G20

Primary Goal for the G20

In his initial meeting with the G20, Pres. Obama should use his immense world wide popularity and his natural ability to forge compromise to initiate a reasonable, comprehensive system of international financial regulation. There is reason to believe that many of the G20 see such reform as needed to calm fears, bring stability and build confidence in the world’s interconnected financial institutions. Without efficient global financial markets we cannot reach equilibrium and restart growth. Initial areas to be addressed include the level of government involvement that is necessary and that is tolerable, the treatment of derivatives, and setting capital and liquidity requirements.
It is futile to pressure the G20 nations to adopt our idea of an economic recovery jump started by an enormous stimulus package. Rightly or wrongly, they do not see that in their best interest. In addition, many countries are reluctant to take guidance from the US whom they hold as responsible for the world wide financial crisis.

Glass Half Full?

Glass Half Full?

For me that would be a “yes.”

Starting last spring we had the Fannie and Freddie debacles, an extended period with no visible leadership in Washington, train loads of toxic assets on the books of most lending institutions, inability in all sectors to obtain credit, layoffs in most industries, losses in the stock market, plummeting sales of new and existing homes, and defaults on home mortgages, an astronomical deficit, and lessening revenues. Considering this, I’d say this is about the most severe recession that I have known. So how can my glass be anywhere near half full?

I have no choice. Optimism is our only hope! Jon Stewart may want to borrow my line; it’s funny but true. We’ve gotten some much needed leadership in Washington, Congress somehow passed the stimulus package (American Recovery and Reinvestment Act/ARRA), and the Congressional Budget Office (CBO) has forecast unemployment will peak at 9.4% in late 2009 or early 2010. Now we need investors to get back in the market. I don’t think we will rebound over night. I am looking for signs of improvement. That’s where it starts. Optimism may breed confidence.

For about the last two weeks, we have seen some life in the markets also it appears that the housing market may be stabilizing so why did I get up this morning to hear gloom and doom on the morning news show? While I was still sipping my coffee, analysts were predicting that Wall Street would be positive about Treasury’s plan to partner with private investors to buy up toxic assets. But the pessimistic talk on the TV continued, they had already written there forlorn script and I had to listen to it. Joe Scarborough threw a temper tantrum because a couple of guests thought the Obama administration was doing pretty well, considering what they had to deal with. That was at 9:00 a.m.

Now we’re at the closing bell on Wall Street. Let’s recap. We’ve seen Sec. Geithner’s plan was a hit with the financiers and they announced better than expected figures on existing home sales. Volume was up, the NYSE closed up about 500 points, all DOW stocks closed higher, the S&P had its best day this year, NASDAQ was up nearly 7% - back above 1500, bank stocks up, tech stocks up, home builders, retailers, industrials, transportation and energy sectors all closed up. The DOW and NASDAQ both are on track for their biggest monthly percentage gains since 2002. The S&P is on pace for its best monthly percentage gain since 1991. The Board is green.

I know this may be one wonderful isolated trading day but then again it may signal a turn around. I know that if the market keeps going in a positive direction before long there will be profit taking and it’ll dip again. But for now things are better than they were.

WILL SOMEONE PLEASE TELL THE TALK SHOW HOSTS?

Earmarks

Earmarks

Article 1 of the Constitution grants to Congress all legislative powers, the authority to raise taxes, pay debts and provide for the common good. Passing the budget resides within those powers. Administration of the appropriated funds then rests in the Executive branch of the government.

We ordinarily see appropriated funds go to the proper agency to be doled out for worthy projects. For example, monies to be used for education are administered by the Department of Education. The executive agency uses its own criteria to prioritize projects and a process, usually through competitive bidding, to select contractors to carry them out. Somewhere along the way Members of Congress figured out that they could direct portions of the budgeted funds to their favorite projects or to selected companies in their home districts. I guess everybody can identify at least one such project. Does “highway to nowhere” ring a bell? Passage of spending for hometown projects garner their sponsors plenty of constituent praise and probable reelection in the future. The legislators are “bringing home the bacon” just like a good daddy should. “Bacon” equals “pork.” This is nothing new. The term “pork barrel spending” has been in Webster’s Dictionary since the early 1900s. It was defined as “a government appropriation that provides funds for local improvements designed to ingratiate legislators with their constituents.” It hasn’t changed in 100 years.

These special expenditures that we also call earmarks don’t actually increase the amount of money in the budget; they only direct where the funds will be spent. The appropriated funds still go to the government agency involved but instead of the usual process of the agency selecting projects and conducting competitive bidding, the agency merely becomes a conduit, basically giving up its administrative duties.

I’m sure most local projects designated as earmarks have merit but they create several problems. First, the earmark projects go to the head of the list of projects, they don’t go through the scrutiny required of all other federally funded projects. Community Redevelopment Act funding of a new amphitheater in wealthy Boca Raton may not be as worthwhile as funding a community theater in Belle Glade, an extremely poor community in a region that has no theater at all. Second, where contracts are directed to specific companies without competitive bidding there is an obvious problem in that we may not get the best price for the service or product. Third, there is no accountability for the misdirection of funds from more worthwhile projects. Earmarks may be created in committee or inserted into a bill without attribution to a Congress member. There’s not much objection to even the silliest initiative because the instigators use their clout, mostly earned through longevity in Congress, to push through their pet projects. In addition, a vote for a pet project may be used as a bargaining chip, you support my project and I’ll support yours. We both win. The only ones to lose are the citizens who would benefit by more worthwhile projects displaced by the trivial and the taxpayers across the country who pay for them.

Until the last couple of years I never thought about earmarks. To me that was just how things were done. I credit Sen. John McCain with my enlightenment. Unfortunately, while many politicians jumped on the bandwagon of decrying earmarks as the work of the devil they were filling spending bills with their own pet projects. Just this week, Sen. Mitch McConnell and 34 others were exposed for their hypocrisy in this regard.

Yesterday, President Obama proposed new rules for earmarks. A good time to do so since he was signing a budget that contained 8500 earmarks worth more than $7.7 billion, less than 2 % of the total amount but never the less... Here are the important aspects of the president’s earmark reform plan.
•Earmarks would be submitted to the appropriate agency for review and if found not to be for a legitimate public purpose they would be eliminated.
•Any earmark aimed at a private company must be subject to competitive bidding.
•Earmarks must never be traded for favors.
•Earmarks have to be posted in advance on the Web and
•Publicly aired in hearings before being inserted into spending bills.

These proposals seem reasonable to me and I hope that Members of Congress agree. If they don’t agree, I hope they will be shamed into going along. Even if the dollars appropriated remain the same we will have restored some of the public’s confidence in the legislative branch, and helped to eliminate less worthy projects making way for the most important ones.

Blame it on the CRA

Right wing blogs and FOX News hold the Community Reinvestment Act (CRA) responsible for the mortgage meltdown. And it’s Bill Clinton’s fault for forcing the CRA down our throats. I’m not a fan of former president Clinton’s but I think his share of the blame for the mortgage meltdown is smaller than most. He was connected to Allen Greenspan for sure and he was caught up in his desire of leaving a legacy of economic boom but there are many others who contributed more. I intend to read the latest Time Magazine article on who is to blame for our current predicaments and use that as a jumping off point for research on Clinton’s liability. Time placed him 13th most responsible and that may be right.

To try to get a handle on this I recommend that everyone look at CNBC’s recent documentary “House of Cards” and read “Fannie Mae’s Last Stand” by Bethany McLean in Vanity Fair’s, February issue. Both of these pieces give names, dates and places surrounding our housing crisis. After these I suggest that you get on the Net and start verifying for yourself.

As to the CRA, it was passed in 1977, so you should really blame former Pres. Jimmy Carter. He’s always a good one to go after. The Act was designed to encourage community banks and S&Ls to meet the need of borrowers in all sections of the community, including low and moderate income neighborhoods. The authors of the bill hoped that by monitoring the lending practices of regulated banks “red lining” would be ended. Red lining is the practice of denying loans to those in low income geographic areas without regard to an individual’s ability to qualify for a loan. This practice was one of the last legal ways of discriminating against people of color. Before the CRA, stereotyping based on where you lived or where your business was located without regard to your individual credit-worthiness was the norm. Few outside sociology class knew this was going on and few today would think this was appropriate. Tiger Woods couldn’t have gotten a loan to start a business in one of these poorer areas before this law went into place. The Federal Reserve Website or Wikipedia, for those of us in a rush, are good places to start to research the CRA.

Years after the passage of CRA, in May 1995, Pres. Clinton signed an amendment to the CRA that was meant to strengthen the original bill. In order to track the effectiveness or lack thereof there was a provision in the bill for a review of its performance after seven years. I’m not go into the 1995 amendment since the bill was later amended by Pres. Bush in August 2005 and it was only after 2005 that the subprime mortgage problem began to occur to any measurable degree. The 2005 amendment significantly altered the Act and was seen by liberals and housing advocates as a weakening of the CRA law. The changes allowed less restrictive definitions of small and intermediate-small banks that amounted to an exemption of more institutions from original CRA rules. If any reader would like to explain or amplify on this I’d greatly appreciate it.

The fact is that the bulk of high risk loans were offered by lenders who were not even subject to CRA regulations. A good article on this is by Michael Barr published in The NYU Law Review in 2005. Barr estimates that only 25% of the subprime loans were made by institutions fully regulated by CRA. It appears that the crisis comes from unregulated loans not from those granted by regulated institutions.


The facts are that the CRA did not require loans be made to those who did not qualify. The CRA did not create or require subprime loans. The CRA also did not require Fannie Mae or Freddie Mac to create Alt-A mortgages, the ones we now call “Liar Loans.”
Loans, made by greedy lenders, not CRA regulated institutions, started an avalanche of risky lending. Their loans were sold to Wall Street firms which sold their own mortgage-backed securities, private label securities (PLS). Fannie and Freddie did buy CRA loans but didn’t enter this market until 2007 in an effort to keep their share of the mortgage market.

Another topic for another day and another blogger is whether the CRA has been effective in accomplishing its original goal to increase lending to low income neighborhoods. Experts come down on both sides of this issue. The Cato Institute, The Competitive Enterprise Institute, Ben Bernanke, The U.S. Treasury and many others have commented on this. A study conducted by The Woodstock Institute of loans made by CRA regulated banks in the Chicago area showed that most loans went to higher income areas. It found that only 16.6% of CRA loans went to low income areas.

From the above, I conclude that the problem wasn’t caused by the CRA, a law that required banks to make a portion of their loans to benefit the community in which they operate. If I’m right, then why is the CRA getting all this grief? It wouldn’t have to do with the fact that the CRA is seen as benefiting low income areas, inhabited by minorities would it? Today CRA is read to mean BLACK. And that is why the CRA is to blame.

Caught Skipping Class

The University of Louisville College of Arts and Sciences had better toughen its standards. Its leading graduate, Sen. Republican Leader Mitch McConnell, either didn’t take a modern American history course or was truant when they lectured on the first part of the 20th century.

I come to this conclusion because, yesterday, Sen. McConnell took time to grab some attention on the Senate floor by stating that the New Deal didn’t work. He made his speech to show his disdain for the recovery package called for by Pres. Obama, the majority of both houses of congress, and 51% of Americans who believe that it is “critically” important to improving the nation’s economy.

Here’s McConnell’s quote: “But one of the good things about reading history is you learn a good deal. And we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still at 15%.” He goes on to admit that it was WWII that “got us out of the doldrums.” I hate revisionist history unless, of course, it is founded on legitimate new discovery. No new research here. This is just partisan sour grapes, 70+ years of sour grapes.

I don’t know which text McConnell was reading to come up with his ideas. I’m partial to checking the Bureau of Labor Statistics, which has been collecting economic data since the 1880s. Using this reference, we can track both unemployment and GDP (in the 30s called GNP). I’m neither a historian nor an economist but I can follow their numbers pretty easily.

Unemployment: 1932=23.6%, 1933=24.9%, 1934=21.7%, 1935=20.1%, 1936=17.0%
GDP: 1932=58.7B, 1933=56.4B, 1934=66.0B, 1935=73.3B, 1936=83.8B

By 1933, 21 states had closed their banks. You couldn’t get a loan; you couldn’t cash a check or access your own deposits. Between 1929-33 the stock market lost 90% of its value. Prices were falling, there were foreclosures, and hope was all but lost.

Herbert Hoover, who was a kind man, a successful business man and administrator despite what popular history has made of him, had a plan that would end the nation’s economic woes. He had established the Reconstruction Finance Corporation (RFC) to help stem a run on the banks which was a good move. The rest of the plan was not so good. He demanded all government expenses be cut and that Congress balance the budget. He would not spend federal money on the states but did loan money through purchases of state issued bonds. He greatly favored private organizations providing help, as if the Salvation Army could solve the problems of the Great Depression.

With the economy in the shape it was in and doleful persona of Pres. Hoover the Republicans were in for an uphill battle that election year. Added to this along comes Franklin D. Roosevelt, the antithesis of Hoover.
The first mention of the phrase “New Deal” was made by Franklin Roosevelt in his acceptance speech at the Democratic National Convention held in Chicago. “I pledge you-I pledge myself to a new deal for the American people.” FDR’s goal was to put people back to work, help the markets recover and reform the financial system so that recovery would be sustained. Just about the opposite of the Republican plan. FDR won. The people wanted to try it a new way, to shed the destructive policies of the 1920s.

Right after the swearing-in the new programs began to roll out. FDR instituted the programs collectively known as The First 100 Days- the TVA, hydroelectric power, roads, parks, public buildings, etc. There was so much Keynesian deficit spending for New Deal programs poor Herbert Hoover must have gone into his own depression. It was FDR’s first term on steroids that restored hope by putting millions back to work, restoring consumer confidence, and tripling the Dow. A look at other economies around the world show that countries that did not apply massive government spending or began it late in the game had a worse time of it than we did.

In 1936 the public demonstrated that it thought the New Deal was working by reelecting Democrats by landslide majorities. The contagious optimism of the elegant president put us back on track so much so that FDR wanted to cut public spending and concentrate on balancing the budget. This action was followed an economic slow down. Some called it the “Roosevelt Recession.” Ironically it was cutting back too soon not spending too much that was the problem. It wasn’t much of a slow-down for we soon began a second round of massive government spending, this time for a war build-up. This round of spending preceding our entry into WWII followed by war spending itself put a lid on the Great Depression once and for all. Mitch McConnell got this part right.

The similarities between 1933 and now are eerie – from the greed, corruption, over leveraging of the banks, the drop in the Dow, lay offs, foreclosures, bank closings, and finally the emergence of a charismatic leader promising change. Let’s hope our new leader does as well as the other one

NYTimes.com: Mistresses of the Universe

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Feminist Hero

I just heard that Justice Ruth Bader Ginsburg was operated on to remove a small cancerous tumor in her pancreas. This is very worrisome since she has already survived one round of cancer and this is number two. I am hopeful though that she will come through this second battle and return to her place on the USSC bench.

I’ve revered Justice Ginsburg since I was in law school and read three of her cases. I was active in the women’s movement at the time and had a great interest in the decisions that led the Court nearer to recognizing the equal rights of women. In the landmark case Craig v. Boren the Supreme Court held that gender discrimination cases should be decided by applying a heightened level of scrutiny. These cases still didn’t receive the same standard of review used to decide cases involving race or religion but none the less, Craig v Boren was a giant step toward securing equal opportunity under the law for women.

What I really admired was the measured approach taken by Ms. Ginsburg. She adopted the same strategy of patience used by Justice Thurgood Marshall when he and his NAACP colleagues fought the battle to end racial segregation. They picked their cases very carefully, prepared methodically and built one case upon another. Ginsburg did not use a head on aggressive approach instead she cleverly achieved her ultimate goal of improving the lot of women by upholding the rights of men. In the most well known case, Craig v. Boren, she fought for the rights of 18 year old males in Oklahoma to buy 3.2 beer just as the 18 year old females could. She probably could have cared less about teenage boys drinking near beer but she saw the opportunity to show that males were treated differently than females. By showing that gender discrimination wasn’t justified against males the next step would be showing that such discrimination wasn’t justified against females. The same approach was taken in Frontiero v. Richardson which secured military benefits for male dependents of female officers. In another case, she argued that a man was entitled to the Social Security benefits of his deceased spouse just as a woman was entitled to widow’s benefits. To the observer, it looked like Ms. Ginsburg was winning wars for the men of America but underneath she was laying the foundation for securing legal equality for women. Without her groundbreaking work, who knows how long it would have taken to get as far as we have today. As a law student I found her strategy delicious and I still relish it today.

Another fact I always found interesting was that like Sandra Day O’Connor, Ruth Bader Ginsburg could not get a job after graduating from law school even though she was at the top of her class (O’Connor was third). With such life experiences I always felt pretty confident of getting a fair hearing on gender based cases from both women.

Speedy recovery, your honor.