Coyote Blog

Every year, the government forced nearly every working American to give it an interest-free loan.   Each person pays his taxes (via legally required withholding) as much as 16 months early, with not a cent of interest from the government for this loan of funds.  Several states have been toying of late  (and California actually implemented) schemes in which the required withholding rates are jacked far above any conceivable level of tax liability.  These are desperate financing approaches from entities who are no longer able to borrow (or afford the interest of) money at arms length, and so much use the coercive power of the government to force its citizens to fork over interest free loans.

Apparently, the Obama administration is looking at such a scheme, but on steriods:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Whatever their stated justification (I am sure it is somehow for the children), I think Dale Franks gets at the actual motivation:

There literally isn't enough money in the world to float the T-notes the Treasury must issue in order to prop up our unsustainable spending path.  There are, however, about $3.6 trillion in funds just sitting in 401(k) accounts.  If the government can urge"“or force"“you to convert your 401(k) into T-note funded annuities, the Treasury can continue to issue those notes to float the government's deficit.  Essentially, you'll be converting your retirement funds into an IOU from the government"¦just like your social security account has already done.

This will allow the Treasury to keep borrowing money"“from your retirement"“in order to keep issuing more debt that they may or may not be able to pay back to you

I thought Dale Franks has a really good post on why the bailout is a crock.  Its quite long, but here is one excerpt:

Banks that made bad mortgage choices get a buttload of money for their
bad MBS paper. Banks that charted a more reasonable course"”and yes,
there are quite a few"”get no reward.

In a real free market, of
course, the banks that made bad decision would have to take the hit.
They'd auction them off at whatever price the market would bear, and
they'd have to suck up the losses on the difference between face value
and sale value, even if that meant driving them out of business.
Meanwhile, the more rational banks would be able to pick up the MBS
paper at a discount, and make some cash off of the distress sale from
the incompetent banks.

And, of course, the incompetent banks would probably be driven out of business.  Which, after all, is how it is supposed
to work. But, the government seems entirely uninterested in letting the
market work this out, which brings me to my next point....

I keep hearing over and over again"”and I've even said it"”that no one
knows what these mortgage backed securities are worth. But let's be
clear here: the reason we don't isn't because the price is mystifyingly
unknowable. It's because they haven't even tried to sell them off yet.
We already know it's possible to find out what the price is, simply by
offering them up for sale. Indeed, we did it in July when Merril Lynch sold off its entire MBS portfolio.

The reason we're not doing it now is because the holders of MBS paper expect a government bailout, and they expect to
receive through it a price significantly higher than they would in the
secondary market. If it were otherwise, they'd already be auctioning
them off.

After all, we're talking about securities based on the
value of mortgage repayments. We already know that the default rate on
most of the MBS paper will be around 5%, with a maximum of probably no
more than 10%. Everybody already knows this. Now, just to turn the
screw, a buyer might want a discount of over"”perhaps well over"”50%.
after all, it's a fire sale, and everybody wants a bargain, right.

But there is a market-clearing price for these securities, and everybody on the street knows it.
What they also know is that they have an excellent chance of receiving
a much better price from the Feds, and that waiting for the bailout
gives them a better chance to stay in business, even if the Treasury is
a large shareholder in the company. And, after all, if the Treasury is
a shareholder, how likely is it that the government will let them fail, losing all that equity?

The
bailout doesn't solve the problem. It keeps the bad banks in business,
lets them escape the worst consequences of their malfeasance, and
prevents the better run banks from taking up the reins that would be
otherwise dropped when the bad banks went out of business.

I had the same reaction as Dale Franks when I drove through Houston a while back and found that Astroworld was gone.  When I grew up in Houston, there was absolutely nothing that would get me as excited as the prospect of a trip there.  Another piece of trivia, for years the nearby Astroworld hotel had a penthouse suite that was listed by the Guinness Book of World Records as the most expensive hotel room in the world.  Hard to believe when you see what a pit it is now.

Dale Franks at QandO, quoting some from John Derbyshire, raise a key question that certainly has always concerned me as a pro-immigration libertarian:

As to why I think libertarians are nuts to favor mass uncontrolled
immigration from the third world: I think they are nuts because their
enthusiasm on this matter is suicidal to their cause. Their ideological
passion is blinding them to a rather obvious fact: that libertarianism
is a peculiarly American doctrine, with very little appeal to the
huddled masses of the third world. If libertarianism implies mass
third-world immigration, then it is self-destroying. Libertarianism is
simply not attractive either to illiterate peasants from mercantilist
Latin American states, or to East Asians with traditions of
imperial-bureaucratic paternalism, or to the products of Middle Eastern
Muslim theocracies.

In other words, by open immigration, are we letting in waves of people from statist traditions that will drive the US further away from an open, liberal society.  This worries me from time to time, enough that I don't have a fully crafted response that I consider definitive.  However, I want to offer some initial thoughts.  Before I do, here are two background points:

1. I think the freedom to move to another country, take a job there, buy property, live there, etc. is a basic individual right that should not be limited to the accident of not having been born originally in that country.  Freedom of association is a right of all human beings, not merely a result of citizenship.  I go into these arguments in much more detail here.
2. Note that immigrant status and citizen status are two different things.  Immigrant means that you are present in a country but not a citizen.  As an immigrant, I believe you should be able to own property, accept employment, and most of the other things you and I do every day.  However, immigrants don't vote.  Only the narrow class of people called citizens may vote, and there is some process where over time immigrants can meet some hurdles and become citizens.  The key problem for a libertarian, which I think Dale Franks would agree with, is "which status must you be to get government handouts?"  My view is that only citizens should get most handouts, like welfare and food stamps and such, though immigrants should have access to things like infrastructure (highways) and emergency services.  It is when one argues that any immigrant should have access to all this stuff that the whole immigration picture becomes a total mess.

With those couple of things in mind, here are my thoughts on the issue Franks raises:

• The US is not made up primarily of Scots and Dutch, two areas that can legitimately claim to have strong liberal traditions.  Most of our past immigration has come from Ireland and Germany and Scandinavia and Eastern Europe.  None of these areas particularly have a liberal tradition, and many were nationalistic-militaristic-paternalistic governments.  Also, we may forget it today, but when countries like Ireland where a large source of our immigration in the 19th century, they were a third world country at the time.  Just look at Vietnam -- it has one of the worst traditions I can think of, but as a class Vietnamese immigrants tend to be capitalist tigers.
• Depending on how one counts it, US citizens are already 65%-85% statist anyway, so I am not sure immigration is going to change the mix negatively.  In other words, the statist train has already sailed.  In fact, statism has flourished in this country from 1930-1980 during exactly the same period of time we were most restrictionist in immigration.  Sure, correlation is not causation, but certainly you can't prove to me that restrictionist immigration slows statism in any way. 
• Much of the statist economic policies in this country were launched by Wilson and Roosevelt, from two of the more blue-blooded families in America.  Now this may not mean much.  What I don't know, because I don't know enough history of the period, is this:  Did support for New Deal (and more extreme socialist NRA-type policies) come disproportionately from new immigrants?  My sense is exactly the opposite, that in fact some New Deal policies like the minimum wage were aimed by nativists at circumscribing the opportunities of immigrants.
• In effect, the author is advocating that we limit the freedom of movement and property ownership of people not born in the US because we are afraid that these new entrants into our country will bring political pressure to undermine individual rights.  I think that is a legitimate fear, but if I accept that argument, I don't know why I would not also have to accept the argument that we should take away the freedom of speech from people who argue for limitations of individual rights.  In both cases, we are giving political access to people who want to undermine our basic liberties.  My conclusion:  I can't go there in either case.  I refuse to put a political test on the exercise of individual rights, even for people with really bad politics.
• A well-crafted welfare regime would make the problem a lot better.  I am not so unrealistic to expect the welfare state to go away tomorrow, but I do think that the political will can be mustered to deny substantial benefits to new non-citizen immigrants.  Which way we go on this will decide whether we can open up immigration.  If welfare handouts to immigrants are limited, then new immigrants will tend to self-select towards those looking to work hard and take risks to make it on their own.  This will mitigate the author's concern, and is in fact how we have maintained our culture of liberality through a history that was dominated mostly by open rather than closed immigration.  If welfare handouts are generous to new immigrants, then immigrants will self-select to people looking to live off the state.  If we insist on the latter, then I guess I will agree that immigration needs to be limited (though there is an even better reason for doing so in that we will, in that case, surely bankrupt ourselves.)