of government, resulting in his poor health, abdicated four years after the statute on wages and prices was promulgated. It certainly became a dead letter after the abdication of its author. Less than four years after the currency reform associated with the edict, the price of gold in terms of the denarius had risen 250 percent.

Diocletian had failed to fool the people and had failed to suppress the ability of people to buy and sell as they saw fit. The failure of the edict and the currency "reform" led to a return to more conventional fiscal irresponsibility and by A.D. 305 the process of currency debasement had begun again. By the turn of the century, this process had produced a two-thousand-percent increase in the price of gold in terms of denarii:

These are impossible figures and simply mean that any attempt at preserving a market, let alone a mint ratio, between the bronze denarius and the pound of gold was lost. The astronomical figures of the French "assignats," the German mark after the First World War, and of the Hungarian pengo after the Second, were not unprecedented phenomena.[19] … Copper coins could very easily be manufactured; numismatists testify that the coins of the fourth century often bear signs of hasty and careless minting; they were thrust out into circulation in many cases without having been properly trimmed or made tolerably respectable. This hasty manipulation of the mints was just as effective as our modern printing presses, with their floods of worthless, or nearly worthless, paper money.[20]

M. Rostovtzeff, a leading Roman historian, summed up this unhappy experience in these words:

The same expedient had often been tried before him and was often tried after him. As a temporary measure in a critical time, it might be of some use. As a general measure intended to last, it was certain to do great harm and to cause terrible bloodshed, without bringing any relief. Diocletian shared the pernicious belief of the ancient world in the omnipotence of the state, a belief which many modern theorists continue to share with him and with it.[21]

Although Diocletian's attempt to control the economy ended in complete failure and he was forced to abdicate, it was only sixty years later that his successor, Julian the Apostate, was back at the same old stand. Edward Gibbon, the brilliant historian of the period, ironically noted that

the emperor ventured on a very dangerous and doubtful step, of fixing by legal authority, the value of corn [grain]. He enacted that, in a time of scarcity, it should be sold at a price which had seldom been known in the most plentiful years; and that his own example might strengthen his laws [he sent into the market a large quantity of his own grain at the fixed price]. The consequences might have been foreseen and were soon felt. The imperial wheat was purchased by the rich merchants; the proprietors of land, or of corn [grain] withheld from that city the accustomed supply, and the small quantities that appeared in the market were secretly sold at an advanced and illegal price.[22]

As a desperate measure, succeeding emperors tried to tie workers to the land or to their fathers' occupations in order to prevent workers from changing jobs as a means of evading the low wages prescribed for certain professions. This, of course, was the ultimate consequence of the attempt to control wages by law.

The only legal escape for many workers was to find a willing replacement and then to give up all their goods to him. The Emperor Aurelian had previously compared a man who left his profession to a soldier who deserted on the field of battle.[23]

The historian Levy concludes his survey of the economy of the empire by declaring that

State intervention and a crushing fiscal policy made the whole empire groan under the yoke; more than once, both poor men and rich prayed that the barbarians would deliver them from it. In A.D. 378, the Balkan miners went over en masse to the Visigoth invaders, and just prior to A.D. 500 the priest Salvian expressed the universal resignation to barbarian domination.[24]

Killing in War

Mises Daily by David Gordon

Jeff McMahan has written a genuinely revolutionary book. He has uncovered a flaw in standard just-war theory. The standard view sharply separates the morality of going to war, jus ad bellum, from the morality of warfare, jus in bello. Whether or not a war is just does not affect the morality of how war is to be conducted. Soldiers are forbidden to violate the laws of war; but no greater restrictions are imposed on those who fight in an unjust cause than on those whose cause meets the requirements of jus ad bellum. This is exactly what McMahan rejects. Soldiers in an unjust cause have, for the most part, no right at all to engage in violent action against soldiers in a just cause. Not only do they lack moral standing to engage in aggressive warfare; they cannot legitimately even engage in defensive war, in most circumstances.

McMahan states his basic thesis in this way:

The contention of this book is that common sense beliefs about the morality of killing in war are deeply mistaken. The prevailing view is that in a state of war, the practice of killing is governed by different moral principles from those that govern acts of killing in other contexts. This presupposes that it can make a difference to the moral permissibility of killing another person whether one's political leaders have declared a state of war with that person's country. According to the prevailing view, therefore, political leaders can sometimes cause other people's moral rights to disappear simply by commanding their armies to attack them. When stated in this way, the received view seems obviously absurd. (p. vii)

Once advanced, McMahan's thesis seems obvious, and it is his considerable philosophical merit to make us realize how obvious it is. Those who fight in an unjust war are, by hypothesis, directing force against people whom they have no right to attack. If, e.g., the United States had no right to invade Iraq in 2003, then American soldiers wrongly used force against Iraqi soldiers. If so, how can one contend that they are morally permitted to do so? Further, do not defenders against such aggression have the right to resist? If they do have this right, then the aggressors may not fight back, even in self-defense. If a policeman legitimately shoots at a suspect, the suspect cannot claim the right to shoot back in self-defense. McMahan holds that matters in this respect do not change in warfare.

McMahan contends further that his view is of more than merely theoretical importance. Because people accept the incorrect view that soldiers who fight in an unjust war do no wrong, so long as they obey the laws of war, they are more likely to participate in such wars. This makes wars more likely.

[Although] the idea that no one does wrong, or acts impermissibly, merely by fighting in a war that turns out to be unjust … is intended to have a restraining effect on the conduct of war, the widespread acceptance of this idea also makes it easier … to fight in war without qualms about whether the war is unjust. (p. 3)

As mentioned, it seems obvious, once stated, that those engaged in an unjust war have no right to attack others. But is it too severe a doctrine to claim that they have no right to defend themselves, if attacked by just combatants? Quite the contrary, McMahan notes that his view applies a standard position in interpersonal morality to the ethics of war:

For many centuries there has been general agreement that, as a matter of both morality and law, "where attack is justified there can be no lawful defence." These words were written by Pierino Belli in 1563 and were echoed a little over a century later by John Locke, who claimed that "Force is to be opposed to nothing, but to unjust and unlawful force." (p. 14)

McMahan is a very careful philosopher; as soon as he states a thesis, he thinks of qualifications, objections, and rebuttals. He notes an instance where unjust combatants can permissibly use force:

The exception to the claim that just combatants are illegitimate targets in war is when they pursue their just cause by impermissible means. If, for example, just combatants attempt to achieve their just cause by using terrorist tactics — that is, by intentionally killing and attacking innocent people, as the Allies did when they bombed German and Japanese cities in World War II — they make themselves morally liable to defensive attack and become legitimate targets even for unjust combatants. (p. 16)

If McMahan contends that unjust combatants are not morally permitted, in most cases, to use force, has he not placed unreasonable demands on them? They are in many cases conscripted into the armed forces and serve against their will: in fighting, they simply obey the orders of their government. If they refuse to serve, they may face severe criminal penalties. And once enemy troops fire on them, is it not unrealistic to demand that they not fire back?

But these considerations at best give unjust combatants an excuse for their conduct: they do not serve to show that what they do is morally right. Further, not all unjust combatants are conscripts; and, as to those who are, one sometimes has a moral duty to disobey unjust commands, even if doing so leads to harsh penalties.

"I was just following orders" is not always a convincing defense. And the situation for the soldiers who wish to act in accord with moral duty is not always so bleak. McMahan calls attention to the work of S.L.A. Marshall, who claimed that during World War II, "only about 15–20% of combatants had fired their weapons at all" (p. 133). Though not everyone accepts Marshall's figures, it is not in dispute that many soldiers in battle did not fight. But of course the majority of combatants were not jailed for resistance. Soldiers, then, who wish to disobey unjust orders may be able to escape penalties.

McMahan considers an objection to his thesis advanced by David Estlund. Do not soldiers in a democratic country act reasonably in relying on their government's claim that a war is just? After all, the government is likely to have much more relevant information than the soldiers and, Estlund contends, democratic decision-making has "epistemic value"; given the government's democratic bona fides, soldiers act reasonably in not attempting to assess for themselves the justice of a war.

Not so, McMahan responds.

Among democratic countries, the US stands out in two respects: it has carefully designed and robust democratic institutions and also goes to war more often than any other democratic country. What procedural guarantees are there that the wars it fights will be just? The answer is: none. The only constraint is a requirement of Congressional authorization — a requirement that can be fudged… (p. 69)[1]

McMahan is an appropriately severe critic of American foreign policy:

The Pentagon Papers revealed an assortment of lies told to rally support for the war in Vietnam; Reagan lied about the nature of the Contras and the sources of their funding in order to make war against Nicaragua; and members of the George W. Bush administration lied repeatedly about weapons of mass destruction in Iraq in order to justify the invasion and occupation of that country to the UN, the Congress, and the American public. (p. 152)[2]

Although he considers American participation in World War II justifiable, he nevertheless remarks:

It is revealing about our attitudes in general that we sometimes do take combatants who have committed war crimes to be fully excused, or even justified… Perhaps the most notorious case of this sort is that of General Paul Tibbets, who was the commander and pilot of the Enola Gay, the plane … from which the atomic bomb was dropped on the Japanese city of Hiroshima in August of 1945… This single act by Tibbets, with contributions by the other members of his small crew, had as an immediate physical effect the killing of more people, the vast majority of whom were civilians, than any other single act ever done … all plausible moral theories, including even the most radical forms of consequentialism, prohibit the killing of that many innocent people in virtually all practically possible circumstances. Tibbets's act is therefore the most egregious war crime, and the most destructive single terrorist act, ever committed, even though it was committed in the course of a just war. Yet he was congratulated for it by President Truman… (pp. 128–29)

McMahan's drastic revision of just-war theory, however cogent, appears to carry with it an unfortunate consequence. If unjust combatants use force illegitimately, are they not then subject to criminal penalties for their conduct? If we accept this consequence, the result will be large scale Nuremberg Trial proceedings: do we rally want this? Further, as F.J.P. Veale long ago pointed out in Advance to Barbarism, the prospect of being tried for war crimes encourages leaders of governments to refuse to surrender.

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Fortunately, McMahan's view does not have this consequence. What he is concerned to argue is that unjust combatants do not have the moral right to use force. It does not follow from this that they ought to be subject to criminal penalties for doing so. That is a prudential matter, and, as McMahan notes, strong considerations tell against resorting to criminal law. For one thing,

there is no impartial international court that could conduct trials of combatants who have fought in an unjust war. Because no government could try its own soldiers for fighting in a war in which it has commanded them to fight, the idea that unjust combatants are liable to punishment could lead to trials by victorious powers of individual soldiers of their defeated adversary … the victorious power that would prosecute allegedly unjust combatants would be more likely to be a vengeful aggressor prosecuting just combatants who had opposed it. (p. 190)

Further, McMahan grasps Veale's point:

Unjust combatants who feared punishment at the end of the war might be more reluctant to surrender, preferring to continue to fight with a low probability of victory than to surrender with a high probability of being punished. (pp. 190–91)

Readers unaccustomed to analytic moral philosophy may find McMahan's book hard going. He does not operate from a general theory but proceeds from case to case, weaving an intricate web of subtle distinctions.[3] The effort required to read the book, though, is well worth it: Killing in War is a distinguished contribution to moral theory.

Geithner Defends Plan to Step Up Oversight

| Associated Press

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Treasury Secretary Timothy Geithner arrives for testimony before the Senate Banking Committee on Thursday.

WASHINGTON -- Treasury Secretary Timothy Geithner said it is clear that the government could have done more to prevent the economic downfall.

In prepared testimony, Mr. Geithner said that gaps and weaknesses in the regulatory framework governing banks and other financial institutions "presented challenges" to the government's ability to monitor and address risky market bets.

One problem, he said, is that no single regulator saw its job as protecting the economy and financial system as a whole.

The administration's plan, which Mr. Geithner outlined Thursday before the Senate Banking Committee, calls for the Federal Reserve to do that job supported by a new council of regulators.

White Paper

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Vote: Does the plan go too far or fall short?

"Every financial crisis of the last generation has sparked some effort at reform. But past efforts have begun too late, after the will to act has subsided," he said in prepared remarks. "We cannot let that happen this time. We may disagree about the details, and we will have to work through those issues. But ordinary Americans have suffered too much; trust in our financial system has been too shaken; our economy has been brought too close to the brink for us to let this moment pass."

A visibly angry Sen. Christopher Dodd (D., Conn.) had a simple message for financial firms on Thursday: You oppose the creation of a new consumer protection agency at your own risk.

Sen. Dodd, who chairs the Senate Banking Committee and will be the chamber's leader on regulatory reform efforts, said he was "upset" by media reports that financial-industry groups are gearing up to oppose the Obama administration's proposal to create an agency to protect consumers from abusive financial products.

"The very people who created the damn mess are the ones" now saying they will oppose sensible changes, he said. "That's not the place to start."

At the hearing, Mr. Geither said the Federal Reserve is best suited to become a super-regulator that would oversee financial firms so big and influential that their failure could topple the economy.

Some lawmakers want to give the job to a council of regulators. The administration has proposed creating such a group, but says it wouldn't be an effective "first responder" in a financial emergency. "You don't convene a committee to put out a fire," he said.

Democratic leaders have committed to enacting the regulatory revision by the end of the year.

"We have to evaluate it, weigh it, slow it down and make sure we do it right," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee. "Because if we don't, we will pay dearly."

The proposal is aimed at filling in regulatory gaps and increasing oversight of the financial markets to prevent another economic calamity.

"We don't want to stifle innovation," said President Barack Obama in a speech Wednesday.

"But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealings, we will actually promote a more vibrant market," he added.

Mr. Obama wants to empower the Federal Reserve to oversee the largest and most influential financial firms. He also wants to create a council of federal regulators, chaired by the treasury secretary, to monitor risk across the broader market.

A new consumer protection agency would be created to prevent deceptive practices by such companies as credit card lenders and mortgage brokers.

In an interview Wednesday with ABC News, Mr. Geithner outlined the three core elements of the package: consumer protections, safeguards against risk-taking by financial institutions, and new federal authority "to better manage ... the potential failure of large institutions."

The proposal was well-received among Democrats on Capitol Hill, who said it would prevent another round of bank bailouts and protect consumers from predatory lending practices.

"We regard this as very pro-market," said Rep. Barney Frank (D., Mass.), who chairs the House Financial Services Committee. "Unless you have investors that are well-protected, you don't have a market."

A swift legislative endorsement of the plan could be difficult. Sen. Dodd (D., Conn.) is leading a major overhaul of the nation's health-care system, while the Senate also faces a debate on whether to confirm Supreme Court nominee Sonia Sotomayor.

In addition to the Senate's packed schedule, several lawmakers, including Sen. Dodd, have questioned whether Mr. Obama's proposal relies too heavily on the Federal Reserve and expressed concern that the Fed, as an independent agency, doesn't answer to Congress.

"It's certainly worthy of a thorough and full-throated debate and discussion as to whether or not that's a better alternative than vesting the Fed," Sen. Dodd told reporters after Obama's speech. "There's not a lot of confidence in the Fed at this point."

Mr. Geithner told reporters at a briefing that the administration had looked at a range of alternatives to giving the Fed expanded powers and had come to the conclusion that "we do not believe there is a plausible alternative."

Too Big to Fail, or Succeed

Everyone will want to become big enough to enjoy 'systemic risk' protection.

PETER J. WALLISON

In a speech at the White House yesterday, President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth . . . a transformation on a scale not seen since the reforms that followed the Great Depression." Indeed it is.

His plan, if adopted, will fundamentally change the nature of our financial system and economy. The underlying concerns and assumptions are clear, and they are made clearer by considering other ways that his administration has dealt with the consequences of competition -- particularly the faux bankruptcies of General Motors and Chrysler and the impending change in antitrust policy. Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

Chad Crowe

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are too big to fail. It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

In other words, the administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy -- insurers, securities firms, finance companies, bank holding companies, and hedge funds -- where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated. Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." But failure comes from risk-taking -- the very source of our economy's strength -- and it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

The turmoil following Lehman's failure occurred because market participants expected, after the rescue of Bear Stearns, that any larger firm would also be rescued. When Lehman wasn't, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers.

Contrast this with AIG, the administration's paradigm, which was saved by the government because it was allegedly too big to fail. That firm is gradually wasting away under government control, with the taxpayers footing the bill.

The administration's fear of competitive outcomes is not reflected solely in financial-sector policies. Consider General Motors and Chrysler. They were defeated in the marketplace. Simply put, they failed to build automobiles enough Americans wanted to buy.

Their disappearance would not have threatened the stability of the financial system, although it would undoubtedly have been disruptive for suppliers, dealers and employees. Yet the administration wouldn't allow them to fail, either. Despite all the talk about credit priorities, the fundamental point is that the administration used taxpayer money to overturn the market's verdict. If we want a preview of what the administration will do with the resolution authority it wants for large financial companies, we need look no further.

The same pattern with regard to competitive markets can be seen in the Justice Department's new antitrust policy. Christine Varney, the new assistant attorney general in charge of antitrust policy, has said that U.S. policy should be more like Europe's. Until now, U.S. antitrust policy has tried to protect competition. Europe attempts to protect competitors. Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.

The president has said on several occasions, including in yesterday's speech, that "I've always been a strong believer in the power of the free market." But his administration's prescriptions tell a different story. In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy -- a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

Iraq Expresses Concern About Unrest in Iran

Hope vs. Financial Experience

Next time, we're told, the regulators will have 20-20 foresight.

The main idea behind the Obama Administration's new financial revamp is essentially this: With more power and a modest reshuffling of the bureaucratic furniture, the same regulators who missed the last credit mania will somehow prevent the next one. If nothing else, this concept is certainly true to President Obama's campaign theme of "hope."

In its analysis of what went wrong and in its prescriptions, the proposal also remains true to the current Washington consensus that the bankers caused the whole mess. They did so, we are told, by cleverly running around and through Washington's already vast regulatory army of the Federal Reserve, the Treasury's Office of the Comptroller, the OTS, the FDIC, the NCUA (credit unions), the SEC, the CFTC and, who could forget, the FHFA (Fannie Mae). Who'd have thought these massed legions were little more than a Maginot Line against the banker blitzkrieg?

* * *

"Gaps and weaknesses in the supervision and regulation of financial firms presented challenges to our government's ability to monitor, prevent, or address risks as they built up in the system," says the Treasury white paper. "No regulator saw its job as protecting the economy and financial system as a whole." The result was "a credit boom" that "accompanied a housing bubble," which the bankers were able to exploit for riches until they drove into a ditch.

This "gaps and weaknesses" theory has the political benefit of ignoring the role that Washington played in creating the credit bubble. There's not a word in the 85 pages about the Fed's years of negative real interest rates, and the only mention of Fannie Mae and Freddie Mac is a placeholder paragraph noting that reform of those housing giants will come later. Also nowhere in sight is any explanation for how the Fed, which had every power imaginable to regulate Citigroup, could have allowed Citi to sell tens of billions of dollars of off-balance-sheet mortgage products.

However, the "gaps" theory does neatly set the stage for Treasury's regulator ex machina: new powers to monitor "systemic risk." Never mind that the most crucial defense against a credit mania is careful monetary policy. The Fed is nonetheless failing upward and would get new authority to inspect any financial institution in the world whose failure it believes might lead to other failures. How systemically risky institutions would be defined isn't clear -- except that, like the Supreme Court and pornography, the regulators will know it when they see it.

To assist the Fed in this 20-20 foresight, Treasury is also proposing a new Financial Services Oversight Council, composed of various financial regulators. This body will "identify emerging risks in firms and market activities." Amid the fine print, we learn the council will be chaired by Treasury and "supported by a permanent, full-time expert staff at Treasury." (What is the current staff, nonexpert?)

Treasury is of course a political body subject to political pressure. One reason "emerging risks" are often overlooked is that regulators have to be brave enough, and independent enough, to stop the music in the middle of the credit party. This tends to make a regulator very unpopular, much as those pleading with the Fed to tighten money from 2003-2005 were dismissed as spoilsports and cranks. The new systemic regulator, in short, may end up making the system less safe by making it more susceptible to political intervention.

And what if this new regulatory czar is wrong about the safety of some financial practice or trend? Then every part of the financial system may be vulnerable to damage because the regulator has blessed the behavior. Exhibit A: The Basel capital standards were written by the Fed and other regulators precisely to make the system safer, yet they proved to be inadequate when the Fed deferred to Moody's and other credit raters to judge what qualified as bank capital.

For all of its systemic worry, the Treasury proposal doesn't really address the biggest cause of risky financial business: the fact that some institutions have become too big to fail. Regulators would be able to force large institutions to hold more capital and abide by leverage limits. But large banks that hold insured deposits and have already been rescued by the taxpayers -- Citi and Goldman Sachs, for example -- would still be able to engage in such lucrative but risky behavior as trading for their own account.

The danger is that once the market understands these banks are too big to fail, the banks themselves and their lenders will begin to consider them to be like Fannie and Freddie. Their cost of funds would become cheaper than those of smaller competitors, and the incentive could be for more and more institutions to get bigger to rate the "systemic" brand of too big to fail.

This is the moral hazard that Paul Volcker mentioned in recent remarks that we excerpted Tuesday but that goes unaddressed in the Obama plan. Mr. Volcker would address this by barring deposit-taking institutions from engaging in certain financial practices, such as proprietary trading. We think Congress should explore former SEC Chairman Richard Breeden's proposal for a special bankruptcy court that could resolve financial institutions, even large ones, more carefully than Lehman Brothers was allowed to collapse. This would re-introduce the discipline of failure -- in contrast to the serial rescues of Citigroup.

* * *

The larger question is why all of this regulatory reshuffling needs to be done so quickly, when we are still too close to the mania and panic to have truly absorbed their policy implications. The political class wants to rush through something to claim it has solved the problem, even if it means creating new and different problems later. Meanwhile, the bankers are relieved that Treasury's proposal would leave their business models intact, even if they have to wear tighter chastity belts. This truly is the triumph of hope over financial experience, and someone in Congress should slow this down and make sure we do it right.

No More Bailouts

The House GOP's Alternative to Geithnerism.

SCOTT GARRETT JEB HENSARLING TOM PRICE

The turmoil of the past year has caused us to reconsider what we believe to be the reality of the marketplace. Titans of industry, once considered impervious, proved that they weren't as resistant to crisis as was once thought. While the effects of this crisis are still evident in our communities, we've seemed to survive the most turbulent period. Now is the challenge of figuring out how to pick up the pieces to prevent a similar occurrence from happening again – all the while making sure that as we reassemble those pieces, what emerges preserves the free market system.

The Republican leaders of the Financial Services Committee have developed a reform package aimed at preserving free market principles while providing significant reform to our antiquated banking regulations. Our plan includes enhancements to our bankruptcy code, the creation of a Market Stability and Capital Adequacy Board, reforms to the Federal Reserve's authority and a path to privatization for the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac. Our solution also addresses needed reforms to regulatory agencies through regulatory consolidation of depository institutions, including moving supervisory authority from the Federal Reserve and the Federal Deposit Insurance Corporation to this new agency.

Unlike the proposal from the Obama Administration, the core of our plan is a promise to the American taxpayer: no more bailouts. The actions of the past year have merely incentivized additional excessive risk-taking by providing the promise of a government backstop. This backstop – whether in the form of capital injections, loan guarantees, or the purchase of toxic assets – exposes taxpayers to untold risk while benefitting firms, creditors and counterparties that have made questionable decisions. We must put an end to the bailout mentality that has gripped our government and changed the face of our financial sector.

We need to reverse the trend of government interference in the marketplace. Our plan creates a legal reform to allow for the resolution of insolvent non-bank institutions, regardless of size. The United States has a long history using the constitutionally defined bankruptcy court system to resolve failed or illiquid institutions. This new section of the law allows for the failure of large firms without undue greater harm to the broader economy. This will expedite the process and consolidate expertise for resolving large financial institution failures, without institutionalizing too-big-to-fail companies, concentrating too much power in a federal entity, or exposing taxpayer funds - all of which are possible under the bailout authority proposed by our Democrat colleagues.

Our plan also addresses two of the most prominent wards of the state, Fannie Mae and Freddie Mac. Fannie and Freddie played leading roles in adding fuel to the mortgage finance fire that burned down a great portion of our financial system and economy as a whole. By financing roughly 36 percent of the subprime housing market and recklessly growing their leverage to 100-to-1, they abused their federally granted competitive advantages in the marketplace and have run up a bill with the taxpayers to the tune of hundreds of billions of dollars and counting. We are proposing a phase-out of taxpayer subsidies and a sunset of the current GSE conservatorship, telling Fannie and Freddie they must either learn to compete on a level playing filed with other private sector companies or be placed into receivership to save taxpayers from even more liability .

In addition, we must have significant reform of the role of the Federal Reserve in our financial sector. While the Fed is a favorite candidate for a systemic risk regulator role, it has a regulatory record that leaves much to be desired. Its handling of monetary policy in the years leading up to the current crisis is often mentioned as one of the crisis' enabling events. Furthermore, the Fed already has the role of regulator for large bank holding companies, such as Citi and Bank of America, which are two of the largest recipients of federal TARP funds. We must refocus the Fed on monetary policy, and reassign its regulatory and supervisory responsibilities to other agencies. We also limit the Fed's over-abused authority, by narrowly defining the "exigent circumstances" clause it has used to bailout firms. In the future, such moves by the Fed would need to be truly emergency actions, not new lending programs spanning months.

As previously mentioned, the idea of a proposed systemic risk regulator is quite worrisome, regardless of whether it is the Fed or a separate entity. By creating a systemic risk regulator, we would essentially establish a dozen new "too big to fail" companies that, like Fannie and Freddie, would have inherent market advantages because of that distinction. Privatizing profits and socializing risk is a bad business model, and even worse for taxpayers. As an alternative to a systemic risk regulator, we propose a Market Stability and Capital Adequacy Board responsible for observing the strength of the financial system. Such a board will have the potential to identify risks to the system rather than designate selected institutions as protected from failure.

We also recognize that our financial services sector is in significant need of regulatory restructuring. Yet, many areas that are already subject to significant regulation are some of those with the most problems. As previously mentioned, Bank of America and Citi were regulated by the Fed as bank holding companies. IndyMac and Washington Mutual were both regulated by the Office of Thrift Supervision. Additionally, OTS had oversight responsibility for the AIG Financial Products unit, where most of its problems originated. The current system needs to be streamlined to reduce regulatory gaps and redundancies with more appropriate regulatory expertise targeted to particular subsidiaries of large financial institutions. We propose consolidating depository institution regulators into one agency that also possesses the supervisory functions of the Federal Reserve and the FDIC. This will allow for consistent supervision over depository institutions, while creating greater transparency within the system.

The ability of the financial services industry to help Americans achieve financial security is paramount. To preserve this, the financial services sector must offer a fair and transparent playing field for borrowers and investors. A competitive financial services industry, populated by well run, properly regulated companies, is the best means of helping Americans achieve their financial goals. Regulatory reform is needed to make sure that financial companies are never again allowed to wager their consumers' money without consequence, nor to rely on the government for a handout when they make reckless decisions.

Under the leadership of Ranking Member Bachus, the Republicans on the Financial Services Committee have crafted a thoughtful and substantive plan for regulatory reform. It's time to reject the "too big to fail" bailout logic that has resulted in unprecedented government intrusion into the marketplace and reinstate the free market principles that are the cornerstone of our nation and a healthy financial sector.

Messrs. Garrett, Hensarling, and Price are Members of the House Financial Services Committee and contributors to the Republican Financial Services Regulatory Reform Proposal.

The GOP Can Stop ObamaCare

The public is in no mood for drastic changes in current coverage.

KARL ROVE

It's extremely unlikely that Republicans will be able to pass their own health-care plan in this Congress. But in politics you can't beat something with nothing, so it is critical that the GOP offers an alternative to President Barack Obama's government-run monstrosity.

Americans will listen more closely to Republicans if they make empirical and specific arguments against Mr. Obama's attempted government takeover of the nation's health system. But they must also offer proposals that families, small-businesspeople and health-care providers will applaud.

Associated Press

President Barack Obama before delivering remarks on health care reform at the annual meeting of the American Medical Association on Monday in Chicago.

Fortunately, Sens. Tom Coburn of Oklahoma and Richard Burr of North Carolina, and Reps. Paul Ryan of Wisconsin and Devin Nunes of California have devised a plan that will likely appeal to anyone interested in making health insurance more affordable and portable.

Their proposal -- called the Patients' Choice Act -- is to leave in place the tax deduction companies receive for providing employees with health insurance and to create a "Medi-Choice" tax rebate that will give individuals $2,200 and families $5,700 to spend on health insurance.

The rebate will make health insurance more affordable, especially for young people. It also will make health insurance portable, which will free people from being locked into jobs they hate because they are afraid of losing their health insurance.

The Coburn-Ryan plan also helps the hard-to-insure and chronically ill because it shares their risk across all insurance companies, providing lower premiums than they might find now. It would help those in Medicaid because they receive private insurance rather than being forced into a one-size-fits-all government program in which doctors are increasingly refusing to participate.

About Karl Rove

Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy making process.

Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.

Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Email the author at Karl@Rove.com or visit him on the web at Rove.com.

Or, you can send him a Tweet @karlrove.

The House GOP also formed a Health Care Solutions Group that unveiled proposals yesterday. The group wanted to make health care more affordable, expand availability, and promote healthier life choices. It did this by proposing two-dozen ways to improve existing law to make it easier and more cost-effective to buy health insurance.

One proposal is to give families who purchase their own insurance a tax benefit similar to the one companies get for providing health benefits. Another proposal is to pass medical liability reforms that will reduce costly junk lawsuits. Still another would allow small businesses to team up to buy insurance at a group discount. The group also wants to allow families to save money tax-free for a wide range of health expenses and permit children to stay on their parents' policies until age 25.

Under the group's proposals, Medicaid beneficiaries would get the flexibility to choose private coverage, rather than being locked into a government-run program. The group is also calling for stepping up efforts to detect and punish Medicare and Medicaid fraud, which costs an estimated $60 billion a year.

Individual Republicans are also stepping forward with health-reform ideas, such as creating a national health-insurance market that would allow Americans to buy insurance across state lines. Sens. Jon Kyl (R., Ariz.) and Lamar Alexander (R., Tenn.) have offered other ideas, including expanding community health centers.

This is the first time congressional Republicans as a group have been comfortable talking about health care. It may be the product of necessity, but it is also necessary to get a robust debate on health-care reform.

Republican efforts will be helped by a recent Congressional Budget Office report that found that Sen. Ted Kennedy's health-care reform would cost at least $1 trillion over the next 10 years and still leave 36 million Americans uninsured (it may be slightly more once all the details are released). Estimates for the health-care bill that the Senate Finance Committee is drafting with help from the White House are coming in around $1.6 trillion over 10 years.

As the debate now shifts from broad generalities to the specifics of how health-care reform would work and how the government will pay for it, the GOP has an opportunity to stop the nationalization of the health-care industry. The more scrutiny it gets, the less appealing Obama-Care will become. And the more Democrats have to talk about creating a new value-added tax or junk food taxes to pay for it, the more Americans will recoil.

Republican credibility on health care depends on whether the party offers positive alternatives that build on the strengths of American medicine. As long as the choice was between reform and the status quo, the public was likely to go with the reformers. But if the debate is whether to go with costly, unnecessary reforms or with common-sense changes, then Republicans have a chance to appeal to fiscally conservative independents and Democrats and win this one. It is still possible to stop ObamaCare in its tracks. If Republicans can do that, they will win public confidence on an issue that will dominate politics for decades.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

'Public Option': Son of Medicaid

Lard atop lard that only a politician or bureaucrat could love.

By DANIEL HENNINGER

In his speech on health care to the American Medical Association, President Obama explained why the U.S. has "failed" (yet again) to provide comprehensive reform that "covers everyone." He had a list of the failing people, who "simply couldn't agree" on reform: doctors, insurance companies, businesses, workers, others. And "if we're honest," he said (ergo, disagreeing with this is dishonest) we must add to the list "some interest groups and lobbyists" who have used "fear tactics."

It seems to me, if we're honest, that one other contributor to the health-care morass should have been on the president's list: Congress. Indeed a close reading of Mr. Obama's speech suggests he holds the political class innocent insofar as he blames everyone else but them. Can this be true?

Getty Images

Back before recorded history, in 1965, Congress erected the nation's first two monuments to health-care "reform," Medicaid and Medicare. Medicaid was described at the time as a modest solution to the problem of health care for the poor. It would be run by the states and "monitored" by the federal government.

The reform known as Medicaid is worth our attention now because Mr. Obama is more or less demanding that the nation accept another reform, his "optional" federalized health insurance program. He suggested several times before the AMA that opposition to it will consist of "scare tactics" and "fear mongering."

Whatever Medicaid's merits, this federal health-care program more than any other factor has put California and New York on the brink of fiscal catastrophe. I'd even call it scary.

Spending on health and welfare, largely under Medicaid, makes up one-third of California's budget of some $100 billion. In New York Gov. David Paterson's budget message, he notes that "New York spends more per capital ($2,283) on Medicaid than any other state in the country."

After 45 years, the health-care reform called Medicaid has crushed state budgets. A study by the National Governors Association said a decade ago that because of "new requirements" imposed by federal law -- meaning Congress -- "Medicaid has evolved into a program whose size, cost and significance are far beyond the original vision of its creators."

In his speeches, Mr. Obama makes the original vision of his "public option" insurance plan sound about as simple as driving through toll booths with an electronic pass on your windshield. It's going to be all about "best practices" with patients "reimbursed in a thoughtful way," as if the federal government is about to become just another big Google.

Medicaid is a morass. Since the program's inception, Congress has loaded it up every few years with more notions of what to cover, shifting about 43% of the ever-upward cost onto someone else's tab, mainly the states. A 1988 congressional mandate requires local schools to pay for schooling and related services for disabled children, but because Congress underfunds its mandates, the states pay the rest through Medicaid.

The list of add-ons is endless, and there's little about it that is thoughtful. Why shouldn't one think that, as with Medicare and Medicaid, the Obama Public Option in time will become an impossible fog for patients to navigate? But unto eternity the program's administrative complexity will provide work for bureaucrats, Members of Congress, their staffs, lobbyist spouses and the "health-care" establishment of foundations and economists.

Oh, and the courts. The fact that this is a public program ensures not just congressional meddling but also makes it vulnerable to litigation. Over time, the Sotomayors of the federal bench will make it bigger. One piece of California's incredible budget mess flows from a federal judge's 2006 decision to seize control of the state's prison-health system and make the state pay billions for new health spending imagined by his appointed federal overseer.

Medicaid alone didn't put California and New York on the brink. Add in spending on public education and you've accounted for about 60% of their budgets. This drives the deficits and gets all the ink, but not least among the casualties of bigness is the idea of governance.

The elected legislatures of California, which holds 36.7 million American citizens, and New York, with 20 million, are essentially falling apart as governing bodies. The whole country has witnessed the spectacle of the comic "coup" in New York's Senate in Albany the past two weeks.

With collapse comes a truth: The bigger the government, the smaller the politicians. As mandated entitlements grow, the spending "crowds out" the need or obligation to think or to govern. Legislators with nothing very real to do become lazy, slack and corrupt. They become Albany. Or Sacramento. Or Trenton.

Mr. Obama's plan is intended to "guarantee" health insurance for all. Whatever the truth of that, its outlays -- larded atop Medicaid, Medicare and Social Security -- guarantee that Congress will become more like the states' clown shows. But they are expensive clowns.

In his speech, Mr. Obama said the cost of the Public Option won't add to the deficit: "I've set down a rule for my staff, for my team -- and I've said this to Congress -- health-care reform must be, and will be, deficit-neutral in the next decade." If we're honest, that means tax increases are inevitable. Sounds scary to me.

BofA Dangles Bonuses

Financial Stocks Boost Market

Financial stocks rebounded Thursday, helping lead the broader market modestly higher after three days of losses.

The Dow Jones Industrial Average was recently up 71 points at 8568.9, recovering from a three-day slide in which it has shed more than 300 points. The Nasdaq Composite Index was up 0.1%.

Market Data Center >

The S&P 500 was up 0.8%, as its financial sector, which has been under heavy pressure this week due to concerns about a restructuring of federal market regulation, managed to post a 2.2% gain on Thursday.

Among the sector's bellwethers, Bank of America rose 4.6%, Morgan Stanley and Goldman Sachs were up about 2% each and J.P. Morgan Chase rose about 3%.

President Barack Obama on Wednesday proposed a sweeping revamp of the U.S. financial regulatory system which would boost the power of the Federal Reserve. Treasury Secretary Timothy Geithner is testifying to Senate and House committees on the proposals on Thursday.

The Labor Department reported that the number of workers filing new claims for jobless benefits rose slightly last week, climbing by 3,000 to 608,000. But at the same time, continuing claims fell by the largest amount since November 2001, breaking a streak of 21 straight increases.

The tally of continuing claims, or benefits drawn by workers for more than one week, fell 148,000 to 6,687,000, the first weekly decline since the week ended Jan. 3 and largest since Nov. 24, 2001.

The report was the latest in a string of recent developments that have gradually shifted traders' attention away from the risk of inflation in the U.S. economy fueled by the government's bailout and stimulus spending.

"The risk of inflation is still out there, but it's not immediate by any means," said Peter Cardillo, chief market economist at Avalon Partners in New York. "Some of the fears we saw along those lines recently were really exaggerated."

Treasury prices were mostly lower, led by the long end of the yield curve, as traders looked ahead to another round of government debt auctions next week. The dollar was stronger, rising against the euro and the yen.

The front-month crude-oil futures contract slid about 31 cents to $71.34 a barrel.

Asian equity markets posted a mixed finish Thursday. Tokyo's Nikkei index fell 1.4. Stocks in Europe were under pressure after disappointing retail-sales numbers out of the U.K.

Thursday, June 18, 2009

Socialism on the never-never

Hard times on the streets of Caracas

Better broth, still too many cooks

Barack Obama’s plan for regulatory reform is not bold enough

Don’t let a crisis go to waste

Iran rises up

It looks increasingly as though the government will have to crack down or back down

The judgment of history

The best of all possible worlds

Price Fixing in Ancient Rome

The Edict of Diocletian

The Results of the Edict

Killing in War

Geithner Defends Plan to Step Up Oversight

| Associated Press

White Paper

More

Too Big to Fail, or Succeed

Everyone will want to become big enough to enjoy 'systemic risk' protection.

Hope vs. Financial Experience

Next time, we're told, the regulators will have 20-20 foresight.

* * *

* * *

No More Bailouts

The House GOP's Alternative to Geithnerism.

The GOP Can Stop ObamaCare

The public is in no mood for drastic changes in current coverage.

About Karl Rove

'Public Option': Son of Medicaid

Lard atop lard that only a politician or bureaucrat could love.

By DANIEL HENNINGER

Financial Stocks Boost Market

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