The Volokh Conspiracy

Last week I blogged about a very interesting article in the Manhattan Institute’s City Journal by Claremont Review of Books contributing editor William Voegeli titled “The Big-Spending, High-Taxing, Lousy Services Paradigm” (Autumn 2009).  It compared the tax-services models of California and Texas.  VC commenters were spirited as ever and raised a number of important questions.

Although I haven’t had the pleasure of meeting William Voegeli, I took the liberty of contacting him through the Claremont Institute and asked if he might have any additional thoughts for us, particularly responding to VC commenters.  Mr. Voegeli was kind enough to say yes, and has sent along the following response, below.  Let me add, on behalf of the VC community, myself as well as readers and commenters, our great thanks for engaging with us.  And let me add to the VC commenting community, that in the spirit of the original article, you might call Volokh Conspiracy a ... Low-Taxing, High-Services blog!  Mr. Voegeli:

Dear Prof. Anderson:

Thank you for bringing my City Journal article (http://www.city-journal.org/2009/19_4_california.html) on California and Texas to the attention of the Volokh conspirators, and for your generous and thoughtful analysis (http://volokh.com/2009/11/02/the-california-versus-texas-model-and-public-choice/) of the piece.  Your post elicited many . . . spirited comments.  It would be cumbersome to address them individually, but I can offer a few points that speak to some of the general questions your readers brought up.

My essay argues that it’s not enough to look at how much states and localities spend because how well they spend is very important.  I understand several people in the comments section to be saying that this principle applies to the tax side of the equation, too.  Thus, California’s problem is not so much that it is a high-tax state but, as one commenter says, that it is a “constrained-and-erratic tax” state.

That’s a fair point.  The combination of direct democracy and the state’s belief that vast optimism could overcome mundane realities left Californians believing they could somehow be “taxed like libertarians, but subsidized like socialists,” as Troy Senik recently said (http://www.nationalaffairs.com/publications/detail/who-killed-california) in National Affairs.  Not only did it prove impossible to achieve the best of both worlds, but the political impotence created by undertaking the effort helped bring about the worst of both: “In a grim irony, Californians are now being taxed like socialists and subsidized like libertarians.”

Proposition 13 is certainly not beyond criticism.  Some things need to be said in defense of the law and its advocates, however. Lots of poorly drawn laws and state constitutional amendments have been passed at the ballot box.  The ballot initiative is never going to be a precision instrument, however, and it’s unfair to hand the voters an axe and then judge their work as if they possessed a scalpel.

The best way to have averted the enactment of Proposition 13 would have been if California’s political establishment in 1978 had put forward a better alternative, one that addressed Californians’ anxieties about tax escalation without 13’s flaws.  Instead, Gov. Jerry Brown and the Democratic legislature held off for as long as possible in offering any sort of response to the people angry and fearful about rapidly rising property taxes, in the hope that the political problem would blow over.  When it didn’t, they finally devised a tax limitation alternative to 13 whose distinguishing feature was that it didn’t guarantee that anyone’s taxes would be limited.

In the 31 years since Proposition 13 was enacted that bait-and-switch problem crops up over and over.  When people here complain that taxes are too high, especially given the doubtful quality of the public services they purchase, the enlightened response is always that taxes aren’t high so much as they’re arbitrary and complicated.  The correctives proposed to enhance the quality of the citizen’s tax-paying experience all purport to make taxes fairer and simpler, but their one clear outcome is that taxes would be higher.  Thus, the reforms that would streamline how California’s governments collect money would have the consequence of relieving those governments of any obligation to devise better, smarter and fairer ways to spend it.  It takes a trusting spirit to believe that this outcome would be an accidental byproduct of tax reform.

A final note.  One commenter argued that government is expensive in California largely because housing is expensive, thus disproving the idea that California governments spend their money in undisciplined, ineffective ways.  Two points:

• 1) California’s state and local employees are the best compensated in the country (http://www.census.gov/compendia/statab/tables/09s0448.pdf) and the differences between them and their counterparts in states that are also expensive are not trivial.  Local government employees make 11.5% more in California than Connecticut, and 21.4% more than those in Massachusetts.  State workers in California make 13.1% more than New York’s and 19.9% more than those in Massachusetts.
• 2) The high cost of living in California, especially the high cost of housing, is a problem for government, in that it puts pressure on it to increase the pay scale for public employees.  That fact does not preclude the possibility that the high cost of housing is, in significant measure, a problem caused by California’s governments.

Let me close on this point by bringing in an expert witness, Edward Glaeser of Harvard’s economics department and Taubman Center for State and Local Government.  In a Los Angeles Times article (http://www.latimes.com/news/opinion/commentary/la-oe-glaeser4-2009mar04,0,4085382,print.story) earlier this year he said:

Although California is a populous state, it still has plenty of land. Santa Clara County, the home of Silicon Valley, only has about 2.2 people per acre. Even in denser places, such as Los Angeles, there is plenty of room to build.

California’s growth has slowed because the state has made it increasingly difficult to build new homes. There is an almost perfect correlation between the growth of an area and the amount of housing that is permitted in that area. California has some of the toughest land-use regulations in the country, which are often justified as environmental measures. When high housing demand is met with restrictions — not construction — California homes become unaffordable and new construction goes somewhere else.

Best regards,

Bill Voegeli

I started out legal life in California, clerking for the California Supreme Court and, already being a tax geek, was handed many of the state tax issues.  So I have some familiarity with California’s tax law.  It is complicated and in many policy aspects problematic, but also, to be clear as a lawyer, it is also highly sophisticated as a body of regulatory law.  I have not had time to look back to California law and regulations on withholding, and haven’t updated my knowledge of the topic since I clerked there a long time ago and dealt with a couple of minor issues.

However, my understanding then was that withholding law was premised on it being an enforcement mechanism to ensure that the proper tax would be withheld on an expeditious basis and taking account of difficulties in collecting the tax due after the fact.  I did not think that it had a basis in law as a revenue raising device in its own right — it was legally an administrative provision for the correct, fair, and efficient collection of tax due, where the actual tax due was figured on the basis of separate statutes.

So I am confused as to the legal authority of the state of California apparently to impose an increase in the withholding rate, not for reasons having to do with the fair and efficient collection of tax finally to be due, but instead to raise revenues or time revenues for reasons not deriving from the administrative necessities of actually collecting a tax, the amount of which is determined by separate tax statutes and regulations.  Or have I not understood correctly, from news articles, what has taken place in a legal, tax-lawyer sense?

Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners — holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it’s not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers’ annual tax bills won’t change.

Think of it as a forced, interest-free loan: You’ll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

Okay, forced interest-free loan, got that.  What I don’t understand is the legal basis for ordering it.  I realize that I should do a little legal research, or anyway tell my research assistants to do it, but I’m swamped while still interested — and think it is broadly interesting, and not just in California.  So:  I would be interested to know particularly if any experienced California tax lawyers could explain for us the following.

• First, what is the statutory or regulatory basis, if any, on which the state of California has justified the change, and, for that matter, where is the change officially promulgated and on whose authority?
• Second, is there precedent for this, as an administrative but also legal matter in California — has this occurred before and has there ever been litigation, administrative or otherwise?
• Third, is there a basis on which to contest the lawfulness of the increase?  And further to that, how does that proceed in California — can one proceed on an injunctive basis, on a class basis, what — or is it foreclosed by law or precedent?
• Fourth, even if the Governor or the Legislature has issued the order, does the administrative agency thereby have the authority under California law to carry it out; that is, is it possible that such an order exceeds the authority of the relevant agency?
• Finally, is anyone pursuing such litigation; or alternatively, is the order obviously lawful?

I’m happy to hear people’s views on the policy and political issue, but I particularly welcome comments going to California law and regulations.  Thanks.

Update:  TaxLawyer (thanks!) provides helpful comments and a couple of links, below.  One link is to a client advice memo (ie, public) from the Littler law firm.  It provides a good, succinct analysis of the law and the change, and makes clear that the change is a revision to the standard withholding tax schedules.  But it also adds that this is essentially a trap for the uninformed (emphasis added):

As part of California’s annual budget ordeal, rather than enacting new taxes, the legislature enacted (and the Governor signed) various income shifting and tax acceleration provisions. Under ABX4-17, as of November 1, 2009, employers will be using a new state income tax withholding table to increase by 10% the amount of income taxes withheld based on existing claimed exemptions ...

Typically, employees adjust the level of income tax withholding by submitting to their employers an IRS form W-4. California also has its own form, DE-4. Employees can submit different forms reflecting their state and federal personal income tax circumstances. Rarely will the use of either or both forms result in withholding that precisely matches the employee’s own annual income tax liability. Ultimately personal tax liability is a matter for the employee.

In an effort to accelerate revenue flow, beginning November 1, 2009, California is adjusting its income tax withholding tax tables by 10%. For example, if bi-weekly state income tax withholding is currently $500 a pay period on an employee’s regular wages, come November 1, such withholding will automatically adjust to $550 ....

As this flat rate adjustment may have no relationship to actual state income taxes, employers can anticipate employees will be potentially flooding payroll departments with revised W-4 and DE-4 forms to “right size” their withholding arrangement. Since nothing in the law forces employees to increase their withholding, an employee can effectively reduce the effect of this law by increasing claimed exemptions, if the new tables would result in excessive tax withholding.

California is proceeding on the assumption that either employees under withhold income taxes through payroll or that employees will not be smart enough to adjust their withholding, and instead give California an interest-free loan of California employees’ income.

That’s with respect to withholding taxes on employment income.  There are separate issues with respect to other kinds of withholding, and the Littler memo notes the following.  The statutory authorization, ABX4-17

also provides for those who file estimated taxes (typically the self-employed) to also accelerate such payments. Both of these acceleration features raise potential constitutional issues and/or other statutory issues, as in many instances such accelerated revenue receipts exceed an individual’s tax obligations and conflict with other state and/or federal laws obliging an employee to accurately provide for income tax withholding.

AP reports on a new Fannie Mae program to allow homeowners who can’t pay their mortgages to rent instead:

Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period. . . . 

The rental program is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. . . . 

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties. 

In the Depression, when the government took over late or delinquent mortgages, many people just stopped paying because they knew that the federal government usually didn’t have the stomach to foreclose.

With its new rental program and Fannie Mae’s superb record of planning and management, what could possibly go wrong?

William Voegeli, a contributing editor at The Claremont Review of Books, has an excellent essay in Manhattan Journal comparing the economic performance of California and Texas.  (I believe a short opinion page version appeared recently in the LAT.)  Among other things, the article provides a good example for how a public choice analysis can be applied to show, in this case, capture of public revenues and the process of increasing public revenues by public employees in California.

The most interesting feature of the article, however, is that it does not start out from a position of hostility toward California and its high tax model.  On the contrary, it says that there is a tradeoff that different people will make differently with respect to high tax/ high public services jurisdictions and low tax/ low public services jurisdictions.  There is a perfectly good argument for the former as well as for the latter.

It’s true that many people are less sensitive to taxes and more concerned about public goods, and these consumer-voters will congregate in places with extensive services. But it’s also true, all things being equal, that everyone would rather pay lower than higher taxes. The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.

I grew up in California and despite my Upper Upper NW DC address, will always count myself a Californian, product of its public schools and a proud graduate of UCLA.  I was a beneficiary of the high tax/ high benefits model, and gravitate toward it.  The problem, as Voegeli documents, is two fold.  First, California is today a high tax/ low benefits model, while Texas, even with relatively low taxes, has managed remarkably to catch up and even pass California in ways I would not have believed possible.  But Voegeli’s data, as I have discussed it with other Californians and Texans, seems to me pretty robust.  His conclusion?

“Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California,” Joel Kotkin, executive editor of NewGeography.com and a presidential fellow at Chapman University in Southern California, told the Los Angeles Timesthis past March. “Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Similarly, the CEO of a manufacturing company in suburban Los Angeles told a Times reporter that his business suffered less from California’s high taxes than from its ineffectual services. As a result, the company pays “a fortune” to educate its employees, many of whom graduated from California public schools, “on basic things like writing and math skills.” According to a report issued earlier this year by McKinsey & Company, Texas students “are, on average, one to two years of learning ahead of California students of the same age,” though expenditures per public school student are 12 percent higher in California.

State and local government expenditures as a whole were 46.8 percent higher in California than in Texas in 2005–06—$10,070 per person compared with $6,858. And Texas not only spends its citizens’ dollars more effectively; it emphasizes priorities that are more broadly beneficial. In 2005-06, per-capita spending on transportation was 5.9 percent lower in California than in Texas, and highway expenditures in particular were 9.5 percent lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam.

What happened?  According to Voegeli, two things.  One is that scarce tax dollars in Texas are spent on priorities that have broad appeal, while California spends far more of its tax dollars on transfer payments to particular groups with political clout.  Second (and a subset of the first, really) is that the tax dollars in California go to public employees, public employee pensions, public sector unions — nominally to the service providers of the “high benefits” received in exchange for high taxes.  Voegeli reports that they soak up the additional revenue but provide increasingly poor services at an ever increasing cost.

In California, by contrast, more and more spending consists of either transfer payments to government dependents (as in welfare, health, housing, and community development programs) or generous payments to government employees and contractors (reflected in administrative costs, pensions, and general expenditures). Both kinds of spending weaken California’s appeal to consumer-voters, the first because redistributive transfer payments are the least publicly beneficial type of public good, and the second because the dues paid to Club California purchase benefits that, increasingly, are enjoyed by the staff instead of the members.

Californians have the best possible reason to believe that the state’s public sector is not holding up its end of the bargain: clear evidence that it used to do a better job. Bill Watkins, executive director of the Economic Forecast Project at the University of California at Santa Barbara, has calculated that once you adjust for population growth and inflation, the state government spent 26 percent more in 2007-08 than in 1997–98. Back then, “California had teachers. Prisoners were in jail. Health care was provided for those with the least resources.” Today, Watkins asks, “Are the roads 26 percent better? Are schools 26 percent better? What is 26 percent better?”

Watkins is not referring to the mythical golden past in which I grew up outside of LA; this is a mere decade ago.  But Voegeli observes that the task for California is inherently harder for it than for Texas; there is an asymmetry baked in:

If California doesn’t want to be Texas, it must find a way to be a better California. The easy thing about being Texas is that the government has a great deal of control over the part of its package deal that attracts consumer-voters—it must merely keep taxes low. California, on the other hand, must deliver on the high benefits promised in its sales pitch. It won’t be enough for its state and local governments to spend a lot of money; they have to spend it efficiently and effectively.

Agency capture of public institutions, their tax mechanisms and their benefits, is far from an unknown phenomenon.  But I have to say that the idea that California could ever be surpassed on any of the metrics above — education, liveability, transportation, quality of life, etc, — by Texas is ... shocking.

(Note — and before everyone gets all p-o’d in the comments.  I do freely admit and guilty as charged that I feel pretty much about my home state as every Texan I’ve ever known feels about Texas, so no need to abuse me in the comments.  And I will also say that if I were able to move back to California today, and not have to worry about gainful employment as a law professor, I would move to ... Carson City, Nevada, just below the Nevada side of Tahoe, on Highway 395 in the Eastern Sierra Nevada corridor, and have two-thirds the benefits of California (the mountains and the desert, minus the Pacific and the California coastal foothills) without the taxes.  I’m headed out to give a talk at Stanford Law School next week, and while terrifically excited to go talk about robots and war and grateful for the invite, I have serious regrets about not being able stay just long enough to drive over the Sierras.)

A few weeks ago, I warned that one of the problems with the Administration’s proposed Consumer Financial Protection Agency is that it could easily be captured by interest groups who would use its powers to exploit the general public for their own benefit:

[Voter] political ignorance opens the door to interest group “capture” of the CFPA or other agencies that will implement paternalistic regulations. Such regulations will necessarily be complex and difficult to understand. Rationally ignorant voters are unlikely to follow them closely enough to be able to tell the difference between effective regulations and harmful ones. As a result, it will be easy for interest groups and government officials to enact regulations that benefit politically influential businesses as the expense of the public under the guise of consumer protection. We have seen this pattern time and again with other regulatory agencies, such as those engaged in railroad, airline, public utility, and trucking regulation.There is no reason to believe that the new paternalistic regulatory agencies will be any different. Indeed, agencies implement paternalistic financial regulations are likely to be even more vulnerable to capture because of the complexity of the financial system (which makes political monitoring by ignorant voters even more difficult), and the presence of numerous powerful interest groups who have an incentive to do the capturing. Banks, credit card companies, real estate developers, and many others will no doubt lobby hard to capture the CFPA once it gets established.

Recently, Democratic Representative Maxine Waters added an amendment to the bill establishing the CFPA that would add five seats to its powerful Oversight Board for “experts in the fields of consumer protection, fair lending and civil rights, representatives of depository institutions that primarily serve underserved communities, or representatives of communities that have been significantly impacted by higher-priced mortgage loans.” All sorts of interest group representatives could easily get on the board under this amendment. For example, pretty much any bank or credit card company official could claim to have expertise in the “fields” of “consumer protection” or “fair lending.” Similarly, many banks can easily claim to “primarily serve underserved communities.” Finally, interest group representatives could pose as “representatives of communities that have been significantly impacted by higher-priced mortgage loans.” For example, lenders and real estate developers located in such areas would surely qualify; after all, they live in the community too. The majority of the board will still be made up of various federal government officials. But these officials are far from immune from interest group pressure themselves, and of course such lobbying will be facilitated by the fact that several interest group representatives will likely be sitting on the board itself. 

Conservative columnist Byron York, author of the linked article, focuses mostly on the fact that Waters’ amendment cleverly forestalled a Republican effort to keep ACORN from getting representatives on the board. ACORN, however, is just one of many groups that could potentially get seats on the Oversight Board. Indeed, ACORN’s notoriety makes it less dangerous than many of the other groups that could potentially capture the CFPA. Any effort to put ACORN representatives on the board would likely result in lots of negative publicity; for that reason, I doubt that the administration would let it happen. On the other hand, rationally ignorant voters are likely to overlook the presence of representatives from other, equally pernicious but less well-known groups.

Michael Hersh describes a new $50 million George Soros initative to try and remake the economics profession so to reclaim it from “free market fundamentalists.”  The fund will be run by Robert Johnson, formerly a managing director of Soros Fund Management; it hopes to raise $200 million in matching funds.  (H/T Instapundit; also Mark N is right in the first comment to raise Cato as a better point of comparison in the (lengthy) discussion below the fold.)

Large swaths of economics are going to have to be rethought on the basis of what’s happened.” So said Larry Summers, President Obama’s chief economic adviser, in an interview in the weeks after the markets crashed a year ago. Yet to a remarkable degree, economic thinking hasn’t changed very much at all.

Now financier George Soros is announcing a $50 million effort to speed things along. This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of “free-market fundamentalism,” among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He’s also creating an “Institute for New Economic Thinking” to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades, and to correct the failures of decades of market deregulation. Soros hopes matching funds will bring the total endowment up to $200 million. “Economics has failed not only to predict and explain what happened but has also failed to protect society,” says Robert Johnson, a former managing director at Soros Fund Management, who will direct the new institute. “That’s what the crisis revealed. The paradigm has failed. There is no guidance.”

I am curious what professional and academic economists make of this kind of initiative.  (Update:  Here’s a much better article from the FT.  And I’ve added ... still more to the post below.) Continue reading ‘A New Soros Initiative on the Economics Profession?’ »

The Lex column in the Financial Times reports that the rating agencies — Standard & Poor’s and Moody’s — are doing financially just fine and, well, even better than fine:

McGraw Hill this week showed the ratings business is on the increase ...  Its Standard & Poor’s credit ratings agency, which accounts for the vast majority of the publisher’s profits, produced its first quarterly rise in revenues in two years.

In a business with large fixed costs, any upturn makes a substantial impact on the bottom line. Profitability in McGraw Hill’s financial services division, which includes lower-margin data and research businesses as well as ratings, never hit the lofty peaks of rival Moody’s with an operating margin of some 55 per cent. Nevertheless, S&P still managed to reach a 40 per cent margin, having merely dipped to 34 per cent at the end of 2008.

I have found it remarkable how little scrutiny has been focused on the rating agencies, and how little has been done — sensibly or foolishly — to revamp their incentives and business models.  There was some discussion of cutting off the implicit regulatory monopoly created by regulations specifying their services; I am not sure even that has gone anywhere, though I haven’t checked recently.  However, Lex adds this cheerful thought:

In spite of widespread gnashing of teeth over rating agencies’ role in the crisis, both companies are even thought to have increased their fees this year. Furthermore, proposed regulation looks less onerous than first feared. McGraw Hill estimates that extra regulatory costs, such as more compliance personnel, will be half what it originally thought.

The New York Times reports that Congress and the administration might soon reach some kind of view on legislation for addressing “too big to fail” institutions.  Off the table is Paul Volker’s proposal to re-establish some line between commercial banking and proprietary trading — some updated Glass-Steagall demarcation.  On the table is the Treasury’s proposal to designate various institutions as “too big to fail” in various degrees and subject them to greater capital requirements, limits on risk-taking, and in addition require a so-called “living will” that would make clear how to disentangle these institutions from others in a crisis.  I think the “living will” idea is not a bad one on its own, as long as we all understand the limits of what it gets you.

Much, much more puzzling to me is this description in the Times, quoting Michael S. Barr, assistant Treasury secretary for financial institutions (italics added to show the quote):

The White House plan as outlined so far would already make it much more costly to be a large financial company whose failure would put the financial system and the economy at risk. It would force such institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets.

Setting up the equivalent of living wills for corporations, that plan would require that they come up with their own procedure to be disentangled in the event of a crisis, a plan that administration officials say ought to be made public in advance.

“These changes will impose market discipline on the largest and most interconnected companies,” said Michael S. Barr, assistant Treasury secretary for financial institutions. One of the biggest changes the plan would make, he said, is that instead of being controlled by creditors, the process is controlled by the government.

Some regulators and economists in recent weeks have suggested that the administration’s plan does not go far enough. They say that the government should consider breaking up the biggest banks and investment firms long before they fail, or at least impose strict limits on their trading activities — steps that the administration continues to reject.

The changes will “impose market discipline”?  How?  They all seem designed to make for better prudential regulation by government regulators — not a bad idea necessarily, in fact not a bad idea at all — but hardly market discipline.  As the Times says Barr says, if there is a big problem, instead of “being controlled by creditors,” the process will be “controlled by the government.” Continue reading ‘Market Discipline? What Market Discipline?’ »

One proposal for addressing too big to fail, or to systemically interconnected to fail, among financial institutions is to separate out the proprietary trading and other “casino” activities from the “utilities” business of commercial banking with the public.  In some ways (not all) it is a revival of the Glass-Steagall approach.  Paul Volker has urged such a policy, as have others.  The Obama administration has not so far shown any appetite for such it, preferring, in its Treasury blueprint for reform, to allow the functional interconnections within holding company structures, and identifying institutions that are regarded as too big or too systemically interconnected to fail and apply “regulation and last resort lending” to apply to them.

Something like the same debate is taking place in Britain, and the Financial Times’s Martin Wolf makes a comment on why one could see the functional separation desirable, but also why it is hard to do and hard to ensure that it actually reduces the systemic risk.  In response to a recent speech by Mervyn King of the Bank of England calling to separate out the “casinos” from the “utilities,” Wolf says:

it is evident why this distinction is appealing. If we define the utility parts of the financial system narrowly, as management of the payment system, it works like clockwork. It is in the management of risk (and the advice given to its clients) that the financial system fails. The limited liability businesses at the heart of our credit-based monetary system have a tendency to mismanage risk (and uncertainty), with devastating results.

However, he ultimately says that he is unpersuaded that a modernized form of Glass-Steagall can work as a structural solution to systemic risk:

Yet I remain unpersuaded that the structural solution – the separation of utility from casino finance – is workable, as I pointed out in a column on the “narrow banking” proposal of my colleague, John Kay. Indeed, Mr King himself is well aware of the difficulties.

First, the border between utility and casino banking is impossible to draw. For Mr Kay, the utility is the payment system and protection of deposits. This would leave all lending – including to households and businesses – inside the casino. For those in the US who hark back to the Glass-Steagall Act, the distinction is between commercial and riskier investment banking.

Mr Kay’s distinction is clear, but problematic. If we followed him, all risk management would become unregulated. It is inconceivable that governments would, or could, leave them so. If we moved back to a Glass-Steagall distinction (itself never accepted in continental Europe), we would need to draw a line. But where? Why would lending to households and business be good, but securitising those loans bad? Why would hedging be good, but speculating bad and how might one draw the line between them? Mr King counters that prudential regulation already draws such distinctions. I would respond that regulation has made a mess in doing so. Furthermore, these are not distinctions between businesses.

This is not to argue that there is no way of making finance safe. There is. But it would be far more radical: deposits would be 100 per cent reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.

Short of such radicalism, we must approach the task in a more subtle manner. First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.

If we did all this, the world of finance would be duller and safer. It would still not have the reliability of jet engines. So long as we allow people to make leveraged bets on the future, breakdowns will occur. The division of finance into utility and casino cannot solve this problem. Only the end of leverage would do so. Do we want that? I doubt it.

I am still thinking through policy on this.  I am more or less persuaded that the Treasury view in the US represents a bad compromise that won’t  prevent the next crisis while stifling activities under regulation that might well turn out to have been both intrusive and yet mostly pointless.  Yet, while accepting Wolf’s criticisms of the casino-utility distinction, I question whether there is still not a role for a structural separation even if one recognizes that it does not solve all the problems of systemic interconnection of institutions via markets.  Constructive comments on the best approach to too big too fail and systemic risk welcomed.

In my most recent post on paternalism, I criticized claims that paternalistic policies can be justified on the grounds that government-appointed experts have greater knowledge than consumers and are less likely to be influenced to cognitive error. Among other points, I emphasized that government experts have no way of determining how much benefit consumers get from potentially risky products and therefore no good way of deciding which products should be banned or restricted on the grounds that their costs outweigh their benefits. In a recent e-mail, NYU economist Mario Rizzo (himself a leading academic critic of paternalism) points out that F.A. Hayek made a similar point in his classic 1945 article, “The Use of Knowledge in Society”:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.

Hayek’s point was directed at arguments for socialist central planning (common in Hayek’s time). But it applies with almost equal force to modern expertise-based arguments for paternalism. Last year, I discussed the broader relevance of Hayek’s thought to our own times in this post. In a follow-up post, I argued for the modern relevance of Hayek’s critique of conservatism.

In my last post I opened a discussion about my new paper, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, which you can download here.  My thesis is that corporate law and theory goes haywire when the government, while enjoying sovereign immunity protection from corporate and securities law, takes control of a company by owning shares.  But does the government really control TARP companies?

When Treasury initially sold Congress on the bailout, the plan was to create all sorts of nifty market-oriented structures to reinvigorate the market for troubled assets.  But once Hank Paulson got the money, he used most of the first $300 Billion to buy stock in over 600 troubled banks (from Citigroup and Bank of America to your local First State bank).  Eric Posner warned us about this sort of surprise.  Some of the stock is non-voting preferred stock that gives Treasury the ability to appoint directors in certain circumstances, for other companies like Citigroup the stock is voting common equity.  The share purchase program was later extended to the automotive sector by Tim Geithner.  The question is whether the government is a controlling shareholder based on its percentage of share ownership, the fact that the government regulates banks, and the fact that it  loans them a lot of money.

Control is an elusive concept.  What does it mean to control something?  Is it the power to dictate demands, to encourage, to threaten, or maybe the power to destroy something if you wanted?  Some forms of control require force.  Then again, sometimes control can be exhibited more powerfully through a sublime and unspoken understanding, the Godfather-esque “I give him an offer, he don’t refuse.”  It is a question not lent to easy answers, and yet corporate and securities law is riddled with special provisions assigning liability, prohibiting transactions, or requiring additional disclosure based on whether a shareholder controls a company.

Analysis of control in business law is unfortunately muddled.  For an entirely novel method of determining control, keep an eye out for an article I’m doing with Terry Chorvat sometime next year.  For now, here are some basic rules: i) control is exclusive, a corporation may only have one control shareholder, ii) control is usually present for majority shareholders, unless the board has staggered terms (like the U.S. Senate) iii) holding a majority of shares is not required for control, owing to the collective action problems, rational apathy, and regulatory restrictions limiting dispersed shareholder exercise of their votes, and iv) factors indicating control for sub-majority shareholders could include percentage of holdings, special contractual rights, concurrent status as a powerful creditor, or actual exercise of control such as holding corporate office.

With that, let’s turn to the question of whether the federal government is a control shareholder for any of the 600+ companies accepting TARP bailout money.  We start with the obvious point that the government stands as both a powerful creditor and shareholder for most of these companies.  It also has a power that no other shareholder has, it regulates the companies.  For banking, Treasury and the Fed are regulators, for the automotive industry the DOTD, DOE, and other entities do the job.  At GM and AIG, Treasury and the Fed are majority shareholders (GM is not currently publicly traded, but soon will be).  Fannie and Freddie are not technically TARP bailout owing to their pre-bailout conservatorship (in much the same way that Marcia, Jan, and Cindy are not technically Brady) but in light of their starring roles in the financial crisis, let’s throw them in anyway as former Fortune 500 companies that are presently 100% government owned.

At AIG, the Federal Reserve placed its shares with a trust that it created, the AIG Trust, managed by three trustees selected by the Federal Reserve.  The Fed’s position is that this helps to create a buffer between the Fed and AIG.  I don’t buy that argument.  I had an opportunity to testify about the AIG Trust, along with then AIG CEO Ed Liddy and the three trustees, at a hearing before House Oversight this summer where I urged that the AIG Trust Document actually requires the Trustees to manage the trust in the best interest of the Treasury Department.  To read the testimony, see here.  I’ve consulted for the Special Inspector General for TARP and the GAO TARP team on this issue for a Corporate Governance Audit requested by Senator Baucus, a very engaged and informed group of folks by the way, hopefully that report will bring this issue to light.

At Citigroup the government holds a 34% interest.  For any other shareholder 34% ownership, by itself, is a close call for determining control.  When we add the fact that banking is a deeply regulated industry, regulated by same two government entities that control the shares in question, and we also consider the fact that the government is also a substantial creditor of Citi through a number of guarantees it has also offered to Citi’s outstanding liabilities, I feel confident in asserting that the federal government is a control shareholder in Citi.  For real world indicia of control, consider that the government has chosen most of Citi’s current directors, and that Citi has been the first to accede to congressional demands on mortgage re-modifications, support for cramdown legislation, and worker visa limitations.

I won’t analyze every one of the 600 companies, but I think you get the point.  Treasury and the Federal Reserve are control shareholders of many TARP companies, the only real question is how many.

More from Walter Olson on the potential scope of the FTC’s new regulations governing bloggers and other social media users.

It’s been much asserted of late that it’s no particular burden to disclose when mentioning a newly published book or quoting from a newsworthy speech that the publisher sent you a review copy or the conference-giver let you into the hall on a press pass or its equivalent. But the regulations clearly contemplate broader disclosures than that. At some point, acceptance of such benefits will be deemed to create a relationship that must be disclosed even on other occasions, when, say, you mention an author or a nonprofit institution in a different context six months later.

The Washington Post reports on how the Obama Administration is increasing regulatory efforts on many fronts.  There’s no question Obama appointees are more enthusiastic regulators than their Bush counterparts (with the possible exception of those at Homeland Security), but it would be a mistake to place all the credit/blame for increased regulation on the Obama Administration.  In some cases, as with the CPSIA, Obama appointees are merely implementing regualtory statutes enacted, and signed into law, under President Bush.

The NYT reports on how efforts to reduce air pollution have sometimes led to an increase in water pollution.

Even as a growing number of coal-burning power plants around the nation have moved to reduce their air emissions, many of them are creating another problem: water pollution. Power plants are the nation’s biggest producer of toxic waste, surpassing industries like plastic and paint manufacturing and chemical plants, according to a New York Times analysis of Environmental Protection Agency data.

Much power plant waste once went into the sky, but because of toughened air pollution laws, it now often goes into lakes and rivers, or into landfills that have leaked into nearby groundwater, say regulators and environmentalists.

Officials at the plant here in southwest Pennsylvania — named Hatfield’s Ferry — say it does not pose any health or environmental risks because they have installed equipment to limit the toxins the facility releases into the Monongahela River and elsewhere.

But as the number of scrubbers around the nation increases, environmentalists — including those in Pennsylvania — have become worried. The Environmental Protection Agency projects that by next year, roughly 50 percent of coal-generated electricity in the United States will come from plants that use scrubbers or similar technologies, creating vast new sources of wastewater.

Yet no federal regulations specifically govern the disposal of power plant discharges into waterways or landfills. Some regulators have used laws like the Clean Water Act to combat such pollution. But those laws can prove inadequate, say regulators, because they do not mandate limits on the most dangerous chemicals in power plant waste, like arsenic and lead.

One problem is the focus on scrubbers as a means of pollution control when, in some instances, fuel switching or other measures may to the trick. (Of course, for years federal regulations discouraged use of low-sulfur coal as a means of emission control, even though it could have produced greater emission reductions.  See Ackerman & Hassler, Clean Coal, Dirty Air (1981).)

This is not the only example of environmental regulations controlling pollution in one media while increasing it in another.  The federal oxygenate mandate for reformulated gas in the 1990 Clean Air Act resultedin widespread use of MTBE in gasoline, which has led to widespread groundwater contamination in many parts of the country.  Part of the kicker with MTBE, however, is that it did very little to reduce automotive emissions.  Indeed, the original mandate was less about pollution control than increasing markets for another oxygenate: ethanol.  [For those interested, I told the  story behind the mandate in “Clean Fuels, Dirty Air,” a chapter in Environmental Politics: Public Costs, Private Rewards (Greve & Smith eds. 1992) that was somewhat inspired by the Ackerman & Hassler work.  A shorter version is available in The Public Interest archives here.]

I was very happy to hear about Elinor Ostrom’s Nobel Prize in Economics. Her work focuses on the tragedy of the commons and collective action problems, which overlaps several of my own research interests. When Ostrom began writing in this field in the 1960s, the conventional wisdom in economics and political science was that the tragedy of the commons and other similar collective action problems could only be addressed through government intervention. Some dissenting economists (such as Ronald Coase) argued that they could often be addressed through privatization — converting common property into property owned by individuals, who would then have strong incentives not to overuse or destroy it. In a series of influential articles and books, Ostrom showed that there is a third way: often individuals can use social norms and informal institutions to manage common property resources and prevent tragedies of the commons. In many situations, Ostrom demonstrates, informal, decentralized approaches to managing common property resources are superior to government-imposed ones. The former take more account of the specialized local knowledge possessed by the people who actually use the resources and depend on them for their livelihoods. 

For the best summary of Ostrom’s work, see her excellent 1990 book Governing the Commons.

Ostrom’s theories are often seen as an alternative to traditional libertarian thought, which emphasizes the importance of private property and markets. However, it actually fits well with libertarianism defined more broadly as advocacy of the superiority of private sector institutions over government. In some respects, Ostrom’s norm-based approach to dealing with tragedies of the commons is actually less dependent on government than the more traditional libertarian approach of relying on exclusive private property rights. The latter, after all, often depend on enforcement by government. Even where private property rights exist, it is often easier and cheaper to solve some collective action problems by norms rather than relying on the law. And, obviously, Ostrom’s emphasis on the importance of local knowledge is similar to the earlier work of libertarian theorist F.A. Hayek.

Not all tragedies of the commons can be solved by the kinds of mechanisms studied by Ostrom. Her research shows that such approaches usually work well only in groups with no more than a few thousand members. Beyond that point, resource usage norms become hard to enforce and free-riding difficult to suppress. Informal norms and institutions probably cannot solve nationwide collective action problems such as rational political ignorance (the focus of much of my own work), or worldwide ones such as global warming. Still, they can address a great many environmental and economic dangers that most experts once believed required government-imposed solutions.

Because Ostrom is a political scientist, her work hasn’t been as widely recognized by economists as it probably should be; this despite the fact that collective action problems are a major focus of study for modern economics. Steve Levitt writes that he had not even heard of Ostrom before she won the Nobel. However, her work has been enormously influential in political science and legal scholarship. 

I’m not going to argue the question of whether Ostrom deserves the Prize more than various other candidates who are professional economists. Other people are far better qualified to judge that issue than I am. However, there is no doubt that her work is a major contribution to the study of important economic issues. Hopefully, the Nobel will make her scholarship better known in economics and other fields.

UPDATE: Paul Krugman admits that he, like Levitt, was unfamiliar with Ostrom’s work before she won the prize. But he goes on to suggest that she is deserving of the award based on her work on institutions.

The Wall Street Journal has a new story from over the weekend on Democratic proposals, in Congress and the administration and from outside groups, to impose a tax on financial transactions (John D. McKinnon, Democrats Weigh Tax on Financial Transactions, WSJ, October 10, 2009):

Taxing financial transactions on Wall Street is gathering support in high places.

With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.

Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.

Financial transactions taxes, whether on the US domestic level or the often-proposed international “Tobin tax,” are sometimes described simply as broad based revenue raisers, and sometimes described as ways of deliberately slowing down the movement and flow of capital.  As a revenue raiser, one current proposal operates this way:

This week, the left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

The money would be used initially to pay for temporary aid to states, hiring incentives for public– and private-sector employers and school construction money.

“We are in a difficult time right now, so people are looking at every opportunity to gain some revenue to fund” new initiatives, said Rep. Stephen Lynch (D., Mass.), a member of the House Financial Services Committee. “Because I was one of the first to suggest using this to fund [new] regulatory infrastructure, folks have come to me and said, ‘That’s a good idea; I’ve got a better one: Why don’t we use it for stimulus or especially health care?’”

One Democratic aide said the idea is under consideration among House leadership, though the discussions are preliminary.

It does sound like a dandy, relatively hidden revenue raiser — one that could generate vast sums of money relatively unnoticed, at least among ultimate ordinary consumers and taxpayers, who will not notice the long-term, collective hit to their pension funds and retirement funds which, anyway, they often do not directly manage.  However, taxing at the front end is generally considered more distorting than taxing at the back end, and a tax on simply engaging in transactions themselves is almost certainly more distorting, other things being equal, than a tax on the final net economic transaction.  Certainly less transparent to those who ultimately bear the tax.  And of course there are many questions of where the incidence of tax falls — after all, a huge percentage of these transactions involve people’s retirement funds, long term savings, pension plans, including those of the unions.  It is not just a bunch of plutocrats sitting around trading their stocks and bonds.

Hence a bit of bait and switch — when that point is raised, then the defense is offered that, well, after all, it is independently a good thing to slow down and make more expensive capital market transactions.  Capital flows too quickly and too fluidly as is, on this view; it needs to be slowed down, for its own sake, quite apart from the revenue raising.  The sand in the wheels of commerce is a good thing because the flow of funds is, if not precisely too efficient, then too volatile.  This was an argument heard particularly in the 1990s with respect to the global capital markets, around the various currency crises, the Mexican peso crisis of the early 1990s or the Asian crisis of the later 90s.  Of course, another bit of bait and switch was going on in those arguments as well — many of the Tobin tax supporters presented this as a desirable distortion of incentives, but actually were interested in the revenue, proposed as a way of funding international organizations starting with the UN.

Sometimes the transactions tax is coupled with the idea of exempting transactions that favor holding for some period of time — an anti-volatility, anti-rapid-turnover kind of rule; sometimes it is suggested that this will spare long-term retirement savings from the burden of the tax.  The problem is that the distortionary effects are not easily separated that way; the effects of economic distortion are not the same as the question of who pays the direct transaction tax.  The economic distortions are far less about whether I pay such taxes on my relatively infrequent trades in my retirement account and much more about whether the market as a whole is less efficient and so reduces the long run growth and value of my retirement account indirectly, irrespective of whether I, individually and directly, pay much in the way of the transactions taxes.

According to the article, leading Democrats such as Barney Frank are open to the idea.  The revenue needs, it seems, will be insatiable, and the distortions something like the indirect, hard to pin down, long-run effects of inflation.  But in the case of a domestic US transactions tax, of course there is something else to worry about.  There is no reason why financial transactions have to remain in American markets.  Other than efficiency, liquidity, depth, interconnectedness among financial markets, security, relatively good corporate and regulatory governance, transparency, low transaction costs, the neutral application of the rule of law to all comers.  Yes, the United States offers all those things, but it does not have a monopoly of them, obviously.  London offers all of that.  So do other places — mainland China does not, as yet, but Singapore does, and other places in the world.

Hard as it might be to imagine financial market transactions migrating from the US elsewhere, it has happened to many financial centers in the past and can happen to the US in the future.  The US has huge accumulated advantages in these areas, many of which are social, institutional, and political-legal cultural benefits that seem immutable and free-standing.   On the other hand, automotive Detroit seemed immutable and free-standing and the beneficiary of all those advantages for decades and decades — its political class decided to eat its seed corn, so to speak, and even once it was obvious where it was heading, decided to go with the flow and double-down the bet on ‘other taxpayers’ money’.  Maybe it will (continue to) work out for the best for the UAW and its labor allies, at the expense of the rest, but there are limits to even what the current administration can do for it.

This is not a declinist prediction.  It doesn’t have to be this way.  It is, rather, to observe that for the US now, actions to promote US decline are decisions taken today by the political class.  Decline-inducing decisions include making the US less attractive as a capital market center and leader, making transactions more expensive in order to favor current spending.

Does a complex welfare state need taxes?  Sure.  Transparent, widely shared, everybody pays something and everyone can see what they pay, so that everyone has a stake in the extent of taxing and spending, as visible and little distortionary as possible.  Thus almost the opposite direction to where the US tax code has drifted since the 1986 reform and even more so to where current proposals aim to go.  They tend to increase the rent-seeking possibilities of the political class and its ability to ‘get the juice’ from economic actors who must navigate the artificial shoals of regulations that aim to benefit particular constituencies and particular politicians.  VAT taxes flunk the transparency requirement, as do turnover taxes of this kind.  That is, of course, one reason why politicians love them.

I’m considering submitting two new course proposals to our curriculum committee at our law school here in DC.  I’d be grateful for your pedagogical advice.

One would be a reading-research seminar in law and economics on the current state of debate over the Efficient Market Hypothesis.  I imagine we would read some standard economics articles and material running back over the last few decades, including classics like A Random Walk Down Wall Street, but also a couple of recent books on the debate, including Justin Fox’s The Myth of the Rational Market, and perhaps Dick Posner’s book, among other things.   One specifically law school connection would be to help students understand how the theory underpins much regulation, how courts view cases, many parts of the law itself.

The second class would be on financial derivatives, considered as contracts.  We already have a class on derivative regulation at my school — this would be a class specifically on the contracts themselves, and the economic context in which the derivatives are used.

Would those seem like useful seminar courses for business law students in their third year of law school?  Or yet another example of professor doing what interests him without much attention as to pedagogical utility?  We are a solid mid tier school, in DC; many, many of our students go into government regulatory agencies dealing with the economy.

Bank Analyst Meredith Whitney in the Wall Street Journal:

Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.

Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country’s workforce and contribute 38% of GDP. Without access to credit, small businesses can’t grow, can’t hire, and too often end up going out of business. What’s more, small businesses are often the primary source of this country’s innovation. Apple, Dell, McDonald’s, Starbucks were all started as small businesses.

What’s especially disturbing is how taxpayer dollars have supported “too big to fail” businesses yet left small businesses unassisted and at a significant disadvantage. Small businesses do not have the same access to government guarantees on their debt. After all, most of these small businesses don’t issue public debt. . . .

I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut “inactive” accounts (whether or not the customer viewed the account as a liquidity vehicle).

The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.

Regulators should be mindful that regulatory change during the midst of a credit crisis often ends with unintended consequences. Those same consumers that regulators are trying to help are actually being hurt by a vast reduction in available credit.

UPDATE: From what I see, Whitney is right that credit remains very tight. I have heard from some friends who carry large credit card balances that before the new federal credit card laws took effect in August their credit card lines were cut to just above their existing balances. 

The home appraisal fiasco is causing many signed contracts based on mortgage funding to fall through. And getting jumbo loans (over $417,000) for second homes is extremely difficult today, with only a few national lenders even considering such loans.