…Article I of the Constitution vests all legislative power in Congress. Article II imposes a duty on the president to “take care that the laws be faithfully executed.” When a law is unambiguous, the president cannot rewrite it to suit his own preferences.”, David B. Rivkin Jr. and Elizabeth Price Foley, “The Case for Suing the President”, Wall Street Journal

OPINION

The Case for Suing the President

Rewriting ObamaCare laws on the fly is a violation of the constitutionally mandated separation of powers.

By

DAVID B. RIVKIN JR. And

ELIZABETH PRICE FOLEY

July 30, 2014 7:06 p.m. ET

‘So sue me” is President Obama’s message to Congress. And on Wednesday the House of Representatives took up his taunt, authorizing a lawsuit to challenge the president’s failure to faithfully execute provisions of the Affordable Care Act as passed by Congress. The House lawsuit is no “stunt,” as Mr. Obama has characterized it. The lawsuit is necessary to protect the Constitution’s separation of powers, a core means of protecting individual liberty. Without a judicial check on unbounded executive power to suspend the law, this president and all who follow him will have a powerful new weapon to destroy political accountability and democracy itself.

Article I of the Constitution vests all legislative power in Congress. Article II imposes a duty on the president to “take care that the laws be faithfully executed.” When a law is unambiguous, the president cannot rewrite it to suit his own preferences. “The power of executing the laws,” as the Supreme Court emphasized in June in Utility Air Regulatory Group v. EPA, “does not include a power to revise clear statutory terms that turn out not to work in practice.” If a law has defects, fixing them is Congress’s business.

These barriers between the branches are not formalities—they were designed to prevent the accumulation of excessive power in one branch. As the Supreme Court explained in New York v. United States (1992), the “Constitution protects us from our own best intentions: It divides power among sovereigns and among branches of government precisely so that we may resist the temptation to concentrate power in one location as an expedient solution to the crisis of the day.”

The barriers also reflect the Framers’ belief that some powers are better suited for a particular branch of government because of its institutional characteristics.

Congress has the exclusive authority to make law because lawmaking requires pluralism, debate and compromise, the essence of representative government. If Congress cannot achieve consensus, that doesn’t mean Congress is “broken.” A divided Congress reflects a divided people. Until there is a compromise acceptable to the majority, the status quo is the only correct path. An impasse emphatically does not warrant a president’s bypassing Congress with a pen and phone, as Mr. Obama claimed the power to do early this year.

The separation of powers also guarantees political accountability. When Congress makes a law and the president executes it as written, citizens will know whom to reward or punish at the next election.

A president who unilaterally rewrites a bad or unworkable law, however, prevents the American people from knowing whether Congress should be praised or condemned for passing it. Such unconstitutional actions can be used to avert electoral pain for the president and his allies.

If Mr. Obama can get away with this, his successors will be tempted to follow suit. A Republican president, for example, might unilaterally get the Internal Revenue Service to waive collection of the capital-gains tax. Congress will be bypassed, rendering it increasingly irrelevant, and disfranchising the American people.

Over time, the Supreme Court has come to recognize that preserving the constitutional separation of powers between the branches of government at the federal level, and between the states and the federal government, is among the judiciary’s highest duties.

In Garcia v. San Antonio Metropolitan Transit Authority(1985), the court was asked whether the wage and hour provisions of federal labor law could be imposed on states as employers. The justices refused to examine the substance of the states’ claim, declaring that the so-called vertical separation of powers—federalism—was “more properly protected by procedural safeguards inherent in the structure of the federal system than by judicially created limitations on federal power.” Because members of Congress are elected on a state-by-state basis, the court thought the national political process itself was the more proper way to protect states’ rights against federal encroachment. It was a mistake the court would quickly regret.

Seven years later, in New York v. United States (1992), the Supreme Court did an about-face, acknowledging that the political-remedies process alone could not safeguard the separation of powers, and invalidated a federal law that forced states to “take title” to low-levelradioactive waste. The court abandoned the “hands off” position of Garcia because if it did not do so, the federal government could coerce states to do the federal government’s bidding—a power that could have severely undermined the federalist structure of the Constitution, and hence, political accountability.

Litigation in federal court is an indispensable way to protect all branches of government against encroachment on their authority. States have successfully sued to stop federal intrusions into their constitutionally reserved powers. State legislators have also successfully sued to protect their institutional authority when state executives nullified their legislative power.

The executive branch is no different. President Obama has repeatedly resorted to litigation to vindicate the executive branch’s constitutional prerogatives. His administration has routinely sued states for violating federal laws, in cases such as Arizona v. United States (2012), involving the constitutionality of a state law dealing with illegal immigration.

And the Supreme Court has declared unconstitutional portions of congressional statutes that encroached on the federal judiciary’s power. In Northern Pipeline Construction Company v. Marathon Pipe Line Company (1982), the court invalidated a transfer of judicial power to “judges” in bankruptcy cases who were not part of the regular federal judiciary and were exercising powers conferred by Congress, rather than by the Constitution.

Congress is not an institutional orphan. Like the president and the states, it can rightfully expect courts to enforce its institutional authority. Any other result would establish an anomalous loophole preventing Congress, and Congress alone, from vindicating its constitutional prerogatives. Courts would not countenance such a lapse in the constitutional architecture, with the potential to inflict enormous damage to the separation of powers, political accountability and individual liberty.

The problem will be cured once the judiciary declares unconstitutional the president’s unilateral suspension of Affordable Care Act provisions and vacates the executive branch measures through which these suspensions were effected.

Rivkin, a partner at the firm Baker Hostetler LLP, served in the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations. Ms. Foley is a constitutional law professor at Florida International University College of Law.

Note Sent to Me from former Top Mortgage Industry Executive re. Blog Statement 301 (July 30, 2014):

Mike,

Agree completely with your points.  When driving through Sacramento last week I was listening to a radio show on KFBK which was an infomercial for United Law Center.  They had just won a $16 million verdict against PHH Mortgage for a borrower in Yuba City.  See Sac Bee Article http://www.sacbee.com/2014/07/18/6566661/yuba-jury-awards-16-million-in.html

The gist of the case is that a salesman bought a home for $280,000 in 2006.  He lost his job or income declined, so he could not make the payments and he filed BK in 2009.  PHH as servicer offered a loan mod in 2011, which would reduce his monthly payment from $2,100 to $1,500.  PHH apparently messed up the modification, and later offered a payment of $2,300.  A lawsuit was filed and the borrower was awarded $500,000 in compensatory damages and $15.5 million in punitive damages by a jury.

The infomercial was aggravating as it implied that PHH and all banks and mortgage lenders intentionally originated loans that they knew would end in foreclosure.  And only by applying punitive damages will these practices be ended.

This is probably a fairly typical case in which the lender could have simply foreclosed on the home under the terms of the note.  But instead was forced or encouraged to offer a loan mod that it was not equipped to process efficiently or accurately.  And for offering this loan mod, the servicer is now penalized at 50 times the original loan amount that was given to the borrower.  The original purpose of the loan mod was to limit the loss to the lender and investors, not to provide windfalls to defaulting borrowers!!

One other note, I checked the United Law Center website, and it is located in Roseville.  They have an introductory checklist for clients to try to identify litigation claims.  The first question on the checklist is “Was your income overstated on your loan application?”  This is apparently used to blame the lender/broker for the loan provided.  However, any borrower that answers yes to this question is admitting that they committed a crime!!

It is still crazy to me that the lender who gives money to a defaulting borrower is the bad guy here.  PHH gave a borrower $280,000 that he never repaid.  Then PHH offered to voluntarily modify the loan terms.  And because the modification is not processed correctly or to the borrowers liking, the lender owes this defaulting borrower $16 million??

What happened to contract law?

…But monetary policy should encourage investments that will strengthen the economy and create jobs in the long term—not conjure an illusory “wealth effect” that is for now lifting mainly the wealthy.”, Ruchir Sharma, “Liberals Love the ‘One Percent’”, Wall Street Journal

“Mr. Sharma’s OpEd (below) on the Fed and its monetary policies and their effect, both intended and unintended, is short and outstanding. (It was hard to highlight just one quote, it was so outstanding.) Why is it that liberals seem to support centralized government power no matter what? My guess is they believe that the “wise liberal elites” among us know what’s best for all of us. In other words, we are not capable of making decisions for ourselves; at least any important ones.  And yet, Nobel Laureate Hayek says this type (“we know what’s best for you and society”) of centralized government power eventually leads to totalitarianism.  The handful of “elite” women and men who run the Federal Reserve…our central bank; the epitome of centralized government power….think they know what’s best for all of us in regards to money, interest rates, finance, and the economy. Yet their admitted record of “not knowing” and track record of almost continuous forecasting errors is powerful evidence that “they really don’t know”. Why in the world do we ignore the facts and continue to vest so much unaccountable monetary and economic power with them? Many, like myself and others, including top economists (and Nobel Laureates), have come to believe the Fed itself is a major source of asset bubbles and financial instability.”, Mike Perry, former Chairman and CEO, IndyMac Bank

OPINION

Liberals Love the ‘One Percent’

The left has a strange affection for Federal Reserve policy that has turbocharged inequality.

By

RUCHIR SHARMA

Updated July 29, 2014 7:43 p.m. ET

Federal Reserve Chair Janet Yellen has said the central bank’s goal is “to help Main Street not Wall Street,” and many liberal commentators seem convinced that she is advancing that goal. But talk to anyone on Wall Street. If they are being frank, they’ll admit that the Fed’s loose monetary policy has been one of the biggest contributors to their returns over the past five years. Unwittingly, it seems, liberals who support the Fed are defending policies that boost the wealth of the wealthy but do nothing to reduce inequality.

This perverse outcome is not the Fed’s intent. It has kept interest rates near zero in an effort to combat the great recession of 2008-09 and nurse the weak economy back to health. Many analysts will argue that the recovery might have been even worse without the Fed’s efforts. Still, the U.S. economy has staged its weakest recovery since World War II, with output up a total of just 10 percentage points over the past five years. Meanwhile, the stock market has never been so high at this point in a recovery. This is the most powerful post-recession bull market in postwar history, with the stock market up by a record 135% over the past five years.

The Fed can print as much money as it wants, but it can’t control where it goes, and much of it is finding its way into financial assets. On many long-term metrics, the stock market is now at levels that fall within the top 10% of valuations recorded over the past 100 years. The rally in the fixed-income market too is reaching giddy proportions, particularly for high-yield junk bonds, which are up 150% since 2009.

It’s no secret who owns most of these assets. The wealthiest 1% of households, according to a study by Edward Wolff (National Bureau of Economic Research, 2012), now owns 50% of all financial wealth in the U.S., and the top 10% owns 91% of the wealth in stocks and mutual funds.

Over the past decade, easy-money policies also have fueled the rise of an industry that transforms raw commodities—from soybeans to steel and oil—into financial products, such as exchange-traded funds, that can be traded like stocks. Hundreds of billions of dollars have poured into these products. In many cases, large investors hold the commodities in storage, driving up demand and the price.

On average, prices for commodities from oil to coffee to eggs are up 40% since 2009, double the typical commodity-price rebound in postwar recoveries. Though rising prices for staples such as these are inconsequential expenses to the rich, they are burdens for the poor, who spend about 10% of their income on energy and a third of it on food. Meanwhile, since bottoming in 2011, median house prices have risen four times faster than incomes, putting homes out of reach for many first-time buyers.

Leading Wall Street figures such as Stanley Druckenmiller and Seth Klarman are warning that the Fed is blowing dangerous asset-price bubbles. These warnings—given political suspicion of the financial community—seem only to confirm liberal faith in the Fed. Economists including Joseph Stiglitz and Brad DeLong cling to the hope that at least some of the easy money helps to create growth and jobs. Yet the abnormally low cost of capital is giving companies another incentive to invest in technologies that replace workers, rather than hiring more workers.

Some liberals are skeptical even of the basic premise that easy money is fueling higher asset prices. As Paul Krugman put it, “for the most part” the money printed by the Fed is piling up in bank reserves and cash. While banks are generally reluctant to lend, the fact is that commercial and industrial loans in particular are increasing rapidly, and much of that credit is reportedly going to financial-engineering projects, like mergers and share buybacks, which do more to increase stock prices than to create economic growth.

There is no doubt that easy money is boosting the stock market. Low interest rates are driving investors out of money-market funds and into stocks, while they also allow wealthy investors to borrow money cheaply to buy more stocks. In the U.S., margin debt has more than doubled in the past five years to a record $438 billion.

Many liberal economists note that dire warnings of how the Fed’s money printing would lead to runaway inflation have not come true. Overall consumer prices are indeed contained and the mandate of a central bank has traditionally been to control consumer prices. But that target is out of date. In a global economy, rising competition has a restraining effect on consumer prices because producers can shop around for the lowest-cost country in which to make goods like clothes or flat-screen TVs. The effect on asset prices is the opposite, as the supply of houses and stocks is relatively limited, and because demand is rising, as investors seek higher returns than the near-zero interest rates they can get at the bank. That is why investors are bidding up asset prices, even as consumer prices remain stable.

There is a fundamental shift in the challenge facing central bankers, everywhere. Top Fed officials including former Chairman Ben Bernanke have argued that rising asset prices are less a risk than a plus, because the rising value of houses, stocks and bonds makes families feel wealthier, so they spend more and boost the economy. But monetary policy should encourage investments that will strengthen the economy and create jobs in the long term—not conjure an illusory “wealth effect” that is for now lifting mainly the wealthy.

Sharma is head of emerging markets and global macro at Morgan Stanley Investment Management and the author of “Breakout Nations: In Pursuit of the Next Economic Miracles” ( Norton, 2012).

“Let’s all understand, the fact that this homeowner’s mortgage exceeds her current home’s value has nothing to do with whether or not she has the income sufficient to continue to make her monthly mortgage payment. Nor does it for anyone else either. And the fact that she has a personal matter that has affected her family’s income and ability to pay her mortgage is NOT the mortgage lender’s fault or responsibility. My general recollection is that roughly 5% of American homeowners with mortgages experience a death, divorce, illness/health issue, job loss or other personal matter each year that affect their ability to pay their mortgage.  In normal times, as a result of regularly rising nominal home prices (assisted by the Fed’s monetary inflation goals), many solved this problem on their own by selling their homes and paying off their mortgage in full (or borrowing against their home equity, hoping their finances would turn around before being forced to sell…you can’t do this today, with the CFPB’s ability to pay rules). It is only during this time (a massive housing bubble bursting), where these homeowners can’t solve this problem on their own (by selling their home or temporarily drawing on their home equity). Their inability to pay their mortgage is (mostly) not their fault and it’s also (mostly) not their mortgage lenders fault either. (See related blog Statement #199 on May 20, 2014 for a partial solution.)”, Mike Perry, former Chairman and CEO, IndyMac Bank

ECONOMY

Homeowner Program Faces Mounting Application Backlog

Mortgage Companies Processing HAMP Applications Can’t Keep Up With Demand, Watchdog’s Report Finds

By

JOE LIGHT

July 30, 2014 12:01 a.m. ET

The Obama administration’s signature program to aid struggling homeowners has hit another speed bump: The mortgage companies processing applications can’t keep up with demand.

More than 221,000 applications to the Home Affordable Modification Program were waiting to be processed by mortgage servicers at the end of May, according to a government report scheduled for release Wednesday. That is up from a backlog of 133,649 unprocessed applications at the end of November.

The report, prepared for Congress by the special inspector general for the Troubled Asset Relief Program, a watchdog within the Treasury Department, said at the recent rate, the number of unprocessed applications will grow by more than 27,000 a month.

“We’re very concerned about this. Homeowners should not have to wait six months, 10 months or more than a year to get a decision,” said Christy Romero, the TARP special inspector general. “The problem of delays is real and could have a disastrous impact on homeowners who are not able to keep up with their payments during this delay and lose their homes.”

Treasury officials say the mounting backlog may be partly due to changes made this year by the Consumer Financial Protection Bureau that require servicers to consider other options for homeowners as they process a HAMP application. Before, a servicer might consider a HAMP application without looking into other options.

Timothy Bowler, Treasury acting assistant secretary for financial stability, said even if some applications take longer to process due to the CFPB rules, in the end, more homeowners could get help. He said that while the department isn’t pleased with the backlog, if the outcomes are better for homeowners, that is the ultimate goal.

“Treasury remains committed to maintaining the standards HAMP has set while the industry implements new servicing regulations so that those households facing a hardship receive the best and most timely outcome,” Mr. Bowler said in a statement.

The growing backlog is the latest challenge for HAMP, which seeks to reduce monthly payments for borrowers by extending loan terms, lowering interest rates and reducing principal. Since the program was unveiled by the Obama administration in 2009, it has had some setbacks, including criticism that banks and mortgage servicers weren’t adequately prepared to handle the high volume of modification requests, and that the program required too much paperwork.

Still, as of June, more than 1.3 million borrowers have gotten help through the program, the Treasury Department said, while the loans of many others were modified through banks’ own programs using the HAMP model. The program was set to expire at the end of 2015, but in June the administration said it would extend the deadline “at least another year.”

Of the 10 mortgage-servicing companies mentioned in the TARP inspector-general report, Ocwen Loan Servicing LLC had the biggest backlog, with 60,812 unprocessed HAMP applications at the end of May. Ocwen also receives by far more applications than any servicer, with more than 30,630 received monthly between December and May, according to the report. The speed with which it processes applications was faster than many other servicers.

An Ocwen spokeswoman, who didn’t see the report before publication, said in a statement, “We are committed to maintaining best practices in mortgage servicing and keeping homeowners in their homes, while also preserving value for [mortgage-backed-security] investors.”

Mortgage companies have been investigated for failing to process applications. This month, SunTrust Banks Inc. agreed to pay as much as $320 million to end a criminal investigation into its treatment of HAMP applicants. In that investigation, the TARP inspector general said that SunTrust stored so many unopened applications in a room that the floor buckled under their weight. SunTrust acknowledged the issues highlighted by the government but didn’t admit to liability, a spokeswoman said at the time. Ms. Romero said that Wednesday’s report doesn’t imply any legal violations.

The inspector-general report is a reminder that while foreclosures have declined sharply over the past year, hundreds of thousands of mortgages remain delinquent or in some form of foreclosure—and many of the households involved are seeking some type of mortgage relief.

Gloria Mora of Miami said that she applied to HAMP in September 2012 through her mortgage-servicing company, Nationstar Mortgage LLC. She had run into financial difficulty after separating from her husband and owed nearly $300,000 on her home, which was valued at less than $200,000, she said.

Ms. Mora, 42 years old, said Nationstar repeatedly asked her to send documents that she had already submitted and didn’t get back to her with a final decision—a rejection—until August 2013. “They kept saying, ‘Send me more documents,’ when they were the same documents I had already sent,” she said. She said she is still making mortgage payments but is facing bankruptcy.

A spokesman said Nationstar required more documents to verify Ms. Mora’s income and some of her earlier documents expired during the application process, requiring her to refile them. Nationstar was one of a handful of servicers cited by the inspector-general report as having processed more applications in the six months through May than it received in the period.

Write to Joe Light at joe.light@wsj.com

“This seems just “over-the-top” ridiculous!!! What do you think? In my opinion, the post-crisis regulatory compliance bureaucracy we are piling on U.S. businesses is going to come back to bite us big-time, by slowly destroying American risk-taking, entrepreneurship and competitiveness (relative to the rest of the world) for years to come.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Relevant Excerpt from July 30, 2014 Mortgage Industry Newsletter:

“And (name removed) observes, “It is worthwhile to remind readers that this August marks the 2-year anniversary of FinCEN’s requirement that non-bank residential mortgage brokers adopt an Anti-Money Laundering (AML) program (the requirement was effective August 13, 2012).  Among the minimum requirements is that every mortgage broker’s AML program must be independently reviewed.  We thought it might be helpful to discuss some of the more frequently asked questions concerning the AML audit.

“How frequently must my firm conduct an independent test of its AML program? The answer lies in your company’s assessment which takes into account the unique risks associated with its particular products and services, size, market, and other issues. And while each mortgage broker’s AML program will necessarily be different than those with different product, geographic, and other risks, a “Best Practices” approach would indicate that the independent test be conducted no less than every eighteen months.

“What happens if my firm doesn’t conduct have an independent test?  Who polices this? The Financial Crimes Enforcement Network (FinCEN) and Treasury Department has the authority to investigate mortgage brokers for compliance with this requirement. At this time there have been no formal actions taken against mortgage brokers, however keep in mind that this requirement is just two years old.  Companies in other regulated industries that have the same requirements for a longer period of time have had very significant penalties levied for failure to conduct this review.  For example, last month FinCEN levied a civil penalty of $45,000 against Mian Inc., a money service business, for failure to implement and maintain an effective written anti-money laundering program and for failure to conduct an independent test of its AML program.

“Can I do the audit myself? The short answer is that independent audits can be done internally by any officer or employee who is not the firm’s designated AML Compliance Officer.  If there is no one on staff qualified or if yours is a one-person shop and you wear multiple hats, including that of the AML compliance officer, then you should seek the services of a qualified third party.””

…and before derivative “insurance” had become prominent markers of the greatest of all national housing bubbles. Hence the bubble was exhibiting clear evidences of the presence of price momentum…buying in proportion to price increases….in the years before the mortgage market’s structural features had become prominent; before the Fannie Mae and Freddie Mac scandals of 2003 and 2004; and before 2005 when 45 percent of first-time home buyers paid no money down. This momentum-driven acceleration in home prices was therefore part of the expectations environment before radical changes in the mortgage market that subsequently dominated so much of both media and professional comment.

Throughout the entire period of 1997-2006, aggregate inflation-adjusted real estate equity….the primary source of net real wealth for most households….more than doubled, to about $13 trillion. The ensuing collapse in real estate values in 2007 against fixed mortgage debt continued until Q4 2011, with devastating consequences for real estate equity: In Q4 2011, households’ inflation-adjusted real estate equity reached its post-bubble minimum of $5.6 trillion, which was identical to its level in Q2 1985, more than twenty-six years earlier! These movements were reflected in the national income accounts in the form of rising expenditures on new home construction that reached a peak in Q1 2006 seven quarters before the recession began in Q4 2007. All other components of GDP had been steady or increasing, reversing course only after the recession began…a lag consistent with the “surprise” character of the Great Recession for consumers and businesses as much as for the “blindsided” policy makers (see Figure 3.8). Only the collapse in 1929 into the Great Depression was comparable.”

(Excerpt from 2014’s “Rethinking Housing Bubbles”, by Steven D. Gjerstad and Vernon L. Smith. Mr. Gjerstad is a Presidential Fellow at Chapman University and has a Ph.D. in economics from the University of Minnesota. Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments in the Argyros School of Business and Economics and the School of Law at Chapman University, and he is part of a team that created and runs the Economics Science Institute there.)

“In other words, the U.S. housing bubble was not caused by mortgage lenders and alternative mortgage products, as many incorrectly believe. As I have said many times before on this blog, it makes no sense that alternative mortgage products and securitization were the cause, when numerous foreign countries that also experienced housing bubbles and busts didn’t have these types of products or securities.”, Mike Perry, former Chairman and CEO, IndyMac Bank

(11.13 Conclusions…”Rethinking Housing Bubbles”)

…One effect  of overuse of this instrument was an excessively volatile residential construction sector. More recently, the policy has generally led to high volatility in house prices, household wealth, and economic activity. The problems of housing market and asset market instability are exacerbated by large and persistent trade and current account deficits. Deficits on the current account are balanced by investments from outside the country, and these investments naturally flow into secured assets (e.g., mortgages, bonds, equity, and foreign direct investment). Excessive and chronic capital inflows lead inevitably to inflated asset prices. Policies that contribute to these capital inflows should be identified and moderated. Preliminary examination of data from many countries that have experienced asset market collapses and financial sector turmoil indicates that fiscal expansion is not associated with recovery. It is also reasonable to conclude that excessive monetary accommodation will not help either, because central bank absorption of fiscal deficits delays the adjustments required to eliminate current account deficits. The fundamental lesson that we see in these episodes is that policies that facilitate large capital inflows into specific asset markets should be watched carefully. If excessive flows occur and financial market turmoil develops, the best solution is to allow capital flows to reverse so that export growth can replace the asset and fixed investment growth that has collapsed. Extraordinary measures by monetary and fiscal authorities lead to prolonged stagnation.”

(Conclusions from 2014’s “Rethinking Housing Bubbles”, by Steven D. Gjerstad and Vernon L. Smith. Mr. Gjerstad is a Presidential Fellow at Chapman University and has a Ph.D. in economics from the University of Minnesota. Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments in the Argyros School of Business and Economics and the School of Law at Chapman University, and he is part of a team that created and runs the Economics Science Institute there.)

“We identify the following three primary sources that sustained the bubble:

1. The continued large inflow of foreign capital.
2. The unprecedented (for fifty-two years up to that time) ease in monetary policy, 2001-2003. Chapter 5 discusses the role of monetary policy in the context of the recession of 2001. This section further examines this episode of monetary ease: Exceptionally low interest rates were associated with an increase in home purchase loans and a surge in loans to refinance existing mortgages.
3. Uncollateralized Credit Default Obligations (i.e. derivatives) widely thought of as providing “insurance” against mortgage defaults (see Chapter 7).

(Excerpt from 2014’s “Rethinking Housing Bubbles”, by Steven D. Gjerstad and Vernon L. Smith. Mr. Gjerstad is a Presidential Fellow at Chapman University and has a Ph.D. in economics from the University of Minnesota. Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments in the Argyros School of Business and Economics and the School of Law at Chapman University, and he is part of a team that created and runs the Economics Science Institute there.)

“Again, where are the evil banks and mortgage lenders who the government and mainstream press says are responsible for this crisis?”, Mike Perry, former Chairman and CEO, IndyMac Bank

“For the upswing of house prices from 1997 through 2001, we suggest the following four possible stage-setting events:

1. The bipartisan Taxpayer Relief Act of 1997, which exempted home resales from capital gains taxes up to a maximum of $500,000.
2. Government housing programs: Fannie Mae, Freddie Mac, and Ginnie Mae. Beginning in 1996, U.S. housing agencies were assigned target goals to direct their funding to low-income borrowers (subsequently, targets were increased to 50 percent in 2000 and 52 percent in 2005).
3. Laws intended to help the poor own homes by requiring mortgage lenders to be performance-rated on their efforts to lend to borrowers with incomes below 80 percent of the median family income. Accusations regarding these issues have centered on the Community Reinvestment Act (CRA).
4. The U.S. trade deficit, resulting in a large inflow of foreign investment capital beginning in the early 1990s. Chapter 3 (see Subsections 3.3.2 and 3.3.3) examined the inflow of foreign investment, comparing it with the net flow of mortgage funds…Chapter 10 revisits the topic of foreign investment flows in the context of the crisis experiences of several other countries.

(Excerpt from 2014’s “Rethinking Housing Bubbles”, by Steven D. Gjerstad and Vernon L. Smith. Mr. Gjerstad is a Presidential Fellow at Chapman University and has a Ph.D. in economics from the University of Minnesota. Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments in the Argyros School of Business and Economics and the School of Law at Chapman University, and he is part of a team that created and runs the Economics Science Institute there.)

“Wow, I am shocked!!! I thought we had all been told by our government and the mainstream press that the banks and mortgage lenders were to blame for starting the housing bubble???” Mike Perry, former Chairman and CEO, IndyMac Bank

…In the pre-Fed 124 years, the dollar shrank only about 12%. Today, the Fed’s discretion is aimed at 2% annual inflation, which equates to a $1,000 annual (and cumulative) tax-via-shrinkage on the median household income of about $50,000…..The progressive “talented 10th” claims of superior intellectual ability and technocratic skill, entitling and obligating them to govern those of us in the less bright 90%, aren’t borne out by these historical data. A return to gold, or commodities (think Benjamin Graham), or a Taylor rule, could hardly produce worse results.”, Martin Harris

Jonesborough, Tenn.

LETTERS

Should the Federal Reserve Follow Some Policy Rule?

Alan Blinder gets it wrong. In fact, the Federal Reserve Accountability and Transparency Act would make a number of common-sense changes to increase transparency and accountability at the Federal Reserve.

July 24, 2014 4:07 p.m. ET

Alan Blinder gets it wrong in “An Unnecessary Fix for the Fed” (op-ed, July 18). In fact, the Federal Reserve Accountability and Transparency Act (FRAT) would make a number of common-sense changes to increase transparency and accountability at the Federal Reserve. First, the FRAT Act wouldn’t straitjacket the Fed by requiring the central bank to follow the Taylor rule, or any particular monetary rule, as Mr. Blinder asserts. Rather, the bill would merely require the Fed to formulate a monetary rule. The legislation preserves the agility of the Fed to change the rule in response to changes in the economy.

Mr. Blinder wrongly characterizes the FRAT Act’s requirement on public disclosures regarding international negotiations. The provision simply requires that the Fed disclose to the public the topics, scope and broad goals of international negotiations. This hardly amounts to playing poker with an open hand. Since Dodd-Frank became law, the Fed has amassed unprecedented power. While some Fed apologists may believe these new powers are appropriate, the American people have the right to necessary and robust oversight of the central bank. The FRAT Act would accomplish both of these worthy aims.

Scott Garrett (R., N.J.)

Bill Huizenga (R., Mich.)

Washington

Without questioning the discretion of such recent Fed leaders as Janet Yellen and Ben Bernanke, one can review the century-long track record of the Fed, since its founding in 1913, in executing the congressional constitutional task (Article 1, Sec. 8) “to coin money and regulate the value thereof” by comparing the purchasing power of the 1913 dollar with the equal purchasing power, per CPI comparisons, of the comparable $24.30 needed today. That’s a 96% shrinkage. In the pre-Fed 124 years, the dollar shrank only about 12%. Today, the Fed’s discretion is aimed at 2% annual inflation, which equates to a $1,000 annual (and cumulative) tax-via-shrinkage on the median household income of about $50,000.

The progressive “talented 10th” claims of superior intellectual ability and technocratic skill, entitling and obligating them to govern those of us in the less bright 90%, aren’t borne out by these historical data. A return to gold, or commodities (think Benjamin Graham), or a Taylor rule, could hardly produce worse results.

Martin Harris

Jonesborough, Tenn.

Alan Blinder seriously undercuts his argument against rules-based monetary policy when he claims that Paul Volcker’s 1979-82 policy, purportedly guided by Milton Friedman’s money-supply criteria, had “miserable results.” To the contrary, most Fed watchers agree that Mr. Volcker’s strong medicine did much to repair the economy and promote its growth.

Mr. Volcker probably made the job of the next two successors immeasurably easier than it would have been in the absence of the difficult decisions he took early in his own tenure. But it is doubtful that even Mr. Volcker could have stayed his course long enough to break the inflationary cycle had he not been able to reference seemingly neutral rules, widely accepted among fellow economists, relating to the growth of the (then identifiable) money supply.

Steve Stein

Larkspur, Calif.

The transparent, rules-based Fed approach set forth in FRAT does little to actually restrain Federal Reserve decision-making, but it does impose some discipline in the monetary policy determination and review process.

Before we accept Mr. Blinder’s contention that Fed policy today “ain’t broke,” we need to see when our economy breaks out of a weak recovery and whether the Fed then can unwind its bond portfolio without rattling markets. Transparency, benchmarks and decision-making disciplines offer some comfort in what would appear to be another period of tumultuous transition.

Roy Brooks

Columbia, Md.