Thursday, July 26, 2012

Betting the Bank

Are bankers just inherently evil?

It sure seems like it sometimes. Especially if you follow the news in Ireland and the UK. A few days ago Séan FitzPatrick, former chairman of Anglo Irish Bank was arrested and charged (finally) for activities in 2008, which involved a scheme to lend money to investors who, in turn, invested the money in Anglo Irish to artificially inflate its share price. Before that, Barclays (Britain’s second largest bank) admitted that it manipulated the interest rates at which banks lend money to each other (the London interbank offered rate, or Libor) to inflate its profits. And, of course, everyone knows about the dodgy mortgage practices that went on in both Ireland and the United States that led to housing bubbles in both countries and precipitated the financial crisis and resulting recession.

You probably don’t need to follow the news to have a low opinion of banks. Many of us have our personal experiences to draw on for that. Mine go back to the year I went to France as an exchange student and a local banker advised me to buy traveler’s checks denominated in Swiss francs. Needless to say, the U.S. dollar only went up in relation to the Swiss franc during that year. To add insult to injury, when I deposited the left-over un-cashed traveler’s checks in my account after returning home, the bank somehow managed to put the money in the wrong account. More recently, when I sold my condo after moving to Ireland, Washington Mutual (where I had gotten the mortgage) somehow managed to show a lien on it even though the mortgage had been paid off years before—nearly causing me to miss the deadline for closing the sale. I can forgive people making mistakes, but what I don’t forgive is an unwillingness to even sort out the problem. Washington Mutual had sold my mortgage on years before and had absolutely no interested in tracking down any records for me. I managed to solve the problem without their help, and I considered it karma when Washington Mutual became a casualty of the financial crisis.

The fact is, though, we need banks and that is why they exist and why almost all of us do business with them. They perform a necessary function in a modern economy by allowing the work done by people (and converted to currency through salary and profits) to be made available to other people (in the form of loans) for starting new businesses or making major purchases. When the financial crisis caused lending to freeze up, we saw what it did to the economy and just how much we needed the banks to be lending.

Let’s be adult about this and acknowledge that, of course, most bankers aren’t evil and that they provide a necessary service. At the same time, let’s be realistic and acknowledge that handling so much money is an irresistible temptation to some and there will always be some level of crooked activity.

How can we keep the crooked activity to a minimum? That’s a complicated question, but in general there are a couple of major things that seem obvious. For one, it was clearly a mistake to repeal the 1933 Glass-Steagall Act in 1999. That act was a firewall between commercial banking and investment banking. Personally, I don’t mind seeing investors losing their money. They accept that risk when they get into the game. But it is neither fair nor logical for investment losses to affect other bank customers, who only want a safe place to keep their money. For another thing, the government clearly got too lax about allowing bank mergers, and that needs to change. I don’t mind seeing banks fail if they are poorly managed. Deposits are insured, so at least regular customers are protected. But when banks become Too Big To Fail their collapses can affect the overall economy, forcing the government to bail them out which, in turn, only encourages more unhealthy risk on the part of large banks. Clearly, a lot of huge bad bets were made in the years leading up to 2007 out of a realistic expectation that there would be a bailout in a worse-case scenario.

Congress’s solution to problems like these is often to enact more regulation. Politicians do this so often that they actually seem to forget that it’s already been done before. I’m always amused when Democrats rail against the financial “deregulation” of the George W. Bush administration when one of the most onerous financial regulation laws, the Sarbanes-Oxley Act, was enacted in 2002. This was in reaction to the Enron scandal, and it clearly didn’t solve anything. If anything, it made things worse by adding more paperwork burdens to companies with no discernible benefit. Similarly, the Dodd-Frank Act of 2010 added yet more paperwork requirements. No one seems very happy with that bill, either because it was “watered down” by lobbyists or because it adds more costs to doing business. The fact is that large businesses don’t mind extra regulations because they have plenty of staff on hand to deal with it. It’s middle-sized and small businesses that go under or don’t expand because of regulatory burdens.

Having said that, make no mistake, financial regulation is extremely important and necessary. In the end, it is our only hope to avoid more economic messes like the one we are in now. But it is the quality of government oversight that matters, not the quantity. When politicians pile a new regulatory framework on top of already existing ones, there is a law of diminishing returns. If you have ever worked in a large organization, then you know that the more overlapping responsibilities people have, the more time they tend to spend making sure someone else gets blamed for a foul-up than they do trying to prevent the foul-up in the first place.

One of the most outrageous and criminal financial operations in recent times was the scheme operated by Bernie Madoff. His victims were not stupid or unsophisticated. They included banks and charities run by serious professionals. They also included such well-known individuals as Larry King, Jeffrey Katzenberg, Kevin Bacon, John Malkovich, Sandy Koufax and Zsa Zsa Gabor. Most of these people were not dumb by any stretch of the imagination, but somehow they missed the simple fact that Madoff’s numbers made no sense. I have to wonder if they were lulled into complacency by the belief that nothing improper could be going on because, surely, the government simply wouldn’t let it happen.

This may be the true downside of too much regulation. We all might do a better job of looking after ourselves (and doing our own math) if we don’t succumb to the false hope that the government is out there always looking out for our interests.

Tuesday, July 10, 2012

Gimme Shelter

Politics ain’t beanbag. We have heard that expression lots of times, usually when a campaign spokesman has been asked about some underhanded tactic used by his own campaign or someone else’s.

But I think the general way in which a politician runs a campaign says a lot about him. Sure, they all are going to make cheap shots from time to time or tolerate cheap shots made by others working on their behalf. I’m not Pollyanna. I understand that. But when basic arguments made by a candidate are consistently and fundamentally dishonest, it makes it hard for me to support that candidate.

When Barack Obama ran for the presidency four years ago, he ran a generally positive and forward-looking campaign. Of course, it was easy then. He had hardly any record to defend politically and, as a non-incumbent, only had to criticize the job done by President Bush and the Republicans (conveniently downplaying the fact that Democrats were already in control of the House of Representatives).

Things are different this time. Now, finally, Obama actually has a record to defend and it includes persistent and historically high unemployment. He has little choice but to go negative. Actually, he did have a choice. He could have instituted policies that would have resulted in a better economy. He didn’t have to listen to Republicans to do that. Bill Clinton, who presided over a very strong economy, could have guided him. But there is no time left to change things around now, so he has no real choice but to go negative on Mitt Romney.

The best way to confront Romney would be to come up with a better plan than Romney to fix the economy. Romney has endorsed Paul Ryan’s budget, which puts him on the defensive because it provides plenty of specifics to attack. But Obama refuses to endorse any plan. He talks vaguely about a “balanced approach,” which essentially means raising taxes on the wealthy. There’s nothing wrong with that, but it will make precious little difference to the deficit and will not help the economy very much. Middle-class tax increases (including people who currently pay no net income tax) would go a lot farther in shrinking the deficit, but that would be political suicide.

The president’s lack of action on the economy since his last stimulus failed is enough reason to think twice about reelecting him. He appears to have no more ideas or maybe he will feel safe in putting them forward only when he doesn’t have to face another election. So instead, he pretty much spends all his time campaigning. And the way he campaigns gives more reasons to think twice about voting for him.

The Irish media took note the other day when the web site cited Ireland as a tax haven. This comes as a surprise to people living—and paying increasingly higher taxes—in Ireland. The web site has a chart that shows assets that Romney has (or has had) in Ireland as well as Bermuda, the Cayman Islands, Luxembourg and Switzerland. Most of these boxes on the chart include a line that reads, “Value: Not disclosed in tax returns” as well as the applicable local tax rate. (The 12.5 percent rate listed for Ireland is the business tax rate and probably lower than the applicable one in Romney’s case, which seems to be a blind trust investment fund.) The implication is that something underhanded or shady is going on. And that Romney is somehow avoiding paying taxes to the U.S. Treasury.

I have been filling out tax returns for decades and none of them has ever asked for the value of my accounts. The IRS only wants to know what my income is so that it can tax it. U.S. law—and this is something I know all too well—requires U.S. citizens to pay taxes on all income, no matter where in the world they are living, earning money or investing. If these accounts appear on Mitt Romney’s tax returns (and the chart tells us they do), then that means he is paying the full U.S. tax rate (at the very least) on any income they are earning for him. If the local rate is higher than the U.S. rate, then he would also be paying to the difference between the two rates to the other country.

One of the privileges of being a U.S. citizen is that you cannot legally avoid paying income tax to the U.S. government no matter where you live or invest. Just ask Facebook co-founder Eduardo Saverin, who has given up his U.S. citizenship to live in low-tax Singapore. That the Obama campaign does its best to imply otherwise shows not only desperation but a lack of honesty.

The way Romney’s tax returns have been twisted and manipulated in a blatant attempt to vilify him solves the mystery (if there ever was one) of why candidates hate to release this information and usually don’t until they absolutely have to.

Is the larger point the fact that Romney is a parasite who sucks wealth out of America and sends it abroad? The president would like you think so. But the two most salient points are these. First, Romney clearly knows how the economy works and how to generate wealth. Second, wealth has a tendency to flow from high-tax countries to low-tax countries. If those two facts make you want to keep living with high unemployment, then your choice in November will be simple.

Perhaps the most dishonest aspect of the way the president is running his campaign so far is that he wants to make it a fight over wealth that has already been generated. If the country’s overall standard of living is not to slip further, he needs to start focusing on generating new wealth—instead of trying to reallocate the shrinking wealth that is already out there.

Monday, July 2, 2012

Courting Disaster

Speaking of distractions...

During the seemingly endless months leading up to the Supreme Court ruling on Obamacare, the focus was primarily on the individual mandate. Now that we finally have the ruling, the focus continues to be on the mandate, I mean, the tax.

Now, I am as amused as anybody about the way the pundits’ predictions on the outcome were totally wrong for months and how politicians on both sides have shown their hypocrisy by reversing their supposed principles on what the Supreme Court should and shouldn’t do. Conservatives, who usually rail against courts that overturn duly passed laws, were fiercely disappointed that the court didn’t overturn this law. Liberals, who can frequently be heard bemoaning 5-4 decisions as proving the justices’ partisan motives, were this time praising the court’s integrity. And the president, who swore up and down that the mandate did not constitute a tax on the middle class and who ridiculed George Stephanopoulos for looking up the word “tax” in a dictionary, gratefully accepted (without acknowledging) the court’s definition of what a tax is.

But to my mind, this has all been and continues to be a distraction from what is really important. The question of whether Congress can order citizens to buy a product is certainly a very interesting one, as is the way it all finally got interpreted by the court. But personally, I have never particularly agreed with those who see the individual mandate as some sort of enslavement. Our personal liberty is limited in all kinds of ways by the government. What makes it okay is that the government has to answer to the voters, so these limits on our liberty are enacted indirectly by ourselves. If we don’t like what the government is doing, we can vote it out of office. That is what elections are for. No, the problem with the ironically named Affordable Care Act was never the mandate. It was the fact that, as it finally emerged from Congress, it pretty much guarantees that health care will continue to get even more expensive and out of reach for more, rather than fewer, people.

It attempts to “help” people get healthcare coverage. And it does it in the same sort of way that Fannie Mae and Freddie Mac were meant to “help” people to buy houses and government-subsidized student loan programs were meant to “help” people get a higher education. And the result of all that help has been to contribute to a vicious circle of those things becoming ever more expensive and people needing ever more “help” from the government. Think about it this way. Creating a healthcare mandate (of, if you prefer, tax penalty) to get more people to have health care is sort of like trying to end poverty by passing a law to require people to have money.

Yes, I understand that the idea is for those who can afford health insurance (including the young and the healthy who otherwise might not buy it) to pay into the system to provide more and better care for those who do need the health insurance and for those who cannot afford it. Requiring people to have insurance is not unreasonable, but it will only work if marketplace forces are allowed to keep costs down so that people can actually afford it. And the law, in all its volumes of text, never dealt with the factors that actually drive up health care costs. As a study cited in Time back in March (for example) notes, Obamacare makes no difference to the projection that health care costs will eventually exceed a typical family’s income. And with Obamacare in place, it will only be rational behavior for more and more people to give up and let the government subsidize their care rather than to keep working.

The president’s chief of staff, Jack Lew, made the Sunday talk show rounds in the wake of the court’s ruling, and I never saw anyone more anxious to change the subject from what was ostensibly a victory for his side. It just reminds people of all the laughable claims that were made about the Affordable Care Act while it was being fought over: that it was a “jobs bill,” that it would reduce the deficit, that it would bring costs down. Other Democrats in various panels (Donna Brazile on ABC’s This Week was one), when pressed about the illogic of how the whole thing was supposed to work, ultimately conceded that their preference was never really Obamacare but single-payer.

And that seems to be the president’s plan. If he can just get through the election, then when the healthcare situation worsens, he can put it forward that single-payer is the only solution. He’d be right insofar as it would be better than what is in place now. But it’s hard to see how, even if he is reelected, he would have enough support in Congress to put that through.

Unless the public collectively takes a firm stand, one way or the other, on the healthcare issue by giving the White House and a sizeable majority in Congress to one party or the other, we are liable to see two or four or more years of things getting worse and the two parties doing their best to attach the blame to each other, since there won’t be anything else they can do.