Think about your retirement account. As Congress developed the law that governs our retirement accounts over the years they could have authorized us each to set up a trust account where we could invest in anything and have our income from the investment tax free as it accumulates. In a trust account we could invest in a neighbors new business, or our own business, or we could buy a rental property, or buy gold coins or any other asset we think is a good long term investment. Trust law has existed for hundreds of years, it would have been easy and cheap to create tax free retirement accounts using trust law.
But that wasn't what Congress did. Instead they gave the financial services industry a monopoly on the tax free benefits of retirement accounts. If you want the ability to invest tax free for retirement you have to invest through a financial services company that will charge you fee's and limit what you can invest in.
It has been a bonanza for the financial services industry. Financial services used to be a small part of our economy, now it is the biggest profit center in the US economy. As a result our retirement accounts are at the mercy of the greed that created the 2007-08 economic meltdown, or the Financial services industry entanglement with European government bonds.
It is not to late. Congress could still create a trust based retirement provisions that don't require handing a portion of your investment income to a financial services industry. Possible but extremely unlikely - unfortunately.
Tuesday, January 3, 2012
Monday, December 26, 2011
The America Institution of Crony Capitalism
The way a free market works that I learned long ago in Economics class is the people that put up the money hire managers for the business and the managers hire labor. The three legs of this stool have roughly equal bargaining power so are able to work out an agreement that allows them all to profit from the enterprise.
This idealistic theoretical notion has never worked very well in modern reality for labor absent strong unions and in modern life large business enterprises that dominate the economy also have disenfranchised ownership somewhat. In large business enterprises managers have developed disproportionate power. Ownership is diffuse and inattentive. Corporate management has become an exclusive club that looks after its own. Every Corporation is run by a Board of Directors composed mostly of top managers from other corporations. The Board of Directors govern how much top managers get paid, and often the road to becoming a member of the board of directors is through management. Since shareholder power is diffuse and difficult to organize the typical Board of Directors is pretty free to run the company as they see fit. And the evidence suggests for the last 20 years or so they seem to believe that showering money on their fellow club members is the best was to run the company.
Financial publications like the Economist have been noting for years the extraordinary rise of wages for corporate management in the United States. This isn't because companies are rewarding managers who have performed spectacularly, raising their company above all of their competitors, after the fact. Its all top managers. Management that run companies into bankruptcy got multi-millions in annual compensation, then make millions more with their golden parachutes. Managers whose companies muddle along in the middle of the pack of competitors make millions of dollars.
Government has failed to structure financial incentives in a manner that keeps the relative power of owners, managers and workers in alignment.
Evidence for this theory?
Even in this recession big corporations are making piles of money. But neither owners nor workers are benefiting.
Owners get little - big Corporations pay peanuts in dividends to their shareholders (the owners), many tech corporations don't even pay dividends. The only way to make money on stocks is by clever buying and selling of stocks, there is little money to be made in the next decade or so by buying and holding stocks since decades of rising stock prices have pushed stock prices well above their historical averages. When you do own a stock you face the risk management is pursuing short term policies to pump up stock prices so they can pay themselves millions, even though they are destroying the long term viability of the corporation. How many corporate bankruptcies in the last couple years have been accompanied by news of corporate CEO's parachuting out with their multi-million dollar severance packages?
Workers are perhaps the biggest losers. Managers use the Company's financial clout to undermine the bargaining power of workers. Managers use the threat of job loss to drive down wages for workers, then lay them off anyway to ship production overseas.
The law has been twisted to coddle this form of crony capitalism that is hollowing out our middle class and enriching anybody who can glad hand their way into the club. Management has used the financial power of the corporations to control the political debate in this country and set the rules in their favor. Their influence sends the US military around the globe to protect the commercial interests of large business enterprises on borrowed money they want taxpayers to repay. When big enterprises make stupid mistakes they get bailed out by Government, or run into the bankruptcy court to dump losses on investors, suppliers and workers, but I have never heard of a bankruptcy court requiring top management to return some of their salary. Corporations pour money into candidates who protect the ability of wealthy folks to make as much money as possible from large business enterprises at the expense of security for old working people. They undermine efforts at reforming our ridiculously expensive and inefficient private health care system.
Crony Capitalism will always be with us. Business will always largely be run by those among us who are the most obsessed with money, status and their own self interest. They will never control their own tendency to choose what is best for them in the short term. Their cleverness, energy and ambition can be a benefit to all, but we need to channel it.
That is government's job - to set rules that insure a fair and prosperous future for all. Government best tool for controlling business excess is not through dictating how business behaves, Governments role is to structure the law in a manner that aligns financial incentives away from short term get rich quick thinking and maintains a balance of power between the stakeholders. For example:
1. To re-balance the power of owners and management government should create a graduated tax structure for corporate taxation. Companies with fairly flat compensation plans that spread wealth broadly across the whole range of employees pay lower taxes than companies that are used to enrich the top management. Use a mean, median and mode test that will insure the Board of Directors won't be able to indulge in handing out excessive compensation to management without bumping up the Corporate tax rate - with all the negative ramifications that will have on the stock price and corporate profitability. So in the end the market of owners will have the power to control managers.
2. To remove the extraordinary political power management has developed through the use of corporate funds, we have to make an end run around the nonsense notion that the Supreme Court has burdened us with that Corporations have the same rights as people under the Constitution. Corporations don't exist in nature, they are created by law. Congress could pass a law linking the limited liability that makes Corporations such a valuable tool for business to limitations on political activities. So if a corporation wants to engage in political activism the owners and/or managers are no longer exempt from personal liability for any damages they cause in their business activities.
3. Restructure the personal income tax law to go back to something like the 1954 tax code. Lots of marginal tax rates, some so high as to be confiscatory as a disincentive to folks seeking to pad their pockets through corporate cronyism. Then allow companies to create a "stock trust" for their executives, where as compensation to entice good performance the Board of Directors can reward managers by depositing a special class of stock into trust for the managers that is lower priority than regular stock and the first wiped out in bankruptcy. The trust holds the stock until 5 years after the manager leaves or retires at which point it can be transferred directly to the retired manager as ordinary common stock. The goal is to align the managers self interest with the long term interests of the company.
4. Reform the Bankruptcy Code to make top managements perks as vulnerable as labor retirement obligations, and/or make bankruptcy automatic anytime top management does not to fully fund promised worker wage or retirement obligations.
This idealistic theoretical notion has never worked very well in modern reality for labor absent strong unions and in modern life large business enterprises that dominate the economy also have disenfranchised ownership somewhat. In large business enterprises managers have developed disproportionate power. Ownership is diffuse and inattentive. Corporate management has become an exclusive club that looks after its own. Every Corporation is run by a Board of Directors composed mostly of top managers from other corporations. The Board of Directors govern how much top managers get paid, and often the road to becoming a member of the board of directors is through management. Since shareholder power is diffuse and difficult to organize the typical Board of Directors is pretty free to run the company as they see fit. And the evidence suggests for the last 20 years or so they seem to believe that showering money on their fellow club members is the best was to run the company.
Financial publications like the Economist have been noting for years the extraordinary rise of wages for corporate management in the United States. This isn't because companies are rewarding managers who have performed spectacularly, raising their company above all of their competitors, after the fact. Its all top managers. Management that run companies into bankruptcy got multi-millions in annual compensation, then make millions more with their golden parachutes. Managers whose companies muddle along in the middle of the pack of competitors make millions of dollars.
Government has failed to structure financial incentives in a manner that keeps the relative power of owners, managers and workers in alignment.
Evidence for this theory?
Even in this recession big corporations are making piles of money. But neither owners nor workers are benefiting.
Owners get little - big Corporations pay peanuts in dividends to their shareholders (the owners), many tech corporations don't even pay dividends. The only way to make money on stocks is by clever buying and selling of stocks, there is little money to be made in the next decade or so by buying and holding stocks since decades of rising stock prices have pushed stock prices well above their historical averages. When you do own a stock you face the risk management is pursuing short term policies to pump up stock prices so they can pay themselves millions, even though they are destroying the long term viability of the corporation. How many corporate bankruptcies in the last couple years have been accompanied by news of corporate CEO's parachuting out with their multi-million dollar severance packages?
Workers are perhaps the biggest losers. Managers use the Company's financial clout to undermine the bargaining power of workers. Managers use the threat of job loss to drive down wages for workers, then lay them off anyway to ship production overseas.
The law has been twisted to coddle this form of crony capitalism that is hollowing out our middle class and enriching anybody who can glad hand their way into the club. Management has used the financial power of the corporations to control the political debate in this country and set the rules in their favor. Their influence sends the US military around the globe to protect the commercial interests of large business enterprises on borrowed money they want taxpayers to repay. When big enterprises make stupid mistakes they get bailed out by Government, or run into the bankruptcy court to dump losses on investors, suppliers and workers, but I have never heard of a bankruptcy court requiring top management to return some of their salary. Corporations pour money into candidates who protect the ability of wealthy folks to make as much money as possible from large business enterprises at the expense of security for old working people. They undermine efforts at reforming our ridiculously expensive and inefficient private health care system.
Crony Capitalism will always be with us. Business will always largely be run by those among us who are the most obsessed with money, status and their own self interest. They will never control their own tendency to choose what is best for them in the short term. Their cleverness, energy and ambition can be a benefit to all, but we need to channel it.
That is government's job - to set rules that insure a fair and prosperous future for all. Government best tool for controlling business excess is not through dictating how business behaves, Governments role is to structure the law in a manner that aligns financial incentives away from short term get rich quick thinking and maintains a balance of power between the stakeholders. For example:
1. To re-balance the power of owners and management government should create a graduated tax structure for corporate taxation. Companies with fairly flat compensation plans that spread wealth broadly across the whole range of employees pay lower taxes than companies that are used to enrich the top management. Use a mean, median and mode test that will insure the Board of Directors won't be able to indulge in handing out excessive compensation to management without bumping up the Corporate tax rate - with all the negative ramifications that will have on the stock price and corporate profitability. So in the end the market of owners will have the power to control managers.
2. To remove the extraordinary political power management has developed through the use of corporate funds, we have to make an end run around the nonsense notion that the Supreme Court has burdened us with that Corporations have the same rights as people under the Constitution. Corporations don't exist in nature, they are created by law. Congress could pass a law linking the limited liability that makes Corporations such a valuable tool for business to limitations on political activities. So if a corporation wants to engage in political activism the owners and/or managers are no longer exempt from personal liability for any damages they cause in their business activities.
3. Restructure the personal income tax law to go back to something like the 1954 tax code. Lots of marginal tax rates, some so high as to be confiscatory as a disincentive to folks seeking to pad their pockets through corporate cronyism. Then allow companies to create a "stock trust" for their executives, where as compensation to entice good performance the Board of Directors can reward managers by depositing a special class of stock into trust for the managers that is lower priority than regular stock and the first wiped out in bankruptcy. The trust holds the stock until 5 years after the manager leaves or retires at which point it can be transferred directly to the retired manager as ordinary common stock. The goal is to align the managers self interest with the long term interests of the company.
4. Reform the Bankruptcy Code to make top managements perks as vulnerable as labor retirement obligations, and/or make bankruptcy automatic anytime top management does not to fully fund promised worker wage or retirement obligations.
Monday, December 19, 2011
Crossroads for Occupy Wall Street
All social movements began as an effort to get peoples attention, to mobilize people to address some problem that has not been on the agenda of the powers that be. Appealing to emotion and physical involvement are crucial in this stage. Emotion is our motivator, without it we tend to do nothing, so marches, rallies, and other events where people of like mind can gather and emotionally connect are crucial.
But emotion is a beast that sometimes can be hard to corral. Emotion is a real problem because when any of us has a emotional belief something is correct it is very difficult to change that belief through logic without something bad happening first to counteract the strong emotional link associated with the belief. The Tea Party movement turned emotion loose a couple years ago and has made no attempt to rein in the emotion. They rode emotion, reveled in it, celebrated inflammatory, accusatory speech, encouraged the view that those that were not with them were evil or diabolical. The short term final result is still in doubt but it appears to me the Tea Party emotional indulgence has, for the longer term, pulled the Republican party into a groupthink trap that is moving them down the road toward electoral irrelevance.
The Civil Rights movement is a great example of a movement the corralled and controlled emotion. It had leaders that recognized that though emotion gets the ball rolling, it is facts, logic and - perhaps most importantly - restraint - even in the face of provocation - that swings public opinion to the point where the movements goals become public opinion.
The anti-war movement of the Vietnam years never developed leaders with that level of intellectual sophistication. In my estimation the anti-war movement of the 60's and early 70's was an abject failure. Even though they had really valid points about the Viet-nam war, the movement never went beyond emotion. They vilified those that disagreed with them. They were so self-rightous they had no problem inconveniencing everybody else to indulge their desire to vent their anger. The riot their confrontations sparked in Chicago in 1968 crippled the Democratic Party - handing the Presidency to the man they loathed, Richard Nixon. In the end the war ended in 1975 more despite the anti-war movement than because of it. The war had gone on so long the average voters realized it was crippling the economy, accomplishing nothing, and killing thousands of our young people. I believe the anti-war movement, in the end, probably made the war last longer because for the decade the movement existed many voters focused more attention on the negative emotions they experienced from the movements self-indulgent tactics than on the facts that demonstrated the war was not a wise course of action.
I think Occupy Wall Street is at a crossroads. A broad agreement that extends even into parts of the Republican party supports most of their basic points, but they do not seem to have developed the leadership that can channel their energy in positive and respectful directions. The anarchy of the movements leadership is very much like the deliberate anarchy that the anti-war protests embraced so enthusiastically back in the 1960's.
I think Occupy Wall Street has done a marvelous job of piercing through the political slogans the politicians infatuated with wealthy people have used for years to prevent serious discussion of economic issues. But when OWS shut down the Port of Oakland all I could think was "what purpose did that serve beyond gratifying their sense of power because they could do it?" They deprived a lot of working folk of work, inconvenienced thousands of citizens of Oakland and the only thing the shut down accomplished that I can see was to gratify their sense of importance. The image that pops into my head is a grown up version of a kid flopping around in the Supermarket aisle throwing a tantrum because Mom won't buy the sugar cereal the kid wants.
They are in danger of terminal group think, they all hang around talking to each other all day and are becoming oblivious to the wider world. Occupy Wall Street, if it developed some real leadership who understand the public relations value of restraint could turn this country around. But if they degenerate into a self indulgent obstructionist movement, they could help the existing order survive for years longer than it otherwise would.
But emotion is a beast that sometimes can be hard to corral. Emotion is a real problem because when any of us has a emotional belief something is correct it is very difficult to change that belief through logic without something bad happening first to counteract the strong emotional link associated with the belief. The Tea Party movement turned emotion loose a couple years ago and has made no attempt to rein in the emotion. They rode emotion, reveled in it, celebrated inflammatory, accusatory speech, encouraged the view that those that were not with them were evil or diabolical. The short term final result is still in doubt but it appears to me the Tea Party emotional indulgence has, for the longer term, pulled the Republican party into a groupthink trap that is moving them down the road toward electoral irrelevance.
The Civil Rights movement is a great example of a movement the corralled and controlled emotion. It had leaders that recognized that though emotion gets the ball rolling, it is facts, logic and - perhaps most importantly - restraint - even in the face of provocation - that swings public opinion to the point where the movements goals become public opinion.
The anti-war movement of the Vietnam years never developed leaders with that level of intellectual sophistication. In my estimation the anti-war movement of the 60's and early 70's was an abject failure. Even though they had really valid points about the Viet-nam war, the movement never went beyond emotion. They vilified those that disagreed with them. They were so self-rightous they had no problem inconveniencing everybody else to indulge their desire to vent their anger. The riot their confrontations sparked in Chicago in 1968 crippled the Democratic Party - handing the Presidency to the man they loathed, Richard Nixon. In the end the war ended in 1975 more despite the anti-war movement than because of it. The war had gone on so long the average voters realized it was crippling the economy, accomplishing nothing, and killing thousands of our young people. I believe the anti-war movement, in the end, probably made the war last longer because for the decade the movement existed many voters focused more attention on the negative emotions they experienced from the movements self-indulgent tactics than on the facts that demonstrated the war was not a wise course of action.
I think Occupy Wall Street is at a crossroads. A broad agreement that extends even into parts of the Republican party supports most of their basic points, but they do not seem to have developed the leadership that can channel their energy in positive and respectful directions. The anarchy of the movements leadership is very much like the deliberate anarchy that the anti-war protests embraced so enthusiastically back in the 1960's.
I think Occupy Wall Street has done a marvelous job of piercing through the political slogans the politicians infatuated with wealthy people have used for years to prevent serious discussion of economic issues. But when OWS shut down the Port of Oakland all I could think was "what purpose did that serve beyond gratifying their sense of power because they could do it?" They deprived a lot of working folk of work, inconvenienced thousands of citizens of Oakland and the only thing the shut down accomplished that I can see was to gratify their sense of importance. The image that pops into my head is a grown up version of a kid flopping around in the Supermarket aisle throwing a tantrum because Mom won't buy the sugar cereal the kid wants.
They are in danger of terminal group think, they all hang around talking to each other all day and are becoming oblivious to the wider world. Occupy Wall Street, if it developed some real leadership who understand the public relations value of restraint could turn this country around. But if they degenerate into a self indulgent obstructionist movement, they could help the existing order survive for years longer than it otherwise would.
Thursday, December 15, 2011
Does Government do housing finance better than the private sector?
In my adult lifetime we have had two financial blow ups in the private housing finance market. The Savings and Loan debacle in the 1980's cost taxpayers somewhere around 700 billion dollars. The final tab for the more recent blow up is still in doubt but it could cost the taxpayers trillions, but for the sake of making a point I will conservatively estimate it will cost at least as much as the 1980's event. So in the last 40 years taxpayers have been dinged for at least 1.4 trillion dollars to bail out private housing financiers.
That of course doesn't consider the cost of the lost economic output, the dislocation in millions of lives from foreclosures, and the ongoing cost to people trapped in underwater mortgages.
On the other hand...
Ever since at least WW II, maybe before, California has had a stand alone home loan program for Veterans. As far as I know it never cost taxpayers a dime. Unlike most Federal programs California's program doesn't create screwball public private partnerships that guarantee loans made by private lenders. Instead California issues bonds, then uses the money from the bond sales to make loans directly to veterans to buy a home. The Veterans mortgage payments are used to repay the bondholders. The program has plugged along for at least 60 years putting a lot of people into homes without any cost to taxpayers.
Hmmm......seems to me the evidence would suggest that direct government financing of home loans is a pretty safe and sane way to help people buy homes.
I know some of my Republican friends are jumping up and down thinking "what about Fannie Mae and Freddie Mac - they are government programs that were a big part of the problem in the current housing collapse". Well, Fannie Mae and Freddie Mac aren't really government programs - they are both "public-private partnerships" - those designed by committee entities that usually end up exhibiting the worst characteristics of the constituent parts. Fannie Mae and Freddie Mac are not owned by the government, they are owned by stockholders, government just guarantee's them against any loss. So with Government guaranteeing they won't lose money, the stockholders and management of Fannie-Mae and Freddie Mace got greedy and went out and took crazy risks.
I think a government direct lending program that uses the power of governments to sell bonds and provide tax free returns could play a big part in bringing the housing market back to some degree of health. Perhaps the best solution would be a program that operated at the city level, where the city can take an equity interest for a reduced mortgage payment in cases where the people want to stay in the home but are underwater.
This is a constructive goal occupy Wall Street could take on. Making big banks irrelevant.
That of course doesn't consider the cost of the lost economic output, the dislocation in millions of lives from foreclosures, and the ongoing cost to people trapped in underwater mortgages.
On the other hand...
Ever since at least WW II, maybe before, California has had a stand alone home loan program for Veterans. As far as I know it never cost taxpayers a dime. Unlike most Federal programs California's program doesn't create screwball public private partnerships that guarantee loans made by private lenders. Instead California issues bonds, then uses the money from the bond sales to make loans directly to veterans to buy a home. The Veterans mortgage payments are used to repay the bondholders. The program has plugged along for at least 60 years putting a lot of people into homes without any cost to taxpayers.
Hmmm......seems to me the evidence would suggest that direct government financing of home loans is a pretty safe and sane way to help people buy homes.
I know some of my Republican friends are jumping up and down thinking "what about Fannie Mae and Freddie Mac - they are government programs that were a big part of the problem in the current housing collapse". Well, Fannie Mae and Freddie Mac aren't really government programs - they are both "public-private partnerships" - those designed by committee entities that usually end up exhibiting the worst characteristics of the constituent parts. Fannie Mae and Freddie Mac are not owned by the government, they are owned by stockholders, government just guarantee's them against any loss. So with Government guaranteeing they won't lose money, the stockholders and management of Fannie-Mae and Freddie Mace got greedy and went out and took crazy risks.
I think a government direct lending program that uses the power of governments to sell bonds and provide tax free returns could play a big part in bringing the housing market back to some degree of health. Perhaps the best solution would be a program that operated at the city level, where the city can take an equity interest for a reduced mortgage payment in cases where the people want to stay in the home but are underwater.
This is a constructive goal occupy Wall Street could take on. Making big banks irrelevant.
Friday, December 9, 2011
The Melting Pot and Income Disparity
I read an item recently (didn't note the source unfortunately) suggesting that income inequality correlates with the homogeneity of a countries population. The more homogeneous, the less income inequality, the more diverse the greater the income inequality. It is an interesting notion. When we feel like our countrymen are like us we are more inclined to insure that everyone gets a piece of the pie. When we start dividing ourselves in different "tribes" on political and ethnic lines we become less concerned about other American "tribes" and more of a winner take all society.
Looking back over more recent American history certainly doesn't contradict this theory. The last time income disparity became so glaring was in the 1920's leading up to the great depression. The decades before 1920 had been marked by a huge wave of immigration that filled our cities with ethnic enclaves and politically often faced off city dwellers against the largely home grown rural and small town folk.
Then the income disparity shrunk greatly after WW II. Perhaps the war effort made people become American's first and all the political and ethnic divisions faded in significance? Guys from all parts of the country, all ethnic and political views bunking next to each other in the barracks, or sharing a foxhole, can certainly break town tribal instincts.
The high levels of income disparity disappeared in the years after WW II. Clearly there was a different attitude then as the tax code imposed marginal rates of up to 90% on the most wealthy Americans as part of the effort to pay off the deficit from WW II and the great depression. The capstone of this tax effort occurred with the 1954 tax code passed by Congress which was, amazingly, passed during the only session between 1932 and 2000 where the Republicans controlled both houses of Congress and the Presidency. (Clearly the Republican party of 1954 was not the Republican party of 2011). Income disparity was then relatively low for the next couple decades - it began to grow again in the late 1970's, and accelerated greatly in the 1990's and 2000's, a time when immigration has become a hugely controversial issue and politics is bitterly partisan.
Why don't we maintain institutional memory - why do we have such different attitudes today than we did in after WW II? Probably because each new generation starts from our brains tendency to break the world in groups of us and them. Until each new generation has some learning experience to teach them the value of inclusiveness they see others outside their immediate group as less human and threatening.
I hope we don't need WW III to pull us back together as a country. Might not work anyway, since we abolished the draft after the Vietnam War. In WW II everyone served. In modern US warfare generally only the folks at the bottom of the income spectrum serve in the military, the kids of the well to do go to college and on to careers, seldom interacting with people who are not similarly blessed.
Looking back over more recent American history certainly doesn't contradict this theory. The last time income disparity became so glaring was in the 1920's leading up to the great depression. The decades before 1920 had been marked by a huge wave of immigration that filled our cities with ethnic enclaves and politically often faced off city dwellers against the largely home grown rural and small town folk.
Then the income disparity shrunk greatly after WW II. Perhaps the war effort made people become American's first and all the political and ethnic divisions faded in significance? Guys from all parts of the country, all ethnic and political views bunking next to each other in the barracks, or sharing a foxhole, can certainly break town tribal instincts.
The high levels of income disparity disappeared in the years after WW II. Clearly there was a different attitude then as the tax code imposed marginal rates of up to 90% on the most wealthy Americans as part of the effort to pay off the deficit from WW II and the great depression. The capstone of this tax effort occurred with the 1954 tax code passed by Congress which was, amazingly, passed during the only session between 1932 and 2000 where the Republicans controlled both houses of Congress and the Presidency. (Clearly the Republican party of 1954 was not the Republican party of 2011). Income disparity was then relatively low for the next couple decades - it began to grow again in the late 1970's, and accelerated greatly in the 1990's and 2000's, a time when immigration has become a hugely controversial issue and politics is bitterly partisan.
Why don't we maintain institutional memory - why do we have such different attitudes today than we did in after WW II? Probably because each new generation starts from our brains tendency to break the world in groups of us and them. Until each new generation has some learning experience to teach them the value of inclusiveness they see others outside their immediate group as less human and threatening.
I hope we don't need WW III to pull us back together as a country. Might not work anyway, since we abolished the draft after the Vietnam War. In WW II everyone served. In modern US warfare generally only the folks at the bottom of the income spectrum serve in the military, the kids of the well to do go to college and on to careers, seldom interacting with people who are not similarly blessed.
Monday, December 5, 2011
Constructive goals Occupy Wall Street could pursue - the housing market
We are not going to find a solution to the housing crises that involves either Wall Street or the Federal Government any time in the near future and our economy will not recover until we deal with the housing mess. In any economy the driving force is the people from 35 to 50, people still young and energetic, but with the experience and maturity to build or grow an economy. To use the latest Republican buzz word, the job creators. In my experience it seems it is the people in this group that have been hammered the worst by the housing market collapse. The hard working, imaginative and ambitious who got to the point where they felt like they could finally buy a house in the middle of the last decade are now locked into houses they can't afford to own the way they are currently financed, but also can't afford to sell. We are financially crippling the dynamic heart of our economy.
Government is not going to solve the problems in the housing market, for both partisan ideological reasons and structural reasons. The feds have created programs to refinance loans with great fanfare, then virtually no loans get refinanced. Occupying foreclosed houses will get some publicity and wring some concessions out of banks in the short term on individual properties but will not result in any action by the private sector or government that will begin to solve the problem.
What is the problem? It appears to be twofold.
1. The political problem - Republicans are living in an economic fantasy world and Democrats are ineffectual without Republican help. It really doesn't matter why Republicans policies are so out of touch with reality - whether it is an irrational belief that making money is proof of goodness, or simply they see rich folks as their constituency and are protecting their constituency the result is the same. They will not consider any plan to address the housing market that doesn't involve laws benefiting the same folks that caused the problems.
2. Structural problems - Getting a home loan used to be pretty simple, you went and talked to the bank, if they thought you were reliable and had the income to make the payments, they made the loan then held the mortgage in their portfolio until it was paid off. Gradually all those smart people on Wall Street started making it more and more complicated. No bank, to my knowledge, holds loans they make to maturity anymore. Banks make loans anticipating the mortgage will be sold in secondary mortgage markets, maybe sold repeatedly. So now instead of having to convince the banker across the desk from you that you are reliable and can pay the mortgage back, that guy across the desk from you has to meet the criteria set by a bunch of different people you never met. The old simple transaction has become a complex and tangled bureaucratic minefield, so even if you had the money in the bank to buy the house outright you still might not qualify for the loan.
On top of the complexity of the transaction the banks that control the process are understandably not enthusiastic about converting a bunch of loans on which they are getting interest of 6, 7 or 8% to loans on which they will getting somewhere around 4%. So they are perfectly happy to just wring their hands in sham sympathy and quietly let the complex process not work.
So what can OWS do? Here are some ideas:
1. Start organizing all the people out there who bought houses at the peak of the boom, are struggling to keep the house, and could keep the house with some financial restructuring. When they are dealing with the banks one by one they are helpless. But if hundreds or thousands get organized and are prepared to take concerted action, they could have the power to strike fear in the heart of Wall Street. Suppose half a million homeowners pledged to stop paying their mortgage payments on March 1 if some real refinance option was not in place.
2. A back up strategy (because it would take longer to implement) would be create an fund to make direct refinancing loans using local or state government bonds working through refinance agencies set up by branches of government. Local governments, for example, can offer tax free status on their bond issues to make the bonds attractive. Local governments could perhaps reduce the loan balances in some cases and take back an equity interest in the home as a way of protecting property values within the community.
At the State level an option that could get refinancing up and running pretty quickly in California would be to open up the Cal-Vet loan program to allow refinancing, and maybe even open up the program to non-veterans due to the dire economic situation in the State. The Cal Vet loan program has been around for decades, it is entirely funded by bonds paid off through the payments on the loans.
A non-government option would be to create a non-profit that little folks can invest in to create a pool of money, then use the money to refinance home loans, starting with those with the highest interest rates first. Google, Apple or other tech companies are making a lot of money off the generations that have been hurt by the housing collapse, why can't they kick in some money to create a fund to provide an alternative to the banking system?
Until there is an option to the banking system that threatens to damage the banks bottom lines, the banks are going to keep dragging their feet. If private sector banks started to see their highest interest rate loans disappearing from their balance sheets, and their loan portfolio's shrinking they might discover that maybe refinancing loans isn't such a bad idea.
Government is not going to solve the problems in the housing market, for both partisan ideological reasons and structural reasons. The feds have created programs to refinance loans with great fanfare, then virtually no loans get refinanced. Occupying foreclosed houses will get some publicity and wring some concessions out of banks in the short term on individual properties but will not result in any action by the private sector or government that will begin to solve the problem.
What is the problem? It appears to be twofold.
1. The political problem - Republicans are living in an economic fantasy world and Democrats are ineffectual without Republican help. It really doesn't matter why Republicans policies are so out of touch with reality - whether it is an irrational belief that making money is proof of goodness, or simply they see rich folks as their constituency and are protecting their constituency the result is the same. They will not consider any plan to address the housing market that doesn't involve laws benefiting the same folks that caused the problems.
2. Structural problems - Getting a home loan used to be pretty simple, you went and talked to the bank, if they thought you were reliable and had the income to make the payments, they made the loan then held the mortgage in their portfolio until it was paid off. Gradually all those smart people on Wall Street started making it more and more complicated. No bank, to my knowledge, holds loans they make to maturity anymore. Banks make loans anticipating the mortgage will be sold in secondary mortgage markets, maybe sold repeatedly. So now instead of having to convince the banker across the desk from you that you are reliable and can pay the mortgage back, that guy across the desk from you has to meet the criteria set by a bunch of different people you never met. The old simple transaction has become a complex and tangled bureaucratic minefield, so even if you had the money in the bank to buy the house outright you still might not qualify for the loan.
On top of the complexity of the transaction the banks that control the process are understandably not enthusiastic about converting a bunch of loans on which they are getting interest of 6, 7 or 8% to loans on which they will getting somewhere around 4%. So they are perfectly happy to just wring their hands in sham sympathy and quietly let the complex process not work.
So what can OWS do? Here are some ideas:
1. Start organizing all the people out there who bought houses at the peak of the boom, are struggling to keep the house, and could keep the house with some financial restructuring. When they are dealing with the banks one by one they are helpless. But if hundreds or thousands get organized and are prepared to take concerted action, they could have the power to strike fear in the heart of Wall Street. Suppose half a million homeowners pledged to stop paying their mortgage payments on March 1 if some real refinance option was not in place.
2. A back up strategy (because it would take longer to implement) would be create an fund to make direct refinancing loans using local or state government bonds working through refinance agencies set up by branches of government. Local governments, for example, can offer tax free status on their bond issues to make the bonds attractive. Local governments could perhaps reduce the loan balances in some cases and take back an equity interest in the home as a way of protecting property values within the community.
At the State level an option that could get refinancing up and running pretty quickly in California would be to open up the Cal-Vet loan program to allow refinancing, and maybe even open up the program to non-veterans due to the dire economic situation in the State. The Cal Vet loan program has been around for decades, it is entirely funded by bonds paid off through the payments on the loans.
A non-government option would be to create a non-profit that little folks can invest in to create a pool of money, then use the money to refinance home loans, starting with those with the highest interest rates first. Google, Apple or other tech companies are making a lot of money off the generations that have been hurt by the housing collapse, why can't they kick in some money to create a fund to provide an alternative to the banking system?
Until there is an option to the banking system that threatens to damage the banks bottom lines, the banks are going to keep dragging their feet. If private sector banks started to see their highest interest rate loans disappearing from their balance sheets, and their loan portfolio's shrinking they might discover that maybe refinancing loans isn't such a bad idea.
Constructive Goals Occupy Wall Street could pursue - engaging Republicans
The emotion and outrage that fuels occupy wall street is a powerful force, but I feel like the reason we have a disfunctional Congress is because we have too many people in this country whose views have been cast in concrete by linking ideas with the strong emotions that are generated by confrontation.
Back in the 1960's and 1970's the social movements of that time galvanized young people on the left side of the political spectrum, who really felt like they were on the side of all that is true and right and anyone opposed to them deserved to be dismissed.
History has shown their was a degree of truth to their beliefs - much of what were radical ideas at the time - particularly in civil rights - are now commonly accepted as truths of what America stands for.
But I believe the dismissive and somewhat arrogant attitude of the leftish movements are to some degree the source of the irrational group-think and obstructionism that marks current Republican politics. People of a Conservative persuasion who are running the Republican party now were young folks growing up during those years and got pummeled for expressing Conservative views. So they learned to express their views among themselves rather than trying to engage the left. You see the results in the extraordinary Republican primary playing out before our eyes, where political views that ignore history, objective data and common sense cannot even be expressed by a candidate without the candidate being marginalized in the party for not toeing the party line. Republican ideology has become the political equivalent of a bulldog - so inbred it is littered with genetic defects.
Occupy Wall Street should avoid going down that same road. OWS should be arranging discussions of basic policy questions in a format that protects participants from abuse and inviting Republican organization to join to present their views. A format for discussions that focuses on data rather than ideology and encourages people to think about whether their political beliefs actually accomplish the goals they seek can be found at www.Theidp.org
I believe if this kind of engagement could occur in enough parts of the country we could break the logjam in Washington in a few years, and it would certainly contribute to a more civil and productive government in the longer term.
This is not a path to be pursued by those just out for the experience. Engagement requires discipline, research and tolerance. You have to want to be a force for good.
Back in the 1960's and 1970's the social movements of that time galvanized young people on the left side of the political spectrum, who really felt like they were on the side of all that is true and right and anyone opposed to them deserved to be dismissed.
History has shown their was a degree of truth to their beliefs - much of what were radical ideas at the time - particularly in civil rights - are now commonly accepted as truths of what America stands for.
But I believe the dismissive and somewhat arrogant attitude of the leftish movements are to some degree the source of the irrational group-think and obstructionism that marks current Republican politics. People of a Conservative persuasion who are running the Republican party now were young folks growing up during those years and got pummeled for expressing Conservative views. So they learned to express their views among themselves rather than trying to engage the left. You see the results in the extraordinary Republican primary playing out before our eyes, where political views that ignore history, objective data and common sense cannot even be expressed by a candidate without the candidate being marginalized in the party for not toeing the party line. Republican ideology has become the political equivalent of a bulldog - so inbred it is littered with genetic defects.
Occupy Wall Street should avoid going down that same road. OWS should be arranging discussions of basic policy questions in a format that protects participants from abuse and inviting Republican organization to join to present their views. A format for discussions that focuses on data rather than ideology and encourages people to think about whether their political beliefs actually accomplish the goals they seek can be found at www.Theidp.org
I believe if this kind of engagement could occur in enough parts of the country we could break the logjam in Washington in a few years, and it would certainly contribute to a more civil and productive government in the longer term.
This is not a path to be pursued by those just out for the experience. Engagement requires discipline, research and tolerance. You have to want to be a force for good.
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