Tag Archives: ethics

Community Banks, Big Banks, and Government Regulation

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First, the value of community banks, as illustrated by this anecdote from an Iowa bank’s President:

We have a good story to tell. According to the latest annual report from the Iowa Bankers Association, Iowa’s banks helped keep the state’s economy humming by, among other things, safeguarding $56 billion in deposits and using those funds to lend nearly $42 billion to help Iowa residents and businesses. Iowa banks also paid $158 million in taxes, made $39 million in community donations, and sponsored financial education programs in more than 129 schools.

For perspective, this compares to Iowa’s estimated 2012 GDP of $158 billion.

Despite this value-add, though, here’s what Uncle Sugar is doing to these smaller banks, courtesy of Dodd-Frank:

This expanding multitude of [Dodd-Frank] rules is…why some banks have decided not to offer certain types of consumer loans and more accommodating repayment terms.  A recent survey of Iowa bankers reveals that 89 percent of respondents say the regulatory environment has impacted their ability to provide credit; 81 percent say it has hurt their customers’ ability to understand financial products; and 68 percent say it has caused them to consider eliminating financial products.

As Spirit of Enterprise notes, this favors big banks, who can afford the costs of staff whose sole function has no relation to a banks’ actual business, but instead centers on compliance with government mandates, and it’s driving these community banks out of the industry.  Defending Enterprise puts it this way, and rather than seeing him as cynical, I agree with him:

Once heavy new banking regulation became inevitable, Wall Street and the Democrats insured that the government would make the big banks even bigger by driving the small banks out of business. One might argue that these were “unintended” consequences. We respectfully submit that these consequences were so predictable, akin to the timing of the rising of the sun or at least tomorrow’s weather, that they were, in fact, intended.

Debt Forgiveness and Bankruptcy

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Christine Lagarde, Managing Director of the IMF, insists as Spiegel Online International reports, that

For Greece to recover…creditor countries would have to forgive the government in Athens a large share of its debt.  “Nothing else will work[.]”

After all,

given that Greece will be unable to reach the target [of debt to GDP, originally 120% by 2020] on its own, European creditors have little choice but to forgive a portion of the debt they hold, Lagarde insists.

Additionally,

Senior troika representatives, including ECB Executive Board member Jörg Asmussen, Thomas Wieser, the president of the Euro Working Group, and IMF representative Paul Thompson, are campaigning for a debt haircut, especially among smaller member states.  Their goal is to reduce Greece’s 2020 debt level from the 144 percent of GDP that it would likely be without any kind of debt forgiveness, to just 70 percent.  To achieve the latter number, creditor countries would have to waive half of their claims.

The proposed haircut (of which the just concluded deal is a down payment) is a default, as was the prior haircut forced onto Greece’s many private creditors.  And here we are again.

These worthies are conflating default and forgiveness with bankruptcy, and that’s why we’re here again.

Default must come through a Greek bankruptcy, not through the EU, or the IMF, condoning irresponsibility by saying, “Forget it; consider our erstwhile loans to be grants.”  Forgiveness, which approaches a bankruptcy outcome, doesn’t achieve the new beginning that a bankruptcy would; it merely condones past irresponsibility without an actual write-off and fresh start—albeit with a poorer credit rating.  But what’s the Greek credit rating, functionally, now?  “The situation in Greece is scaring away private investors.”

And all of this shows the original folly of bailing out Greece.  And the similarly original folly of the tactic in the US.

Others’ Thoughts on Politics

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Thomas Jefferson:

I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.

And

We in America do not have government by the majority. We have government by the majority who participate.

Benjamin Franklin:

This will be the best security for maintaining our liberties. A nation of well-informed men who have been taught to know and prize the rights which God has given them cannot be enslaved. It is in the religion of ignorance that tyranny begins.

And

Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote.

George Washington:

While we are contending for our own liberty, we should be very cautious not to violate the rights of conscience in others, ever considering that God alone is the judge of the hearts of men, and to him only in this case they are answerable.

And

To contract new debts is not the way to pay old ones.

Patrick Henry:

When the American spirit was in its youth, the language of America was different: Liberty, sir, was the primary object.

And

The liberties of a people never were, nor ever will be, secure, when the transactions of their rulers may be concealed from them.

Thomas Paine:

Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness POSITIVELY by uniting our affections, the latter NEGATIVELY by restraining our vices. The one encourages intercourse, the other creates distinctions. The first a patron, the last a punisher.

Francis Lightfoot Lee:

I feel myself deeply interested in the security and happiness of America, compared with which, the interests of Britain, is as a feather in the scale….

Robert Morris:

I assert boldly that commerce ought to be as free as the air, to place it in the most advantageous state to mankind in general.

John Adams:

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

Also, from a couple of older guys:

Pericles:

Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you

Plato:

One of the penalties of refusing to participate in politics is that you end up being governed by your inferiors.

And

Those who tell the stories rule society.

An Empirical Demonstration

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Investor’s Business Daily provides one.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

Hmm….

This figure compares, across just a few parameters, the outcome of big government, high taxes, and profligate spending—California—with the outcome of limited government, low taxes, and (more) disciplined spending—Texas.  Texas has many faults, but the routine of government interference with its citizens’ wallets and businesses isn’t among them.

California has become a state that people are increasingly trying to escape, and Texas a state people are increasingly migrating to.

…

A study by the Manhattan Institute found that Californians have been leaving for states with better job prospects, lower taxes and better business climates.

In other words, states that are pursuing the kind of low-tax, limited government, free market policies [President Barack] Obama typically rejects.

The public may have voted to give Obama a second term.  But many people in California are voting with their feet, leaving the state that’s already put in place policies Obama has promised to keep pushing for four more years.

Obamanomics, as California demonstrates—its economy actually shrank sharply in the last four years—are an utter failure.  RTWT.

A Market Parallel

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Amity Shlaes has noted some interesting parallels between today’s economic situation and that of 1937, post reelection of another Progressive President (she’s politer than I am).

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

…

[T]he parallels are visible enough to be worth tracing.  They have to do with the danger of big government, and can be captured in a few categories.

Here are those parallels [emphasis added]:

Pre-election spree that sets records.  In the old days, federal spending amounted to about 19 percent or 19.5 percent of gross domestic product. …[from that] federal spending would have dropped back once the worst of the 2008 economic crisis passed.

…even in 2012, when the crisis was long past, the government went on a spree, spending the equivalent of 24.3 percent of the economy, more than the 24.1 percent for the year earlier.

Up until 1936, federal spending flowed at smaller levels than the spending by states and towns combined, with wartime being the exception.  Roosevelt slowly ratcheted up the outlays, and in 1936, Washington spent more than the states and towns.  This shift was dizzying for a country based on the principle of federalism, of strong states.

 

Fearsome attack on the status quo.  In his first news conference on Nov 14, Obama went out of his way to make clear his tax increases would fall on the rich: “What I’m concerned about is not finding ourselves in a situation where the wealthy aren’t paying more or aren’t paying as much as they should.”

Roosevelt was also ferocious, telling the old guard: “I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.”

When Roosevelt followed through in 1937, both with high taxes and his effort to pack the Supreme Court with more progressives, markets shivered.

Shlaes concludes with

The obvious question is why an announcement by Obama or Roosevelt to cut back just after the election doesn’t reassure those who dislike government expansion.

The answer is that the markets, which observe a giant march forward and then a step backward, don’t believe the step back is permanent.  Giants are giants.  Expansionists tend to revert to expanding government….

In the end, FDR’s Treasury Secretary, Henry Morgenthau, learned that lesson:

We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

The Obama administration, unfortunately, has no Treasury Secretary, or anyone else, capable of (re)learning that lesson.

Why should we care about the stock market, though?  The problem with significant drop in overall market stock prices isn’t just one of hammering rich investors and any workaday American with an IRA, a 401(k), or a 403(b) retirement account.  It’s that selling shares in a company is one of two ways in which businesses raise money (the other being borrowing) for product development or business expansion, either of which means prosperity for the company and, oh by the way, more jobs.  A significant market drop, then, closes off one more avenue for business expansion, jobs, and economic recovery.