Supreme Court Overturns Sotomayor Ruling

Pelosi v. CIA

Videotapes for agents, secrecy for the Speaker.

The last time the CIA and Nancy Pelosi were in the news together, the House Speaker was accusing the agency of lying about its briefings to Congress on the interrogation of al Qaeda detainees. This week, the Speaker's fellow Democrats are set to block public disclosure of what Ms. Pelosi was really told and when.

Democrats recently marked up the 2010 intelligence bill, and Republican Pete Hoekstra offered an amendment in committee to require the CIA to make public an unclassified version of its records on Congressional briefings. It also would have required the CIA to disclose the information gleaned from those interrogations.

Democrats have spent years demanding a "truth commission" into interrogations, so you'd think such public disclosure would be welcome. Ah, that was when a different guy was in the White House and before Mrs. Pelosi had made her own veracity an issue. Suddenly, she's all for secrecy. And sure enough, Intelligence Committee Democrats lined up to protect their leader and defeated the Hoekstra amendment on a party line vote. This follows Democratic rejection of a resolution by Utah Republican Rob Bishop to initiate a bipartisan investigation of Mrs. Pelosi's accusation.

CIA employees weren't so lucky. Chairman Silvestre Reyes's Intelligence Democrats passed a new requirement that the CIA videotape all detainee interrogations. This is a sop to the anti-antiterror left, which wants heads to roll because the CIA destroyed tapes of the interrogations of the likes of terrorist Abu Zubaydah. CIA clandestine chief Jose Rodriguez ordered those tapes destroyed precisely because he worried they might leak and compromise U.S. methods. Republicans offered an amendment to strip the videotape provision but lost on another partisan vote.

This fits the Pelosi policy that the wartime decisions of CIA agents can and will be second-guessed years later, but Congressional acquiescence in those decisions is off-limits. Philip Mudd, a respected career intelligence officer, was recently blackballed by Congress for a Homeland Security job because he knew about harsh interrogations. The message to CIA operatives is don't take any risks for national security, and better have a lawyer on speed dial. All of which belies President Obama's promise that there would be no political recriminations for CIA actions taken after 9/11. Meanwhile, CIA Director Leon Panetta has so far said nothing publicly about the House's videotape provision.

Democrats intend to bring the intelligence bill to the House floor this week, and Republicans are preparing a new set of amendments. At least on the videotapes, Mr. Obama ought to spend some political capital in the cause of protecting the spies we need to defend the country.

Let's Treat Borrowers Like Adults

The problems with a financial products safety panel.

TODD J. ZYWICKI

Imagine a man in California who speculated in real estate at the height of the housing bubble. He bought a house with no money down and an adjustable-rate mortgage. But before he could flip that house for a profit, the market collapsed. He then owed more than his house was worth, but he knew that under his state's laws it would be impossible for his bank to sue him for the balance of his loan if he abandoned the house to foreclosure.

What is this man likely to do?

Several hundred thousand people have found themselves in a similar situation in recent years, and they have walked away from their real estate investments. Nothing down, interest-only mortgages taken out by speculators in states with default-friendly laws have fueled the foreclosure crisis and have come to be seen as a major threat to the American financial system.

Chad Crowe

They have also led the Obama administration to propose creating a consumer financial product safety commission to protect homeowners from dangerous loans. The premise of this proposal is that the financial crisis was created by predatory lenders taking advantage of hapless borrowers.

But do consumers really need such protection? Or would such a commission make it harder and more expensive for consumers to find the loans they need?

The idea of a financial product safety commission comes from Elizabeth Warren, a Harvard Law professor and the chairwoman of Congress's oversight panel for the Troubled Asset Relief Program. She says that such a commission is necessary because consumers cannot buy a toaster that has a one-in-five chance of exploding, but they can get a subprime mortgage that has a one-in-five chance of ending in foreclosure.

But this simple-minded analogy misses the point. An unsafe toaster is a hazard to anyone who buys it. That's not true for loans.

Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators).

And unlike toasters, borrowers have substantial say over whether their loan "explodes." Foreclosures have risen throughout the country, but an epidemic exists only in a handful of areas -- Las Vegas, Phoenix, Miami and the Inland Empire region of California are all places where foreclosure rates are five to 10 times higher than the national average. These areas saw price bubbles that have now popped, giving many homeowners who owe more than their house is worth strong incentives to walk away from their loans.

Treating all consumers as hapless victims rather than recognizing that many consumers rationally respond to incentives is a recipe for unintended consequences. It can lead to counterproductive regulation that makes loans more expensive and harder to get.

Consider, for example, prepayment penalties in subprime mortgages. Banks charge such penalties because prepaying a mortgage makes it less profitable and subprime loans are already less profitable than prime loans.

Empirical studies show that there is no link between penalizing borrowers for paying off their loans ahead of schedule and increased foreclosures. Yet, consumer advocates say these penalties are one reason why subprime borrowers find themselves underwater.

If we listened to consumer advocates, prepayment penalties would be banned. But if we did that, lenders would likely charge riskier borrowers higher interest rates. These higher interest rates would, ironically, make it more likely that subprime borrowers would default on their loans.

Moreover, the absence of prepayment penalties in prime mortgages has exacerbated the foreclosure problem. Millions of Americans have stripped equity out of their homes by refinancing (essentially paying off their old mortgages with new larger loans). This has made it more likely that these homeowners would be underwater once home prices plunged.

European home values have also fallen. But foreclosure rates are lower in Europe partly because homeowners there haven't stripped their homes of equity to the same extent.

Similarly, adjustable-rate mortgages are standard in Europe and have been very common at times in the United States. It was the Federal Reserve's erratic monetary policy that made adjustable-rate mortgages here "explode," not the loans themselves.

As these examples indicate, there is nothing sacred about 30-year, fixed-rate mortgages with an absolute right to prepay. Yet as the Associated Press has reported, the proponents of a consumer financial products safety commission seem to believe that the 30-year fixed should be the gold standard by which all other mortgages should be considered "exotic" or "risky."

This obsession with simplicity threatens innovation as well as competition. Thirty years ago credit cards were exceedingly simple. They charged high annual fees just to own them (often $40-$50), high fixed interest rates (approaching 20%), and offered no cash rebates.

Today credit cards are more complex, but they are also better. They offer no annual fees for no-frills cards, flexible interest rates, and more benefits. Competition is fierce and consumers have a wide range of choices.

One wonders whether the credit card revolution would have been possible under a consumer financial product safety commission.

A final concern about the Obama administration's proposed new commission is that governmental agencies tend to expand their jurisdiction. Eventually, the commission will nudge up against the authority of the Federal Reserve.

If the safety commission is given enforcement authority, including the ability to impose massive fines, it could one day undermine the soundness of financial institutions and therefore come into conflict with the Fed. Such a regulatory conflict would create the kind of policy inconsistencies and turf battles that the Obama administration says it wants to eliminate.

Instead of a new consumer financial products safety commission, Washington should revise the disclosures it mandates for mortgages, its tax and other incentives that encourage overinvestment in housing, and the incentives for homeowners to walk away from their homes. Our current problems are caused by misaligned incentives and the rational response of consumers and lenders to those incentives. It's not a crisis of consumer protection. A new agency premised on the erroneous belief what consumers need is to be protected from themselves is likely to do more harm than good.

Mr. Zywicki is a professor of Law at George Mason University School of Law and a senior scholar of the University's Mercatus Center.

Supreme Court Overturns Sotomayor Ruling

Does Obama Want to Own the Airlines?

Welcome to government for the benefit of government officials and their hangers-on.

• By HOLMAN W. JENKINS, JR.

Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession. United Airlines last week mortgaged its spare-parts inventory to raise cash at a usurious 17% interest rate.

Yet the Obama Justice Department has come out of the blocks trying to scuttle a promising experiment to stabilize the chronically unprofitable U.S. airline sector. The new administration seemingly won't let companies fail, and won't let them succeed either.

The airline industry's self-help solution has been an evolving trio of international alliances, partly blessed with "antitrust immunity" by the U.S. Department of Transportation. One, the Star Alliance led by United and Lufthansa, is currently poaching Continental from a rival alliance, SkyTeam. DOT was set to approve their application last week when Justice belatedly intervened with a 58-page complaint about why the pact should be restructured.

Getty Images

To anyone drilled in the antitrust mindset, Justice's argument won't seem outlandish. It frets about reduced competition on this or that international route, and sees little chance of competitive entry by new carriers despite fat profits that presumably would be on offer. It argues, in a fashion typical of antitrust these days, that nonstop flights are a market unto themselves, so connecting flights on the same routes don't count.

But the real fulcrum is Justice's insistence, or plea, that DOT should set a high bar for antitrust immunity, because antitrust enforcement has been such a gosh-darn boon to consumers.

Justice offers no supporting evidence for this proposition, which has resisted academic verification. And in dismissing the "putative" benefits of immunized airline alliances, Justice fails even to acknowledge the one benefit that Obama Transportation Secretary Ray LaHood has emphasized: "These alliances are life savers for airlines. That is the premise from which we start. We believe it. The airlines believe it."

In part, such alliances are substitutes for international airline mergers (which are prohibited under U.S. law), but are more interesting than mergers, thanks to the flexibility with which carriers can enter and exit cooperative agreements with each other.

The antitrust mindset naturally sees such cooperation as always harmful, inflating prices and gouging consumers. But then why does organized labor oppose the deals? Shouldn't workers favor alliances if they reduce competitive pressure on wages? Yet Justice's intervention came after United's pilots ran a full-page ad in Roll Call attacking the company's own deal.

And why do carriers lobby against each other's pacts? Shouldn't they favor anything that leads to oligopoly pricing? And what to make of Continental's decision to jilt SkyTeam and jump to Star, shifting the competitive balance on the North Atlantic?

Obama antitrust chief Christine Varney doesn't have much good to say about her Bush predecessors. But she praises their record of cartel-busting. She might examine that record for what it actually says about the incentive to collude.

It shows, for one thing, that companies are inclined to snuggle up mainly to share losses and preserve capacity in a downturn or to curb the free-riding of powerful customers. When profits are available, on the other hand, they quickly go back to competing to maximize their respective shares rather than colluding to limit their individual upsides.

These incentives would very likely prevail in the highly flexible airline alliances. Such alliances are no miracle cure for what ails the domestic carriers, but they would open a window to let us see beyond antitrust's indiscriminate prejudice against cooperative acts by competitors.

Of course, this would fly in the face of Ms. Varney's agenda, which is to expand the bailiwick of the Washington antitrust bar. Even now, she has turned her attention from airlines to the mobile-phone business on the theory that any industry that hasn't collapsed into government receivership must be doing something wrong.

Mr. Obama blabs about the evils of lobbying, but his administration is fast becoming the greatest fillip to lobbying ever seen. Ms. Varney has now horned in on the DOT's action, forcing the airline business and all its camp followers to come and pay tribute. Her choice of targets is obviously designed for political effect. Airlines and mobile-phone operators both touch the public in ways that leave the public frequently annoyed.

What we're seeing here and elsewhere from the new administration is not some rebirth of thoughtful liberalism, but a spastic descent into machine liberalism -- government for the benefit of government officials and their hangers-on. Mr. Obama, however, may not be so pleased with the result if it means he must soon add the airlines to the collection of failed industries being run out of the White House.

Ratcheting Back on Risk

Stocks, Oil Continue Skid

Stocks were lower as a new earnings season approached and crude-oil prices continued to fall.

The Dow Jones Industrial Average was recently down about 60 points after its 161-point slide Tuesday. Its component Alcoa sank 3.9% ahead of its second-quarter report, due after the closing bell.

Market Data Center >

• Most Actives | Gainers | Losers
• New Highs and Lows | Money Flows
• Intraday Futures | Currencies

That release will mark the symbolic start of the broader reporting season, which is likely to be lackluster. Wall Street is expecting an eighth straight quarter of declining profits in the S&P 500, led by raw-materials producers whose year-ago numbers will be tough to beat after the bursting of a multi-year commodity bubble last summer.

The broad Dow Jones-UBS Commodity Index was recently down about 2.5%, off more than 50% from its record set more than a year ago. Oil futures, which have been under particularly heavy pressure lately, were down $2.16 at $60.77 a barrel after a weekly report showed a build in U.S. fuel inventories.

How the stock market, which has suffered a correction in recent weeks after a springtime rally, will weather a grim profit season is also a key question. Some analysts and traders are guardedly optimistic, hoping that much of the bad news has been factored into stock prices during recent bouts of selling like the one on Tuesday.

"A little bit of trepidation ahead of earnings season is usually a good thing," said strategist Jeffrey Kleintop, of LPL Financial Services in Boston. "People are looking for businesses to say that they saw some improvement in their businesses during the quarter. The ones who don't say that will be penalized, but there's also room now for the ones who do say it to be rewarded."

According to Thomson Reuters, analysts expect the S&P 500's components to show a decline of about 36% in second-quarter earnings.

Ashwani Kaul, global head of research at Thomson Reuters, said the index's profits could "surprise" about four percentage points above the expectations, with Alcoa's report likely to play a more important tone than usual in setting the tone for the broader reporting season.

The aluminum maker is traditionally the first Dow component to report its results -- a distinction that traders in recent years have found less and less important. But under the current circumstances, Mr. Kaul said Alcoa could offer an important window onto the state of U.S. housing and manufacturing, key areas that will need to revive for there to be an end to the recession.

Steve Auth, executive vice president at Federated Global Investment Management, said Alcoa can beat expectations for a 34 cents per share loss, though many participants remain on the defensive because of fears stemming from recent economic reports.

"The jobs numbers last week still have everyone a little spooked," said Mr. Auth. "But at the same time, I don't think anyone wants to get too short ahead of that [earnings] number."

The S&P 500 and Nasdaq Composite Index were off about 1.1% each. The Russell 2000 was down 2.1%.

Treasury prices rose as investors sought safe harbor. The 10-year Treasury note climbed 19/32 to yield 3.384%. The dollar fell against the yen and rose against the euro