Mostly Monday Reads: The Case of Consumer Protection, Fiat money, and Other off-budget Agencies.

Good Day, Sky Dancers!

Yes, it’s another rabbit hole.  Yes, it’s rather scholarly and lawyerly. Yes, we all didn’t catch this back in February when the 5th Circuit made a decision that may impact more than just the Consumer Financial Protection Bureau.  The Bureau has been on every outrage list of right-wingers and the financial industry due to its oversight of how it snags borrowers and then proceeds to drain every last drop of money it can.  You may remember this being set up by the Obama Administration under the leadership of Elizabeth Warren before her Senate run.

The most revealing thing about the scope of the case that SCOTUS agreed to review is the weird logic of the 5th Circuit and the actual grounds of the case. This is from Scotus Blog on February 27. It’s written by Amy Howe. “Court will review constitutionality of consumer-watchdog agency’s funding.” 

The Supreme Court on Monday agreed to take up a major case involving funding for the Consumer Financial Protection Bureau, which was formed in response to the 2008 financial crisis. A federal appeals court ruled in October that the funding mechanism for the CFPB violates the Constitution, but the Biden administration, which had asked the justices to weigh in, says that allowing the lower court’s decision to stand could raise “grave concerns” for “the entire financial industry.”

The announcement came as part of a list of orders from the justices’ private conference last week.

The case involving the CFPB began as a challenge by the payday-lending industry to a 2017 rule that (as relevant here) barred lenders from making additional efforts to withdraw payments from borrowers’ bank accounts after two consecutive failed attempts due to a lack of funds.

A three-judge panel of the U.S. Court of Appeals for the 5th Circuit rejected most of the groups’ challenges to the rule, but it ultimately struck down the rule based on the CFPB’s unique funding scheme, which operates outside the normal congressional appropriations process. Instead of receiving money allocated to it each year by Congress, the CFPB receives funding directly from the Federal Reserve, which collects fees from member banks. And that scheme, the court of appeals concluded, violates the Constitution’s appropriations clause, which directs that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The appropriations clause, the court of appeals explained, “ensures Congress’s exclusive power over the federal purse,” which is in turn essential to ensure that other branches of government don’t overstep their authority. The court of appeals vacated the 2017 rule on the ground that the CFPB was receiving funding through that unconstitutional funding mechanism when it adopted the rule.

The CFPB came to the Supreme Court in November, asking the justices to take up the case and overrule what it characterized as the lower court’s “unprecedented and erroneous understanding of the Appropriations Clause.” The appropriations clause, the CFPB argued, means “simply that no money can be paid out of the Treasury unless it has been appropriated by an Act of Congress.” In the case of the CFPB, the government contends, “Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes. The Appropriations Clause requires nothing more.”

Let me explain why the court’s logic and the current makeup of SCOTUS worry me.  Many quasi-agencies are funded the same way the CFPB is funded.  If they let the logic of the 5th circuit stand, you would be surprised at what would likely be eliminated next.  This is from Nina Totenburg’s All Things Considered on February 27.

The Supreme Court agreed on Monday to take up a case that could threaten the existence of the Consumer Financial Protection Bureau and potentially the status of numerous other federal agencies, including the Federal Reserve.

A panel of three Trump appointees on the Fifth Circuit Court of Appeals ruled last fall that the agency’s funding is unconstitutional because the CFPB gets its money from the Federal Reserve, which in turn is funded by bank fees.

Although the agency reports regularly to Congress and is routinely audited, the Fifth Circuit ruled that is not enough. The CFPB’s money has to be appropriated annually by Congress or the agency, or else everything it does is unconstitutional, the lower courts said.

The CFPB is not the only agency funded this way. The Federal Reserve itself is funded not by Congress but by banking fees. The U.S. Postal Service, the U.S. Mint, and the Federal Deposit Insurance Corp., which protects bank depositors, and more, are also not funded by annual congressional appropriations.

In its brief to the Supreme Court, the Biden administration noted that even programs like Social Security and Medicare are paid for by mandatory spending, not annual appropriations.

“This marks the first time in our nation’s history that any court has held that Congress violated the Appropriations Clause by enacting a law authorizing spending,” wrote the Biden administration’s Solicitor General Elizabeth Prelogar.

Lydon Larouche, The John Birch Society, and now cryptocurrency maniacs, including Elon Musk, have been after all of these agencies for decades.  Have they found the court and the basis that could do that?  Tottenberg also notes this.

A conservative bête noire

Conservatives who have long opposed the modern administrative state have previously challenged laws that declared heads of agencies can only be fired for cause. In recent years, the Supreme Court has agreed and struck down many of those provisions. The court has held that administrative agencies are essentially creatures of the Executive Branch, so the president has to be able to fire at-will and not just for cause.

This is from the Consumer Finance Monitor. “SCOTUS agrees to decide whether CFPB’s funding is unconstitutional but will not hear case until next Term.”  We’re going to have to watch this one.

The sole question presented by the CFPB’s petition is:

Whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB), 12 U.S.C. 5497, violates the Appropriations Clause, U.S. Const. Art. I, § 9, Cl. 7, and in vacating a regulation promulgated at a time when the CFPB was receiving such funding.

Thus, by denying CFSA’s cross-petition and also rejecting CFSA’s request to consider the alternative grounds as antecedent questions to the CFPB’s petition, the Supreme Court is poised to decide the Appropriations Clause issue.

While the Court’s decision not to hear the case this Term means the Fifth Circuit decision will continue to be a cloud over all CFPB actions and could slow the pace of enforcement activity (particularly in pending cases where defendants can be expected to assert the Appropriations Clause issue as a defense), we do not expect it to impact the CFPB’s ongoing supervisory activity in any material way or deter Director Chopra from continuing to pursue his aggressive regulatory agenda.

Here’s an exciting read by Dave Troy, writing for The Washington Spectator, if you’d like to visit the crockpot of crazy folks wanting to tank our economy through debt default or any other possible way. “The Wide Angle: Crash the Global Economy? It’s Harder than It Sounds.”

Just yesterday, I visited the “Rage Against the War Machine” rally at the Lincoln Memorial. Organized by the Libertarian Party, the People’s Party, and the Schiller Institute (run by LaRouche’s widow, Helga Zepp), it was thick with leafleteers pushing LaRouche messaging and featured speeches by two dozen or so Putin-friendly speakers, including presidential candidates Jill Stein, Dennis Kucinich, Tulsi Gabbard, and Ron Paul.

One speaker led the crowd in a chant, “all wars are bankers’ wars,” bringing things full circle: the assertion being that it is only because we have departed from pure, good, and undefiled Austrian economics and the gold standard can (usually Jewish) bankers print the money required to fuel endless war. It seems no one at this anti-war rally had arrived at the most obvious solution: tell Vladimir Putin to withdraw his troops and go home.

Paul, the final live speaker of the day, predictably took the podium to chants of “End the Fed” with a phalanx of Russian flags behind him in the afternoon light. (Ironically, the Eccles Federal Reserve building, barely a block away, is undergoing renovations.)

The North-Paul strategy seems to be alive and well. The most obvious strategy to achieve it would be to crash the global economy by failing to raise the debt ceiling. Kevin McCarthy has repeatedly and explicitly stated his intent to pursue this, and the Washington Post recently reported that the strategy has been developed by former Trump budget director Russell Vought. But two things stand in his way.

The Debt Ceiling Crisis looms eminently. This is from Sahil Kapur and NBC News. “The big problem with trying to cut spending in a debt ceiling bill. President Biden and congressional leaders have a major hurdle to overcome as negotiators meet privately to consider a way forward and prevent a self-inflicted economic calamity.”

Heading into an expected meeting between President Joe Biden and congressional leaders this week, Republican lawmakers say an agreement on “spending caps” is important in securing their support to avert a dangerous debt default.

The House-passed debt ceiling bill would slash federal spending to fiscal year 2022 levels, requiring appropriators charged with allocating government funding to cut $131 billion compared with what Congress is currently spending.

Meeting that target without cutting defense funding would require a steep 17% cut to nondefense discretionary spending.

“Democrats will not let nondefense take a disproportionate share of deep cuts. So Republicans will have to moderate their cut demands if they want to spare defense,” said Brian Riedl, a former Senate Republican policy aide who now works at the Manhattan Institute, a conservative public policy think tank.

Riedl said they may be able to avoid the dispute by freezing spending rather than making cuts, suggesting “a two-year freeze” on federal spending as one possible endgame.

The trick is that Republicans do not want to touch Defense Spending. We’re not at war anywhere anymore so that should be the item to look for any cuts.  Spending on the Military generally is just about half of discretionary spending. No country spends the kinds of money we spend on its military budget.

We’re watching Turkey’s election go to run-offs while it appears Elon Musk is using Twitter in the interests of Erdogan and his business interests there.

Erdogan is currently trending on Twitter, along with a lot of information on how Twitter has successfully fought off Erdogan’s attempt to censor its content.

All of this should make for an interesting few weeks.

What’s on your reading and blogging list today?

Death by Bubble

cosmic-bubbles-fEconomist Andy Xie says Lehman Brothers died in vain and that it’s just a matter of time before we get hit by another deadly bubble. His guest post at Caijing Magazine is just so dead on that you must go read it.

There has been plenty to learn from last year’s miserable economy and near collapse of key financial markets but U.S. policy makers appear to rebuilding the same system with the same ghastly mistakes in place. We cannot afford to be complacent about this because if it’s done, another huge mishap can’t be far behind. Xie explains that the entire financial system is one big Lehman now and has become much more costly to bail out.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

‘Absolutely no progress’ may actually be an optimistic estimate of the current situation. No progress would mean, to me, we’re not rebuilding the same time bomb. Xie’s article is remarkable in that it deconstructs the arguments one-by-one that we’re hearing that things are really changing, What we actually have is the proverbial shuffling of the chairs on the financial Titantic.

Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

This, of course, leads to the most fundamental question of all. What happens when the government funding disappears? I admit that I see no end to that infusion unless the Fed or some other central bank becomes spooked by the possibility of inflation. These institutions would have to be rebalancing their portfolios in lieu of all the M&A activity they’ve undertaken this year to be able to live with out cheap government funds. Some of them may be repaying the TARP funds, but the real deal happens when Quantitative Easing and ZIRP ends. We’ve had no indication from the FOMC or Bernanke that that’s in the works any time soon but I can tell you, one little glimpse of inflation and the game ends there.

Now, here’s my favorite point. It’s this bull market where the shadow banking system profits from churning and running up your own portfolio by selling it back and forth between the parent and subsidiaries to create a false sense of momentum.

…financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.

Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What’s occurring now is another bubble that is again redistributing income from the masses to the few.

Yup, there it is. The idea that many of the bigger players are just trying to run up the market enough to entice the suckers back near the top. Catch the one about redistribution? We’re basically using cheap money to finance the reverse Robin Hood scenario one more time.

Read the rest of this entry »

Support your new Alphabet Soup Agency

house-mazeA central component of the Obama administration’s Wall Street reform policy is creation of the Consumer Financial Protection Agency (CFPA). He mentioned it earlier this week in his speech as well as today in his radio address. The banks are not happy about the agency. I thought I’d spend some time on what is being proposed.

Obama emphasized the need for the legislature to move quickly to enact a centerpiece of his plan, the Consumer Financial Protection Agency. (This sentence links to the bill.)

“Part of what led to this crisis were not just decisions made on Wall Street, but also unsustainable mortgage loans made across the country. While many folks took on more than they knew they could afford, too often folks signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth,” Obama argued. “That’s why we need clear rules, clearly enforced. And that’s what this agency will do.”

The legislature making the CFPA a legal entity is pending in the House. The responsibility for passage and creation of the bill lay with Congressman Barney Frank (D-MA) and the Financial Services Committee. Frank is the principal author. The LA Times has a succinct explanation of what the plans are for the new agency.

Why should you care? What might the agency do for you — or to you? Here’s a quick overview:

To begin with, be aware that the agency’s powers and oversight would extend far beyond mortgages and real estate — into all credit cards, debit cards, consumer loans, payday loans, credit reporting agencies, debt collection, stored-value cards and even investment advisory and financial advisory services, to name only part of the list.

It would have the authority to alter long-common practices that nettle consumers, such as mandatory arbitration clauses in the fine print of contracts that automatically send business-consumer disputes to arbitrators rather than to courts. The agency could ban or limit such clauses in specific products if they are shown to tilt against consumers’ interests.

The agency would write the user-safety rules for virtually all consumer financial products and would have the legal firepower to levy huge fines — tens of thousands of dollars a day per violation in some cases — and prosecute lenders, brokers and others who break the rules.

The agency would be the dominant federal consumer protector in all home real estate settlements. It would regulate “affiliated” title, escrow and financing businesses connected with realty firms and builders. It would oversee equal credit opportunity and fair housing, and would set standards for all mortgage offerings, whether from the biggest national banks or the smallest local brokers. Generally it wouldn’t seek outright bans on mortgage products that carry elevated risks — interest-only loans, for instance — but would require that lenders restrict such mortgages to well-informed applicants who can document that they understand the risks and can afford the payments.

Within its first year, the agency would be tasked with creating consumer-friendly, uniform disclosures for all home purchase and financing transactions, starting with a combined “good-faith estimates” and truth-in-lending statement.

The core idea behind the proposal, supporters say, is to pull together consumer oversight powers that are now scattered among various agencies, and to put consumer interests where they should be — much higher on the priority list than they were during the years leading up to the housing and credit bubble and bust.

Read the rest of this entry »