“This was Socialist “scientism”—ideology masquerading as science—of the highest order. The broad outline was established on calculations by a Moscow-minted engineer in China’s nuclear program. These computations bore no relation to the actual ways in which Chinese men and women thought about family life. As soon as the policy was rolled out in 1980 and 1981, it collided with human realities…. Why has Beijing stubbornly ignored the advice of its own top talent? My baffled Chinese colleagues speculate on possible explanations: the difficulty of re-tasking the vast army of population-control bureaucrats; the value of the hefty fines exacted for out-of-quota births; the neo-Malthusian ideology to which China’s bosses still seem to be slave. All of these are plausible, but they overlook a key piece: the Chinese government’s undying claim to totalitarian control over the most basic details of its subjects’ lives, revealed as well by the retrograde hukou system of residence permits that makes urban China’s migrant workers illegal aliens in their own country. For all the talk of “reforming”—and we have been hearing it overseas for almost two decades now—the Chinese government has been unwilling to dispense with these instruments of social control precisely because they are instruments of social control. The “fatal conceit” (to borrow Friedrich Hayek’s term) of China’s population planners was that they could micro-calibrate the behavior of the men and women under their command. The new two-child policy suffers the same flaw. As long as Beijing deforms Chinese society with these misbegotten tools, the nation’s future will be compromised, poorer and sadder than it otherwise could be.”, Nicholas Eberstadt, “China’s New Two-Child Policy and the Fatal Conceit”, The Wall Street Journal, October 30, 2015

Opinion

China’s New Two-Child Policy and the Fatal Conceit

Even facing decline, the Communist Party enforces police-state birth control.

In Yanji, a city in China’s northeast Jilin province. PHOTO: GREG BAKER/AGENCE FRANCE-PRESSE/GETTY IMAGES

By Nicholas Eberstadt

It is the latest twist in the most ambitious and ruthless social-engineering program ever undertaken by a modern state: Beijing announced Thursday that the Chinese Communist Party will officially abandon its one-child policy. Yet it has no plans to relinquish authority over its subjects’ birth patterns; rather, Beijing has simply changed the ration. Now two children per family will be permitted.

The first partial relaxation came two years ago, when Chinese authorities decreed that spouses who were both an only child would be allowed to have two children. This fine-tuning was expected to result in several million additional births—but only a fraction of that number of couples even applied for a second ration coupon. Now, after 3½ decades of attempted one-child enforcement, the government can no longer ignore that its policy of forcible population control has been a disaster. As the Communist Party prepares for its 13th five-year plan, it must survey what its quest to remold the Chinese family has wrought.

The one-child mandate is the single greatest social-policy error in human history. After Mao Zedong’s death in 1976, his legatees were horrified to discover how little they had inherited. Despite almost three decades of “socialist construction,” China was still overwhelmingly rural and desperately poor. More than 97% of the country lived below the World Bank’s notional $1.25 a day threshold for absolute poverty, according to recent Chinese estimates. With a population still rapidly growing, China seemed on the brink of losing the race between mouths and food.

In their attempt to process these facts, Chinese leaders stumbled into an elementary neo-Malthusian misdiagnosis. Rather than focus solely on undoing the crushing inefficiencies of their Maoist economy, they blamed abysmal productivity on the childbearing patterns of their subjects. The outcome was involuntary birth control, promulgated through a vast scheme of quotas and an army of family-planning agents.

This was Socialist “scientism”—ideology masquerading as science—of the highest order. The broad outline was established on calculations by a Moscow-minted engineer in China’s nuclear program. These computations bore no relation to the actual ways in which Chinese men and women thought about family life. As soon as the policy was rolled out in 1980 and 1981, it collided with human realities.

First came alarming reports that female infanticide, an ancient practice, had once again erupted throughout the countryside. China’s 1982 census, released some years later, showed an unnatural imbalance in the sex ratio for birth-year 1981 on the order of hundreds of thousands of missing baby girls.

Infanticide was then replaced by mass sex-selective abortion, made possible in the late 1980s by increased rural access to ultrasound machines. China’s sex ratio climbed to nearly 120 baby boys for every 100 baby girls, where it plateaued around 2000. Although a war against baby girls is evident in other countries—India and Taiwan among them—leading Chinese demographers have suggested that half or more of China’s imbalance may directly result from the one-child policy.

The precise long-term effects have yet to be accurately estimated. Chinese authorities claim that the country has 400 million fewer people due to the one-child policy, because they have overseen that many abortions. But this misleading metric ignores the distinction between forced and voluntary abortions.

To the extent that the policy has achieved its objective, it magnified the demographic problems that Communist planners are apparently only now beginning to acknowledge. Fertility levels in urban China were already well below replacement by 1980. Today the country is on track to go gray at a shocking tempo. Two years ago, working-age manpower began to decline, according to Chinese authorities. The only close comparator is post-bubble Japan: not a cheering vision for what remains a relatively poor society.

And China’s cities are now producing a new family type utterly unfamiliar to Chinese history: only children begotten by only children. They have no siblings, cousins, uncles or aunts, only ancestors (and perhaps, one day, descendants). But in a low-trust society, extended social networks, known in Chinese as guanxi, play a vital economic role. They reduce uncertainty and transaction costs by providing the reassurance supplied elsewhere by rule of law and transparency. How will Chinese economic performance be affected by the atrophy of the extended family?

Beijing’s latest adjustments to population plans seem to have been prompted by economic concerns, yet these changes will have only modest demographic repercussions. Like other East Asian locales without forced population control, the average desired family size in China appears to be far below replacement. Beijing also can’t rely on immigration for demographic help. Even modest gains from the new policy will take decades to have an economic impact.

Contemporary China has a host of top-flight demographers and population economists—and so far as I can tell, almost all are critics of their country’s population program. Some are concerned with human-rights violations; most pragmatically regard the one-child policy as painfully, obviously counterproductive. A number of these experts wrote a letter to the State Council a decade ago urging “reconsideration” (translation: complete scrapping) of the one-child norm—to no effect.

Why has Beijing stubbornly ignored the advice of its own top talent? My baffled Chinese colleagues speculate on possible explanations: the difficulty of re-tasking the vast army of population-control bureaucrats; the value of the hefty fines exacted for out-of-quota births; the neo-Malthusian ideology to which China’s bosses still seem to be slave.

All of these are plausible, but they overlook a key piece: the Chinese government’s undying claim to totalitarian control over the most basic details of its subjects’ lives, revealed as well by the retrogradehukou system of residence permits that makes urban China’s migrant workers illegal aliens in their own country. For all the talk of “reforming”—and we have been hearing it overseas for almost two decades now—the Chinese government has been unwilling to dispense with these instruments of social control precisely because they are instruments of social control.

The “fatal conceit” (to borrow Friedrich Hayek’s term) of China’s population planners was that they could micro-calibrate the behavior of the men and women under their command. The new two-child policy suffers the same flaw. As long as Beijing deforms Chinese society with these misbegotten tools, the nation’s future will be compromised, poorer and sadder than it otherwise could be.

Mr. Eberstadt is a political economist at the American Enterprise Institute in Washington, D.C.

…It’s like we Americans can’t even “wipe our ass” any longer, without consulting a lawyer! It’s bad enough that we are destroying corporate America, the vibrancy of our economy, and jobs, with excessive litigation, regulation, and compliance. But isn’t it even more worrisome that our government cares so much about “CYA” legal matters on such an important national security and military matter? Someone might say, “CYA, what do you mean, we were just trying to follow U.S. and International law?” Really? Read the article below, these lawyers were prepared to bend (and did) their opinions in any almost manner necessary, to document the action taken, so that the government could CYA and say “we followed the law”. I and many others believe America is being destroyed by litigation, regulation, compliance and the CYA culture it fosters (and don’t get me started on our PC culture). One related story: I was over at USC for an event last year at their new athletic center. I was standing in a very cool area, where I am guessing recruits and their families come to visit. As I looked around, there were lots of big screen TV’s, with sporting events being shown. One big TV, separate from all the others, stood out to me. It constantly scrolled through a version of the USC Athletic department’s “Ten Commandments” and then unbelievably scrolled through the names of individual current athletes and asked them to “see the assistant athletic dean” to resolve various compliance matters. I could be wrong, but this floor and area did not seem to me to be where current athletes might regularly walk by and why wouldn’t you notify them via text or email or an online website? I thought for a moment and then it hit me. This TV was CYA for the NCAA investigators and compliance folks…to show them that the USC athletic department had changed and embraced a culture of regulation and compliance. I wonder, how many of the jobs created in this economic recovery are regulatory and compliance jobs? I can tell you in banking, and I bet in the USC athletic department, its all of them. I fear the rest of the world is going to run us over, laughing at all of our unproductive CYA rules and jobs.” Mike Perry

Politics  

How 4 Federal Lawyers Paved the Way to Kill Osama bin Laden

By CHARLIE SAVAGE

WASHINGTON — Weeks before President Obama ordered the raid on Osama bin Laden’s compound in May 2011, four administration lawyers developed rationales intended to overcome any legal obstacles — and made it all but inevitable that Navy SEALs would kill the fugitive Qaeda leader, not capture him.

Stretching sparse precedents, the lawyers worked in intense secrecy. Fearing leaks, the White House would not let them consult aides or even the administration’s top lawyer, Attorney General Eric H. Holder Jr.They did their own research, wrote memos on highly secure laptops and traded drafts hand-delivered by trusted couriers.

From left, Stephen W. Preston, the C.I.A.’s general counsel; Mary DeRosa, the National Security Council’s legal adviser; then-Rear Admiral James W. Crawford III, the Joint Chiefs of Staff legal adviser, and Jeh C. Johnson, the Pentagon general counsel worked secretly on clearing legal hurdles for the 2011 raid against Osama bin Laden. Credit Chip Somodevilla/Getty Images; U.S. Government; Doug Mills/The New York Times

Just days before the raid, the lawyers drafted five secret memos so that if pressed later, they could prove they were not inventing after-the-fact reasons for having blessed it. “We should memorialize our rationales because we may be called upon to explain our legal conclusions, particularly if the operation goes terribly badly,” said Stephen W. Preston, the C.I.A.’s general counsel, according to officials familiar with the internal deliberations.

While the Bin Laden operation has been much scrutinized, the story of how a tiny team of government lawyers helped shape and justify Mr. Obama’s high-stakes decision has not been previously told. The group worked as military and intelligence officials conducted a parallel effort to explore options and prepare members of SEAL Team 6 for the possible mission.

The legal analysis offered the administration wide flexibility to send ground forces onto Pakistani soil without the country’s consent, to explicitly authorize a lethal mission, to delay telling Congress until afterward, and to bury a wartime enemy at sea. By the end, one official said, the lawyers concluded that there was “clear and ample authority for the use of lethal force under U.S. and international law.”

Some legal scholars later raised objections, but criticism was muted after the successful operation. The administration lawyers, however, did not know at the time how events would play out, and they faced the “unenviable task” of “resolving a cluster of sensitive legal issues without any consultation with colleagues,” said Robert M. Chesney, a law professor at the University of Texas at Austin who worked on a Justice Department detainee policy task force in 2009.

“The proposed raid required answers to many hard legal questions, some of which were entirely novel despite a decade’s worth of conflict with Al Qaeda,” Mr. Chesney said.

Bin Laden watching himself on television in a video image released by the Pentagon in May 2011. Five videos were found in his compound. Credit Department of Defense, via Reuters

This account of the role of the four lawyers — Mr. Preston; Mary B. DeRosa, the National Security Council’s legal adviser; Jeh C. Johnson, the Pentagon general counsel; and then-Rear Adm. James W. Crawford III, the Joint Chiefs of Staff legal adviser — is based on interviews with more than a half-dozen current and former administration officials who had direct knowledge of the planning for the raid. While outlines of some of the government’s rationales have been mentioned previously, the officials provided new insights and details about the analysis and decision-making process.

The officials described the secret legal deliberations and memos for a forthcoming book on national security legal policy under Mr. Obama. Most spoke on the condition of anonymity because the talks were confidential.

‘The Biggest Secret’

“I am about to read you into the biggest secret in Washington,” Michael G. Vickers, the under secretary of defense for intelligence, told Mr. Johnson.

It was March 24, 2011, about five weeks before the raid. Not long before, officials said, Mr. Preston and Ms. DeRosa had visited the Pentagon to meet with Mr. Johnson and Admiral Crawford, the nation’s two top military lawyers. The visitors posed what they said was a hypothetical question: “Suppose we found a very high-value target. What issues would be raised?”

One was where to take him if captured. Mr. Johnson said he would suggest the Guantánamo Bay prison, making an exception to Mr. Obama’s policy of not bringing new detainees there.

But the conversation was necessarily vague. The Pentagon lawyers needed to know the secret if they were going to help, Mr. Preston told Ms. DeRosa afterward.

By then, the two of them had known for over six months that the C.I.A. thought it might have found Bin Laden’s hiding place: a compound in Abbottabad, a military town in northeastern Pakistan. Policy makers initially focused on trying to get more intelligence about who was inside. By the spring of 2011, they turned to possible courses of action, raising legal issues; Thomas E. Donilon, national security adviser to Mr. Obama, then allowed the two military lawyers to be briefed.

One proposal Mr. Obama considered, as previously reported, was to destroy the compound with bombs capable of taking out any tunnels beneath. That would kill dozens of civilians in the neighborhood. But, the officials disclosed, the lawyers were prepared to deem significant collateral damage as lawful, given the circumstances. Still, the Obama team’s examination of the legal factors intertwined with policy concerns about the wisdom of that option, Mr. Donilon said.

The house in Abbottabad, Pakistan, where Bin Laden was killed in a raid by Navy SEAL Team 6.

“Not only would there be noncombatants at the compound killed, there could be completely innocent people. That was a key factor in the decision” not to bomb it, he said, adding that the likely impossibility of verifying afterward that Bin Laden had been killed would have heightened controversy over bystander casualties. “All it would have bought us was a propaganda fight.”

Mr. Preston delivered a cabinet-level briefing on April 12, and as the National Security Council deliberated over that and two other options — a more surgical drone strike, which might miss, or a raid by American forces, which carried its own risks — a few other lawyers were eventually told the secret. But the White House kept senior lawyers at the Justice and State Departments in the dark.

On April 28, 2011, a week before the raid, Michael E. Leiter, the director of the National Counterterrorism Center, proposed at least telling Mr. Holder. “I think the A.G. should be here, just to make sure,” Mr. Leiter told Ms. DeRosa.

But Mr. Donilon decided that there was no need for the attorney general to know. Mr. Holder was briefed the day before the raid, long after the legal questions had been resolved.

As they worked out their reasoning, the four lawyers conferred in secure conference calls and stopped by Ms. DeRosa’s office after unrelated meetings. They gave no hint to colleagues that anything was afoot. Then, as the possible date for a raid neared, Mr. Preston grew tense and proposed writing the memos.

Mr. Johnson wrote one on violating Pakistani sovereignty. When two countries are not at war, international law generally forbids one from using force on the other’s soil without consent. That appeared to require that the United States ask the Pakistani government to arrest Bin Laden itself or to authorize an American raid. But the administration feared that the Pakistani intelligence service might have sanctioned Bin Laden’s presence; if so, the reasoning went, asking for Pakistan’s help might enable his escape.

The lawyers decided that a unilateral military incursion would be lawful because of a disputed exception to sovereignty for situations in which a government is “unwilling or unable” to suppress a threat to others emanating from its soil.

Invoking this exception was a legal stretch, for two reasons. Many countries have not accepted its legitimacy. And there was no precedent for applying it to a situation in which the United States did not first ask Pakistan, which had helped with or granted consent for other counterterrorism operations. But given fears of a tip-off, the lawyers signed off on invoking the exception.

There was also a trump card. While the lawyers believed that Mr. Obama was bound to obey domestic law, they also believed he could decide to violate international law when authorizing a “covert” action, officials said.

If the SEALs got Bin Laden, the Obama administration would lift the secrecy and trumpet the accomplishment. But if it turned out that the founder and head of Al Qaeda was not there, some officials thought the SEALs might be able to slip back out, allowing the United States to pretend the raid never happened.

A staircase in the house where Osama bin Laden was killed.

Mr. Preston wrote a memo addressing when the administration had to alert congressional leaders under a statute governing covert actions. Given the circumstances, the lawyers decided that the administration would be legally justified in delaying notification until after the raid. But then they learned that the C.I.A. director, Leon E. Panetta, had already briefed several top lawmakers about Abbottabad without White House permission.

The lawyers also grappled with whether it was lawful for the SEAL team to go in intending to kill Bin Laden as its default option. They agreed that it would be legal, in a memo written by Ms. DeRosa, and Mr. Obama later explicitly ordered a kill mission, officials said. The SEAL team expected to face resistance and would go in shooting, relying on the congressional authorization to use military force against perpetrators of the Sept. 11 terrorist attacks.

The law of war required acceptance of any surrender offer that was feasible to accept, the lawyers cautioned. But they also knew that military rules of engagement in such a situation narrowly define what would count. They discussed possible situations in which it might still be lawful to shoot Bin Laden even if he appeared to be surrendering — for instance, if militants next to him were firing weapons, or if he could be concealing a suicide vest under his clothing, officials said.

Matt Bissonnette, one of the SEALs who participated in the raid, recalled in his 2012 memoir, “No Easy Day,” that during their preparations, a Washington lawyer told them, “If he is naked with his hands up, you’re not going to engage him.” Mr. Bissonnette and Robert O’Neill, who also joined in the raid, disagree about who fired the fatal shot at Bin Laden. But on a key point they concur: In Bin Laden’s final moments, he neither resisted nor surrendered.

Ms. DeRosa wrote a memo on plans for detaining Bin Laden in the event of his capture. But in a sign of how little expectation there was for his survival, the administration made no hard decisions. The plan was to take him to the brig of a naval ship for interrogation and then figure out how to proceed. The lawyers also considered writing a memo describing their earlier analysis about what to do with any other living prisoners taken out of the compound, but did not write it because the final plan did not call for the SEALs to leave with anyone else.

No Shrines

The final legal question had been whether the United States, to avoid creating a potential Islamist shrine, could bury Bin Laden at sea.

The Geneva Conventions call for burying enemies slain in battle, “if possible,” in accordance with their religion — which for Muslims means swift interment in soil, facing Mecca — and in marked graves. Still, some Islamic writings permit burial at sea during voyages. The burial memo, handled by Admiral Crawford, focused on that exception; ultimately, burial at sea is religiously acceptable if necessary, and is not a desecration, it said.

The lawyers decided that Saudi Arabia, Bin Laden’s home, must be asked whether it wanted his remains. If not, burial at sea would be permissible. As expected, the Saudis declined, officials said.

President Obama and other officials in the Situation Room on the day of the raid that killed Osama bin Laden. A classified document in front of Hillary Rodham Clinton was blurred before this photo was released. Credit Pete Souza/The White House

On Sunday, May 1, the day of the raid, Mr. Johnson rose early, planted impatiens in his yard, put on a sport coat and told his wife he had to go to the office. First, he took communion at his Episcopal church. Admiral Crawford attended Mass at his Catholic parish. He and Mr. Johnson converged at a Pentagon operations center.

Mr. Preston packed a toothbrush and a change of clothes so he could stay overnight at C.I.A. headquarters if the operation went awry. He joined Mr. Panetta in the director’s conference room, then doubling as a command center. Ms. DeRosa came to the White House.

As the SEALs arrived at the compound in Pakistan, Mr. Obama went into a small anteroom off the Situation Room to watch a live video feed. Most of his senior team followed him, as depicted in a famous photo. The four lawyers who had helped clear the way for the operation were not in the frame.

Correction: October 28, 2015

Because of an editing error, an earlier version of a photo caption with this article reversed the two men on the right in photos of four lawyers who worked for the Obama administration. Jeh Johnson is on the far right, and Rear Admiral James W. Crawford III is second from right

An earlier version of this article also had the wrong middle initial for the national security adviser to Mr. Obama in 2011. He is Thomas E. Donilon, not Thomas W. Donilon.

This article is adapted from “Power Wars: Inside Obama’s Post-9/11 Presidency,” by Charlie Savage, to be published next week by Little, Brown & Company.

A version of this article appears in print on October 29, 2015, on page A1 of the New York edition with the headline: How 4 Lawyers Enabled Killing of Bin Laden.

 

…The high rates and aggressive collection practices of payday lenders cause consumers to lose their bank accounts and sometimes to exit the formal banking system entirely. Well-structured small bank loans, repayable in installments, could prevent that….. If regulators do not require excessive underwriting and documentation procedures for loans that meet basic safety guidelines, origination costs will also be low. Losses on these loans are typically modest, because access to a customer’s checking account gives lenders strong collateral. Credit unions that have offered such services have written off between just 2 and 4 percent of their loans….. When discussing financial inclusion, it is tempting to focus on people who are not considered part of the financial mainstream. But most people who use fringe financial services actually are bank customers, and we should be devising ways for them to stay in the banking system rather than creating the risk that they might fall out. Banking services should be geared to their needs, and regulations should not render large groups of middle- to low-income customers as “too small to help.” If our banking system is going to become an inclusive one that works for everyone and not just the affluent, allowing banks to offer small installment credit would be a great place to start.”, Frederick Wherry, “Payday Loans Cost the Poor Billions, and There’s an Easy Fix”, The New York Times, October 29, 2015

“I agree 100% with Professor Wherry, but let’s be clear…it’s government bank regulators (including the Consumer Financial Protection Bureau) that have prohibited banks from offering these loans to poor Americans on much better terms (than payday lenders). That’s why it’s so dangerous for government regulators to prohibit any type of lending that banks and borrowers believe is in their mutual interest. (I am pro-life, but a good analogy is abortions. Make them illegal and many will still get done. Just in a very bad way.) The regulators can address the risk of any type of lending, by placing limits on it (as a percent of a bank’s assets or capital) and/or requiring more capital to be held against it and/or limiting its annual growth rate at individual banks.”,  Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages

Payday Loans Cost the Poor Billions, and There’s an Easy Fix

By FREDERICK WHERRY

EVERY year, millions of Americans who need a short-term loan to repair a car, fly quickly to a sick relative’s bedside, or catch up on child care payments find themselves going to payday lenders, either online or through one of the thousands of payday-lending storefronts. These are not people without credit or steady jobs. They simply can’t borrow such small amounts through the traditional banking system.

What might start as a $500 lifeline can quickly become a heavy burden. Annual interest rates for payday loans typically run between 391 and 521 percent, according to the Center for Responsible Lending, and most people who use them end up paying more in fees over the course of the year than they originally received in credit. Nationally, borrowers spend roughly $8.7 billion per year on payday-loan fees.

The United States government could put billions of dollars back into the pockets of these consumers by fixing a small regulatory problem and allowing banks to get into the business of small loans.

Currently, the Office of the Comptroller of the Currency, which regulates banks, has such stringent underwriting standards that it costs more for banks to meet the paperwork-intensive requirements than they could reasonably charge for such small sums. Indeed, the regulations have in practice (though not in rule) banned banks from offering small credit to a broad range of people. Encouraging banks to lend small sums would benefit both banks and customers.

I am in the midst of conducting research in several parts of the country with low- and moderate-income households who live paycheck to paycheck. Some of them use credit to manage fluctuations in their budgets. And they are not the unbanked — a checking account and an income are both required to secure a payday loan.

We should change the regulations so that these customers could stay in the financial mainstream and not leave banks where they already have accounts just to go borrow a few hundred dollars. The high rates and aggressive collection practices of payday lenders cause consumers to lose their bank accounts and sometimes to exit the formal banking system entirely. Well-structured small bank loans, repayable in installments, could prevent that.

While these loans will never be a big part of banks’ revenue compared with mortgages and credit cards, some banks are interested in offering them. A federal regulatory framework issued by the Consumer Financial Protection Bureau this year provides an initial pathway for banks to issue loans with payments limited to an affordable 5 percent of monthly income. Some credit unions already make such loans and a survey by the Pew Charitable Trusts estimates that a $500 loan made to a typical borrower would cost about $250 in finance charges over six months. The same loan from a payday lender typically costs well over $1,000.

So far policy makers have proposed a much more complex way to address this: Let the Postal Service do it. Senator Elizabeth Warren, Democrat of Massachusetts, proposed that the post office offer low-cost financial services like small loans to compete with payday lenders, with banks supplying help on the back end. It would be “the public option” for small-scale finance, but it would require that a new infrastructure of services be built and new skills acquired. Even if the Postal Service idea could be implemented without a technological glitch, the idea has already run into political opposition.

Banks are in a stronger position both to address emergency needs quickly and to achieve scale in the business. There are nearly 100,000 bank branches in the United States, and most banks could lend to their customers through their websites, mobile platforms, A.T.M.s or automated phone systems. That would help keep down the overhead costs that are the main driver of high payday loan prices. If regulators do not require excessive underwriting and documentation procedures for loans that meet basic safety guidelines, origination costs will also be low. Losses on these loans are typically modest, because access to a customer’s checking account gives lenders strong collateral. Credit unions that have offered such services have written off between just 2 and 4 percent of their loans.

By contrast, the post office does not have easy access to a person’s financial history, the ability to see whether there might be the resources available to repay the loan or the wide range of platforms already available for customers to apply for and receive a loan.

When discussing financial inclusion, it is tempting to focus on people who are not considered part of the financial mainstream. But most people who use fringe financial services actually are bank customers, and we should be devising ways for them to stay in the banking system rather than creating the risk that they might fall out. Banking services should be geared to their needs, and regulations should not render large groups of middle- to low-income customers as “too small to help.” If our banking system is going to become an inclusive one that works for everyone and not just the affluent, allowing banks to offer small installment credit would be a great place to start.

Frederick Wherry is a professor of sociology at Yale University and the author of “The Culture of Markets.”

A version of this op-ed appears in print on October 29, 2015, on page A31 of the New York edition with the headline: Failing the ‘Too Small to Help’.

…and as a participant in the deliberations of the Fed’s Open Market Committee. The problem is that the writers offer no tangible solution to the problems they so capably describe… Monetary policy, especially quantitative easing, has made the rich richer (Democrats and Republicans can agree on that) but fiscal and regulatory policy has made conditions worse for middle-income groups, undermining the economy. Easy money was supposed to go into creating meaningful jobs for middle-income, hardworking Americans; fiscal policy and regulatory policy has discouraged it from working….. We do not need more easy money. We need tax, spending and regulatory (and educational) policy—none of which is within the capacity of the Fed—to encourage investment in new, higher-paying jobs.”, Richard Fisher, The Wall Street Journal, October 29, 2015

Opinion Letters

Congress, Not the Fed, Must Act for Growth

We do not need more easy money. We need tax and spending and regulatory (and educational) policy—none of which is within the capacity of the Fed.

Kevin Warsh and Mike Spence wrote a good primer that should be read by all presidential candidates (“The Fed Has Hurt Business Investment,” op-ed, Oct. 27). I especially like it because it repeats everything I said for years as president of the Federal Reserve Bank of Dallas and as a participant in the deliberations of the Fed’s Open Market Committee.

The problem is that the writers offer no tangible solution to the problems they so capably describe. This is where presidential aspirants come in. Monetary policy, especially quantitative easing, has made the rich richer (Democrats and Republicans can agree on that) but fiscal and regulatory policy has made conditions worse for middle-income groups, undermining the economy. Easy money was supposed to go into creating meaningful jobs for middle-income, hardworking Americans; fiscal policy and regulatory policy has discouraged it from working. The simple analogy is this: The Fed filled the gas tank of the car that is the economy and then some—the tank is overflowing—but only Congress and the executive can provide the incentive for job creators (80%-plus of jobs are created by small- and medium-size businesses) to step on the accelerator and drive the engine of job creation forward. Without proper fiscal and regulatory policy, loose monetary policy represents pushing on a string.

We do not need more easy money. We need tax, spending and regulatory (and educational) policy—none of which is within the capacity of the Fed—to encourage investment in new, higher-paying jobs.

During the crisis and the early recovery, I said in public that “the U.S. economy was the best looking horse in the glue factory” but “proper fiscal and regulatory policy, monetary policy could be harnessed to transform us into the economic equivalent of Secretariat winning by 30 lengths at Belmont in 1973.” We need a president who will jockey that transformation.

My vote for president will go to that candidate who will have the most convincing plan for transforming our economy back into being the most muscular thoroughbred on the global economy racetrack.

Richard Fisher

Dallas

Mr. Fisher served as president of the Federal Reserve Bank of Dallas for 10 years until last March.

“It’s not just directors. Even more importantly, it’s the management teams of these companies; especially the CEOs, CFOs, and General Counsels. You think directors focusing much of their time on regulatory compliance matters is a problem for the company and the U.S. economy? It’s much worse when management is doing the same. Corporate America today doesn’t “wipe its ass” these days without consulting a lawyer to make sure they have ZERO chance of violating any government rule or regulation (no matter how inconsequential to the company, employees, customers, shareholders, or the safety of Americans, generally).”, Mike Perry, former Chairman and CEO, IndyMac Bank

October 28, 2015, William R. Baker and Joel H. Trotter, The Wall Street Journal

Opinion

Nothing to Fear From the SEC?

Directors of public companies are preoccupied with costly and time-consuming regulatory compliance.

SEC Commissioner Luis Aguilar. PHOTO: GETTY IMAGES

By William R. Baker III And Joel H. Trotter

In a recent speech to corporate directors in New York City, Luis Aguilar, the longest-serving commissioner on the Securities and Exchange Commission, stated that “the SEC has rarely brought cases against directors” of public companies and that “directors should have nothing to fear from the SEC” if they are conscientious and responsible.

Mr. Aguilar is right about the SEC’s historical approach to enforcement against directors in their personal capacity. But from what we see every day in the boardrooms of corporate America, we’re not so sure he has drawn the correct conclusion. Our experience suggests that board members are more concerned than ever about regulatory liability—and with good reason.

Two years ago, SEC Chairman Mary Jo White announced the agency’s specific focus on “deficient” directors and other gatekeepers who “should be serving as the neighborhood watch” but “fail to do their jobs.” She bluntly warned that serving as a director “is not for the uninitiated or the faint of heart.”

The SEC is not looking only to go after egregious, enterprise-level meltdowns. Instead, during Ms. White’s tenure, the SEC has implemented a “broken windows” enforcement program that targets “violations and violators regardless of size.” Ms. White has explained that “it is important to pursue even the smallest infractions” because “minor violations that are overlooked or ignored can feed bigger ones.”

Meanwhile, public companies face a host of new rules and potential infractions. The 2010 Dodd-Frank financial law alone has to date spawned more than 13,700 pages and 15 million words of enabling regulations, with more mandatory rulemakings to follow.

The costs associated with SEC enforcement actions have never been higher. A recent U.S. Chamber of Commerce study reported that an SEC investigation imposes $4.6 million in average direct costs. Even when the SEC determines no wrongdoing, companies can incur enormous financial costs, with some investigations running well over $100 million.

Yet beyond their financial impact, SEC enforcement actions impose direct and indirect costs on public companies and their officers and directors, including management and board distraction and reputational harm.

The collateral damage can be far-reaching. Where companies choose to disclose a pending SEC investigation, proxy advisory firms such as Institutional Shareholder Services tend to use an inflexible approach in the governance ratings they publish, not taking into account the underlying merits of pending proceedings and negatively swaying votes at shareholder meetings.

Directors are now preoccupied with regulatory compliance at the expense of time spent growing their companies. That’s bad for business, and bad for the U.S. economy.

Mr. Baker, a former associate director of the SEC’s Division of Enforcement, and Mr. Trotter are partners in the Washington, D.C., office of Latham & Watkins LLP.

…If that continues for years (as it has for some of the Too Big to Fail Banks mentioned in the article below), then these banks should eliminate any dividend payments, shrink their assets (by attrition/not growing and/or asset sales that don’t result in losses greater than the market value discount to book value), and use all excess capital to buy back shares until their stock price trades at or above their book value per share or they have liquidated the entire bank. Simple as that.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“It is no surprise that investors think CIT might be worth more in parts than as a whole, or that it could offer better returns as a smaller bank. A look across the landscape of the big banks shows just how hard it is for them to earn acceptable returns. On a trailing 12-month basis, returns on equity for Bank of America, Citigroup, and J.P. Morgan are all below the 10% benchmark considered to be their theoretical cost of capital. The question for investors then is whether dismantling some of these banking empires might produce better results. Obviously that would be a complicated, and fraught, exercise. Still, Bank of America and Citigroup, whose shares have languished below book value for seven years, seem like good candidates for devolution. Bothbanks could be broken up by cleaving their commercial banks from their investment banks. Citigroup perhaps could sell off its international assets. In light of the market’s reaction to Mr. Thain’s departure, boards at long beaten-down banks should at least begin to question whether their current structure is stifling shareholder value.”, John Carney, “These Two Big Banks Should Follow CIT’s Lead”, The Wall Street Journal, October 27, 2015

Markets

Heard on the Street

These Two Big Banks Should Follow CIT’s Lead

Investors reacted positively to John Thain’s departure from CIT. Beleaguered big banks should take note.

The John Thain era at CIT Group ended last week. PHOTO: CHRIS GOODNEY/BLOOMBERG NEWS

By John Carney

John Thain’s quest to build a banking empire at CIT Group came to an end last week. That should be an occasion for soul searching in the boardrooms of some of the biggest U.S. banks.

Mr. Thain bears the dubious distinction of having built the first intentionally created SIFI, or “systemically important financial institution.” He earned that through the acquisition of OneWest Bank, a move that pushed CIT’s assets above the $50 billion threshold that qualifies a bank for extra measures of supervisory scrutiny.

Investors initially applauded the move. It promised CIT low-cost deposit funding, pointed the way to asset growth, and put the bank’s abundant capital to work. The stock shot up nearly 14% after the deal was announced.

Yet the enthusiasm didn’t last. Before last week’s announcement, CIT’s shares had declined around 13% from the start of the year, compared with a 4.6% decline in the KBW Nasdaq Bank index. Even after the bounce following Thain’s departure bounce, CIT’s stock was still underperforming.

But Mr. Thain’s exit wasn’t the only high-level departure at the bank. Investors also learned last week that finance chief Scott Parker was also leaving. Typically, the resignation of two top executives so close together would be cause for concern.

But rather than read this as a signal that something might have gone awry at CIT, investors breathed a sigh of relief. They sent the stock up sharply higher.

Why relief? Mr. Thain’s departure likely means CIT will no longer be pushing itself into the big league of banks. As if to underline that message, the bank also announced it would look to sell its Canadian and China operations and explore options for its $10 billion commercial air business. CIT’s life as a SIFI may prove short indeed.

It is no surprise that investors think CIT might be worth more in parts than as a whole, or that it could offer better returns as a smaller bank. A look across the landscape of the big banks shows just how hard it is for them to earn acceptable returns.

On a trailing 12-month basis, returns on equity for Bank of America, Citigroup, and J.P. Morgan are all below the 10% benchmark considered to be their theoretical cost of capital. The question for investors then is whether dismantling some of thesebanking empires might produce better results.

Obviously that would be a complicated, and fraught, exercise. Still, Bank of America and Citigroup, whose shares have languished below book value for seven years, seem like good candidates for devolution. Both banks could be broken up by cleaving their commercial banks from their investment banks. Citigroup perhaps could sell off its international assets.

In light of the market’s reaction to Mr. Thain’s departure, boards at long beaten-down banks should at least begin to question whether their current structure is stifling shareholder value.

…This is at least as true in investing as it is in sports…….In his book, Taleb talks about “alternative histories,” which I describe as “other things that reasonably could have happened but didn’t.” Sure, the Seahawks lost the game (the 2015 Super Bowl). But they could have won, and Carroll’s decision would have made the difference in that case, too, making him the hero instead of the goat. So rather than judge a decision solely on the basis of the outcome, you have to consider (a) the quality of the process that led to the decision, (b) the a priori probability that the decision would work (which is very different from the question of whether it did  work), (c) the other decisions that could have been made, (d) all of the events that reasonably could have unfolded, and thus (e), which of the decisions had the highest probably of success.”, Howard Marks, Memo to Oaktree Clients, “Inspiration from the World of Sports”, October 22, 2015

“I contend that based on the above criteria, I made the correct decisions for IndyMac Bank, especially those decisions I made in 2007 and 2008. The fact that they didn’t work out, doesn’t mean they were not correct. It means that we experienced a highly improbable, nearly unpredictable series of financial and economic events that were beyond my and my management team’s (or any financial institution with our home lending business model) control. Fannie Mae, Freddie Mac, FHA, the FDIC, and several Too Big to Fail Banks (among many others) all failed or would have (if the government had not bailed them out) during the crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Inspiration from the World of Sports

…and is one we will return to as we prepare for trial.  Thanks for this analysis. YYY

On Apr 26, 2012, at 8:21 PM, “Michael Perry” wrote:

AAAA,
Here is the email we discussed earlier this evening. Love to get the team’s thoughts on this. thanks, mike

I am not a statistician or expert on securities disclosures and stock prices, but I think the SEC’s allegations against me and Indymac’s former CFO are ridiculous when you step back and look at the big picture (material issues).

Here is what I am talking about:

1. Indymac’s stock price declined 86.8% in 2007, from $45.16 at December 31, 2006 to $5.95 at December 31, 2007.

2. It declined every quarter in 2007.

3. It declined 10 of 12 months in 2007.

4. It declined 29% in Q12007, it declined 9% in Q22007, it declined 10.1% in Q32007, and it declined 74.8% in Q42007.

5. It declined 13.9% in Jan2007, it declined 11.7% in Feb2007, it declined 6.4% in Mar2007, it declined 5.6% in Apr2007, it rose 11% in May2007, it declined 13.1% in Jun2007, it decline 24.6% in Jul2007, it rose 10% in Aug2007, it declined 2.4% in Sep2007, it declined 43.2% in Oct2007, it declined 28.8% in Nov2007, and it decline 27.7% in Dec2007.

6. Based on Indymac’s December 31, 2006 stock price of $45.16 and its shares outstanding at that time, from the 2006 10-K of 73,017,356, Indymac had a total market value of $3,297,463,797.

7. Based on Indymac’s December 31, 2007 stock price of $5.95 and its shares outstanding at that time, from the 2007 10-K of 80,885,421, Indymac had a total market value of $614,729,200.

8. Investors lost $2.68 billion in market value during 2007 (81% of the market value at December 31, 2006).

This is what happened if you were an investor in Indymac in 2007, well BEFORE a single SEC allegation about Indymac’s securities disclosures. You were sitting there shell-shocked by the events of 2007, like I was given I did not sell a single share and in fact purchased 35,000 shares of Indymac stock for $1.03 million on March 23, 2007. And all of the above, happened BEFORE Indymac’s unprecedented Q42007 loss was known to management and/or disclosed to investors on February 12, 2008.

The above unprecedented shareholder losses occurred because investors clearly understood the material risks and uncertain prospects to Indymac and other financial institutions (especially those whose well-disclosed business models were tied to housing, mortgage lending, and the secondary mortgage markets) heading into 2008.

And on February 12, 2008 (ironically and really ridiculously the beginning of the SEC’s 90-day allegation period), we disclosed in an 8K filing the following material bad news in regards to Indymac’s fourth quarter of 2007, year 2007, and Indymac’s prospects:
1. A surprising and unprecedented $509 million after-tax loss for Q42007 vs. a $72 million after-tax profit for Q42006.

2. A huge loss for all of 2007; a $615 million after-tax loss vs. a $343 million after-tax profit for 2006.

3. Accumulated Other Comprehensive Loss (unrealized losses reducing common equity) increased a whopping 342% during 2007 to $139.2 million.

4. Book Value Per Share declined 40% during 2007, from $27.78 at December 31, 2006 to $16.61 at December 31, 2007.

5. Tier 1 Core Capital declined 16% in 2007, to 6.24% at December 31, 2007.

6. Nonperforming Assets (as a percentage of Total Assets), increased a whopping 635% in 2007 to an unprecedented 4.61% at December 31, 2007.

7. Loan production was $12.3 billion in Q42007, a 53% decline from the $26.3 billion produced in Q42006.

8. I opened the 2007 Shareholders letter stating the following: “2007 was a terrible year for our industry, for Indymac, and for you are owners.”

9. And I closed the 2007 Shareholders letter stating the following: “What happens if we are wrong (relative to the plan we laid out) and credit costs are higher or profitability is delayed further?” Then I went on to say the following: “And yes, things could get worse, including our potentially incurring more rightsizing costs, or selling non-performing assets in bulk at a loss or having to raise very dilutive capital…..”

And then three days later on February 15, 2008, I purchased 328,988 shares of Indymac stock at a total cost of more than $2.6 million.

Yes, market conditions for Indymac (and many others) got worse….far worse than we ever imagined……but “step back”……and think about the SEC’s allegations in the context of the above material facts.

By February 12, 2008, in my opinion, the “materiality” threshold for investors should have been VERY high….VERY. It would take something very big for shareholders to consider it material…..in my view.

Remember, in 2007 Indymac shareholders unfortunately lost $2.68 billion in market value, that is more than ten times larger than the $242.8 million in shareholder market value lost in 2008 (from January 1, 2008 through May 13, 2008); one full trading day after the end of the SEC’s allegation period. In fact, during the month January 2008, before any SEC disclosure allegations (alleging we mislead or omitted to inflate the stock price), the stock rallied 37.3%. From February 12, 2008 until May 9, 2008 (the period in which we allegedly inflated Indymac’s stock price), Indymac’s stock actually declined 58%, from $8.24 to $3.43. If we were misleading to “inflate” the stock (and we were not)….we sure did a pretty poor job. Finally, the SEC cites an 11% decline on May 12th and a 24% decline on May 13, 2008, as evidence that “the truth was partially revealed” and that’s why the stock declined so much. Their own expert says…..you can’t really measure this stuff and be statistically accurate, if there are “confounding disclosures” and there were a ton of them on this date. I would argue, as the SEC questioned me re., that the analysts two main focuses and “likely why” the stock declined post-release was as PPP noted in her email re. the analyst coverage: 1) continued uncertainty with respect to housing, credit losses and profitability, and 2) the plan showing the math of prospective book value per share dilution throughout the remainder of 2008. Bottom line, if shareholders on May 12, 2008 believed Indymac’s credit losses would be abating, and Indymac would be returning to profitability, and it wouldn’t have to issue any further dilutive shares…Indymac stock would have rallied considerably on May 12 and 13, 2008. I am sure of it. Also, these declines were not unprecedented. As the absolute stock price declined throughout 2007 and 2008….the daily stock price volatility increased significantly (see below analysis).

My kids school’s motto is “Action not Words”…….the SEC’s allegations are all minor wording disclosure issues…..not material financial issues for Indymac and its shareholders.

The SEC has manufactured a case…..with the benefit of hindsight and as you can see from Statements #5 through #11 on the blog, we are slowly but surely destroying each and every one of their meritless allegations…….but please don’t lose sight of the above “big picture”, as the SEC has done.

Other Points about the Stock in 2007 and 2008.

The SEC has the following in the complaint:

“….it closed on May 12, 2008, at $3.06 an 11% drop from its prior close of $3.43, on volume of 4.8 million shares. OnMay 13, Indymac’s stock fell 24%, closing at $2.32 on volume of 14.9 million shares.

Here are some facts I have derived from the stock price activity in 2007 and 2008:

1.       I didn’t do a statistical analysis, but the daily price volatility (percentage change up or down) clearly rises as the stock price declines throughout 2007 and 2008.

2.       The largest daily trading volume and highest percentage declines occur well after May, 12th….when the stock becomes a penny stock.

3.       As I recall, if a stock goes below $5…..lot’s of institutional players have to sell, per their charters….this can put pressure on the stock price alone and increase volatility.

4.       The 4.8 million share daily trading threshold……..cited in the complaint, is no big deal. In 2007,  38 (or 15%) of the trading days during the year had daily trading volume at or exceeding 4.8 million shares. From January 1, 2008 to February 11, 2008…..7 (or 25% of the total of the trading days) that had volume at or exceeding 4.8 million. From February 12, 2008 through May 13, 2008 (the end day cited in the complaint for stock prices)…..there were 6 (or 9% of the total of trading days) that had volume at or exceeding 4.8 million. From May 14, 2008 to July 14, 2008 (the first trading day after Indymac was seized by the FDIC), there were 14 (or 33% of the total of trading days) that had volume at or exceeding 4.8 million shares. After July 14, 2008……huge daily trading volumes occurred almost daily.

5.       In Jan2007, there were two daily declines of 7% or more. In Feb2007, there were none. In Mar2007 there was one. In Apr2007 through Jul2007 there was none. In Aug2007 there were four. In Sep2007 there was one. In Oct2007 there were four. In Nov2007 there were five. In Dec2007 there were four. There was a 10% decline on Sep52007. There was 10% decline on Oct232007. There was an 11% decline on Nov7, 2007. There was a 10% decline on Nov152007. There was a 13% decline on Nov262007. There was a 10% decline on Dec42007. There was a 10% decline on Dec112007. There was a 13% decline on Dec122007. All before ANY SEC allegations.

6.       In Jan2008, there were eight daily declines of 7% or more. There was a decline of 10% on Jan82008. There was a decline of 17% on Jan92008. There was a decline of 10% on Jan112008. There was a decline of 16% on Jan302008.  All before ANY SEC allegations.

7.       In Feb2008, there were four daily declines of 7% or more (two before and two after the SEC allegation period). There was a decline of 18% on Feb52008 (before the SEC allegation period). There was a decline of 10% on Feb282008 (after the SEC allegation period).

8.       In Mar2008, there were seven daily declines of 7% or more (during the SEC allegation period when we were allegedly withholding information to inflate the stock price). There was a 20% decline on Mar32008. There was a 10% decline on Mar62008. There was a 13% decline on Mar122008.

9.       In Apr2008, there were three daily declines of 7% or more. None above 10%.

10.   In May2008, there were seven daily declines of 7% or more. The stock rose 22% on May12008. It declined 12% on May52008. Both moves BEFORE “the truth was allegedly revealed”. It declined 11% on May122008. It declined 24% on May132008. It declined 14% on May132008. It declined 16% on May142008. It rose 17% on May222008. It declined 11% on May272008.

11.   In Jun2008, there were eight daily declines of 7% or more (well after “the truth was partially revealed”). The stock rose 11% on Jun32008. The stock rose 15% on June202008. There was a decline of 11% on Jun232008. There was a decline of 12% on Jun252008. There was a decline of 26% on Jun26 (caused by Schumer). There was a decline of 24% on Jun30 (caused by Schumer and our 8K filing on the bank run).

Bottom line……I think this additional information on the stock price shows that the stock became much more volatile on a daily basis as it declined throughout 2007 and 2008. Someone may be able to put all this together statistically….but at best, I think all the stock price data relative to disclosures is inconclusive……..the real conclusive facts are in the body of my email above.

P.S. I am going to look at DSPP issuance and see if I can see anything there.

Michael W. Perry
Chairman
RaubHIL LLC

…Why? It’s simple economics. If sophisticated, private, for-profit investors know that Fannie and Freddie, mandated by its government conservator, MUST sell off a portion of its credit risk within a specific period of time, who is really going to obtain great terms? Fannie Mae and Freddie Mac or the private investors? What’s the gross and net (after expected credit costs) yield these private investors are receiving? And what’s really the market value of the credit risk piece that Fannie and Freddie are keeping? I suspect a lower valuation than they have it on their books for (they probably account for it at cost)? Fannie and Freddie should be required to sell some of these “retained pieces” of credit risk, so we can see how the market really values those too. Economically, I am not sure, but I don’t think you can take a government guaranteed (subsidized lower than market rates) mortgage rate and “lay off” to the private markets a portion of the yield and credit risk, without creating a loss? Does this make sense? I think it does.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“First, taxpayers shouldn’t be left holding the bag for mortgage defaults. Instead, private capital needs to be brought back into this system. In 2013 the Federal Housing Finance Agency (FHFA) began the process of shifting mortgage credit risk from taxpayers to private markets. The agency directed Fannie and Freddie to sell some portion of the mortgage credit risk they assume when they issue mortgage-backed securities. These transactions disperse mortgage credit risk among a broad array of investors who knowingly and willingly take on this risk and its rewards. This builds liquidity in the market and reduces systemic and taxpayer risk. Market demand for these deals has been strong and new approaches to selling credit risk keep emerging, thereby broadening the range of market participants. Congress should pass legislation making sure that within four years all securitizations involve enough risk transfer so that taxpayers are left with credit risk only in catastrophic circumstances. Lawmakers can then decide whether to stop there, as in some current legislative proposals, or move the remaining risk away from taxpayers.” Edward DeMarco, “Put Fannie and Freddie Out of Taxpayers’ Misery”, The Wall Street Journal, August 21, 2015

Opinion

Put Fannie and Freddie Out of Taxpayers’ Misery

Seven years after the crash, why is the American public still on the hook for three out of every four new mortgages?

By Edward DeMarco

The collapse of the housing finance system played a pivotal role in the 2008 financial crisis and the Great Recession. Seven years later, fundamental problems with the system—especially the roles of Fannie Mae andFreddie Mac —remain unreformed. If today’s presidential candidates want to engage in a policy debate that affects the lives of nearly all Americans, this is it.

Fannie and Freddie purchase mortgages, bundle them into pools, and issue mortgage-backed securities to investors. Securitization allows investors to provide funds for families to buy houses, and those families’ monthly mortgage payments repay investors. If a borrower defaults, Fannie and Freddie guarantee investors repayment of their principal.

Before the crisis, Fannie and Freddie shareholders backed that guarantee. As losses overwhelmed shareholders’ equity in 2008, these “government-sponsored enterprises” were placed into federal conservatorships and taxpayers have since injected $188 billion into the companies to backstop their guarantees. Seven years later the conservatorships remain and the companies’ guarantees exceed the level when the conservatorships started.

Several comprehensive legislative proposals to replace Fannie and Freddie and revisit overall housing policy have been made. But nothing has happened. So taxpayers guarantee repayment to investors on roughly three out of every four new mortgages today.

PHOTO: GETTY IMAGES/COLLECTION MIX: SUBJECTS RF

The good news is that broad consensus exists on two core changes that could be implemented now:

First, taxpayers shouldn’t be left holding the bag for mortgage defaults. Instead, private capital needs to be brought back into this system. In 2013 the Federal Housing Finance Agency (FHFA) began the process of shifting mortgage credit risk from taxpayers to private markets. The agency directed Fannie and Freddie to sell some portion of the mortgage credit risk they assume when they issue mortgage-backed securities.

These transactions disperse mortgage credit risk among a broad array of investors who knowingly and willingly take on this risk and its rewards. This builds liquidity in the market and reduces systemic and taxpayer risk. Market demand for these deals has been strong and new approaches to selling credit risk keep emerging, thereby broadening the range of market participants.

Congress should pass legislation making sure that within four years all securitizations involve enough risk transfer so that taxpayers are left with credit risk only in catastrophic circumstances. Lawmakers can then decide whether to stop there, as in some current legislative proposals, or move the remaining risk away from taxpayers.

Second, housing-finance reforms being developed under the FHFA’s direction should accommodate firms beyond Fannie and Freddie. One reason for the conservatorships in 2008 was that the country lacked a viable secondary market without them. The common securitization platform introduced by FHFA in 2012 will fix that by creating the operational infrastructure for other firms to issue mortgage-backed securities equivalent to Fannie and Freddie’s. That will enable Congress to end the conservatorships and replace the Fannie-Freddie model.

This platform is not unprecedented. Ginnie Mae, a government corporation that securitizes mortgages guaranteed by the Federal Housing Administration and Veterans Administration, is an existing, successful model of a multi-issuer, single-security framework using a common securitization platform.

These two steps aren’t controversial. Every major legislative proposal in the past few years, Democratic and Republican, included them. What is needed is leadership, if not from the White House then from Congress.

Congress should also act now to avoid increasing taxpayers’ costs and risk. That means, to begin with, the recent sixfold increase in CEO pay at Fannie and Freddie should be reversed. Being CEO of a company in government conservatorship isn’t the same as running an independent financial institution, and CEO pay should reflect that.

Even more important, the limits that govern the size of a loan eligible for a Fannie or Freddie guarantee must not be raised. In trying to move credit risk away from taxpayers, it is folly to allow increases in loan limits. In most of the country, mortgages up to $417,000 are eligible for taxpayer backing through Fannie and Freddie. In high-cost areas, it goes up to $625,000. Lowering these limits is the best course, but at a minimum taxpayer guarantees should not be expanded at the upper end of the market as house prices recover.

Apart from Fannie and Freddie, national housing policy needs fresh thinking. Here are two questions that could get us started: Numerous federal housing policies such as the mortgage interest deduction and federal mortgage insurance programs subsidize borrowing (and drive up house prices). How can we encourage homeowners to build equity rather than subsidize them to carry more debt?

Government spends billions a year, including tax expenditures, on housing, much of which subsidizes higher-income homeowners. How could we eliminate some of this spending while redirecting another portion of it to the truly disadvantaged?

Now that’s a discussion worthy of a presidential debate.

Mr. DeMarco is a senior fellow at the Milken Institute’s Center for Financial Markets. He served as acting director of the Federal Housing Finance Agency and the conservator for Fannie Mae and Freddie Mac (2009-14).

“How clearer can it be? Cuba has been utterly destroyed (both economically and morally) by the Castro’s and socialism (which Nobel Laureate F.A. Hayek said, “leads every time to totalitarianism and The Road to Serfdom.”). And socialism is what many liberals and progressives in America, like Senators Bernie Sanders and Elizabeth Warren, wish for us? Bernie now touts Denmark, but didn’t he and his ilk tout the Soviet Union, Castro and Venezuela’s Chavez?”, Mike Perry

October 27, 2015, Azam Ahmed, The New York Times

Americas

In Cuba, an Abundance of Love but a Lack of Babies

By AZAM AHMED

A pregnant woman waiting outside a hospital in Havana. In an effort to spur birthrates, the government has begun encouraging young couples to have children. Credit Daniel Berehulak for The New York Times

HAVANA — A magnetic energy courses between Claudia Rodriguez and Alejandro Padilla, binding the couple in clichés of intimacy: the tendency to finish each other’s sentences; hands that naturally gravitate toward one another; a shared laughter that forms the soundtrack of their romance.

What their love will not bear, for the moment, is a family. Though they plan to marry and have children, they will wait — until they are no longer sharing a small apartment with a half-dozen others, or perhaps until obtaining diapers and formula is no longer a gamble.

In short, they will be waiting a long time.

“You have to take into consideration the world we live in,” said Ms. Rodriguez, 24, who says she has had two abortions to avoid having children too soon. Clutching Mr. Padilla’s hand, she said, “It would be so much harder with a child.”

By almost any metric, Cuba’s demographics are in dire straits. Since the 1970s, the birthrate has been in free fall, tilting population figures into decline, a problem much more common in rich, industrialized nations, not poor ones.

Claudia Rodriguez and Alejandro Padilla are planning to marry, but they are not certain when they will be able to afford to raise a child. Ms. Rodriguez, 24, said she has had two abortions to avoid having children too soon. Credit Daniel Berehulak for The New York Times

Cuba already has the oldest population in all of Latin America. Experts predict that 50 years from now, Cuba’s population will have fallen by a third. More than 40 percent of the country will be older than 60.

The demographic crisis is both an economic and a political one. The aging population will require a vast health care system, the likes of which the state cannot afford. And without a viable work force, the cycle of flight and wariness about Cuba’s future is even harder to break, despite the country’s halting steps to open itself up to the outside world.

“We are all so excited about the trade and travel that we have overlooked the demographics problem,” said Hazel Denton, a former World Bank economist who has studied Cuban demographics. “This is a significant issue.”

Young people are fleeing the island in big numbers, fearful that warming relations with America will signal the end of a policy that allows Cubans who make it to the United States to naturalize. Until recently, a law prohibited Cubans from taking children out of the country, further discouraging many from having children to avoid the painful choice of leaving them behind.

Those who remain in Cuba say they are also reluctant to have children, citing the strain of raising an infant in a country where the average state salary is just $20 a month.

“At the end of the day, we don’t want to make things more difficult for ourselves,” said Laura Rivera Gonzalez, an architecture student, standing with her husband in central Havana. “Just graduating doesn’t mean that things are resolved. That won’t sustain us.”

Ms. Gonzalez embodies a common feature of the Cuban demographic crisis: As the government educated its people after the revolution, achieving one of the highest literacy rates in the world, its citizens became more cautious about bearing children. Scant job opportunities, a shortage of available goods and a dearth of sufficient housing encouraged Cubans to wait to start a family, sometimes indefinitely.

“Education for women is the button you press when you want to change fertility preferences in developing countries,” said Dr. Denton, who now teaches at Georgetown University. “You educate the woman, then she has choices — she stays longer in school, marries at an older age, has the number of children she wants and uses contraception in a more healthy manner.”

There is another factor that alters the equation in Cuba: Abortion is legal, free and commonly practiced. There is no stigma attached to the procedure, helping to make Cuba’s reported abortion rates among the highest in the world. In many respects, abortion is viewed as another manner of birth control.

In Cuba, women are free to choose as they wish, another legacy of the revolution, which prioritized women’s rights. They speak openly about abortions, and lines at clinics often wrap around the building.

By the numbers, the country exhibits a rate of nearly 30 abortions for every 1,000 women of childbearing age, according to 2010 data compiled by the United Nations. Among countries that permit abortion, only Russia had a higher rate. In the United States, 2011 figures show a rate of about 17.

But experts caution that the liberal abortion policy is not responsible for the declining population. Rather, it is a symptom of a larger issue. Generally speaking, many Cubans simply believe they cannot afford a child.

“I’ve had two abortions, one of them with Jorge,” said Claudia Aguilar San Juan, a 27-year-old restaurant worker, referring to her boyfriend of two years, Jorge Antonio Nazco. “At the time, we didn’t think we were ready to have kids, and we continue to think that it’s still not the time.”

Mr. Nazco added: “We need to be able to afford basic things for ourselves, and we’re also not going to be living three people in one room. I just want to give my kids a comfortable life, a better life than what I had.”

That is the case with Elisabeth Dominguez and Eddy Marrero. Together, the couple earn about $70 a month for her work as a psychologist and his as a pediatric nurse, a relatively high income by Cuban standards.

The standard, however, is the problem. “It’s barely enough for the two of us,” said Ms. Dominguez, 29, shaking her head. “How could we afford a kid?”

Recognizing the problem, the government has begun to circulate pro-pregnancy pamphlets and fliers to encourage young couples to keep their children. Some women said that in recent months, government doctors had discouraged them from having abortions, while others have noticed sudden shortages of condoms and birth control pills.

While those assertions could not be verified, most experts say it hardly matters. Cuba will not be able to procreate its way out of the current crisis anytime soon.

Few tactics work to increase a nation’s fertility rate, despite efforts in countries like Japan to pay families to have children.

What some suggest could help is if the government could manage to encourage the vast Cuban expatriate population to come home. There, too, the government has shown some willingness to adjust its stance, including easing the return of islanders living or traveling abroad.

Walking in Old Havana. Cuba has the oldest population in Latin America, a demographic crisis that appears to be worsening. Credit Daniel Berehulak for The New York Times

But surmounting the longstanding bitterness of many families toward the government, which still holds a tight grip on the country, poses challenges of its own. And the returning Cubans will need to be interested in more than an extended vacation or investment opportunity.

“Already there is more flow,” said Ted Piccone, a senior fellow at the Brookings Institution who studies Cuba, referring to the return of Cubans abroad in their 20s, 30s and 40s. “But is it going to be a matter of ‘I want my vacation home there,’ or will they put down roots?”

Separated families are a fact of life for most Cubans, another element straining the state of the Cuban family. With millions abroad, and a domestic population of just over 11 million, few families are left untouched by the schism that followed the country’s revolution.

Ms. Rodriguez and Mr. Padilla both have relatives living in the United States, some of whom they have not seen for years. Some do not want to return, having disconnected from the rhythm of life on the island. Others return and appear changed, no longer the cousins and nephews from years before.

In many respects, their relationship represents the challenges facing the government as it confronts an industrialized world problem with a developing world economy.

In their minds, there is no doubt they will get married. As a jeweler, Mr. Padilla, 29, plans to design the ring himself and propose once he saves enough to buy a diamond.

Even then, they say, they are not certain they can afford the burden of a child. Earlier this year, the pair aborted a pregnancy, a decision for which they both express a degree of sadness. Still, it is not so uncommon in their families. Their mothers have had four abortions each, the two say, seated on the back porch of Ms. Rodriguez’s mother’s home, where the couple live.

Mr. Padilla, smirking, blurted out that Ms. Rodriguez’s aunt had undergone 10 procedures, prompting his partner to laugh.

“Quiet,” she whispered sharply, slapping his arm. “She has a degree in French and is inside right now.”

He giggled quietly and looped his arm through hers. Ultimately, he said, they do want a family. The when of the matter would come in the not-too-distant future, he hoped.

“We don’t want to pressure ourselves,” Mr. Padilla said. “We want to live our lives, day by day, each day in its own time.”

Hannah Berkeley Cohen contributed reporting.

A version of this article appears in print on October 28, 2015, on page A6 of the New York edition with the headline: Plenty of Romance but Too Few Babies Means a Demographic Crisis for Cuba.