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The Lighthouse is the weekly email newsletter of the Independent Institute.
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Volume 13, Issue 30: July 26, 2011

  1. U.S. Wars Undermine Civil Society
  2. Dodd-Frank: One Year Later, the Bailout Dilemma Remains
  3. Seminar on Liberty Addresses Key Questions
  4. U.S. Should Give Moral Support to Peaceful Transitions, Eland Argues
  5. New Blog Posts

1) U.S. Wars Undermine Civil Society

Alexis de Tocqueville visited the United States in 1831 and marveled at the social dynamism he saw, a by-product of the young republic’s protection of the “law of equal liberty.” He also warned that democratic politics runs the risk of creating a “tyranny of the majority,” as voters use the electoral system to overrule their neighbors’ property rights. In a symposium sponsored by the Center of the American Experiment, Independent Institute President David J. Theroux offered his top recommendation to help restore civil society to the full glory that Tocqueville had witnessed: he called for an end to U.S. wars in Iraq, Afghanistan, Libya, Pakistan, and elsewhere.

Ending these military interventions, Theroux writes, “could be a much-needed step to reduce the U.S. annual deficit, save countless lives and injuries, and restore America as a beacon of liberty and justice.”

War crises, Theroux continues, “have always been the most efficient engine to generate big government in every area, including entitlements, regulation, taxes, and so on.” War crises have given birth to virtually every single program of federal spending and power, he argues. “As a result, it is a fool’s errand to seek to reduce the welfare state or eliminate farm subsidies as long as invasive wars are pursued unchecked.... The vibrant blessings of liberty in America that Tocqueville discovered and chronicled so well can be restored only when America’s invasive wars are ended.”

Ending Invasive Wars, by David J. Theroux (Center of the American Experiment, 7/18/11)

Event: The Independent Institute will award its Alexis de Tocqueville Prize to Lech Walesa, Mario Vargas Llosa, and Robert Higgs at its 25th Anniversary Celebration, A Gala for Liberty (San Francisco, Calif., 11/15/11) Get your tickets now!

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2) Dodd-Frank: One Year Later, the Bailout Dilemma Remains

Ever since the bailout of Continental Illinois Bank in 1984, bank bailouts have been an unpopular device invoked to protect the financial system from risks posed by troubled banks deemed “too big to fail.” Many taxpayers believe that bank bailouts are an abuse of taxpayer funds, especially when bank managers are allowed to keep their jobs, stocks, severance pay, and pensions. Free-market enthusiasts, on the other hand, dislike bailouts because they thwart the corrective action that market forces would otherwise bring about. Members of Congress have heard these complaints. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010, prohibits taxpayer-funded bailouts, but it also suffers from a fundamental flaw: it leaves the financial system exposed to meltdowns.

Dodd-Frank gives the Federal Reserve new authority to deal with bank and nonbank financial institutions that it believes are “systemically important,” i.e., firms previously viewed as “too big to fail,” explains New York University professor of finance Roy C. Smith in the Summer 2011 issue of The Independent Review. If the Fed deems that an illiquid financial institution poses a “grave threat” to the financial system and warrants special regulatory action, the targeted firm can lobby the Financial Stability Oversight Council to block the Fed. But by then it may be too late for the targeted firm: because bailouts are off the table, the market may react to the Fed’s announcement with a run on the targeted firm, with undesirable consequences for the rest of the banking system. “The run will spread instantly throughout the banking industry,” writes Smith, “as such runs did after the Lehman episode in September 2010, and without the capacity for bailouts several firms rather than only one might end up in bankruptcy.”

Federal Reserve policymakers, however, are unlikely to take actions they believe would result in the bankruptcies of several of the largest financial institutions. “The only way to avoid such an outcome in a no-bailout world is never to declare a firm to be a ‘grave threat,’ which means the Dodd-Frank resolution authority almost certainly will never be used except to liquidate a bank the Fed has decided to close down,” Smith writes. Dodd-Frank is also flawed in other ways, according to Smith. For example, because it gives federal agencies new powers to scrutinize and regulate large financial institutions, riskier financial transactions would gravitate to smaller, less-regulated institutions. “The nonbanks that take over these businesses,” Smith continues, “will endeavor not to become large enough to become systematically important under Dodd-Frank.” In other words, Dodd-Frank is designed to look as if the government has new powers to prevent financial crises, but the fine print reveals a different picture.

The Dilemma of Bailouts, by Roy C. Smith (The Independent Review, Summer 2011)

Subscribe to The Independent Review. Get two complimentary issues when you purchase your subscription online!

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3) Seminar on Liberty Addresses Key Questions

A recent student seminar sponsored by the Institute for Humane Studies concluded with a wide-ranging question-and-answer session about the importance and advancement of liberty. One of the faculty members, Independent Institute Research Fellow Art Carden, recaps some of his answers at the Q&A session in his latest column at Forbes.com

The questions touched on policy priorities, religion, immigration, illicit drugs, and market failure. One key to policy realism, Carden explained, is to recognize that people respond to incentives, and that efforts to improve society must never overlook that constraint. Carden also suggested that interfering with an individual’s questionable choices is an unjustified interference with moral agency. Ending immigration restrictions, he argued, should be a high priority because it would improve the standard of living both for native-born Americans and for immigrants to the United States. The war on drugs, he argued, had been “an unmitigated disaster” and should be ended.

Carden also suggested that markets should be left alone even when they fail to perform as desired. One argument for laissez-faire is that government interference in the market process typically produces an even worse outcome. “The public choice critique of government intervention suggests that quite often, the government cures will be worse than the market disease,” Carden writes. “Making this a more prominent part of the conversation is, I think, an important step toward a freer, more prosperous, and more just society.”

Thoughts on Liberty and Society, by Art Carden (Forbes.com, 7/22/11)

College students, learn about the principles of a free society at

The Challenge of Liberty Summer Seminars
When: August 1-5

Where: Notre Dame de Namur University, Belmont, Calif.

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4) U.S. Should Give Moral Support to Peaceful Transitions, Eland Argues

John Quincy Adams meant to set the tone for U.S. foreign policy when he said that the United States “is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own.” Unfortunately, Adams’s advice has been ignored for decades, notes Independent Institute Senior Fellow Ivan Eland in his latest op-ed.

The United States should “steadfastly declare rhetorical support for peaceful transitions to democracy and respect for individual rights,” Eland writes. But too often, “U.S. policy encourages more bloody revolts around the world.” U.S. policymakers provide aid and support to overthrow Muammar Gadhafi in Libya, for example, but they were slow to support the relatively peaceful regime change in Egypt and Tunisia.

Another example involves the Arab-Israeli conflict. According to Eland, “it is taken as a given that, this fall, the United States will veto in the United Nations Security Council any resolution for Palestinian statehood.” Rather than veto such a resolution, the United States should champion it, provided that it is accompanied by peaceful change, Eland suggests.

United States Fails to Stand for Peaceful Change, by Ivan Eland (7/20/11)

The Empire Has No Clothes: U.S. Foreign Policy Exposed, by Ivan Eland

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

Partitioning for Peace: An Exit Strategy for Iraq, by Ivan Eland

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5) New Blog Posts

From The Beacon:

FDR Redux: A Cartoon Guide to Cutting the National Debt by 40% with the Stroke of a Pen! (Part II)
Jonathan Bean (7/24/11)

FDR Redux: A Cartoon Guide to Cutting the National Debt by 40% with the Stroke of a Pen! (Part I)
Jonathan Bean (7/24/11)

Warren Buffett’s Deficit Reduction Plan
Randall Holcombe (7/22/11)

Let Us All Sacrifice to Balance the Budget
Anthony Gregory (7/22/11)

Justice Done in Louisiana! Whuda Thunk?
Robert Higgs (7/22/11)

The Profound Hypocrisy of a Clintonian State Department
Anthony Gregory (7/20/11)

Debt Ceiling? Default? These Aren’t Big Issues
Randall Holcombe (7/20/11)

We Need More People Like Rais Bhuiyan in America
Anthony Gregory (7/19/11)

More Evidence Suggestive of Regime Uncertainty
Robert Higgs (7/19/11)

Church Leaders in Alabama and Georgia Lead Fight Against Harsh Anti-Illegal Immigration Legislation
Mary Theroux (7/18/11)

From MyGovCost News & Blog:

Michael Munger on America’s Debt Crisis
Emily Skarbek (7/23/11)

Private vs. Public Investing
Stephanie Freedman (7/22/11)

Gang of Six Plan
Emily Skarbek (7/22/11)

The U.S. Mortgage Interest Deduction by Income Level
Craig Eyermann (7/21/11)

Size of the U.S. Debt Visualized in 3D
Emily Skarbek (7/21/11)

The Double Edge Sword of a Government Subsidy
Stephanie Freedman (7/20/11)

NSA: An Example of Government Mismanagement
Stephanie Freedman (7/20/11)

The Ongoing Debt Debate
Stephanie Freedman (7/19/11)

‘Budget Hero’ Game Allows You to Try to Balance the Budget
Stephanie Freedman (7/18/11)

The Independent Institute’s Spanish-language blog is available here.

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