The Sunshine Report

Tag Archive: economy

1. Forget the Fiscal Cliff. There Are Only 9 Days Left To Help Small Businesses

   December 26, 2012 3:59 pm Leave a Comment

   The Sen­ate has only 9 days to climb off the leg­isla­tive cliff and pass a bill that will help small busi­ness through­out America.

   No, I am not count­ing days until we fall off Fis­cal Cliff. I am count­ing the days remain­ing for the Sen­ate to approve the Small Busi­ness Invest­ment Com­pany Mod­ern­iza­tion Act of 2012, also known as H.R. 6504.

   H.R. 6504 is only a one sen­tence bill that changes a sin­gle word in exist­ing leg­is­la­tion and mod­estly increases the max­i­mum allow­able size of small busi­ness invest­ment companies.

   There is no pork attached to HR. 6504 and no implied polit­i­cal state­ments in the pre­am­ble of the legislation.

   It just doesn’t get any leg­isla­tively eas­ier or more straight­for­ward than H.R. 6504. But once the new Sen­ate is sworn in at 12 noon on Jan­u­ary 3^rd, it will be too late. H.R. 6504 will die.

   The Small Busi­ness Invest­ment Com­pany Mod­ern­iza­tion Act of 2012 changes the amount of lever­age a fam­ily of small busi­ness invest­ment com­pa­nies can receive from the Small Busi­ness Admin­is­tra­tion from an aggre­gate cap of $225 mil­lion to $350 mil­lion. That means that cer­tain types of small busi­ness lenders and investors called small busi­ness invest­ment com­pa­nies can bor­row more from the SBA than before.

   The bill doesn’t change the over­all lim­its for the small busi­ness invest­ment com­pany pro­gram, or oth­er­wise touch any other aspect of the pro­gram in any way. It makes it a lit­tle more attrac­tive for spon­sors of small busi­ness invest­ment com­pa­nies to spend time and money in the small busi­ness sec­tor by allow­ing a lit­tle more scale to indi­vid­ual pro­gram par­tic­i­pants. Since the pro­gram was formed in the late 1950s it has been stan­dard oper­at­ing pro­ce­dure for Con­gress to make sure that the pro­gram remains rel­e­vant by approv­ing increases in allow­able pro­gram par­tic­i­pant size to match infla­tion and eco­nomic growth.

   The small busi­ness invest­ment com­pany pro­gram, also known as the SBIC Pro­gram, has been around since 1958 and has not cost the Fed­eral gov­ern­ment a dime since its for­ma­tion. The SBIC Pro­gram is an exam­ple of gov­ern­ment “work­ing” for the ben­e­fit of every­one through public-private partnership.

   The equity for small busi­ness invest­ment com­pa­nies comes exclu­sively from pri­vate investors. The SBA’s role is to pro­vide loans to small busi­ness invest­ment com­pa­nies instead of these invest­ment pools get­ting their loans from banks. The SBA loans are made on attrac­tive terms and the SBA charges a fee to pro­gram par­tic­i­pants. It is through these loans to small busi­ness invest­ment com­pa­nies that the SBA helps get money into the hands of small business.

   How­ever, it is the man­agers of the small busi­ness invest­ment com­pa­nies who make invest­ment deci­sions and allo­cate cap­i­tal, not the SBA. And, if small busi­ness invest­ment com­pa­nies make good invest­ments, it is the pri­vate share­hold­ers of the small busi­ness invest­ment com­pa­nies who ben­e­fit. On the other hand, if small busi­ness invest­ment com­pa­nies lose money, their share­hold­ers bear the bur­den of loss.

   The small busi­ness invest­ment pro­gram does not cost the Fed­eral gov­ern­ment a dime. It charges pro­gram par­tic­i­pants a fee which cov­ers all costs. The SBA seems pretty good at charg­ing the right amount of fee for the pro­gram because they have got­ten it right for the last 54 con­sec­u­tive years.

   How­ever, there is a catch. For pri­vate investors to receive the ben­e­fits of the small busi­ness invest­ment com­pany pro­gram they must actu­ally make invest­ments in small busi­nesses in the United States. The invest­ments can be debt or equity, but they have to be actual invest­ments in U.S. small businesses.

   So just to review, H.R. 6504 changes a sin­gle word in exist­ing leg­is­la­tion relat­ing to a suc­cess­ful pro­gram that doesn’t have any attached pork or polit­i­cally charged lan­guage. The pro­gram is self-funding and has been a suc­cess­ful and non-controversial con­trib­u­tor to the econ­omy since 1958.

   How did the bill do in the House of Representatives?

   Sur­pris­ingly well. In the parochial atmos­phere of the House, H.R. 6504 passed with over­whelm­ing bi-partisan sup­port. The offi­cial vote was 359 yea to 36 nea, which is approx­i­mately a 90% vote to approve.

   I esti­mate that Approx­i­mately 25,000 employ­ees of small busi­ness will ben­e­fit in 2013 from H.R. 6504, as well as a like num­ber of employ­ees in 2014, 2015, 2016 and every year there­after. Over 10 years that’s a quar­ter of a mil­lion Amer­i­can jobs.

   It is not like there is a lot of con­tro­versy in the Sen­ate over this bill. After all, there were three bills intro­duced in the Sen­ate that did the same thing as H.R. 6504. It’s just that the House passed the res­o­lu­tion while the Sen­ate didn’t.

   The Sen­ate does not need to incon­ve­nience itself by actu­ally com­ing to Wash­ing­ton and vot­ing. It can sus­pend its rules and approve H.R. 6504 tomor­row, or the next day or the next; only a hand­ful of Sen­a­tors are needed to get this done. But, includ­ing what is left of today, Sat­ur­day and Sun­day, New Year’s Eve, New Year’s Day and the morn­ing of Jan­u­ary 3^rd, there are only 9 days to pass H.R. 6504 before it dies.  Of actual nor­mal work days there are only two days left, Decem­ber 27th and Decem­ber 28th.  And unfor­tu­nately, accord­ing to the Sen­ate web site H.R. 6504 isn’t sched­uled to be con­sid­ered either day.

   One must admit that 25,000 jobs in 2013 isn’t a lot of jobs in the greater scheme of things for the U.S. econ­omy. But to the scheme of 25,000 indi­vid­u­als who would imme­di­ately ben­e­fit from this bill, and the quar­ter of a mil­lion who would ben­e­fit in the years to come, this bill could mean the world. It means the dif­fer­ence between self-reliance and reliance on gov­ern­ment; it means the dif­fer­ent between bring­ing home the bacon and real­iz­ing that a food stamp does not afford a slice of meat.

   9 days and count­ing for the Sen­ate to say “yes” to small busi­ness, “yes” to jobs and “yes” to the Amer­ica peo­ple. I know the Sen­ate can pass H.R. 6504; all they have to do is try.

2. Tax Cut Proposal Kicks U.S. Workers Out Of Jobs

   June 27, 2011 5:35 pm Leave a Comment

   Tax cut pro­po­nents want to encour­age domes­tic employ­ment by sub­si­diz­ing Amer­i­can com­pa­nies who employ for­eign work­ers in over­seas plants.

   Cut­ting cor­po­rate income tax on for­eign earn­ings puts com­pa­nies that keep their pro­duc­tion in Amer­ica at a com­pet­i­tive dis­ad­van­tage and encour­ages the con­tin­ued hol­low­ing out of the Amer­i­can economy.

   The sub­sidy for mov­ing pro­duc­tion over­seas has been euphemisti­cally called a “repa­tri­a­tion tax hol­i­day” but the only peo­ple who are going to get a hol­i­day are unem­ployed Amer­i­cans whose jobs will move overseas.

   The prob­lem with the repa­tri­a­tion tax hol­i­day is that it will mas­sively cut taxes on for­eign cor­po­rate prof­its while not chang­ing the tax rate on domes­tic prof­its. It isn’t hard to fig­ure out what will hap­pen. If the cor­po­rate income tax rate is close to 0% for for­eign prof­its, but remains at 35% for prof­its made domes­ti­cally, every com­pany that can move over­seas will do so. A 35% mar­gin advan­tage by mov­ing pro­duc­tion over­seas will be too much to overcome.

   Tax cuts almost always sound good. Con­ser­v­a­tives like them because it gives peo­ple more money to make their own choices, and some lib­er­als like them because it’s a form of gov­ern­ment stim­u­lus. But not all tax cuts are cre­ated equal. Some, like the repa­tri­a­tion tax hol­i­day, actu­ally cre­ate incen­tives for bad eco­nomic behavior.

   Tax hol­i­day pro­po­nents argue that Amer­i­can com­pa­nies won’t bring their for­eign prof­its into the U.S. and invest in Amer­ica because U.S. taxes on for­eign prof­its are too expen­sive. It’s unfair, they say, to force Amer­i­can com­pa­nies to pay U.S. cor­po­rate income taxes on for­eign earn­ings because a for­eign income tax was already paid. After all, why would any­one want to pay a tax on the same earn­ings twice?

   Tax hol­i­day sup­port­ers say that if taxes on for­eign earn­ings are sig­nif­i­cantly reduced, U.S. com­pa­nies will use their for­eign earn­ings to fund a domes­tic invest­ment renais­sance. New York Sen­a­tor Charles Schumer even thinks that the extra rev­enue could be used to fund an infra­struc­ture bank.

   But for some odd rea­son every­one who is advo­cat­ing the tax hol­i­day has for­got­ten that the tax code already con­tains a “for­eign tax credit” which elim­i­nates the dou­ble tax­a­tion of for­eign earnings.

   When U.S. com­pa­nies pay taxes over­seas they can claim a tax credit equal to the amount of for­eign taxes paid or assessed. The effect of the tax credit is to reduce U.S. taxes by the amount of for­eign taxes and keep the com­bined for­eign and domes­tic tax bur­den the same as it would be for a domes­tic only tax­payer. If the tax hol­i­day is enacted, the tax bur­den on for­eign earned income by U.S. com­pa­nies will be close to 0%.

   The 0% tax rate won’t hap­pen because for­eign gov­ern­ments reduce their income tax rates or taxes col­lected. Taxes paid to for­eign gov­ern­ments will still be paid, just indi­rectly by U.S. tax­pay­ers through the for­eign tax credit.

   If tax cut­ters get their way U.S. com­pa­nies that employ U.S. work­ers will be at a com­pet­i­tive dis­ad­van­tage. U.S. employ­ers that hire Amer­i­cans will pay a 35%+ cor­po­rate income tax on their prof­its while U.S. com­pa­nies that hire for­eign work­ers will pay almost a 0% cor­po­rate income tax rate.

   It’s just a com­mon sense fact that if tax do-gooders were seri­ous about cre­at­ing U.S. jobs and invest­ment they wouldn’t be talk­ing about sub­si­diz­ing U.S. com­pa­nies to hire for­eign workers.

   If tax cut­ters were seri­ous about sup­port­ing Amer­i­can jobs they be talk­ing about tax increases on for­eign prof­its and off­set­ting tax cuts on domes­tic earn­ings. A sim­ple elim­i­na­tion of the for­eign tax credit and a dol­lar for dol­lar domes­tic tax credit would do the trick.

   For Amer­i­can work­ers strug­gling to com­pete in the global econ­omy, the tax hol­i­day pro­posal is insult on top of injury. Amer­i­can work­ers are try­ing to keep their jobs but are being asked to pay taxes that are used to sub­si­dize employ­ers replac­ing them with for­eign workers.

   Amer­i­can cit­i­zens should be demand­ing that their elected offi­cials fight for Amer­i­can jobs and the Amer­i­can econ­omy. It is uncon­scionable for any mem­bers of Con­gress to advo­cate a tax sub­sidy for U.S. com­pa­nies so that they can hire for­eign work­ers instead of Americans.

   Con­gress needs to stop pan­der­ing to spe­cial inter­est groups that are hell bent on raz­ing the Amer­i­can econ­omy and start fight­ing for Amer­i­can workers.

3. Goodbye Recovery, Hello Recession

   June 18, 2011 10:18 am Leave a Comment

   I’m no pilot, but I imag­ine that if I were fly­ing a plane and a moun­tain appeared in front of me, I’d pull up to avoid crash­ing. Instead, I am an econ­o­mist and busi­ness per­son and I see an eco­nomic moun­tain loom­ing in front of the U.S. I only wish I could explain why Wash­ing­ton insists on fly­ing straight into the moun­tain rather than pulling up.

   Wash­ing­ton politi­cians are point­ing the U.S. econ­omy straight into a liq­uid­ity trap and instead of a bright eco­nomic future, the U.S. is look­ing at years of high unem­ploy­ment, weak GDP growth and the pos­si­bil­ity of wide­spread deflation.

   When the econ­omy is in a liq­uid­ity trap, mon­e­tary pol­icy is inef­fec­tive because indi­vid­u­als and busi­nesses hoard money rather than spend it. The more money the Fed makes avail­able, the more con­sumers hoard.

   Will I be able to feed my fam­ily and pay the bills? Is my job secure? Is my house worth less than the mort­gage? Will the gov­ern­ment help me when I am old or will Medicare be denied when I need it the most? Why is the school board cut­ting pay and fir­ing teach­ers? Does a gov­ern­ment shut­down mean that I won’t be paid? Is the Trea­sury raid­ing my pen­sion to pay bondholders?

   When ordi­nary peo­ple aren’t sure how to answer those ques­tions, they become gripped by fear and uncer­tainty. To assuage their fears, they spend their time and resources get­ting ready for what­ever bad news comes their way. They hoard cash and try to save for the rainy day that they are con­vinced will come. As a result, demand for goods and ser­vices falls caus­ing prices, wages and liv­ing stan­dards to plunge. Before you know it, we’re in the midst of what econ­o­mists call a defla­tion­ary spi­ral with no end in sight.

   Last week the Fed­eral Reserve of Bank St. Louis pub­lished an update to its M1 Money Mul­ti­plier chart that shows ordi­nary Amer­i­cans are hold­ing on to cash. In the last six months the Money Mul­ti­plier has gone into a down­ward spi­ral. When the Money Mul­ti­plier falls, it’s tough for the econ­omy to sus­tain growth.

   

   It’s not just the M1 Money Mul­ti­plier that is falling; M2 Veloc­ity is falling as well. M2 veloc­ity is a mea­sure of how fast broadly defined money sup­ply turns over each year. When M2 veloc­ity falls, con­sumers, busi­nesses and investors are slow­ing the rate at which they spend and invest their money. Annual GDP equals the amount of money avail­able to spend mul­ti­plied by the num­ber of times the money turns over in a year. When veloc­ity goes down it is a sure bet that a reces­sion is right around the corner.

   As the below chart illus­trates, M2 Veloc­ity resumed its down­ward tra­jec­tory about six months ago after recov­er­ing a lit­tle from the 2008 finan­cial crisis.

   

   Falling veloc­ity is a sign that con­sumers and busi­nesses are los­ing con­fi­dence in the future.

   Beyond the obvi­ous incli­na­tion to hoard, one of the side effects of falling mon­e­tary veloc­ity is the ten­dency of investors to sell more risky and less liq­uid assets and invest in Trea­sury bonds which are con­sid­ered “as good as cash.” Right on queue in the last two months, the stock mar­ket has been in decline while the Trea­sury mar­ket has been rising.

   Con­fi­dence in the future is needed to get money turn­ing over again. Yet, con­fi­dence is being destroyed by a lethal com­bi­na­tion of nat­ural and man-made disasters.

   In the last six months there have been nat­ural dis­as­ters of epic pro­por­tion, but the worst dis­as­ters are man-made and caus­ing self inflicted wounds.

   The earth­quake and tsunami in Japan were nat­ural dis­as­ters with wide spread eco­nomic con­se­quences for both Japan and the global econ­omy. Flood­ing in the Mid­west and tor­na­does through­out the East were no one’s fault, but still rocked the world of mil­lions of Americans.

   Even so, it’s man-made dis­as­ters that are hurt­ing the most.

   Con­flict in the Mid­dle East is a man-made dis­as­ter that has the poten­tial to take a turn to the dark side with last­ing con­se­quences. Also, the Euro­pean sov­er­eign debt cri­sis is a man-made cri­sis that still isn’t under control.

   How­ever, by far the biggest eco­nomic dis­as­ter is being cre­ated in Wash­ing­ton and in state capi­tols. The deaf ear of politi­cians and pol­icy mak­ers to the unin­tended side effects of their words and deeds is almost beyond com­pre­hen­sion. Cer­tain politi­cians seem to think that they were elected to play Russ­ian roulette with the econ­omy and don’t under­stand the con­se­quences of their actions.

   In the last six months investors, busi­nesses and con­sumers have watched the U.S. come within min­utes of defund­ing itself and shut­ting down.

   This month every­one is won­der­ing if Con­gres­sional lead­ers will com­mit col­lec­tive sui­cide and fail to pass an increase in the debt limit. Every night on TV mem­bers of Con­gress seem almost giddy at the prospect of serv­ing the U.S. econ­omy cyanide-laced Kool-Aid.

   Con­sumer and busi­ness con­fi­dence requires pub­lic sec­tor cer­tainty. It can’t be up for debate whether or not the gov­ern­ment should honor its commitments.

   Sev­eral state and local gov­ern­ments aren’t doing any bet­ter. Solv­ing bud­get prob­lems by going to war with work­ers and con­stituents is like pour­ing acid on confidence.

   The Fed’s abil­ity to help the econ­omy is very lim­ited when fear drains money from the pro­duc­tive econ­omy. For bet­ter or worse, when the Fed can’t help, it’s up to our elected offi­cials to fix the econ­omy. Unfor­tu­nately, it’s these elected offi­cials that led us into the shadow of the val­ley of eco­nomic death.

   Despite evi­dence to the con­trary, politi­cians con­tinue to believe that their words and per­sonal deeds don’t mat­ter; that there are no con­se­quences to cre­at­ing uncer­tainty by threat­en­ing to uni­lat­er­ally break con­tracts and bank­rupt peo­ple that trusted the word of the United States.

   Until our elected offi­cials stop threat­en­ing an eco­nomic Jon­estown, we are doomed for as far as the eye can see.

4. Fed Has Power To Pop Commodity Bubble

   May 9, 2011 12:45 pm Leave a Comment

   
   

   Crude oil down almost 15% last week

   As pub­lished on Forbes.com

   I don’t know about you, but I’m fed up with being a vic­tim of Wall Street spec­u­la­tors who are dri­ving food and fuel prices up through the roof. The recent plunge in com­modi­ties prices con­firms what every­one knew all the time — infla­tion is being dri­ven by com­modi­ties spec­u­la­tors who are prof­it­ing from every­one else’s col­lec­tive misery.

   Last week the mar­gin require­ments for sil­ver — a rel­a­tively minor com­mod­ity — were changed and trig­gered a wide­spread sell off. The evi­dence of a spec­u­la­tor dri­ven bub­ble was unmis­tak­able by the end of the week — crude oil was down almost 15%, corn down about 10% and wheat down almost 8%.

   If mar­gin rule changes for a minor com­mod­ity can trig­ger a gen­eral price run, imag­ine what would hap­pen if a series of broad based rule changes were implemented.

   Well I have a sug­ges­tion for our eco­nomic lead­er­ship in Wash­ing­ton — go crazy — change the rules for all com­modi­ties. I guar­an­tee that the com­modi­ties price bub­ble will instantly pop.

   The Fed has the reg­u­la­tory author­ity to imme­di­ately imple­ment this pol­icy by order­ing banks to stop fund­ing, invest­ing, clear­ing or facil­i­tat­ing deriv­a­tives com­mod­ity trading.

   The prob­lem that the Fed needs to fix is that the com­modi­ties mar­kets have been “finan­cial­ized” by Wall Street. Prices that used to be deter­mined by pro­duc­ers and users of com­modi­ties are now set by finan­cial spec­u­la­tors mak­ing naked bets on how much price pain con­sumers can endure with­out break­ing by buy­ing and sell­ing deriv­a­tives com­mod­ity con­tracts. These spec­u­la­tors don’t own, or oth­er­wise have a long term inter­est, in the com­modi­ties that they bet on, they are just in the mar­ket for the quick finan­cial kill.

   Over the past decade, com­modi­ties mar­kets have become a large book­mak­ing oper­a­tion where bets are placed on the amount of eco­nomic tor­ture con­sumers can take before cry­ing “uncle.” In the last 12 months when oil at $100 per bar­rel didn’t destroy Amer­i­can fam­i­lies, spec­u­la­tors raised the stakes and tried $110. When oil at $110 didn’t break us, spec­u­la­tors were will­ing to go to $115.

   Despite the rapidly ris­ing prices, there was no short­age of crude oil to jus­tify the run up of price in the com­modi­ties pits. In fact, oil spot prices have con­sis­tently been far below reported “mar­ket” prices.

   If you think the com­modi­ties mar­kets seem like a Las Vegas casino oper­a­tion that isn’t a coin­ci­dence. Com­modi­ties spec­u­la­tion enjoys a spe­cial exemp­tion from crim­i­nal gam­ing laws and only exists because Con­gress says that wager­ing on oil, corn and wheat isn’t the same as gam­bling and that the peo­ple that run the mar­kets aren’t the same as gangsters.

   

   Com­modi­ties trad­ing is a form of legal­ized gambling

   If he wants to, Bernanke can fight back at com­modi­ties wager­ing by stop­ping banks from fund­ing or sup­port­ing naked com­modi­ties bets. That action won’t hurt pro­duc­ers or users of com­modi­ties or the com­modi­ties trad­ing mar­kets that actu­ally have some­thing to do with the pur­chase and sale of the under­ly­ing goods. Nev­er­the­less, it will stop finan­cial spec­u­la­tors from using liq­uid­ity that was actu­ally intended as eco­nomic stim­u­lus from being diverted into legal­ized com­modi­ties gambling.

   Thirty years ago Paul Vol­cker attacked a sim­i­lar liq­uid­ity fueled com­modi­ties bub­ble by declar­ing banks couldn’t fund com­modi­ties spec­u­la­tion. Prices plunged and the bub­ble was popped. Bernanke can learn a thing or two from Volcker.

   

   Bernanke can learn a thing or two from Volcker

   Put sim­ply, the Fed has the reg­u­la­tory author­ity to stop bank hold­ing com­pa­nies, and their sub­sidiaries, from being the “house” at the com­modi­ties casino.

   Unfor­tu­nately, in recent years the Fed has been at best a reluc­tant reg­u­la­tor. The Fed needs to ditch its pol­icy of reg­u­la­tory non-intervention, at least when its own mon­e­tary pol­icy is cre­at­ing unin­tended eco­nomic distortions.

   Fed action doesn’t have to be broad based to be effec­tive — in fact, nar­rower is bet­ter. Lend­ing and cap­i­tal rules only need to change for the financ­ing and clear­ing of non-delivery deriv­a­tive com­modi­ties con­tracts. Fed pol­icy shouldn’t change for phys­i­cal deliv­ery con­tracts that are used by pro­duc­ers and users of commodities.

   Bernanke needs to get some back­bone and stand up to com­modi­ties spec­u­la­tors, and the sooner the bet­ter. He should remem­ber that there was a time when the Fed Chair­man wasn’t afraid of Wall Street and didn’t hes­i­tate to use all of the reg­u­la­tory tools at his disposal.

   Pun­ish­ing every­one by rais­ing inter­est rates, or wait­ing until infla­tion over­takes the econ­omy, isn’t a ratio­nal choice. Bernanke has the power to pop the com­modi­ties bub­ble right now with­out hurt­ing the rest of us. Let’s hope he uses it.

5. Headline From 2036: Banks Say ‘Drop Dead’ To White House

   April 29, 2011 9:49 am Leave a Comment

   Date­line April 29, 2036

   At sep­a­rate news con­fer­ences Demo­c­ra­tic and Repub­li­can lead­ers accused each other of polit­i­cal oppor­tunism after Con­gress again failed to raise the debt ceil­ing and banks refused the President’s request to fund a gov­ern­ment bailout.

   As a result, the fed­eral gov­ern­ment shut­down that began in 2011 will con­tinue for another year.

   

   Fed future for Ryan?

   Fed­eral Amer­i­can Reserve Bank Chair­man Paul Ryan stated ”It isn’t fair that the pres­i­dent is ask­ing banks to pay taxes. If we pay taxes this year, he will just come back next year for another hand­out. The cycle has to be bro­ken. I used to be one of those irre­spon­si­ble tax and spend offi­cials and I know how things work in Wash­ing­ton. If we give in now to pay­ing taxes there is no telling where this will end up.”

   Chair­man Ryan’s com­ments were cir­cu­lated on the House floor just before today’s crit­i­cal vote.

   Ever since the mega bank Amer­i­can National acquired the Fed­eral Reserve Bank­ing sys­tem the gov­ern­ment has been unable to col­lect tax rev­enue with­out Chair­man Ryan’s help.

   

   Sticky issue of taxes

   The Pres­i­dent responded to Ryan’s crit­i­cism by point­ing out that because cor­po­rate taxes were elim­i­nated and per­sonal income tax rates are only 0.001% for any­one earn­ing more than $250,000 per year the gov­ern­ment hasn’t been able to bal­ance the bud­get. ”Since the last tax reduc­tion the gov­ern­ment has been forced to live off of park­ing fees at the national parks. It just isn’t enough to fund essen­tial ser­vices and invest in the future.”

   It didn’t take long before Eco­nom­ics Nobel Prize Lau­re­ate Glenn Beck shot back at the Pres­i­dent. ”We need to take back our coun­try from the lib­eral elites. All they want to do is take from you and me and give it to the poor. We can’t let Marx­ists run this coun­try anymore.”

   Beck’s rival, Trea­sury Sec­re­tary Paul Krug­man, wor­ried that the gov­ern­ment might have no choice but to per­ma­nently shut down. “The gov­ern­ment has been on the ropes ever since we adopted the gold stan­dard and closed the Fed­eral Reserve. I warned every­one that this would hap­pen but no one lis­tened to me. The Republican’s even made fun of me. But, facts are facts. With gold at $18,829 per ounce we can’t afford to buy the cur­rency needed to run gov­ern­ment anymore.”

   Long time TV com­men­ta­tor Sean Han­nity inter­rupted his long run­ning cable news show and devoted an entire 5 min­utes to an in-depth exam­i­na­tion of the issue. ”Let not your hearts be trou­bled. The only thing per­ma­nently shut­ting down is Krug­man — he’s even older than me, and I am so old I have trou­ble think­ing straight. I say gov­ern­ment can be deliv­ered by the pri­vate sec­tor cheaper and more effec­tively than through the pub­lic sec­tor. Peo­ple just need to trust the pri­vate sec­tor and free mar­kets to take care of them and every­thing will be OK. Look at me, I have been taken care of all my life and I am doing just fine.”

   In sep­a­rate eco­nomic news, the Pay Czar deliv­ered a new report crit­i­ciz­ing the com­pen­sa­tion of pub­lic sec­tor employ­ees includ­ing school teach­ers, fire fight­ers and san­i­ta­tion work­ers as being exces­sive. ”When school teach­ers earn more than their students…well that just isn’t right. After all, who works for whom?”

   The Pay Czar was espe­cially dis­parag­ing of work­ers at the Depart­ment of Motor Vehi­cles. ”Those work­ers don’t deserve to be paid. I had to get my license renewed and I know — no one wants to pay for the DMV. If we could do it over again, why would there be a DMV at all?”

   See the orig­i­nal ver­sion of this post at Forbes.com.

6. LIBOR Manipulation Redux" rel="bookmark">LIBOR Manipulation Redux

   March 25, 2011 2:01 pm Leave a Comment

   Back in 2008 my very first blog entry was about LIBOR and whether or not it was a real or imag­i­nary inter­est rate.

   Since that time I wrote another six arti­cles on the topic and got sin­gled out by the British Banker’s Asso­ci­a­tion, the pub­lish­ers of LIBOR, for spe­cial treat­ment and criticism.

   
   

   Start­ing about two weeks ago it became clear that back in 2008 I was onto some­thing because LIBOR is back in the news — only this time it is in the news because it is the sub­ject of inves­ti­ga­tions by U.S. reg­u­la­tors and pros­e­cu­tors, British reg­u­la­tors and Japan­ese reg­u­la­tors.

   It seems that my 2008 rant­i­ngs back that LIBOR may have been manip­u­lated, and my calls for inves­ti­ga­tions into the mat­ter, were right on tar­get.

   You can read the old LIBOR posts here and read my newest LIBOR post, which was pub­lished today on the Huff­in­g­ton Post, here.

   Thanks for reading.

7. Renminbi to Replace the Dollar as King of Currencies? Not Likely

   March 7, 2011 10:45 am Leave a Comment

   There is a lot of spec­u­la­tion that the dol­lar is los­ing ground to the Chi­nese ren­minbi and that sooner or later the Fed will share the global stage with Chi­nese mon­e­tary author­i­ties. Chi­nese gov­ern­ment offi­cials and Jere­miad west­ern eco­nomic fore­cast­ers who claim that the ren­minbi will replace the dol­lar as the world’s pre­mier cur­rency cer­tainly have not helped assuage Amer­i­can fears.

   How­ever, con­trary to the increas­ingly shared belief that the Chi­nese are com­ing, the dollar’s sta­tus is not in dan­ger nor is the ren­minbi a real­is­tic hard cur­rency alternative.

   For the rest of this post, please tap this link to seek­ing alpha where the post appears in full.

8. New Bank Fees Hit Unsuspecting Customers

   February 11, 2011 10:56 pm Leave a Comment

   I have to admire the cre­ativ­ity of money cen­ter bankers. It takes a really imag­i­na­tive mind to think of new ways to do noth­ing of value but still charge out­ra­geous fees as if impor­tant ser­vices are being delivered. 

    

   A cou­ple of days ago I became aware of the lat­est bank­ing fee inno­va­tion; bank sur­charges for “not” pro­vid­ing ser­vice. The first of the “not” fees is being charged by at least one money cen­ter bank to con­sumers who don’t use their branches or ATMs. 

    

   That’s right, cus­tomers are being sur­charged for not using their bank. 

    

   I found out about these fees when one of my employ­ees asked me if it was legal for her bank to charge a $2 sur­charge for doing noth­ing.  My employee won­dered aloud if the fee might con­sti­tute some sort of larceny.

    

   At first I didn’t under­stand what she was say­ing. How can a fee be charged for doing noth­ing?  I asked to see her bank state­ment so that I could inter­pret and explain. 

    

   Sure enough, there it was right where she said it would be; a clearly labeled $2 fee for not using her bank to with­draw money. Basi­cally, my employee was charged a $2 fee for using another bank’s ATM to get $100 that was in her check­ing account. This “none use” sur­charge was in addi­tion to the $2 fee that the bank which actu­ally owned the ATM charged. As a result, the total fees charged were $4 for a with­drawal of $100.

    

   The fee for doing noth­ing was buried in my employee’s Feb­ru­ary bank state­ment. This state­ment was received last week in the mail. 

    

   I stud­ied the bank state­ment for more than 15 min­utes but couldn’t fig­ure out how to match the $2 fee up to an actual ATM with­drawal. The infor­ma­tion needed to know where and when the with­drawal took place was curi­ously missing. 

    

   We reluc­tantly decided that the only way to parse the state­ment was to call cus­tomer ser­vice for help. After being put on hold for 40 min­utes while a record­ing told us our call was impor­tant and we were val­ued bank cus­tomers, we were con­nected to a very polite cus­tomer ser­vice rep­re­sen­ta­tive located some­where within 8,000 nau­ti­cal miles of the U.S. mainland.

    

   The cus­tomer ser­vice rep­re­sen­ta­tive was ready for our ques­tions. We learned that if we had care­fully stud­ied the Sep­tem­ber 2010 bank state­ment we would know that the bank had informed us of its uni­lat­eral right to charge a fee when cus­tomers with­draw money from ATMs owned by other banks. We were told that it was only because of char­ity and con­sid­er­a­tion for its cus­tomers that the bank didn’t start to charge the fee in Sep­tem­ber. But, char­ity has its lim­its, and from now on every time a bank cus­tomer uses another bank’s ATM, a $2 fee will be assessed. 

    

   The cus­tomer ser­vice rep­re­sen­ta­tive claimed that my employee had used another bank’s ATM in Novem­ber to with­draw $100 and there­fore her bank was enti­tled to a $2 fee for not using her bank. Of course, the fact that the other bank charged her a $2 trans­ac­tion fee back at the time of the with­drawal was irrelevant. 

    

   The sur­charge for not using a branch ATM in Novem­ber was charged to my employee’s bank account in late Jan­u­ary and retroac­tively posted to Decem­ber 20th. While the cus­tomer ser­vice rep­re­sen­ta­tive knew all about Amer­ica and hoped one day to emi­grate to our great nation, she didn’t know why Decem­ber 20th was the post­ing date for a Novem­ber fee appear­ing on a Feb­ru­ary statement. 

    

   After some care­ful check­ing the cus­tomer ser­vice rep­re­sen­ta­tive told me and my employee that she was wrong when she stated that all check­ing accounts for all bank cus­tomers were being sur­charged.  We informed us that if my employee had $50,000 on deposit in her check­ing account the sur­charge could be waived.  Appar­ently, only accounts with less than $50,000 were sub­ject to surcharge. 

    

   I under­stand why bank’s that own ATM’s charge non-bank cus­tomers a fee for use of ATMs.  After all, there is a cost to run­ning an ATM net­work, main­tain­ing the equip­ment and stock­ing the ATM with cash. But, what I don’t under­stand is why banks think it is OK to charge their cus­tomers for not using their branches and ATMs. The $2 fee is being charged for doing noth­ing and isn’t based upon any sem­blance of the mar­ginal cost not to deliver bank­ing ser­vices (for those who aren’t good with math, the mar­ginal cost of not doing some­thing is $0). 

    

   Since there are really big profit mar­gins and banker bonuses that can be ripped out of the sys­tem for not doing things, it won’t sur­prise me if banks think up totally new cat­e­gories of “not” fees.  With a lit­tle bit of effort banks should be able to charge fees for cus­tomers not using credit cards, not bounc­ing checks and not default­ing on mortgages. 

    

   If banks use “smart card” tech­nol­ogy they should be able to fig­ure out other things that we aren’t doing in our ordi­nary lives and charge us appro­pri­ately. I think we can all look for­ward to the day when smart cards will tell banks when we don’t buy fast food, when we don’t get a new gym mem­ber­ship and when we pass up a shiny new set of chrome wheels for our ride.  We should be ready to pay a sur­charge to make up for lost bank­ing prof­its when we don’t do things because of our incon­sid­er­ate non-use of bank credit and services. 

    

   Con­sumer bank agree­ments are con­tracts of adhe­sion. That means that there isn’t an equal play­ing field between banks and their cus­tomers and cus­tomers don’t have real recourse when banks steal their money.  Courts are mostly inef­fec­tive because they just don’t view bank lar­ceny as any­thing more than a com­mer­cial dis­pute.  Since the amounts taken from any indi­vid­ual cus­tomer tend to be small, it doesn’t make eco­nomic sense to pur­sue indi­vid­ual reme­dies to bank theft.  After all, what is my employee going to do, sue her bank for $2? 

    

   Cus­tomers that are abused by their bank just have to grin and bear it.  Wronged cus­tomers can take their busi­ness to another bank but that won’t get them back money that has already been taken. 

    

   It is the job of reg­u­la­tors to level the play­ing field and watch out for con­sumers.  Reg­u­la­tors aren’t sup­posed to be indus­try abuse enablers, they are sup­posed to watch out for the lit­tle guy and make sure that com­pe­ti­tion pro­duces mar­ket prices based upon real com­pe­ti­tion and not theft and extor­tion.
    
   Fee’s charged for not pro­vid­ing ser­vice should be banned imme­di­ately by the Fed­eral Reserve, the FDIC, the OCC and every state bank­ing author­ity.  If banks think that reg­u­la­tors over­step their author­ity by ban­ning non-use sur­charges, they can do what the cus­tomer ser­vice rep­re­sen­ta­tive told me and my employee to do, hire a lawyer and sue.

9. What to Learn From Florida’s Mortgage Meltdown

   January 10, 2011 8:21 pm Leave a Comment

   If any­one wants to see a real live mort­gage melt­down in progress, they should visit Florida where, accord­ing to the Amer­i­can Secu­ri­ti­za­tion Forum, more than 50% of secu­ri­tized non-agency Florida res­i­den­tial mort­gages are greater than 60 days past due. 

   That means that at least 50% of all bor­row­ers included in the data didn’t make their mort­gage pay­ments in Novem­ber and December. 

   In my world, a 50+ per­cent non-payment rate qual­i­fies as a bona fide “melt-down”. 

   The Florida 50%+ non-payment pool includes all the mort­gages that got sold into the sec­ondary mar­ket other than through U.S. gov­ern­ment spon­sored enter­prises, i.e., Fred­die Mac, Fan­nie Mae and Gin­nie Mae.  Accord­ing to Amer­i­can Secu­ri­ti­za­tion Forum, their data cov­ers approx­i­mately 97% of all non-agency res­i­den­tial mort­gage backed securities. 

   The worst types of mort­gages were the Alt-A and sub-prime mort­gages.  Among the 2004 to 2008 vin­tage mort­gages, Alt-A mort­gages had a 46.7%+ non-payment rate, while sub-prime mort­gage had more than a 63.5%+ non-payment rate.

   It’s time to con­fess; I have more than a pass­ing inter­est in what hap­pens in Florida and not because the “Sun­shine State” was named after my fam­ily.  I live in Florida.  The bor­row­ers that aren’t pay­ing are my neigh­bors.  Some are my friends. 

   Why are my neigh­bors not paying?

   I spend a lot of time talk­ing with other Florid­i­ans about real estate and mort­gages.  Frankly, in Florida every­one talks about real estate most of the time.  Of all of the con­ver­sa­tions, one really stands out. 

   About six months ago I went scuba div­ing near my home.  My dive group included a bank lawyer, a real estate spec­u­la­tor, a doc­tor, an accoun­tant and a friend of mine that is a part time dive instructor. 

   The dive instructor’s “real job” is com­puter pro­gram­ming (being a dive instruc­tor is fun but only pays for the cost of scuba div­ing).  In early 2007, the dive instruc­tor pur­chased a con­do­minium for approx­i­mately $300,000. 

   Unfor­tu­nately, the dive instruc­tor got laid off in 2008.  It took him approx­i­mately 12 months to find another com­puter job. 

   It turns out that the condo had prob­lems.  It was built with Chi­nese dry­wall and had a leaky roof that caused black mold to grow in the ceiling. 

   Most of the time the dive instruc­tor was unem­ployed he didn’t make mort­gage pay­ments.  Given the choice of buy­ing food or pay­ing the mort­gage, he chose food.  When he got a new job he started pay­ing again. 

   The dive instruc­tor applied for a mort­gage mod­i­fi­ca­tion.  He was approved for a mod­i­fi­ca­tion three times, only to be told each time that the bank lost his paper work and that he needed to start the process over again.  After nine months of mak­ing pay­ments pur­suant to a tem­po­rary mod­i­fi­ca­tion, the bank turned him down for a per­ma­nent mod­i­fi­ca­tion.  When the bank turned him down they tacked onto his mort­gage amount penal­ties, fees and default inter­est.  The bank claimed that the dive instruc­tor owed tens of thou­sands more than he orig­i­nally borrowed. 

   By the time we went div­ing, the dive instructor’s condo was worth a lot less than $100,000.  Instead mak­ing mort­gage pay­ments, the dive instruc­tor again stopped pay­ing and saved the money he was would have been send­ing to the bank. 

   The dive instruc­tor was a strate­gic defaulter. 

   On the dive boat he told his story and said he was anx­ious and wor­ried about the future.  I watched and lis­tened as the group reacted. 

   Every­one had the same advice (even the bank lawyer); don’t pay and damn the con­se­quences.  My fel­low divers praised him for sav­ing his money and advised him to be ready for a quick move to a rental unit. 

   There was no one on the boat who thought that being a strate­gic defaulter was bad.  Every­one agreed the bank got what they had com­ing to it. 

   As for wreck­ing his credit rat­ing, no one thought that it was even worth think­ing about.  After all, the dive instruc­tor already had a bad credit rat­ing; what’s a lit­tle more bad really mean.  The dive instruc­tor would just join the mil­lions of other Florid­i­ans who had bad credit ratings. 

   Even the accoun­tant agreed that the smart move was not to pay.  If he tried to pay, it could take more than a decade until he was able to get right side up in the mort­gage.  By strate­gi­cally default­ing, the dive instruc­tor would repair his already dam­aged credit rat­ing sooner than if he tried to live up to his obligations. 

   The lawyer and real estate spec­u­la­tor even told the dive instruc­tor that he should imme­di­ately file for bank­ruptcy and cut off the pos­si­bil­ity of the bank ever suing him per­son­ally for the unpaid mort­gage.  They argued that the sooner he legally cut off recourse the sooner he would cure his credit bureau. 

   I asked the dive instruc­tor if he thought about defend­ing the fore­clo­sure.  I spec­u­lated that the ser­vicer might not have a legal right to fore­close on the unit.  The bank lawyer explained that it didn’t make a dif­fer­ence if the ser­vicer had the legal right to fore­close or not, they would do what­ever it took to seize the condo and the courts would cooperate. 

   There was a moment where I thought there could be some ugli­ness on the boat.  I won­dered if the other divers were going to feed the lawyer to sharks.  Banks and their lawyers were the com­mon enemy and the dive instruc­tor was the vic­tim, at least that was how every­one on the boat saw it.

   The econ­omy in Florida is bad, but it isn’t so bad that more than 50% of the bor­row­ers can’t pay.  Many Florid­i­ans can pay but don’t because the sys­tem makes it bet­ter to default. 

   More and more Florid­i­ans who pay their mort­gage feel like chumps com­pared to default­ers; they turn over their dis­pos­able income to the bank and know it will take most of their life­times to recover. 

   As for future access to the bank­ing sys­tem, every­one in Florida knows that that banks will be back, offer­ing credit to both default­ers and non-defaulters.  The rates maybe a lit­tle higher for default­ers but not high enough to make it the smart move to pay.  The banks just aren’t going to for­get about more than 50% of Florida’s con­sumer market.

   What’s a mort­gage melt­down look like? 

   On the ground it’s not so ugly.  It’s peo­ple real­iz­ing that they are bet­ter off default­ing than pay­ing and that there are few, if any, con­se­quences.  It’s fig­ur­ing out that rent­ing is a pretty good option and that neigh­bors don’t really care who is pay­ing and who isn’t.  Once debtors find per­sonal jus­ti­fi­ca­tion for not pay­ing and get over the anquish of prob­a­bly fil­ing for bank­ruptcy life gets a lot bet­ter after default. 

   Florida isn’t spe­cial.  What is hap­pen­ing in the Sun­shine State could spread.  If it does, the finan­cial mar­kets will face another round of intense pres­sure.  Only this time it may be a lot tougher to contain.

10. There’s A Better Alternative To Cutting Social Security…

    January 6, 2011 11:39 pm 1 Comment

    On Sun­day morn­ing, I woke up just in time to hear Sen­a­tor Lind­sey Gra­ham announce on a TV talk show that he isn’t going to vote to increase the U.S. debt limit unless Social Secu­rity and Medicare ben­e­fits are cut for peo­ple under 55 years old. I started lis­ten­ing care­fully to the pro­gram because if Sen­a­tor Gra­ham has his way two of the peo­ple that will have their ben­e­fits cuts are my wife and me. While we are both under 55 years old, we have paid into the sys­tem for more than 30 years and would feel cheated if the terms under which we paid our taxes for more than three decades was changed; espe­cially since we know that there is a bet­ter alternative.

    Sen­a­tor Gra­ham believes that future Social Secu­rity and Medicare ben­e­fits cost too much and if left unchecked will even­tu­ally bank­rupt Amer­ica. He feels so strongly about his posi­tion that he is will­ing to bank­rupt Amer­ica now by refus­ing to vote to increase the debt limit rather than wait for Social Secu­rity and Medicare costs to bank­rupt us later. Sen­a­tor Gra­ham knows that a fail­ure to increase the debt limit will cause a U.S. default and destroy our national econ­omy. But he seems to believe if a Social Secu­rity and Medicare are fis­cal hand grenades that are going to blow us up any­way, 2011 is as good a time as any to pull the pin.

    While Mr. Gra­ham is cor­rect in his asser­tion that Social Secu­rity and Medicare costs will be an increas­ingly dif­fi­cult bur­den for future gen­er­a­tions, his solu­tion doesn’t address the under­ly­ing cause of the prob­lem — dete­ri­o­rat­ing demo­graph­ics caused by an aging U.S. pop­u­la­tion. Sim­ply put, unless some­thing changes there will be too many older Amer­i­cans who want to receive ben­e­fits which will be paid for by too few younger Americans.

    Demo­graphic prob­lems require demo­graphic solu­tions and Sen­a­tor Gra­ham isn’t attempt­ing to deal with the under­ly­ing pop­u­la­tion prob­lem fac­ing the U.S.

    Here’s a sug­ges­tion for Sen­a­tor Gra­ham and every­one else that that thinks ham­mer­ing older Amer­i­cans is the way to fix a future demo­graphic imbal­ance; con­cen­trate on get­ting more young Amer­i­cans into the econ­omy so that the demo­graphic grenade doesn’t explode.

    There are two ways to get more Amer­i­cans into the econ­omy; increase the birth rate or allow more immi­grants to be admit­ted into the U.S. Unfor­tu­nately, both alter­na­tives have Con­gres­sional foes.

    Increas­ing the birth rate means enact­ing gov­ern­ment fam­ily friendly poli­cies that encour­age Amer­i­can women to have more kids. More often than not Con­gres­sional crit­ics label fam­ily friendly pub­lic pol­icy as an evil exer­cise in social engineering.

    The other way to fix the demo­graphic prob­lem is to have peo­ple move to the U.S. to live and work. Unfor­tu­nately, immi­gra­tion reform has been stuck in Con­gress for more than a decade and last month an attempt at encour­ag­ing young and edu­cated immi­grants to stay in the United States, the DREAM Act, was voted down.

    Right around the same time as the DREAM Act was going down in Sen­a­to­r­ial flames, the Cen­sus Bureau announced that dur­ing the last decade the U.S. pop­u­la­tion grew at the slow­est pace since the Great Depres­sion. It’s no coin­ci­dence that the econ­omy was ter­ri­ble both dur­ing the last decade and the Great Depression.

    Immi­gra­tion advo­cates on both sides of the issue need to under­stand that the size, age and com­pet­i­tive­ness of the U.S. pop­u­la­tion is the largest sin­gle deter­mi­nant of our eco­nomic wel­fare. An older, slower grow­ing and less well edu­cated pop­u­la­tion will always have less eco­nomic wealth than a younger, grow­ing and bet­ter edu­cated population.

    Even the lin­ger­ing hous­ing cri­sis is a hostage of dete­ri­o­rat­ing demo­graph­ics. If the pop­u­la­tion of the U.S. had the same growth rate from 2006 to 2010 as it did from 1995 to 2000, the over­hang of unsold and unoc­cu­pied homes would be dra­mat­i­cally smaller. New house­hold for­ma­tion dri­ves hous­ing demand and is a deriv­a­tive of pop­u­la­tion growth. Slow pop­u­la­tion growth and an aging pop­u­la­tion are ter­ri­ble for housing.

    Demo­graph­ics drive both gen­eral eco­nomic sup­ply and demand. On the sup­ply side, young and highly edu­cated work­ers are the seed corn for a pro­duc­tive work force. Younger work­ers also push up aggre­gate demand as they spend money to raise their fam­i­lies and live active lives. Dean Baker recently wrote that retirees con­sume only 70% of non-retirees.

    If any­one wants to see what really bad demo­graph­ics do to an econ­omy, just look at Japan. In the 1980s Japan had a fast grow­ing and hard work­ing labor force. The con­ven­tional wis­dom was that it was Japan’s des­tiny to dom­i­nate the global economy.

    Con­ven­tional wis­dom about Japan was wrong and when the Japan­ese pop­u­la­tion started to age, birth rates dropped and the econ­omy slowed. There was a pop­ulist back­lash caused by the eco­nomic slow­down that resulted in xeno­pho­bic poli­cies that effec­tively cut off Japan­ese immi­gra­tion. Japan even has a sort of sec­ond class res­i­dence sta­tus for chil­dren of immi­grants, even if these chil­dren were born and raised in Japan.

    Last week the Japan­ese gov­ern­ment announced that in 2010 the Japan­ese pop­u­la­tion shrank by the great­est amount ever (other than dur­ing peri­ods of war) and that the trend towards a smaller and older pop­u­la­tion will con­tinue for the fore­see­able future. Since 1993 the Japan­ese labor force hasn’t grown and demand has remained weak for more than a decade. It’s been a long time since any­one has been wor­ried about Japan dom­i­nat­ing the world economy.

    Sen­a­tor Gra­ham and Con­gres­sional anti-immigrant advo­cates are mak­ing the same mis­takes that Japan­ese lead­ers made 20 years ago. Rather than learn­ing from the expe­ri­ences of other coun­tries and his­tory, Sen­a­tor Gra­ham is read­ing from the same play­book that robbed Japan of its future and if con­tin­ued will have the same effect on the U.S.

    Before enact­ing large scale cuts in retiree ben­e­fits the U.S. needs to do every­thing it can to increase the tax base and fix its demo­graphic prob­lem. Cut­ting ben­e­fits should be the last pub­lic pol­icy option, not the first.