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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 14, Issue 4: January 24, 2012

  1. The Failure of Financial Reform
  2. The Courts and Popular Sovereignty
  3. U.S. Debt Woes Worsen
  4. Scrapping State-Funded ‘Redevelopment’ Is a Positive Development
  5. New Blog Posts

1) The Failure of Financial Reform

Reform of the nation’s financial regulatory system has failed. Years after the bailouts of 2008 and 2009, the underlying problems remain. For proof, consider the meltdown of MF Global last October. The Financial Services Oversight Council, a creation of the Dodd-Frank Act, has given no indication that it foresaw the company’s implosion and no rationale for its response, even though the Council is supposed to act as an early-warning system and make its decision-making transparent. In other words, the government has yet to get its house in order, according to Independent Institute Research Fellow Vern McKinley, author of Financing Failure: A Century of Bailouts.

These failures come as no surprise, McKinley argues in his latest op-ed. The regulatory bureaucracy has had an “early-warning” agency since the late 1980s—the Working Group on Financial Markets—but it too proved incapable of sounding the alarms in time. And the problem of non-transparency has long been a serious shortcoming of regulatory agencies. For example, the Federal Housing Financing Authority possessed the authority to put Fannie Mae and Freddie Mac into receivership, a process that would have led to the dismantling of those government-sponsored enterprises and saved hundreds of billions of dollars in bailout costs. Instead, the agency chose to put them into conservatorship, thereby prolonging their costly and damaging existence. To date, the agency has failed to explain its actions to the public.

And the government seems content to ignore the ongoing failures. The heat generated by the recent appointment of Richard Cordray to head the Consumer Financial Protection Bureau has brought no light to the dark problems of financial reform. In addition, the Federal Reserve has been pushing, not for Fannie and Freddie to be wound down, but for them to go to greater lengths to artificially prop up the mortgage market. “For all the rhetoric of reforming our financial system, the latest facts show no material progress to date,” McKinley concludes.

Financing Failure: The State of Bailouts, by Vern McKinley (The Washington Times, 1/18/02)

Financing Failure: A Century of Bailouts, by Vern McKinley

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2) The Courts and Popular Sovereignty

Whatever traits one might ascribe to Newt Gingrich, a fear of speaking his mind on vital issues isn’t among them. Agree with him or not, the presidential hopeful merits gratitude for broaching a topic often neglected by his Republican rivals: the proper role of the courts. Moreover, Gingrich’s charge that the judiciary has stepped beyond its proper boundary—that it has usurped the authority of legislatures and the executive branch to properly interpret the U.S. Constitution—is especially refreshing, according to Independent Institute Research Fellow William Watkins, Jr.

The fundamental issue is whether the Supreme Court is the final arbiter of the Constitution, or merely a co-equal partner, along with other branches of government, in the task of constitutional interpretation. And a fair reading of constitutional history supports the latter view, even though the former has become the conventional wisdom, Watkins argues. “One of the most egregious mistakes [pundits of the left and right] make is to ignore the impact of popular sovereignty on the United States,” Watkins writes in the Daily Caller.

The idea of popular sovereignty was central to the creation of the American Republic’s distinctive form of government. British jurist William Blackstone, a major influence on the Founders, argued that Parliament, rather than the Crown, possessed sovereignty and authority in making and abrogating the laws. In 1776, the Virginia Declaration of Rights asserted that all power is vested in, and derives from, “the People.” Early state courts viewed judicial review of other branches of government as compatible with popular sovereignty; they didn’t claim to have the last word on the authority of legislatures. Even Supreme Court Chief Justice John Marshall’s decision in Marbury v. Madison (1803) “suggested that the court must show deference to the elected branches of government,” Watkins writes. Thomas Jefferson, Marshall’s enemy, held that nothing in the Constitution gives judges the authority to substitute their judgments for those of the Executive (or vice versa). Thus Watkins seems to stand on solid ground when he writes: “A correct understanding of popular sovereignty is necessary to restore our government to one that upholds the fundamental principles and respects the structural framework of this nation, as our forefathers intended.”

Gingrich Is Right about Judicial Supremacy, by William J. Watkins Jr. (The Daily Caller, 1/17/2012)

Reclaiming the American Revolution: The Kentucky and Virginia Resolutions and Their Legacy, by William J. Watkins, Jr.

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3) U.S. Debt Woes Worsen

As of January 9, Uncle Sam owes more money than the value of the annual output of the U.S. economy. And by 2022, total federal debt is slated to exceed gross domestic product by 15 percent, according to the White House. Common arguments that the mounting federal debt is a non-problem are “dangerous and misleading,” according to Independent Institute Research Fellow Emily C. Skarbek.

“Those who argue that government spending now will produce future rapid growth in the economy do not see the increasing costs—and dangers—of big government,” Skarbek writes in the Washington Examiner. “It’s like telling a dangerously overweight person that the extra calories he takes on by eating another double cheeseburger will give him more energy to work out later. It doesn’t work that way.”

America’s best recourse, Skarbek argues, is to pass a constitutional amendment to limit federal spending. “A properly conceived balanced-budget amendment would send a strong signal to American families and investors, as well as the rest of the world, that America intends to get its fiscal house in order and avoid the devastating debt crisis facing Europe,” Skarbek concludes.

Writing Checks Against the Future, by Emily C. Skarbek (Washington Examiner, 1/22/12)

MyGovCost.org—Home of the Government Cost Calculator.

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4) Scrapping State-Funded ‘Redevelopment’ Is a Positive Development

Last month, the California Supreme Court cleared the way for the state to defund more than 400 municipal redevelopment agencies. This is a positive development for several reasons, according to Independent Institute Senior Fellow Benjamin Powell.

The agencies were a bad idea to begin with, and their tenure has often had disastrous results. They have violated the rights of private-property owners who wished to keep their land; underperformed on their promises to foster long-term economic growth; and provided lavish subsidies to politically connected developers, sports-team owners, and big-box retail stores. Defunding the agencies will therefore serve the cause of justice, an objective that is more important than Sacramento’s budgetary reasons for doing so.

Lobbyists for redevelopment will call for new legislation to promote the same goals as the agencies, such as making housing more affordable. “But there are better ways to promote affordable housing,” Powell writes. “In fact, government policies—including zoning restrictions, certain building codes, labor laws, permit moratoria, urban growth boundaries, and even so-called ‘inclusionary zoning’—are among the main reasons there is less affordable housing. Abolishing these policies would do more to increase the supply of affordable housing than anything the development agencies have done.”

Spur Redevelopment by Abolishing RDAs, by Benjamin Powell (The Sacramento Bee, 1/18/12)

Housing America: Building Out of a Crisis, edited by Randall G. Holcombe and Benjamin Powell

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5) New Blog Posts

From The Beacon:

From MyGovCost News & Blog:

You can find the Independent Institute’s Spanish-language blog here.

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