Common Sense in 2012: Prosperity and Charity for America

This book was written by Art Robinson, and in his words, “…for the voters of Congressional District 4 in Oregon. It explains, to the best of my ability, the issues facing us all in the 2012 elections.” A copy of the book was mailed to all subscribers of Dr. Robinson’s newsletter “Access to Energy” along with a request for donation. I donated despite the fact that I am a resident of Colorado. I believe it is important to support someone offering to serve as a citizen volunteer in Congress who promises to use common sense. His son Matthew is running against the incumbent Peter DeFazio in the Democratic primary. Dr. Robinson judges that Oregon’s District 4 will have a significantly better representative regardless of the general election outcome should Matthew win the primary.

I’ve followed developments in Oregon District 4 since Dr. Robinson and his family began his campaign for the 2010 election. I donated to that campaign in hopes of helping an honorable and ethical scientist who was willing to take the slings and arrows of a long time politician. The back cover of the book provides endorsements of Dr. Robinson from several renowned scientists. However, to illustrate my point about what he faces, the back cover ends with a quote from opponent Peter DeFazio, “Robinson is a ‘pathological nut job’.” I suggest readers consider donating to the campaign to replace DeFazio and request a copy of Dr. Robinson’s book.

The book is provides details of the Constitutional. Countless quotes by the Founders and other great thinkers explain Dr. Robinson’s positions. The erosion of liberty created by growth in government is documented with several examples. There is a graph that shows the percentage of U.S. population with jobs. Jobs began to be lost by the year 2000 “…in an economy that was gradually being strangled by Big Government.” Government has expanded relentlessly since taxing of income began in 1913. Manufacturing jobs have been hit especially hard. Reference is given to the astonishing mass of regulations that have been created that has made the U.S. increasingly unfriendly to all businesses. The federal debt “…has grown so large that service of this debt is draining away huge amounts of resources that are needed for the production of goods and services by American industry and workers.”

Chapter 1 is titled “Who is Art Robinson,” and introduces him as “…a successful scientist, businessman, and father. He lives with his family on their family farm…and works at the Oregon Institute of Science and Medicine.” He introduces his wife Laurelee and their six children. The children were all home schooled and developed a home schooling curriculum that has been used by 60,000 American children for grades 1 through 12. The family business, which also publishes children’s books, has allowed the children to put each other through college and graduate school.

Laurelee tragically died after a 24 hour illness in 1988, but the strength of the family’s belief in each other and God led to “A silent, almost eerie calm…” I challenge anyone to read about the family and their successes and not be both touched and impressed.

It also is not difficult to be the opposite of impressed with the Congressional opponent. There was a billboard prominently displayed that showed Art Robinson and the words “Energy company CEO’s shouldn’t pay taxes.” The only very thin thread that connects this statement to the truth is that Dr. Robinson had suggested solving a national energy crisis by “…forgoing taxes on the industries and workers required to solve this problem…” It is true that CEOs are energy company employees. DeFazio, in the same vein as saying “Robinson is a ‘pathological nut job’,” also said that he lived in a “survivalist compound” and his campaign was supported by “money launderers.” In fact 99.3% of Robinson’s campaign contributions came from individuals. DeFazio also said that Robinson wanted to allow drinking water to be contaminated with nuclear waste.

There are some personal stories in the book that are quite interesting. Some are sad stories. One of those is about the Robinson’s research on “metabolic profiling,” which could have had significant impact on diagnosis of disease. They learned years later that a competing scientist entered the laboratory and scrambled the labels on the samples, which of course destroyed the experiment. You can almost feel the pain as Dr. Robinson wrote that the research “…could have saved Laurelee’s life in 1988, by getting her to surgery in time, and the lives of countless other people.”

There are also some fun stories. I particularly enjoyed one about Dr. Robinson being stopped by an officer who asked to see the permit for the wide load he was hauling. The officer inquired why the map for the route wasn’t attached to the permit. He was told it had been taken apart to allow the map to be unfolded and read. When asked where the staple was that had been removed to separate the map, he was told that the staple hadn’t been saved. Dr. Robinson was allowed to proceed if he promised he would get a staple at the next station. He was stopped again, and informed, “We know all about you. We heard about you on the radio. You’re the guy without the staple.”

Another quite sad story is the targeting of the Robinson children at Oregon State University. The remarkable academic achievements are listed for each of the Robinson children. Three of the children are in graduate studies at Oregon State University, and after Dr. Robinson began his campaign against DeFazio, “…DeFazio supporters at OSU seriously interfered with their graduate work. The actions against them were, in my experience, unprecedented in American academia.”  It was difficult to misrepresent Dr. Robinson’s academic achievements when “Everywhere DeFazio looked there were Robinson young adults with doctorates…or earning doctorates at Oregon State University.” An OSU professor stepped in to assist the three students, and was blackballed. “An outpouring of public support for the students and Professor Higginbotham made the rescue of the students possible.” Dr. Robinson writes that he did not want to make this public, but was forced to do so when he learned that one of his children and the professor were in immediate danger of permanent dismissal without cause from OSU.

There are always two sides in a dispute, and I’ll be open to considering the other side when Mr. DeFazio publishes his book. In the interim, I suggest you donate to Art Robinson’s campaign and request a copy of his book.

George W. Bush and Social Security

George W. Bush was vilified for “wanting to privatize Social Security” after he proposed allowing younger workers to voluntarily elect to invest a third of their Social Security taxes in a private IRA type retirement account. However, there has been little political outcry as Barrack Obama champions the continuation of reducing personal Social Security taxes from 6.2% to 4.2%. My rudimentary math indicates that workers are being allowed to keep just under a third of the taxes they were originally paying. A friend points out that Obama’s approach has the advantage that the government isn’t involved in what happens with the money left in the paychecks.  Workers can use the money in any manner they elect, and they might even decide to put it into an IRA. However, it doesn’t do anything to repair or improve Social Security.

A brief history of Social Security was given in a posting titled “Weasels and Social Security,” and preparing that posting has me thinking more about the subject. I’m going to focus this posting on what Mr. Bush really proposed, which was a far cry from “privatizing Social Security.” The information I’ll be using is from a link that provides fact checks on several of his speeches beginning in 2000 on the subject.

Mr. Bush said in his State of the Union address on January 20, 2004,” Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account. We should make the Social Security system a source of ownership for the American people.” He continued his advocacy for changes in his acceptance speech at the Republican national convention on September 2, 2004.  “We will always keep the promise of Social Security for our older workers. With the huge Baby Boom generation approaching retirement, many of our children and grandchildren understandably worry whether Social Security will be there when they need it. We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account a nest egg you can call your own, and government can never take away.”

Mr. Bush clearly stated that his ideas were for workers under 50, and that benefits promised to older workers and people who were already retired would not be changed. However, I learned that elderly relatives were sending money to organizations promising to prevent George W. Bush from gutting Social Security with his plans “to privatize it.”

The outcry against what Mr. Bush had proposed was reinstated when the stock market tanked in 2008. There were frequent news reports that the market collapse would have been even more devastating to people if Bush’s proposal to “privatize Social Security” had been accepted. I’ve done some calculations based on a worker who has a static salary of $50,000/yr to estimate the results. That worker has Social Security “contributions” of $6200/yr. Half would be taken from the paycheck and the employer is required to match it. The Bush proposal would have allowed the worker to voluntarily invest one third of the total, or $2066.67/ year in a private account. The worker could also choose to leave all the money in Social Security.

Everyone who has investments in the stock market knows that 2008 was a scary year. The hypothetical young worker who elected to open the private retirement account would have been just as spooked. There would have been about $8300 added to the account if the account had been opened at the beginning of 2005. The value would have dropped to about $5700 at the end of 2008 if it had been invested in a Standard and Poors 500 index fund. The good news is that more shares are purchased per dollar invested when the market drops if you have the guts to keep buying when the market is plummeting. Continuing to invest the $172/month in the same S&P 500 fund would have resulted in your account being worth about $16,400 (including a net dividend of about 2 % after expenses) versus the $14,469 put into the account by the end of 2011.

What would the account have in it at the end of a career? Who knows? The stock market has historically been a good place to invest. However, as all those financial documents say, “past performance is not an indication of future performance.” Mr. Bush’s proposal was that people could invest the money according to their willingness to take risk. People could have put the money into insured CDs, and those could have very high yields if surging inflation happens a few years as many predict.

I’ve provided a fun link to a calculator to allow a reader to play with various investment scenarios. I entered data for a person opening a private account beginning in 2005 that is worth the $16,400 estimated above. I kept salary static at $50,000/yr for the worker who retires at age 62. The account would be worth $58,000 for a person who began the investments at age 40 and $94,000 for someone beginning at age 30 using an annual rate of return of 2%. The account would be worth about $81,000 for a forty year old and $154,000 for a thirty year old worker with a rate of return of 5%.

I see at least two important lessons. It is important for people to begin preparing for retirement as early as possible. That is especially true for young people who can’t depend on Social Security unless our politicians suddenly develop the courage to improve it.   The other lesson is to be successful in politics you must dress up your policies and criticize others with selective language. For example, you can explain your idea to let people keep about a third of their Social Security contributions is a tax break for the middle class while Bush’s idea about allowing people to voluntarily put a third of the money in a private account is “privatizing Social Security.”

Unintended Consequences of Financial Regulations

I’ve expressed skepticism about the move by regulators to take advantage of the 2008 financial crisis to impose more control on business by government in previous postings on this link. The negative impacts from the massive Dodd-Frank law continue to mount. I don’t know how to measure the impact from businesses being cautious about their plans until the hundreds of new regulations are finally developed and implemented. However, there are some negative impacts being experienced by small businesses and people employed by the banking industry.

David Migoya wrote an article in the Denver Post discussing how the limits on bank card fees are adding costs to small businesses that are or will be passed to consumers. Dodd-Frank decided that the previous charges to retailers of 42 cents per swipe of a debit card was excessive, and capped the charges at 22 cents per swipe. They had previously charged as low as 2 cents for a dollar transaction and that escalated on a graduated scale up to the maximum of 42 cents. Debit card companies began charging 22 cents for every swipe after Dodd-Frank passed. According to Mr. Migoya’s article a popular site in a food court in downtown Denver was losing 3.8 % of revenue to the new fees, and the owners were worried that they would have to raise prices to remain profitable. Businesses that “…primarily run charges of less than $10 are being slammed.” Vending businesses are faced with raising prices to protect already thin profit margins. I expect that Mr. Dodd and Mr. Frank would explain that it was worth it to try and prevent banks from making a profit.

A report by the Financial Services Committee titled “One Year Later: The Consequences of the Dodd-Frank Act” by Chairman Spencer Bachus and Vice-Chairman Jeb Hensnarling does not report that the act had the intended consequences of improving the economy. The hundreds of new Federal Regulations creating massive bureaucracies when the economy is fragile had the opposite effect. The regulations did not address “too big to fail,” but instead provided financial support to large financial companies while businesses “…too small to save are left to fend for themselves.” The Federal Reserve Board’s Chairman acknowledged “…that the government is not capable of calculating the effect of the cumulative regulatory burden imposed over the past year…on the strength of the U. S. economy.”

It is really quite simple. The government decided that there were 387 new sets of rules needed. Most of the new bureaucracies haven’t had high level positions filled to impose the regulations, few if any deadlines to impose regulations have been met, and businesses that could be the engine to economic growth are waiting to see what the government is going to do.

Let me ask a question that makes the question personal. What would you do if you were contemplating a new business if you didn’t know what the government was going to require? What would you do if you were an existing business that will undoubtedly be impacted by whatever the new regulations might be? Would you hire people thinking the new regulations will be “business friendly?” I think the answer is “Not likely.”

I saw a report on CNBC about the banking industry, and there have been about 40,000 jobs cut from large banks, I’m guessing the people who lost their jobs were not those who received huge bonuses for driving the businesses into huge losses during the 2008 economic crisis. They were probably “middle class Americans” who had nothing to do with the risky investments that caused the crisis. Of course the Dodd-Frank law didn’t do anything to help those people since they were associated with “big banks.”

The quest of the government to protect “average Americans” has harmed thousands of “average Americans.” Perhaps someday we will learn that more government doesn’t help. Perhaps not.

Commercial Mortgage Loan Turmoil

I mentioned in a June 29, 2011 posting titled Financial Crisis–Part III that one component of the Dodd-Frank law was to create a new regulatory structure for credit rating agencies.  Erroneous credit ratings that were given to mortgage-backed securities resulted in billions of dollars of losses, and were one cause of the financial crisis.  The SEC has not fully staffed the new office mandated by the Dodd-Frank law that is supposed to address this issue, and the provision that would hold credit rating agencies legally liable for their ratings was reported to have been tabled. Of course the government is now angry at Standard & Poors (S & P) for downgrading U.S. debt from AAA. There was a recent event involving S & P that was given very little media attention, but shocked the commercial mortgage-backed security (CMBS) world into disarray. Goldman Sachs and Citigroup pulled a $1.48 billion dollar CMBS offering hours away from settling the issue after S&P announced they would not be able to deliver final ratings on the security. A Wall Street Journal article by Al Yoon quoted a man who has worked in real estate finance since 1995 as saying “I’ve never seen this happen, to the extent where a deal was so far along, ever.”

The process of issuing a CMBS involves issuers working with the rating agencies to determine final pricing based on a preliminary rating, which has been developed after months of diligence. As was the custom, Goldman Sachs and Citigroup priced the recent issue based on the preliminary rating. No rating agency has previously failed to issue the rating when the deal is about to close, but that string has now been broken. S&P muddied the issue even more by saying “…it won’t assign new ratings to transactions based on its current criteria” (whatever that might mean). Other deals had to be recently “sweetened” to reassure investors.

What does this mean, and why should we care? The drama of watching the President and Congress thrash around with how to come up with a way of keeping the government funded followed by a stock market swoon has consumed nearly all of the news reporting. The possibility that the commercial real estate mortgage market is in limbo has been hidden behind the screen of bureaucratic ineptness of our elected officials trying to figure out how to fund overspending by the government. I fear this mostly unnoticed event instigated by what must be a nervous S&P could further cripple an already fragile economy. For those who haven’t been watching, the real estate market hasn’t been doing very well, and killing the commercial market by causing funding to dry up will be harmful. I write that believing that I have mastered the art of understatement. One analyst was quoted as saying, “This is a debacle of epic proportions.”

Financial Crisis–Part III

Parts one and two gave a historical perspective about government actions that paved the way for the crises that brought the economic system to the brink of collapse in 2008. In the spirit of “never let a crisis go to waste,” Congress reacted by passing the Dodd-Frank law after accusations such as, “See what happens when businesses aren’t adequately regulated.” The Dodd-Frank law requires 387 rules to be developed by 20 different regulatory agencies. The regulators have finalized 24 rules and have missed deadlines on 28. An article in ProPublica by Jesse Eisinger and Jake Bernstein details what the law was intended to accomplish and the problems that are being faced in developing the regulations. A few things the law was intended to accomplish have been at least partially put in place. A Consumer Financial Protection Bureau has been created, although the Obama administration hasn’t appoint a person to head the agency.  Outrage over executives being rewarded for taking risks that pushed their companies near or to failure resulted in rules that give shareholders a say on executive pay. The larger problem is in the 363 rules that remain to be developed and imposed.

Baring “proprietary trading” was central to the passage of the Dodd-Frank law. Banks leveraged heavily to speculate in bundled packages of subprime mortgage-backed securities and derivatives. The collapse of the value of those securities was central to the crisis. However, the rulemaking process for regulating derivatives has generated wide opposition. The Treasury Department has proposed some to be exempted from the regulations and the Securities and Exchange Commission (SEC) has issued an initial rule that will allow derivative trades under certain conditions. The rulemaking process has been so flawed that it “…has sparked a barrage of opposition, even from previously supportive legislators.”

Some believe that erroneous credit ratings given to mortgage-backed securities by the rating agencies was the root cause of the crisis, and losses from investments that had been given high ratings resulted in billions of dollars in losses. The Dodd-Frank law created a new regulatory structure for credit rating agencies, but the SEC has not fully staffed the new office. They also have indefinitely tabled a provision that holds the credit rating agencies legally liable for their ratings.

Regulators are dealing with complex issues while facing severe budget constraints, and many are saying they may not be able to carry out some key provisions. Wall Street is lobbying to blunt provisions it failed to defeat in the legislature. “Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.”

It is tempting to hope that the budget problems of the regulators and the intensity of lobbying will succeed at blunting the effects of the law, since there is a growing chorus of warnings that the law could damage American competitiveness. I would argue with the phrase “could damage.” I would replace it with “has damaged.” To fully appreciate how effective the government is, I only need to quote Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there will be a shortage of sand.”

The Financial Crisis–Part II

Eamon R. Moran has written a comprehensive and well-referenced, 97-page article for the University of North Carolina School of Law’s North Carolina Banking Institute Journal about the causes of the crisis.  In Part I of this blog I focused on the role of the Community Reinvestment Act (CRA) of 1977.  This entry will focus on other regulations and acts that contributed to the mortgage meltdown.

Congress enacted many measures between 1980 and 2003 to make home ownership more attainable for moderate and low income borrowers.  Some of those measures included:

  • An act that preempted state ceilings on home mortgage loans and encouraged subprime loans
  • Another act that allowed adjustable rate mortgages, the loan of choice for subprime loans
  • Tax law was revised to made interest on home loans the only consumer loan that is tax deductible
  • HUD changed regulations so that borrowers no longer had to prove their incomes would remain stable
  • CRA was strengthened to impose fines and business penalties on banks that refused home loans to low income borrowers
  • Tax law was revised again to exempt most home sales from capital gains taxes

The outcome of these actions was that a borrower in California with an annual income of $14,000 was approved for a $720,000 home loan.  An investor in Minneapolis borrowed $2.4 million to buy ten properties, and all would go into foreclosure.  Financial institutions began bundling loans into complex packages, the rating agencies gave the packages AAA ratings, and the packages were sold around the world.  Millions of other examples such as these led to the eventual collapse of home values and created the crisis.

Congress leapt into action and passed a massive financial regulation while studiously ignoring the history of government’s role in creating the crisis.  The new laws will undoubtedly impede an economic recovery, and Congress will be given the opportunity to pass even more laws.