Category: Law
ECB collateral requirements for lending
…we said the ECB’s decision in September to accept unlisted bank bonds — i.e., bonds that the banks could have issued purely to themselves solely in order to pledge them as collateral for central bank funding — was “potentially very significant”.
There is much more at the link, all along the same lines. For better or worse, the ECB is engaging in lots of (de facto) unsecured lending. Hat tip goes to Sober Look.
Rehypothecation: a simple guide
From Keith Fitz-Gerald, via The Browser, here is a useful introductory article to what is likely this year’s coming hot topic. Excerpt:
Assets in brokerage accounts can be used and re-used in such a way the credit multiples far outweigh the actual assets in the accounts. In effect, rehypothecated assets become part of a daisy chain, for lack of a better term, wherein one company’s liabilities become another’s assets.
If there is a hiccup anywhere in the chain, the effect is one of instant collateral collapse as everybody in the chain is forced to buy back, or recall, their assets. The effect is not unlike a colossal global “short” on world markets.
Imagine what happens if something goes wrong and everybody wants their $10 back, but find that there is only $1 in actual cash.
I believe this is what Federal Reserve Chairman Ben Bernanke and his counterparts at the ECB are so concerned with and why they are obsessed with liquidity. Everybody knows that too much debt caused this mess, but what they don’t realize is that it’s the use of rehypothecated assets that make collateralizing it nearly impossible barring massive injections and printing.
I would define it as “an asset used as collateral more than once, at the same time.” And there is this:
Take the United Kingdom, for example, where there is no limit on the amount of client assets that can be rehypothecated. There, brokers have reportedly and routinely rehypothecated 100% of the value of client accounts, not just those assets pledged as collateral.
What kind of day would Arnold Kling be wishing you at this point?
What would Grossman and Hart say?
After a lengthy legal battle between a black South Carolina church and members of the Ku Klux Klan, a judge has ruled that the church owns a building where KKK robes and T-shirts are sold.
A circuit judge ruled last month that New Beginnings Baptist Church is the rightful owner of the building that houses the Redneck Shop, which operates a so-called Klan museum and sells Klan robes and T-shirts emblazoned with racial slurs.
That is near Columbia, and the story is here. It is temporary, yes, but does this count as vertical or horizontal integration?
No-give, No-take in Israel
In Entrepreneurial Economics I argued for a “no give, no take” system for organ donation–people who signed their organ donor cards would be given priority over non-signers should they one day need an organ. The idea has an element of justice to it but the primary goal is to increase the incentive to sign one’s organ donor card.
Israel recently adopted this policy by giving extra points on the allocation system to people who previously signed the organ donor card. In the case of kidneys, for example, two points (on a 0-18 point scale) are given if the candidate had three or more years previous to being listed signed their organ card. One point is given if a first-degree relative had signed and 3.5 points if a first-degree relative had previously donated.
It’s early but so far the policy appears to be very successful:
Due to the population’s surge of interest in obtaining an organ donor card, the Adi-National Israel Transplant Center has extended through March 31 the deadline to register as a donor and receive special benefits.
…During the past few weeks, Adi’s phone system has collapsed several times due to the high demand.
Since Adi decided to give preferential treatment to those registering as a potential organ donor, tens of thousands of people have registered, raising the number of potential donors to over 600,000. Until last year, the rate of registration was among the lowest in the Western world.
Hat tip to David Undis whose excellent group Lifesharers (I am an adviser) is implementing a private version of no-give, no take in the United States.
Here is my piece on Life Saving Incentives and here are previous MR posts on organ donation.
IP Feudalism and the Shrinking of the Public Domain
Creators of intellectual property used to be granted up to 56 years of monopoly before their works entered the public domain. Since the 1976 copyright act (which came into effect in 1978) copyright has been progressively lengthened so it now extends to the life of the author plus an additional 70 years, i.e. an author’s heirs now get significantly more monopoly power than an author did prior to 1978, truly a kind of IP feudalism.
It’s hard to believe that the extension of copyright for decades after an author’s death can appreciably increase artistic creation and innovation, thus the public has gained little from copyright extension. What has been lost?
If the pre-1976 law were still in place then as of Jan 1, 2012 the following books, movies and music would have entered the public domain (from the Center for the Study of the Public Domain):
- J.R.R. Tolkien’s The Return of the King, the final installment in his Lord of Rings trilogy
- The Family of Man, Edward Steichen’s book of photographs showing the diversity and universality of human experience
- Michihiko Hachiya’s Hiroshima Diary: The Journal of a Japanese Physician, August 8–September 30, 1945, translated by Warner Wells, md
- Evelyn Waugh’s Officers and Gentlemen, the second book in his Sword of Honour trilogy
- C.S. Lewis’ The Magician’s Nephew, the sixth volume his The Chronicles of Narnia
- Vladimir Nabokov’s Lolita
- Jerome Lawrence & Robert E. Lee’s play about the Scopes “Monkey Trial,” Inherit the Wind
- Isaac Asimov’s The End of Eternity.
- Jack Finney’s The Body Snatchers
- The Seven Year Itch, directed by Billy Wilder; starring Marilyn Monroe and Tom Ewell
- Lady and the Tramp, Walt Disney Productions’ classic animation
- Alfred Hitchcock’s To Catch a Thief, starring Cary Grant and Grace Kelly
- The thriller The Night of the Hunter, directed by Charles Laughton; starring Robert Mitchum and Shelley Winters
- Two of James Dean’s three major motion pictures: East of Eden, directed by Elia Kazan and co-starring Raymond Massey and Julie Harris; and Rebel Without a Cause, directed by Nicholas Ray and co-starring Natlie Woods, Sal Mineo, and Jim Backus
- Hollywood versions of major Broadway musicals such as Oklahoma! and Guys and Dolls
- Richard III, Laurence Olivier’s film version of the Shakespeare play, co-starring Claire Bloom, Cedric Hardwicke, Nicholas Hannen, Ralph Richardson, and John Gielgud
- Unchained Melody (Hy Zaret & Alex North)
- Ain’t That a Shame (Antoine “Fats” Domino and Dave Bartholomew)
- Blue Suede Shoes (Carl Perkins), Folsom Prison Blues (Johnny Cash)
- The Great Pretender (Buck Ram)
- Maybellene (Chuck Berry, Russ Fratto, & Alan Freed),
- Tutti Frutti (Richard Penniman (aka Little Richard)
Under the old law these works and many others could today have been read, seen and played at low cost throughout the world. Consumers have certainly lost from copyright extension. What about creators?
We typically frame copyright and patent strength as an issue between consumers and creators, with consumers assumed to favor weaker rules and creators stronger. But, as I discuss in Launching the Innovation Renaissance, that is the wrong frame. A vibrant public domain can be good for consumers and for creators.
Under the old law, the above works could not only have been consumed they could also at low cost and without requiring the express permission of the original copyright holder have been remixed, reworked and extended in new directions. Under the new regime, innovators will not be able to easily build on these works until 2051 and it could be well into the 22nd century before we get Star Wars prequels worthy of the name.
How is the U.S. tax system different?
Clive Crook reports:
A new report by the Organization for Economic Cooperation and Development shows that in the middle of the last decade — i.e., after the Bush tax cuts were introduced — the U.S. income tax was about as strongly redistributive as income taxes in Canada, Denmark, Finland, the Netherlands and Sweden. You might have noticed that the CBO report on top incomes was widely quoted, but one finding got less attention: Between 1979 and 2007, “the federal individual income tax became slightly more progressive.” [TC: note that this last sentence can mean a number of different things/]
The awkward truth is that the U.S. income tax system is anomalous not because it taxes the rich lightly but because it taxes everybody else lightly.
Sentences of note
But overall income inequality would likely have increased even in the absence of tax policy changes.
That is from the Congressional Research Service, here is much more. For the pointer I thank Jason Fichtner.
Why not treat debt and equity the same?
Varun, a loyal MR reader, asks me:
I do have a fairly simple question on tax policy I’ve never really seen a good answer to: Why do we treat interest payments differently in terms of taxation? Why are interest payments tax deductible?
Clearly a zero corporate tax rate is best, but why do we offer tax shields for highly levered companies? All of private equity, and much of banking etc. is built on this tax arbitrage. Wouldn’t treating interest payments on par with dividends and corporate profits (hopefully at a lower tax rate) unlock a great deal of value, drive an increase in (stock) investment, while significantly un-levering businesses? Why do we borrow when we can seek investment?More importantly, isn’t it odd that few advocate such a simple policy change: to treat debt and capital investment identically.
Contrary to common impression, the tax deductibility of interest payments does not give a tax advantage to borrowing, not if the return to savings is taxed. What you save by borrowing and writing off interest payments you pay back tax on your more liquid asset holdings; admittedly there are complications and wedges when lending and borrowing rates are not the same. Therefore tax-deductible interest payments makes tax law roughly neutral in intertemporal terms, with lots of qualifications tacked on to that claim, including the possibility that some corporations can avoid the taxes on liquid asset holdings altogether.
The tax deductibility of interest payments operates in a highly imperfect manner, but at its core it is a piece of what an ideal (roughly) neutral tax system would look like, not a deviation from such neutrality.
GiveWell
GiveWell, by far the best charity evaluator working today, has a new top ranked charity, the Against Malaria Foundation. Why is VillageReach, their best ranked charity for several years, no longer at the top? First, GiveWell is ranking more charities and charities are now more willing to provide GiveWell the kind of detailed information on outcomes that GiveWell demands. Thus, more charities are vying for the top spot. Even more important is this:
VillageReach was our top-rated organization for 2009, 2010 and much of 2011 and it has now received over $2 million due to GiveWell’s recommendation. We do not believe that VillageReach has short-term funding needs…
When was the last time that a charity or evaluator told you that due to successful fund-raising there are now more urgent needs elsewhere? Impressive. As I have for several years, I will be following GiveWell’s advice and donating to the Against Malaria Foundation and several of GiveWell’s other top charities.
Larry Ribstein has passed away
Larry was a well-known legal scholar, and blogger on law, economics, and also film, with a focus on how commerce was portrayed in the movies. He was a former colleague of mine at George Mason. Ilya Somin offers some remarks here, here is Geoffrey Manne, here is Bainbridge, here is Ted Frank. There are more remembrances here. Sad to hear of course.
Immigrants, welfare reform, and the U.S. safety net
That is the title of an intriguing new economics paper by Marianne Bitler and Hilary W. Hoynes, official NBER version here. Remember when they cut some benefits for immigrants, circa 1996? That can form the basis for a natural experiment, because non-immigrant poor families did not experience a similar cut in benefits.
I urge extreme caution in the interpretation, but here is one result:
The difference-in-difference estimates show that poverty rates declined for children in immigrant-headed households compared to natives post-welfare reform (2008-2009) relative to pre-reform (1994-1995).
But why? There is more:
This result is unexpected but may be explained by a change in the composition of immigrant children (see Figure 3). That is…the difference-in-difference reflects the decrease in immigrant poverty in the 1994-1999 period.
You can take this as a mix of optimism about immigrants and skepticism about some welfare programs, or perhaps optimism about how a health job market helps immigrants more than non-immigrants. I don’t in Figure 3 see any actual measurement of the composition of immigrants, although immigrant households do show rising income levels over the critical years. Stick by the caution mentioned above. In any case, following the decrease in welfare benefits immigrant households rely more heavily on earned income, which should be taken as good news. I would rather offer fewer benefits to immigrants and take more people in, to the extent that is the choice.
I don’t think this paper gets to the bottom of the puzzle it is studying, but it is an important piece of work.
What is the real rate of corporate taxation in the United States?
The inclusion of taxes both at the corporate level and on dividends changes our perspective on which countries are high tax and which are low tax. For example, Ireland has the lowest statutory corporate tax rate among O.E.C.D. countries, yet is still a relatively high-tax country because of the high tax rate it imposes on dividends. By contrast, Japan has the highest statutory corporate tax rate but only the 12th highest overall rate because it has one of the lowest tax rates on dividends.
Those advocating a cut in the corporate tax rate today generally ignore the tax on dividends, as well as many other provisions of United States and foreign tax law that may reduce the effective tax rate well below the statutory rate.
A recent study found that only 25 percent of the largest American corporations pay anywhere close to the statutory corporate tax rate of 35 percent on their earnings, while 40 percent pay less than half that rate.
Indeed, General Electric, the nation’s largest corporation, paid no federal corporate taxes in the United States in 2010, according to a report in The New York Times.
…while it may be a good idea to reduce the corporate tax rate as part of a tax reform package, the idea that this will jump-start growth is nonsense.
The No Brainer Policy of the Year
Behind Door #1 are people of extraordinary ability: scientists, artists, educators, business people and athletes. Behind Door #2 stand a random assortment of people. Which door should the United States open?
In 2010, the United States more often chose Door #2, setting aside about 40,000 visas for people of extraordinary ability and 55,000 for people randomly chosen by lottery.
It’s just one small example of our bizarre U.S. policy toward high-skill immigrants.
That is the opening of a short piece by me over at The Atlantic, drawn in part from my TED e-book Launching the Innovation Renaissance (Nook, iTunes).
Markets in everything but is there a core?
Ireland would need to get a significant reduction in its debt burden in order to get any referendum on new European budgetary rules passed, Minister of State for Finance Brian Hayes has said.
“The idea that we could have a referendum without that agreement, on a substantial re-arranging of our debt, wouldn’t fly,” Mr Hayes said in an interview with the Sunday Business Post .
“We would have to have that in place before we put the question (to the people) and that’s beginning to be understood at an EU level, which puts us in a stronger position,” he said.
Story here, via Economistmeg.
Paragraphs to ponder
Signs of financial repression in the eurozone are already widespread. Greece this week sold six-month bills at auction at a yield of 4.95 per cent, more than 1.5 percentage points lower than Italy recently sold similar bills. But in the secondary markets, the only yields that Bloomberg quotes for Greek short-dated paper are 330 per cent for one-year bills.
Here is much more, excellent analysis throughout.