On September 26, 2010 — 92 years after the WWI officially ended — Germany made her last payment of $94 million in reparations “to private individuals, pension funds and corporations holding debenture bonds as agreed under the Treaty of Versailles.” As Keynes rightly predicted, the unreasonably high French demands for financial reparations led to German economic weakness. The end result was hyperinflation, which was one of the principal causes of Hitler’s rise to power and the start of the Second World War. In spite of losing two world wars, Germany did eventually become the most powerful nation in Europe — through trade, capitalism and German ingenuity.
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Targeted Killing of U.S. Citizen a State Secret?
That’s the claim the Obama administration made in court. As Glenn Greenwald puts it:
[W]hat’s most notable here is that one of the arguments the Obama DOJ raises to demand dismissal of this lawsuit is “state secrets”: in other words, not only does the President have the right to sentence Americans to death with no due process or charges of any kind, but his decisions as to who will be killed and why he wants them dead are “state secrets,” and thus no court may adjudicate their legality.
Italics in the original. My colleagues Gene Healy and Nat Hentoff have expressed concerns about targeted killings. Charlie Savage wrote a good piece on this that highlights how even the most ardent defenders of executive power may blush at this broad claim of power.
The government’s increasing use of the state secrets doctrine to shield its actions from judicial review has been contentious. Some officials have argued that invoking it in the Awlaki matter, about which so much is already public, would risk a backlash. David Rivkin, a lawyer in the White House of President George H. W. Bush, echoed that concern.
“I’m a huge fan of executive power, but if someone came up to you and said the government wants to target you and you can’t even talk about it in court to try to stop it, that’s too harsh even for me,” he said.
In fairness, Rivkin would defend the administration’s claim of power on other grounds — that targeting is a “political question” for the elected branches of government — but this approach seems to have lost out because it invites the judiciary to determine whether the U.S. is at war in Yemen.
Amending the Authorization for the Use of Military Force passed by Congress after 9/11 is long overdue. What groups are we truly at war with, where does the line between war and peace sit, who can we detain and kill, and what process is owed before a citizen may be targeted with lethal force? Questions of war are political in nature, and if we don’t know the answers, it is Congress’ role to step in and provide them.
If Not Fannie, then Who?
A common defense offered for keeping Fannie Mae and Freddie Mac, or something like them, is that the market simply cannot absorb the same level of mortgage lending without them. The central flaw in this argument is that Fannie and Freddie themselves must be funded by the market. So if the financial markets can absorb X in GSE debt, then the financial markets can absorb X in mortgages.
Different market participants currently face different capital requirements for the same assets. To some extent, Fannie and Freddie were a vehicle for shifting mortgage risk from higher capitalized institutions to less capitalized. If the Obama administration and bank regulators are serious about closing “regulatory gaps” then all entities backed by the govt, implicit or otherwise, should hold the same capital against the same risks. In the following I will thus assume that differences in capital requirements behind mortgages are irrelevant.
So to determine who could absorb the GSEs’ buying of mortgages, let’s look at who holds GSE debt. Of the approximately $5 trillion in GSE debt and mortgage backed securities (MBS), about a trillion is held by commercial banks and thrifts. Another trillion is held by insurance companies and pension funds. Close to a trillion is held by mutual funds. That quickly gets one to 3 trillion. Households and state/local governments also hold close to a trillion. That leaves us with about a trillion left, held mostly by foreign governments (usually central banks). For this analysis, I am using data pre-Federal Reserve purchases of GSE debt/MBS.
Given that banks hold about a trillion in excess reserves and over 9 trillion in deposits, I think its fair to assume commercial banks could easily absorb another $1 trillion in mortgages, as represented by foreign holders. Some holders of GSE debt are legally prohibited from holding mortgages. These entities can generally hold bank commercial paper (think mutual funds) which could then fund the same level of mortgages.
The point here should be clear, by swapping out GSE debt for mortgages, our financial markets have sufficient capacity to replace Fannie and Freddie. In fact, we are the only advanced country that does not fund our mortgage market primarily or exclusively with bank deposits. This analysis also does not assume any reduction in the size of our mortgage market, which should actually be an objective of reform. We devote too much capital to mortgages, at the expense of more productive sectors of our economy.
End Drug War, Save Billions in Wealth
A new Cato Institute report examines the budgetary impact of ending the drug war and concludes that $88 billion could be saved each year (about $41 billion from canceled spending and about $47 billion in new tax revenue).
Here’s the executive summary:
State and federal governments in the United States face massive looming fiscal deficits. One policy change that can reduce deficits is ending the drug war. Legalization means reduced expenditure on enforcement and an increase in tax revenue from legalized sales.
This report estimates that legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government.
Approximately $8.7 billion of the savings would result from legalization of marijuana and $32.6 billion from legalization of other drugs.
The report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs.
Saving money that is otherwise wasted is just one of a dozen good reasons to end the drug war. But since policymakers have placed all of us into a financial jam, this report shows one way to improve our position. Voting against the drug war remains a risky vote but more politicians are concluding that it is a less painful vote than voting against other things the government spends money on.
Harvard economist Jeff Miron and his co-author Katherine Waldock have data on the federal budget and all the states. Check out how much money your state is wasting and spread the word to others.
Judge Dismisses Wiretapping Charges against Motorcyclist for Recording Traffic Stop
Maryland Circuit Court Judge Emory A Pitt, Jr. has ruled that motorcyclist and Maryland Air National Guardsman Anthony Graber did not violate the Maryland wiretapping statute when he recorded his traffic stop. The wiretap law does prohibit the recording of audio where there is a “reasonable expectation of privacy,” but Judge Pitt found that a police officer performing a traffic stop has no such expectation of privacy.
“Those of us who are public officials and are entrusted with the power of the state are ultimately accountable to the public,” the judge wrote. “When we exercise that power in public fora, we should not expect our actions to be shielded from public observation.”
As I said in this op-ed, and as Clark Neily, Radley Balko and I pointed out in this video, Maryland police officers have used the “expectation of privacy” claim as a tool to deter anyone from recording on-duty police officers. In Anthony Graber’s case, a Maryland state trooper cut off Graber in an unmarked car and emerged from the driver’s side door in jeans and a gray pullover, gun drawn and badge not visible. It looked like a carjacking, and Graber was not charged for recording the encounter until he posted it on YouTube. The message to other Marylanders was clear: record the police, and you will face arrest and felony prosecution.
The prosecutor behind the case against Graber, Joseph Cassilly, spoke on a panel last week at Cato. He made clear that he disagreed with the structure of the Maryland wiretapping law, and was using the case to push the legislature toward a single-party consent wiretap statute. While I agree with a move to a single-party consent law, it is satisfying to see the charges against Anthony Graber reduced to the traffic violations that instigated the encounter in the first place.
Venezuela Votes against Chavez
The Venezuelan opposition has won an important victory—for now. In Sunday’s parliamentary elections it managed to receive 52 percent of the popular vote, which translates into some 60 out of 165 seats in the legislature, thus depriving Chavez of the two-thirds majority he needs to pass some laws and make some major decisions such as naming Supreme Court justices.
The victory shows that a majority of Venezuelans are tired of the regime’s autocratic ways and its results; it has emboldened the up-until-now ineffective and disorganized opposition; and it undermines the legitimacy that Chavez has claimed to have in speaking for the people (it will be difficult for him to continue to dismiss serious criticisms of his government as the concerns of a small oligarchy).
So life may be a bit more difficult for Chavez in the future, but it would be naïve to think that Chavez will suddenly begin respecting democratic institutions and let the election results stand in the way of his socialist revolution. He’s used every dirty trick in the book to subvert and silence his opponents—technical disqualification of candidates, gerrymandering, intimidation, de-funding local governments led by the opposition, exiling or jailing critics on false charges, shutting down media outlets, etc.—and to gain autocratic control of every major institution in the country.
Chavez will surely try to circumvent the legislature if it suits him. He has set up parallel government structures that he controls, and has spoken of creating local “communes” throughout the country whose decisions would override those of the parliament. Chavez controls virtually all government spending in an opaque process that imposes no accountability. It will be a challenging task for a new parliament to make spending transparent and accountable. The lame duck congress that lasts for the next three months (and that Chavez fully controls) can still pass a law empowering Chavez to rule by decree for any period of time that it chooses. So Chavez still has the ability to get his way.
In the end, politics matter, but the factor that will determine whether Chavez will be able to hold on to power may very well be economics. The economy is the worst performing in Latin America, inflation is about 30 percent, the country suffers power outages and water shortages, there is a scarcity of basic foods and other goods, infrastructure is crumbling and the dramatic rise in crime has made Venezuela one of the most criminally violent places in the world. It is no surprise then that most Venezuelans are fed up with Chavez. The rise in discontent, including among his base, threatens Chavez’s hold on power. Thus, the autocrat’s need to move fast in consolidating his revolution a la Cuba, at which point popular discontent matters little. Venezuela is still very much in a race between a deteriorating domestic economy and the completion of Chavez’s totalitarian project.
Frivolous Lawsuit Aimed at Silencing Critics of Eminent Domain Abuse
In Kelo v. City of New London, the Supreme Court ruled that a locality could use its eminent domain authority to seize private property to sell to private developers. Cato’s amicus brief opposing this abuse of the Takings Clause is available here, and an article on Kelo and other property law rulings of the 2004–2005 term by law professor James W. Ely, Jr. is available here.
One positive outcome of Kelo was the legislative restriction of eminent domain usage in state houses across the country. On the other hand, developers and localities have attempted to muzzle their critics with frivolous lawsuits. The Institute for Justice is currently litigating one of these actions in Texas:
Investigative journalist Carla Main wrote a book about eminent domain abuse in Freeport, Texas. The city is attempting to force out a generations-old family shrimp and marine supply business to make way for a luxury marina development that was to be owned and operated by Royall’s private company. When the victims of this eminent domain abuse complained, Royall sued them for defamation. Main’s book, Bulldozed: “Kelo,” Eminent Domain, and the American Lust for Land, tells the story of the Gore family’s generations-old shrimp business and how Royall and the city tried to take their land. Prominent law professor Richard Epstein (University of Chicago and New York University) contributed a blurb to the back cover of Bulldozed.
Royall sued Main, Epstein and Encounter Books (the publisher) for defamation over the contents of Bulldozed. He also sued two newspapers and a journalist who published reviews of Bulldozed. Royall is attempting to use the power of the courts to silence his critics.
A Dallas trial court ruled last year that the lawsuit was not barred by the First Amendment, even though Royall could not point to any statement in Main’s book that came close to the legal standard for defamation. The Institute for Justice is appealing the trial court’s decision. As Bill McGurn writes in today’s Wall Street Journal, this suit is one of the “high costs of Mr. Kennedy’s concurrence” in Kelo. Here’s hoping that rights protected by both the First and Fifth Amendments can prevail.
Susette Kelo, the owner of the Little Pink House at the center of the Kelo case, spoke at the Cato Institute about her ordeal, and her story is the subject of this Cato Institute video.