Tag: money

Federalist No. 44

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Although it is not the central point of Federalist No. 44, I found it very interesting to read the fervent distrust of paper money that the defenders of the Constitution had based on their experience – especially considering our present circumstances of economic uncertainty that are largely due to the instability of paper currency (which we manipulate, and experience steady inflation and erratic deflation).

I also found another example of an assumption of our founders which has since been rendered false – this one relates to the checks and balances to be found between state and federal authority.

as every such act of the {federal government} (to violate their Constitutional authority) will be an invasion of the rights of the {state governments}, these will be ever ready to mark the innovation, to sound the alarm to the people, and to exert their local influence in effecting a change of federal representatives. There being no such intermediate body between the State legislatures and the people interested in watching the conduct of the former, violations of the State constitutions are more likely to remain unnoticed and unredressed.

If our states today were truly guarding their constitutional autrity with the jealousy that the founders envisioned I doubt that we the federal behemoth that we are carrying around today which, due to its sheer size, has convinced a large portion of our society that it is capable of solving all our perceived woes. The unfortunate truth is that our states today hardly even whimper at any violation of Constitutional authority by the federal government. There are rare exceptions – such as the backlash against the Real ID Act – but those cases are often nothing more than a plea for full funding when they are asked to implement a federal program that exceeds the Constitutional authority of the government. The states no longer guard their authority – they simply guard their balance sheets.

At the same time, the statement that there are no intermediaries watching the state governments and calling the people to action reamins as true as it was presented in 1788. One might expect that job to be handled by an independent and free press, but the press has done no better at that task than the state governments have done on their level.

Tags documents, federalist, history, media, money, unconstitutional

culture

An Education on Social Class

Post author By David
Post date November 20, 2008
2 Comments on An Education on Social Class

I read a chapter today that was intent on destroying the myth of American egalitarianism and our "classless" social structure. I almost laugh at the idea of a society without classes based on the amount of time we spend talking about the middle class (and how to get in or out of it). I also believe that nobody who has lived even one decade of their adult life in the United States can still believe the myth of American egalitarianism. If we have a meritocracy (as we often claim) then it is one where the greatest merit is being born into a family that is well off economically.

One of the problems I have with all discussions of social classes and social inequality is that they are all based on assumptions about the desirability of eliminating social class and a definition of class that is based primarily on economic factors. I understand that economic factors are used to define class because money is used to enforce social position and because class structures tend to coalesce around different strata of economic situation. While that makes sense, my problem is that those who discuss it imply that redistributing the wealth would break the class structure – and that it would be a positive change.

I believe that there is nothing wrong with having different social classes so long as those classes are not strictly enforced, in other words I don’t view it as a problem so long as people are allowed to change classes. In other words, a system that distinguishes classes but treats people of different classes with equal respect and equal rights is perfectly acceptable to me. (This does not mean that I will argue that our society embodies such a system.)

I also believe that inequality of wealth and income is not inherently undesirable. It again comes back to a question of whether people with differing levels of wealth or income are treated equitably. If the inequalities are achieved through dishonesty or manipulation that indicates a problem. This is true whether we are talking about individual wealth or whether we are talking about corporate market-share (thus the reason to be wary of monopolies).

I think the greatest thing we can do with regard to education on the issue of social classes is to tell the truth – that classes exist – and to work to ensure that we eliminate preferential treatment of one class over another (that goes for any kind of class, whether economic or otherwise) and manipulation intended to dishonestly profit.

If we would accept the existence of classes and then work to remove those negative elements that generally tag along with the class system people could feel empowered and we could have a true meritocracy where people advanced among the classes based on their personal strengths and fell based on theri own weaknesses.

Tags Education, money, thoughts

National

Support But Don’t Trust

I am a strong supporter of our government. I obey the laws (even little ones like speed limits and seat belt laws) and pay my taxes without complaint and without seeking any tricks to minimize those taxes. Supporting the government, however, does not mean that I trust the government when they ask for expanded powers. I oppose the efforts of courts, congress, or the President to increase their powers in any area of society. In the financial sector that lack of trust has proven to be a sound policy recently. As September turned to October I wrote six different times opposing the bailout. All over the news and in many blogs people were saying that we should hold our noses and accept that plan because it was necessary. Now I am finding it ironic that some those same people who support the government managing more of our lives are unhappy as they see the mismanagement of the "necessary" bailout funds.

It seems that Congress is the special group in the world that can convince us to let them have more of our money based on how poorly they use it. Perot Charts reports that Theresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York testified testified in support of a plan that would "modify" 401K’s. Components of the plan include the following:

- All workers would receive a $600 annual inflation-adjusted subsidy from the U.S, government but would be required to invest 5 percent of their pay into a guaranteed retirement account which would be invested in government bonds that would accrue 3 percent per year.
- The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

This is extremely frightening considering that the 5% that you would be required to "invest" (at only 3% return) on a $25,000 salary is $1250 For that you would receive a $600 subsidy. This might appear helpful to those who make very little money, but the benefits of their savings are insignificant compared to their needs at retirement and come at a very high price for everyone who just lost their tax savings that encourage them to save in a 401K, not to mention the disincentive that this would be to business who have provided tax free matching for 401K accounts which do much better than 3% returns 90% of the time. Overall savings in the country would decline under this plan.

Is it any wonder that my support of our government does not include my trust. We should all support our government no matter who is in power, but support means that we watch them instead of trusting them. It means that we hold our leaders accountable for what they do. For me, it means that every chance I get I will encourage them to give power back to the people and the states. I like that 10th amendment – too bad it gets worse treatment than the other 26.

Tags amendments, connections, Constitution, economics, government, media, money, New York Times

General

Real Capitalists

My reaction to Obi wan’s claim that "pro-capitalist conservatives have pushed for governmental intervention into our capital markets" was that nobody who supported the bailout has any claim to being a capitalist. I find that my position is much more clearly stated by Judy Shelton in the Wall Street Journal:

Honest capitalism requires the following:

Free-market clarity – Consumers must be able to properly judge the inherent value of goods brought to the marketplace if markets are to function properly;

Monetary integrity – Monetary-policy decisions that "stimulate" the economy by issuing too many claims to real production, or "constrict" the economy by reducing the amount of available purchasing power or capital investment, utterly confound the notion of stable money.

Financial validity – What turns the reputable practice of granting credits to deserving borrowers into a high-stakes casino game where the biggest stacks of chips are held by speculators working for the world’s largest banks and investment houses? . . . Exotic financial derivatives that gamble on the anomalies of the global economy — currency movements, interest-rate disparities, governance incongruities — mock the very concept of "investment" to generate future higher returns from production.

Regulatory responsibility – Rule of law is a core requirement for civil society; without it, anarchy reigns. Government regulation does not create wealth, but it is a necessary condition to provide the stable and predictable environment that permits buyers and sellers to carry out economic and financial transactions with confidence.

Entrepreneurial opportunity – Much of the resentment felt by citizens toward the massive investment companies who peddled bad government paper, and the craven politicians who promoted the practice, stems from the perception that capitalism is rigged toward the most powerful. When the owner of a small retail outlet or medium-sized service firm gets into financial trouble — who steps in to help? . . . Equal access to credit is sacrificed to the overwhelming appetite of big business — especially when government skews the terms in favor of its friends.

(emphasis added)

This is what I was trying to say in Financial Foundations Exposed and which makes me reject the notion that capitalists pushed for intervention in our markets. I admit that many of those pushing for that intervention claim to be capitalists, but some of them make the claim as a lie and others make the claim in ignorance. No real capitalist could back the bailout because real capitalists recognize that there is value to be had in failure.

Tags connections, economics, government, money, reactions, Wall Street Journal

National

Government Gray Area

When the House voted down the bailout on Monday I was very surprised by the result, but I was not particularly surprised to hear that of the Representatives facing close re-elections, only two voted in favor of the bailout. This looks like a blatant reminder that the primary concern of elected officials tends to be keeping their jobs rather than showing leadership. I say that while acknowledging that I feel strongly that rejecting the bailout was the right choice. The urgency with which the bailout was pushed makes me immediately wary. Government should never work that fast on anything of importance – except in cases of our nation being attacked. In other words, the members of the house did the right thing, but it appears that they did it, in most cases, for the wrong reason.

Today the Senate is set to vote on the bailout bill – despite the fact that they have no Constitutional authority to appropriate money except in concurrence with the House. Unlike the House, where every member is facing re-election, 2/3 of our Senators are insulated from an immediate election. Because of this I expect that the bailout bill will pass in the Senate as Senators feel more free to lead with re-election not being an immediate issue for most of them. I have not been able to read a draft of the Senate version of the bailout, but assuming that they have not written a new bill from scratch I fully expect that they will do the wrong thing for the right reasons.

I’m really not sure which is worse, but our options in Congress (when we have options) seem to be that our elected officials do the right thing for the wrong reasons, or the wrong thing for the right reasons.

UPDATE 11:00am: There is no way that any Senator will have read the full text of this bill – it is 451 pages long. I have no idea why it is so long because as of the parts I have read nothing of significance has changed. In fact, the page numbers for the entire first section of the bill (which contains the bulk of the substance) appear to be unchanged. None of the issues I raised with the House bill have been addressed in any way.

Tags bailout, change congress, government, money

culture

Something for Nothing

As I have been thinking and reading about the credit crisis my mind has been chewing on the idea that there are two very different kinds of investing. One is the kind of investing where you put in an initial outlay of resources and follow that with efforts to improve the investment (whether that is a company, an idea, or a building) so that the final product is greater than the sum invested and thus turns a profit. Some examples are finding a company in need of cash with a good idea, a business plan, and the support of other qualified investors and giving them cash to help realize their plans and turn a profit. Another example is buying a distressed property and fixing it up. Perhaps you are purchasing a house for $150,000 in an area where most houses are going for $225,000. You put in an extra $70,000 in materials and time to get the house in prime shape and then sell it for $240,000 – realizing $20,000 profit for your efforts.

The second kind of investing is the shortcut based on the mentality of seeking something for nothing – it’s called speculating. Although it may look similar to traditional investing it is really just a serious form of gambling. An example of this would be buying into a company that is cutting corners to turn a profit and operating with a loose regard for the rules of their business. They put on a good show with richly rewarded executives and a lot of talk, but there is no substance to their ideas if you do a little digging. Another example would be "flipping" a house. You go in and buy a house with an interest-only mortgage where the owner is in a hurry to sell and then you turn around and sell the house at a $100,000 profit within weeks without putting in any work. It also applies to those who purchase a large, showy home (compared to what their income should support) with an adjustable rate mortgage on the assumption that the value of the home will rise in time to refinance the home later using the "equity" gained by sitting in the home for a year – worse is when they intend not only to refinance, but to refinance and get cash out to support a lifestyle that they cannot support on their regular income.

A financial crisis, at least for individual cases, may result from either approach to investing – but it is much more likely (and I believe it is generally more damaging) when the crisis results from speculating. I am convinced that every time we experience a bubble in the economy – whether it’s a tech bubble, a housing bubble, or any thing else – the bubble is a result of speculation, even though there is legitimate investing taking place as well. In our current credit crunch we will not be able completely sort out those who were burned by speculating and those who were legitimately investing (the same is true anytime a bubble bursts) so we must either rescue some or all of those who were speculating, or else we will have to accept in advance that many people who did nothing wrong will be paying the price for the fallout from the rampant speculation that caused the crisis.

Tags bailout, economics, money

National

Amateur vs Professional

The financial amateurs in Congress have given us the 110 page text of their bailout plan which they will probably vote on today. It’s pretty much like the 102 page draft I wrote about on Saturday. They added the option to insure troubled assets in addition to the option to buy such assets. They also settled on the Graduated Authority to Purchase version rather than a straight-up $700B gift. I’m not sure if this is new, but there is also an option to remove the mark-to-market rules in the latest version.

The financial professionals such as Ross Perot have outlined a much better plan at perotcharts.com. Their plan in the immediate term calls for:

Modification or removal of mark-to-market
A 120 moratorium on foreclosures and dividend payments by banks
Higher national standards for capital bases at banks with the Treasury able to buy equity in those banks who cannot raise equity to meet the standard
Raising the FDIC guarantee from $100,000 to $250,000
Using any profits from equity that the government does buy to strengthen Social Security
An independent oversight board for the plan
Criminal investigations into the causes of the crisis

Later they would fix the Glass-Stegall Act, amend bankruptcy regulations, and give HUD/Fannie Mae/Freddie Mac the authority to work with individual homeowners facing foreclosure.

It’s too bad our amateur decision makers are so busy listening to the vested-interests rather than the independent professionals.

Tags bailout, economics, fiscal restraint, money

National

A First Glance at the Bailout Bill

Post author By David
Post date September 27, 2008
4 Comments on A First Glance at the Bailout Bill

I don’t claim to have read the full 102 page text of the bailout draft proposal yet, but I wanted to share my first reactions after jumping around to some of the sections that caught my interest.

Section 110 – Executive compensation (p. 29)

I like the idea of controls on executive compensation for participating companies, but the regulations here are vague and toothless. For example, the bill prohibits "inappropriate or excessive severance compensation." (110 3b) Considering how much the executives of large companies make, it should specify that there be zero compensation for severance.

Section 114 – Graduated Authorization to Purchase (P. 38)

This section was a pleasant surprise. It appears that it is not settled, but I like the idea of having a tiered approach to how much the Treasury is authorized to spend. The levels here are $250B initially, $350B upon notice from the treasury, and $700B if Congress does not oppose within 15 days the proposal of the treasury for that level of authority. Personally I think there should be an intermediate level of $500B where the treasury must write a proposal and the Congress has 8 days to decline before it takes effect.

Does anyone want to make bets on how long it takes the Treasury to bump its authority from $250B to $350B?

Section 119 – Termination of Authority (p. 55)

This might be my favorite section. I was pleasantly surprised that the authority was only granted until December 31, 2009 – with the option to petition for an extension by describing how extended authority will benefit the taxpayers. Even with a petition the authority is specified to end only two years from the day the bill is originally signed. Of course I won’t hold my breath that it will die in two years or less. I will believe it when it happens.

Section 123 – Minimizing Foreclosures (p. 65)

What I saw of this section suggested an approach that would not cost taxpayers anything – that’s the right aproach. The efforts to minimize foreclosures are directed at restructuring loans by extending their terms where appropriate.

One More Wish

I would like to see a provision, on the outside chance that this program actually generates a profit, that any profit realized by the treasury through this program will be used 100% to pay down the national debt – this should not be used as a windfall by Congress to fund some pet projects.

Tags bailout, money, reactions

National

Economics 101 (Bush Edition)

Post author By David
Post date September 25, 2008
6 Comments on Economics 101 (Bush Edition)

Wasn’t it so nice for our president to give the country a lesson in economics. He worked hard to reinforce the image of Washington knows best. Unfortunately his lesson left out a few details that are less than flattering for Washington. Let’s review the text of his speech. I’ll skip all the real fluff and focus on those parts of the speech that need correction.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time.

It’s nice to cite the "large influx of money" but the real problem was "{artificially} low interest rates" that were being managed by the Federal Reserve Board. These are what allowed for people to get credit too easily to buy cars and houses that they often had no business buying – certainly not at the inflated prices that tend to follow easy credit. And lets not kid ourselves, loans for college tuition are an inconsequential fraction of this problem but citing them makes it harder to argue against all that easy credit in the first place.

Easy credit, combined with the faulty brainless assumption that home values would continue to rise, led to excesses and bad decisions. (corrections in italics)

The following statement is almost entirely true and when we insert the one final bit of truth it is very damning to the idea of government intervention.

Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk. (emphasis added)

The one bit of untruth there was the implication that people were wrong to believe that Fannie and Freddie were guaranteed by the government. When push came to shove, the government stepped in and guaranteed both entities. Even if it had not, it was the perception of such a guarantee that allowed those companies to "put our financial system at risk."

The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down.

If the market is allowed to correct itself those sectors would shut down and restart, like a computer reboot. Though the process would be painful in the short term, the problems would be corrected much faster than if we insist on picking our way down the face of the cliff.

Perhaps we should take note of the fact that our government has been actively assisting the market for 7 years allowing the housing market to artificially expand our economy during a time when we should have allowed for a market correction following the Tech bubble and the shock of 9/11. Now the problem is worse than it was which gives us more excuse to pursue the same course with more drastic measures.

Without $700 Billion worth of intervention, Bush predicts:

Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.

In a free market individuals and businesses would be learning to deal with the difficulties of tighter credit by living within their means, but "We must not let that happen." Because our market has been manipulated with artificially low interest rates and other such "minor" interventions the true value of a new car or a college education has become distorted. I note that Bush did not list buying a house as something that would be more difficult, I’m sure that’s because reckless home buying on easy credit is a visible part of the problem.

Lest we forget our recent history, while we have not had a serious recession (which would generally last less than 12 months) our last 84 months (at least) have been filled with news of job losses and anemic economic growth. We credited the rise of home prices with what little growth we saw and blamed the war, outsourcing, and illegal immigrants in turn for the lack of real growth.

Now we are seeing the one positive thing we saw as the primary cause of our current predicament – and yet we fail to realize that the reason for our unnatural 84 month see-saw is government intervention in the markets. Ultimately we have experienced a long and painful open wound which is now infected which was caused by our attempts to avoid the surgery of a natural market correction.

The president paints a rosy picture of how the proposed intervention would function, but the fact is that the proposal so far lacks any structure to guarantee anything like the picture we are being sold.

I liked the reference to the FDIC:

And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change.

In order to avoid some panic, let’s remind ourselves that the above statement is true, those accounts which are based on actual cash value are safe so far, and safely insured by the government already. With that safety net, we should take our chances with Wall Street and let the government bail out the savings of those who lose money if their local banks ever fail.

Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has once made this country the best place in the world to invest and do business. And it gives gave our economy the flexibility and resilience to absorb shocks, adjust, and bounce back. (corrections in italics)

Since then we have decided that we want to unleash the entrepreneurial spirit without having to absorb shocks and adjust. Good luck with that plan.

Tags bailout, Bush, economics, fiscal restraint, money

culture

Curbing Innovation

When talking about a $700 Billion intervention it only makes sense that taxpayers and members of Congress would want that money to go where it’s needed rather than to propping up salaries of $50 Million/year to executives of failing companies.

But Wall Street, its lobbyists and trade groups are waging a feverish lobbying campaign to try to fight compensation curbs. Pay restrictions, they say, would sap incentives to hard work and innovation, and hurt the financial sector and the American economy. (emphasis mine)

It seems to me that incentives to work hard and be innovative got us into this mess – I think we would want to sap those incentives for the time being.

Tags bailout, government, money, New York Times