How to Fix America

We’ve got a moment of possible momentum here.  The unemployment rate is about to head back down into the 6%’s for the first time in five years; non-farm payrolls heading into the +200-thousand’s per month.  Housing - the thing that caused all this mess - has for about a year been in a real recovery now.  A bipartisan budget deal is on the table and the Speaker for the first time in a long time seems done with the more radical fringes of his party that have so paralyzed Washington, in my view.

The iron is hot.  I have been developing some ideas about how to set the course for our nation’s present and future.  I know I am but one voice.  But for those who would listen, this is what I propose we do.

There are way too many underemployed in this nation.  Although the trend has only briefly possibly begun to change, most hires in the past few years post-crisis have been into low-wage, low-skilled jobs.  Many of those hires however have skill-sets much more developed than their new job requires.  We have structural employment problems tied in no small part to business' reluctance to truly expand given sociopolitical uncertainty.

So I propose that we offer tax credits to small businesses (say under 50 or 100 employees) for hires above a certain pay-grade.  Why small business?  They are where most entrepreneurial activity occurs. Small is by nature poised to grow faster than large.  They are small enough to offer for their employees the fastest upward promotion mobility.  They are more invested in their employees, as each is that much larger a piece of their business. (Plus the business owner actually bumps into them weekly, if not daily, so it’s more of an emotional investment in each employee.  How often does that happen at IBM?)  They are the best place to cross-train and thus more broadly develop new skill sets.  They have a disadvantage to accessing capital markets versus large firms, so helping that lower common denominator improves the situation for all.  They are a large portion of business anyway – 50% of those employed in the US are at firms with under 500 employees each (35% under 100).

How do we pay for it?  It pays for itself.  We can nail down the numbers later, but for instance, say you hire a mid-level person for $45,000, versus a lower-level person for $28,000.  Or just promote her.  For individuals with no dependents using the standard deduction, $45,000 will pay about $9,100 in federal income and payroll taxes for 2013.  A $28,000 income would pay about $5,000.  So the $45,000 income pays $4,100 more taxes to the federal government.

If we offered a $4,100 tax credit to companies that hire people for $45,000 or more, it’s revenue neutral because we’ve moved someone out of a $28,000 taxpayer position into a $45,000 one (if not created a new one entirely out of thin air, which would be a revenue add, and an expenditure cut from no more unemployment insurance or food stamps or home heating assistance, health care credits, etc.).  And we can scale the credit up, for the higher the income (up to a point).  We can put safeguards in to protect the duration of their employment as well.

Yes, the employer is paying $18,100 more for that higher wage employee ($45,000 - $28,000 = $17,000, plus $1,100 more for the employer’s share of higher Social Security payroll taxes).  But the end result is, we are incentivizing business to expand; to use that pent up cash and invest in the projects they’ve been wanting to for a few years now.  That ultimately requires higher wage workers.  So we are offering them the incentive to take that shot and hire up where they previously would not , and receive an almost 10% reduction in the cost of higher-wage labor (the increased $18,100 labor cost is a tax shield anyway, because it's an operating expense deductible from pretax profit).

Second, I propose offering tax credits for those businesses that hire our Veterans.  We owe them far more than an ovation at the State of the Union or a pat on the back in the bar (or making them wait a year or more for their benefits).  These people already have the discipline and adaptiveness that, if hired, would raise the bar and set the standard for your other employees (making your employees a little nervous about performing to the best of their abilities is something I know every employer would appreciate).  Our Veterans don’t want a hand out.  They just want to work at the highest wage their skills can attract.

How do we pay for it?  Even during the so-called “sequester” (forced budget cuts due to failure of Washington to come up with budgets), we’re still spending ~$600-700 billion in defense and security.  We can’t find anything in there to offset this?

And to anyone pro-Defense that balks at cutting Defense budgets, I would humbly submit that we fought decade-plus long multiple engagements with no draft, forcing much higher numbers of redeployments than otherwise.  Our Veterans and those still actively serving, as well their families, are the ones who subsidized that for us with their above and beyond commitment to serve.  So I think the Defense Dept. – indeed all of us – should put some sober thought into finding how we can truly give back to them.

We can further incentivize businesses to add higher-wage employees and/or Veterans by offering them the ability to secure lower-interest loans, with implicit government sponsorship if they do so.  That gives them better access to capital markets to expand business.  I heard someone propose that the Federal government pick up the school loans for those that give two years of public service.  I like that idea as I think our younger people should have more skin in the game of our society, but I would submit we marry that idea to offering credits or loan support to businesses that hire them.

And finally, yes, let’s raise the minimum wage to ~$8-9 per hour.  But only after the unemployment rate drops below 6%.  This will incentivize those more liberal elected officials to pursue pro-business reforms.  And businesses should be healthy enough at that point to absorb the higher labor costs.

If we can get unemployment to or below 6%, with higher wage jobs, employ our Veterans, put more cash in the pockets of those who really need it, get the next generation more civically involved; and during a period of real, significant, sustainable job growth, then we have a whole lot to look forward to.

At that time, we can explore whether we need to raise taxes to reduce debts and pay for the rising social subsidies we’ve promised everyone.  And/or right-size those subsidies for future generations to a level we can afford.  Reform and simplify the tax code.  Close loopholes.  Lower Corporate tax rates.  Incentive our K-12 and secondary educational systems to promote math and science.  Explore public-private partnerships to nurture new technologies that will spawn the higher wage industries of America’s future.  And rebuild our infrastructure along the way.

All we need to do is get along, and it’s as good as done.

Volcker Rule and the Faux Unwinding of Risk

Yesterday, a body of regulatory agencies finalized the tenets of the so-called Volcker Rule, which seeks to limit the ability for banks to engage in investing or trading deemed too risky.

So first of all, there are two kinds of banks – commercial banks and investment banks.  Commercial banks take deposits (our savings or checking accounts) and use the surplus funds to make loans to businesses, consumers and potential homeowners, earning a return in the process.  Investment banks perform a variety of other activities, some of which may be deemed riskier than making a plain-vanilla loan.  Mostly, they trade their own capital for profit, act as financial advisors in transactions and they engage in market-making in securities markets to facilitate liquidity for their corporate and institutional clients.

A commercial bank’s source of capital, as already alluded to, are the deposits that we give them to safeguard for us.  Those are insured by the FDIC, an industry self-funded entity, with an implicit guarantee provided by the Federal government.  In contrast, an investment bank’s source of capital is basically just like every other business’s.  They must have partners buy-in providing equity capital and/or borrow it by issuing debt in the public market.

The “cost of capital” for a commercial bank is the interest rate that they must pay on our savings account or the marketable equivalent through issuing certificates of deposit.  Both offer comparatively low interest rates.  In other words, the cost of bank deposits for the commercial bank is comparatively cheap.  Because the lender is unsophisticated (just every-day people opening a bank account), the funds are insured with a Federal back-stop and there had traditionally been a limit to the amount of risk a bank could take reinvesting those funds.

The cost of capital for an investment bank is much more expensive.  It must pay whatever the market demands.  And the market is sophisticated, the funds are not insured and the investing of the funds will be riskier.

So for example, in a normal investment environment (unlike now), commercial banks might have to offer savings deposit or CD rates somewhere around ~2.5-4%.  An investment bank would have to source capital through either issuing notes which would carry an interest rate more like ~6-8% or issuing equity, which would “cost” ~10-12% (by issuing equity, you give up a share in the earnings and profits of your business; basically if the stock tends to go up ~10-12% a year on average, you are giving that up, or “paying that out”).

The separation between commercial banks and investment banks ended in 1999.  President Bill Clinton and a Republican controlled Congress approved the Gramm-Leach-Bliley Act, which repealed the Depression Era Glass-Steagall provisions of the 1933 Banking Act, put in place expressly to separate such activity.

1999 forward, what this did was it allowed for banks to engage in riskier investing and trading, raising capital at a cheaper cost by using our deposits.  The banks could now use our savings deposits to do things riskier than make some loan to a business or consumer.  In other words, it mispriced risk.  They could now raise capital at a cost that did not account for the risk.  There was a reason why investment banks had to pay more for their capital.  They did riskier things.  Now, since 1999, they don’t have to pay more for taking more risk.

Banks (and most businesses) lever.  In other words, they have more stuff than money they have.  So they borrow the rest.  If investors give me $100 million to buy a basket of securities, I can buy $100 million in securities.  But what if I want to buy $1 billion in securities.  I need to borrow the other $900 million.  Say I can borrow it at 7%.  That means I owe $63 million every year to borrow ($900 x 7%).

So what if the $1 billion of securities I now own earn 11% in a year?  That means I made $110 million.  But I paid out $63 million to borrow, so my net return is $47 million.  That might sound like I’m not left with much of that $110 million.  But remember, I only have $100 million in actual funds.  So through levering, I actually earned 47% on my money by borrowing to invest in a butt-load of securities that really only appreciated by 11%.

Such is the power of leverage.  Not bad, huh?  Well it can be.  As leverage magnifies potential returns, it also magnifies potential losses.  If those securities dropped 10%, my funds would be entirely wiped out (before even paying for the cost of borrowing).  Indeed, if the securities just went nowhere that year, I lost $63 million of my $100 million fund just to pay for borrowing.

So lenders to funds that will engage in this sort of activity will charge a higher rate to protect themselves from the risks of their borrowers’ investing activities.  Charging a higher rate does two things.  It provides the lender more cushion or payment for the risk the borrower is taking.  And it eats up more potential profits of the borrower who is using the loan to lever.  The higher the cost to the borrower, the less they are incentivized to lever a lot, as it eats up too much profits at some point.

If I could now borrow at 3.5% instead of 7%, I could borrow twice the amount while still just paying that same $63 million.  But now my entire fund will be wiped out in just a 5.2% swing on the $1.9 billion of securities I now own, v. the previous 10% swing on the $1 billion.  Leverage and risk has become mispriced, because 3.5% does not adequately reflect the risks that I am borrowing to engage in.

Off the top of my head, earlier in the 2000s, bank leverage (I define as tangible investment assets as a multiple of tangible equity) was ~5-10x.  A $1 change in the stuff they were invested in, lost or made them ~$5-10 of their own money.  By 2007/8, it was ~25-35x.  Earlier on, they would invest in securities that might earn ~6-8%, but losses might be flat to 1%.  By 2007/8, they were in all sorts of esoteric crap that might earn 15-25%, but also might drop by 20% or more.  And that’s BEFORE the effects of levering.

So if a bank can now use really cheap deposit accounts to do this sort of stuff, they can lever up a whole lot and in really risky investments.  That’s what they’ve been able to do for over a decade now.  There were also a handful of significant dislocations of accountability for risk that allowed this to perpetuate.

In the 1980s, the investment banks all started going public.  As a result, the owners were now a bunch of public shareholders that really had no clue what was going on inside, especially given that regulation concerning public disclosure is really rather poor to this day.  Before this, the owners were a bunch of partners risking their own money.  Everyone was constantly looking over each other’s shoulders on the inside.

The other dislocation is, no one really understood or “owned” the risk of these complicated mortgage-related investments, as the bank or broker originating the loan would instantly securitize them and pass it on into a pool owned by many investors that really had no transparency and had nothing to do with the origination.  The creator of the investment did not care about how risky or transparent it was, because they earned a fee to create it, and then instantly passed their Frankenmonster on to anyone else.

Today’s now-approved Volcker Rule attempts to unwind some of that mispricing of risk.  It prohibits banks from using bank deposits to engage in deemed riskier investing and trading.  They can no longer invest in or form private equity funds (which borrow funds to acquire businesses) or hedge funds (which engage in a wide variety of sophisticated and generally riskier trading and investing).  Banks can no longer use their own capital to directly engage in that form of trading and investing.

But they are allowed to continue to use capital in market-making activities for their clients.  Which should be the case, but is generally misunderstood by the unsophisticated public.  When market-making, banks compete with each other to get the trade order and earn a commission or mark-up.

So for example, client Fidelity might suddenly call up Bear wanting to sell 20 million shares of Apple, unbeknownst to Bear a moment earlier.  If Bear can’t do the trade at the best price and in the time Fidelity wants, Fidelity will pass and go do it with Merrill who will.  So in order to be able to suddenly take down 20 million shares on a moment’s notice for one of the biggest clients around, Bear needs to be able to use its capital to set up various types of hedging trades to safeguard having to suddenly own 20 million shares of Apple.

This activity generally has a depressive impact on the share price of its client’s Apple position.  Which runs counter to the interests of the client, as they will have to sell the shares lower.  But if no market maker engaged in this hedging, no market maker would aggressively offer the best possible unwind for Fidelity.  And Fidelity would have to sell those shares ultimately at a much lower price over a much longer period of time, as they awkwardly pound the market lower trying to get out.

So Bear’s trading practices to protect itself is a necessary evil of sorts that client Fidelity accepts in order to get the best possible result, given the weight of the order.  And none of that is illegal.  Because as a market-maker, the bank does not have a fiduciary duty to the client, irrespective of the various front-running rules.  In fact, it’s only duty in market-making is to “know the client”.  That means make sure they are sophisticated, adequately capitalized and confirm that they aren’t running money for Al Qaeda.  All of these duties are to protect the market-making bank, not the client.

Fiduciary duties to the client only exist when securities subject to the Securities Act of 1933 are being issued in the primary market.  That means basically only for US stocks and corporate bonds being IPOd, or issued for the very first time.  For anything else issued for the first time – really complicated mortgage-related instruments for example – no such duty exists.  For the everyday market-making activity they blather on endlessly about on CNBC, that duty is not really there.  And institutional clients fully understand and accept that... Until they have to blame their own irresponsibility on someone else.

So sprinkle some loose rules and regulation, mispricing of risk, investing in misunderstood instruments, dislocation of accountability all allowing for banks to take on way too much risk and leverage using your life savings all relying on home prices going up forever but really went down ~20-50% perniciously since 2006… and you get the worst financial crisis of perhaps ever.

All they had to do was make all investment instruments subject to the 1933 Act.  It would shine all the sunlight that a common stock is exposed to on all those weird mortgage-related instruments, and it would force banks to apply the same duty of care when issuing them for the first time.  And they need to fully separate commercial banks from investment banks.  Salomon Brothers did just fine before it was a subsidiary of Citi.

But none of that happened really with Democrats Chris Dodd and Barney Frank’s namesake 2010 legislation which is supposed to right these wrongs, and which spawned this Volcker Rule.  Because it wasn’t really written by Frank or Dodd.  It was written by the banks.  A Republican couldn’t have asked for more.

And the banks are bigger than ever.

Wages, Work and the Way

A Facebook post of mine this morning, which stimulated some agreement (read: a handful of people clicked "like"; but I'll take it).  And, as most FB threads go, it then went sideways into some ranting about how much subway tokens and pizza costs now.  So I figure I'd post to a broader (in theory) audience.  (Not the stuff about the subway tokens and pizza.) This is in connection to a Thomas Friedman New York Times op-ed column, whose piece I feel really nailed it, link...

http://www.nytimes.com/2013/12/08/opinion/sunday/friedman-cant-we-do-better.html?smid=fb-share&_r=0

My FB remarks: "You want to know where American wages are going? This is where they are going [ref: Friedman article]. You want to put more income into the average American's hands? Then we need to give them the skills worth paying for. McDonalds workers are not going to get the $15/hr they demand. Because they are not worth it. No offense.  It is a minimum wage skill.

"Math, science should dominate K-12. Universities need to stop preparing young adults for the 19th Century (it would also be nice if that not-really-fantastic-anyway undergrad degree didn't cost a kidney, each year). The Bronte sisters or Wordsworth are not going to help them in the 21st. We need more engineers and physicists. We need to prepare ourselves to compete with Klingons and Romulans, not Ottomans and Prussians. Flipping burgers or digging ditches is hard, honest work. The only job to be ashamed of is the one not done to the best of your ability. And for doing your best, you will be compensated to the best of your ability...

"... Friedman is a credible voice to me. Because he is able to take both ideologies to task - not always criticizing one party v. the other. His voice and its like should be paid attention to. Not the ones who simply exist to promote one camp v. the other. Those types are in our way. Move them aside...

"... I mean, I know we can do good things here. The handful of my friends that read this thread and clicked 'like' are across the political spectrum, for instance. So where there is agreement, let's build on that.

"1) Realign educational goals, 2) commit govt expenditure toward 21st C. infrastructure rebuild and 3) public-private partnerships to nurture new technologies and (when they have legs) release them as new private industries.  I think both the capitalist and socialist (or whatever other labels we might use for each other) can rally around these goals. And I think we can also readjust our tax codes and social subsidies to make them more efficient, affordable, bringing down debts along the way.  There are credible, bipartisan plans in Washington that address this.

"That's the best pathway for our success and survival. It will hand the strongest America ever to the next generation, in my view. And simply embarking down that path today will immediately improve our social psychology, jump-starting investment and jobs. The only thing standing in the way of all of that, is the will to be disagreeable."

If you agree with my sentiments here, please share this with your elected representatives and/or favorite pundits.  They are the ones who can change the social attitude, focus and thus, coarse of our nation.  You are the ones who will hold them to it.

Jobs Update

So the jobs report was out this morning. Everyone’s saying it looked decent. About 200 thousand jobs created in Nov. The unemployment rate dropped to 7.0%. The government shutdown didn't even put the slightest dent into things.

The amount of jobs lost in the Great Recession and global financial crisis circa 2007-2010 is 2 ½ times the average lost in every post WW II recession preceding it. We have now spent 60 months with unemployment over 7%. During the economically challenged 1970s, unemployment was over 7% for a total of 30 months that entire decade. (To be balanced in presentation, we spent 74 months over 7% from the 1980-82 double-dip recession; but nowadays is still way worse.)

At the current rate in a little over half a year from now, we will have recovered all 8.7 million jobs lost in the worst recession in a generation. That will be a total drawdown/recovery period of almost 6½ years. Which will be triple the average duration of every post WW II recession before it. And about as anemic a recovery as that of the Great Depression, post-1934.

In those 6½ years, we will also have needed to generate enough jobs to keep up with population growth – about another 10 million jobs in that time. Which means, all the while through this "recovery", we have been adding jobs that barely even keeps up with population growth. Said another way, at this rate, we will never recover from the Great Recession of 2008/09.

Despite the fact that for over six years since late 2007, our central bank the Federal Reserve has been pumping unprecedented stimulus into the system to counter the depressive effects of the recession and global financial crisis. They have kept short term borrowing rates for banks at effectively 0% - free money for banks to lend. The Fed has nearly quadrupled the size of its balance sheet at this point, buying up treasury and agency securities in the open market, flooding the system with dollars.

Never before done on this scale, it would typically be very inflationary. Yet inflation has averaged at anemic levels below 2% for the past five years now. Too much inflation is bad. But a little is good. (Think of it as your pulse. You don't want it racing too fast, but it is nice to have one.) Too little is symptomatic of a depressive economic state. And in the face of the Fed’s colossal stimulus to date, it is exemplary of just how massively deflationary the full-on effects of the financial crisis would have been, had the Fed and government done nothing to counter it.

Stocks rally because the Fed is forcing investor capital into stocks with near 0% interest rates. Handing them too much cash through their stimulus efforts all the while. Profits are decent, so the market isn't overvalued. But sophisticated investment professionals understand that the economic landscape is still very precarious. When the Fed ends its stimulus, it will be a very bad year for stocks. But it will only be one year, so buy everything you like at that time (which is about nine months away, I'm guessing).

So when the talking heads apply a positive spin to pumping out 200 thousand jobs last month, they simply are being disingenuous or have no real understanding of this stuff.

The good news is, housing is now in a real recovery for about a year now.  It brought us down, so it will bring us out.  Banks still have housing assets marked on their balance sheets at unrealistically high levels.  This is why they don't make loans, despite the Fed handing them free money to do so for half a decade now.  You get home prices rising, lending activity up... Suddenly that $2 trillion in pent-up corporate cash goes to work - read: jobs.  And with that everyone's feeling a lot better.  The unprecedented vitriol in Washington (and power of certain radical third parties for that matter) will dissipate.  Politicians will not fear getting primaried for daring to cooperate.

Dogs and cats living together.  Ice cream for dinner.  You get the idea.  It's not gonna be that good, but anything just a little bit better than the past several years will be welcomed and appreciated enough, in my view, to get us back to the business of America.

Death by Republicans

As a result of the Republican instigated government shutdown, and risking of our nation's credit, all to repeal a health care law that in no way ever could have been repealed...

The new NBC/Wall Street Journal polling data this morning shows that 78% of the public suddenly thinks the nation is on the wrong track - and by far mostly blames Republicans. It is the biggest and quickest swing in over two decades.

The last time we scored a 78 was in October 2008. Which is around the time when Lehman Bothers collapsed; Fannie Mae, Freddie Mac and AIG were nationalized after failing; in a year where Bear Stearns, Merrill Lynch, WaMu, Wachovia, IndyMac all effectively failed; followed by GM and Chrysler failing; after home prices had been cut by one-quarter (from 2006) after not really declining for five decades; after world credit markets melted down; after the Treasury suddenly was begging Congress for $700 billion, and they needed it yesterday; after the Dow Jones Industrial Average crashed thousands of points, wiping away almost $30 trillion in global wealth.

In short, this colossal misstep by the Republican Party which now risks their own destruction, has created a public concern to rival that of the worst financial crisis of a generation's time. Possibly setting into motion materially adverse market consequences (God, I hope not).  Which are at the moment docile, as they focus on the fact that we would not default and that a deal is likely days away.  But the unintended consequences of a suddenly and materially chilled public factor in a new set of economic dampening, until alleviated.

Thank you so much, Republicans.  I know you are divided between Evangelicals, Tea Parties and Moderates.  I know you are panicked right now.  I know the "true leadership" rests more in the Moderate camp, but is unwilling to demonstrate that true leadership, take ownership publicly of this mess, roll up your sleeves and clean it up, getting dirty in the process.  (PS - The one Republican who does, truly has a chance of beating Hillary in 2016.  But right now, this party couldn't beat a Dukakis/Tsongas ticket.  Actually right now, it looks like it will be three parties, come 2016.)

And never forget: The poster child for all this is a Republican Texas Senator, named Ted Cruz: a guy who regards himself so smart, that he would only study with Harvard or Princeton grads while in school. Well, look at the brains on Ted. He's about as smart as Eugene McCarthy - who drank himself to death after finally being censured by Congress.

I think it was MSNBC's Chuck Todd last night that coined this situation (for all politicians, not just Republicans) as "political depression".  So aptly put.  I guess I would refer to the present as a "political crash", where the depression sets in afterward.  And as economic depressions have political consequences, so then political depressions have economic consequences.

Hopefully this all blows over in the next weeks.  Good night, and good luck.

Note: I am not a Democrat.

Contract with Congress

Once again the government is shuttered.  The last time was in 1995, for about a month into 1996.  In the 1994 election, Republicans led by Newt Gingrich R-GA and Dick Armey R-TX made a “Contract with America”.  It was a promise, largely written by the Heritage Foundation, borrowing in part from President Reagan’s 1985 second term State of the Union Address.  Generally, if Republicans were elected to take control of the House, they promised to reduce the size of government, lower taxes, stimulate private business initiatives, reform tort and welfare.

It worked.  In 1995 they took control of both the House and the Senate for the first time since 1953.  And then the Republican controlled Congress sent President Clinton a budget tailored to their Contract’s tenets, that he vetoed.  The government shut for 28 days.  During the shutdown, the President was largely blamed.

Afterward, Speaker Gingrich became vilified for it – portrayed as an infant throwing a tantrum.  Many point to that as a backfire for Republicans.  Speaker Gingrich in their defense cites that it led to balanced budget amendments, and Republicans were subsequently reelected and continued to control Congress for greater than one election cycle, for the first time since 1928.

Whatever the gamesmanship, they didn’t tie their list of demands to risking our nation’s creditworthiness.  Like a handful of House Republicans (and at least one Senate Republican) presently have.  In a couple weeks, the government will run out of money if Congress doesn’t vote to raise the debt ceiling.  About a week after that, our first interest payment on treasury issues will come due.  If we go there, we will not default.  The Treasury will move some money around to keep from a default (not to mention grace periods).

But we should not go there.  Anywhere near there.  The only mitigating factor to the potential panic it could create, is that the world has no place else to store value.  The by-far largest, most liquid, presumed “risk-free” place to invest excess reserves is in US dollar-denominated treasuries, issued by the Federal government, backed by its full faith and credit.  Since the US dollar is the world’s dominant currency reserve, there’s no place else of scale or liquidity to run to if the world sells treasuries, even if some whack-a-dos undermine world faith in our credit.

This is the reality of it all.  Since the world has no place else to go, it dampens the effects of a panicky flight from dollars and treasuries.  Beyond that, the Federal Reserve would run in and buy a shovel-load more treasuries than they already have been.  But all that ends up in the same place, because they can only purchase those treasuries with dollars printed out of thin air by the Treasury.  The Treasury – that has no more ability to borrow in the first place.

All this round and round destroys the value of a fiat currency – whose value only exists through the promise of its issuer to not debase its value by printing too much.  This is all ultimately inflationary – possible hyper – as the flood of a supply of dollars entering a system where everyone is dumping them only accelerates the problem.

And because the world can’t dump dollars and treasuries for the only reason it has nowhere else go, markets haven’t gone where they by now likely would have.  (That is down.  A lot.)  And thus, those politicians are learning a bad lesson – that their brinkmanship is not destabilizing global financial markets.  Because the dollar has not yet collapsed and interest rates have not yet spiked.  Which is a horrible way to govern.  And precisely how it is usually done.  If you will, the stop sign doesn’t go up at the intersection, until after someone has been run over by a car.

So thank you, Congress, for completely abrogating your most basic responsibilities.  Congress has become ungovernable.  Their collective approval rating is ~10% (and even individual approval is plumbing new depths).  They are unfit to serve us.

“What we’ve got here, is a failure to communicate.”  So, Luke, allow me to propose an enhanced method of communication.

What we need is to find a way to impose term limits on Congress members.  Eliminate the possibility of a lifetime career in power with its juicy, comfy perks.  That might go a long way to mitigate the attitude associated with presumed career security that comes from party-favorable gerrymandered districts.

The problem with getting term limits for members of Congress is, you need Congress to vote to impose term limits on themselves.  Like that'll happen any time soon.  Congress voted to impose term limits on the President in 1947 (ratified in 1951).  But is it so hard for a legislative body – that has been at odds with the ever increasing power of the executive since our founding – to limit the President’s power?  The answer is, not nearly as hard as making them impose such on themselves.  Nonetheless, but really to that point…

We need a "Contract with Congress".  We need to level the playing field between the people and its elected representatives.  We need a grass-roots, cross-ideology populist movement.  A contract by the people with any would-be Congress members, that states that the voting public will only vote to elect a person to Congress that subsequently votes in Congress to approve term limits on themselves.

Senators presently serve six-year terms indefinitely (with the Senate being staggered, where one-third is elected every two years).  House Representatives serve two-year terms indefinitely (where all of them are reelected every two years).

We can work on the details, but I propose limiting Senators to no more than two, six-year terms (same staggering).  And allow Representatives no more than two terms, but make them four years in length, so they aren't constantly running for reelection (and staggered, where half the House is reelected every two years).

If you know you’re only in for two election cycles, then that should mitigate your fear of being “primaried” in ever redder and bluer gerrymandered districts.  Compromising with the other side becomes more a viable option.  It will also shorten the leash of control by the monied interests, since they’ll have to train a new dog every handful of years, rather than sit comfortable with one potentially for decades.  And afterward, those elected representatives will still be able to "retire" from public "service" and go on to K Street and make obscene amounts of money "consulting".

All that will require a Constitutional Amendment.  In order to propose one, a super-majority of both houses of Congress must.  Absent that, a national convention of two-thirds of the states (34 of 50) may propose one.  A national convention would require the state legislatures voting to.  Which would require the people sticking it to state level legislators to do so.  Which is even more difficult than this already would be.  Because focusing the public on any of this might make them miss an episode of Duck Dynasty or distract them from Googling Miley Cyrus twerking or something.  But for the rest of us…

In the past several decades, there have been two nearly successful, yet ultimately failed, national conventions.  One addressed the process of redistricting.  The other addressed bringing excessive budget deficits into line.  How germane for today.

Once properly brought (proposed), it must be ratified by three-fourths of the states (38 of 50).  Any deadline for ratification is murky.  The Constitution is silent on that.  In other words, there isn’t one.  But the Supreme Court has since ruled that Congress may place a deadline on it, if it wishes.  An Equal Rights Amendment for women, for example, was written and proposed to Congress in 1923. Congress voted and approved it… in 1972.  It then went to the states for ratification, but it failed to receive the 38 states’ approval before Congress’ self-imposed deadline of 1979 (extended to 1983).  So it failed.

And once passed, it could be repealed in the same process.  By the same people that we have now imposed this on.  So we need a safeguard there.  A term prohibition on repeal, until it sets in as part of our political ethos.  Or perhaps impose some form of poison pill, like barring any member of Congress voting to repeal it, from ever holding subsequent Federal elected office.

So obviously, this is a tall order.  But is this not so clearly a moment in our history that it is desperately needed?  Where politicians now use our nation’s creditworthiness as a poker chip in their power games.  Who are bought and sold by their invisible campaign contributors.  Who for a handful of months each election cycle, pay only lip service to those people who vote them into power.  As our deficits run rampant and our debts balloon.

Where presently every existential threat to the United States is the construct of a small privileged power club, whose near-permanent membership is virtually assured.

Fight Crazy with Crazy

I’m sorry.  I don’t like getting political, but there’s political stuff here tied to some real important economic and financial stuff… And this one’s pretty cut and dry…

Presently, I count 47 House members that represent the Tea Party Caucus.[1]  Based on the November 2012 election results, I estimate that ~2.6% of the US population have empowered them to hold office.[2]  Almost one-quarter of those 47 are from Texas, who have been empowered by ~0.5% of the population.

There are presently 432 members of the House.[3]  The Republican Party en masse holds a majority, with 232 seats.  To the extent its Tea Party Caucus is not aligned with broader Republican Party interests, Republicans don’t enjoy majority power with only 185 seats.  To the extent Democrats try to do anything in the House with their 200 seats, they become obstructed by the Republican/Tea Party coalition of 232 seats.  Stalemate.

So 11% of House members – that ~97.4% of us did not vote for – now stand in the way of funding our government’s basic operations, which will shut down hours from now.  But that’s not the scary part.  The scary part is, come 17 October or thereabout, the US Treasury won’t have any more money to pay Federal debts if the debt ceiling is not raised.

The Tea Party Caucus has tied that and government funding to a list of demands, which predominantly include defunding or now materially limiting so-called Obamacare.  A bill that – like it or hate it – has been signed into law over three years ago.  Since upheld by the Supreme Court.  Its primary advocate for repealing lost the last Presidential election.

Now although I absolutely agree that our debts are getting out of hand and need to be pared back, this is a very dangerous game to play.  Either through ignorance, obstinacy or both, it is the ultimate in foolishness.  The US is the largest, most successful, most integrated economy of the world.  What happens to it moves the entire global economy and financial markets.  Because of our unique foundational role in the world, if a legitimate sense of fear of the US defaulting on its obligations were to begin spreading through the markets, it has the potential to set in motion a series of events that could utterly collapse the global financial system and usher in a depression to rival the 1930s.

In brief, the dollar would collapse.  The price of everything would skyrocket overnight.  Interest rates would spike.  What little lending activity that has come back since the 2008-09 global financial crisis would completely shut down.  So would our economy.  Mass firing would ensue.  The unemployment rate would climb dramatically.  The stock market would crash hard, destroying everyone’s nest egg.

Depending on the severity and protraction of the above, social stresses would start to develop.  We could see hoarding of supplies.  There could be gas shortages, and food and water could disappear from store shelves.  With a scarcity of basic survival supplies, crime would likely spike.  Gangs would roam from neighborhood to neighborhood looting those households that could not defend themselves.

To counter that, martial law would become imposed for an undetermined period of time.  Civil rights would be suspended until things calm down.  Rationing and price controls would be instituted by the government, until the economy comes back.  Which could be years.  And the world will spend the next quarter-century trying to rebuild a global economy, destroyed by a completely avoidable man-made event.  That is, if those increased global hardships don’t devolve world cooperation into global conflict.

This draconian scenario happens to nations all the time (just ask our many friends who have left their homes to live with with us here), when markets lose faith in their financial or political systems.  It just hasn’t happened to us yet.  Mostly because, so far, we have been governed by politicians who – albeit might have been self-serving or corrupt or not very bright – have at least not been complete, raving loony idiot children.

But at least the Tea Party Caucus members got to stick to their convictions, so that they could maintain the favor of the 1/38^th of America in their very, very gerrymandered districts who elected them.

The potential economic devastation from such political gamesmanship, could well end up far worse than what any terrorist could hope to inflict on us.  I urge all to think soberly about that last statement, and consider the extent to which these politicians’ personal aspirations might rival those who we regard true enemies of the state.

I understand that was a more extreme statement.  But I measure my words in proportion to the subject matter.  The potential dangers here are that extreme in my view.  And I know I might have miffed some conservative readers here (who haven't stopped reading after my first few paragraphs), because I just sound like I’m towing the Democrat Party line.  If I have you pissed off, good. You should be.

For the record, I am not a Democrat.  Nor am I a Republican.  I have absolutely no vested ideological interest or party affiliation.  It just so happens in this instance, the President is correct, and those that claim to represent the Tea Parties in Congress are wrong.  They have put the President in a situation, where to compromise, sets a bad precedent where any antagonist minority fringe can risk too much (for us all) for too little (for them).

Risking our creditworthiness in some political maneuver to castrate Obamacare… that’s not “crazy like a fox”.  That’s just crazy.  As crazy as it is, it isn’t totally as unbelievable as it might feel.  This is what happens when societies come under prolonged periods of economic hardship.  Desperate people start actually giving ear to the more radical voices, frustrated that their incumbent governments have not delivered.

The rise of communism in Russia and China, or fascism in Italy and Germany in the early 20^th Century for example.  Indeed in 1930, the Nazis became the second largest party in the Reichstag.  They won over business interests, successfully campaigning that their version of national socialism was not like Marxism, as the Nazis were not anti-private ownership of property.  (Maybe you can find some Princeton or Harvard grad to explain that to you.  Since some seem to like making Nazi references.  Just sayin'.)

And our depressions of the late 1800s through the 1930s gave rise to a host of third parties with more radical points of view as well.  And every single one of them disappeared into oblivion as soon as the economy got back to where it should be.  So pay attention Tea Party… the moment we’ve gotten this economy working again properly… you and your uncompromising ways are gone.

For all non-Tea Party Republicans, to the extent you can’t wait long enough for that to happen… to date, House Republican leadership has not demonstrated a willingness to split from the Tea Party and pass agreeable legislation with Democrats, combining their 185 and 200 respective seats (although that’s the rumbling as of a few minutes ago).  I have heard that off the record Republican leadership regards that act as being the end of their party for the next quarter-century.

I don’t disagree necessarily.  But consider two things.  One, until you get back to the art of the compromise and stop allowing the Tea Party to continually take us all to the brink, you risk destroying the entire nation for a quarter-century.  Which will destroy the Republican Party for at least that long.  Two, given its already internally fractured state, lack of leadership and a confusing platform that seems to embrace everything that this nation’s attitude and demographics are moving away from, the Republican party may have already come to an end.

I know you are in an existentially very tough spot, but sometimes the only way to fight crazy, is with crazy.  So get on it, guys and gals.  I don’t want that other party having too much power for the rest of my life.

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[1] Source: http://conservatives4palin.com/2013/04/reviving-the-congressional-tea-party-caucus.html.  There were 48, but last week Congressman Rodney Alexander of Louisiana’s 5^th District resigned.  AZ 1, CA 3, CO 2, FL4, GA 4, IA 1, KS 2, LA 3, MI 1, MN 1, MO 2, MS 1, NC 1, NE 1, NM 1, SC 3, TN 3, TX 11, UT 1, WV 1.

[2] Excludes Alexander, who last week resigned.  Of the 47, five ran unopposed in the general election.  For those five, I count all votes in their respective district as “for”.  If you count none in the unopposed races (with the view that all voters in that district had no other viable party alternative), that results in ~2.3% of population as having voted “for” the House Tea Party Caucus.  Voting results source: Politico, November 2012, with 100% reporting.

[3] Three vacancies.