Dollar Bill On Floor Sends Wall Street Into Frenzy

NYSE traders excitedly swarm the piece of actual, tangible currency.

NEW YORK—Wall Street investors experienced a sudden surge in optimism Tuesday when, after six tumultuous weeks that saw record drops in the Dow Jones industrial average, a $1 bill was spotted on the floor of the New York Stock Exchange.

The dollar bill was discovered in the northwest corner of the trading floor at approximately 12:05 p.m., and its condition was reported as "crinkled, but real." Word of the tangible denomination of U.S. currency spread quickly across the NYSE, sending traders into a frenzied rush of shouting, arm-flailing, hooting, hollering, and, according to eyewitnesses, at least one dog pile.

"With credit frozen and the commercial paper market poised on the brink of collapse, this is the most promising development I've seen on Wall Street in months," said floor trader Tim Formato, one of hundreds who gathered around the $1 bill and excitedly called their clients to inform them that they were looking at actual U.S. tender. "I think I touched it."

According to witnesses, the trading floor was soon abuzz with energy, as traders pointed at the dollar and repeatedly shouted "Look!" and "Money!" A proposal to divide the $1 note into 1,300 equal pieces and distribute them amongst investors was considered, but ultimately rejected. Early reports estimate the dollar may have passed through as many as 65 hands before disappearing in the late afternoon.

The bill's absence, however, did not deter the growing enthusiasm from those on the trading floor. By 2:15 p.m., more than 60,000 shares had been purchased in the new publicly traded asset, DLR, after brokers placed a flurry of calls advising their investors to buy into the booming single-dollar market.

By the close of day, economists were estimating the dollar bill's net worth at just under $270 million.

"We couldn't be in a better situation right now," trader Patrick Kady said. "Unless of course it had been a euro."

However, some financial advisers are warning against the rampant speculation the dollar has caused on Wall Street. Many have cautioned investors not to make rash decisions, such as liquidating all their low-risk government bonds in order to sniff the green paper bill for just a minute.

"I bet it smells like rose petals," mutual funds specialist Ken Stoute said. "My friend's friend Tim Formato? He's on the board at Westminster Securities and he says he touched it. He said it was warm and soft and wonderful. He said he knows where it is now, and I can put in an option on seeing it tomorrow for only $85."

Since the appearance of the dollar, the Dow has spiked an impressive 993 points—its largest gain ever. Initial numbers are showing the most sizable rises in technology stocks, a trend some are attributing to Microsoft's CFO Chris Liddell, who toured the trading floor Tuesday morning with the bill stuck to his left shoe.

The overall projection for the market following the incident has been positive, with many analysts claiming that the $1 bill may be an indication of other spare change lying around. This, coupled with reports out of Europe that there is a German college student who has not yet hit her credit card limit this month, could be enough to stabilize the Dow and jump-start the global economy once again.

"This is just another sign that the U.S. economy is as strong and resilient as it has ever been," said Richard Fuld Jr., former CEO of Lehman Brothers. "I'm just glad we finally have these credit and subprime mortgage loan crises behind us. This $1 bill will carry us through another 10 years of reckless, unregulated borrowing."

Added Fuld, "Just for God's sake, don't invest it in the stock market."

Original here

Rich Cheat More On Taxes, New Study ShowsRich Cheat More On Taxes, New Study Shows

Janet Novack

In Pictures: Who Cheats The Most On Their Taxes?

Washington, D.C. -

A new study based on unpublished Internal Revenue Service data shows the rich are different when it comes to paying taxes: They hide more of their income.

The previously unreported study estimates that taxpayers whose true income was between $500,000 and $1 million a year understated their adjusted gross incomes by 21% overall in 2001, compared to an 8% underreporting rate for those earning $50,000 to $100,000 and even lower rates for those earning less. (The "net misreporting rate" as the IRS calls it, includes both underreported income and inflated deductions.)

In all, because of their higher noncompliance rates, those with true incomes of $200,000 or more received 25% of all income, but accounted for 40% of net underreported income and 42% of underreported tax in 2001, the new analysis finds.

The study was written by Joel Slemrod, an economics professor and director of the Office of Tax Policy Research at the University of Michigan's business school and IRS economist Andrew Johns. It has not been officially endorsed or even released by the IRS and seems sure to add fuel to the election season debate over whether those earning $250,000 or more should pay higher tax rates, as Sen. Barack Obama, the Democratic presidential nominee, has proposed.

The Slemrod/Johns analysis uses unpublished data from special research audits the IRS conducted on a sample of 45,000 individual returns filed for 2001. It was the IRS' first such research effort since 1988, and it led the agency to estimate the 2001 gross "tax gap" at $345 billion.

The main reason for the income-related cheating disparity: Higher income folks receive more of their income from sources that are easier to hide, including self-employment earnings; income from rents, partnerships and S corporations; and capital gains.

"The distribution of noncompliance lines up pretty closely with who gets income that's hard (for the IRS) to keep track of,'' Slemrod says. Still, he notes, the distribution of income by source doesn't explain all the increased noncompliance at higher income levels.

In its 2001 tax gap study, the IRS estimated that individuals underreported business income by 43% overall. Sole proprietors, who report self-employment income on schedule C of their tax returns, underreported their income a stunning 57%.

By contrast, the IRS found, 99% of all wages were reported by individual tax filers. The obvious explanation is that workers have no choice--their employers report their earnings to the IRS and withhold taxes on them.

Meanwhile, net capital gains for 2001 were underreported by 12%, the IRS estimated. The IRS receives reports from brokers of taxpayers' gross sales of stocks and bonds, but not of their initial costs or profits--therefore it has no way to easily check their reported capital gains. (Last month, as part of the $700 billion bailout bill, Congress mandated that brokers report the basis of any stocks bought in 2011 or later.)

The new study seems to show that the really rich are more tax compliant than the merely well-off, although not nearly as compliant as middle- and working-class wage slaves. Those earning $2 million plus had an 11% underreporting rate. But Slemrod told Forbes that he was "less comfortable" with that finding, noting that the very rich may have made use of techniques that IRS research audits didn't detect.

"I just don't know whether these audits were able to track down really sophisticated noncompliance or Swiss bank accounts. They may underestimate it (noncompliance) at the top,'' he says.

Indeed, in the past several years, the IRS has collected billions in back taxes from wealthy taxpayers who used dicey tax shelters to manufacture huge phony losses in the late 1990s, 2000 and 2001. But the IRS didn't get a handle on the nature or extent of these shelters until years later and relied on tax shelter promoters' customer lists and special self-disclosure programs, not audits, to find most of the taxpayers involved.

Currently, the government is suing UBS (nyse: UBS - news - people ) for the names of 18,000 wealthy Americans it believes may have had unreported Swiss bank accounts.

Original here

Online Businesses Subject to Local Laws…Everywhere

A judge in Kentucky seized the Web addresses of more than 140 Internet-gambling sites last week, the latest example of how local governments can affect online businesses with physical operations beyond their jurisdictions.

should online businesses be subject to local laws?

It is common to think of the Internet as a global network that transcends geography. But online entities are often forced to adhere to laws in the places where they do business. One iconic example is a ruling by a French court in 2000, where the court said a French law banning the sale of Nazi paraphernalia applied to U.S.-based Web site Yahoo.

In the Kentucky case, Circuit Court Judge Thomas Wingate concluded that gambling Web sites were “virtual keys” that provided access to places where one could play online versions of gambling devices such as slot machines and roulette tables, which are illegal in the state.

None of the online businesses—such as GoldenPalace.com, PokerStars.com and UltimateBet.com—are based in Kentucky or rely on technical equipment located in the state. Still, the sites readily accept bets placed by users in Kentucky and process payments from banks based there. That is what triggered Judge Wingate to seize control of the Web addresses.

“Seizing,” it should be noted, sounds more ominous than it is when applied to the Internet realm. It prevents an Internet registrar that issues Web site names from transferring a Web address to a different registrar, even if the owner of the address, such as a gambling site, requests it. The gambling sites will remain operational until the judge issues a forfeiture order, at which point they will become state property.

The court said it will lift its seizure order for online casinos if they implement technology that would block Kentucky residents from accessing their sites.

Groups affiliated with the online casinos are worried about the precedent the ruling sets. “If you’re a business operator, you should be subject to the laws where you do and pursue business, and not have to worry about a state halfway around the world taking away your storefront,” says Jeremiah Johnston, president of the Internet Commerce Association, which monitors legal matters for online businesses. He adds that there is no reason that other governments couldn’t use the same technique to challenge online businesses for whatever reason they choose.

Todd Greene, an attorney for Oversee.net, which has a subsidiary called Moniker Online Services that is the registrar for two of the gambling sites, says he doesn’t believe that the Kentucky court has the jurisdiction to order the seizure. While Moniker has frozen the domain names for now — effectively following the court order — it is doing so as a matter of policy.

J. Michael Brown, secretary of justice and public safety for Kentucky, who brought the lawsuit, says he only wants to stop what he considers an illegal activity.

A final hearing is set for November.

Update: We want to make it clear that the Web sites and registrars aren’t just sitting by, but intend to challenge both the Kentucky courts ruling and its jurisdiction in the matter.

-Ben Worthen

Image: Jeff Kubina via Flickr

Original here

Yielding to Conservationists, eBay Will Ban Ivory Sales

By FELICITY BARRINGER

SAN FRANCISCO — In response to growing pressure from international law enforcement agencies and conservation groups, eBay, the online auction giant, announced Monday that it would ban all commerce in ivory, including most heirlooms, to avoid providing a market that will encourage the slaughter of endangered elephants.

Skip to next paragraph

Enlarge This Image

EBay says it will no longer allow advertisements like this one, for elephant tusks. The ban also extends to most heirlooms.

The announcement, made to the company’s merchants and customers, came as a conservation organization based in Massachusetts prepared to issue the latest in a series of reports documenting how online auction sites, particularly eBay, have become a magnet for trading in items derived from endangered species, among them rare birds and reptiles sold to collectors, ivory-handled walking sticks or bracelets and figurines carved from elephant tusks.

The report, to be released here on Tuesday by the International Fund for Animal Welfare, analyzes data gathered in a six-week survey that tracked more than 7,000 listings of wildlife or their feathers, teeth or pelts offered for sale on more than 185 Web sites in 11 countries. Nearly three-quarters of the items were elephant products, the report said.

The vast majority of the online trade in endangered animals, the report says, is done on eBay. Law enforcement officials and specialists in illegal wildlife trade said it was impossible to determine how much of the estimated $10 billion spent each year in the illicit trade happens online.

Nichola Sharpe, a spokeswoman for eBay, said Monday that the company had been talking about a ban with the federal Fish and Wildlife Service’s enforcement division and conservation groups like the World Wildlife Fund. Because of the complications of abiding by multiple and overlapping state, federal and international conservation laws, Ms. Sharpe said, eBay officials decided on the ban, effective Jan. 1.

“It’s just so complicated,” she said. “As we’ve said over the years, we are not experts” in the items bought and sold through the site.

“We don’t have possession of the items,” she said. “We never allow anything illegal to be sold. Where there are complex laws, we work with a number of stakeholders to make sure we are in compliance. That’s especially true with ivory.”

Last year, the company instituted a ban on international sales of elephant ivory products, but Jeffrey Flocken of the animal welfare fund said it “has not worked at all.”

EBay has already banned commerce in guns and digital music, and it is unclear whether the ivory ban will have a noticeable impact on its revenues. The new report from the animal welfare fund said the advertised price for wildlife items offered on the site during the six weeks of the study was $3.87 million and the sales value about $457,000.

The ban may be slow to take effect, suggested Crawford Allan, the North American regional director of Traffic, a subsidiary of the World Wildlife Fund that tracks illegal trade in wildlife.

“It’s not that they are going to turn on a switch and it’s going to end,” Mr. Allan said, pointing out that merchants need only avoid calling their wares “ivory” or using the word “elephant” to avoid automatic filtering. EBay, he said, “does find it difficult to police their own site.”

But at least, he said, “you can’t have people arguing ‘This isn’t elephant ivory.’ ”

The ban, Mr. Allan said, “is the ultimate answer” to that defense.

The use of the Internet for black-market dealings has expanded, experts say, along with the expansion of the legitimate market for ivory, feathers, exotic birds, rare animal hides and parts of rare animals that are used for medicinal purposes. In the United States alone, Mr. Allan said, the value of legal wildlife commerce grew to $2.8 billion in 2007 from $1.2 billion in 2000.

Benito Perez, the head of enforcement for the Fish and Wildlife Service, which has investigators to enforce wildlife protection laws, said Monday, “We’re not strangers to Internet cases.”

The agency’s goal, Mr. Perez said, is to focus not on single sales but on a pattern of questionable commerce that can be traced to a small number of people. His investigators, he said, are pursuing investigations into potentially illicit sales of ivory.

Tight budgets in the enforcement division have led to a decrease in the pool of inspectors — there are 201 as of three weeks ago, down from 238 in 2002. But while enforcement activities have been squeezed, the Bush administration has made significant diplomatic initiatives.

Assistant Secretary of State Claudia A. McMurray told Congress earlier this year that “illegal trade has brought us to a tipping point — in other words, it is pushing many species over the edge to extinction.”

Wildlife experts have documented a precipitous decline in elephant populations, particularly in Africa. In the 1980s an estimated 100,000 elephants a year were being slaughtered, Mr. Flocken said. The worldwide population of elephants stood at an estimated 1.3 million in 1979; by 1989, the number was 450,000. The population has increased slightly since then, he said, to about 470,000.

But the poaching continues. Mr. Allan said that much of the ivory went to the Far East, particularly China and Bangkok, but that some of the Chinese ivory carvers had now set up shop in Africa.

Kuki Gallman, the conservationist who gained wide recognition with her book, “I Dreamed of Africa,” said on Monday from her home in Kenya that within the past two weeks, seven elephants had been found shot by poachers with AK-47s on her 100,000-acre preserve, the Laikipia Nature Conservancy. Several had been shorn of their tusks, but at least two fled the poachers before dying, Ms. Gallman said.

“If you give a value to something,” she said, “there will be someone ready to do whatever possible to get it.”

Original here

Wall Street higher on hopes of credit recovery

The board on the trading floor of the New York Stock Exchange shows the final result of 127.04 points down as the Dow ends a volatile week on Wall Street Friday, Oct. 17, 2008. (AP Photo/David Karp) By Joe Bel Bruno AP Business Writer

NEW YORK—A rising wave of optimism lifted Wall Street Monday, propelling the Dow Jones industrials up more than 400 points on more signs of a reviving credit market and support from Federal Reserve Chairman Ben Bernanke for further steps to aid the economy. All the major indexes finished with gains of 3 percent or more.

Investors who had sold furiously in recent weeks in response to immobile credit markets became more optimistic as bank-to-bank lending rates eased further. There's also less demand for ultra-safe Treasury bills, another sign that the credit markets are gradually returning to a healthier state.

The improvement in lending rates helped temper concerns that tight credit will contribute to a prolonged recession, but Bernanke still warned that the economy is likely to be "weak for several quarters, and with some risk of a protracted slowdown."

But he also told the House Budget Committee that a fresh round of government measures might help ease the country's economic weakness. There were no details but the White House said it was open to ideas that Congress might put forth.

"The market liked what Bernanke had to say, and there were hints that he's leaving the door open for further moves in terms of rate cuts or economic stimulus," said Ryan Larson, head of equity trading at Voyageur Asset Management. "And, with credit easing in slow baby steps, the market has started to realize that this is going to be a process."

Wall Street was also sifting through the first of hundreds of earnings reports expected this week, seeking clues about future business conditions. Among those reporting, oilfield services provider Halliburton Co. topped estimates, and CEO Dave Lesar told investors and analysts in a conference call, "We expect that any major macroeconomic disruptions will ultimately correct themselves."

Trading was orderly for much of the day, but the final hour again saw frenetic activity, this time to the upside, with the Dow rising nearly 140 points in the last 25 minutes. The market's tone was clearly better than during the previous two weeks, when investors' heightened anxiety about credit markets and the economy sent stocks plunging. The relative calm in Friday's session, when the Dow fell 127, and Monday's trading, had more investors feeling confident that the worst of the market's losses was behind it.

Still, with back-and-forth trading a hallmark during recoveries from plunges in the past, analysts and investors were also expecting that Wall Street would be subject to volatile price swings for some time.

"We don't have any sense if this kind of a run is sustainable," said Phil Orlando, chief equity market strategist at Federated Investors. "We're groping quite literally for a bottom right here, but I'm not going to discount that we won't retest lows over the next couple of weeks."

The Dow rose 413.21, or 4.67 percent, to 9,265.43. The blue chips' gain were in line with a 4.68 percent gain registered Thursday, when the Dow jumped 401 points.

The rally marked the Dow's 23rd triple-digit move in 26 sessions. Most sessions have brought losses, however, with 11 of the past 14 showing declines.

Broader indexes also rose sharply Monday. The Standard & Poor's 500 index jumped 44.85, or 4.77 percent, to 985.40. The Nasdaq composite index rose 58.74, or 3.43 percent, to 1,770.03.

Despite the advances of recent sessions, the major indexes remain well below their peaks of a year ago. the Dow is down 34.6 percent, the S&P 500 is down 37 percent and the Nasdaq composite index is off 38.1 percent.

The credit markets were gradually responding to the series of bailout measures by governments around the world, including a joint U.S. and European plan to buy stakes in private banks to boost their lending. Demand for Treasury bills, regarded as the safest assets around, lessened Monday but remained relatively high in a sign that there was still much fear in the markets.

The three-month Treasury bill Monday yielded 1.12 percent, up from 0.82 percent late Friday. That's better than the 0.20 percent of last Wednesday, and the first time it surpassed 1 percent in more than a week.

Investors were also optimistic about the steady decline in interbank lending rates, which fell for a sixth straight day Monday. The London interbank offered rate, or Libor, for three-month dollar loans fell 0.36 percent to 4.06 percent, the biggest daily drop since January.

The benchmark 10-year Treasury note rose. The yield, which moves opposite its price, fell to 3.87 percent from 3.93 percent late Friday.

Todd Leone, managing director of equity trading at Cowen & Co., said many investors were feeling optimistic that credit is slowly becoming more available. He also believes that Bernanke's remarks, along with the fact earnings haven't been dismal, are helping markets move higher.

"People are just getting comfortable with buying again," said Todd Leone, managing director of equity trading at Cowen & Co. "We still could see another big drop, but those big drops are going to get less and less."

Investors also received a bit more detail about how Treasury Secretary Henry Paulson plans to roll out a $250 billion plan to recapitalize banks. Paulson said the government will own shares in the banks that should be paid back with a reasonable return, and expects that the investment will eventually make money.

Meanwhile, there were some optimistic data that showed the economy's health improved for the first time in five months in September as supplier deliveries and new orders strengthened, a private research group said Monday. The New York-based Conference Board said its monthly forecast of future economic activity rose 0.3 percent, a much better reading than the 0.2 percent drop expected by Wall Street economists surveyed by Thomson/IFR.

Light, sweet crude rose $2.40 to settle at $74.25 a barrel on the New York Mercantile Exchange. Last week, it sank to an almost 16-month low on worries about a deep global recession obliterating fuel demand.

The Russell 2000 index of smaller companies rose 20.41, or 3.88 percent, to 546.84.

Advancing issues outpaced decliners by about 5 to 1 on the New York Stock Exchange, where consolidated volume came to 5.1 billion shares compared with 6.48 billion shares.

Financial markets overseas also jumped. Japan's Nikkei stock average closed up 3.59 percent. Britain's FTSE 100 rose 5.41 percent, Germany's DAX index advanced 1.12 percent, and France's CAC-40 rose 3.56 percent.

Original here

Suck It, OPEC.

Apparently a lot has happened since my last post.

The stock, credit and housing markets have been in shambles; the price of oil has now fallen over 50% from its record highs set this past July; and the price of gasoline has dropped well below the psychologically important $3 mark.

As of this afternoon, the national average price of a gallon of regular unleaded gasoline stood at $2.88, which is about 30% below this summer’s peak prices. Over the past month alone, the price of gas has fallen nearly 23%. Additionally, the price of gasoline is now only 7% higher than what it was at this point last year.

Currently every state is reporting an average price below $4 per gallon, and there are only 13 states with average prices above $3 per gallon. Hawaii has the highest state-wide average price at $3.77 per gallon, while Oklahoma has the lowest state-wide average price at $2.40 per gallon.

Unfortunately, this record price decline might be nearing an end. The Organization of Petroleum Exporting Countries (OPEC) will be holding a meeting this coming Friday to discuss massive production cuts in order to protect oil prices. It is widely speculated that OPEC will announce daily production cuts of between 1.5 million and 2 million barrels.

Given the world’s current economic state, it is very doubtful that this production cut will cause oil prices - and subsequently gasoline prices - to shoot back up towards their record highs. However, it’s not unreasonable to expect prices to, at the very least, stay at their current levels or rise slightly.

Original here

China: Where 9% GDP growth is recession

by Douglas McIntyre

China's big stock index, the Shanghai Composite, has fallen from a 52-week high of over 6,000 to 1,974. Idiot math would say that is equivalent to the DJIA trading at 4,600. That may be a simpleton's view of the world, but the perspectives of the foolish as not always wrong.

China announced that its GDP grew only 9% in the third quarter. That number was supposed to be closer to 10%.

According to Reuters, "A gloomy outlook lies ahead after the third quarter, and concerns about the slowdown now outweigh concerns about inflation," said Chen Jinren, an analyst at Huatai Securities.

In the U.S. and Europe, a recession is still probably defined at two consecutive quarters of GDP shrinkage. In a world where 4% growth is burning up the track China's increase of 9% seems unattainable. But, in an economy which relies on rapid growth to build a middle class and huge industrial base, even a modest drop in a torrid quarterly improvement pattern probably spells significant problems.

The economic policy in China has been relatively simple. It uses its export might to bring citizens from rural parts of the county to work in factories and other places where exportable goods are produced. This has built a middle class that have bought everything from stocks to cars. Any slowing in the process of industrialization and increased wages throws the system into a cocked hat.

For the first time since China emerged as one of the three or four leading economies in the world it is facing a situation which is cannot easily fix. As a matter of fact, it cannot fix it at all. The government has used its surplus to subsidize oil prices which in turn has lubricated a huge transportation system. That surplus is based on a balance of trade which cannot be sustained if exports falter. They are about to fall off a cliff. The central government probably does not have a five year plan to cover that.

Original here

Google CEO to endorse Obama: WSJ

Google chief executive Eric Schmidt plans to endorse Barack Obama this week and campaign for the Democratic presidential candidate, The Wall Street Journal reported Monday.

"I'm doing this personally," Schmidt told the newspaper in an interview, adding that the Mountain View, California-based Internet search giant was "officially neutral" in the November 4 presidential election.

The Wall Street Journal said Schmidt planned to join executives from other technology companies in announcing their support for Obama and would appear at an event in Florida on Tuesday with the Democratic candidate.

The newspaper did not identify the other executives.

Schmidt is one of a number of top Silicon Valley executives who have served as technology advisors to the Obama campaign. Craig Newmark, founder of popular classified ads firm craigslist, is also an advisor to the Democratic nominee.

Republican candidate John McCain enjoys the support of former eBay CEO Meg Whitman, Cisco CEO John Chambers and former Hewlett-Packard CEO Carly Fiorina among others.

But the high-tech sector has generally viewed Obama more favorably than McCain and The Wall Street Journal said that as of August 31, Google employees have contributed 487,355 dollars to Obama's campaign and just 20,600 dollars to McCain's.

The newspaper noted that Schmidt's endorsement of Obama comes although Google is involved in a number of regulator issues with the US Congress and Justice Department, including scrutiny of a proposed advertising agreement between Google and Yahoo.

"My sense is, the Justice Department makes judgments on these issues independent of politics," Schmidt told the newspaper. "It would be unfair to Justice to imply (that supporting Obama) would make a difference."

The Journal said that although Schmidt has said he is not interested in politics, there was speculation among tech and media executives that he could fill the chief technology officer post Obama has said he would create.

Original here

How to avoid the next housing bubble

Daniel J. Mitchell says Washington should use its past mistakes as a guide for avoiding future crises. David M. Abromowitz says that government must take action when the free market fails consumers.

oday's question: How do we avoid another disastrous housing bubble? Increased regulation, or trust the market to price risk better next time? Previously, Mitchell and Abromowitz discussed what Washington should do about Fannie Mae and Freddie Mac, John McCain’s proposal for the government to buy bad mortgages, the biggest players in the mortgage meltdown and whether Washington should give tax breaks to homeowners.

Act more like Hong Kong, not France

Point: Daniel J. Mitchell

At the risk of putting a smile on your face, David, I must admit that the last month has been a miserable time for people like me who support economic liberty. The politicians in Washington approved a massively expensive $700-billion bailout. The Treasury Department, after first proposing a goofy plan to buy bad assets for either too much (to line the pockets of financial institutions) or too little (to supposedly make a profit for taxpayers), has now decided to coerce banks into accepting partial government ownership. Combined with a similarly inept $300-billion housing bailout earlier this year, politicians are displaying their typical ability to make a bad situation even worse.

But the ultimate insult to injury is that the financial crisis is largely a result of other government mistakes. As I explained in my counterpoint column on Tuesday, the current turmoil is the result of the housing bubble, and the housing bubble can be traced to three misguided policies.

* Easy money from the Federal Reserve: Egged on by politicians who think artificially low interest rates somehow are good for growth, the Federal Reserve flooded the economy with excess liquidity earlier this decade. That extra money had to go someplace, either by bidding up consumer prices or bidding up asset prices. For reasons I'll explain soon, the funds got channeled into the housing market.

* A corrupt system of subsidies from Fannie Mae and Freddie Mac: As I explained in my Thursday counterpoint, these two infamous government-sponsored enterprises used their favored status to dramatically expand the size and scope of their activities, making the bubble even bigger and increasing systemic risk.

* Government-mandated lending to borrowers with bad credit: A number of policies, ranging from the Community Reinvestment Act to so-called affordable-housing quotas imposed on Fannie and Freddie, either extorted or lured lenders into giving mortgages to people who were ill-prepared for the responsibilities of homeownership.

The only piece of good news in the "perfect storm" of bad policy is that policymakers now have a road map to avoid disastrous housing bubbles in the future. If politicians want a stronger economy (or, to be more accurate, if they want a stronger economy more than they want to curry favor with special-interest groups), they should get rid of the policies that caused today's mess.

That means abolishing Fannie and Freddie, which hopefully should be easy now that they've gone bankrupt and have stopped giving campaign contributions. It also means repealing the Community Reinvestment Act and other "affordable-housing" mandates. Luring people into homes they cannot afford is bad for banks and bad for poor people.

But why stop there? To protect taxpayers as well as the economy, the entire Department of Housing and Urban Development should be shut down. And, just to be on the safe side, the building should be razed and the ground covered with a foot of salt to prevent it from springing back to life and haunting future taxpayers. As I explained in my Monday post, housing is not a legitimate role for the federal government.

Fixing monetary policy is a more challenging task, particularly since a stable, zero-inflation policy requires the Federal Reserve to accurately gauge both the supply of money and the demand for money. But one no-brainer step would be to repeal the Humphrey-Hawkins Act, which saddles the Fed with an impossible dual mandate of price stability and macroeconomic fine-tuning. Europeans generally are not role models for economic policy, but we could learn at least one lesson from them, because the European Central Bank is responsible for price stability and nothing else.

The key goal, in all cases, is to reduce the amount of damage that government imposes on the economy. There is a reason the United States is more prosperous than France, and that is because the burden of government is smaller. But this is also a reason Hong Kong grows so much faster than America. It has a limited government, similar to what our founding fathers envisioned. Rather than become more like France, maybe it's time for the United States to become more like Hong Kong.

Daniel J. Mitchell is a senior fellow at the Cato Institute, where he is an expert on tax reform and supply-side tax policy.

Government must keep an eye on the 'free market'

Counterpoint: David M. Abromowitz

Dan,

If consistently repeating "poor people ruined our housing market" in various ways made it so, conservatives would win the argument. But I've see no data that agree with you, nor does your point agree with basic common sense. Lump together all the families assisted by the Community Reinvestment Act, Fannie and Freddie affordability efforts, the Federal Housing Administration or any other dreaded government housing help for schoolteachers, secretaries and police officers, and they would still make up a fraction of borrowers during the frenzied bubble period of 2000-06. And as I've pointed out all week, these responsible lending programs verify income and use fixed-rate loans -- meaning that the families making, say, $40,000 or less who were helped by these programs were not the ones bidding $250,000 houses up to $400,000. That behavior, Dan, was brought to us by the excesses of unleashed market "innovation."

But back to topic: Going forward, what would help the housing market restabilize and thrive? A few thoughts:

* First, given the real causes of the bubble (pdf); perhaps you and I agree that a Fed that ignores an inflating asset bubble does so at everyone's peril.

* Mortgage brokers and originators play a critical role in launching either responsible or shoddy loans into the commerce stream. To strengthen the market, we need baseline national standards of responsibility (without pre-empting states that want to more carefully oversee mortgage companies). Although I am sure you would want a caveat-emptor approach -- assuming the average American can ferret out hidden fees, prepayment penalties, interest rate trends and the like -- the experience of the last few years demonstrates why that wouldn't work. Thoughtful proposals exist on how to do this better.

* Now is an opportunity to expand housing affordability for moderate-income families, not retreat from it. Prices have dropped, and as I noted earlier this week, many safe and sound lending models with proven, low-default rates exist for first-time buyers. Particularly interesting is a recent University of North Carolina study highlighting that it is not the low-income borrower profile but rather the risky mortgages themselves that cause defaults (pdf). We must also, however, attend to the rental side of the equation. With nearly one-third of Americans in households that overspend on housing, the market is apparently underproducing on rental options for working families.

* Finally, whatever mortgages are originated, be they fair or predatory, they will be bundled and sold into investor pools in today's global capital era. Reforms are needed to prevent abuses, manage dispersed risk, minimize more "too big to fail" situations and deny incentives to peddle bad products that present little risk to mortgage brokers. Some of these reforms have emerged; others still need to be crafted.

Dan, in sum, all week you have consistently painted government as the problem and the unfettered markets as naturally good. To many of us who do believe in market economies, this is faith-based economics -- which recent experience (not to mention the savings and loan meltdown that occurred after massive deregulation) proves false. As I have written at greater length elsewhere, markets are a human invention harnessed to achieve human goals, not a divine set of commandments to which we must submit. Moreover, for markets to function, we need market referees. Those features that many assume are a natural part of a "free market" -- such as relatively even bargaining power, effective alternatives, perfect information and the like -- do not automatically happen in the real world. Government has a vital role in keeping markets fair and intervening for the public welfare where markets fail or fall short.

David M. Abromowitz is a lawyer and a senior fellow at the Center for American Progress Action Fund.

Original here

Nearly deforested Haiti vulnerable to hurricanes

4 storms in 30 days bring floods and landslides

By JACQUELINE CHARLES
Mcclatchy-Tribune

ARIANA CUBILLOS ASSOCIATED PRESS FILE

A Haitian girl negotiates a muddy street in Gonaives, Haiti, last month. Floodwaters from three hurricanes and a tropical storm are receding and leaving Haiti with mud-caked streets.

KENSCOFF, HAITI — Plush mansions and concrete shacks perch precariously on the hillside of this steep green mountain retreat, miles from the storm-ravaged cities of Cabaret and Gonaives.

With the brick-red topsoil quickly eroding and few trees to hold what's left, a heavy downpour can easily trigger an avalanche, sending the hills crashing down, washing away homes and uprooting crops.

Haiti's crumbling hillsides have made the country vulnerable to flash floods and lethal landslides, but that vulnerability has come in sharp focus recently, following four back-to-back killer storms in less than 30 days.

Fay, Hanna, Gustav and Ike cut a trail of death and destruction through this already impoverished nation, leaving hundreds dead, thousands homeless and a coastal town in the northwestern corner buried in mud-caked floodwaters.

Haphazard farming techniques, poorly constructed homes on unregulated land, years of neglecting rivers and storm canals and lax enforcement of environmental laws have all left Haiti's landscape in a particularly fragile state. Even heavy rainshowers can create havoc.

The country has less than 2 percent of its valuable tree cover, compared to neighboring Dominican Republic, with 28 percent, according to the United Nations.

'Ecological disaster'

The United States Agency for International Development estimates that only 1.5 percent of Haiti is still forested, compared to 60 percent in 1923. Approximately 30 million trees are cut down annually in Haiti, according to the USAID.

"The whole country is facing an ecological disaster," said Haiti's new prime minister, Michele Pierre-Louis. "We cannot keep going on like this. We are going to disappear one day. There will not be 400, 500 or 1,000 deaths. There are going to be a million deaths."

Convoy bogged down

Waterlogged Gonaives, sitting like a bowl on a flat plain between the ocean and barren mountains, only tells part of the story of Haiti's environmental crisis.

As Tropical Storm Hanna pounded the port city last month, Pierre-Louis and a government convoy tried to reach there. They couldn't get through.

"On the road there, we almost died," Pierre-Louis said.

Boulders crashed down the mountain, bringing a cascade of soiled water.

Two of the government SUVs were washed out by the water on the Nacional, the road connecting the capital of Port-au-Prince to Gonaives and Cap-Haitien.

"You could see all this water falling down with rocks and mud," she said. She ended up traveling to the devastation by air.

"Everyone is talking about Gonaives and Cabaret, but people forget this is a national catastrophe," said Arnaud Dupuy, of the U.N.'s Development Program with responsibility for the environment.

"Port-au-Prince one day will suffer the same fate."

History of devastation

This is not the first time Haiti has been wracked by natural disaster.

Last year, 20 people died in Cabaret after the Betel River burst over its banks.

During Hurricane Ike last month, the same river swelled and killed more than a dozen children.

In 2004, Tropical Storm Jeanne killed an estimated 3,000 Haitians, most in Gonaives, when the three rivers leading into the city roiled down the denuded mountains, loaded with boulders and muck.

"With all of these disasters happening now, we have to ask, 'What have we been doing wrong?' " said environmentalist Jane Wynne, who has spent her life trying to get Haitians to change their lifestyles to help the country avoid devastation.

Original here