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NEW GLOBAL LENDING RULES
U.S. officials ignore key parts of proposal BY HOWARD SCHNEIDER
A committee writing new in-
ternational financial standards has recommended strict new guidelines to restrain bank lend- ing, an idea considered central to preventing the global financial system from overheating, but one that some feel could choke off needed credit for households and businesses. U.S. officials say they have al-
ready decided to ignore key parts of the proposal because of the potentially damaging impact to the country’s economy. Data re- leased by the group, the Switzer- land-based Basel Committee on Banking Supervision, indicates that under the proposed guide- lines,
U.S.bankswouldhave faced restrictionsonlending for at least 13 of the 23 years from 1985 to 2007 — including the time when theeconomywasrecovering from the collapse of the tech bubble and Sept. 11, 2001. AlthoughU.S. officials say they agree with the overall aim of the
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recommendations — to curb the type of runaway lending that can fuel a financial crisis — they are researching alternative ways to achieve the same end. “Lending is what helps the
good times continue,” said Scott Talbott, a vice president for the Financial Services Roundtable, an industry trade group. “You don’t want a buffer that creates a wet blanket.” But some analysts argue that
by not making the recommenda- tions mandatory, the panel was skirting one of the chief causes of the recent crisis. Restraining credit from too
much growth “is a centerpiece” of what’s needed, said Morris Gold- stein, a senior fellow at the Peter- son Institute for International Economics. “That’s what does the best over time. That does not mean you will get it right all the time. You will get false positives” that prompt regulators to re- strain an economy unnecessarily, he said. But, “if you don’t have this, you really take the heart out of it.” The proposal might face a
chilly reception in parts of Eu- rope as well. According to the committee’s data, Britain would face bank restrictions even as it struggles with a tepid recovery. Still, thecommittee, comprised
of central bankers and regulators from major countries, including the United States, said its non- binding guidelines address a core
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U Bank group tries to prevent credit bubble
problem: that when times are good, financial institutions tend to lend more freely in a self- reinforcing cycle that encourages risky credit and other bubbles. The recommendations try to
break that cycle by forcing banks to hold more cash and other capital in reserve if credit grows too fast—a step that would raise banks’ costs and serve as an effec- tive brake on lending. Countries should boost bank
capital requirements“whenthere is evidence that the stock of credit has grown to excessive levels rela- tive to the benchmarks of past experience,” the committee con- cluded. Based on the committee’s anal-
ysis of previous crises, it recom- mended that extra capital re- quirements be imposed on banks when a nation’s pool of credit, compared with the size of its economy, reaches more than 2 percent above its historical norm. The amount of extra capital
would increase steadily if credit continued to expand, eventually forcing banks to set aside perhaps 30 percent more in their reserves than usually required. Similarly, the extra capital re- quirement would be lifted if the economy slows, in an effort to encourage more lending. Initially, Basel officials had in-
tended this proposal as one of their main reforms, hoping to produce a global standard to
guard against large credit build- ups. However, they were unable to reach consensus, with Europe- an nations — their economies heavily reliant on lending by tra- ditional banks — worried about possible restraints on growth and the United States concerned about adapting Basel’s statistical yardsticks to its own financial system. The document released Thurs-
day, while precise in the formulas it recommends, acknowledges that national regulators will have to take local circumstances into account in deciding whether credit and lending markets are overheating. Financial industry officials
have endorsed many of the Basel principles, including recent rec- ommendations to require higher overall capital levels and larger cash holdings to tide over a bank in a crisis. Those guidelines have been accepted by the United States and other major financial centers and are due to be imple- mented in coming years. The committee on Thursday
estimatedhowmuchextracapital banksmighthave to raise, putting the figure at about $650 billion for larger institutions. Banks will have several years to raise the money,andindustry analysts said they did not think it would pose a problem. Many U.S. banks have already reported adequate capi- tal to meet the newrules.
schneiderh@washpost.com
ECONOMY
Jobless claims at lowest level since August ’08 Fewer workers than forecast
filed claims for unemployment benefits last week, pointing to a drop in firings that signals im- provement intheU.S. jobmarket. Applications for jobless insur-
ance payments fell by 3,000 to 420,000, sending the average over the past four weeks to the lowest level since August 2008, according to data fromthe Labor Department issued Thursday. The four-weekmoving average of claims, a less volatile measure, decreased to 422,750, the lowest
LEGAL Nokia presses patent suits against Apple
since the week ended Aug. 2, 2008. Home builders in November
began work on more homes for the first time in three months, showing the industry is strug- gling to recover, Commerce De- partment figures showed. Hous- ing starts rose to a 555,000 annual rate, up 3.9 percent from the previous month. Building permits, a proxy of future work, fell, reflecting a drop in applica- tions formultifamily projects. — Bloomberg News
FRIDAY, DECEMBER 17, 2010
10-YEARTREASURY UP$8.00PER$1,000,3.43%YIELD
CURRENCIES $1=84.04YEN; EURO=$1.324
DIGEST
FRED PROUSER/REUTERS
Acustomer shops at the Apple Store in Glendale, Calif. Nokia, the world’s largest
STEVEN PEARLSTEIN Republicans and tax cuts? Now, that’s rich. O
ne of the great enduring mysteries of American politics is why
Republicans attach somuch importance to cutting taxes for the rich. I know there aremany
Democrats and independents who believe that Republicans get up in themorning determined to do whatever is necessary to help their rich friends and campaign contributors.While thatmay explain some Republicans’ behavior some of the time, I strongly doubt it’s the primary motivation. For starters, there is no
American Association of Rich Persons out there with a huge political action committee and a formidable grass-roots lobbying effort. Yes, there are cabals of very rich people who fund conservative think tanks and political advertising. But American democracy is not so corrupt or dysfunctional that a tiny portion of the population, driven purely by selfish greed, can capture somany elected officials and bamboozle somany voters. It’s also worth noting that
there are plenty of very rich people who are liberal Democrats in true-blue states, such as New York and California, who don’t seemto have a problemwith paying higher taxes. That said, a lot of the
explanations given by Republicans themselves don’t quite explain their fetish about taxes on the wealthy. While Republicans have
argued recently that it would be an economic catastrophe to raise taxes on anyone now, in the midst of a jobs recession, the truth is that they don’t believe there is ever a good time to raise taxes on anyone. Equally unconvincing is the
argument that they are primarily concerned about small-business job creation. Surely there are other ways to encourage small businesses to expand their payrolls without giving tax breaks tomovie stars, professional athletes, law firm partners and hedge fund billionaires. Theremay be some truth to
the Republican belief that lowering taxes overall is a good way to boost economic growth or contain the size of government. However, that would apply just as well to cuts in corporate and payroll taxes or additional income tax cuts for themiddle class. Yet you don’t see Republicans drawing lines in the sand over those.What’s so magical about the estate tax or the topmarginal income tax
manufacturer of cellphone hand- sets, is suing Apple in Britain, Germany and the Netherlands for allegedly infringing its pat- ents with technology used in the iPhone, the iPad and the iPod Touch. The complaints, filed in Octo-
ber through December, follow earlier lawsuits by Nokia claim- ing that a broad swath of Apple products violate its patents. The actions “add 13 further Nokia patents to the 24 already asserted
BANKING
Bank of America in talks with investors Bank of America is talking
further with a group of angry investors, including the Federal Reserve Bank of New York and Blackrock, who are pressing the bank to buy back billions of dollars of busted mortgage secu- rities. The two sidesmight be explor-
ing a settlement after the inves- tors sent a letter Oct. 17 demand- ingBank ofAmerica respond by a set of deadlines to concerns the
BRENDAN SMIALOWSKI/GETTY IMAGES TheHouse is expected to vote on extending Bush-era tax cuts.
rate? For their part, liberal
Democrats have now worked themselves into a lather about the impact of an upper-income tax cut on the burgeoning federal deficit. Ifmemory serves, many of those same Democrats had worked themselves into a lather when Bill Clinton betrayed themand struck his budget-balancing deal in the 1990s. It’s hard to believe their real outrage over tax cuts is rooted in some profound sense of fiscal rectitude. So what’s really going on
here? KevinHassett, an economist
at the conservative American Enterprise Institute, suspects that the issue of taxing the rich looms so large because it is a proxy for what you think about GeorgeW. Bush. If it were just some wonkish disagreement over whether themarginal tax rate should be 39 percent or 35 percent, it would be easy enough to split the difference at 37 and move on to somethingmore meaningful. Instead, the question is invariably posed as whether to extend the Bush tax cuts, implicitlymaking it a referendumon the Bush presidency and the latest round in a partisan feud that goes back to Bush v. Gore. Another reason this issue
arouses such an emotional response is that it’s really not about economics, or even economic self-interest—it’s about fairness, an inherently
subjective concept. Democrats, of course, focus on
the increasingly unequal outcomes being generated by the private economy, the widening gap between the very rich and everyone else. To them, raising taxes on the rich seems like the least that we can do to even things out in a freemarket that is increasingly arbitrary and unfair. Do the rich deserve a tax cut when 15million other Americans are out of work and even those with jobs are struggling? Do their children deserve to inherit a life of leisure and luxury? They consider the answers to bemorally self- evident. For Republicans, it’s also a
moral issue, looked at through a much different lens. For them, the focus isn’t on the fairness of income distribution but the fairness of the systemthat produces it. And part of that calculation involves howmuch of a person’s hard-earned income government takes away. Karlyn Bowman of the
American Enterprise Institute has gathered extensive polling data on this subject that goes back decades.What she found is thatmost Americans agree with Democrats that national income is unfairly distributed and that upper-income households pay too little in taxes. But when you ask themwhat is the highest percentage that even high- income households should pay in taxes, the average tends to be around 25 percent, with very few
in favor of it goingmuch above 30 percent. As it happens, the rich pay
more than that—a good deal more. According to the Congressional Budget Office, the average effective federal tax burden on the top 1 percent of households is now about 28 percent (that’s different fromthe marginal rate, or the rate on the last dollar earned). Add in state and local taxes, the total tax burden on the richest households probably exceeds 40 percent inmost places, considerably higher than what most Americans consider fair. If you listen to themore thoughtful Republican politicians talk about their views on taxes, they invariably reflect that sensibility. For years now, liberals have
taken comfort in the work of behavioral economists that shows human beings aren’t the rational, income-maximizing stick figures they’re assumed to be in classical economicmodels. According to this research, one of the things we care about is fairness, even when the fair thingmay not be in our economic self-interest. Democrats have used these findings to bolster their argument that a healthy economy over the long term must be both efficient and fair. What they are only now coming to recognize is that people’s views on fairness can be complex and don’t always point in the same policy direction.
pearlstein@washpost.com
ALSOINBUSINESS l Heater recall: Wal-Mart
Stores is recalling about 2.2 mil- lion electric heaters because they may overheat, burn ormelt, caus- ing fires, the U.S. Consumer Product Safety Commission said. Wal-Mart received 21 com-
plaints about the appliances, in- cluding the Flow Pro, Airtech, AlohaBreeze andComfortEssen- tials heaters, the CPSC said Thursday. Consumers should stop using the heaters immedi-
bank has mishandled mortgages that were bundled into $47 bil- lion of bonds. Those deadlines have now
been extended as both sides agree to continue “constructive dialogue,” according to Bank of America in a statement. The bank’s chief executive, Brian Moynihan, had initially vowed to “diligently fight” the investors’ claims loan by loan. — Jia Lynn Yang
against Apple in theU.S. Interna- tional Trade Commission and the Delaware andWisconsin Federal courts,”Nokia said in a statement Thursday. In October 2009, Nokia filed
its first patent-infringement claimagainst Apple in Delaware. Apple declined to comment
Thursday on Nokia’s latestmove. Last week it filed a countersuit claiming that the Finnish compa- ny was infringing 13 Apple pat- ents.
— Associated Press
ately and return them to a store for a full refund, the agency said. In 11 cases, there was property
damage beyond the heaters themselves, the agency said. Four people were injured, including three who neededmedical atten- tion. The heaterswere sold exclu- sively at the chain and were tested to comply with safety standards before being sold, a Wal-Mart spokeswoman said. — Bloomberg News
Post Tech CECILIA KANG Excerpt from
voices.washingtonpost.com/posttech
White House urges ‘Privacy Bill of Rights’ The Obama administration released recommendations Thursday
to better protect consumer privacy on the Internet, creating baseline guidelines for how companies treat user data and encouraging federal agencies to enforce privacy protections. A consumers’ “Privacy Bill of Rights” would create a privacy
policy office in the Commerce Department and for the first time would establish clear guidelines for what kind of information can be collected about users and how companies can use the data, a Commerce Department report says. That framework also gives clearer limitations on data use and would increase audits to hold companies accountable for their practices. The report, which follows similar guidelines released weeks ago
by the Federal Trade Commission, comes as lawmakers’, consumers’ and privacy groups’ concerns grow that Internet users are increasingly givingmore information about their preferences and personal profiles without adequate protections. “Self-regulation without stronger enforcement is not enough,”
Commerce Department Secretary Gary Locke said in a statement. “Today’s report is a roadmap for considering a new framework that is good for consumers and businesses.” At the same time, the agency said it wants input fromWeb
companies and advertisers that have resisted legislation or new rules that would hamper their activity online.
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