More Hypocrisy from Advocates of Smaller Government

In the May 25, 2010 Florida Times-Union blog entry, "Small-government Rubio said it may be time for federal takeover of cleanup ops", David Hunt highlights the hypocrisy inherent in many advocates of free markets, smaller government and lower taxes. When insufficiently regulated markets create socially undesirable outcomes, such as the oil spill in the Gulf of Mexico, those harmed by the market failure scream that the government should do more. You cannot have it both ways. It is easy to support free markets and smaller government when one fails to consider the negative consequences. Rational economists argue those consequences always should be considered.

According to David Hunt's blog:

During a campaign stop in Jacksonville, former Florida House Speaker Marco Rubio said he's been disturbed by the lack of technology to harness the oil leak in the Gulf of Mexico.

Although Rubio presents himself as a small-government candidate for U.S. Senate, he said it may be time for a government takeover of operations.

Here's what he had to say:

There's an increasing loss of patience with British Petroleum and, quite frankly, with the federal government. I think one of the things we've learned, sadly, is that cleanup technologies have not advanced at all over the last 30 years. They're basically making it up as they go along. The fact that they were drilling at such a deep level, and there wasn't the technology to deal with a spill if it happened, is in and of itself frightening. Those questions have to be answered.

Priority number one has got to be focus on preventing this from getting worse. If that means the federal government has to step in and take over than that's what needs to happen.

The second thing, we need to figure out why this happened so that it never happens again. You know how when there's an airline accident, how the FAA treats that very seriously? They investigate it down to the thread as to what caused that accident so that airline travel in America is exceedingly safe. The same needs to happen here.

Lax Oversight Caused Crisis, Bernanke Says

In the January 4, 2010 New York Times article "Lax Oversight Caused Crisis, Bernanke Says," Catherine Rampell reports that the Federal Reserve chairman blames regulatory failure for the economic decline of recent years:

ATLANTA — Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.

Mr. Bernanke’s remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke said in remarks to the American Economic Association.

Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued in his speech that the interest rates set by the central bank from 2002 to 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period.

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” Mr. Bernanke said.

Some lawmakers and economists have argued that the Fed kept interest rates too low in the aftermath of the 2001 recession, making loans cheap and feeding reckless lending by banks.

“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated,” Richard Shelby of Alabama, the Senate Banking Committee’s top-ranking Republican, said in December during a committee vote on Mr. Bernanke’s reconfirmation.

The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition.

Even if confirmed, however, Mr. Bernanke is likely to face further political challenges over financial regulatory reform and the governance of the Fed.

The House passed a provision to audit the Fed as part of a larger financial reform package last month. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades.

The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.

In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed’s vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said “the appropriate use and sequencing of these tools is under active discussion” by regulators.

But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”

Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against “systemic risk.”

The implication is that the Fed believes that regulation and supervision, rather than tighter monetary policies, should be used to address asset bubbles in the future.

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

Fed Chairman Bernanke argues for increased regulation of financial markets

In the January 3, 2010 article "Fed: Regulation 1st defense against speculation," Associated Press economics writer Jeannine Aversa reports that Federal Reserve Chairman Ben Bernanke argues increased regulation of financial markets is necessary to avoid future economic crises:

WASHINGTON – Stronger regulation is the best way to prevent financial speculation from getting out of hand and throwing the economy in a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.

But he didn't rule out higher interest rates to stop new speculative investment bubbles from forming.

The Fed chief's remarks were his most extensive on the subject since the housing market's tumble led to the gravest financial crisis since World War II — and perhaps the worst in modern history, in his view.

Critics blame the Fed for feeding that speculative boom in housing by holding interest rates too low for too long after the 2001 recession.

But Bernanke, in a speech to the American Economic Association's annual meeting in Atlanta, defended the central bank's actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said.

Bernanke said the direct links were weak between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time. The stance of interest rates during that period "does not appear to have been inappropriate," he said.

Still, the enormous economic damage from the housing bust — the longest and deepest recession since the 1930s and double-digit unemployment — shows how important it is to guard against a repeat, Bernanke said.

"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," he said.

"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool," he added.

Speculative excesses are not easy to pinpoint in their early stages, he said, and using higher interest rates to combat them can hurt the economy.

For instance, rate increases in 2003 and 2004 to constrain the housing bubble could have "seriously weakened" the economy just when a recovery from the 2001 recession was starting, he said.

To help the country emerge from that recession, the Fed under then-Chairman Alan Greenspan cut its key bank lending rate from 6.5 percent in late 2000 to 1 percent in June 2003. It held rates at what was then a record low for a year. It's this action that critics blame for feeding the housing speculation.

Bernanke, however, said the expansion of complex mortgage products and the belief that housing prices would keep rising were the keys to inflating the housing bubble. As a result, lenders made home loans to people to finance houses they couldn't afford.

The Fed in 2005 did crack down on dubious mortgage practices and the type of mortgages blamed for the crisis. Bernanke acknowledged that these efforts "came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble."

Still, Bernanke said the lesson learned from the crisis isn't that regulation is ineffective but that regulation "must be better and smarter."

However, the Fed's regulatory lapses and its failure to spot problems leading up to the crisis have spurred efforts in Congress to rein in the Fed's powers and subject it to more oversight. Bernanke, who has been tapped by President Barack Obama to a second term as Fed chief, faces a contentious confirmation in the Senate.

During a brief question-and-answer session after his speech, Bernanke didn't talk about current economic conditions or the future course of interest rates.

When the Fed meets later this month, it is expected to keep its key bank lending rate at a record low, near zero. The big question is whether the Fed will provide clues at that time about when it will need to start raising rates to prevent inflation from taking off.

Some analysts worry that the Fed, which has held rates at record lows since December 2008, could be fueling a new speculative period and potentially a future economic crisis.

Looking back, Bernanke suggested the Fed might have underestimated the full force of the recession, which struck in December 2007. "It turns out the recession was worse than we thought at the time," he said.

After four straight losing quarters, the economy finally grew from July through September last year. Much of that growth, though, came from government-supported spending on homes and cars. There's concern about how vigorous the recovery will be once government supports are removed later this year.

Court orders Microsoft to stop selling Word

In his December 22, 2009 blog article "Microsoft Word sale prohibited as of Jan. 11, fix promised," Christopher Null reports that a U.S. federal court has found Microsoft in violation of patent law. This is another example of how some corporations abuse their market power to the detriment of consumers. Most economists agree government regulation is necessary to achieve more desirable social outcomes when there are market failures, such as a lack of sufficient competition.

Office workers of America, enjoy your Christmas break. Because come the new year, things could get a little hairy around the office. Microsoft Word is now scheduled to be prohibited from sale beginning January 11, 2010. That's less than three weeks away. The good news: Microsoft has promised a fix, one which will be rolled out before the deadline arrives.

If you don't understand, you might have simply missed this story, or dismissed it as something that Microsoft would ultimately use its considerable clout to have pushed under a legal rug.

But it's no joke. In August of this year, a court sided with a small Canadian company called i4i that holds a 1998 patent on the way the XML language is implemented, finding that Microsoft was in violation of that patent. The result: Microsoft was told to license the code in question from i4i or reprogram it, or else Microsoft Word would have to be removed from sale in the market. The original ruling gave Microsoft until October to get its legal affairs in order, but appeals pushed that out a bit.

Now a federal court has upheld that original ruling -- plus a fat, $290 million judgment against the company -- imposing the new January 11 D-Day on the matter. Microsoft Word and Microsoft Office will both be barred from sale as of that date -- though naturally you'll still be able to use copies of Word and Office that you already own, and Microsoft will be allowed to keep supporting those copies.

Unless Microsoft ships the promised technical workaround very quickly, things are going to get extremely dicey in the computer world, and fast. Not only will retail outlets selling shrinkwrapped copies of the software be affected, computer manufacturers (who complained loudly about this injunction when it was announced) who bundle Word and Office on the computers they sell will also be seriously impacted by the ruling.

There's always a chance things will change again as the January 11 deadline approaches, but if your company requires Word or Office to keep operations running, it might not be a bad idea to stock up on a few extra copies now.

Gov't imposes 3-hour limit on how long airlines can keeping passengers waiting on tarmacs

In the December 21, 2009 article "Gov't imposes 3-hour limit on tarmac strandings," Associated Press writer Joan Lowy reports a new government regulation will limit the length of time passengers can be stranded on a an airport tarmac. Is this an unnecessary intrusion on the free market? Or is it an example of government fulfilling its Constitutional mandate to "promote the general welfare… to ourselves and our posterity” and to secure the rights to life, liberty, and the pursuit of happiness as specified in the Declaration of Independence.

WASHINGTON (AP) -- Stinky toilets, crying babies, airless cabins -- the Obama administration said Monday passengers don't have to take it any more. It ordered airlines to let people get off planes delayed on the ground after three hours.

Transportation Secretary Ray LaHood said the three-hour limit and other new regulations are meant to send an unequivocal message to airlines not to hold passengers hostage on stuck planes. Coming on the eve of the busy holiday travel season, the announcement was hailed by consumer advocates as "a Christmas miracle."

The airline industry said it will comply with the regulations -- which go into effect in 120 days -- but predicted the result will be more canceled flights, more inconvenience for passengers.

"The requirement of having planes return to the gates within a three-hour window or face significant fines is inconsistent with our goal of completing as many flights as possible. Lengthy tarmac delays benefit no one," said Air Transport Association President and CEO James May.

LaHood, however, dismissed that concern.

"I don't know what can be more disruptive to people than to be stuck sitting on a plane five, six, seven hours with no explanation," LaHood said at a briefing.

This year through Oct. 31, there were 864 flights with taxi out times of three hours or more, according to the Bureau of Transportation Statistics. Transportation officials, using 2007 and 2008 data, said there are an average of 1,500 domestic flights a year carrying about 114,000 passengers that are delayed more than three hours.

Last month, the department fined Continental Airlines, ExpressJet Airlines and Mesaba Airlines $175,000 for their roles in a nearly six-hour tarmac delay in Rochester, Minn. In August, Continental Express Flight 2816 en route to Minneapolis was diverted to Rochester due to thunderstorms. Forty-seven passengers were kept overnight in a cramped plane because Mesaba employees refused to open a gate so that they could enter the closed airport terminal.

It was the first time the department had fined an airline for actions involving a ground delay. Transportation officials made clear the case was a warning to the industry.

Under the new regulations, the only exceptions to the requirement that planes must return to the gate after three hours are for safety or security or if air traffic control advises the pilot in command that returning to the terminal would disrupt airport operations.

Homeland Security Secretary Janet Napolitano said she thought the 3-hour rule would not cause any problems for security. "I can't imagine it would. I call it the rule of common sense," she said.

Airlines could be fined $27,500 per passenger for each violation of the three-hour limit.

The regulations apply to domestic flights. U.S. carriers operating international flights departing from or arriving in the United States must specify, in advance, their own time limits for deplaning passengers. Foreign carriers do not fly between two U.S. cities and are not covered by the rules.

Tarmac strandings have mostly involved domestic flights, but the department is studying extending the three-hour limit to international flights, LaHood said.

"This is the beginning," LaHood said. "We think we owe it to passengers to really look out for them."

Airlines will be required to provide food and water for passengers within two hours of a plane being delayed on a tarmac, and to maintain operable lavatories. They must also provide passengers with medical attention when necessary.

Airlines will also be prohibited from scheduling chronically delayed flights. They must designate an employee to monitor the effects of flight delays and cancellations and respond to consumer complaints. And they would have to post flight delay information on their Web sites. Carriers who fail to comply could face government enforcement action for using unfair or deceptive trade practices.

Provisions sponsored by Sens. Barbara Boxer, D-Calif., and Olympia Snowe, R-Maine, in pending legislation would also impose a three-hour limit, but the new regulations go even farther, giving passenger rights advocates many of the reforms they've sought for years.

"No more will they be able to strand passengers for over three hours in hot, sweaty, metal tubes," said Kate Hanni, founder of Flyersrights.org. Hanni, who called the rules a Christmas miracle, was stuck on an American Airlines jet in Austin, Texas, for over nine hours in December 2006 when storms forced the closure of Dallas-Fort Worth International Airport, stranding more than 100 planes.

Past efforts to address the problem have fizzled in the face of industry opposition and promises to reform.

Congress and the Clinton administration tried to act after a January 1999 blizzard kept Northwest Airlines planes on the ground in Detroit, trapping passengers for seven hours. Some new regulations were put in place but most proposals died, including one that airlines pay passengers who are kept waiting on a runway for more than two hours.

The Bush administration and Congress returned to the issue three years ago after several high-profile strandings, including a snow and ice storm that led JetBlue Airways to leave planes full of passengers sitting on the tarmac at New York's Kennedy International Airport for nearly 11 hours.

After those incidents, DOT Inspector General Calvin Scovel recommended that airlines be required to set a limit on the time passengers have to wait out travel delays grounded inside an airplane.

A year ago, the Bush administration proposed airlines be required to have contingency plans for stranded passengers, but the proposal didn't include a specific time limit on how long passengers can be kept waiting. It was denounced as toothless by consumer advocates.

AP Airlines Writer Harry R. Weber contributed to this report from Atlanta. Associated Press Writer Suzanne Gamboa in Washington contributed to this report.

Department of Transportation http://www.dot.gov

Air Transport Association http://www.airlines.org

Obama blasts banks for opposition to improved regulation of financial markets

In the December 11, 2009 Salon article "Obama blasts banks," Associated Press writer Darlene Superville says Obama "singles out financial institutions for opposition to tighter regulations."

President Barack Obama singled out financial institutions for causing much of the economic tailspin and criticized their opposition to tighter federal oversight of their industry.

While applauding House passage Friday of overhaul legislation and urging quick Senate action, Obama expressed frustration with banks that were helped by a taxpayer bailout and now are "fighting tooth and nail with their lobbyists" against new government controls.

In his weekly radio and Internet address Saturday, Obama said the economy is only now beginning to recover from the "irresponsibility" of Wall Street institutions that "gambled on risky loans and complex financial products" in pursuit of short-term profits and big bonuses with little regard for long-term consequences.

"It was, as some have put it, risk management without the management," he said.

The president also told CBS' "60 Minutes" that "the people on Wall Street still don't get it. ... They're still puzzled why it is that people are mad at the banks. Well, let's see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year ... in decades and you guys caused the problem," Obama said in an excerpt released in advance of Sunday night's broadcast of his interview.

The House bill, which passed 223-202, would grant the government new powers to split up companies that threaten the economy, create an agency to oversee consumer banking transactions and shine a light into shadow financial markets that have escaped federal oversight.

Obama is seeking swift approval in the Senate "because we should never again find ourselves in the position in which our only choices are bailing out banks or letting our economy collapse."

No House Republicans voted for the bill, and 27 Democrats voted against it. Opponents argue that the broad legislation overreaches and would institutionalize bailouts for the financial industry.

The Senate Banking, Housing and Urban Affairs Committee is working on its own version of the package.

In his address, Obama contended that the worst economic downturn since the Depression wouldn't have happened if the rules governing Wall Street been clearer and enforcement tougher.

Obama singled out Republicans and industry lobbyists for trying to block the changes.

Last week, top House Republicans urged more than 100 financial industry lobbyists to work harder to defeat the bill. Lobbyists have spent more than $300 million this year trying to scuttle the bill.

Opponents say that the changes would limit consumer choice and that added federal oversight would stunt financial market innovation.

Obama suggested that was one risk worth taking.

"Americans don't choose to be victimized by mysterious fees, changing terms and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not," he said. "We can't afford to let the same phony arguments and bad habits of Washington kill financial reform and leave American consumers and our economy vulnerable to another meltdown."

Obama has scheduled a meeting Monday at the White House with financial services industry leaders to seek support for his effort to tighten federal oversight of the industry and to limit pay for top executives at institutions that accepted billions in bailout money from the government.

------

Information on the House bill, H.R.4173, can be found at http://thomas.loc.gov/

Obama address: http://www.whitehouse.gov

LACK of Government Intervention in the Marketplace Leads to Dozens of Deaths

In the December 6, 2009 article "4 detained in Russian club fire; death toll at 112," Associated Press writer Mansur Mirovalev reports that lax building codes and insufficient enforcement of fire safety rules led to dozens of deaths in a single incident at a Russian nightclub. Markets can be great at allocating products and resources, but insufficient regulation of them leads to numerous undesirable social outcomes.

PERM, Russia – Four people were ordered to remain in jail on Sunday pending an investigation into a nightclub fire that killed at least 112 people in Russia's worst blaze in decades, investigators said.

About 130 remained hospitalized, many in critical condition, with injuries from the early Saturday blaze, which witnesses said was sparked by onstage fireworks that shot into the decorative twig ceiling of the Lame Horse club in the Ural Mountains industrial city of Perm. Shocked and grieving relatives on Sunday began to bury the victims of the disaster.

The federal Investigative Committee said the suspects — the club's owner, the executive director, the artistic director and a businessman hired to install pyrotechnics on the night of the blaze — were ordered taken into custody Sunday by Leninsky District Court.

The commitee's Web site said they were suspected of negligence causing multiple deaths and violating fire safety rules causing multiple deaths.

Russian news agencies named the owner as Anatoly Zak. The pyrotechnics expert was named as Sergei Dergunov by his lawyer, Yekaterina Golysheva.

Mourning residents were indignant over the alleged negligence, which President Dmitry Medvedev also criticized in a nationally televised videoconference on Saturday.

Emergency Situations Minister Sergei Shoigu said that the club managers had been fined twice in the past for breaking fire safety regulations, which he did not specify. Russian clubs and restaurants often cover ceilings with plastic insulation and a layer of willow twigs to create a rustic look, one of many uses of combustible materials in buildings by businessmen who bribe officials to look the other way.

Nadezhda Zhizhina placed flowers on the icy ground outside the Perm City Morgue in memory of her 21-year-old son, Sergei.

She said she wasn't expecting the compensation officials have promised to other victims' relatives because Sergei earned pocket money at the club as an unofficial administrator.

"I can't even imagine what to do," Zhizhina said, weeping. "He was a golden boy."

She said Sergei's wife, Yulia, was eight months pregnant.

The disaster has shaken this town of over 1 million, mobilizing even those who didn't lose relatives — such as Marina Dryonina.

"This is nothing but criminal negligence," she said. "A terrible tragedy for our town."

Many victims were trapped in a panicked crush for the exit as they attempted to escape the flames and thick black smoke.

Emergency Ministry spokeswoman Darya Kochneva said a man flown to a Moscow hospital had died of severe burns, bringing the toll to at least 112.

Enforcement of fire safety standards is infamously poor in Russia and there have been several catastrophic blazes at drug-treatment facilities, nursing homes, apartment buildings and nightclubs in recent years. The nation records up to 18,000 fire deaths a year, several times the per-capita rate in the United States and other Western countries.

Medvedev demanded that lawmakers draft changes to toughen the criminal punishment for failing to comply with fire safety standards.

Monday has been designated a national day of mourning, with entertainment events and television programs canceled.

Chinese drywall provides another example of the dangers of unregulated markets

The toxic Chinese drywall is an example of how unregulated markets provide many socially undesirable outcomes. Can you imagine what might be in products if there were no safety and labeling laws?

This is similar to the 2007 problem with lead in toys imported from China.

In the November 7, 2009 article "Expert: Problem of defective Chinese drywall is no surprise," Allison Ross says "During a summit on defective Chinese drywall, a toxicologist said that kind of problem was expected."

TAMPA -- It was just a matter of time before a problematic building material would make it into American homes.

That's what state toxicologist Dr. David Krause told attendees during a summit on defective Chinese drywall Friday in Tampa.

"That this took so long to occur is somewhat surprising,'' Krause said.

He said that Americans have for decades used building materials that were altered to be more durable and put them into homes that were built to be tighter and less breathable.

Combine that with an absence of indoor air-quality standards, and "this was bound to happen with some material at some point,'' Krause said.

But now the law of unintended consequences has hit home hard for thousands of families in Florida and throughout the United States, who are struggling to figure out what to do with defective Chinese drywall that gives off a sulfuric gas.

HUNDREDS COMPLAIN

Almost 1,900 homeowners in 30 states, the District of Columbia and Puerto Rico have complained of having a problematic drywall that's tied to corrosion of metal in their homes and blamed for giving them headaches, nosebleeds and respiratory irritation.

Part of the problem, Krause told the gathering of nearly 400, is a "lack and absence of indoor air-quality standards.''

He later told reporters that "we sometimes just get away from 'meat and potatoes' public health and stewardship,'' saying that the last major effort he was involved in to examine product emissions was in the mid-1990s.

"It was a valiant effort, but there was no interest,'' he said.

However, stricter regulation of chemicals in products would be a major undertaking, he added.

"You're talking about interstate commerce, and in this case, now international commerce,'' he said.

His comments wrapped up a two-day Technical Symposium on Corrosive Imported Drywall that brought together experts in both the private and public sector to discuss the latest details of testing and research being done on the corrosive drywall problem.

CHINA VISIT

U.S. Sen. Bill Nelson, D-Fla., was the keynote speaker Friday. He said he is pushing President Barack Obama to address the defective drywall issue when he goes to China next week.

"At the end of the day, the financial wherewithal to make these homeowners whole is going to be the party responsible. I think that's the Chinese government,'' Nelson said. "We've just got to keep agitating on this.''

Dallas Cowboys Practice Facility Collapse - Should There Be More or Less Regulation of Markets?

According to the Dallas Cowboys Stadium Roof Collapse Report posted by EngineersEdge.com, "A fabric-covered, steel frame practice facility owned by the National Football League's Dallas Cowboys collapsed under wind loads significantly less than those required under applicable design standards, according to a report released on October 6 for public comment by the Commerce Department's National Institute of Standards and Technology (NIST). Located in Irving, Texas, the facility collapsed on May 2, 2009, during a severe thunderstorm Twelve people were injured, one seriously." Would accidents such as this be more or less common with reduced government regulation of markets?

Where Politics Don’t Belong

In the September 12, 2009 New York Times article "Where Politics Don’t Belong," Tyler Cowen argues that the regulation of markets may do more harm than good:

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.

Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill. Much of the competition was cleaned out by bank failures and consolidation, so giants like Goldman Sachs and JPMorgan had an easier time getting back to profits. The Federal Reserve has been lending to banks at near-zero interest rates while paying higher interest on the reserves the banks hold at the Fed. “Too big to fail” policies mean that the large banks can raise money more cheaply because everyone knows they are safe counterparties.

President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.

One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics.

If these initial deals are falling apart, it is only because reform met with unexpected resistance. Even after Mr. Obama’s speech Wednesday night, we’re still at the point where the medical sector is enshrined as “too big to take a pay cut,” which is not so far removed from the banking motto of “too big to fail.” In finance and health care, a common political dynamic has created similar trends, namely, out-of-control costs, weak accountability, and the use of immediate revenue patches to postpone dealing with fundamental problems.

Even worse, these political deals threaten open discourse. The dealmaking may be inhibiting some people in health care from speaking out in opposition to the administration’s proposals. Robert Reich, who served as secretary of labor in the Clinton administration, deserves credit for complaining about this arrangement, but not enough people are asking where such dealmaking might stop.

The banking sector has been facing similar constraints; if bankers criticize the Treasury or the Fed, they risk losing their gilded cages and could get a bad deal when the next bailout comes. When major economic sectors can be influenced in this way, are we really very far from the nightmare depicted by Ayn Rand in “Atlas Shrugged”?

So if we’re looking for a major lesson from our banking mess, it is undoubtedly this: We have made a grave mistake in politicizing the economy so deeply, and should back away now. In health care, the Obama administration should drop its medical sector deals and try to sell a reform plan — in whatever form Mr. Obama chooses — on its own merits. That’s not only good for health care, but also good for the American polity. And in the longer run, that will be good for banking, too. If nothing else, without controlling health care costs, the American government will not stay solvent — and that will be the biggest financial crisis of them all.

In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.

Tyler Cowen is a professor of economics at George Mason University.

The Sad Story Behind Labor Day

Claudine Zap's September 4, 2009 article "The Sad Story Behind Labor Day" about the origin of Labor Day is a good reminder that unregulated markets cause some socially undesirable outcomes:

For most of us, Labor Day means backyard barbecues, weekend sales, and a last carefree day before school starts. But the laid-back holiday has some seriously sad history, including chaos, riots, and even death. Let us explain.

A tragic tale
Back in the days of the Industrial Revolution, workers were expected to put in 12-hour days, seven days a week (yes, including kids). Already sounds awful, right? It gets worse. In Pullman, Illinois, a company town that employed and housed workers to build posh railway cars, times had gotten tough. In response, George Pullman cut jobs and wages. It was 1893. Thousands of workers walked off their jobs in protest, demanding higher salaries and lower rents. Other unions joined, refusing to work the Pullman cars, turning the small-town fracas into a national fury.

With mail cars backing up, and riots worrying train execs, President Grover Cleveland stepped in. He declared the strike illegal and sent 12,000 troops to break the strike. Cue brutal protests and bloodshed. The strike was broken, but so was the spirit of the workers. To reach out to the labor movement, Congress rushed the national holiday into law. The bad will resulted in Cleveland losing re-election. But the day off for hot dogs endures.

When is it?
Labor Day falls on the first Monday of September. This year, that would be Monday, September 7. According to the Department of Labor, Congress passed an act in 1894 making the first Monday in September of each year a legal holiday.

So, working stiffs everywhere, say it now, with feeling: Happy Labor Day.

How workers get stiffed out of pay

In the September 3, 2009 U.S. News & World Report article
"How the Lowest-Paid Workers Get Ripped Off," Liz Wolgemuth reports that employers are cheating some workers out of wages they legally earned. Regulation is sometimes needed to improve market outcomes when the marketplace fails to provide socially desirable ones.

In large cities like Chicago, Los Angeles, and New York, there's a good chance that the employee mopping up drips at the car wash, the delivery driver at the nearby gourmet grocery store, and the temp worker hired to do janitorial work are not being paid much. It turns out, there's also a good chance they are not even being paid what they've earned.

According to a new study, the average low-wage urban worker earning $339 a week is cheated out of $51 of that amount by an employer committing one or more workplace violations--such as paying less than minimum wage, refusing overtime pay, requiring off-the-clock work, or preventing workers compensation claims. Whether damning proof of the government's inability to adequately enforce labor laws or evidence of a need for stronger standards, the report offers insight into the working lives of an often under-the-radar demographic.

The study, funded by the Joyce, Haynes, Ford, and Russell Sage foundations, is based on interviews with 4,387 low-income workers--39 percent unauthorized immigrants, 31 percent authorized immigrants, and 30 percent U.S.-born citizens--in the first half of 2008. The median hourly wage for workers surveyed was $8.02, and the workers were in a wide variety of industries, including manufacturing, construction, food service, and child care. Employing a method that uses social networks to recruit participants, the study focused on workers who tend to be the most difficult to survey. The questions asked were aimed at gaining accurate information about employer policies from workers who might not understand the law, and surveys were translated into languages that included Hindi, Urdu, Bengali, Polish, and Haitian Creole.

More than two thirds of the workers surveyed had experienced at least one pay-related violation within the previous workweek, according to the study. Nearly a quarter worked off the clock and were rarely paid for it. And 76 percent of workers who had worked overtime were not paid the overtime rate, as required by law. More than two thirds of workers entitled to lunch breaks had either not received them, had them shortened, had been interrupted, or continued to work through their break.

More violations were found in certain industries than in others. Minimum wage violations were most common in apparel and textile manufacturing, personal and repair services, and in private households. Violations were lower in residential construction, social assistance and education, and home healthcare. Employees of businesses with more than 100 employees experienced violations less often than those who worked at smaller businesses.

Study coauthor Ruth Milkman, a sociologist at University of California-Los Angeles, says the study results provide convincing evidence that the enforcement of labor laws has been very limited. "In that segment of the labor market, it also appears that employers have realized that enforcement is extremely unlikely and they can do this stuff without much fear of consequences," Milkman says.

It's not clear how violations affecting low-wage workers compare with those who are paid more. Milkman suspects that overtime violations extend to groups of higher-earning workers. The researchers found that women, immigrants, and people of color were disproportionately more likely to experience a violation. Three quarters of the workers surveyed had a high school degree or less. Foreign-born workers were nearly twice as likely to experience minimum wage violations, and foreign-born Latino workers had the highest minimum wage violation rates of any ethnic or racial groups.

The study's authors argue that "the best inoculation against workplace violations is ensuring that workers know their rights, have full status under the law to assert them, have access to sufficient legal resources, and do not fear retaliation." This is, they point out, a near impossibility for unauthorized immigrant workers. "Any policy initiative to reduce workplace violations must prioritize equal protection and equal status in national immigration reform, and ensure status-blind enforcement of employment and labor laws," they write.

In the existing labor market, employers who hire illegal immigrants benefit from an unnatural balance of power, since undocumented workers have little leverage with employers who violate the regulations of the formal labor market, says Will Wilkinson of the Cato Institute. He believes there needs to be much greater integration in the labor market in North America and policies that give undocumented immigrants the status to live and work here.

According to the New York Times, Labor Secretary Hilda Solis said her department was hiring 250 additional wage-and-hour inspectors. But greater enforcement of the existing workplace standards could complicate the route to employment for many illegal immigrants because they often rely on jobs that are below minimum wage as entry points in the U.S. job market and use those jobs to gain the skills to reach higher pay levels, Wilkinson says.

Milkman tells of interviewing a hotel worker whose supervisor would enter hotel rooms before her and take the tips that had been left for her. The worker also was required to work more hours than she was paid for. When she complained, she was essentially fired--told her services were no longer needed.

The prisoners' dilemma

In the classic example of the prisoners' dilemma, two suspects have been arrested. The police do not have enough evidence to convict the perpetrators of a serious crime (e.g., a felony), but are assured of conviction on a lesser charge (e.g., a misdemeanor).
The prosecutor wants to induce a confession from at least one of the suspects in order to obtain a conviction of the larger crime.
So the suspects are separated and interrogated. Each is offered the following deal:

*You must make a choice without knowing what your partner in crime has chosen.
*If you stay silent and your partner stays silent, you both will be convicted of a lesser charge and will serve 1 year in jail.
*If you stay silent, but your partner confesses to the serious crime, then you will go to jail for 20 years. Your partner in crime will go free and serve no time in jail. (A plea agreement typically results in a reduced penalty.)
*If you confess, but your partner remains silent, then your partner will go to jail for 20 years. You will go free and serve no time in jail.
*If you confess and your partner confesses, then you both will be convicted of the more serious crime. But because you both cooperate with the prosecutor, your prison sentences will be reduced. You both will serve 5 years in jail.

If you and your partner in crime are acquaintances with no loyalty to each other, what decision do you make. Do you confess or stay silent?

Remember you do not know what your partner will choose. So let us consider both possibilities. If your partner confesses, then your options are (a) to confess and serve 5 years, or (b) to stay silent and serve 20 years. Confessing seems clearly preferable. (You would prefer to spend 5 years in jail rather than 20 years.) If your partner stays silent, then your options are (a) to confess and go free, or (b) to stay silent and serve 1 year in jail. Again, confessing seems clearly preferable. (You would prefer to spend no time in jail than to be in prison for 1 year.) So regardless of your partner's decision, it seems preferable for you to confess to the more serious crime.

Your partner has the same incentive structure. So regardless of your decision, it seems preferable for your partner to confess to the more serious crime, also. Thus, the likely outcome is that you both confess and go to jail for 5 years. Yet, there was option available in which you and your partner would have been better off. If you both remained silent, each of you would serve significantly less jail time.

So this is the prisoners' dilemma: Choosing what seems to be in your self interest may not be. Selfishness may not lead to optimal solutions, for society as a whole or you as an individual. You and your partner would be better off if you make choices than seem to go against your self interest.

So how can we arrive at the optimal outcome?

Suppose the two suspects have genuine love for each other, rather than being just acquaintances. (For example, suppose the two criminals are Bonnie Parker & Clyde Barrow.) Suppose you would be willing to serve a longer prison sentence if it allowed your partner to serve less time. If both partners feel this way, then you both might choose to remain silent. The outcome is then the optimal one.

Humanitarians and religious leaders urge people to show more love and compassion to one another. (Love your neighbor ... and everyone is your neighbor.) So a cultural revolution in which love and compassion become prominent might lead to more optimal social outcomes. In the absence of that, however, there may be yet another rationale for government intervention in the marketplace. (Indeed, if people demonstrated more love and compassion to each other, there would be less need for government.)

For example, the primary justification for large taxes on alcohol and tobacco is to increase the price of them to discourage their consumption. The government intervenes in the markets for these products because society deems it beneficial. The free market frequently provides outcomes that are socially undesirable. Unregulated markets create too much pollution, poverty, and market power. And free markets create too little national defense, public health, education, roads, and other public goods. Thus, despite the proclamations of many free market advocates, most people agree it is appropriate and indeed necessary for the government sometimes to intervene in the marketplace.

The Tragedy of the Commons

Play the Tragedy of the Bunnies game to learn about the tragedy of the commons.

Should regulations of markets be simplified?

In his June 26, 2009 TIME magazine article, "Dumbing Down Regulation," Justin Fox argues for simplified regulation of markets:

If only our financial regulations were dumber! It's not a cry you hear often. But phrased a little differently, it may be the most cogent criticism of the convoluted regulatory approach of recent decades--and one that applies to most of the Obama Administration's financial-reform proposals.

The argument goes like this: the biggest flaw in current financial regulation is not that there is too little of it or too much, but that it relies on regulators knowing best. We regulate because financial systems are fragile, prone to booms and busts that can have harmful effects on the real economy. But regulators aren't immune to the boom-bust cycle. They have an understandable habit of easing up when times are good and cracking down when they're not. In doing so, they often amplify the ups and downs of markets rather than modulate them. (Watch TIME's video of Peter Schiff trash-talking the markets.)

You can spin this into a case for reduced regulation--regulators are likely to mess up, so why bother? But it can also point toward an approach based not so much on discretion as on rules, the simpler the better. I first encountered this argument last fall in the work of left-leaning blogger Matthew Yglesias--he advocated "crude measures" like the old ban on interstate banking. Lately, though, I've been hearing similar suggestions from those of a conservative, University of Chicago bent. "When you give a lot of discretion to regulators, they don't use the tools that are given to them," Chicago economist Gary Becker said at a conference this spring. His prescription: rules, not leeway.

The antidiscretion case has been made for years with regard to Federal Reserve monetary policy. Becker's Chicago teacher Milton Friedman thought that instead of tweaking interest rates, the Fed should just automatically increase the money supply 3% to 4% a year. Measuring the money supply in an era of financial innovation has turned out to be awfully hard, so in recent years believers in an automated Fed have turned to an equation concocted by Stanford economist John Taylor that takes in inflation, current economic growth and long-term-trend growth and churns out a suggested Fed interest-rate target. Taylor and some other conservatives have said that if the Fed had followed his rule in the early 2000s, all would be well today. There's no way of knowing if this is true, but it's hard to see how it could have led to a worse outcome than the monetary course chosen by the smarties at the Fed.

As for other forms of financial regulation, many conservatives long thought that few, if any, were needed, but the crisis has changed some minds. Alan Greenspan's famous October admission that his antiregulation ideology had failed was a landmark on this front. Federal judge and Chicago Law School professor Richard Posner's new book, A Failure of Capitalism, is another. In it, Posner fingers financial deregulation as a major cause of the crisis. He's less clear about what we ought to do now, although one of his suggestions very much fits the crude-measure standard: we should consider raising income taxes on high earners "in order to reduce their appetite for risk-taking."

Capital requirements are an area in which many observers think dumbing down is in order. Regulators spent decades fine-tuning their risk-weighted capital rules, in some cases using the supposedly sophisticated risk models developed by banks themselves. The result was ratios of debt to capital that topped 35 to 1 at some investment banks. Oops! A simpler, cruder standard (say, 10 to 1) surely would have worked better.

Then there's the 1933 Glass-Steagall Act, which separated commercial banking from other financial endeavors. By the time Congress repealed the law in 1999, it seemed utterly out of step with the times, but now many economists are wondering if there is something to the idea of separating risky financial activities from essential ones. Or we could tax financial transactions, a policy suggested as far back as 1929 by Virginia Senator Carter Glass (he of the Glass-Steagall Act) and now identified most closely with the late Yale economist James Tobin. In the 1970s, Tobin proposed a tax on currency trades to throw "sand in the wheels" of international finance and damp speculation.

Larry Summers, now the top economic adviser in the Obama White House, was a proponent of such taxes in the 1980s and early 1990s. There's no hint of them in the Administration's 88-page white paper on financial regulation. There is talk of higher capital requirements, tougher consumer-protection standards and new rules for derivatives. But taken as a whole, the document sketches a regulatory approach that still relies heavily on judgment and smarts. Maybe it's time for some dumbing down.

Is Regulation of the Tobacco Industry an Appropriate Role for Government?

What is the appropriate role for government? The Republican Party used to advocate limited government, relying on individuals to do what is in their best interest. In recent decades, despite claims to the contrary, Republicans have favored big government - just with different priorities than Democrats.

Obama signs anti-smoking bill, cites own struggle

By PHILIP ELLIOTT, Associated Press Writer, June 22, 2008

WASHINGTON – President Barack Obama cited his own long struggle to quit the cigarettes he got hooked on as a teenager as he signed the nation's strongest-ever anti-smoking bill Monday and praised it for providing critically needed protections for kids.
"The decades-long effort to protect our children from the harmful effects of tobacco has emerged victorious," Obama said at a signing ceremony in the White House Rose Garden.
The bill marks the latest legislative victory for Obama's first five months. Among his other successes: a $787 billion economic stimulus bill, legislation to expand a state program providing children's health insurance and a bill making it easier for workers to sue for pay discrimination.
The president has frequently spoken, in the White House and on the campaign trail, of his own struggles to quit smoking. He brought it up during Monday's ceremony while criticizing the tobacco industry for marketing its products to young people.
Obama said almost 90 percent of people who smoke began at age 18 or younger, snared in a dangerous and hard-to-kick habit.
"I know — I was one of these teenagers," Obama said. "So I know how difficult it can be to break this habit when it's been with you for a long time."
Before dozens of invited guests, including children from the Campaign for Tobacco Free Kids, the president signed legislation giving the Food and Drug Administration unprecedented authority to regulate tobacco.
Obama accused the tobacco industry of targeting young people, exposing them to a "constant and insidious barrage of advertising where they live, where they learn and where they play. Most insidiously, they are offered products with flavorings that mask the taste of tobacco and make it even more tempting."
The new law bans candy and fruit flavors in tobacco products, and it limits advertising that could attract young people.
The Family Smoking Prevention and Tobacco Control Act also allows the FDA to lower the amount of addiction-causing nicotine in tobacco products and block misleading labels such "low tar" and "light." Tobacco companies also will be required to cover their cartons with large graphic warnings.
The law won't let the FDA ban nicotine or tobacco outright.
"It is a law that will save American lives," Obama said.
Anti-smoking advocates looked forward to the bill after years of attempts to control an industry so fundamental to the U.S. that carved tobacco leaves adorn some parts of the Capitol.
Opponents from tobacco-growing states such as top-producing North Carolina argued that the FDA had proved through a series of food safety failures that it was not up to the job of regulation. They also said that instead of unrealistically trying to get smokers to quit or to prevent others from starting, lawmakers should ensure that people have other options, like smokeless tobacco.
As president, George W. Bush opposed the legislation and threatened a veto after it passed the House last year. The Obama administration, by contrast, issued a statement declaring strong support for the measure.

Increased Regulation of Financial Markets

Recent financial market failures have prompted President Barack Obama to proposed increased regulations. According to a McClatchy article on June 16, 2009:

WASHINGTON — Among the sweeping changes in government regulation that President Barack Obama will propose Wednesday is the creation of an independent and powerful Consumer Financial Product Safety Commission to regulate financial products such as mortgages and credit cards.

With an eye toward protecting consumers and ordinary investors, the Federal Reserve and other bank regulators would lose their oversight over mortgages, credit cards and other financial products that are sold to consumers. It's a radical shift in approach and a tacit acknowledgment of federal failure.

"Lets face it, the (Federal Reserve Board) has had the power to engage in aggressive consumer regulation at least since 1994," Harvard law professor Elizabeth Warren, who chairs the Congressional Oversight Panel, which oversees how Wall Street bailout money is being spent, told McClatchy in an interview. "They clearly had the power to stop the mortgage crisis before it started. And what did they do with that power? Nothing."

Warren's view was echoed by Rep. Barney Frank, D-Mass., the chairman of the influential House Financial Services Committee, which will write the legislation to implement and perhaps build on Obama's proposals.

"We definitely should take consumer protection away from the Fed," Frank said.

While Fed Chairman Ben Bernanke has done a good job on consumer finance issues, Frank said, his predecessor Alan Greenspan's failure to enforce laws on deceptive mortgage practices led to weak lending standards and the proliferation of mortgages issued with little or no review of borrowers' ability to pay.

"We find this idea (of a commission) very intriguing, and we think it shows a lot of promise and can certainly help put the country back on the right track and make sure that the consumer is present in the equation," said Evan Fuguet, senior policy counsel for the Center for Responsible Lending, a consumer advocacy group in Durham, N.C.

For people who've been saddled with arbitrary rate increases on credit cards, predatory lending in subprime mortgages or onerous terms on tax-deferred annuities, the proposed new agency could be a breakthrough.

However, the commission could end up limiting consumer credit options and innovation just as the economy is beginning to rebound, said Bill Himpler, the executive vice president for government affairs of the American Financial Services Association, the trade association for the consumer credit industry.

"The last thing we want to do is scare the consumer. And we're afraid that creating an agency that would put government in control of personal finances would undermine that confidence that seems to be being restored," he said.

American Financial Services Association officials said they didn't believe that the proposed new agency was a reflection of past regulatory failures.

"We honestly believe that the regulatory bodies in place now have adequately addressed the situation," said Chris Stinebert, the association's president and chief executive. "The regulatory structure as it exists now between the federal (government) and the state(s) is working."

The regulation of consumer finance now is spread across a number of agencies that regulate not the products themselves, but the issuers. The Office of Thrift Supervision regulates savings and loan institutions that offer credit cards, while the Fed or the Office of the Comptroller of the Currency regulates federally regulated banks that offer the same product.

In fact, Frank said, the comptroller's office brought successful legal challenges earlier this decade against efforts by states to protect consumers, working against the interests of consumers in an effort to ensure that federal powers take precedence over state laws.

Under Obama's plan, the new agency would regulate the financial products themselves.

The commission "fills in the last big regulatory gap at the consumer level. Food is safe. Physical products are safe. And with this agency, credit products will be safe," said Warren, a nationally recognized consumer advocate who's long called for improving the way consumer financial products are regulated.

Warren and Frank said that when regulatory agencies were charged with policing the safety and soundness of an institution along with protecting consumers, the latter took a back seat.

The new agency's mission would be to put the consumer front and center, as the Food and Drug Administration is tasked with doing with grocery products and pharmaceuticals.

"I think it does certainly raise the question that the regulatory system as structured was not responsive enough, fast enough. And I think this certainly does take a look at the little guy," said Fuguet, of the Center for Responsible Lending. "I think it's an acknowledgment that they need to look at actors in credit transactions in a new light."

See also "Obama Calls for Increased Regulation of Financial Markets."

Obama Calls for Increased Regulation of Financial Markets

There is a general consensus that insufficient regulation was a significant cause of the current economic recession. Even President George W. Bush agrees. President Barack Obama has responded by proposing increased regulation of financial markets. According to a June 16, 2009 Associated Press story by Anne Flaherty and Jim Kuhnhenn:

WASHINGTON – Setting up a certain fight with big business, President Barack Obama is proposing a new regulatory agency to police lenders and protect consumers in credit, savings and other banking transactions. The consumer agency and a newly empowered Federal Reserve will be two of the central elements of a broad overhaul of the financial regulatory system that the president will announce on Wednesday, officials said.

Already the nation's central bank, the Federal Reserve would supervise large financial institutions that are considered so big that their failure could undermine America's economy, according to the administration proposal.

But even as the Fed gains new powers, Obama also would transfer some banking authority that now rests with the Federal Reserve and the Treasury Department to the new consumer agency — the Consumer Financial Protection Agency.

"There is going to be streamlining, consolidation and additional overlap so that you don't find people falling through the gaps, whether it's the consumer protection side, the investor protection side, the systemic risk that we need to make sure is avoided," Obama said Tuesday.

The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers in Congress worry the Fed could turn into a too-powerful and independent financial overseer. Friction over those points could slow any major overhaul of banking and market regulations.

In addition to having the Federal Reserve supervise "systemically significant" institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system.

The arrangement is designed to prevent any more crashes like those that felled AIG and Lehman Brothers.

In conjunction with the Fed's authority over large financial institutions and the new consumer agency, Obama will also propose:
• Requiring higher capital levels at financial institutions to avoid over-leveraging.
• Eliminating the Office of Thrift Supervision, which oversees savings institutions, and creating a new national bank regulator for all federally chartered banks.
• Additional protections for investors by requiring greater disclosure by hedge funds as well as regulations of credit default swaps and over-the-counter derivatives that previously operated outside of government oversight.
• Requiring brokers and originators of asset-backed securities to retain a 5 percent stake in the securities.
• A system for the orderly disposition of any troubled large interconnected firms whose failure poses a risk to the entire financial system, such as AIG.

Obama's plan does not attempt major consolidation of regulatory agencies and does not inject itself in an ongoing debate over whether to bring some insurance companies under federal oversight.

Asked on CNBC whether the plan stopped short out of political concerns, the Obama said: "We want to get this thing passed. We think speed is important ... but we don't want to tilt at windmills. ... We want to get the best regulatory system in place."

Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt. The financial crisis was precipitated in part by the preponderance of securities backed by mortgages that went sour when the housing market collapsed.

Treasury spokesman Andrew Williams said lax consumer protections contributed to the financial crisis and that the recession revealed even more weaknesses in consumer protections across the spectrum of financial markets. The new agency, he said, will "help ensure that consumers have the protection and the representation they deserve."

The new regulator would have the power to impose fines and allow states to pass laws that are stricter than the federal standards — an approach favored by consumer advocates. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.

"Tremendous problems could have been avoided had such an agency weighed in against some of the abusive practices that Congress acted on only recently," said Travis Plunkett, legislative director of the Consumer Federation of America, citing excessive bank fees and misleading practices.

But business leaders made their opposition clear.

David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets, said the chamber will oppose a standalone agency "that cannibalizes regulatory expertise, adding yet another regulatory layer."

The administration will also have to use its political skills to strengthen the Fed. While Democrats generally agree with a need for regulatory changes, many oppose relying too heavily on the Fed.

They say its status as a politically independent organization would make it difficult to keep the newly empowered organization in check.

"What happens if the representatives of the people and the president want a certain action and it's not taken?" asked Rep. Paul Kanjorski of Pennsylvania, a senior Democrat on the House Financial Services Committee.

"You can't fire the chairman of the Federal Reserve," Kanjorski said.

Likewise, Sen. Christopher Dodd, chairman of the Banking Committee, opposes adding new tasks to the Fed. In private deliberations with the administration, Dodd has advocated an alternative plan to strip the Fed of its regulatory role entirely and create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.

Under this scenario, the Fed would focus on its existing mission as the nation's central bank — setting monetary policy and acting as a "lender of last resort."

Dodd, however, is a strong proponent of a consumer protection agency and is likely to champion that component of Obama's plan.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has not taken a position on the administration's plan to bolster the powers of the Fed. A spokesman said Frank supports the idea of monitoring risk across the financial system.

In a staff document circulated last week, House Republicans on the committee argued that expanding the Fed's responsibilities and increasing government spending pose "a far more significant source of 'systemic risk' to our nation's economy than the failure of any specific financial institution."

See also "Increased Regulation of Financial Markets."

President Bush blames insufficient regulation for economic downturn

In a May 28, 2009 speech to The Economic Club of Southwestern Michigan at Lake Michigan College, President George W. Bush blamed the current economic recession on insufficient regulation of financial markets:

He talked about the economy, blaming "a lack of responsible regulation" in the lending industry for the recession and said that the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac, shouldn't have engaged in certain financial practices.

As mentioned in an earlier post, markets are amazing. Yet, markets are not perfect. Most economists believe it is appropriate to regulate markets to improve their social outcomes. President Bush seems to agree. Despite his claims to the contrary, he is not a supporter of free markets, which are by definition free of government regulation and interference.

Lead in toys provides another example of the dangers of unregulated markets

The lead in Chinese toys is an example of how unregulated markets provide many socially undesirable outcomes. Can you imagine what might be in products if there were no safety and labeling laws?

In the June 19, 2007 New York Times article "As More Toys Are Recalled, Trail Ends in China," Eric S. Lipton and David Barboza report there are cries for increased government oversight to prevent the recurrence of events such as this.

WASHINGTON, June 18 — China manufactured every one of the 24 kinds of toys recalled for safety reasons in the United States so far this year, including the enormously popular Thomas & Friends wooden train sets, a record that is causing alarm among consumer advocates, parents and regulators.

The latest recall, announced last week, involves 1.5 million Thomas & Friends trains and rail components — about 4 percent of all those sold in the United States over the last two years by RC2 Corporation of Oak Brook, Ill. The toys were coated at a factory in China with lead paint, which can damage brain cells, especially in children.

Just in the last month, a ghoulish fake eyeball toy made in China was recalled after it was found to be filled with kerosene. Sets of toy drums and a toy bear were also recalled because of lead paint, and an infant wrist rattle was recalled because of a choking hazard.

Over all, the number of products made in China that are being recalled in the United States by the federal Consumer Product Safety Commission has doubled in the last five years, driving the total number of recalls in the country to 467 last year, an annual record.

It also means that China today is responsible for about 60 percent of all product recalls, compared with 36 percent in 2000.

Much of the rise in China’s ranking on the recall list has to do with its corresponding surge as the world’s toy chest: toys made in China make up 70 to 80 percent of the toys sold in the country, according to the Toy Industry Association.

Combined with the recent scares in the United States of Chinese-made pet food, and globally of Chinese-made pharmaceuticals and toothpaste, the string of toy recalls is inspiring new demands for stepped-up enforcement of safety by United States regulators and importers, as well as by the government and industry in China.

“These are items that children are supposed to be playing with,” said Prescott Carlson, co-founder of a Web site called the Imperfect Parent, which includes a section that tracks recalls of toys and other baby products. “It should be at a point where companies in the United States that are importing these items are held liable.”

The toy trains and railroad pieces are made directly for RC2 at plants it oversees in China, presumably giving it some control over the quality and safety of the toys made there. Staci Rubinstein, a spokeswoman for RC2, declined on Monday to comment on safety control measures at company plants in China.

The Toy Industry Association, which represents most American toy companies and importers, also declined to comment.

Julie Vallese, a spokeswoman for the Consumer Product Safety Commission, said the agency recognizes that more must be done to prevent the importation of hazardous toys and other products from China. “It is a big concern. And the agency is taking steps to try to address that as quickly as possible,” Ms. Vallese said. “Their businesses will suffer if they don’t meet safety standards.”

Scott J. Wolfson, a second Consumer Product Safety Commission spokesman, would not say how long ago RC2 discovered the problem or when it first reported it to federal authorities.

In the last two years, the staff of the consumer product commission has been cut by more than 10 percent, leaving fewer regulators to monitor the safety of the growing flood of imports.

Some consumer advocates say that such staff cuts under the Bush administration have made the commission a lax regulator. The commission, for example, acknowledged in a recent budget document that “because of resource limitations,” it was planning next year to curtail its efforts aimed at preventing children from drowning in swimming pools and bathtubs.

The toy industry in the United States is largely self-policed. The Consumer Product Safety Commission has safety standards, but it has only about 100 field investigators and compliance personnel nationwide to conduct inspections at ports, warehouses and stores of $22 billion worth of toys and tens of billions of dollars’ worth of other consumer products sold in the country each year. “They don’t have the staff that they need to try to get ahead of this problem,” said Janell Mayo Duncan, senior counsel at the Consumers Union, which publishes Consumer Reports. “They need more money and resources to do more checks.”

Most recalls are done voluntarily, as was the case with Thomas & Friends, after companies discover problems or receive complaints.

Among the toy recalls, the problem is most acute with low-price, no-brand-name toys that are often sold at dollar stores and other deep discounters, which are manufactured and sent to the United States often without the involvement of major American toy importers. Last year, China also was the source of 81 percent of the counterfeit goods seized by Customs officials at ports of entry in the United States — products that typically are not made according to the standards on the labels they are copying.

At one of the RC2 factories in Dongguan, China, on Sunday, a pair of workers who were paid about $150 a month to spray paint on mostly metal toy trains six days a week said they did not know whether the paint they used contained lead. The factory produces metal toys as well as the wooden toys listed in the Thomas recall.

“We’re just doing the painting,” says Li Hong, a 22-year-old factory worker who was sitting out in front of the factory dormitories.

Exactly who operates the factories making the Thomas & Friends trains in Dongguan is unclear. While the zone is run by a group of Chinese or Hong Kong suppliers, it also houses an office building that bears the RC2 corporate logo.

China’s own government auditing agency reported last month that 20 percent of the toys made and sold in China had safety hazards such as small parts that could be swallowed or sharp edges that could cut a child, according to a report in China Daily. Officials in China, of course, are fighting back, insisting that its food and other exports are safe and valuable, that new regulations are being put into place and that problem goods account for a tiny portion of all exports.

The Toy Industry Association urges its members to routinely test products it is importing to make sure they comply with federal safety standards, which prohibit, for example, surface paint that contains lead in toys or items that could cause a choking hazard.

Other major retailers or toy industry companies hit by recalls for products made in China this year include Easy-Bake Ovens, made by Hasbro, which could trap children’s fingers in the oven and burn them, and Target stores, which the consumer product commission said was importing and selling Anima Bamboo collection games, some of which were coated with lead paint.

The 22 models of the Thomas & Friends toys that are being recalled include some of the most popular items in the line’s collection, such as the red James engine and the fire brigade truck. The toy line, based on the children’s book and television series, has an almost fanatical following among some families, who own dozens of models, which can cost $6.50 to $70 each.

The string of lead paint cases has drawn the most attention from consumer watchdogs and parenting advice columnists.

“Do I have to look at every toy that has paint on it that comes from China as perhaps suspect?” said Mr. Carlson, of Imperfect Parent.

Ms. Duncan, of Consumers Union, urged parents to sign up for the Consumer Product Safety Commission’s automated notification system at the commission’s Web site (www.cpsc.gov), so they can stay on top of which toys are being recalled.

Ms. Vallese, the spokeswoman for the product safety commission, said the agency’s acting chairwoman, Nancy A. Nord, went to China in May for a meeting with her counterparts there, focusing in particular on toys, lighters, electronics and fireworks.

“Is there a concern that there are more products coming in from China and making sure they live up to the standards we expect?” Ms. Vallese said. “Yes, there is, and we understand our authority and obligation and we will make sure we enforce it.”

But parents shopping at for toys in New York over the weekend said the whole episode left them uneasy.

“I think it’s terrible,” said Chris Gunster, 41, while perusing the Thomas & Friends display area in Toys “R” Us at Times Square with his wife and 4-year-old son, James, a big fan of the toy trains. “Lead paint in this day and age?”

Eric S. Lipton reported from Washington and David Barboza from Dongguan, China.