10/09/08 – Declan McCullagh – The Scott Horton Show

Don't slam it!
I'm coming back to you!
I'll just ask him to introduce himself.
Sorry, Declan.
Welcome to the show.
No worries.
Thanks for having me on.
That was about the lousiest introduction I've given anybody in a year and a half or two.
Sorry about that.
I got a page here, but it's 15 tabs away from the one that has the article I'm looking at.
I can survive.
If you want, I can give it a shot.
The title is something like Chief Political Correspondent for CNET News, which is part of CBS.
I cover things like technology, politics, and all that kind of wonderful, what Washington, D.C. is up to and how it might hurt you.
It could help you generally.
It hurts you type of topic.
Right.
And wonderful.
That's what I was going to say.
You've got this thing, Bailout Bill Loops in Green Tech.
Loops in, pardon me, Green Tech, IRS snooping.
This is from news.cnet.com.
It starts off with a little bit of arithmetic for us.
Can you help go through and help us figure out exactly how much money has been spent on bailing out the billionaires on Wall Street so far?
$700 billion, right?
Somewhere around there?
The problem is that it's actually really difficult to put a number on it so far.
We know that the bill authorizes the feds to spend another $700 billion at one time.
If you add that to everything else that's been spent so far, like the housing rescue bill earlier this year in the early summer, and then the Fannie and Freddie bailout and the AIG bailout, and you add all this stuff up.
And this is actually Reuters financial data, not even mine.
They're better at it than I am.
It hits $1.8 trillion, which is bloody huge.
You divide that by the number of households in the U.S., according to the U.S. Census, and you get $17,000 and a few cents per household, which is just a whopping amazing.
$1.8 trillion is your possible total.
We know how that works.
It's always going to be higher than that.
And I don't know if I can even really comprehend exactly how much $1.8 trillion is.
I mean, I try.
I know it's, you know.
Well, it's difficult to really imagine.
The human brain is just not made to think of numbers that large.
We can try it a few ways.
We can look at it at $17,000 per household, which is a number you can grasp.
What would you want to do with that $17,000?
I can probably think of other things than bailing out Wall Street.
Another way to look at it, perhaps, is that this is roughly the entire cost of the Iraq War.
I mean, we have estimates in that range.
There's a book out closer to $3 trillion.
But, you know, $1.8 trillion seems like a reasonable, perhaps even conservative number.
And here's another point that really hasn't been mentioned in the press very much, because it requires you to actually read the bill carefully, and not everyone has, I'm embarrassed to say.
But it's $700 billion at one time was the bailout bill that Bush signed into law last week.
Now, $700 billion at one time means that if the Treasury Department wanted to, it buys up $700 billion in assets, sells it for maybe half that, and then keeps on going.
It's not supposed to, but there's no legal prohibition against it.
And so that's, again, $700 billion at one time, and then it can sell and go on and do it again.
And really, you know, they say that the chain of dominoes is only beginning to fall.
And perhaps, I mean, there's, I guess, some questions as to whether all this bailout money is actually going to only make the problem worse, rather than letting the bad debt be liquidated and trying to get a start from a reasonable pricing structure of what things are actually worth.
Hell, you saw John McCain say the government ought to buy up every bad mortgage in the country.
I am absolutely right.
And then Obama came back today with an advertisement on the Internet saying, well, look at this video clip of John McCain saying this during the debate.
This is just going to shift the problem to taxpayers, and you're going to be paying to bail this out.
And so if you have a Democratic candidate being more economically sound than the Republican, I'm not really sure what the world is coming to.
But, yes, there's a reasonable argument, and a number of economists have made this, that the bailout didn't help.
We were told that there would be catastrophe if the bailout were not passed, and the bailout did pass eventually, and there was still something close to a catastrophe if you look at share prices.
The prospect of future or government meddling in the economy, government intervention, and this is an intervention of a sort we just have not seen before, is creating more uncertainty, and there's one thing that investors don't like, and that's uncertainty.
So this really may not be helping that much at all.
Right, yes, the uncertainty, that's the big thing.
That's what Robert Higgs talks about during the Great Depression, that the new dealers were experimenting so many different ways that anybody who had any money was basically just sitting on it, because they didn't want to invest in anything and have the government come and just take whatever it was away.
You can't really make educated guesses about what prices are going to do in a market economy when the government is coming in and stepping all over everything.
Exactly right.
I may not be that smart about many things, but I'm smart enough to never disagree with Robert Higgs on this stuff.
Yes, that's about right.
Good rule of thumb anyway, you know.
Wow, so okay, Ron Paul made the joke on TV, said, well it wasn't really a joke, but he kind of laughed at the irony, and said, yeah, you know, the House defeated this bill, all they had to do was make it ten times worse, and they got the votes they needed.
What was it that they added to this thing to get the votes?
They added more IRS surveillance of Americans.
Yeah, tell us about that.
Start right there.
Tell us about the IRS.
Let's go through this list, but especially the IRS's new or renewed powers in this thing.
The IRS has had off and on since 1988, and the law in 1988 was of course called the Anti-Drug Abuse Act, which had nothing to do with the IRS, but just got flipped in there to show this problem of larding bills up is not a new one.
But in any case, since 1988, for the last 20 years, the IRS has had off and on temporary limited authority to conduct undercover operations, and this is a pretty broad authority.
It would let the IRS, for instance, set up a fake business.
It can open bank accounts that are off the books and are not handled through the U.S. Treasury, which is normal for government agencies.
It would let them set up such a business, pose as an accountant or tax preparer, say, hey, I'm open for business, but I'm not sure if this deduction on your tax return is legal, but why don't you take it anyway?
It'll save you $1,000.
And then if someone does that, all of a sudden they can be investigated and perhaps even put in jail.
So this is what it lets them do, and they say that it won't be misused, but we know that when you give the government such broad powers, they tend to be misused over time, especially when there are limited checks on this.
So that's one thing they can do.
They can conduct undercover operations, and unlike all the previous times in the past this was granted them, this time it's permanent.
Unless Congress takes action, they can do this forever.
So it's the permanent undercover ops.
The second thing that's worth noting in the IRS section is that it lets this bill, now law, it lets the IRS give information from individual tax returns to any federal law enforcement agency that's investigating supposed terrorist activities, and they in turn can turn around and share it with anyone else, the NSA, CIA, state police, and whatever.
Oh, yeah, that's where we're headed, where the local traffic department camera narks on you to the IRS.
There he is!
Get him!
We're all integrated together.
We're headed that way, aren't we?
It's getting there.
We actually ran an article on news.com yesterday.
I searched for database on our site.
I probably scrolled off the home page.
There was a meeting two days ago in D.C., a conference, and about three officials from DHS were speaking, and one of my colleagues went there and they said, the government has too many databases.
I'm thinking, yes, exactly, and they're thinking, and they're responsive, and actually it was not, let's get rid of some.
They said, let's merge them so we can, just for efficiency's sake.
Now, this is, right now, let's say the FBI has a database on you, or a database in which you appear, and someone from Health and Human Services wants to look you up.
They're not going to have access to it, but if you have all agencies with access to one master database, then you have the potential for huge privacy invasions unless we're very careful.
Well, you know, Christopher Ketchum wrote that article for Radar Magazine about MainCore, which is, he said, not quite the database itself.
It's basically a table of contents of all the government databases, and basically what it amounts to is the single big brother computer that has access to all the private credit agencies and every other kind of record kept on you, and all the government agencies all together in one place.
It's already there.
I don't know who all has access to it.
Yeah.
Data mining and the increased databaseification of society is a real ongoing problem that we're not going to resolve in this conversation.
But what's worth noting is that you have a report that came out this week from the government.
It had folks including the former IT president, the former secretary of defense, and it was sort of, in other words, an all-star panel.
And they looked at this idea of data mining and whether it would actually let government agencies sift through databases, all DMV records, all credit card records, all bank transactions, and flag a possible terrorist activity.
So this is the broad idea.
You sift through everything and it will detect terrorist behavior.
And they said it just doesn't work.
And this is a pretty powerful conclusion.
And so now at least folks who are skeptical of this kind of thing will have some evidence to wave around the next time the federal government comes up with or proposes something like total information awareness or some sort of broad data mining program.
The problem is that they might just do it in secret and we never have the chance to debate it.
Well, you know, it's funny because under our system of law, the way it works is the government is supposed to investigate crimes, not people.
And I think it's like that because going around investigating people isn't any kind of effective way to fight crime or even hold people accountable for crimes.
That's just everybody is screwing up one way or another, but not necessarily in prosecutable ways on any given day.
You need a real victim of something that happened to justify intervention.
The phishing expeditions, not only do they violate our rights, but they just don't make sense.
And while lo and behold you take the very same principle and apply it to some mathematical algorithm in a computer and it's just as useless basically is what you're telling me.
Yeah, I mean the one problem, and this is a 250-page report.
I'm really doing a disservice by trying to summarize it here.
But one problem is that you have false positives.
And even if you have a false positive rate of 0.1% or something or 0.01%, when you have billions of credit card transactions per year, if not trillions, that 0.01% false positive rate can flag innocent people.
Another reason this is a problem, and the report actually didn't go there, but it could have, is that if you have these sorts of data mining programs, it allows you to target someone who's doing nothing wrong and find some law, some technicality somewhere that they're violating.
There are so many laws out there.
I'm doing this conversation over a phone at work here at CNET in San Francisco.
And if I were to say something that's untrue, then that might be wire fraud.
In reality, I'm probably not going to be prosecuted for it.
But in truth, I perhaps could be if I were, say, an enemy of the state, or just like by the local prosecutors.
Harvey Silverglate, a former criminal defense attorney in Boston, has a book coming out talking about just this.
And it's coming out in a few months, and he showed me portions of it.
And it's pretty impressive.
The working idea of it is something like nine felonies before breakfast.
Right.
I mean, that's the thing.
How many laws and regulations are there?
Criminal offense is possible in America.
There's got to be millions and millions of them.
The greatest genius of us all couldn't understand what they all are or how to avoid breaking them.
And we all know it, too.
That's what's funny is we continue on this way, and usually most of our complaining is when Congress isn't doing anything.
I don't know.
I guess that's where we're at.
All right, so anyway, I wanted to get back also to the entrapment that you described.
The IRS is notoriously the least accountable agency.
I mean, they get away with more than the ATF.
I mean, these guys, they're absolutely incredible.
Every few years the Senate has some hearings and pretends to be indignant about it, and then it goes on.
These people are ruthless anyway, the IRS.
They go around hijacking Americans.
I mean, just ask for horror stories and you'll get them.
And there are millions of them.
But now you're saying these guys can set up an accounting firm and have you walk in the door to do legitimate business with them, and then they can say, hey, you know, I can wink, nudge, and check this box, and that'll save you some money.
And if you say yes, off to the gulag you go.
There might be an entrapment defense, but if they— this is where you need to talk to someone who's a criminal defense attorney to see how far that plays out.
My understanding of the relevant law is that if you're predisposed to commit the crime, then your entrapment defense is going to be a very weak one and perhaps won't work.
And so if they say, here are two options, one is legal, one is illegal, and they say, I can't advise you what to take, but you do whichever you prefer, and you choose the illegal one, I'm not sure how that's entrapment, at least the way our courts have interpreted the entrapment defense nowadays.
If you're predisposed to do it, then there you are.
Or they could put up—I mean, I'm just speculating here, and I don't think this would happen in reality, but it would be— I think the law would allow them to, for instance, set up a tax protester site and then focus on—and then to investigate the people who are connecting to it, signing up for a newsletter, and so on.
But to go back to your IRS point, it's kind of—it's almost too easy to blame the IRS for what they're doing.
I mean, Congress created the tax laws, and so Congress, in the end, should be held responsible.
And there's—let me just throw a few quotes at you while we're on the topic.
If you look at the debate surrounding the adoption of the income tax, this was circa 1911.
The New York State Senate had voted for the constitutional amendment creating the federal income tax, and the Senate Majority Leader, his name was Smith, said, quote, I don't think Congress will ever unjustly tax us.
And this was when the federal income tax rate was, I believe, proposed to be 1%.
So you can see how that turned out.
Oh, yeah, well, it's just always the proverbial camel's nose inside the tent.
How are you going to get them to get out of the shade now, you know?
All right, so there's a bunch of other stuff that got—little amendments and riders and things that got added to this bill.
And to be perfectly honest, I just don't know anybody else—I'm not saying they didn't.
I just don't know anybody else who really went through and broke down the mess that is this bailout bill.
You know, as you said, the biggest thing probably of all in here is that it sort of leaves open-ended how much money they can continue to use for this purpose, and then, of course, the IRS and that kind of thing.
But what else is in there that people ought to know about?
Well, let's see.
Let's back up a little.
Last Monday—I think it was last Monday—the Treasury Department said, And this is going to help us stabilize the economy, et cetera.
It probably wouldn't have, much like the Friday final version didn't, but it was only three pages.
It might have had many faults.
I think it did.
One of them is the lack of judicial review.
Courts shall not review anything the Treasury Secretary did is what it said.
But at least it was just three pages.
It was simple.
It was easy to understand.
It was probably too broad.
But it was comprehensible.
And the final version was 442 pages.
And so this is over 100 times the length.
What else?
This is all this green tech energy, wind tax credits, coal tax credits.
And this is basically industrial policy.
You're favoring certain technologies but not others.
What else?
Those two sections under cover-ups and database sharing with federal agencies.
There's the TARP program, or Troubled Assets Relief Program.
And here's one interesting thing.
The Treasury Department can, quote, guarantee home mortgages, basically being your cosigner.
And the idea is that it would reduce the number of foreclosures.
But if the homeowner stops paying the mortgage, then taxpayers would be on the hook.
Right.
And why would any homeowner pay his mortgage again if this is the deal?
Well, presumably you'll be hurt in terms of your credit rating.
But, yeah, this creates a strong incentive to just walk away.
If you have someone guaranteeing your rent, let's say, if you're just out of school or something and you don't have a credit rating, then you might not care that much about being especially diligent.
The Treasury Department can also eliminate, quote, a reasonable amount of a homeowner's mortgage debt.
This is under Section 109 of the law if you want to look it up, which would probably delay the process of house prices falling, which is necessary to rectify all these weird economic imbalances we have and also make homes more affordable, which is, I thought, one of the whole ideas behind this.
Right.
Isn't that funny?
Because the whole thing is about, well, supposedly anyway, and we know this is the genuine motive and honest motive of a lot of people, is to help the average guy and maybe even lower than the average guy be able to own their own home.
And yet the idea that, well, wow, housing prices are falling to the point where the average schmuck might be able to afford one, we can't let that happen.
Exactly.
We have to prop them up at almost any cost, which is also what Fannie and Freddie are doing.
They're lowering interest rates below what would be the case otherwise.
And what this does is it props up housing prices, because if your monthly payment is lower, you'll be able to buy a bigger house or a more expensive one at least.
Here's one other point.
There was a public outcry about Wall Street executives cashing in and basically getting wealthier as a result of taxpayer bailouts.
And so Section 111 was described as limiting that, but in reality it doesn't include any dollar limit on how high executive salaries can be.
They just let the Treasury Secretary come up with something that's, quote, appropriate.
And only the top five executives have their golden parachute limited.
All the rest can remain untouched, even if, say, Assistant Vice President has a salary and a golden parachute of $50 million.
That's untouched.
And here's one other thing.
If the firm declares bankruptcy, then that's another exemption to the limit on golden parachutes.
There's also another loophole.
If the company sells the government over $300 million in assets, you can imagine a lot of them are going to hold off at $299 million, so then they don't have to cap executive salaries or golden parachutes.
So there's a lot of loopholes in this.
So I don't know how good a job this is going to do of capping the salaries of failed executives who are coming begging to the taxpayers for a bailout.
Yeah.
Well, and it just shows, too, I mean, how would government be in the position to dictate to any company the limit on what they're allowed to pay anybody other than the fact that they're providing this bailout, which just means that their extent of control, even if they don't take, they're saying now they're going to literally take ownership stakes in these companies and try to get profits back one day and all these kinds of things, they now have their tentacles extended much further into the financial system than ever before.
I think it's hard because it's all happening in real time.
It's sort of hard to take a step back and try to see how much of a revolution is really going on here in terms of the relationship between Washington, D.C., and the financial system in this country.
You know?
It is.
You almost get the feeling that things are intentionally obscured.
And so if you really want to understand it, you have to spend weeks or months trying to figure out exactly how these things work.
And, yeah, I don't see this changing anytime soon.
Let me throw one more thought out.
And this is a problem of socialism in the form that we're entering into, of having the government take ownership stakes in firms.
You have AIG, the insurance firm, had a beach resort party.
You probably saw the news reports.
And $23,000 are there in SPA bills.
The overall total is about half a million.
And so then Representative Waxman and his colleagues had fun earlier this week saying, why are you doing this at the same time you're getting a taxpayer bailout?
That's kind of a reasonable point.
But at the same time, then you start getting into the government micromanaging things and working with Congress micromanaging things.
So maybe that was over the top.
I think any firm that takes a bailout should not have these kind of parties.
But at the same time, what happens if you actually need to reward your salespeople and pay them handsomely in order to make money for the company?
You give your sales folks $100,000, but then they bring in $500,000 of business and revenue.
Now, this is called a good deal.
But then you can imagine Congress saying, oh, no, these salespeople are getting paid too much.
We can't allow this.
We'll hold hearings on this.
We'll pass legislation.
Or maybe the numbers are $1 million in salary and $5 million in revenue.
Still a good deal for the company.
And so you can just sort of see how this goes, more and more regulations and oversight.
The Congress folks love this because it lets them really be at the center of things and throw their weight around.
You know, somebody on the LewRockwell.com blog posted a political cartoon of a bunch of capitalists standing on top of the treasury, and they all have ropes, and they're pulling Marx's statue back up into place.
It's funny.
You know, in fact, it reminds me of a political cartoon from back in, what, 1912, 1913, and it's Karl Marx with his hand out, and there's all the big capitalists, and they're saying, pleased to meet you, because they thought socialism was great.
What a better way to guarantee their profits than to create a big government that has unlimited authority to tamper with, to use force, to tamper with business, to keep things their way, where no matter how terrible the decisions they make are, they don't have to be held responsible.
They roll it over onto the rest of us.
Yeah, and you have investors taking risks with their own money, and they suffer the profit or loss if they choose wrongly.
And now you have the government investing taxpayers' money, and there's no reason to believe that government bureaucrats are especially good at investing.
Some may be, but in general I wouldn't trust them, especially because they're not investing their own money.
You're going to have a process that the Treasury Department will probably follow that would be similar to the process we have with building the space shuttle or military contracting.
You're going to have money spread around through every congressional district of the people sitting on the relevant committees.
It may not make sense to build certain space shuttle parts in Nebraska, but we'll do this anyway just because that person happens to be the committee head, and that costs taxpayers more money.
It might be more efficient to do it, say, in Southern California where a lot of contractors are.
So I anticipate the same thing happening now with the bailout.
What firms should get it?
Well, how about firms that have given money to me or they're based in my district?
That's so funny.
It's already happened right in front of our eyes.
You already said it went from three pages to however many hundred pages, and that was all simply political negotiating.
That wasn't scientific experts in the economy figuring out what was the best thing to do.
That was a bunch of bribes and payoffs for people's pet projects, for Nancy Pelosi's friends, the tuna manufacturers.
Yeah, SunKist's parent company is in San Francisco, and it happens to be in Nancy Pelosi's home district.
So, yeah, hey, all of a sudden companies that can tuna in American Samoa get a nice tax break.
It was weird, a very weird process.
Ron Paul was right.
You took a bill that might have had problems, and then you added many more.
You know, somebody wrote an article a few weeks back on LewRockwell.com that was called Will the Feds Bail Out Chili Mac?
And, yeah, apparently that is the level of absurdity we're going to here, where, you know, little favored corporation.
Nobody ever said that the tuna market was in trouble because of a housing bubble, and yet for some reason they get a giant handout from those of us who work for a living.
It's true.
It's true.
And another thing, well, I think we could probably go on.
I've got another thing.
I want to ask you, because you brought it up, and I don't know too much about this.
I hope that you can tell me about the non-reviewable nature of the Treasury and Fed's actions under this bill and how that was even in the original three pages.
I assume that that lasted through the rest.
Is that right?
I can't answer that question, I'm happy to say.
The initial version of the bailout bill said pretty flatly courts cannot review this, and that would probably be upheld in court, as in judges would probably follow this dictate from Congress because under modern jurisprudence courts wouldn't view this as violating constitutional rights.
If Congress said we're going to pass a law saying you can't criticize Democrats, then that would trigger the First Amendment and courts would strike that down.
But in this case, there's no way for them to do that, so it would have been a real problem.
The final version of the bill, now law, does have judicial review, but it tilts it heavily in favor of the government.
It limits injunctions, it grants expedited appeal.
Basically, it allows a little but not a hell of a lot.
This could be necessary at some point because the wording of the bill allows the Treasury Department, and this is I believe in section 101, so you could check out my article, search for bailout on news.com, and then get the link to the final text.
In any case, I think section 101 says the Treasury Department can buy up any asset from any company.
Now, it's difficult to imagine anything broader than that.
It could mean buying up used photocopiers from CNET, my employer.
I mean, buying up assets is incredibly vague.
It's not limited to financial companies.
It's not limited to stock.
It could be used running shoes.
It's just so broad, it's a little weird.
Yeah, you know, Peter Schiff on this show said, hey, if they can buy a failing company, why can't they buy a successful company?
Why can't they buy up everything?
Why not just start calling this place Italy from now on, and it'll be like the 1930s?
Maybe we can have a world war or something.
This is the danger.
I mean, you probably have folks on who are with more expertise on the Great Depression than me, but one thing that caused it and extended it is the government meddling with the economy.
You're going to have boom and bust cycles in the absence of government meddling in the economy, but they made it much worse.
And we run the danger of something like that.
I don't think we're going to have something that's exactly the same, but we could be looking at something much like the depression or recession that Japan went through in the last decade.
Yeah, well, I'm no economist either.
I wish I really understood these things, but it seems like the Austrian economist said that all this was going to happen going way back.
Ron Paul is the ultimate example of that, as you note in your article, quoting an article from a long time ago that he wrote on this subject.
It seems like they're the ones saying the hands-off approach is the solution.
It's basically a lie or at least the worst of ignorance when people blame this on laissez-faire free market capitalism, which is a joke.
It's government intervention in the artificially low interest rates.
I only just figured this out.
They slashed the reserve ratios from 12 to 1 to 40 to 1, how much money banks could create out of thin air.
And they created this problem.
Now the thing to do is let the laissez-faire system work.
Let the bad debt be liquidated.
Then we can all get back to reality and make our economic decisions based on prices that reflect real value.
And instead, by more intervention, more smoke and mirrors and bubble gum and string, trying to hold everything together and make it look this way and that, all we end up doing is prolonging the problem and perhaps even making it much worse down the line.
I can't disagree in principle.
If you're going to have government intervention, and we certainly have it, then it's going to prolong the agony.
Without it, the downturn would be sharp, but at least it would be over with quickly.
All right.
Well, listen, I really appreciate your analysis of this bill so that we don't all have to go through and read it ourselves.
I can't stand reading legalese.
It's so hard to understand.
I guess I should have gone to law school just so I can read these darn bills.
Well, you don't need to go to law school.
But it is a question of time, and sometimes they make it as difficult as possible to understand just so they can get away with it.
Right, yeah.
That's how it is even on the local ballot measures, right?
Yes means no and no means yes, like a date rape kind of thing.
That's what they call it.
All right.
So, everybody, that's Declan McCullough.
He's an award-winning journalist for CNET, news.com.
It's news.cnet.com.
He writes about computer security and privacy issues.
He's CNET's chief political correspondent.
Thanks very much for your time on the show today.
My pleasure.