Monthly Archives: October 2011

A Word on Risk

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52% of all Americans do not pay income taxes – a startling percentage in light of the demand by the Obama administration that the rich should pay more. So if the logic continues the majority of Americans already take a free ride and based on the current plan more people will receive more and contribute less. Something for nothing, converts something to nothing.

Maybe this model should and has to be reexamined.

If you live in the US you need to contribute to the country’s well being. If the government is in the business of providing for everything, what is the purpose of the individual to consume, to take? Not acceptable.

Where has this been an effective model? The test is simple: does it work? Has the government had a history of good decisions? Or as a past mayor of New York Edward Koch used to say, how am I doing?

Let’s look at the history- the history of near decisions. With the economic downturn of the recent 4 year and the potential collapse of the banking system, the government provided a bailout program to shore up the banks by giving banks money at practically zero cost. With zero cost money, banks lent out the money reaping significant profits and the ability to repay the zero cost money. Okay the banks are fiscally solvent. But are they?

Are the customers better off? More profitable? Expanding?

The foundation is on shaky ground. It does not make a slight bit of difference what you build on top of shaky ground, it maybe pretty but it isn’t safe.

Let’s refocus on making the borrowers more stable. Maybe just maybe, we need to address the cost of money to the borrower. If the borrower is healthy the lender has a better chance of being repaid.

How did we get to higher interest rates? The history of this goes back to the lifting of usury caps on interest rates, and specifically on credit cards. Without boring you with history lessons about Citibank moving the credit card business to South Dakota and the state legislature lifting the usury ceiling in exchange for jobs. Believe it, you can look this up at http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html

The real issue is what is a reasonable interest rate, if your cost of money is practically zero. If the risk free rate on government debt is .9% for a 5 year treasury security, lets say it is 4 times the risk free rate so a good return on money is 4% with a lending cap rate of 12% for high risk, speculative lending.

So lets make rate workable and inject money into the economy in a place that has a need, the ability to repay and make the banks responsible for its lending practices.

Let’s cap all interest rates at 12% – that is the usury ceiling. Let’s reduce all interest rates on outstanding mortgages, credit cards to that maximum and all interest rates on mortgages, reduced by 2%. The government can pick up the cost of the “re-pegging of rates”, not refinancing, of say $500.00. The banks create fee income from refinancing. All the paper work is there from the original closing; there is no need for attorney fee’s or title insurance. These fees drain the consumer for problems that originate in the abuse of the mortgage system.

For new mortgages, closing fees are appropriate and maybe necessary but for refinancing, it just abuse. If the original loan was improperly closed, the fault lays with the original transaction.

This proposal is not a bailout. This is a resetting of rates. Commensurate with the current rate environment and desired rate environment to control inflation. This is a policy decision to let money in the economy stay in the economy with the consumer, the borrower and taxpayer. Create a new value system based on affordable cost of money and risk. If you can successfully pay your mortgage and credit cards you should be rewarded and not have to subsidize bad decisions by bad banking practices. Legislative mandated risk taking.

If it is the desire for the government to mandate lending practices for social reform, the risk must be borne by a government insured and funded entity. That entity must be fully funded and overseen by a regulatory body that reports of funding level, measures success of the program. This program must have fixed parameters as to the lending levels, access requirements and sunset provisions such that once the program has achieve its requisite goals, it ceases to exist or if continued, continues by legislative approval.

Getting back to the interest limitations, the reorienting of the economy based not on speculation but on sound principals of ability to pay, resets the real estate market and creates unencumbered cash in the hands of the consumer and ultimately spurs economic growth. This growth is organic, in that the consumer has the money, subsidized with a no bailout basis.

The bailout mentality of loss safety nets with the government baring the risk of speculative default has to stop. The government’s roll is not to create an environment for speculation and acceptable high risk taking for individual gain, with failure borne by the taxpayer.

August to Remember

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An August to Remember

It is an interesting time to be in the Northeast of the United States.

I like summer and I really like August. There is a lazy feel to August. The heat of summer, the fresh farmers market fruit, getting together with friends and squeezing out the last bit of every warm sunny day. There is a relaxed attitude towards work- resting now, knowing fall is coming. The children talk about going back to school and grading up.

This year was not different except two thing happened that were unique.  Number one was the earthquake. http://www.usatoday.com/news/nation/story/2011-08-23/Earthquake-rocks-East-Coast/50107542/1(http://img.ibtimes.com/www/articles/20110901/207114_aftershock-virginia-earthquake-3-4-magnitude-mineral-louisa-county.htm) A 5.9 tremor with shock waves up and down the East Coast.  An earthquake in the Northeast is a big deal. It is not like the West coast, where a quake unless really big, is a normal event, similar to traffic on the LA freeways.

There wasn’t any big fallout, or structural damage like the offshore Japanese Quake but what it did do was remind us that we were vulnerable. Things can happen when we are not prepared.

A week later a hurricane formed in the eastern Atlantic and took a track up the coast producing wind, rain and flooding. Prepare for the worst case, if nothing happens at least you were prepared. If something does happen, prepared you are. But what happens if the worse case is worse that you planned? Then what?

To a certain extent, worse than you planned was what the Northeast received.

What a great lesson in planning and leadership. My litmus test is simple; does it work? Crises and decisions in crises tell a lot about people and our leaders. From these events, I look for successes and failures. A crisis presents the perfect opportunity to see who the Politicians really are. Are they leaders or slaves? I’m sorry to use the work slave maybe that is rather strong but it is better than the other word: reactionary. My definition of reactionary is a person that responds to events after the fact with an air of learned critic. Too bad the words slave is after the fact.

Anyone can be a critic.

Well, what did we learn from our Politicians?

Obama went on vacation but cut it short, because of the potential that the storm would hit Martha’s Vineyard. He was detached, on vacation. And what did he do when he came back? He got on a bus and started campaigning. After Labor Day his big pronouncement was a speech on the economy and jobs.

I call this the vacation high; it’s a feeling of lightness and clarity. When I get back from vacation, and all the other politicians get back from vacation, we’ve got refreshed ideas and want to share it with everyone. This should fix everything.

But what about now!?! What about all the Americans that cannot take vacation or are on a forced vacation because they are unemployed? I’m sorry there is no urgency for the President to act. Ask the unemployed if there is a need for urgent action. No doubt they understand that the presidency is a tough job, and the president needs a vacation. At the same time ask them if they could start a job on Saturday morning, my guess is they would be dressed ready to work within minutes, not saying, “great, thanks, I’ll start on Monday.”

Personally I fearful what the president is cooking up to rescue us from his failed economic policies of his administration.

I really don’t what to hear, “he inherited the problems, or the congress this or that”. Or worse, that he has a new stimulus package that adds more liquidity to the market. Excuse me but what market needs is liquidity.

A captain of ship knows if they are going in the wrong direction it is appropriate to change direction. But not this one, so far, the plan is stay the course and everything will turnout all right. Trust him.

In New York, there is a media mogul who as taken some time off from his formidable empire to do some community service. He takes $1 in salary and kicks in his own money to supplement his municipal budgets. Facing a potential catastrophic hurricane he took action. He went on the TV and radio, explained his concerns about the hurricane, referring to his experts advice, he planned to take action. He prefaced ahead of time that if the storm does not come he would be most happy but his course of action was in the best interest of the city and the people in it.

Michael Bloomberg, the mayor of New York City took action.  Explained his actions, apologized if any one was inconvenient by his actions but took full responsibly for the path he set.

Was the city of New York prepared? Yes.

Was there loss of life? No.

Were there problems? Yes.

Was the city up and operating after the storm? Also yes.

The city of New York is not the United Sates of America, but the Mayor is a leader, businessman, a planner and lastly a politician. The criterion for success is simple: will it work? The method also simple: what is the likely outcome of my actions based on historical empirical results? Will the likelihood of a similar action bring the same or similar results? If so, act. If the event is unprecedented, what is the safest path? In the case of the hurricane: evacuate, shut down the transit system and prepare for recovery.

Our economy is in trouble, 10% of our workforce is unemployed and many more are under employed. The Government’s spending has no limits with results that are ineffective at best and foolish at worse. Actually foolish is far too polite- it is stupid.

If there is any history lesson for this problem, we don’t have to go far into history to resolve it. Under the Regan administration we had a serious recession. So what did Reagan do? He showed leadership focus and he knew that the success of the economy was based, not on the government’s spending, but the people’s group decision to change and act. In his case spend.

The economy is not a physical thing it is an emotional attitude.

Feeling good one can act in confidence. Feel scared, one acts with caution first then with fear. Fear does inspire one to be confident, hire new employees, and spend. Fear is by its nature is a retraction, a consolidation and if it continues for a protracted period of time, a withdrawal. The withdrawal is known in psychological circles as a depression. When people are depressed, they do desperate things.

We have now a remarkable series of events that painfully point down a road none of us want to travel. It started 10 years ago with the 9/11 terrorist attacks – our first point of fear. Our government created a dizzying array of measures to insure our fear in the good intension of improving security. We stepped up internal security, and created TSA, which unfortunately institutionalizes fear, de facto criminalization security procedures for all travelers. We put in a color coded warning system that took a color palette and induced fear in the application for yellow, orange and red. Interesting enough with the warning system directed any procedures or suggestions for modification of behavior. If yellow do what? If orange? If red? Do we as one great political stated buy duct taped?

On a personal level the duct tape was a clue of the true understanding of the problem. It seems the purchase of duct tape would in fact be good, if applied to the politicians’ mouth first, then as binding for them to a chair (if nothing else but to limit his wanton lust for self injury).  For Americans it would be a humanitarian gesture.

Next our government targeted organizations that no one other than themselves knew as the cause of all our troubles. Then it gave it a name that no one has ever seen and create a target of hate. Then with a stroke of genius, it declared war on it.

First our government found an enemy, educated us on the enemy so we can be convinced we have an enemy. They tell us the enemy is in Afghanistan, then Iraq, then Pakistan, then Somalia, then in any place that people are in States of dissatisfaction and lastly use non-peaceful means to target the dissatisfaction.

I wondered why are these people are unhappy with us? What did we do to them? And if we did something so terrible, why they would want to kill us? Our governments answer: they hate our way of life.

I find that a hard to swallow. I’m not fond of rap music and don’t particularly like country and western music, and I find most fast food atrocious say nothing of a means of slowly suicide, I dislike most holidays in that they have lost the meaning and have become overly commercial. That said I do not want to kill anyone over the offenses to my senses.

On the face of it there has to be more.

Anyway that is the governments line on al Qaida or however you spell it.

On closer examination, what does the government buy?  Planes, ships, consultants, government bonds and stuff to keep the government operating. What does consumers buy, food, cars, houses, furniture, carpets, books, computers, paper, tuition, and the list is endless.  Who creates the most jobs? Who should have the money?

I don’t care if you are a Republican or Democrat, given the track record of the government on spending, whom do you trust to make good decisions? My bet is on individuals.

Can we trust the government to make good decisions? Based on recent history? Based on record deficits? Based on results? The answer is indubitably and definitively, NO!