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CEI Planet - November-December 2010

CEI Planet - November-December 2010

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CEI Planet is the Competitive Enterprise Institute round up of articles from the past two months, highlighting the media hits and issues CEI has been fighting for.
CEI Planet is the Competitive Enterprise Institute round up of articles from the past two months, highlighting the media hits and issues CEI has been fighting for.

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Published by: Competitive Enterprise Institute on Jan 25, 2011
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Competitive enterprise institute volume 23, number 6 november/DeCember 2010
Featured articles 
 also insiDe:
 A Better ‘Pledge’: Congress Shall MakeNo Law 
, WCw2t Gd,  bd, d  ug 10mdm11ed n12
mCGraW:biofuel or bust?
>>page 8 >>page 7 
by iain murray 
hen the nancial industry imploded two yearsago, grandstanding politicians on both sidesof the Atlantic wasted no time in suggesting allegedreforms to ensure that “history does not repeat itself.”Of course, these xes—whether tax increases or new regulations—hinged upon the same misguidedworldview that got us into this mess in the rst place.The rst thing to remember is that this wasnot a crisis of capitalism. My good friend MartinHutchinson and his co-author Kevin Dowd, in their recent book 
 Alchemists of Loss
, surveyed all themajor nancial crises from the South Sea Bubbleonwards and determined ve factors that contributedto them. They are:Government involvement, which in manycases precipitated and in most cases deepened problems they sought to alleviate;Misguided monetary policy, the true driver of the Great Depression, causing priceinstability and an orgy of speculation;Rampant speculation, normally caused byloose monetary policy but normally self-correcting;Misguided regulation or legislation, which played a key role in the S&L debacle and theJapanese crisis; and New nancial technology, often imperfectlyunderstood or misapplied.All ve of thesecircumstances applied in therecent crisis. To these factorswe can add a vicious cyclecomprised of three pernicious phenomena: short-term incentivestructures, “rocket science” models,and mark-to-market accounting.Models were made to produceappropriate values that justied huge bonuses, all without any basis in reality.Bankers became mathematicians, provedwith equations that black was white, and,as the late satirical science ction writer Douglas Adams put it, got run over at thenext zebra crossing.So the question is: Would any tax or regulation help to alleviate any of these problems? I think the answer is a veryclear no. If the problem is in large partgovernment-inspired, another tax or regulation will very likely exacerbate the problem, not reduce it. If the problem isexcessive speculation or too many transactions,then, yes, a tax could help reduce the volumeof speculation, but only up to a point. At some point all taxes intended to alter behavior createa paradox: Government revenue is dependenton the behavior continuing.We see this in situations as diverse as the
(continued on page 3)
libeate to stimuate! 
berlau: free CheCkinGrestoration aCtsCribner: lahooD- WinkeD by tiGer ii
>>page 4 
Fred L. Smith, Jr.
Marc Scribner
ed Dc 
Ivan G. Osorio
Cg ed 
 Lee Doren
t Cei p dcd   Ce i, - c gddcd   dd gCei   -, - gzcd  Dc  C d cd  irs   501 (c)(3)c Cei  c d,c ddd   ac  ddd  d  Ceip:(202) 331-1010fx:(202) 331-0640e-:@cg
issn#: 1086-3036
hen I think of a“pledge,” I amreminded of my fraternitydays and being hazed andlightly humiliated. HouseRepublicans offered their “Pledge to America” in therun-up to the 2010 midterm elections. The country has been hazed enough by politicians, so a pledge from the political class to back off is welcome.I am happy to see Republicans offer a “Pledge toAmerica,” but weneed to carefullyexamine these promises. Every program must bechallenged. It’snot enough to cut“entitlements” back to 2008 levels;today’s situationis too serious towarrant accepting atwo-year-old statusquo.Lawmakers needto ask fundamentalquestions abouteverything the federalgovernment is doing.The Pledge needs togo further and ask about every program,“How is this ‘necessaryand proper’ to carryout an enumeratedconstitutional power?”Indeed, as CEI’s FredSmith often jokes,“The Constitution isn’t perfect, but it’s better than what we havenow!” The doctrine of separation of powerswas supposed to have protected us, but it too often means is there is nospecic “tyrant” on which you can put your nger.We know the original intent of the Framers.The development of the Constitution was a battle between those favoring a central power to tax andthose favoring a looser confederation of states. It wasa battle between the doctrine of discretionary power and the doctrine of strict construction. There is not amystery about intent—some favored control, othersfavored liberty. Unfortunately, in many respects, thosefavoring discretionary power won in the two decadesafter the revolution. We are reaping the fruits of their victories now.We need to think well beyond this political pledge. What kind of society is sustainable over centuries— or even over millennia? Whatever the requirements, wehave to make sure thatAmerica is the kindthat can survive. A fewcenturies are enoughto wipe out preciousfreedoms if governmentis not restrained. So wewant to see packageslike this pledge, but alsoserious, fundamentalextensions from it thatask questions not drivenmerely by responses tothe opposing party.Our descendants mustwall off the future. Theymust protect tomorrow’sAmerican citizens from theopportunistic, transitory politicians of any givenera—such as the ones thatfurther collectivized healthcare, bogged down thenancial sector, and seek to push new destructiveregulation in energymarkets and frontier areaslike telecommunications.Most people have notyet been born, and shouldnot be forced to draw their rst breaths in a stiing nanny/welfare state. I amglad to see this Pledge to America, but it is importantwe recognize the full slate of challenges we currentlyface—and those that future generations will be forcedto face.
 A Better ‘Pledge’:Congress Shall Make No Law
By Wayne Crews
>>FrOM tHe Vice PresideNt FOr POlicy
 Lawmakers need to ask fundamental questionsabout everything the federal  government is doing. Te Pledgeneeds to go further and askabout every program, “Howis this ‘necessary and proper’ to carry out an enumerated constitutional power?” 
Tobacco Master Settlement Agreement,whereby state funding is dependent oncontinued sales of cigarettes, and the proposed cap-and-trade scheme for carbon emissions, for which the Obama budget contains $800 billion in revenue projections from auctioned permits—anamount that will help pay for Obamacare.So a tax aimed at reducing speculationwill lead to government encouragingspeculation. And when you consider government’s past role in encouragingspeculation in the housing market, this isnot something to look forward to.So how about a tax on bonuses?That would be treating the symptom,not the cause. Excessive bonuses wereunderpinned by modern nancial theory.When Harry Markowitz defended hisdissertation that laid the groundwork for modern portfolio theory at the Universityof Chicago, Milton Friedman correctlyobserved, “It’s not mathematics; it’s noteconomics; it’s not nance.” Without sucha theory, modern banking loses its short-termist nature. Bonuses will be reined in,not by a tax, but by a ight to quality.So what should we do? I could goon and on, and CEI will soon propose a package of reforms we would like to seeenacted, but here is a short list: No more bailouts—realign capital1.to the wise by allowing proper  bankruptcy.Return to historical cost2.accounting, away from mark-to-market, which is the third leg of theshort-termist stool.Abolish deposit insurance that not3.only perpetuates the ction thatinvestments in banks are deposits, but encourages excessive risk-taking. Consider an arrangementlike that proposed by PolicyExchange for genuine depositaccounts backed by low-risk investments.End the closed shop in rating4.agencies in the U.S., where theSEC has delegated the ratingof securities to an accreditedduopoly—Moody’s and Standard& Poors—which regulatorshave embedded into solvencyrequirements. Without theserequirements, each of the ratingagencies will become just one of many competing ways to pursuedue diligence, instead of a crutch.Abolish the World Bank and IMF,5.which are, quite simply, in the business of making excessivelyrisky loans, usually to scallyirresponsible governments.End the revolving door between6.Wall Street and Washington.Lift the Obama administration’s7.moratorium on retailer-associatedlimited-purpose banks, whichwould allow real, vibrantcompetition for basic bankingservices. Wal-Mart can alreadysupply most of America’s domesticretail needs. Why shouldn’t itsupply domestic banking?These are just a handful of thereforms we should take. Above all, givengovernment’s role in the whole history of nancial crises, we need to keep governmentout of the banks as much as we can.After the South Sea Bubble, a proposalwas introduced in the British Parliament tohave the nanciers tied into sacks lled withsnakes and thrown into the Thames. If similar sternness accompanied the punishment for misguided regulation, perhaps we would seesome genuine progress.
 Iain Murray
is Vice President for Strategy and Director of theCenter for Economic Freedom at CEI. Thisarticle is adapted from remarks Mr. Murraydelivered at the September TransatlanticTaxPayers’ Conference in London.
continued from page 1
My gcy
I need to provide for my loved ones. But like my  family, I want CEI to carry on for generations to come.What can I do? 
It’s easy to do both. Talk to usabout your options, like…Designating your
retirement planLeaving a life insurance policy
Making a bequest 
through your willMaking a gift now, and
receiving income for lifeAnd much more
Any of theseoptions couldhelp you now andprovide for yourfamily in the future.Some you caneven put into placetoday without losing any income.
This publication is intended to provide generalgift planning information. Our organization is
not qualiied to provide speciic legal, tax or
investment advice, and this publication shouldnot be looked to or relied upon as a source forsuch advice. Consult with your own legal and
inancial advisors before making any gift.
Want to learn more?
Contact Al Canata at acanata@cei.orgor (202) 331-1010

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