Out of Control

Citizens Against Government Waste has the answer in this new, link-rich backgrounder, and it lends support to Gov. Palin's "thanks, but no thanks" assertion (which she's apparently not using anymore). From the CAGW press release:

The Bridge to Nowhere was first funded in August 2005 through the 2005 SAFETEA-LU Act through a $223 million earmark inserted by then-House Transportation and Infrastructure Committee Chairman Don Young (R-Alaska). In October, 2005, Sen. Tom Coburn (R-Okla.) offered an amendment to the fiscal 2006 Transportation Appropriations Act to transfer $75 million in funding for the Bridge to Nowhere, along with money for the Knik Arm Bridge in Alaska, to support the rebuilding of the Twin Spans Bridge in New Orleans following Hurricane Katrina. His amendment was defeated by a vote of 15-82. Senators Biden (D-Del.) and Obama (D-Ill.) voted against the amendment; Sen. McCain (R-Ariz.) was not present for the vote.

In November, 2005, Congress included language in the final version of the fiscal 2006 Transportation Appropriations Act that allowed the state of Alaska to either spend money on the two bridges or on other surface transportation projects. In October, 2006, Alaska Governor Frank Murkowski included $91 million for the Gravina Island Bridge in his budget submission for fiscal year 2007. As a candidate for governor, Sarah Palin expressed a mixture of support and doubt about the bridge, particularly about how the project would be funded. As governor, she submitted her budget on January 17, 2007 without any money for the bridge. On July 17, 2007, the Associated Press reported that “The state of Alaska on Friday officially abandoned the ‘bridge to nowhere’ project that became a nationwide symbol of federal pork-barrel spending.” Governor Palin said in a statement that “Ketchikan desires a better way to reach the airport, but the $398 million bridge is not the answer.”

“Media reports that Congress killed the Bridge to Nowhere are not accurate,” said Schatz. “The 2006 transportation appropriations bill allowed Alaska to decide whether or not to move forward. Governor Murkowski said yes; Governor Palin said no. Any discussion about the project should begin with facts.”

» Reason's Transportation Research and Commentary

Earlier this year, I wrote in our Annual Privatization Report 2008 that the ascendancy of Gov. Paterson in New York did not improve the prospects for privatization relative to his predecessor, Eliot Spitzer.

I'm glad to report that I may have been at least partially wrong. I don't think the prospects for competitive contracting for government services have improved much, but at least on the infrastructure front, Gov. Paterson seems to be taking the lead of Mayor Daley, Govs. Rendell and Kaine, and other prominent Democrats by exploring the opportunities presented by public-private partnerships:

Facing billions of dollars in deficits, New York Gov. David Paterson wants to explore the notion of leasing some of the state’s assets.

Paterson said he will sign an executive order on Thursday establishing the New York State Commission on State Asset Maximization to study potential public-private partnerships.

The executive order will establish an 11-member panel, chaired by Charlotte Hitchcock, Paterson’s deputy secretary for labor and financial regulation. The Commission will be required to submit a preliminary report of their recommendations to the governor and state Legislature within 90 days, with a final report due within 180 days.

“Public-private partnerships are not the only answer, but we need to honestly assess whether they can be part of the solution. I believe the private sector can be a source of innovation, allowing us to increase the value, efficiency and safety of assets like our aging infrastructure system, and I look forward to receiving the Commission’s recommendations,” said Paterson.

From Newsday:

New York Gov. David Paterson wants to lease state assets that could include the Thruway, the Tappan Zee Bridge, and the lottery to private contractors to trim costs and provide long-term, steady revenue.

Fair game would be private management of the state's many golf courses, the toll highway network, parks, beaches and bridges, including the 53-year-old Tappan Zee, which spans the Hudson River north of Manhattan and will soon have to be replaced at a cost estimated around $9.3 billion. [. . .]

Investment bankers have already shown interest in some assets, part of a nationwide trend. Among them is the lottery, which state officials have said could bring in $4 billion up front to the state and $200 million a year after that for higher education.

In a conference call with reporters the new commission's executive director, Samara Barend, described "bringing in private sector capital while maintaining public sector oversight."

Nationwide, Wall Street investment houses have courted more than a dozen states to lease state lotteries to private investors. Several more have leased the operation of highways, sea ports and airports. The private firms hope to improve management and marketing to increase profits. In exchange, the states want to guarantee a reliable return and avoid rising costs for maintenance and potentially for payroll.

And from Reuters:

New York state will study maximizing "the value" of its assets via public-private partnerships so that it can keep making long-term investments in roads and bridges despite a budget crisis, Gov. David Paterson said on Tuesday.

A new commission will be created on Thursday, which will issue its initial findings in 90 days, and more detailed recommendations in 180 days, the Democrat said in a statement.

Paterson again said he was not considering the sale of any state assets, adding the new study would examine how to ensure "adequate government oversight, protection of public employees and regulation of user fees; use of non-compete clauses; and prevailing wage and labor standards."

This sounds like a very positive step forward in a state that has historically been the most resistant to privatization and PPPs. We'll be following this closely.

» Reason's Annual Privatization Report 2008
» Reason's Privatization Research and Commentary

A reader recently sent me some questions about the trouble in the financial markets that I think are good concerns free market believers need to address. The marketplace of ideas, and it is arrogant to dismiss other perspectives without careful thought. Sometimes they can poke legitimate holes in our theory, other times make us think carefully about what we believe and establish a firmer understanding.

1. “I'm concerned about the ability of the RSC’s (Republican Study Committee) plan to get enough liquidity into the market fast enough to avoid having credit availability come to a screeching halt.”
(Check out the RSC’s plan at the end of this blog post from earlier today)

The credit markets are already at a near stand still, and will remain there unless the regulations keeping them down are lifted. The fact is that it will take weeks—maybe months considering how the government works—for the bailout to hit bank books. The Treasury will have to hire people to assess everything and make the right choices. So the speed may wind up being the same no matter which they choose.

Still, even if the credit markets stayed down a bit longer it wouldn't be the end of the world (despite what Paulson says). If people can't get loans, Americans will innovate. Perhaps we'll see the rise of something better. We can’t calculate unknown value we destroy by overreacting.

2. “I don't see any concrete figures in your summary of the RSCs plan. Will these plans really free up the market of all of the low value mortgage backed securities?”

I don't have the numbers from their plan, but most of it is principle. The plan calls for cutting taxes in several ways that we may not be able to fully measure from the start but principally will free up an unknown amount of cash. We could measure all the capital gains tax break dollars by assessing all the banks books, but we can't know how much money the repatriation tax will bring in. But we do know that there is well over $700 billion in corporate profit out there that can come back.

The nature of being capitalist, lassie-faire, is that we have to admit that “we don’t know” everything. And we can’t know everything (to try is central planning—or socialism). We can know there is a base minimum from this plan that will help get us back on the right track and stays principled to what has made this country strong.

3. “What about the PR work that has been done to change the public’s view on the White House's plan from a ‘bailout’ to an ‘investment?’ Would the plan really be that bad if the government made money from the selling of these securities?”

I would challenge you to think hard about the idea of an “investment.” Economists have a term called "moral hazard" that refers to a distorted profit motive based on government action. The government should NEVER be investing money into the economy with taxpayer money because of what that does to future perceptions of the role of government. If they do make a profit will they stop? Why stop? Why not try more taxpayer money? Will is always work? It is a moral hazard we should avoid at all costs.

Furthermore, the government should not be make a profit with the people's money because it inherently involves risk, and the free market principle is that my money should be my money and if I don't want to risk it as a business investment I shouldn't be forced to. The government can tax me to provide legitimate services that only government can provide, but otherwise should not be taking my money to use for others because it kills my incentive to create value for myself, which hurts society as a whole.

If the government wants to invest a more acceptable measure is offering tax breaks to innovators to encourage private sector investment. This goes for anything, from solving the financial crisis to encouraging breakthroughs in science and technology.

If you have similar questions feel free to write me at anthony.randazzo@reason.org

Four years ago Chicago Mayor Richard Daley set off something of an earthquake by leasing the Chicago Skyway for $1.8 billion. The question for today is: Will his lease of Midway Airport for $2.5 billion set off a similar earthquake?

In the toll roads area, the Skyway deal was a wake-up call to the global capital markets that there was frozen capital value trapped in often-poorly-run government toll roads. Over the previous decades, Canada, France, Italy, Portugal, and Spain had all privatized state-owned toll roads, but somehow the idea had been considered unthinkable in the land of tax-exempt municipal revenue bonds. The Skyway deal showed that with a sufficiently long lease term (99 years), private capital could compete with tax-advantaged public-sector debt—and the floodgates opened. A year later Indiana leased its much larger toll road for $3.8 billion, and the private sector rescued failing start-up toll roads in Virginia and Colorado. And this year we’ve seen a record $12.8 billion bid for the Pennsylvania Turnpike (though politics may still torpedo that deal).

Are we now going to see a wave of U.S. airport privatization deals? Maybe.

On the upside is known interest from at least two other local governments—Austin and Milwaukee. And there are three available slots left in the federal Airport Privatization Pilot Program for medium-sized airports like those two. The fact that the Midway deal could still be done, given the turmoil in the financial markets right now, is another positive sign. And even though airlines are currently cutting back services to try to get back into the black, that’s a short-term phenomenon that should have little impact on the long-term value of airports as infrastructure investments.

The main downside is that once the three remaining slots in the Pilot Program are filled, nobody else can privatize their airport—unless and until Congress expands that legislation. And that has to be seen as a huge question mark. As of today, Congress is a full year late in reauthorizing the Federal Aviation Administration, and with it the long-running airport grants program. If they give aviation such a low priority, it’s hard to imagine them rushing to expand an obscure piece of aviation legislation, especially to expand the scope of the dreaded P-word.

Still, city and county budgets are likely to be in worse shape next year than they are now. If America’s mayors and legislators call for expanded airport privatization, even a Democratic Congress might actually take them seriously.

From Crain's Chicago Business:

Mayor Richard Daley says the city has reached a landmark agreement to privatize Midway Airport for $2.521 billion.

The deal will net the city more than $1 billion, the mayor said, after paying off the airport’s debt.

The bid came in at the low end of initial estimates by market observers when the city first reached an agreement with Midway’s airlines on the terms of a privatization deal.

But given the current turbulence in the financial markets and a recent downturn in Midway traffic, landing a deal of this size has to be considered a “homerun for the city,” says privatization expert Robert Poole.

“That’s actually more than I was expecting under current circumstances,” adds the director of transportation studies at Reason Foundation, a free-market think tank in Washington, D.C. “It’s a bet on the long term future of Chicago.”

The winning bidder was a consortium called Midway Investment & Development Corp., consisting of YVR Airport Services Ltd., Citi Infrastructure Investors of New York and John Hancock Life Insurance Co. of Boston. Citi Infrastructure and the Vancouver Airport Authority each owns 50% of YVR Airport Services, which owns and operates 18 airports on three continents. [. . .]

"As the first privatization of a major American airport, this transaction will provide unprecedented benefits for the traveling public, the airlines and the taxpayers of Chicago," said Mr. Daley in a statement.

The 99-year lease deal still has to be approved by the city council, the Federal Aviation Administration and the Transportation Security Administration. The city hopes to get FAA approval by yearend so the deal can be finalized shortly after that.

The $2.521 billion would be paid upfront when the deal closes. Under state law, 90% of the net proceeds must be used for infrastructure improvements and to shore up city pension funds. The other 10% is unrestricted, but the mayor said it would not be used solely to balance next year’s budget deficit. [. . .]

“That would only put off until next year the difficult decisions that must be made now,” he said. “It would only make our financial problems worse and I won’t do that. So, because we expect the economy to get even worse, we would be forced to make further spending cuts. It’s too early to speculate on the final plan, which we’re still developing.” [. . .]

“This transaction will allow us to make much-needed capital investments while other cities and states have suspended infrastructure improvements,” said Paul Volpe, the city’s chief financial officer, in a statement. “This is a unique opportunity for Chicago.”

For Southwest Airlines and Midway’s other carriers, the deal includes a 25-year agreement that caps landing fees below the current level for six years and then allows them to grow at the inflation rate, not counting the cost of food and energy.

So yet again, Mayor Daley is at the helm of another blockbuster privatization deal that will raise eyebrows and interest across the U.S. It's hard to argue that there's any other official in the country doing as much to advance privatization and public-private partnerships (PPPs) right now, and he's showing that these aren't partisan issues—they're proven policy management tools (and Daley's doing a lot of proving these days).

And the fact that he announces a multi-billion dollar bid in the thick of the financial crisis says something extremely relevant—despite the financial turmoil on Wall Street, PPP mega-deals are still getting done in this climate. Having just attended a major PPP investor conference where the current market conditions were a central focus, there was a virtual unanimity that infrastructure PPPs are one of those attractive, go-to options in the "flight to quality" we're seeing in the markets more generally (investments flowing to solid, safe, and tangible investments with steady returns and lower risk profiles, relatively speaking). That's not to say that they're entirely unaffected—nothing is in this market—but even if bids aren't as high as they might have been or the tightening of the capital markets may make it more difficult, infrastructure PPPs are as attractive as before the crunch, if not even more so now.

Back to Midway, my colleague Bob Poole has been the pioneer in the field of airport privatization and has written extensively on this issue, and Midway in particular. I'd recommend revisiting his section on air transportation in Reason's Annual Privatization Report 2008, which discusses the Midway deal in more detail and in the context of global airport privatization. And in the "State and Local Update" section, I wrote a section that places Midway in the context of Chicago/Daley's other groundbreaking privatization initiatives.

» Reason's Annual Privatization Report 2008
» Reason's Aviation Research and Commentary

UPDATE: See Bob's thoughts on this announcement here.

It's easy for the uninformed to look at the current financial turmoil and, blinded by the complexity, just grab for the most convenient explanation--"Wall Street greed!" "Republican disdain for regulation!" "Capitalism and markets don't work!" etc. Unfortunately, if you've been listening to the media at all the last few days, it's apparent that many Congressman are among the uninformed, a truly scary thought at a time when sage leadership will be critical. Witness Speaker Pelosi's brilliantly timed tirade yesterday as one example.

The Boston Globe's Jeff Jacoby finds another in this piece, casting a critical eye on Congressman Barney Frank's statement, "The private sector got us into this mess." Nice try, Congressman:

Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector’s discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and "redlining" because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods." Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn't take a financial whiz to recognize that a day of reckoning would come. "What does it mean when Boston banks start making many more loans to minorities?" I asked in this space in 1995. "Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians, and regulators plans to take the credit?"

Frank doesn't. But his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.

It's a damn shame that people still experience a recoil at the mere utterance of "Enron," but Fannie and Freddie—with their own accounting mega-scandals followed by their subprime bender—just seem to get a pass in the media and popular opinion, as do pols like Barney Frank and groups like ACORN that inevitably screw the pooch in their efforts to re-engineer society into something kinder, gentler, and way more collectivist.

And given all of this, it's downright nauseating to have the Speaker Pelosi say this yesterday in her infamous floor speech prior to the vote: "I must recognize the outstanding leadership provided by Chairman Barney Frank, whose enormous intellectual and strategic abilities have never before been so urgently needed, or so widely admired."

Uhhhhh....maybe we should give him another problem to focus on instead?

Scroll down to see my colleague Anthony Randazzo's excellent, ongoing coverage of the financial meltdown.

After the H.R. 3997 Emergency Economic Stabilization Act of 2008, otherwise known as the $700 billion bailout bill, failed 228-205 in the House yesterday, lawmakers went back to the drawing board. Today and tomorrow there will be significant jostling as House leaders try to convince a handful of their members to vote for the bailout.

Speaker Pelosi’s pre-vote speech is widely blamed for turning off several Republicans who were on the fence but planning to vote for the bill. Some believe Minority leader John Boehner can get those votes back to pass the bill in its current form on Thursday. Others believe the bill will be adjusted to add some of the provisions the Republican Study Committee (RSC) has put forth as an alternative to the bailout.

Obama and McCain have backed a proposal to increase FDIC insurance from $100,000 to $250,000 to increase banking confidence. The suspension of "mark-to-market" rules, a key RSC plank, has also been discussed as an addition to the bill.

So just what does the bailout amount to and what are the alternatives?

The core of the plan is Secretary Paulson’s idea to buy the mortgage backed securities from financial institutions that can’t unload them due to their limited value and lack of liquidity. The Treasury would pay cash to cover the toxic debt and free up the credit markets that are at a near stand still. Financial institutions could then begin to restore their capital asset stability.

Who the assets are bought from ranges from banks to credit unions to pension funds. The most likely method of purchasing these assets will be a “reverse auction.” Financial entities will offer the securities they don’t want at a certain price and the Treasury will then assess what has been offered and start by buy the least expensive securities first. This would create an incentive for firms to price low enough to be bought, but not so low that they don’t benefit from the sale and hopefully limit the Treasury overpaying for the securities.

Specifically, here’s what the failed bailout would have done:

1. Create the “Financial Stability Oversight Board” or FSOB as a new agency to manage the bailout

This board would consist of the Treasury Secretary, the Housing and Urban Development secretary, the chairman of the Fed, the chairman of the SEC, and the Federal Home Finance Agency director

This board would be charged with “ensuring the policies implemented protect taxpayers and are in the economic interests of the US”

A separate congressional oversight panel would also be established to review the state of the economy and the FSOB’s activities

The Treasury would retain decision rights over which assets would be purchased and the day-to-day operations of the bailout

2. Increase the national debt limit another $700 billion

The Treasury would be granted powers to spend “up to” $700 billion as they see necessary

Only $250 billion would be made available for purchasing troubled assets

The President’s office would have the authority to release another $100 billion at its discretion

The Treasury would have to request the additional $350 billion in writing if it believes the money is necessary

The Treasury would only have authority to purchase securities that originated on or before March 14, 2008

Authority to spend money in this manner would expire Dec. 31, 2009

3. Charge the Treasury to push for wide-sweeping mortgage refinancing to avoid foreclosures and adjust the mortgages it buys

The bill asks the Treasury to exert it’s new influence as a major mortgage securities owner on financial institutions to modify the trouble loans it does not sell

The Treasury would create a plan that “seeks to maximize assistance to homeowners” by adjusting and refinancing mortgages that it now owns

(A complication with this is that banks often times only own portions of a mortgage and not all the securities issues for that mortgage making it impossible to refinance the mortgage, the government will have to ensure it buys all the securities issued on a particular mortgage in order to adjust it)

4. Protect taxpayers from risk

The Treasury would buy assets that have underlying value that is currently not being realized due to market conditions and mark-to-market accounting rules

The Treasury would hold on to the MBS assets it buys until they regain value and potentially a profit by selling them back to the open market, covering the $700 billion spent to buy them

The President would create a plan to “recoup money form the financial industry” if the assets do not regain value and result in a net loss for taxpayers within five years of purchase

The Treasury would also acquire “nonvoting common stock or preferred stock” in firms participating the program to give taxpayers an ownership stake in the companies it is bailout out and a share of money in case the firm goes bankrupt

5. Limit the compensation packages of corporate executives

Any company that participates in the bailout would not be able to pay a salary above $500,000 to its top five executives

Companies that sell the Treasury more than $300 million of assets would not be allowed to write new “golden parachute” packages for their executives during the duration of the program

Companies would have to “claw back” past bonuses issued to executives that were based on misleading financial statements

Existing compensation packages contractually agreed to would not be adjusted except for cases of fraud

6. Create an insurance program for mortgage backed securities

The Treasury would establish and insurance program to guarantee financial firms’ troubled assets, including mortgage backed securities, “up to 100%”

Risk-based premiums would be paid by the firms whose assets are being protected

Any insurance claims would be paid out of the $700 billion allocated for Treasury expense on the program

This would give the mortgage backed securities greater value and increase their desirability in the marketplace

Republican leaders didn’t want the executive compensation limits or provisions to protect taxpayers in the bill, but they yielded in exchange for leaving out Democratic ideas to let bankruptcy judges alter the terms of mortgages and to give cash to struggling homeowners facing foreclosure.

The Republican Study Committee has proposed a separate plan, though Democratic leaders have not brought it to the floor. This plan would create a “work-out” program instead of the $700 billion bailout program (some provisions were included to make the plan palatable to Democrats as a compromise move):

1. Suspend capital gains taxes for two years

This would immediately suspend the capital gains rate from 15% for individuals and 35% for corporations

This would encouraging corporations to sell unwanted assets, unleashing funds and materials with which to create jobs and grow the economy

After the two-year suspension, capital gains rates would return to present levels but assets would be indexed permanently for any inflationary gains

2. Repatriate profits from U.S. firms overseas

This would create a repatriation window for American firm’s to bring their overseas profits into the U.S. tax free if invested in troubled mortgage backed securities for at least one year

The Treasury would have to define, manage, approve these sales

3. Provide immediate capital by generating a tax refund for net operating losses

This would allow companies to “carry-back” losses incurred in 2007-2009 five years and receive a tax refund for those losses

This carry-back would provide a cushion for any losses firms take by selling the mortgage backed securities they have at the huge loss they would receive in the current market

This would give MBSs immediate value

4. Suspend “mark-to-market” accounting rules

This would suspend the mark-to-market regulatory rules until the SEC can issue new guidelines that will allow firms to mark these assets to their true economic value

5. Stabilize the dollar

This would repeal the Humphrey-Hawkins Full Employment Act which diverts the Federal Reserve’s attention from long-term price stability to short-term economic growth

This would require the Fed to establish a numerical definition for price stability and maintain a policy that promotes it over the long-term

This mandate has encouraged the Fed to keep rates artificially low, fueling economic boom and busts, and now a strong up-tick in inflation and the decline of the dollar (as investors free dollars for hard assets)

6. Schedule Fannie Mae and Freddie Mac for privatization

This would require the Treasury to “truly” privatize the GSE firms over a reasonable time period and strip them of all special government privileges

This would also require the GSEs to pay an appropriate risk-based fee for the current government guarantees that act as insurance for them, subject them to state and local taxes, and force them to file with the SEC like all other for-profit firms

The Treasury would be charged with ensuring Fannie and Freddie no longer securitize any unsound mortgages and limit federal backing for high risk loans

7. Limit the compensation packages of corporate executives

The Treasury would be required to write rules prohibiting “excessive compensation or golden parachutes to executives of failed companies” if they come at the expense of taxpayers

8. Create an insurance program for mortgage backed securities

This is the same as the insurance provision included in the bailout bill

Although some insist that the telecommunications monopoly era is either re-forming—or never ended—a much more realistic take on the market comes in a short post by Steve Taylor and Jim Metzler, two technology analysts who contribute to Network World, in and item titled “Cable vs. DSL vs. dial-up vs. cellular - which to lose?”

Although Taylor and Metzler’s comments address small office/home office markets (hence the call for redundancy) it’s notable that they believe that the latest question facing users is not which type of broadband access to buy, but which to drop. It’s not a question that can be posed in a monopoly market, which by definition has only one provider and no alternatives.

For the past several years, both Steve and Jim have been working in an environment where they felt like some form of backup for network access is mandatory. And, since customers can purchase both DSL and cable modem basic access for roughly the price of an ISDN line, it made all the sense in the world to simply use both. And if one fails you can switch the router (or switch) to the other service. However, as noted in the last newsletter, both services have become much more reliable and both services also have increased in speed (and, to a certain extent, price). So Steve found himself with three ISPs - DSL, cable modem, and a dial-up service - plus the possible need for a fourth, a cellular data service. So the question was how to decide what to do away with.

Here are the results:

1) Getting rid of the dial service was a no-brainer if the cellular service would be available.
2) Cable vs. DSL was a tough call. Both work well. DSL won simply because it was a roughly equivalent price, and, for whatever reason, the performance seemed non-scientifically to be a bit better at the very high speeds. (Subsequent investigation has shown that perhaps a new modem was needed for the higher cable speeds.)
3) The cellular modem performed well, with throughput equivalent to a “lite” service from either – which was what was already in place for a backup.
4) The cellular backup could be used in a mobile environment as well as the primary fixed environment.
5) Even though this has not yet been an issue for Steve or Jim due to their good fortune, the cellular service is not dependent on physical lines or on line-power, making it usable in the event of a power outage (for as long as the notebook can stay charged.)

Of course, the cellular modem is not without its drawbacks. The most significant ones for the moment are that Steve’s current carrier of choice has a maximum monthly data throughput of 5GB, with traffic counted in both directions (transmit and receive). Consequently, it is primarily a backup and mobile option.
Nevertheless, with the increasing number of corporate workers who need always-on broadband connection from anywhere, including home, this provides a great option.

I’m particularly struck by the first point, which all but implies the obsolescence of narrowband wireline dial tone. That some homes and businesses sit in dead zones -- isolated pockets of no service, is due more to the efforts of some communities to block wireless antenna placement than a lack of willingness on the part of service providers to expand coverage. If not for that, the authors say, wireline dial tone would be a white elephant.

Last week I wrote that few missed wireline dial up service after Hurricane Ike blew through Houston, because cell towers were back up pretty quickly. This is what makes calls for ongoing subsidies of wireline dial tone so questionable, since the service is so expensive to build yet so limited in utility.

Overall, however, Taylor and Metzger provide a compact summary of the relative value of various broadband options. There is choice. No one “controls” the market.

In the presidential debate the other night, Senator McCain raised the issue of corporate taxes in Ireland, which are far lower than in the US and are widely recognized as a critical piece of that country's economic resurgence over the last two decades. Hopefully that message won't be lost amid the politics of the campaign season. From the Tax Foundation:

The accounting firm KPMG has released its annual survey of corporate and indirect tax rates for 2008, and what it says about America's tax competitiveness is not good. The survey shows that the U.S. continues to have one of the highest overall corporate tax rates in the world. Of the 106 countries surveyed, only The United Arab Emirates (55 percent), Kuwait (55 percent), and Japan (40.69 percent) impose a higher corporate tax rate than the combined rate of 40 percent in the U.S.

According to the KPMG report:

...the most remarkable result of our 2008 survey is that we have found no country anywhere that has raised its rate since last year. The global average is, once again, down nearly a full point to 25.9 percent with the EU average down to 23.2 percent, the Latin American rate down half a point to 26.6 percent, and the Asia Pacific rate down 0.8 percent to 28.4 percent.

The survey indicates that 23 countries have lowered their corporate tax rates this year including Canada, China, Columbia, the Czech Republic, Denmark, Germany, Hong Kong, Israel, Italy, Malaysia, New Zealand, Singapore, South Africa, Spain, Switzerland, and the United Kingdom.

As the chart below shows, the U.S. rate was higher than all other global regions in 1999 and the difference is even more dramatic today. According to KPMG's figures, the U.S. rate is now 14.1 percentage points higher than the global average and nearly 17 percentage points higher than the average among European Union countries.

For more information, download KPMG's Corporate and Indirect Tax Rate Survey 2008 at: http://www.kpmg.com/SiteCollectionDocuments/Corporate-Tax-Rates-Survey-2008b.pdf

This isn't exactly rocket science—rather, it's a no-brainer. Reminds me of the familiar line that no country has ever taxed and spent its way to economic prosperity. What's scary to me is the fact that we have some pols that actually think we should increase corporate taxes because "those evil corporations aren't paying enough," "it's fair," "(insert economically illiterate, populist claptrap here)." That must be some potent Kool Aid...

Breaking news: The bailout has failed a roll call vote on the floor of the House. It was voted against 205 yea, 228 nea, with 1 abstain. Nearly 100 Democrats voted against the measure, presumably because the final version of the bailout plan failed to provide cash assistance for struggling mortgage owners.

The vote came as a significant surprise as House and Senate leaders were very confident that they had reached an agreeable program this weekend to fix the financial markets.

It is unclear at this point what Congress will do next, but Democratic leaders feel the bill is not dead yet. There will not be another vote today, Rep. Barney Frank said they will "assess economic reaction" before determining the next course of action. There will now be significant back door discussions to try and pull some of the "nea" votes over to the "yea" side and then revote on the measure.

In 2002, the NFL realigned its league from six divisions to eight divisions. In the late 90s, Major League Baseball changed its playoff structure, added new teams, realigned divisions, and sent the Milwaukee Brewers from the American League to the National League (also the last time the Yankee's would win a World Series). Major sports franchises are somewhat used to shake-ups in their industry from time to time.

Wall Street is not.

While the dust has yet to settle and the outcome of The Bailout still not written in stone, the Congressional plan to spend $700 billion could mark the end of Wall Street’s realignment. In the past week Washington Mutual declared bankruptcy—the largest bank failure in history, and yet it’s still been just a blip on the screen—and was taken over by the FDIC. They quickly sold it off to JP Morgan Chase who has been quite the buyer in this bear market. Wachovia has been teetering on the edge of bankruptcy and last night decided to sell to Citigroup before it went under.

All this has created a virtual “Big Three” for the financial community:

Bank of America: acquired Countrywide & Merrill Lynch and is the largest commercial bank in terms of market capitalization
JP Morgan Chase & Co.: acquired Bear Sterns and Washington Mutual to add to its already wide sweeping financial empire which already included Chase Bank and BankOne
Citigroup Inc.: acquired Wachovia, adding to its array of divisions including Citibank, Smith Barney; survived a potential bankruptcy by reaching out to Saudi and Emiratie investors earlier this year

All and all, here is the bulk of major transactions over the past few weeks…

Federal bailouts:

AIG ($85 billion with 80% share)

Fannie & Freddie (take over, $200 to $500 billion)

FSOB: Financial Stability Oversight Board ($700 billion, the new agency created for buying up mortgage backed securities)

Bear Stearns ($29 billion, later to JPMC)

Banking industry through Fed cash infusion ($70 million)

Auto Industry ($25 billion)

Players to be named later

Other financial institutions to change hands:

Merrill Lynch (bought by BOA)

Lehman Bros (bankrupt, bought mainly by Barclays)

Wachovia (bought by Citigroup)

Washington Mutual (FDIC take over, bought by JP Morgan)

13 bank failures in 10 states in 2008 (takeover by FDIC)

Financial institutions that are still “ok” (not comprehensive):

Morgan Stanley ($9B from Mitsubishi UFJ Financial Group)

Goldman Sachs ($5B from Warren Buffett)

TD Ameritrade

Wells Fargo

Commerce Bank (my bank, yippee!)

Anyone thinking that the subprime disease is an American problem should read this article from the UK's Telegraph. The Brits are about to nationalize Bradford & Bingley, the 8th largest mortgage lender, for the same reason the US is poised to bailout our banks--risky loans and mortgages to what the Brits call "amateur" homebuyers (first time buyers). Eighty percent of the bank's mortgages are to these borrowers that, as in the US, "self certify" their income.

Reports the Telegraph:

The Government may merge the bank, which has mortgages worth more than £40 billion, with the nationalised Northern Rock. Every taxpayer in Britain will be exposed to the equivalent of £5,500 in mortgage debt as a result.

In another day of frantic action around the world, the American Government also agreed a $700 billion deal to take on bad banking debts following several days of intense talks in Washington. However, British taxpayers are now more exposed to mortgage debts than their American counterparts, who are saddled with the equivalent of £2,750 per taxpayer.

European regulators were also rushing last night to rescue Fortis, a large Belgian bank, which is Britain’s third biggest motor insurer. Fears are mounting about the viability of Wachovia, an American bank seeking a takeover.

Investors are braced for another volatile day on share prices as stock markets digest the various rescue packages now being launched.

The Centre for Economics and Business Research (CEBR), a leading forecaster, will today predict that the British economy will fall into recession in the second half of this year. It believes that the economic prospects could worsen even further if the Treasury and Bank of England cannot re-establish confidence in the financial markets.

The perspectives of free market economists can be found here.

More from Reason Foundation on the financial crisis can be founder here , here, and here.

THE WHITE HOUSE

Office of the Press Secretary

_________________________________________________________________

For Immediate Release September 29, 2008

STATEMENT BY THE PRESIDENT

ON FINANCIAL RESCUE LEGISLATION

South Drive

7:34 A.M. EDT

THE PRESIDENT: Good morning. Yesterday, leaders here in Washington reached an extraordinary agreement to deal with an extraordinary problem in our economy. Working closely with my administration, congressional leaders from both parties produced the Emergency Economic Stabilization Act -- a bold bill that will help keep the crisis in our financial system from spreading throughout our economy.

This legislation deals with complex issues, and negotiators were asked to address them in a very short period of time. I appreciate the leadership of members on both sides of the aisle, who came together when our nation was counting on them. Negotiations are sometimes difficult, but their hard work and cooperation paid off.

The bipartisan economic rescue plan addresses the root cause of the financial crisis -- the assets related to home mortgages that have lost value during the housing decline. Under the Emergency Economic Stabilization Act, the federal government will be authorized to purchase these assets from banks and other financial institutions, which will help free them to resume lending to businesses and consumers.

The bill also includes other important ideas put forward by members of Congress from both parties. For example, the bill requires the establishment of a guarantee program that will insure assets at no cost to the taxpayer. The bill provides strong, bipartisan oversight so Americans can be certain that their tax dollars are used carefully and wisely. The bill ensures that failed executives do not receive a windfall from your tax dollars.

With this strong and decisive legislation, we will help restart the flow of credit, so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. We'll make clear that the United States is serious about restoring confidence and stability in our financial system.

I know many Americans are worried about the cost of the bill, and I understand their concern. This bill commits up to 700 billion taxpayer dollars, because a large amount of money is necessary to have an impact on our financial system. However, both the non-partisan Congressional Budget Office and the Office of Management and Budget expect that the ultimate cost to the taxpayer will be far less than that. In fact, we expect that over time, much -- if not all -- of the tax dollars we invest will be paid back.

Now that this legislation has been agreed to by leaders of both parties, it must be passed by houses -- both houses of Congress. And I fully understand that this will be a difficult vote. But with the improvements made to this bill, I'm confident that members of both parties will support it. Congress can send a strong signal to markets at home and abroad by passing this bill promptly. Every member of Congress and every American should keep in mind: A vote for this bill is a vote to prevent economic damage to you and your community.

This has been a volatile time for our financial system and our economy. Even with the important steps we're taking to address the current crisis, we will continue to face serious challenges. The impact of the credit crisis and the housing correction will continue to pressure our financial system and impact the growth of our economy for some time. But I'm confident that this rescue plan -- along with other measures taken by the Treasury Department and the Federal Reserve -- will begin to restore strength and stability to America's financial system and overall economy. And I'm confident that in the long run, America will overcome these challenges and remain the most dynamic and productive economy in the world.

Thank you.

END 7:38 A.M. EDT

According to the Wall Street Journal, congressional leaders have tentatively agreed to a bailout deal for U.S. financial markets and all that remains to be done is to commit the legislation to paper. See this article for WSJ's report on the details, Reason will offer commentary early this week.

In the continuing saga of the North Texas Tollway Authority, things are worse than I had previously thought:

Right now, the North Texas Tollway Authority, which operates and builds the area's toll roads, is having trouble finding financing for all of their new projects. Now, area transportation planners say they have a solution that would keep the building of all planned toll roads on time. [. . .]

[T]he credit crunch is causing problems for the NTTA and their financing of toll road construction. "It appears those initiatives are going to be slowed down tremendously," says Transportation Planner Michael Morris.

Investors still haven't bought all of the bonds to pay off Highway 121 and that must happen by November.

The credit crisis is also making it more difficult for the NTTA to finance the fourth phase of the 161 Toll Road connecting Interstate-30 to Interstate-20, in Grand Prairie.

Now, the lead transportation planner in North Texas, Michael Morris, says he's developed a plan to keep the toll roads on schedule and avoid the troubled bond markets.

Under his plan, the Regional Transportation Council would loan the NTTA the $225 million needed to buy outstanding bonds for the 121 toll.

As for the 161 Toll Road, Morris says under his plan, NTTA would give up its right of first refusal to build the toll. Instead, a private firm would pay at least $500 million to the RTC to build the 161 toll, and then the RTC would split the profits with the NTTA.

The plan would also have the RTC and the NTTA split the cost of building the proposed Trinity Parkway Toll Road, which would connect Highway 183, near Interstate-35 in Dallas, and Central Expressway just south of downtown.

A few observations here:

1) The Metroplex is getting a clinic in risk. And having sat in numerous RTC and Texas Transportation Commission meetings on the SH-121 project last summer, I can tell you that the risks were well described in advance, and policymakers knew what they were getting into. They were just blinded by the all of the promises NTTA made, and they were swept up in this "buy local" nonsense. For those on the RTC that voted for NTTA to take that project, I wonder how many would now look back and realize the key mistake: buying local bought the region a ton of risk. And it didn't take long for chickens to start coming home to roost.

2) In principle, I think a bailout of a public toll authority sets a very bad precedent. Taxpayers are not on the hook if a public toll authority implodes— these entities generally rely on non-recourse toll revenue bond financing, meaning that their bonds are backed by project/system toll revenues. The legal documents executed in financing state emphatically that there's no recourse against the state and taxpayers if things go south.

In the case of default, the bondholders may gripe and complain and beg for a state or local bailout, but to date, there's been a long track record of governments refusing to bail out failed toll projects. Should we really reward NTTA for willingly and consciously overextending itself and dumping a ton of risk on Metroplex taxpayers/drivers in its quest to preserve its regional monopoly?

3) The pragmatic side of me knows that Michael Morris is a fine and extremely capable public steward, and I sense that he's not content to simply let NTTA sink, in the interest of the larger mobility needs in the region.

4) There are some interesting aspects to this. If I'm reading this correctly, it sounds like Morris’s plan would be to bail out the NTTA SH-121 bonds unsold by November in exchange for NTTA giving up right of first refusal on SH-161 and letting TXDOT advance that project as a PPP toll concession. Then RTC would later get back any upfront payment proceeds for SH-161, which presumably would repay some or all of the cost of acquiring the bonds. [Still unknown is why would you share the upfront payment and/or annual payments with NTTA? Presumably to hedge again future cash flow problems, but again, is this warranted? Seems to me that that's giving up too much right up front to NTTA.]

5) Regardless, at its core, this plan would ultimately use PPPs to backfill the bailout of NTTA and get projects moving again. Another illustration of how policymakers can turn to PPPs to rescue failing public sector projects/entities. Morris would basically give the most lucrative remaining Metroplex toll project to the private sector, while they get NTTA back focused on projects that they (with RTC assistance, apparently) can realistically finance over the next few decades (which won't be a whole lot, I predict). And Morris's plan would shut down the terrible market valuation process on SH-161 for good. So there are indeed some appealing aspects of this as well, despite the terrible stench of the bailout component.

6) It's not an understatement to say that, with events in the capital markets and Capitol Hill this week, Metroplex taxpayers are probably not going to be too keen to see yet another bailout of an entity making big-ticket, risky gambles. Even if repaid from non-tax sources, I can't imagine that locals would take too kindly to news of a bailout in their backyard, especially for a business enterprise (or government business enterprise, more accurately) that made such lavish promises to the region just one year ago.

And local leaders were clearly complicit--they knew the risks associated with NTTA, and they still let it happen. Worse, they had a golden opportunity to offload many of those risks in a PPP, and they still said no. The RTC's poor judgment is now coming back to haunt them, and their constituents should be asking some tough questions about how they got into this mess in the first place.

In sum, Morris' plan to me seems partially like banishing the bad puppy to the doghouse in the backyard, and partially like still feeding it gourmet dog food in the backyard at mealtime. At the same time, they don't have a whole lot of options to work with, thanks to the state legislature and SB 792 last session. This one will be interesting to watch develop.

» Reason's Annual Privatization Report 2008
» Reason's Transportation Research and Commentary

In Friday's WaPo, South Carolina Governor Mark Sanford once again demonstrates why he is the real deal:

An ever-expanding scope of federal commitment and power is not what made this country great. Expanded power in one place comes at a cost in other places. American cornerstones such as individual initiative and an entrepreneurial spirit -- born in free and open societies with private property rights and the rule of law -- have never fit particularly well within the context of an ever-growing federal government.

For 200 years, the "business model" in our country has rested on a simple fact: that while one may reap rewards from taking risks, one should also be prepared to face the consequences of those risks. Some of the proposed actions with regard to the credit market turn that business model on its head -- absolving those who took too much risk, or bought too much house, from the weight of their own choices. If Congress passes the proposed bailout, we will be destined to have far greater problems in time, leaving those who are prudent in their finances to foot the bill for those who are not.

And he warns:

Many of the "cures" that are soon to be offered will have one thing in common -- telling us what others did wrong. Instead of listening to these, each of us as taxpayers must admonish those in Washington to get their own financial house in order. Washington is the master of creative and unsustainable finance, with $50 trillion in unfunded promises.

We will be told of bailouts that "won't cost anything." We should caution policymakers that this has never been the history of bailouts, and remind them of Milton Friedman's suggestion that the capitalist system never works without loss. Investment titans recently featured in Vanity Fair trading $60 million beach homes should never be sheltered from this old-fashioned concept.

We will be told of "temporary" funds and programs. We should remind our leaders of Ronald Reagan's words that the closest thing to eternal life is a government program.

We will be told "trust us" on pricing assets, and we should not -- because no matter how pure one's intentions, no one watches your money like you do. This makes transparency and open bidding incredibly important.

Read the whole thing. And Gov. Sanford's article in Reason's Annual Privatization Report 2006 is well worth re-reading. Here's a teaser:

Any read through history demonstrates how essential limited government is to preserving freedom and individual liberty. What life experience shows us is that limited government is equally important in both making your economy flourish and in enabling citizens to get the most for their investment in government.

Let me be clear up front that in the long run the only way to make government truly efficient is to make it smaller, and this seems to me to be the real clarion call in highlighting the importance of privatization efforts. Efficiency and government are mutually exclusive in our system, and if our Founding Fathers had wanted efficiency I suppose they would have looked more closely at totalitarian systems. They wanted not efficiency, but checks on power in our republic.

We could use a lot more like him.

» Reason's Privatization Research and Commentary

Debate is still raging on the hill over what to do with the bailout, though everyone says a package will get passed by early next week. While all looked hopeless on Monday, capitalism is putting up a fight against the socialist leaning Bush White House and Congressional Democrats.

The Treasury's plan basically asked for $700 billion and a lot of trust. The Democrats want to add Congressional oversight, cut CEO pay, and firmly establish redistribution policy in American law.

The GOP has finally put forth their own plan, and though it's still a bailout, this compromise gets the private sector involved in an operations and management role. It is estimated to be between $100 billion and $500 billion (significantly less than the Treasury/Democratic solution):

According to Republican Rep. John Campbell, a member of the GOP negotiating team, the Republican plan would require a new government entity, modeled after the Federal Deposit Insurance Corp., that charges premiums to insure risky mortgages.

The more toxic the mortgage, the higher the premium, Campbell said, but the mortgages would then have government-backed guarantees against future losses, which in theory would draw private investors to purchase it from the institutions and get new liquidity into the mortgage-backed securities market. This would be paid by the mortgage industry, not taxpayer dollars, according to the GOP vision.

Any institution that participates would have to suspend dividend payments temporarily to free up funds to pay the insurance premiums, which Campbell acknowledged could be steep. If necessary, institutions could borrow from the Federal Reserve to pay the premiums.

The Republican alternative would also provide new capital by allowing recent operating losses to be carried back for up to 10 years and to provide immediate, giant tax refunds to all the institutions. However, Republicans acknowledge that a capital gains tax cut proposal has been dropped due to cost factors and Democratic push back.

If a private/public sector solution is at hand, Republicans will get a mechanism they prefer and the political cover they need to vote for the finished package.

To say that combat-related military privatization has been controversial in recent years would be an understatement. But it would be a mistake to not draw a distinction between combat-related and non-combat-related contracting in the U.S military. On the non-combat side (things like housing, base development, etc.), every branch has some really interesting public-private partnerships underway, and the scale of some of them is simply staggering. Witness the Residential Communities Initiative:

The final partners have been chosen to team up with the Army in its housing privatization venture.

The partners will work with the Army to privatize housing, under the Residential Communities Initiative, at seven more installations. Those installations include Fort Sill, Okla.; Fort Wainwright, Alaska; Fort Greely, Alaska; Fort Huachuca, Ariz.; Yuma Proving Ground, Ariz.; Aberdeen Proving Ground, Md. and Fort Richardson, Alaska. [. . .]

RCI is the Army's program to privatize housing across the continental United States. By 2020, as many as 89,000 new or renovated homes will be made available to Soldiers through the RCI's housing portfolio. The RCI private sector partners will collect rent from the Soldiers who will live in them and provide the maintenance services for the homes and yards.

"When the smoke settles, it'll be around 97 percent of Army's housing around the United States that is privatized," said Geoffrey G. Prosch, principal deputy assistant secretary of the Army for installations and environment, adding that the Army has already transferred to RCI partners housing operations at 38 installations. [. . .]

"This record of success is a model for the military and one that has resulted in Soldiers and their families receiving new homes sooner rather than later," Prosch said. [. . .]

Prosch commented, "When I came onboard with the Army, the service had between a $6 and $7 billion dollar backlog of unfinanced requirements for maintaining military family housing. Now the Army's portfolio of homes, one of the largest in the nation, is on track to being first rate -- and the Army accomplished it through privatization at a fraction of the cost of what it would have taken in MILCON dollars."

"The Army has contributed a little less than a billion dollars in equity to our development partners," he said. "And in return we've received over 10 billion dollars in initial development scope. That's an 11-to-one ratio. That's phenomenal in the construction industry. And it's allowed us, at all these 45 installations at the same time, to move out simultaneously and rapidly recapitalize our housing."

RCI is beneficial for both Soldiers and the Army. For Soldiers it means their homes will be better maintained by a private contractor that is competing with the rest of the private sector for their dollars. For the Army, it is means fewer MILCON dollars must be requested, and also means an indirect boost in mission readiness.

We've suggested the military housing privatization program as a model for university housing in this 2007 Reason study. The underlying idea is the same--whether military branch or university, their core missions are defense and education, respectively, not real estate. The DOD wisely recognized years ago that being a landlord and developer just wasn't a core competency of the military branches, hence the privatization program.

More on military housing privatization here.

» Reason's Privatization Research and Commentary

Even though the $700 billion bailout is on the ropes, some version of is most likely to go through. At the start of the week, capitalists were fighting strong against it. The Congressional Republicans fought hard against the attempts to railroad the proposal through the House and Senate. Op-eds and commentaries have been published in every major news source condemning the bailout. Even Democrats have raised some issues with the Bush plan. But in the midst of all this, only the solution has been seriously debated, not the outcome. This has created a disconnect in messages. Free market solutions will not result in socialist outcomes, which, given the trend of America, means capitalists are in a losing battle at this point.

There have been a plethora of free market solutions to the financial crisis we’re facing today. Several have been listed, including some on this blog and Reason Online: reducing capital gains taxes (which should be done anyway), cutting taxes for small business, repealing hurtful rules such as mark-to-market and Sarbanes-Oxley (Sarbox), and unloading Fannie Mae and Freddie Mac now to the private sector.

However, these ideas have been met with substantial criticism. Tax cuts are seen as too slow or a reward for Wall Street. Mark-to-market is seen as essential to keep prices fair. Sarbanes-Oxley is viewed as necessary to stem corporate fraud. And Fannie and Freddie are now viewed as critical assets the government can use to make money.

Of course, a free market believer balks at all of this. Tax cuts may be slow, and capital gains taxes might not provide enough liquidity to save every firm—but that is half the point. Capitalists not trying to save every firm (if some fail, that is the market holding them accountable for their actions). Capitalists don’t believe there should be a rule setting the “fair price” for, considering the subjective theory of value. Capitalists see the Sarbox $3 million per firm barrier to entry for private firms to go public as an anti-free market clause, and clearly the fraud rules of Sarbox haven’t worked. And capitalists don’t believe the government should fix Fannie & Freddie, the private sector should, even if the firms take longer to get back on their feet in big, separate chunks.

And therein lies the dichotomy. Free marketers are seeking a free market solution that has a free market result. And a free market result at this point means some economic pain and the acceptance of a possible recession. It means more firms will fail and more money will be lost. Our market has become so regulated and inundated with damaging economic philosophies, such as “too big to fail,” that it needs to be reset. That will require a transitional gains loss.

The free market solutions do not create the socialized outcome Congress and the Bush administration wants. As a caveat, don’t see socialism as a dirty word thrown out by capitalists to demean the “other side,” simply view it as the alternative outcome to capitalism: it is taking money from the social collective to provide for the needs of the greater good of all society regardless of the responsibility of any one individual in that collective to meet the needs of the problem or whether those in the society requiring help deserve it. Socialism.

Free market capitalists are losing the fight for hearts and minds today because America wants everyone to be ok. America wants the system fixed now. America is willing to put up with socialism because the health of the greater good seems appropriate. It is short-term thinking. It is also rational—somewhat. It is understandable that America would want to do everything it can to avoid a recession. The outcome for the socialist thinking today, led by Republicans Hank Paulson, Bernanke, and Georg W. Bush, is short-term health for the market so that everyone can get back on their feet and American’s economic engine restarted.

Politically is a boon for Democrats too because their political philosophy is much more socialist than Republicans—in the House and Senate anyway. Again, “socialist” is not levied as an insult towards Democrats, simply the proper definition of their policies to use society’s money for provide for the poor and unemployed (welfare), the sick (Medicare), the elderly (social security), the uninsured (Universal Healthcare), etc.

So Republicans in Congress, capitalists, free market believers, Libertarians, and economic conservatives alike have a choice to make: either reshape the message that free mark solutions are the best, even with a free market outcome not looking like the most favorable in the short-term; or accept that the bailout will go through and push for a compromise that lets the private sector being involved as much as possible.

The government has no track record of handling or managing business measures properly, this should be an easy rhetorical point to win. Making that point while pushing for a compromise would be much more viable then trying to show how the short-term gain will skew us long-term by reshaping how the role of government is perceived, by increasing our debt, by putting taxpayer dollars at risk, and by increasing the powers of government—which they are unlikely to give back.

THE WHITE HOUSE

Office of the Press Secretary

_________________________________________________________________

For Immediate Release September 26, 2008

STATEMENT BY THE PRESIDENT

REGARDING THE NEGOTIATIONS TO FINALIZE LEGISLATION

ON THE FINANCIAL RESCUE PACKAGE

Oval Colonnade

9:40 A.M. EDT

THE PRESIDENT: Good morning. My administration continues to work with the Congress on a rescue plan. And we need a rescue plan. This is -- it's hard work. Our proposal is a big proposal. And the reason it's big and substantial is because we got a big problem.

We also need to move quickly. Now, anytime you have a plan this big, that is moving this quickly, that requires legislative approval, it creates challenges. Members want to be heard. They want to be able to express their opinions, and they should be allowed to express their opinions.

There are disagreements over aspects of the rescue plan, but there is no disagreement that something substantial must be done. The legislative process is sometimes not very pretty, but we are going to get a package passed. We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan.

Thank you very much.

END 9:42 A.M. EDT

There is always a price someone is willing to pay for something, even as devalued as Lehman Bros. See this report from the Wall Street Journal today:

Nomura Holdings Inc. paid a nominal sum of $2 for the rump of bankrupt Lehman Brothers Holdings Inc. in Europe and the Middle East, a person familiar with the situation said.

Earlier this week, Nomura said it had acquired Lehman's equities and investment banking franchises in Europe, which employs about 2,500 bankers, for a nominal sum that it didn't disclose. Separately, Nomura also bought the Wall Street firm's operations in the Asia Pacific region, with its 3,000-strong staff, for $225 million.

A Nomura spokesman declined to comment on the price it paid for the assets.

The low prices reflect the effort by senior Lehman executives and the insolvency administrators', PricewaterhouseCoopers LLP in Europe and KPMG in Asia, to save jobs. Rival bidder, British bank Barclays PLC, was interested in acquiring a smaller part of Lehman's business in Europe.

Nomura is taking on the responsibility of the former Lehman bankers' salaries but none of the bankrupt firm's liabilities. Talks on compensation packages are continuing.

Reason Foundation is heralding U.S. Transportation Secretary Mary Peters and Texas Gov. Rick Perry as "Innovators in Action" for their work in developing fresh solutions to cope with our growing infrastructure and traffic problems. In Innovators in Action 2008, Ms. Peters and Gov. Perry author columns explaining their visions and policy prescriptions for the future of transportation funding and construction.

"From crumbling roads to collapsing bridges to gridlocked roads, our nation's infrastructure is in desperate need of repair and expansion," said Leonard Gilroy, editor of Innovators in Action and director of government reform at Reason Foundation. "Governor Perry and Secretary Peters have led us down a new path, a path that shows there are better and more sustainable ways to fund, build and operate infrastructure. Their leadership offers hope that after years of falling behind, we can build a 21st century transportation system that protects our mobility and spurs the economy."

Other public officials featured in Reason Foundation's Innovators in Action 2008 include:

• Former U.S. Comptroller General David M. Walker;
• Utah State Senator Howard Stephenson and State Representative Craig Frank;
• New Jersey State Senator Raymond J. Lesniak;
• the late Texas Transportation Commission Chairman Ric Williamson;
• King County, Washington Executive Ron Sims;
• Denver Regional Transportation District CEO Cal Marsella; and
• Olga V. Block, CEO and Executive Director of BASIS Schools.

"At every level of government there are officials of all political stripes who are implementing programs that give taxpayers more bang for their buck and improve accountability," Gilroy said. "Now we need these types of innovators to become the norm, rather than the exception."

In their own words, this bipartisan group of leaders reveal how they are reducing government spending and reforming bureaucracy; how they are collaborating with the private sector to build new infrastructure and deliver cost-savings and better services to taxpayers; how they are advancing market-based transportation solutions to reduce congestion and improve mobility; how they reforming public education delivery and advancing school choice; and how they are reforming urban public transit operations.

» Reason's Innovators in Action 2008
» Press Release
» Reason's Privatization Research and Commentary

Our friends over at NCPA alerted us to a new study from the U.K. finds that concern for the environment increases with income, but high income families have lifestyles that are the most carbon intensive.

People who believe they have the greenest lifestyles can be seen as some of the main culprits behind global warming, says a team of researchers, who claim that many ideas about sustainable living are a myth.

According to the researchers, people who regularly recycle rubbish and save energy at home are also the most likely to take frequent long-haul flights abroad. The carbon emissions from such flights can swamp the green savings made at home, the researchers claim.

For the complete article from the Guardian, click here.

THE WHITE HOUSE

Office of the Press Secretary

For Immediate Release September 24, 2008

ADDRESS BY THE PRESIDENT

TO THE NATION

State Floor

9:01 P.M. EDT

THE PRESIDENT: Good evening. This is an extraordinary period for America's economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We’ve seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.

We’re in the midst of a serious financial crisis, and the federal government is responding with decisive action. We’ve boosted confidence in money market mutual funds, and acted to prevent major investors from intentionally driving down stocks for their own personal gain.

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets. Financial assets related to home mortgages have lost value during the housing decline. And the banks holding these assets have restricted credit. As a result, our entire economy is in danger. So I’ve proposed that the federal government reduce the risk posed by these troubled assets, and supply urgently-needed money so banks and other financial institutions can avoid collapse and resume lending.

This rescue effort is not aimed at preserving any individual company or industry -- it is aimed at preserving America's overall economy. It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America's financial system is back on track.

I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I’ve proposed work? And what does this mean for your financial future? These are good questions, and they deserve clear answers.

First, how did our economy reach this point?

Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition -- some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected -- along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

These widespread defaults had effects far beyond the housing market. See, in today's mortgage industry, home loans are often packaged together, and converted into financial products called "mortgage-backed securities." These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

I’m a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There’s been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.

The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Fellow citizens: We must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem -- and to make improvements to the proposal my administration sent to them. There is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration. In that spirit, I’ve invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned money. I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street. But given the situation we are facing, not passing a bill now would cost these Americans much more later.

Many Americans are asking: How would a rescue plan work?

After much discussion, there is now widespread agreement on the principles such a plan would include. It would remove the risk posed by the troubled assets -- including mortgage-backed securities -- now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses. Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan's implementation. And it should be enacted as soon as possible.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday. First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.

Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

A final question is: What does this mean for your economic future?

The primary steps -- purpose of the steps I have outlined tonight is to safeguard the financial security of American workers and families and small businesses. The federal government also continues to enforce laws and regulations protecting your money. The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit -- and this will not change.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability. There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability to grow.

In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity, and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.

Our economy is facing a moment of great challenge. But we’ve overcome tough challenges before -- and we will overcome this one. I know that Americans sometimes get discouraged by the tone in Washington, and the seemingly endless partisan struggles. Yet history has shown that in times of real trial, elected officials rise to the occasion. And together, we will show the world once again what kind of country America is -- a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.

Thank you for listening. May God bless you.

END 9:14 P.M. EDT

Another from the "PPPs aren't just for roads" file (see this one earlier this week on schools). From Virginia, an interesting new muti-jurisdictional water PPP:

A group of investors seeking a partnership with the towns of Cape Charles and Cheriton is moving forward with plans to build a state-of-the-art wastewater treatment plant and a new water distribution system to serve area residents, businesses and two industrial parks they are developing.

[. . .]

Cape Charles dumps its treated wastewater, or effluent, directly into the bay. The state environmental agency has required the town upgrade their plant by Jan. 1, 2011.

The same deadline applies to plans for a central system for the town of Cheriton, which could not afford to build its own system because the population of the town hovers around 400.

So the three parties are getting together and forming a public-private partnership to design, build, finance, maintain and operate water and wastewater systems that will serve residents and businesses in the two towns, and possibly beyond, and also the industrial needs at the Webster site, which sits partially in the county.

Such ventures are formed under the authority of the state's Public-Private Educational Facilities and Infrastructure Act of 2002, or PPEA.

The intent of the act is to provide a structure so public projects can benefit from the involvement of the private sector, saving time and money.

The law creates resources to fund a broad range of projects, from schools to water treatment and telecommunications. It helps localities reach goals and encourages innovative approaches to financing.

This is a great example of how PPPs offer solutions as public entities face growing infrastructure needs and worsening fiscal conditions. In fact, it's apparent from this article that one of the drivers behind this deal is environmental compliance. Regs are getting tighter soon, and the cities don't have the money to get in compliance on their own, so they're pursuing a PPP to accelerate the project; pool their resources to make a more attractive, larger scale project; and get 'er done before the regs kick in.

Expect to see more interest in water PPPs in coming decades. The feds have been reducing their contributions to local water systems over the several decades, at the same time that they're imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates of this nature are forcing fiscally-strapped municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds, but as we all know, government revenues are drying up and budget shortfalls are reaching epidemic status. So that leaves PPPs as one of the few nontraditional, creative options left on the table to help municipalities meet these obligations.

And Virginia's PPEA is one of the great pieces of state legislation to facilitate these solutions. After the success of its big brother, the Public-Private Transportation Act of 1995, or PPTA (facilitating transportation PPPs, like the Capital Beltway HOT lanes project currently underway), the legislature wisely opted to put legislation in place to facilitate PPPs in other realms of infrastructure. [they even still refer to PPEA in the Commonwealth as the "Public-Private Everything Else Act"].

We're fortunate to have welcomed the PPTA's author, former Virginia DOT secretary Shirley Ybarra, into Reason's policy shop last year, and I'm sure she takes a certain amount of pride knowing that her work carving new ground on transportation finance and procurement has ultimately played a big role in providing options for munis in delivering water and other types of needed infrastructure.

Another observation here is that we may be at the very beginning of a shift in water privatization. The standard way of doing business up to this point has been to partner with the private sector largely on operations & maintenance. The private team may design and build the plant too, or they may just take over operations of an existing facility, but to date the focus has not been on private financing in water infrastructure.

But this Virginia project, a similar project under discussion in the Prescott, AZ area, and several others in recent years may be an early indicator that the more powerful PPP contracting models we see in roads, for example—where the private sector competes for the right to design, build, operate, maintain, as well as finance, infrastructure projects through longer-term contractual arrangements—may be coming to the water industry.

Not that we'll see a major shift away from traditional operational contracting in water; the point is that even looking within the relatively narrow space of water privatization, models are evolving, and new opportunities are emerging that may look way different than they did even a decade ago.

As more elected officials discover that there's a robust competition in the market for privately-financed road projects, they are naturally looking to similar opportunities in other sectors. And the $150B+ in private equity capital raised on Wall Street and within pension funds, etc. to invest in infrastructure are likely more interested than ever in diversification among assets. So it makes sense that we'll see them interested in spreading their resources around to invest in several infrastructure subclasses, including roads, airports, water, wastewater, energy, ports, schools, etc.

This may take some time in water since current privatization models are so well-established and successful, but I do think we'll see growing interest in that evolution towards incorporating the financing component into the PPP models. And with public ledgers running redder and redder, and the maintenance and new capacity needs in water growing greater and greater, the sooner we start to engage that discussion and get some projects up and running, the better.

» Reason FAQ on Water/Wastewater Privatization
» Reason's Water Privatization Research and Commentary

Most of the debate in today’s financial crisis has been focused on the question “what should be done?” There has been little consensus, thus far. The reason is that we’ve failed to settle on what outcome we want from any potential action… or non-action.

Do we (America) want to just stabilize the markets regardless of personal responsibility for firms? Do we want to allow firms who made bad bets suffer the consequences of their choices? Do we have a low threshold for economic pain, requiring a big bailout, or are we willing to take a recession and let the markets fix themselves? Do we want to take this opportunity to reset the “rules of the game” in a free market system? Do we want to cover investor, despite their mistakes, so that lending can continue in America? Do we want to protect Main Street so that people don’t lose their savings over $100,000 FDIC insured money?

Underlying the debate over what to do is this lack of consensus on what the end game should be. Some ends are mutually exclusive; others can be combined and met together. In the end there can be debate over the economics of cutting capital gains taxes. There can be arguments over the economic ramifications for the future of bailing out firms and skewing their risk adjustment thinking. The issue of socialism creeping into American policy can be hashed out. But the end has to be determined first.

There aren’t really two sides in the debate, but rather several different arguments, some of which are:

Keep American people’s savings safe today vs. Some loss is acceptable for future stability

Have a heart for those losing money because of corporate “greed” vs. Its not my fault and my tax dollars shouldn’t pay for it

Free marketers who feel over regulation was the problem and regulation is the only way out vs. Free market principality

Deregulation allowed subprime mortgages and MBS excesses to ruin us vs. Over-regulation such as mark-to-market accounting rules put us in this place

The bailout is bad, but the alternative being a meltdown is worse vs. There will be no meltdown, we have alternative choices

Wall Street needs the money to begin lending again to jump start the economy vs. Wall Street must suffer the consequences of their actions

Capitalists should look for an outcome that includes elimination of harmful regulations (such as adjusting the mark-to-market rules to a three or five year), letting Wall Street investors who made big risks lose their shirts, businesses being able to cover their illiquid assets, a price benchmark set for mortgage-backed securities, and the return of investor confidence. Some of those outcomes are shared goals; others are not.

But to meet these goals while retaining the capitalist principle that the government shouldn’t be bailout out firms with taxpayer money America would have to accept the possibility of a six-month to one-year recession. It is significant to note that historically, the economy moves up and down in cycles and this is a cleansing period for the financial markets. Yet, there are many Americans who are willing to accept this. And for them the capitalist response doesn’t meet their ends. This is what has to be worked out before a solution is reached.

Although the bailout plan is on the ropes, it will probably be worked out in the end, to the chagrin of capitalists. Fingers-crossed that the successful stalls of the RSC will continue.

In the wake of our nation's financial turmoil, John McCain is being, well, John McCain. The decisive, determined, shoot first ask questions later, maverick is suspending his Presidential campaign and encouraging Obama to join him in Washington to figure out a solution to the problem. He has suggested suspending the foreign policy debate on Friday so that America can "come together" to solve Wall Street's issues.

But Obama is won't back down. "Presidents should be able to handle more than one thing at a time," he said. He said he's planning for the debate Friday and the debate commission said the debate is still on. But at this point, a debate on foreign policy will be completely washed away in the financial crisis. If Obama and McCain are serious about this campaign being about real issues and not just doing the whole presidential politics thing then they should just CHANGE THE DEBATE TOPIC.

There are many possibilities, but a good suggestion might be... the economy.

There is a debate scheduled for later in the election to debate economic and domestic policy, they could simply switch the topics. That way they can continue working on the issue and show America how they would handle the situation differently as President. The scenario is ready made to show what kind of leader they would be.

And no one should complain they don't have time to prepare. 1) They are campaigning to be President of the United State of America--shouldn't they already be prepared? 2) What have they been doing the past couple weeks other than think and talk about this?

Cord Blumquest writes today at Technology Liberation Front:

Okay. Google gets the lion’s share of search engine traffic. But controlling search doesn’t amount to controlling online advertising, not by a long shot.

We haven’t seen prices go up because the time people spend on search engines every day is minimal, amounting to only a handful of minutes. Google has successfully turned these few minutes a day into a machine that generates billions of dollars a year. Yet despite its powerful position in the search market, competition from outside of search is forcing Google to keep its rates low.

Think of where the majority of our tim