Opinion
Lawrence Journal-World l LJWorld.com l Thursday, May 5, 2016
The Fannie and Freddie fiasco
EDITORIALS
Flexibility needed Lawrence should be careful to maintain the tax incentive flexibility it needs to be competitive with other cities in attracting new employers.
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awrence city commissioners should be careful not to change the city’s economic incentive policy in ways that makes it difficult or impossible for Lawrence to take advantage of special opportunities to create jobs and add to the city’s tax base. The commission is proposing a number of changes to the policies, including one that would cap tax rebates at 50 percent for 10 years, with some possible exceptions. In a meeting to review the proposed changes, some members of the Economic Development Council of Lawrence and Douglas County expressed concern that such a cap could cause desirable companies to eliminate Lawrence from consideration before the recruitment process even begins. County Administrator Craig Weinaug is right that local economic development officials shouldn’t mislead potential businesses about the size of incentives they could receive. If city commissioners really won’t consider a tax rebate larger than 50 percent for 10 years, businesses should be told that, but, hopefully, commissioners will decide to draw a less rigid line. During last year’s election campaign, several current commissioners decried the city’s overuse of tax incentives. At that time, much of the focus was on the tax incentives granted to a number of large residential projects in the city. There doesn’t seem to be any shortage of apartments in Lawrence, and providing added incentives for developers to build more apartments admittedly is a questionable strategy. However, providing incentives to businesses that will create more jobs in Lawrence and contribute to the city’s tax base is another matter. At the same time commission candidates were criticizing the use of tax incentives, they also acknowledged the need to add more local jobs. If, for instance, a major manufacturing business was interested in locating in Lawrence, would commissioners want that firm to cross Lawrence off its list because of an arbitrary cap on the tax incentives that might be available? In the highly competitive economic development arena, it’s important for Lawrence to remain flexible enough to work with companies that would be strong assets to the community. It might be unusual for commissioners to grant more than a 50 percent tax rebate, but the city needs to be able to respond to an unusual opportunity for Lawrence.
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Washington — Gigantic government’s complexity and opacity provide innumerable opportunities for opportunists to act unconstrained by clear law or effective supervision. Today’s example, involving the government’s expropriation of hundreds of billions of dollars, features three sets of unsympathetic actors — a grasping federal government, a few hedge funds nimble at exploiting the co-mingling of government and the private sector, and two anomalous institutions that should never have existed. The two are the “government-sponsored enterprises” (GSEs) Fannie Mae and Freddie Mac. This maddeningly complex story illustrates the toll the administrative state takes on the rule of law. The two federally chartered but privately owned GSEs, which guarantee 80 percent of American mortgages, were created because Washington wanted to engineer — what could go wrong? — more homeownership than market forces would produce. What could go wrong did, and in 2008 the two GSEs floundered. In September 2008, the government rescued them with $187.5 billion and placed them in conservatorship, which is supposed to be temporary and rehabilitative. A conserved entity should be returned to normal business in private ownership. Fannie and Freddie have recuperated profitably. They also have been nationalized. The government’s original rescue terms were for Fannie and Freddie to pay a stiff dividend on the bailout
George Will
georgewill@washpost.com
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This maddeningly complex story illustrates the toll the administrative state takes on the rule of law.” funds — 10 percent, amounting to $4.7 billion per quarter. Then, however, the Treasury Department was told of the GSEs’ strong recoveries. According to recently unsealed documents, on Aug. 9, 2012, Treasury was told that the GSEs’ prospects were for strong profitability, requiring no further government assistance. Eight days later, Treasury negotiated with the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), for an astounding revision (called “the third amendment”) of policy: Instead of the agreed-upon dividend, and already enjoying a right to 80 percent of the GSEs’ profits, the government would get 100 percent forever, far exceeding the size of the original bailout. So, the government (Treasury) negotiated with itself (FHFA) to achieve a windfall for itself. And the conservator abandoned its duty to safeguard the assets of the entities in conservatorship. The government claims it
changed the terms in order to avoid any need to give the GSEs additional funds to pay the 10 percent dividend on funds already received. This claim, however, is not credible, given what and when the government knew about the GSEs’ profitability. After the government “negotiated” with itself for the GSEs’ profits, the value of their shares cratered. Some hedge funds bet that the government’s transformation of the GSEs into a revenue stream for itself would not survive judicial scrutiny. They added to the GSEs’ shares they had bought before the “third amendment” when they mistakenly trusted the government to act properly as a conservator. They purchased additional shares for pennies on the dollar. Legal scrutiny has arrived in the form of lawsuits with enormous stakes. One hedge fund stands to make $7.5 billion if the government is found to have unconstitutionally taken private property without compensation. A federal judge has sided with the federal government. (See a pattern here?) He made the “utterly astounding” (New York University law professor Richard Epstein’s characterization) judgment — “without allowing any discovery about the underlying facts” (Epstein) — that a fiduciary (FHFA) can take private assets of the fiduciary’s supposed beneficiaries and transfer them to the government. Epstein expects a higher court “to decide that government conservators,
like private conservators, cannot loot the corporations whose shareholders they are sworn to protect.” Many individuals and community banks invested in Fannie and Freddie in good faith and have been injured by the government’s profit confiscation. Granted, a few wealthy people would become more so from judicial invalidation of the “third amendment.” This, however, is at most an argument against creating the moral hazard inherent in GSEs. It is not an argument for allowing the anomalous nature of these institutions to justify lawless discretion by a government as self-interested as those who would profit from restraining the government with law. After the Revolutionary War, many state debts were bought by speculators at steep discounts from the original purchasers, who feared that the states would not pay face value. The buyers, however, wagered correctly that the federal government would assume the debts and pay at par in order to establish the nation’s creditworthiness. Alexander Hamilton successfully argued for assumption. Thomas Jefferson and his allies reluctantly acquiesced in exchange for a more southern location for the nation’s new capital. Which is why Washington is where it is. Fannie’s and Freddie’s misadventures illustrate why Washington is what it is. — George Will is a columnist for Washington Post Writers Group.
OLD HOME TOWN
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From the Lawrence Daily Journal-World for May 5, 1916: “Raymond A. Kent, a young educator who has had much years experience in the schools of ago Minnesota and who has comIN 1916 pleted a technical training remarkable in its thoroughness, will head the Lawrence city schools next year.... Mr. Kent was engaged under the dual agreement entered into by the board of education and the University of Kansas authorities. He will receive the full salary of $2,500 from the board of education, $1,000 additional from the University of Kansas in return for lectures before the students of the board of education, and $500 additional for lectures in the summer session.” — Compiled by Sarah St. John
Read more Old Home Town at LJWorld.com/ news/lawrence/history/old_home_town.
U.S. candidates must face the facts By Leonard Krishtalka
Cal Thomas and others think there “must be a better way to nominate and elect a president” (“Voters need better choices,” Journal-World, April 5), one that attracts smarter, more capable people. Thomas blames a “ravenous media” that scavenge the candidate’s life for the “smallest misdeed.” His solution? A plan devised by academia or think tanks that would recruit better candidates, shorten campaigns, focus on substance and cost less money. But would the candidates listen? The GOP hopefuls don’t listen now to the facts provided by university researchers and science think tanks as fundamental to smart, responsible public policy. Krishtalka Fact: Unprecedented global warming, caused by human industry during the past 150 years, threatens our cities, coastlines, croplands and health. Fact: We now live in the Anthropocene, “the human epoch.” For the first time in the Earth’s 4.5 billion-year history, humans, not nature, are the most powerful force transforming the land, oceans, atmosphere and life of the planet. Fact: Left unchecked, we will face increasing droughts, floods and virulent diseases; destruction of our forests by resistant pests; threats to agribusiness and food security; and upheaval of entire communities and economies. The Defense Department listens. It ranks
YOUR TURN these as top threats to national security because they are the fuel for civil wars, ethnic strife and millions of refugees. Fact: Biology, physics, chemistry, geology, anthropology, history and other disciplines tell us how all this came to be and how to fix it. Instead, the GOP candidates prefer to hear no science, see no science, and speak no science, no matter the consequences for the nation they aspire to lead. Whether they’re pandering to a constituency or practicing willful disbelief, they are unfit to lead the world’s most technological country through the most science-driven era in human history. Thomas himself leads this anti-science parade in his columns. He and the candidates regularly deny climate change and any non-scriptural version of the geology and biology of the planet. As Louis Black quipped, we don’t need a president who thinks The Flintstones television series was a documentary. University researchers and medical think tanks repeatedly report how pollution ravages human health. Yet the GOP candidates don’t listen. Instead, like wind-up clones, they vow every four years to eliminate the Environmental Protection Agency, the very agency mandated to ensure that we are breathing clean air, drinking clean water and living on clean earth. The EPA is “anti business!” they cry. You bet — anti those businesses that treat our neighborhoods as toxic waste dumps and endanger your health and mine.
Air pollution damages lungs and shortens lives, from cancer-causing particulates, to asthma in young children, to life-threatening premature births. Were it not for the EPA, the nation’s waters would be chemical sewers from fertilizer run-off and the dumping of industrial waste. As it is, pollutants have already poisoned the groundwater reservoirs for millions of Americans, caused massive dead zones in Chesapeake Bay and ruined the water quality in 100,000 miles of rivers and streams and millions of square miles of lakes, reservoirs, ponds, bays and estuaries. Perhaps the EPAbashing would stop if the candidates had to drink these waters, or bathe in them. Then there’s guns. Since 2001, about 440,000 Americans have died from gun violence, roughly 30,000 a year. During the same period, about 3,400 were victims of terrorists here and abroad. The response from GOP candidates to acts of terrorism is overwhelming, e.g., Cruz: “We will carpet bomb them (terrorists) into oblivion.” But after mass shootings of students in schools, and people in theaters and shopping malls, all we get are do-nothing condolences. Countless studies by university law schools and think tanks detail how we can sensibly honor the Second Amendment’s right to bear arms, yet stem the daily carnage from firearms. Theoretically, nonstop politicking should provide better candidates, because, given enough time, a democracy allows fools to expose themselves. It’s our fault if we vote for them. — Leonard Krishtalka is director of the Biodiversity Institute and a professor of ecology and evolutionary biology at Kansas University.