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Tag Archive: Politics

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

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    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.

  2. Is Chinese Manufacturing Coming Back To The U.S.?

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    At first I couldn’t believe my ears: a U.S. man­u­fac­turer was telling me that they were plan­ning on flee­ing the high costs of Chi­nese man­u­fac­tur­ing for the rel­a­tively lower costs of the U.S.

    It’s been years since I heard any­one cred­i­bly claim that they could save money by mov­ing man­u­fac­tur­ing to the U.S., but just last week I met with a man­u­fac­tur­ing CEO who was cer­tain 2012 would be the year they out­sourced to the U.S.

    I was sur­prised with the text­book micro­eco­nomic expla­na­tion of why this man­u­fac­turer was leav­ing China for the U.S.

    Long and inflex­i­ble sup­ply lines are caus­ing the com­pany, which man­u­fac­tures replace­ment indus­trial refrig­er­a­tor parts, to finance and store large amounts of goods. High-energy prices are caus­ing trans-Pacific trans­porta­tion costs to sky­rocket. And, the not so hid­den expense and per­sonal sac­ri­fice needed to man­age a large staff 8,000 miles away have worn down the CEO.

    Man­age­ment now believes Chi­nese man­u­fac­tur­ing isn’t a finan­cial elixir and is hurt­ing their abil­ity to ser­vice cus­tomers. The deal was sealed when Chi­nese infla­tion eroded what­ever remain­ing finan­cial ben­e­fit remained and civil unrest ter­ri­fied vis­it­ing employees.

    Instead of con­tin­u­ing down the Chi­nese rab­bit hole, the CEO is work­ing on a plan to trans­port his machine tools to a newly pur­chased man­u­fac­tur­ing plant in South Florida. With a mod­est cap­i­tal invest­ment, he believes that 10 U.S. work­ers will be able to man­u­fac­turer as much as 50 Chi­nese workers.

    Even bet­ter, by man­u­fac­tur­ing in the U.S. the com­pany will improve cus­tomer ser­vice and the per­sonal wear and tear not of try­ing to con­trol qual­ity in a man­u­fac­tur­ing oper­a­tion located in the mid­dle of China will sim­ply disappear.

    The CEO is highly moti­vated and very smart. His com­pany is grow­ing more than 50% per year and is very prof­itable. The com­pany gen­er­ates high mar­gins by pack­ag­ing the deliv­ery and instal­la­tion of a basic indus­trial con­sum­able with supe­rior cus­tomer ser­vice and cus­tomized installation.

    In the big scheme of things, one com­pany mov­ing their man­u­fac­tur­ing to the U.S. doesn’t mean much, but after lis­ten­ing to this CEO, and talk­ing to scores of oth­ers, it’s clear that the Chi­nese advan­tage is being eroded by high domes­tic infla­tion, ris­ing energy prices and an increas­ingly unsta­ble civil envi­ron­ment. Given the choice of hav­ing to com­mute to China or stay in the U.S., the U.S. wins every time.

  3. Fed Has Power To Pop Commodity Bubble

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    Oil refinery#Anacortes Refinery (Tesoro Corpor...

    Crude oil down almost 15% last week

    As pub­lished on

    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.

    Las Vegas Strip

    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.

    US Federal Reserve Chairman Ben Bernanke speak...

    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.

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

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    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.

    US House Budget Committee chairman Paul Ryan, ...

    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.

    Income tax

    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

  5. Congressman Ryan, I Don’t Want To Be A Lab Rat

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    An open and a sent let­ter to Rep. Paul Ryan (R-Wisc.)

    Dear Con­gress­man Ryan,

    Please explain your Medicare plan to me and my wife. We are in our early fifties and are con­cerned about how your changes to Medicare will affect us. We know that Wash­ing­ton can seem dis­con­nected from the real world but, for peo­ple of our age, your plan to do away with Medicare is very real.

    Get­ting rid of Medicare feels like a free mar­kets exper­i­ment to us and nei­ther of us wants to be a “lab rat” for a social and eco­nomic exper­i­ment gone awry. Lab rats are usu­ally expend­able and we don’t want to be part of a dis­carded generation.…

    .…Con­gress­man Ryan, please feel free to pro­vide as much detail as pos­si­ble on how, as a prac­ti­cal mat­ter, your plan will be imple­mented. I under­stand that your objec­tive is to save money — I just won­der if there isn’t a less rad­i­cal approach that would work.

    For exam­ple what’s wrong with mod­i­fy­ing the cur­rent Medicare sys­tem to include means test­ing on co-payments and deductibles, increas­ing the eli­gi­bil­ity age by a few years, restrict­ing pay­ment of cer­tain elec­tive pro­ce­dures and work­ing to reduce hos­pi­tal and provider admin­is­tra­tive costs. Tort reform relat­ing to end of life care couldn’t hurt either. These changes would be easy to imple­ment, fair to all and still pro­vide pro­tec­tion for the elderly.

    When I was a child I read sto­ries about how ani­mals that that get old walk into the for­est to die. They are never heard from again and as a result aren’t a bur­den on their herd. The remain­ing ani­mals have bet­ter sur­vival odds because they are not forced to waste pre­cious resources on old ani­mals that are going to die anyway.

    For bet­ter or worse, a long time ago we decided that we were dif­fer­ent than ani­mals and that old peo­ple shouldn’t be asked to “take one” for the team.

    Con­gress­man Ryan, I am wor­ried that your plan basi­cally is telling me and my wife to get ready for that long walk into the for­est. Please tell me it isn’t true and that I am over reacting.

    Read the rest of this post and the ques­tions I ask Con­gress­man Ryan at

  6. Obstacles To Small Business Lending

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    On Jan­u­ary 13th I attended the FDIC Small Busi­ness Forum titled Over­com­ing Obsta­cles to Small Busi­ness Lend­ing and got an extra­or­di­nary glimpse into why many small busi­nesses are miss­ing the recovery. 

    Even though the forum pan­elists agreed that “what’s good for small busi­ness is good for Amer­ica”, they had few ideas about how to ener­gize the finan­cial sys­tem to help Main Street. 

    While I have a lot of respect for sev­eral of the forum par­tic­i­pants, includ­ing Ben Bernanke and She­lia Bair, I left with an unset­tled feel­ing that the panel wasn’t in touch with what makes Main Street tick.  The con­sen­sus plan is to wait until the eco­nomic recov­ery gets down to Main Street and then hope every­thing will be OK.  Unfor­tu­nately, it’s going to be a long wait. 

    About 30 min­utes into the forum, Sen­a­tor Mark Warner said that to gen­er­ate employ­ment gains Amer­ica needs to nur­ture small busi­ness “gazelles”.  He pointed out that fast mov­ing com­pa­nies often turn into big employ­ers.  The other pan­elists agreed and said that export growth was also key to fix­ing unemployment. 

    Once every­one agreed on the impor­tance of gazelles and exporters, one by one, the pan­elists pledged their alle­giance to com­mu­nity bankers.  They were cer­tain that com­mu­nity banks would be the pri­mary small busi­ness lender of the future.  FDIC Chair­woman Bair sup­ported this the­sis by point­ing out that com­mu­nity banks own almost 40% of small busi­ness loans held by banks. 

    As I lis­tened to Chair­woman Bair’s artic­u­late and enthu­si­as­tic com­ments, I was reminded of the movie<em> It’s A Won­der­ful Life</em>.  Unfor­tu­nately, it’s not cred­i­ble that America’s Bai­ley Build­ing and Loan Asso­ci­a­tions are sud­denly going to become the pri­mary resource for rapid growth man­u­fac­tur­ers who are active in inter­na­tional markets. 

    Maybe a review of prac­ti­cal real­ity and facts would help. 

    Accord­ing to Trea­sury, in 2007 less than 50% of all small busi­ness loans were owned by banks (the rest were owned by non-bank lenders).  Small banks owned about 40% of the bank loans, mean­ing that small banks only owned about 20% of all small busi­ness loans, which isn’t an over­whelm­ing mar­ket share.  More­over, over the past 30 years com­mu­nity banks have been shrink­ing in num­bers and los­ing mar­ket share. 

    Mar­ket share and capac­ity prob­lems con­tinue.  Cur­rently, the FDIC has clas­si­fied around 1,300 small banks as “trou­bled” which means that com­mu­nity banks, as a class, are shrink­ing and under cap­i­tal stress. 

    Put sim­ply, com­mu­nity banks lack the cap­i­tal and oper­a­tional capac­ity to finance a resur­gence of Main Street’s fast growth com­pa­nies and exporters.  Inter­est­ingly, Sen­a­tor Warner artic­u­lated his doubts about com­mu­nity bank capa­bil­i­ties but didn’t receive any agree­ment or sup­port from other panelists. 

    Even healthy com­mu­nity banks have major struc­tural hand­i­caps that pre­vent them from meet­ing the needs of many fast growth com­pa­nies and exporters; namely their small legal lend­ing lim­its and lim­ited prod­ucts and geo­graphic oper­a­tional capabilities. 

    Small banks have a small cap­i­tal base and there­fore a small legal lend­ing limit.  Fast grow­ing inter­na­tional busi­nesses need their banks to have large legal lend­ing lim­its that they won’t quickly out­grow.  Com­mu­nity banks have local oper­a­tional capa­bil­i­ties.  Com­pa­nies that buy and sell goods and ser­vices through­out the U.S. and around the globe need broader trans­ac­tion pro­cess­ing prod­uct offer­ings and the abil­ity to finance inter­na­tional pro­cure­ment and sales.  Com­mu­nity banks, more or less by def­i­n­i­tion, don’t typ­i­cally have such capabilities. 

    I was sur­prised when for much of the sec­ond hour of the forum, the panel stopped talk­ing about financ­ing small busi­ness and turned to issues that every­one on the stage agreed had noth­ing to do with why they were there. 

    Sud­denly, every­one had some­thing to say about Dodd Frank rule­mak­ing, BASEL III reg­u­la­tion, health­care reform, tax cut leg­is­la­tion and the fore­clo­sure mess. 

    When the con­ver­sa­tion got more or less back on point, most speak­ers whined about how declin­ing asset val­ues are hurt­ing small busi­ness.  Of course, not a sin­gle speaker men­tioned that the largest asset class owned by most small busi­nesses, i.e., accounts receiv­ables, didn’t at all drop in value.  Inven­tory, typ­i­cally the sec­ond largest asset class for man­u­fac­tur­ing com­pa­nies, was men­tioned once or twice in pass­ing and not in the con­text of lend­ing or banking. 

    It wasn’t until late in the day that any­one spoke of equip­ment finance, inven­tory finance, trade finance or any other type of loan or ser­vice that a fast grow­ing man­u­fac­tur­ing or ser­vice com­pany would be inter­ested in.  No one talked about how to finance imports through the sup­ply chain.  I’m pretty sure that most of the speak­ers had no idea that some­thing called sup­ply chain finance exists or why it is impor­tant to small business. 

    Karen Mills, SBA admin­is­tra­tor, was the most artic­u­late and rel­e­vant speaker, but she was last to talk and only had 15 min­utes allot­ted to her.  While every­one had agreed with Sen­a­tor Warner at around 1:30 PM that export gazelles were the key to grow­ing small busi­ness employ­ment, it wasn’t until 3:57 PM, with 3 min­utes of time remain­ing, that Ms. Mills men­tioned trade finance.  She was the only per­son to say any­thing remotely use­ful on the topic.  Her two sen­tence ref­er­ence to trade finance secured my vote for the “most rel­e­vant speaker of the day” award.

    With the excep­tion of the SBA, it’s clear that Washington’s eco­nomic power elite is almost totally out of touch with the needs of Main Street.  The FDIC Forum high­lighted that per­haps the biggest obsta­cle to small busi­ness lend­ing is the dis­con­nect between well inten­tioned pol­icy mak­ers and the real­ity of Main Street U.S.A.  Until pol­icy mak­ers pro­vide ini­tia­tives that are rel­e­vant and prac­ti­cal, we have a long wait before small busi­ness restores its sta­tus as the U.S. employ­ment growth engine.

  7. It’s Not Too Late For Congress To Fix The Derivatives Market

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    The finan­cial reform leg­is­la­tion that passed the House last week doesn’t fix the deriv­a­tives mar­ket but there is still time to make it right. The Sen­ate hasn’t passed its ver­sion of the bill and all Sen­a­tors need to do is include a pro­vi­sion stop­ping the Fed­eral gov­ern­ment from pre­vent­ing enforce­ment of state and local crim­i­nal gam­ing and bucket shop laws. With this sim­ple leg­isla­tive change book­ies that run ille­gal deriv­a­tives casi­nos will face crim­i­nal pros­e­cu­tion rather than become mil­lion­aires who ben­e­fit from gov­ern­ment bailouts and guar­an­tees. The prob­lem that needs fix­ing is that in 2000 Con­gress and the Clin­ton Admin­is­tra­tion decided to de-criminalize gam­bling and bucket shops so long as these activ­i­ties are couched as enter­prises trad­ing credit default swaps and other finan­cial deriv­a­tives. Since 2000, Wall Street book­ies have run a boom­ing gam­ing busi­ness while the rest of us pay for bets that go bad.

    There is a real chance of the Sen­ate tak­ing action to reign in the deriv­a­tives mar­ket. Last month three sen­a­tors, Cantwell, Wyden and Sanders, said that they would back a revo­ca­tion of the gam­bling exemp­tion for credit default swaps. It is about time that some­one from the Fed­eral gov­ern­ment real­ized that exempt­ing Wall Street from crim­i­nal laws the rest of us have to live with isn’t good pub­lic pol­icy. Even I real­ized that cur­rent pol­icy makes no sense about a year ago when I wrote about the gam­bling exemp­tion. At that time I said the pro­posal to license clear­ing houses for credit default swaps would only fur­ther insti­tu­tion­al­ize finan­cial deriv­a­tives gam­ing and not fix the under­ly­ing problem.

    About 10 years ago the Com­modi­ties Futures Mod­ern­iza­tion Act of 2000 was signed into law by Pres­i­dent Clin­ton and specif­i­cally exempted states from enforc­ing their gam­bling and bucket shop laws in con­nec­tion with com­modi­ties con­tracts and deal­ers. In the leg­is­la­tion the def­i­n­i­tion of a com­modi­ties con­tract was expanded to include all sorts of finan­cial con­tracts that have lit­tle to do with actual com­modi­ties as most peo­ple under­stand the term. As a result, the scope and reach of the gam­ing and bucket shop exemp­tion grew to unbe­liev­able pro­por­tions. Some experts esti­mate that the credit default swap and deriv­a­tives mar­ket is as large as $600 tril­lion. Since the law was changed the U.S. econ­omy has been held hostage by Wall Street casi­nos where large insti­tu­tions make book for gamers that belly up to the bar with tril­lions of other people’s money.

    Of course, Wall Street mar­ket mak­ers and par­tic­i­pants swear that what they are doing isn’t gam­ing at all but a socially use­ful activ­ity that pro­motes open mar­kets, com­pe­ti­tion and price dis­cov­ery. But then again, have you ever heard a bookie or a gam­bler claim that what they were doing “is bad” or “harms any­one” other than them­selves? By some esti­mates this “vic­tim­less activ­ity” dwarfs the resources of almost all national gov­ern­ments, has already destroyed sev­eral bank­ing and insur­ance icons and required hun­dreds of bil­lions of Fed­eral money to pay for bets gone bad. It’s tough to lose at a casino and the biggest loser is the Amer­i­can public.

    The exis­tence of the credit default swap mar­ket can’t con­tinue to be based upon an explicit exemp­tion from crim­i­nal law. If Wall Street needs and exemp­tion from vice, gam­bling and bucket shop laws then Wall Street as we know it shouldn’t con­tinue to exist.

    For those read­ers who don’t know what a bucket shop is, the term bucket shop gen­er­ally is asso­ci­ated with ille­gal activ­i­ties of unscrupu­lous indi­vid­u­als who take advan­tage of unsus­pect­ing vic­tims by push­ing phony invest­ments and trades that aren’t meant to be hon­ored. Tra­di­tion­ally, bucket shops take orders for the pur­chase and sale of secu­ri­ties from cus­tomers and then never exe­cute the orders. Instead of exe­cut­ing orders for the pur­chase or sale of a stock, bond or other con­tract, the oper­a­tors of bucket shops metaphor­i­cally throw orders into a “bucket” and then lie to their cus­tomers about what they have done. Bucket shops cus­tomers become unse­cured cred­i­tors of the bucket shop and hope that the bucket shop has the finan­cial resources to honor their trades. Bucket shop own­ers keep what­ever money they can skim off the top until too many cus­tomers demand to be paid and the scheme crashes. Bucket shops are explic­itly pro­tected by the com­modi­ties laws so long as the scam involves finan­cial derivatives.

    By the way, in case the bucket shop descrip­tion reminds you of some­thing but you can’t quit put your fin­ger on what it reminds you of, I can help. Three of the biggest fail­ures of the last 18 months were bucket shops, i.e., Mad­off, Lehman and AIG. Each one of these fine cit­i­zens of finan­cial soci­ety sold one sided and unhedged con­tracts that they couldn’t honor and con­ve­niently for­got to tell men­tion that they were insol­vent. Just the fall­out from these scams should moti­vate Con­gress and the Obama Admin­is­tra­tion to imme­di­ately repeal the exemp­tion from bucket shop laws con­tained in the cur­rent com­modi­ties leg­is­la­tion. Of course, each of the big three fail­ures had other big things wrong with them but each also had the com­mon theme of being a bucket shop. Who knows if all three fail­ures would have taken place, or at their size and scope, with­out the exemp­tion from crim­i­nal bucket shop laws?

    Over Thanks­giv­ing week­end I watched The God­fa­ther II and there are two scenes that I keep on replay in in my mind when I think of the Com­modi­ties Futures Mod­ern­iza­tion Act of 2000 and the House reform bill.  It seems like a case of fic­tion pre­dict­ing real life. 

    In the movie Hyman Roth bragged to other mob­sters that he had the per­fect arrange­ment in pre-Castro Cuba. He said …

    What I am say­ing is, we have now what we have always needed, real part­ner­ship with the government.”

    But what I really can’t get out of my head is Michael Corleone’s famous words

    I’ll change; I’ll change. I’ve learned that I have the strength to change…”

    Cor­leone seemed more sin­cere than Wall Street exec­u­tives. At least at the time Cor­leone tried to act convincing.

    We all know how The God­fa­ther II ended. Let’s hope that reform­ing the finan­cial deriv­a­tives mar­ket ends bet­ter than the movie.

  8. The Economy’s Shape Is A Mystery That Isn’t Important To Solve

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    Today Cather­ine Ram­pell of the New York Times authored a story in the Week in Review that quoted an econ­o­mist who stated there are “as many views of the econ­omy going for­ward as you have let­ters of the alpha­bet to describe the recov­ery”.  I was dis­ap­pointed by the arti­cle because rather than focus­ing on the shape of the eco­nomic recov­ery (which is inter­est­ing to wonks but irrel­e­vant to most Amer­i­cans), the national debate needs to be whether or not the ben­e­fits of eco­nomic recov­ery are being con­cen­trated in only a few hands to the detri­ment of aver­age Americans.

    On the sur­face last week’s eco­nomic news was pretty good. Third quar­ter GDP was up more than most peo­ple expected, man­u­fac­tur­ing pro­duc­tiv­ity increased at a strong pace and infla­tion remains tame. Even so, the recov­ery is start­ing out as a job­less recov­ery with a real sep­a­ra­tion between the “haves” and the “have nots”.

    The haves are employed and live in the world of big busi­ness and Wall Street while the have nots make up the major­ity of Amer­i­cans that work and own busi­nesses employ­ing less than 500 work­ers. It is not coin­ci­den­tal that the haves are feel­ing like the reces­sion is end­ing; the gov­ern­ment helped them either directly or indi­rectly with tril­lions of dol­lars of aid while the have nots have had to make their own way through this crisis.

    Wall Street bail outs, Fed­eral Reserve pro­grams and TARP sub­si­dized bro­ker­age firms but also had the unin­tended con­se­quence of pro­vid­ing a com­pet­i­tive advan­tage for com­pa­nies that can bor­row money by issu­ing bonds. Only large com­pa­nies can directly access the bond mar­kets and it is large com­pa­nies that are the clients of bro­ker­age firms.

    On the other hand, smaller com­pa­nies obtain their financ­ing by bor­row­ing from lenders that make direct loans and not through cap­i­tal mar­kets activ­i­ties. These lenders are the small and mid-sized banks whose ranks are get­ting smaller every time the FDIC seizes another bank and from non-bank com­pa­nies like CIT which filed bank­ruptcy today and is illus­tra­tive of what has hap­pened to many non-bank lenders. The recov­ery of the bond mar­ket, which is a direct result of gov­ern­ment action, is almost irrel­e­vant to small man­u­fac­tur­ers and ser­vice com­pa­nies. Small com­pa­nies are the “odd man out” of this eco­nomic recovery.

    It’s great news that the econ­omy has started to recover. How­ever, it doesn’t make a lot of dif­fer­ence what shape the recov­ery takes, i.e., if it is a “W”, “V”, “U” or “L”, so long as the ben­e­fits of the recov­ery are con­cen­trated in only a few hands. And, right now the recov­ery is highly con­cen­trated and in fact pro­vid­ing unin­tended advan­tages to big busi­ness over small companies.

    Many econ­o­mists believe that when the econ­omy grows it is always the case that “a ris­ing tide lifts all boats” and there­fore every­one ben­e­fits. But, as any skip­per will tell you, boats that are tied to a fixed dock sink when the tide rises and that is what is hap­pen­ing to small and medium sized busi­nesses and their work­ers; they are teth­ered to lenders that aren’t ris­ing with the eco­nomic tide.

    The U.S. is at a cross roads that it hasn’t faced in decades. Unless the Admin­is­tra­tion works quickly to level the play­ing field so that small busi­nesses can get the same access to cap­i­tal as big busi­nesses there are going to be unin­tended con­se­quences to U.S. soci­ety for gen­er­a­tions to come. The dis­tri­b­u­tion of income, the even­ness of eco­nomic growth and the unin­tended con­se­quences of the bailouts are a lot more impor­tant sto­ries than report­ing on a bunch of econ­o­mists mus­ing about the shape of the recovery.

    PS. A num­ber of read­ers have noticed that on Sep­tem­ber 3rd I wrote an arti­cle that pointed out econ­o­mists were churn­ing out an alpha­bet soup of pre­dic­tions and that the recov­ery will be very uneven As it turns out today I hit pay dirt twice. The New York Times reported on the alpha­bet soup of eco­nomic pre­dic­tions (only two months after I did and said that the alpha­bet let­ter analo­gies weren’t very impor­tant) and Sec­re­tary Gei­th­ner said that the eco­nomic recov­ery would be choppy and uneven. Some­times it is bet­ter to be lucky than good.

  9. Another Big Win For Energy Economics 101: Demand Destruction Isn’t Good For New Investment

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    On Mon­day the Wall Street Jour­nal ran an arti­cle that described the end of the golden era for oil refin­ers. It is a great arti­cle that, unfor­tu­nately, was pub­lished many years too late to be con­sid­ered news. Just as grav­ity is a force that brings all objects to earth, pub­lic pol­icy that destroys the demand for gaso­line will hurt the refin­ery busi­ness. Not sur­pris­ingly, Pres­i­dent Obama’s pub­lic pol­icy ini­tia­tives that increase car and truck fuel effi­ciency have the side effect of hurt­ing oil refin­ery and dis­tri­b­u­tion businesses.

    Just to be clear, I am not against the Administration’s effort to increase fuel effi­ciency in the vehi­cle fleet. Quite the con­trary, it is a mat­ter of national and eco­nomic secu­rity that we burn less imported fuel.  Increas­ing trans­porta­tion fuel effi­ciency is a “must” for the United States. How­ever, I don’t think that it is real­is­tic to believe that the energy indus­try is act like an old trusted dog that knows when it it time to walk into the woods and die. And, it isn’t fair to the refin­ery and dis­tri­b­u­tion busi­nesses to ask them to effec­tively sub­si­dize the rest of the economy’s shift to more fuel effi­cient vehi­cles and alter­nate energy with­out compensation.

    The Wall Street Jour­nal reported that over the next few years there is going to be global over­ca­pac­ity among oil refin­ers. Not only is demand being reduced for refined prod­ucts (par­tic­u­larly in the U.S.), but there is a lot of new and effi­cient capac­ity that is com­ing on line in Asia and the Mid­dle East. That isn’t a pre­scrip­tion for a lot of new invest­ment in refin­ery capac­ity or for good returns for exist­ing refiners.

    I have a cou­ple of news flashes about the future of oil refin­ery and dis­tri­b­u­tion that I am pretty sure are big news scoops (at least for most major media outlets).

    1. As gaso­line demand drops refiner­ies won’t be the only busi­nesses whose invest­ments are under­per­form­ing. There is going to be a lot of excess dis­tri­b­u­tion and retail­ing capac­ity. So far the Wall Street Jour­nal has only reported on excess refin­ery capac­ity. Dis­tri­b­u­tion and retail­ing are the next seg­ments of the indus­try that will expe­ri­ence over­ca­pac­ity and the end of its “golden era” (to the extent that there ever was a golden era). That means that the U.S. will have too many tank farms, too many truck­ers that move refined prod­ucts and too many gas sta­tions that sell gaso­line and diesel to consumers.
    2. The oil refin­ery and dis­tri­b­u­tion indus­try isn’t going to take an assault on their abil­ity to earn prof­its sit­ting down. They are going to hold back on main­te­nance spend­ing until U.S. refin­ery and dis­tri­b­u­tion capac­ity declines and mar­gins are restored. Restor­ing mar­gins means that prices will rise. There will be a pub­lic back­lash against the oil com­pa­nies for earn­ing too much money and maybe even worth­less Con­gres­sional hear­ings where senior indus­try offi­cials are pub­li­cally flogged. If there are hear­ings, some­one who claims to be smart, but really isn’t, will get on TV and announce that no new refiner­ies have been built in the U.S. in more than 30 years and that this is another exam­ple of the U.S. los­ing its global eco­nomic lead­er­ship. Of course, no one will point out that offi­cial gov­ern­ment pol­icy on fuel effi­ciency has the nasty side effect of destroy­ing the indus­try, that the pol­icy is work­ing and only an idiot would build a new oil refin­ery. Sound famil­iar? It reminds me of the sum­mer of 2007 and the hys­te­ria that took place in the media and Con­gress when refin­ery capac­ity was tight.

    Over­ca­pac­ity and falling mar­gins reported by the Wall Street Jour­nal on Mon­day were eas­ily pre­dictable. In fact, I know that they were pre­dictable because in Decem­ber, 2008, I pre­dicted that oil refin­ers would face over­ca­pac­ity and falling mar­gins. Back in Decem­ber I wrote two arti­cles on energy pol­icy which can be viewed here and here.

    From Three Incon­ve­nient Energy Truths

    …while every­one agrees that cars need to get bet­ter gas mileage, vir­tu­ally no one has thought about what hap­pens to the peo­ple and com­pa­nies that make and dis­trib­ute gas for us to use. Bet­ter gas mileage has a side effect of hurt­ing the refin­ers, trans­porters, whole­salers and retail­ers of gaso­line. Bet­ter gas mileage destroys demand for gaso­line and will cre­ate lower prices and over capac­ity. It isn’t sur­pris­ing that vested inter­ests in the oil indus­try are quiet but effec­tive oppo­nents of energy pol­icy pro­pos­als. After all, how many indus­try lead­ers sup­port fed­eral ini­tia­tives that are the equiv­a­lent of eco­nomic suicide?

    Of course, for every action there is an equal or greater reac­tion and the refin­ery and dis­tri­b­u­tion story doesn’t end with demand destruc­tion and stranded capac­ity and investment.

    …Even worse, it will take years for the U.S. to achieve energy inde­pen­dence. We will need new invest­ment to pre­serve exist­ing infra­struc­ture. For exam­ple, oil refiner­ies need con­stant invest­ment to oper­ate. Dur­ing the sum­mer, with great fan­fare, the media announced that it had been more than 30 years since the last new domes­tic oil refin­ery was built. Politi­cians acted like it was a national crime when the refin­ery indus­try was caught short of capac­ity. But, what ratio­nal investor would put money into a new oil refin­ery know­ing that it is U.S. pol­icy to reduce demand for their prod­ucts and cre­ate over­ca­pac­ity. And, for that mat­ter, why should Saudi Ara­bia invest in pro­duc­tion capac­ity to serve Amer­i­can demand if our stated goal is to leave their infra­struc­ture stranded with­out its best customer.

    The con­cerns of exist­ing energy pro­duc­ers are legit­i­mate and need to be addressed. If Obama’s energy pol­icy for­gets to take care of incum­bent energy inter­ests it will fail. Energy pol­icy needs to make sure that invest­ments in prop­erty, plant and equip­ment that are ren­dered obso­lete or made uneco­nomic because of over­ca­pac­ity are paid for through their use­ful eco­nomic lives.

    The Admin­is­tra­tion means well but needs to get rid of its sim­plis­tic approach to energy pol­icy which ignores how to tran­si­tion the U.S. from a posi­tion of energy depen­dence to one of energy inde­pen­dence. If the Admin­is­tra­tion con­tin­ues on its cur­rent pol­icy path the indus­try will cut capac­ity until mar­gins are restored. It will seem like the oil indus­try is hold­ing the nation hostage to high prices while in fact they will just be act­ing log­i­cally and pre­dictably. It is naïve to believe that Big Oil will merely stand by and watch hun­dreds of bil­lions of dol­lars of invest­ment that is needed to sup­port the rest of the econ­omy get flushed down the drain before the end of its eco­nomic life and with­out com­pen­sa­tion. We need oil refin­ers, dis­trib­u­tors and retail­ers to main­tain the cur­rent infra­struc­ture for the fore­see­able future and will­ingly engi­neer a smooth tran­si­tion to a dif­fer­ent energy par­a­digm. If energy pol­icy keeps on ignor­ing this incon­ve­nient truth the shift will be very expen­sive and extremely rocky.

    The prob­lems of demand destruc­tion, stranded invest­ment and tran­si­tion eco­nom­ics were taught to me in my Energy Eco­nom­ics 101 class 29 years ago. It is just too bad the Admin­is­tra­tion offi­cials didn’t take the class.

  10. Bankers Get A Big Surprise: People Without Money Can’t Pay Back Their Debts

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    Con­sumer lenders that out­source their credit deci­sions to con­sumer credit rat­ing agen­cies aren’t learn­ing from past mis­takes. By now lenders should have noticed that blind reliance on credit scores doesn’t work. Even so, most lenders con­tinue to dis­re­gard good under­writ­ing fun­da­men­tals and then can’t fig­ure out why they con­tinue to have bad credit per­for­mance. It’s almost tragic to watch bankers repeat the same mis­takes year after year.

    As I have often writ­ten, con­sumer credit bureaus and credit scores can­not be blindly relied upon by banks to make credit deci­sions. They have sev­eral flaws including:

    • A lot of infor­ma­tion on con­sumer credit bureaus is wrong;
    • Even if the infor­ma­tion on credit bureaus was accu­rate, it presents an incom­plete pic­ture of the finan­cial health and abil­ity to pay bor­row­ers because credit bureaus tell lenders noth­ing about income, assets or fam­ily oblig­a­tions of borrowers;
    • Credit scores are cal­cu­lated in a “black box” envi­ron­ment with­out any way for con­sumers or banks to check their accu­racy; and
    • Credit scores are sup­posed to be an inde­pen­dent pre­dic­tive sta­tis­ti­cal indi­ca­tor but because they are used by employ­ers to make hir­ing deci­sions, which in turn affects the abil­ity of bor­row­ers to ser­vice their debts, credit scores have lost their sta­tis­ti­cal independence.

    A bet­ter way for banks to under­write con­sumer credit would be to actu­ally take a look at the income, assets and lia­bil­i­ties of bor­row­ers and make an inde­pen­dent assess­ment of the abililty of con­sumers to pay their obligations.

    About 10 days ago the Wall Street Jour­nal ran an arti­cle on con­sumer credit that con­tained a chart illus­trat­ing the incred­i­bly high cor­re­la­tion between annual house­hold income and mort­gage delin­quency rates. The Wall Street Jour­nal accu­rately pointed out the obvi­ous, i.e., peo­ple with low earn­ings have more trou­ble pay­ing their oblig­a­tions than peo­ple with high earn­ings. After all, low earn­ers usu­ally don’t have a lot of money and and it is money that is needed to pay back creditors.

    Set forth below is the chart from the Wall Street Journal.


    Bank man­agers that lend to con­sumers based upon credit bureau infor­ma­tion need to be replaced by share­hold­ers.  Fam­ily income is a lot bet­ter indi­ca­tor of cred­it­wor­thi­ness but takes work and effort to ver­ify.  Credit bureau infor­ma­tion pro­vides lazy bankers the cover to say that they are doing their job when they actu­ally aren’t.   

    If the bank­ing sys­tem is going to get back its mojo, bankers have got to pay atten­tion to com­mon sense basics of good under­writ­ing and try a lot harder to do a good job. Credit deci­sions based upon com­puter cal­cu­lated credit scores doesn’t count toward effort or com­mon sense. 

    After the sur­prise that bor­row­ers need income to repay their debts I won­der if bankers will relearn the mys­tery of loan to value ratios?