Synergy Between Cato and Koch Industry Lobbyists on the FinReg bill?

I’d highly recommend Jane Mayer’s New Yorker piece, Covert Operations: The billionaire brothers who are waging a war against Obama, about David and Charles Koch, lifelong libertarians that have quietly given more than a hundred million dollars to right-wing causes. Here they are helping to create the Cato Institute:

In 1977, the Kochs provided the funds to launch the nation’s first libertarian think tank, the Cato Institute. According to the Center for Public Integrity, between 1986 and 1993 the Koch family gave eleven million dollars to the institute. Today, Cato has more than a hundred full-time employees, and its experts and policy papers are widely quoted and respected by the mainstream media. It describes itself as nonpartisan, and its scholars have at times been critical of both parties. But it has consistently pushed for corporate tax cuts, reductions in social services, and laissez-faire environmental policies.

And here is David Koch talking about how they hold a serious amount of ideological control over the institutions they fund, which many believe to be the Tea Party infrastructure as well (my bold):

The Kochs have gone well beyond their immediate self-interest, however, funding organizations that aim to push the country in a libertarian direction. Among the institutions that they have subsidized are the Institute for Justice, which files lawsuits opposing state and federal regulations; the Institute for Humane Studies, which underwrites libertarian academics; and the Bill of Rights Institute, which promotes a conservative slant on the Constitution. Many of the organizations funded by the Kochs employ specialists who write position papers that are subsequently quoted by politicians and pundits. David Koch has acknowledged that the family exerts tight ideological control. “If we’re going to give a lot of money, we’ll make darn sure they spend it in a way that goes along with our intent,” he told Doherty. “And if they make a wrong turn and start doing things we don’t agree with, we withdraw funding.”

The article discusses the battle of regulation between the government and Koch Industries via Koch intermediaries over environmental regulation and global warming. Sadly, presumably because of space but also because it’s a very shadowy, private battle to follow, this fight also occurred over financial reform. It’s not well reported, but subsidiaries of Koch Industries are major players in derivatives financial markets.

Here’s a report for customers explaining: “Koch Supply & Trading companies are subsidiaries of one of the world’s largest privately held companies, Koch Industries, Inc., and backed by the strong credit rating of Koch Resources, LLC.” Ah, using a strong rating based off an industrial firm from the ratings agencies to backstop a derivatives dealership out of the backroom.

And occasionally Koch Industries would show up in coverage of the debate. Here is Bloomberg, 4/10:

Industry groups backed by Koch Industries Inc. and Cargill Inc. are fighting a Senate bill that would reshape almost 30 years of policy that allowed the $605 trillion over-the-counter derivatives market to surge and helped trigger the financial crisis in 2008…A provision in the bill known as the “end-user exemption” is of particular concern to industry groups representing Koch, Lockheed Martin Corp. and Caterpillar Inc. The rule would exempt companies that use derivatives to hedge their risks in commodities, currencies and interest rates from posting margin, or a deposit against default, on over-the-counter trades.

Koch Industries took a muscular role in making sure that there were enough loopholes and broad enough exemptions so that it could escape most of the new derivatives legislation. Combined with their “And if they make a wrong turn and start doing things we don’t agree with, we withdraw funding” quote, I wonder how that impacted Cato’s coverage of the financial reform bill, which they quite despised. I noticed something was up when the Tea Party came out hard against the financial reform bill, which made little practical sense to me.

Instead of coding a group of reasonable powers that regulators lacked, Mark Calabria described it as a terrible bill, saying that the real problem was with monetary policy and Fannie/Freddie, and that Republicans were right to vote against it. They push a lot of how homeownership policy was the cause of the crisis, and still push for dismantling the CRA.

I think a lot of the housing arguments are torn apart by this simple graph from Krugman, showing that what we really saw was a credit bubble, not simply a housing bubble as it was spread across all credit channels in the economy (there is forthcoming academic work I’ve seen that will really hit this home we’ll cover when it is published):

Lots of other right-of-center people pushed for some form of derivatives regulation, notably Luigi Zingales, The Squam Lake Working Group – a collection of economist including John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Kenneth R. French and Raghuram G. Rajan – here and here, Nicole Gelinas of the Manhattan Institute, Christopher Papagianis of the new shop Economics 21, and those are all off the top of my head.

Cato didn’t push that way. They seemed to be against any changes in the derivatives market (notably here and here though representative of their writing generally) and have pushed against clearing requirements (notably here). When they mention the crony carve-outs they specifically mention auto-companies instead of the far more relevant oil companies like Koch Industries (they also appear to mention in in April 2010, well after that fight was over).

(Cato also, as EoC pointed out, lead the call back in 2007 for our government to emulate Iceland. Heh.)

The issue of the regulation of clearinghouses is key, and Roosevelt Institute will be putting out some exciting work on this topic soon, but I can’t tell how to read some of what Cato has done here in light of the New Yorker story. Is this another extension of their fight against global warming research?

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15 Responses to Synergy Between Cato and Koch Industry Lobbyists on the FinReg bill?

  1. Stephan says:

    I found the paragraphs about Mercatus/GMU very illuminating. Normally these guys (Kling, Caplan, Boudreaux, Roberts, Horwitz, Cowen, et al) blog like maniacs and share their wisdom on anything new under the sun.

    In regard to this particular article their common response is: total silence. The intellectual part-time merceneries of the Koch brothers switch to stealth-mode.

  2. ZeroInMyOnes says:

    Mr Konczal
    I am just a lay person trying to understand for the sake of my kids what is happening to our economy. Please allow me to extend thanks for your clear and detailed analysis.

    A credit bubble, not a housing bubble…Got it.

    The Koch brothers…Still working on that.

  3. Mark Calabria says:

    For the record, I’ve never talked to the Koch’s and have no idea if they’ve even read anything I’ve written. I think Dodd-Frank is a joke because after spending 7 years as staff on the Senate Banking Committee, I watched both of them fight any reasonable attempts to stop the crisis from happening. Plus I’ve actually read the bill…can you say the same? Even more of a joke is Krugman – he know little to nothing about finance or banking. If, as I have argued, loose monetary policy was a driver, then that would show up in most, if not all, credit channels, not just housing. I don’t know anyone who thinks that the only problem was Fannie, Freddie and CRA. They are part of a long list of screw-ups, almost none of which are addressed the bill.

    • Ted K says:

      Mr. Calabria,
      You forgot to mention you worked previously on the staff of Phil Gramm (Senate Banking Committee) and Dick Shelby (Senate Banking Committee) staff, eh??? It could give the blog readers a much clearer idea of where you’re coming from, yes???

      Scroll down after the jump on this last link.

      • Mark says:

        “where you’re coming from” – its that behavior that has made political debate so nasty today. But then I guess just trying to smear people is easier than answering their points. For instance, explain how the chart above disproves my view that loose monetary policy contributed to the crisis.

      • Mike says:

        Ted I killed some comments. No need to make this personal, Mark seems like a good guy, and the financial crisis is a big deal that brings out a lot of heated thoughts. I do wonder how funding by the financial sector impact coverage though, and it is good to hear that Mark doesn’t feel constrained.

        Mark, unlike yourself, I don’t have an economics PhD (I don’t think I claim to anywhere here), business school Master’s Degree here actually.

        The role of the Federal Reserve keeping interest rates low is still being debated and I’m not sure what % it contributed to the housing bubble. But I do think we need to split “housing bubble” from “financial crisis”, which is a separate problem.

  4. Mark says:

    “Instead of coding a group of reasonable powers that regulators lacked” could only have been written by someone who’s never actually bothered to see what powers bank regulators already have. One reason Dodd-Frank didn’t actually give bank regulators much real expanded power is that bank regulators already have massive discretionary power over, among other things, bankers’ pay, bank capital levels, bank activities. Why not try reading say the Federal Deposit Insurance Act or the Federal Reserve Act and then say that regulators lack power. Sadly like most economists, the writer displays an absolute ignorance of the institutional details that matter. Put down your textbook and actually read some laws and regulations.

  5. Covington says:

    I have not been reading your blog long enough. I am unsure whether you are attacking libertarians (a group a little too wide to capture), the Kochs, the Cato Institute, or anyone/someone else.
    Macroeconomics elicits such enormous quantities of hubris that I hesitate to jump on any bandwagon. And,too, throughout the world as I know it, there is an underlying antagonism against markets. And macro seems to bring out the control freaks out there.
    I have to go with Tyler Cowen in expressing an enthusiasm for markets. (Of course, as I tell my students, there is “market failure,” until it is recognized, and then it is corrected by the government (an actor in the market) or a firm or individual. (How anyone can get away with the notion that the government, in its many forms, is not a market player is beyond me. But that may be revealing my libertarianism.)
    A great deal of what I read by the likes of Mark Thoma or Paul Krugman is merely marketing rhetoric produced (“at little or no cost to you!”) for the government as market participant.
    Now I am all for sycophants, lawyers, and semi-intellectuals pursuing their own self-interest by writing in favor of government interventions, packing their Vita with op-eds and such to impress squirrelly campaign managers and so on. (How else does one advance in the world of word-product?) But I do not want to subsidize their little ventures in self-aggrandizement.
    (Nicely designed blog, BTW; and thank goodness for the spell-check extension. I am a lousy typist and nearly blind to boot. Will keep reading you. Maybe I can figure out the Rorty thing. I am thinking of the philosopher!)

  6. Stephan says:

    These Cato folks 😉 Eventually I find the name very fitting. Wasn’t it Marcus Porcius Cato the Older who addressed every policy issue discussed in the senate by repeating the same sentence over and over again? Ceterum censeo Carthaginem esse delendam.

  7. Ted K says:

    Jane Mayer was on Rachel Maddow I think it was Thursday if you download Maddow on
    i-Tunes. A great interview. This deep digging stuff is where magazines can still eke out an edge over the internet (at least for now). Witness Taibbi and Hastings work at Rolling Stone recently. I wish Maddow would do more stuff like this instead of playing “tag!! you got cooties!!” back and forth with FOX news. In my personal opinion Maddow sells herself short to play in the sewer water with FOX. Maybe she feels she has to for the “mass” audiences, but it seems beneath her. We need more digging like this. American Enterprise Institute should be exposed more for the relationships in their group and how they operate.

    Great post Mike as usual and I really appreciate the derivatives and clearinghouse links. Super-great. I just hope i can get the inner drive to read them all. Anyway, bookmarked for a latter date. You get bonus points for ticking off a CATO member.

  8. Conrad says:

    First – the whole libertarian notion that we are free actors is myth. If a population severely pollutes a city water supply by supposably individual acts (in fact people behave in herds) the population collectively gets sick. Look at the fracking issue affecting the NYC water supply.

    Second – As an architect I believe that the fact that Koch Industries Georgia Pacific Subdivision touts LEED certification for some of its products is a farce if the conglomerate denies global warming and lobbies against regulation of carbon emissions. A true case of “if you can’t see who the fish is, it’s you”. The profits KI makes from selling “LEED” rated products are used to subvert the very goals of LEED.

  9. I am John Gault says:

    Cato is just a noise machine. It’s interesting to see how pragmatic the group can be in opposing consumer protection legislation, compared to their ineffective and limp wristed opposition to things like out of control spending during the Bush years and incursions into civil liberties. Many of Cato’s corporate sponsors aren’t libertarians, and would probably suffer in a libertarian world. They just like the single-issue noise the group can generate on hot button issues. They also enjoy the name calling that Cato will do that corporations can’t. Cato is a PR firm in think tank clothing.

  10. Koch Facts says:

    This story misses or overlooks the facts. Find them here:

  11. Pingback: Just Because You’re Paranoid… « Fixing the Economists

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