Category Archives: markets

Hasn’t Our Economy Been Managed Disastrously Enough?

Posted on by
Reply

Congressman Dennis Kucinich (D, OH) considers that the oil and gas businessmen are greedy b*stards, and they cannot be trusted.  He wants to put their business’ profits under government control—and not just any part of government; he wants to cut the Congress out of the picture and set up another Board for President Obama.  He’s joined by five more Democrats.

The Democrats, worried about higher gas prices, want to set up a board that would apply a “windfall profit tax” as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

This “Reasonable Profits Board” is intended to control gas profits in the industry.

Further, in an amazing display of economic ignorance, the bill Kucinich proposes actually requires, in all seriousness, that it’s the oil and gas companies who must pay the tax.  They really don’t believe that the cost increase would be passed on to the customers.  They really don’t understand that the tax, and the cost bump to the end user, would simply depress the business’ ability to fund their own operations, expand hiring, search for more oil and gas supplies, conduct R&D, and so on; and it would similarly reduce consumers’ ability to put food on their tables and pay their rents.

But it’s all for a good cause.  Kucinich earmarks the taxes for funding alternative transportation programs when oil-and-gas prices spike.  This is just ridiculous on its face.  If those “alternative transportation programs” were any good, they wouldn’t need government subsidies—your tax monies—to compete in the market.  Just look at how the Obama High Speed Rail boondoggle, including the California bullet train, for instance, have turned out.  See who’s left holding the bag for that “alternative transportation program” stuff and nonsense.

I’m a bit confused by another aspect of this proposal, though.  It’s a lot of trouble to get such legislation passed these days, especially with unruly Republicans running amok in the House.  It would be a lot easier just to have the EPA issue a rule.

The other Democrats who are pushing this invasion of the free market are these

  • John Conyers, Jr. (D, MI)
  • Bob Filner (D, CA)
  • Marcia Fudge (D, OH)
  • Jim Langevin (D, RI)
  • Lynn Woolsey (D, CA):

All six need to be replaced at the 2012 election, if not in the Democratic Party primaries leading into the election.

Will HARP 2.0 Accomplish Anything?

Posted on by
Reply

The administration has come out with an updated Home Affordable Refinance Program, what The Wall Street Journal‘s  Smart Money calls HARP 2.0.  With this improvement, underwater homeowners can refinance their mortgages at a lower rate if they have Freddie Mac- or Fannie Mae-backed mortgages, they’re current on their existing mortgages, and they’ve not missed a mortgage payment in the last six months and not more than one payment in the last twelve.

There are a number of items to consider, though.  Why would anyone want to take the lender’s side of such a (refinanced) loan?  The collateral offered has less value than the collateral that was offered for the original loan: it’s the same house, now devalued, often very significantly.  This means that a lender that retains the loan in its portfolio is giving up one income stream for a smaller income stream on a lower-valued home. This decrement often can be worth it, given the reduced loan to collateral value ratio associated with an increase in home value, but in this market…?  Additionally, the lender that sells the loan to a packager or another loan servicer is going to get a smaller sales price for the refinanced loan, since both the collateral and the income stream are smaller.

On the other side of such loans, the borrowers still will be underwater.  To be sure, this isn’t a problem for lenders whose borrowers in good standing or for borrowers who aren’t trying to sell, but is a problem for borrowers looking to relocate—to a different job in a different city, or to a job at all in a different city.  But these borrowers aren’t trying to refinance.

There are mechanical problems with HARP 2.0, also.  Even though the Luddites who underwrite loans manually can begin using the program now, the government’s IT whiz kids won’t have the software in place to support the new rules until early February for Freddie Mac-backed mortgages or March for Fannie Mae-backed mortgages.  This shouldn’t be surprising, though: this performance is of a kind with the government’s IT performance with the IRS’ “upgrade” of their computer systems and of OPM’s government jobs Web site.  Still, I remain amazed that, given as long as the government has known about this HARP variation, the software requirements weren’t able to be satisfied already, much less won’t be for another three+ months.

But beyond the bureaucrats’ lack of thought about how much this this program actually is going to accomplish, the lack of consideration for consequences or for history is…apparent.  Consider what the government holds out as selling points for this update:

  • borrowers who apply to the same lender to whom they make their monthly payments won’t have their credit scores checked, and
  • borrowers won’t be required to provide documentation proving their income.

This just repeats the mistakes that contributed to the housing bubble and burst in the first place:

Hmm….

Government Market Intervention

Posted on by
Reply

I’ve written before (here and here) about the damaging risks run by governments intervening in a free market.  I want to talk about a couple of additional examples of such intervention, and then I’ll leave the subject alone for a while.

The Daily Caller wrote today about the President’s attempt, by Executive fiat, to ease the debt burden on students.  The plan, according to early information, is to allow some of the (now graduated) students to ease their debt burdens by consolidating their loans into one loan.  Further, after the original loan contracts have been solemnly entered into, the President’s plan seems to be to allow borrowers to cap their loan payments at 10% of their after-tax income (with the signed contracts capping these payments at 15%).  Finally, unpaid balances can simply be walked away from—”forgiven”—after 20 years, instead of an originally contracted-for 25.  This plan is available, though, only to students whose loans were obtained through a Federal loan guaranty program or directly from the Federal government.  (Thus, not only is a select group being singled out for preferential treatment, only an especially favored subgroup is eligible for this particular intervention.  This, though, is beside the point of this post.)

Early word is that this will be “paid for” by “savings” claimed to occur from the 2010 nationalization of the student loan business which was included in Obamacare legislation.  There are a number of problems with this; I’ll confine myself to the market intervention problem.  With one party able unilaterally to alter the terms of a loan contract, costs will be imposed on the other party absent his agreement—even his discussion.

These costs will include lost interest income and principle repayment from the smaller payments of the loan’s repayment stream, and they will include outright loss of the principle loaned through that earlier forced “forgiveness.”  That five year chop, given the way loans are amortized, means that about 25% of the principle (assuming a 7% loan; the principle loss increases as the interest rate increases) can be written off.  Look at your home mortgages for an example: most of your payments are interest, with only a little principle being paid down until the last years of the loan.  These costs, as I’ve noted, are imposed solely on the borrower’s call.

Then there is the loss to the rest of us taxpayers by using the alleged savings from that nationalization to cover these costs rather than returning those savings to the Treasury to pay down the nation’s debt.  Of course some will point out that these savings, compared to our national debt, is just chump change.  This is disingenuous.  Ask any discount store about the importance of everyone’s nickels and dimes to the millions in profit those chain discounters make in the aggregate—on a slim margin compared to the millions in costs those chains experience, but a positive margin.  And as an Illinois Senator once said, “A billion here, a billion there, pretty soon, we’re talking about real money.”

Then there’s the cost of consolidating those loans—small, generally, compared to the loans themselves, but the fees add up across the six million, or so, prospective eligibles.  This is an unnecessary cost to the taxpayer, though, as anyone who ever has gotten into credit card debt trouble knows: loan consolidation is a standard means of containing, and ultimately paying down, excessive personal debt, and the mechanisms for this are already well established in banks and credit unions.

Some (others) might point out that students might have trouble getting a loan consolidation loan from a bank or credit union; their credit ratings will be too poor.  But wait: if they’re poor risks for a bank, aren’t they poor risks for the National Bank of Taxpayer?  And wasn’t freely lending to poor risks a major contributor to our present mess?

Finally, there’s the moral hazard being created here.  Given that the borrower from, or through, the government can simply change the terms at will, or take advantage of the myriad of loopholes in our current tax system (which I’ve heard no Democrat willing to change) to hold down the dollar size of that 15%10% cap, or simply to wait a now shorter while and then legally walk away from his loan contract, where is the incentive to take his loan obligation seriously in the first place?  Where is the incentive for private lenders to involve themselves in the student loan market?  Oh, wait—what student loan market…?

Another, brief, example is  the travesty of the Chevrolet Volt, built by a car company and union that were the individual, specifically targeted, beneficiaries of an historically huge market intervention.  I suppose, in the end, though, the Volt itself isn’t much of an intervention: even after a taxpayer-funded $7,500 rebate, the $40,000 (post-rebate) Volt isn’t selling, so the taxpayer’s funds aren’t being tapped too hard here.  There’s also no reason why it would be a large intervention.  This marvel of “green” technology gets around 40 miles per charge before it needs help from an on board internal combustion engine (in fairness to the Volt, this is pretty typical of other hybrids, too).  But so does the 1896 [sic] Roberts Electric Car; although the Roberts doesn’t have an internal combustion engine at all, and it’s missing some (unrelated to “green”) comfort features.

In short, what are we getting for these government interventions into our market place?  Moral hazard, higher costs to the taxpayer—and the consumer—and loss of market participation.    This is a big price to pay for interventions that, by their nature, cannot work.

Greed and Envy

Posted on by
Reply

Caution: long post….

Greed is wanting more than we have, not because we need more, but simply because we’re dissatisfied with what we have.

While Dante defined envy as “a desire to deprive other men of theirs,” modern usage stems from another meaning: a painful, even resentful, knowledge that someone else has something that we lack, and we want it, too.

But “Greed is good,” Gordon Gecko said, and he wasn’t far wrong.  More accurately, we should never underestimate the power of greed to do good in the world.  Envy is a part of this, in a way; it’s another aspect of greed: it can give a focus to what it is we want that’s more than what we have: sometimes we want that specific thing that he has, if only because he has it already.  Adam Smith understood this; these are his invisible hand.

To greatly oversimplify things, here’s how that invisible hand works.

A man wants something he doesn’t have; he may not be entirely clear on what it is, but he can describe his shortfall at least to some extent.  Another man offers to develop and then make a widget which he says will generally satisfy the first man’s shortfall.  He’ll then sell it to the first man if he will pay for the labor, materials, and a little extra for a profit.  The two agree on the terms of the transaction, and in short order, one man has a widget he didn’t have before, and the other man has some money he didn’t have before.

Another man sees the first man’s widget and tells the second man he wants one like that.  A conversation occurs, and in short order the third man has a widget, too, and the second man has a bit more money.

Soon a fourth man approaches the second and says that if the second will make a bunch of widgets, the fourth man will buy them all and resell them elsewhere.  Now lots of people have widgets, the widget maker has much more money, and a seller is making money.

A fifth man comes along and says this to all those who’ve bought widgets: “All your widgets look alike.  I have a fine selection of gee-gaws that you each can add to your widget to make it a truly unique possession, which no one else has.”  And others see the gussied up widgets and want—and conclude transactions to obtain—widgets that are just like this man’s, or just like that man’s.

A sixth man says he can improve on the widget: he can make a Widget DeLuxe, or a wodget, either of which is better than even a gussied-up widget.  And so on.

All of those original players—buyers, developers, manufacturers, sellers—are better off for these free exchanges: each has, as a result of the exchanges, something of value to him that he didn’t have before, and he got it at a price he considered worth paying—whether in labor or in money—in order to get that thing.  On top of that, additional jobs were created—additional sellers; manufacturer helpers; after-market developers, manufacturers, and sellers—and these new job holders are all better off than they were before: they have jobs, now, and the wherewithal to buy widgets, if they wish.

In all of this economic growth, in all of this wealth increase, greed and envy played their roles in driving the system.  Every participant acted on his own self-interest, every participant did what he did to satisfy himself alone.  Yet as a result of the interactions of these individual self-interests, these individual greeds and envies, everyone in the system became better off.

It’s true that the wealth distribution was uneven.  In this simple scenario, the original widget maker seems to have the largest gain, and the sellers seem to have the next largest.  But even the meanest widget buyer is better off now than he was before, and he’s better off in a way that would have been impossible without this commerce: he has a widget he couldn’t even contemplate before because it didn’t exist before, and he has options for a better widget or a wodget, as well.

Notice a critical aspect here, though.  This system was a free market, within which participants to an exchange were able to come together and reach their agreements along parameters that were entirely agreeable to them, and to them alone.  No one was forced into an exchange he didn’t want, no one was barred from an exchange in which he wanted to participate, and each one was free to act solely on his own desires.

Greed and envy are two-edged swords, though, and they certainly can overwhelm a free market.  There is a role for government intervention, and it is to protect all of us from the plainly rapacious.  But that intervention must work to preserve free market mechanisms—the very mechanisms that channel our venalities and convert them to accidental strengths for our common good. This kind of government intervention must enforce contracts, and it must ensure transparency so that every participant can readily understand what it is he is getting—or selling—when he enters that market for his own selfish purposes.  But it must leave each participant free to act in his own self-interest.

When the market isn’t free, when the market is centrally controlled—even when the market is nominally free, but government intervenes too much—the capacity of commerce to turn greed and envy to our common betterment is overwhelmed.  When government intervention favors this or that selected group, for instance—one group didn’t get as wealthy as another, let’s say—then our greed and envy are simply channeled away from functional (if accidental) cooperation for the common good toward simple, resentful, isolated greed and envy: “Why do they get special treatment?  Why can’t I, too?”  Members of the other groups—whether government-designated groups or self-styled (now that government has set a precedent of special groups for special treatment)—stop working to gain the wherewithal to buy, they stop working to produce.  These groups insist, instead, that government intervene in their favor, too.  In short order, the market is no longer producing, and wealth and well-being deteriorate.

Thus, government intervention too easily suppresses the essential cooperative nature that is men and women acting in our own self-interest—including our own greed and envy—to arrive at exchanges voluntarily between those of us who want and those of us who have, or can produce, or can create.  Intervention cannot look to control the forces of the free market, to control by government fiat our greed and envy, without destroying that free market.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary,” James Madison wrote.  But we’re not, and they don’t; we must limit government’s market interventions, as we must government’s power generally.  Greed and envy are part of our nature, but only a free market has the capability of channeling those base parts to our collective benefit.

Bank Fees on the Rise

Posted on by
4

Bank of America has announced that it’s going to raise, drastically, the monthly fees for debit card swipes made by its customers.  Why is this bad, though?  It’s certainly true that banking—and shopping—is going to get more expensive for all of us (Wells Fargo and JP Morgan Chase are expected to follow suit, and then the rest of the major banks, and the little banks, will do the same), but is this the real reason?

Big Government, via Dodd-Frank, is dictating limits on what banks can charge for debit card swipes and for a host of other fees.  Dodd-Frank uses the Federal Reserve Bank to cap debit card swipe fees, and the Fed has set this cap at a level that’s 50% of what the banks originally charged, at a cost to those banks of some $16 billion (based on 2009 revenues).  Those additional fee limits will cost still more revenue.  Yet these limits are set in the name of protecting the consumer—us.

Let’s look at the debit card fee limit for a bit.  We use our debit cards 16 times a month on average, for a $10 purchase each time, again on average, according to the Washington Post article at the link.  The merchants used to pay the banks some 4%-6% per debit swipe (depending on the merchant’s size and the size of the actual purchase—that’s the original 44 cent cap on the swipe fee).  Just doing some back of the envelope calculating, we’re buying $160 of goodies each month with our debit cards, and if Bank of America proves typical, we’re going to pay a $5 debit card use fee for that month.  That fee works out to a bit over 3% of our average monthly purchase.  The merchant is still paying 24 cents per transaction: 2.4% of the buy.  Debit card swipe costs now total, then, something like 5.4%.  There’s real change.

Here are some of the unintended consequences of Big Government looking out for the little folks.  In addition to the card swipe problem, for instance, Dodd-Frank makes it difficult for banks to charge for bounced checks—the customer has to agree to be charged beforehand (and there are those other fee caps).  The fees we pay generally will rise because, instead of banks charging those riskier customers higher fees, the Dodd-Frank limits force them to cover those high-risk costs by spreading them across all their customers—low-risk customers are now subsidizing those high-risk ones.

Small checking accounts, the kind held by consumers who aren’t so well off (and that’s a lot of us in this Obama economy) face higher fees to maintain those small balances.  How many of these consumers will be forced to turn to check cashing enterprises, or to prepaid credit cards (with their higher interest rates) and the like, because they cannot—or do not want to—pay the $60/year debit card “convenience” fee?

We’ll also pay more for our credit cards as the banks look to make up for their lost banking fee revenue where they can.  This means higher annual fees, higher interest rates on unpaid balances, and so on, on our credit cards.

Watch out for the results of this latest round of government price controls.  We saw their effectiveness when applied during the Nixon years: gasoline price caps, for instance, intended to fight inflation led to more inflation, gasoline shortages, and long lines at the pump.  We’re already seeing reduced availability of banking services: higher cost for our debit cards, reduced access to low cost checking accounts, harsher credit cards, and so on.

But there’s an additional problem to this government intervention, and it’s a moral one.  One of the most fundamental tenets of our social compact is that each of us is both free to transact our property—our labor, our goods, our money—with others for their property in any way we might mutually agree, and each of us is solely responsible for the outcomes of those transactions.  Government’s sole role under our social compact is to protect that freedom and responsibility.  Yet here we have government’s intervention utterly violating that tenet.  Big Government has determined that it cannot allow two men seeking to do business with each other in a free market to conduct that business unless Big Government is in the middle managing the relationship.  Banks (for instance) no longer can charge high risk customers higher fees: instead, they must, in order to make enough money to stay in business in this regulatory regime, spread those high risk costs across all of their customers.  On what basis should the rest of us be required to subsidize the riskiest?  On what basis does government transfer responsibility from parties to a transaction to others of us who are not involved?

“Bank of America is trying to find new ways to pad their profits by sticking it to their customers,” Senator Dick Durbin, Dem, IL claimed about that debit card fee adjustment.  This, though, is just a paraphrase of what our President has said: “I do think at a certain point you’ve made enough money.”  On what basis does government transfer responsibility from parties to a transaction to itself?

Finally, it’s a bit cheeky for Big Government to dictate to businessmen in the private economy how to handle their accounts, when Big Government has no understanding of the matter whatsoever when it comes to its own accounts.

Bad Moon Rising