Although the details have not been released as of the time of this post, here's an article on President Obama's new plan to address the financial "irregularities" that exist in the United States system: http://www.msnbc.msn.com/id/31403945/ns/business-stocks_and_economy.
There are two main problems to this plan: (1) expanding the power of the Federal Reserve; and (2) enacting a new agency divests the American people of the power to enact strong rules.
It needs to be said: the reason why we are where we are is due to the inordinate amount of influence that the Federal Reserve system has on the lending industry and on the federal government. The Fed is not an agency, and it is not quite private. It is, in the words of Wikipedia, an "independent government institution with private elements". It has its own Board of Governors, largely made up of the most powerful bankers in the country, but it has the power to set regulations and laws that affect the entire lending industry with the muscle of the federal government. Despite the fact that Congress technically has power over the institution, the Federal Reserve is one of those unique government bodies that lacks the accountability of elected officials (because the governors are appointed), yet can wield the sort of power that can cripple the entire country. They are like the Supreme Court, without the robes (and without lifetime terms).
Greenspan believed in the using monetary policy to keep the economy growing. And then, he recanted. Volcker enacted policies that drove inflation down, but also crippled the American economy for a couple of years. An entity such as the Federal Reserve does not need more power: it needs less power. Further, since the governors are bankers, do we really want the people who drove the Titanic into an iceberg to plot the course home?
Setting up another government agency expands on government unnecessarily. There are plenty of government agencies that can oversee the lending industry that already exist: the Department of Commerce, the Federal Trade Commission, the Department of the Treasury, etc. What the proposals fail to address are the gaps in the federal statutes that permit the sort of exploitation that led to the financial crisis. Further, I am concerned that vesting in an agency the sort of authority normally reserved for Congress -- in this case, the setting of reasonable regulations to govern the creation of lending instruments -- usurps the traditional role of the people to determine what is acceptable law. Agencies are headed by appointees, which are subject to the vagaries of politics, something which statutes usually stand up to.
Color me disappointed.
Wednesday, June 17, 2009
The White House tackles financial regulation
This entry is based on the following article: http://www.dispatchpolitics.com/live/content/national_world/stories/2009/06/17/arate.html?adsec=politics&sid=101.
I recognize that Rep. John Boehner (R - Ohio) is the minority leader, and it's his job to present an opposition to the proposals by the majority party. Just for a moment, however, let's step back and look at the history of finance in this country, since the Carter years.
When stagflation hit at the advent of Ford's presidency, industry in the United States started down a novel economic path: the path of inequity. Until the '70's, American workers enjoyed real wages that reflected productivity. When productivity went up, real wages went up. This caused some mild inflation in the country, but that was acceptable because wages rose slightly above inflation. But Friedman, and those that followed his monetary economic policy, argued that inflation would soon kill the growth of the American industrial sector, and moved to have the Federal Reserve take a more active role in shaping the direction of the economy. Thus, we have problem number one: the interference of the Federal Reserve into the economic affairs of the United States.
When Carter came into power, he had to deal with a stagnating economy. By this time, unions had become partners to the corporations; employees had less power relative to their employers, and the trend was not going to change. It's no surprise, then, that we see real wages stagnate and hold, while productivity continued to rise. This created an equity gap, where the workers made the same as they always did, but the managers began to make more. So, we have problem number two: the rising equity gap between workers and managers.
Carter lost to Reagan, and Reagan declared war on regulation. He cut taxes enormously, but failed to realize that the Fed had planned to tackle the inflation problem by raising interest rates to record levels. With high interest rates, there were few people who could borrow, and that was a problem. But the banks had a plan, and lobbied for it. If they were allowed to offer a wide-range of "financial products" (a euphemism for lending contracts or schemes), then they would be able to offer loans below prime (sub-prime) or other kinds of lending instruments that would both protect the bank against risk, and provide loans to the average person. To do this, though, they would need to be rid of the patchwork of state regulations that prevented such loans. So, we get problem number three: the DIDMCA, which effectively removed national banks from the control of the myriad states through the Supremacy Clause -- control would now come solely from the federal level.
Then, it was off to the races. Congress approved of other measures intended to increase the level of high-principle lending, including tax deductions for mortgage interest (which even Reagan could not stop), sub-prime lending instruments, adjustible-rate mortgages, and so forth. Congress also loosened up regulatory enforcement by cutting funding to those efforts. Even after the Savings & Loan scandal of the late 80's, Congress still did not learn its lesson. So, we get problem number four: the introduction of non-traditional mortgage instruments, and the failure of Congress to learn from its mistakes.
And, of course, that was not the end of things. The Gramm-Bliley-Leach Act of 1998 repealed one of the most important prohibitions of the 1933 Glass-Steagall Act -- the prohibition of commercial and investment banks merging together. This created a number of "conflicts of interests" between the agents and actors in each sector. Commercial banks, who lent the money, started to pitch their clients -- ordinary folks and businesses -- to invest in the banks they were affiliated with; the investment wings, in turn, made the commercial wings look like geniuses. Various disclosures that investment banks had to make to the SEC and other regulatory bodies were no longer necessary because they were now commercial banks, and vice versa. Shading blurred what was going on, to the point where the average person only knew that they were making more "money" by investing. Thus, the beginning of the investing binge, the selling out of pensions for 401(k)s, and the fly-by-night trading outfits. So, we have problem number five: an entanglement of entities which should have competing interests and loyalties, but which may shield themselves from scrutiny based on the lack of regulation.
And we haven't even talked about how the lack of oversight makes it simple to commit the sort of fraud that can crush the savings of the average, working American.
The people of Ohio have agreed to let their leaders set interest rates on loaning instruments. In November of 2008, the voters of Ohio, by referendum, ratified the Ohio Short-Term Loan Act, which capped the ability of payday lenders to charge more than 28% interest per annum. Ohio suffers from one of the highest foreclosure rates in the nation (1.797% of households, which is just above half of Nevada's mind-boggling 3.376%), which is at least partially due to the proliferation of alternative "financial products" in the lending market. Despite these facts, Rep. Boehner appears to oppose the ability for government to set reasonable rates for loans, or to regulate the kinds of "financial products" that are available to the average American.
I don't think Rep. Boehner is representing the interests of Ohioans very well at the moment. Being wary of excessive intrusion into the finance industry may be warranted, but certain things need to change, namely the five problems I've outlined above.
I recognize that Rep. John Boehner (R - Ohio) is the minority leader, and it's his job to present an opposition to the proposals by the majority party. Just for a moment, however, let's step back and look at the history of finance in this country, since the Carter years.
When stagflation hit at the advent of Ford's presidency, industry in the United States started down a novel economic path: the path of inequity. Until the '70's, American workers enjoyed real wages that reflected productivity. When productivity went up, real wages went up. This caused some mild inflation in the country, but that was acceptable because wages rose slightly above inflation. But Friedman, and those that followed his monetary economic policy, argued that inflation would soon kill the growth of the American industrial sector, and moved to have the Federal Reserve take a more active role in shaping the direction of the economy. Thus, we have problem number one: the interference of the Federal Reserve into the economic affairs of the United States.
When Carter came into power, he had to deal with a stagnating economy. By this time, unions had become partners to the corporations; employees had less power relative to their employers, and the trend was not going to change. It's no surprise, then, that we see real wages stagnate and hold, while productivity continued to rise. This created an equity gap, where the workers made the same as they always did, but the managers began to make more. So, we have problem number two: the rising equity gap between workers and managers.
Carter lost to Reagan, and Reagan declared war on regulation. He cut taxes enormously, but failed to realize that the Fed had planned to tackle the inflation problem by raising interest rates to record levels. With high interest rates, there were few people who could borrow, and that was a problem. But the banks had a plan, and lobbied for it. If they were allowed to offer a wide-range of "financial products" (a euphemism for lending contracts or schemes), then they would be able to offer loans below prime (sub-prime) or other kinds of lending instruments that would both protect the bank against risk, and provide loans to the average person. To do this, though, they would need to be rid of the patchwork of state regulations that prevented such loans. So, we get problem number three: the DIDMCA, which effectively removed national banks from the control of the myriad states through the Supremacy Clause -- control would now come solely from the federal level.
Then, it was off to the races. Congress approved of other measures intended to increase the level of high-principle lending, including tax deductions for mortgage interest (which even Reagan could not stop), sub-prime lending instruments, adjustible-rate mortgages, and so forth. Congress also loosened up regulatory enforcement by cutting funding to those efforts. Even after the Savings & Loan scandal of the late 80's, Congress still did not learn its lesson. So, we get problem number four: the introduction of non-traditional mortgage instruments, and the failure of Congress to learn from its mistakes.
And, of course, that was not the end of things. The Gramm-Bliley-Leach Act of 1998 repealed one of the most important prohibitions of the 1933 Glass-Steagall Act -- the prohibition of commercial and investment banks merging together. This created a number of "conflicts of interests" between the agents and actors in each sector. Commercial banks, who lent the money, started to pitch their clients -- ordinary folks and businesses -- to invest in the banks they were affiliated with; the investment wings, in turn, made the commercial wings look like geniuses. Various disclosures that investment banks had to make to the SEC and other regulatory bodies were no longer necessary because they were now commercial banks, and vice versa. Shading blurred what was going on, to the point where the average person only knew that they were making more "money" by investing. Thus, the beginning of the investing binge, the selling out of pensions for 401(k)s, and the fly-by-night trading outfits. So, we have problem number five: an entanglement of entities which should have competing interests and loyalties, but which may shield themselves from scrutiny based on the lack of regulation.
And we haven't even talked about how the lack of oversight makes it simple to commit the sort of fraud that can crush the savings of the average, working American.
The people of Ohio have agreed to let their leaders set interest rates on loaning instruments. In November of 2008, the voters of Ohio, by referendum, ratified the Ohio Short-Term Loan Act, which capped the ability of payday lenders to charge more than 28% interest per annum. Ohio suffers from one of the highest foreclosure rates in the nation (1.797% of households, which is just above half of Nevada's mind-boggling 3.376%), which is at least partially due to the proliferation of alternative "financial products" in the lending market. Despite these facts, Rep. Boehner appears to oppose the ability for government to set reasonable rates for loans, or to regulate the kinds of "financial products" that are available to the average American.
I don't think Rep. Boehner is representing the interests of Ohioans very well at the moment. Being wary of excessive intrusion into the finance industry may be warranted, but certain things need to change, namely the five problems I've outlined above.
Gov. Strickland proposes cuts to Medicaid, Passport
The following article is linked from the Columbus Dispatch: http://www.dispatchpolitics.com/live/content/local_news/stories/2009/06/17/BIG_CUTS.ART_ART_06-17-09_A1_KHE70RC.html?adsec=politics&sid=101
In order to meet the $3.2 billion shortfall, the Governor has proposed cutting funds for programs that benefit low-income adults, the elderly, families with pre-school children, and other social welfare initiatives. This will inevitably lead to cuts in the government and social agencies that depend on these funds to keep operating. These are necessary services that decrease the stress upon these demographics; in the trying times that we are in, it is more important than ever to protect these particular groups of people.
Democrats have publicly stated their opposition, instead proposing to end the tax cuts enjoyed by wealthy Ohioans. This may seem unpalatable to many Republicans, but sacrifices must be made to improve the welfare of Ohioans. The longer that the State assaults the middle and lower classes, the less likely the State will be able to pull out of this economic recession, and begin to re-build. As the tax cuts will only raise the income taxes of the wealthier sections of the population, the majority of Ohioans would not suffer from the end. Rather, the added income will improve the perceived liquidity of Ohio, and will make it easier to float bonds, if the need to raise capital arises.
In order to meet the $3.2 billion shortfall, the Governor has proposed cutting funds for programs that benefit low-income adults, the elderly, families with pre-school children, and other social welfare initiatives. This will inevitably lead to cuts in the government and social agencies that depend on these funds to keep operating. These are necessary services that decrease the stress upon these demographics; in the trying times that we are in, it is more important than ever to protect these particular groups of people.
Democrats have publicly stated their opposition, instead proposing to end the tax cuts enjoyed by wealthy Ohioans. This may seem unpalatable to many Republicans, but sacrifices must be made to improve the welfare of Ohioans. The longer that the State assaults the middle and lower classes, the less likely the State will be able to pull out of this economic recession, and begin to re-build. As the tax cuts will only raise the income taxes of the wealthier sections of the population, the majority of Ohioans would not suffer from the end. Rather, the added income will improve the perceived liquidity of Ohio, and will make it easier to float bonds, if the need to raise capital arises.
Tuesday, June 16, 2009
Reagan, Taxes, and Pragmatic Fiscal Policy
Bruce Bartlett wrote an article for Forbes.com back in February that is worth a read for all Republicans: http://www.forbes.com/2009/02/26/obama-budget-reagan-clinton-bush-opinions-columnists_higher_taxes.html?partner=links
I don't bring this up because I'm praising the Democratic Party for its decisions to end tax cuts for the wealthy. I bring this up because it aptly demonstrates that Republican and Democratic Presidents have raised taxes in the past, and that it has proven to be the right decision for the economy. This is completely contrary to the typical Republican's mindset, yet both Reagan and Bush, Sr., have shown that raising taxes can, in fact, have a positive effect on the economy.
Why is that? Taxes mean income for the country. When the country is making money, like a business, investors take notice. Foreign nations take note, and the country's bonds are more attractive as investment opportunities. Raising interest rates does the same thing, but that squelches lending and borrowing, which are needed for economic growth. Taxes, though, affect consumer spending habits; if taxes are too high, consumers have less income to purchase with, and aggregate demand falls. With no demand or lending, production decreases, and the country has a problem.
Reagan recognized this. After his historic tax cuts, he realized that he had cut too far, and that his policies, along with the high interest rates of the Fed (under Paul Volcker), made economic growth difficult. Bush, Sr.? With a war coming up, he had no choice but to raise taxes to get revenue to fund the initiative. These two leaders differ from Bush, Jr.: in the face of a massive deficit and low interest rates, he cut taxes, and then added to entitlement spending. Bush, Jr., followed the ideological approach to policies: the abandonment of practical, responsible fiscal policy in favor of pandering to voters and private political interests.
We are facing a crisis of spending. We are facing a crisis of investment. If the United States dollar is going to remain the currency of international exchange, the United States must demonstrate that its currency still means something, and that its bonds still have value. To do this, the United States must show that it will do what it must in order to increase its income (or reduce its deficit). The people of the world see the power elite and leisure class as images of "American" excess -- of over-consumption, over-payment, and over-indulgence. By rolling back the tax cuts to the wealthy, Reagan and Bush reversed the "bad press", and satisfied the worries of the (ironic) international elite and leisure class. Consequently, heading in that same direction is not necessarily irresponsible or undesirable.
The issue is whether this will have a negative impact on the average American. As far as I'm concerned, ending the tax cuts to those with an income of more than $250,000 will not affect the average American. We may even have a tax cut coming.
So why are Republicans up in arms? Methinks we are protesting too much.
I don't bring this up because I'm praising the Democratic Party for its decisions to end tax cuts for the wealthy. I bring this up because it aptly demonstrates that Republican and Democratic Presidents have raised taxes in the past, and that it has proven to be the right decision for the economy. This is completely contrary to the typical Republican's mindset, yet both Reagan and Bush, Sr., have shown that raising taxes can, in fact, have a positive effect on the economy.
Why is that? Taxes mean income for the country. When the country is making money, like a business, investors take notice. Foreign nations take note, and the country's bonds are more attractive as investment opportunities. Raising interest rates does the same thing, but that squelches lending and borrowing, which are needed for economic growth. Taxes, though, affect consumer spending habits; if taxes are too high, consumers have less income to purchase with, and aggregate demand falls. With no demand or lending, production decreases, and the country has a problem.
Reagan recognized this. After his historic tax cuts, he realized that he had cut too far, and that his policies, along with the high interest rates of the Fed (under Paul Volcker), made economic growth difficult. Bush, Sr.? With a war coming up, he had no choice but to raise taxes to get revenue to fund the initiative. These two leaders differ from Bush, Jr.: in the face of a massive deficit and low interest rates, he cut taxes, and then added to entitlement spending. Bush, Jr., followed the ideological approach to policies: the abandonment of practical, responsible fiscal policy in favor of pandering to voters and private political interests.
We are facing a crisis of spending. We are facing a crisis of investment. If the United States dollar is going to remain the currency of international exchange, the United States must demonstrate that its currency still means something, and that its bonds still have value. To do this, the United States must show that it will do what it must in order to increase its income (or reduce its deficit). The people of the world see the power elite and leisure class as images of "American" excess -- of over-consumption, over-payment, and over-indulgence. By rolling back the tax cuts to the wealthy, Reagan and Bush reversed the "bad press", and satisfied the worries of the (ironic) international elite and leisure class. Consequently, heading in that same direction is not necessarily irresponsible or undesirable.
The issue is whether this will have a negative impact on the average American. As far as I'm concerned, ending the tax cuts to those with an income of more than $250,000 will not affect the average American. We may even have a tax cut coming.
So why are Republicans up in arms? Methinks we are protesting too much.
Economic development starts at home
This entry is based upon the following article: http://www.msnbc.msn.com/id/31377055/ns/politics-capitol_hill/.
There are competiting theories with regard to economic development. Macroeconomists tend to look at the bigger picture, and believe that larger projects will help to create the aggregate demand necessary to grow an economy. Microeconomists look at the smaller picture, and believe that fixing the smaller units of the economy is imperative before national improvement will be noticed. The problem with macroeconomics is that it is easy to say "increase aggregate demand", and difficult to go about doing it. For instance, the failed Bush Stimulus Plan: the $600 taxpayers received did little to the overall economic situation.
Sen. Tom Coburn (R - Okla.) has earmarked what he calls "questionable federal spending". As the author of the article points out, the questionable expenditures are "shovel-ready projects" that have an immediate need, and do not require studies or experts to execute. To the macroeconomist, spending for rural bridges that see limited traffic is a waste of money; to the local government who requested the repairs, these are necessary projects that will create construction jobs. The $3.4 million turtle crossing is important to the State of Florida, as it tries to protect its environmental resources as well as reduce traffic accidents caused by motorists trying to dodge turtles at night; $3.4 million is cheap when compared to a head-on collision accident with two casualties.
Republicans need to remember what it means to demand "small government". Republicans accuse the Democratic Party of being the party of "big government", yet the sort of oversight being practiced by the Republicans in their efforts towards fiscal austerity is the same kind of oversight that justifies "big government". Republicans also need to understand the point to this stimulus spending: to create jobs. A turtle crossing may not mean much to a person in Nevada, but, for the local residents in Florida, that turtle crossing means money that will pay for other goods and services. In turn, this is the sort of stimulus -- creation of jobs -- that fuels consumptive behavior; this, in turn, increases the aggregate demand of the nation, and makes macroeconomic theory work. The point is that if the federal government is going to give general stimulus money, it is best left in the hands of local government for specific earmarkings. It is pointless to presume that a federal Senator has any concept of what "appropriate" spending is at a local level.
Ohio Republican Chairman Kevin DeWine talked on Monday (in Greene County, Ohio) about practicing the ideals of the Republican Party. What he did not do, however, is address the sort of contradictory policies that the Republican Party practices. If the Republicans wish to show that it believes in small government, then the federal Republicans need to putting those ideals into action. Political activity starts at the local level, and small government implies that the federal government shall leave it to the local government to determine what it needs funding for.
There are competiting theories with regard to economic development. Macroeconomists tend to look at the bigger picture, and believe that larger projects will help to create the aggregate demand necessary to grow an economy. Microeconomists look at the smaller picture, and believe that fixing the smaller units of the economy is imperative before national improvement will be noticed. The problem with macroeconomics is that it is easy to say "increase aggregate demand", and difficult to go about doing it. For instance, the failed Bush Stimulus Plan: the $600 taxpayers received did little to the overall economic situation.
Sen. Tom Coburn (R - Okla.) has earmarked what he calls "questionable federal spending". As the author of the article points out, the questionable expenditures are "shovel-ready projects" that have an immediate need, and do not require studies or experts to execute. To the macroeconomist, spending for rural bridges that see limited traffic is a waste of money; to the local government who requested the repairs, these are necessary projects that will create construction jobs. The $3.4 million turtle crossing is important to the State of Florida, as it tries to protect its environmental resources as well as reduce traffic accidents caused by motorists trying to dodge turtles at night; $3.4 million is cheap when compared to a head-on collision accident with two casualties.
Republicans need to remember what it means to demand "small government". Republicans accuse the Democratic Party of being the party of "big government", yet the sort of oversight being practiced by the Republicans in their efforts towards fiscal austerity is the same kind of oversight that justifies "big government". Republicans also need to understand the point to this stimulus spending: to create jobs. A turtle crossing may not mean much to a person in Nevada, but, for the local residents in Florida, that turtle crossing means money that will pay for other goods and services. In turn, this is the sort of stimulus -- creation of jobs -- that fuels consumptive behavior; this, in turn, increases the aggregate demand of the nation, and makes macroeconomic theory work. The point is that if the federal government is going to give general stimulus money, it is best left in the hands of local government for specific earmarkings. It is pointless to presume that a federal Senator has any concept of what "appropriate" spending is at a local level.
Ohio Republican Chairman Kevin DeWine talked on Monday (in Greene County, Ohio) about practicing the ideals of the Republican Party. What he did not do, however, is address the sort of contradictory policies that the Republican Party practices. If the Republicans wish to show that it believes in small government, then the federal Republicans need to putting those ideals into action. Political activity starts at the local level, and small government implies that the federal government shall leave it to the local government to determine what it needs funding for.
Monday, June 15, 2009
Freedom of Speech anyone?
This entry is based upon the following news article: http://www.msnbc.msn.com/id/31176525/ns/us_news-life. Basic summary: States are considering adopting "official languages", and measures to force Congress to do the same.
I have little to say about this that is not already said in the article. The only thing that needs to be pointed out is that "freedom of speech" includes the freedom not to say anything, or not to communicate. I thought this country was about the freedom to express oneself however one wished, in whatever language one wished. Maybe that's why no official language has been adopted.
I don't think the Framers of the Bill of Rights wanted the government to tell people what they can and cannot say, what religion to practice, or what language to use in parlance. It has already been established that there is no fundamental right to receive notices in a person's native language. English is widely-accepted as the language of business and government in the United States. Do we really need to violate the First Amendment to cement that?
I have little to say about this that is not already said in the article. The only thing that needs to be pointed out is that "freedom of speech" includes the freedom not to say anything, or not to communicate. I thought this country was about the freedom to express oneself however one wished, in whatever language one wished. Maybe that's why no official language has been adopted.
I don't think the Framers of the Bill of Rights wanted the government to tell people what they can and cannot say, what religion to practice, or what language to use in parlance. It has already been established that there is no fundamental right to receive notices in a person's native language. English is widely-accepted as the language of business and government in the United States. Do we really need to violate the First Amendment to cement that?
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