Of Good Banking and the New Year

 

Photo by bamagai at Unsplash

A year in retirement can give you perspective, particularly a year fraught with ample opportunity to do some good amidst challenge, risk, and danger of various flavors.  Such was the year behind us.  Does the year ahead offer any less?

Many such thoughts were brought to mind in a recent conversation with the chief financial officer of a community bank.  As you would guess, we discussed the outlook for banking.  I observed that the condition of the industry reminded me of the dot-com bust of 2000.  While the economy was in decline, hit a second time by the terrorist attacks of September 2001, the banking industry was thankfully in strong financial condition.  The dot-com bust had a securities market and Silicon Valley locus.

As in 2001, so also today, the banking industry is strongly capitalized, liquid with financial resources, well positioned to fund economic recovery.  Fortuitously, that position is matched by a host of potential customers, especially entrepreneurs eager to start up new businesses or expand ones that survived the government-led shutdowns.  Among those entrepreneurs are many people whose businesses closed not from bad business plans, but due to the Great Cessation of 2020.  That is to say, there are people who want to start new businesses who know how to run businesses, if government strictures will let them. 

Their problem is one of resources exhausted by trying to keep their businesses floating as the tide went out.  As the tide is coming back in, there is a ready supply of people who would like to have a go with a new boat.  Good bankers have always been in the business of finding and funding good risks. 

Banks grow as their customers and communities grow.  Good banking fosters and facilitates the generation, management, preservation, and application of wealth. 

Bad banking bleeds wealth, which is why failed banks should be allowed to fail, to end the drain on the economy and to make room for the productive work of good banks, new and old.  Good bankers do their work by insightful weighing of opportunities and risks, tailoring terms and conditions to such opportunities and risks.  Bad banking either mistakes opportunities, or it miscalculates or ignores risk, or both.  Which, by the way, is why governments should stay out of the business of banking (other than as prudential supervisors), as the history of government shows an atrocious record of missing opportunities and miscalculating risk, sometimes for the short-term benefit of government’s associates.

The other day I saw a happy video from the chief executive officer of a southwestern bank.  Her timely message was of gratitude to the bank’s customers for constant communication and support.  In return, she offered a reaffirmed invitation apropos to serving in a way tailored to customers’ financial needs.  Reach out to the bank, including its CEO, 24-7 for financial service.  In conclusion, she pledged the bank to “connect you with others in our community who can serve you best.”  Now, that is good banking.

Of Struggling Economies and Finishing the Job

The Obama Administration is having trouble keeping the economy down.  In spite of all the battering that the economy has taken from Obama policies, it keeps showing signs of life—weak, hesitant, surely not robust, but they are there, like the weak patient who wants to get out of bed and shuffle downstairs to sip some chicken soup.  Instead, the Administration, like some 18^th century doctor, wants to try some more blood letting to get the bad humours out of the system. 

People want to do things.  Businessmen have new ideas that they want to have a go at.  Men and women like to build, grow, and develop their lives.  No one needs to tell them to do it.  You just need to get out of the way.  The most productive, the most energetic, the most inspired, the hardest workers will do it best.  We can still remember when the economy was like that, when the news was full of new products, new ventures, new growth, and new jobs.  That is the light America shines to the world and what despots throughout the world hate about the American experiment.

President Obama came to power with a different vision for America, what he thought was a mandate to spread the wealth around, to take from those who succeeded the most in economic activity and growth and find ways in which he and his administration could give it to those who were less productive—or not even productive at all.  In other words, his plan was to tax success and reward failure.  So far, it has worked as designed, even if he has not yet finished with his efforts.  We are getting less of the success and more of the failure.

The trillion dollar “stimulus” plan was a good example.  President Obama and friends hit the economy with a special trillion dollars of new Washington spending that went to support cronies and fund new projects that soon added to the landscape littered with failed businesses.  The “stimulus” plan added to the deficit and became a seemingly permanent part of federal largesse, but it failed to add to the economy.  In fact, it made legitimate businesses compete for funds and customers against those who enjoyed government subsidies.  Hard to do.

The housing market makes up about a quarter of the economy, when you include people who build houses, furnish houses, maintain houses, and so forth.  That market was in full decline as the housing bubble burst in 2007 and kept deflating.  But eventually all the extra air comes out of economic bubbles (if you do not keep pumping new air into them), the crashing market reaches bottom and starts to recover.  The Obama Administration has made sure that it stayed on the bottom a long time.  Normal economic crashes and recoveries look like a “V” on a graph charting their progress.  The housing market under the Obama Administration looks like an “L”.  Note the tiny turn up at the end of the letter.  That is what the Administration’s friends would try to convince us is the recovery.  And they would like to divert our attention from the several thousand pages of new mortgage regulations that will go into effect in the next several months to whack the housing markets again.

Sure, mortgage rates are incredibly low, but that is not a healthy sign.  Have you tried getting a mortgage lately?  The paperwork, already a mountain, has become overwhelming.  And do you think that those rates would be so low if there were a real recovery in demand for houses and mortgages?  There is more (or less):  many people who qualify for mortgages today will have trouble qualifying in the future under the new rules.  The Obama Administration’s new consumer Bureau has been putting off those rules until after the election, but they are promising to issue them by the end of the month.

The summers of 2009, 2010, 2011, and even 2012 were each supposed to be the “Summer of Recovery” with the “green shoots” of new economic activity showing life each spring.  Yet each year those summers saw instead new economic setbacks as the green shoots wilted.  Sometimes the damage came from threats of new tax policies that would raise rates but give “tax breaks” to people who spent their income in ways approved by the Obama Administration and the tax code.

Businesses were threatened with new carbon taxes and other innovative and contorted ways to penalize any use of carbon dioxide, part of the air that we as humans produce with every breath.  Even a Congress with heavy majorities of legislators from President Obama’s own party choked on that idea.  Not to be deterred, the Obama Administration just imposed restrictions by fiat through the Environmental Protection Agency—all part of the war on carbon, which includes the energy industry as its victims.

The business climate remains in turmoil, as waves of new regulation and Obama campaign promises to bail out new favorites in the economy continue changing the rules and make business planning impossible.  Who would take a risk at trying something new when Obamacare and other employee regulations make it hard to know what the expense will be for new hires?  American businesses are sitting on somewhere between one and two trillion dollars in funds, waiting to know when it would be safe to invest them.  Employers are trying to put some of that cash to work, but they are being very cautious in doing so, not what the words “free enterprise” bring to mind.

The Obama Administration and its apologists call the recent unemployment report “good.”  The unemployment rate went up, above the level when President Obama came to office; 5 million people are long-term unemployed, up by 200,000 from the month before; and the economy has 4.4 million fewer jobs than at the peak of its last growing period before Obama took office.  The excitement apparently comes from the net increase of 171,000 jobs in the past month, above the experts’ predictions of 125,000.  Watchers have learned to lower their expectations for this administration, so that they greet with cheers any signs of life above their reduced standards.  Maybe for President Obama that continued anemic performance is good, but America can do better.  America has done better, much better.  We cannot afford to lower our vision. 

Our future and the future of our children and grandchildren must not be crippled by looking at 2% economic growth as being “good” or even acceptable.  If we want a better future for our children and grandchildren, in fact if people my age want a secure retirement, we need to get back to an America where 4% annual growth or better is the norm.  The social welfare state is expensive, not the least of which being the cost it exacts from the future to pay for the promises of today.

Fortunately, the economy still refuses to die, in spite of all the beating that it has received at the hands of the Obama Administration, but the economy is not well.  Let’s not give the Obama team another four years to try to finish it off.

Of Civil Wars and Slavery

One hundred fifty years ago today Jefferson Davis was “elected” President of the so-called Confederate States of America.  For half a year up until then Davis had served as provisional president of the rebellion, not subjected to a formal election process.  With the election he had the trimmings of legality, enough to give him legitimacy in the eyes of most voters in the southern states.  Still, all that the phony election could do was make him the acknowledged leader of an unconstitutional rebellion against the best government then in existence on the earth.

There yet may be some shallow commentators who will claim that the rebellion was not about slavery.  You just need to ask them a couple of children’s questions—such as “Why”—to expose slavery as the fundamental reason for the break.  The attempt at secession from the Union, although threatened for years, did not take place until after the election of 1860 when Republican Abraham Lincoln defeated two different Democrat candidates and one independent.  In accordance with the procedures of the Constitution, Lincoln obtained a clear (and decisive) majority of votes in the Electoral College.  Then southern politicians in southern states started trying to peel away.

Why?, the six-year old asks.

Well, because they did not want to live under Lincoln as President, would be the modern firebrand’s reply.

Why?

Because he was in favor of the abolition of slavery and would be unlikely to do what the Democrat presidents had done before him to keep Congress from passing laws that would destroy slavery.

So the war was about slavery, then?, you might be forgiven for asking.

No, would be the reply.  It was all about states' rights.

Which states' rights?, you could ask without being rude.

Like the right to determine their own future, their own culture, their own institutions.

Which institutions in particular?, you should be expected to inquire.

Well, the institution of slavery in particular, the southern apologist would rejoin.

Are there any other southern institutions that Mr. Lincoln or the Congress were threatening? 

No, not really, responds your interlocutor, except maybe free trade.  Congress several times before imposed protective tariffs and restrictions on trade, and one time the southerners did rebel.  At least South Carolina did.

Did South Carolina really rebel and leave the Union over trade protection?

A truthful response might go like this:  Well, no, not really. No other states were much interested, and President Andrew Jackson, a southerner, by the way, threatened to send in the army.  The action became just talk and eventually died down.

So the only institution southern politicians feared for in 1860 was slavery?  So the rebellion is about slavery after all.

Here the defender of the indefensible would be left with nothing but denials and circular talk, leaving slavery as the only justification standing.

It is hard today to imagine Americans at war with each other, slaughtering each other for the better part of four years and over half a million people.  It took a mighty polarizing canker at the heart of the nation to allow it.

It may be easier to imagine American politics getting all pushed into an impossible situation by failure to come to grips with a monumental problem that only grew worse.  It was clear in the mid-1800s that slavery was unsustainable socially, politically, and even economically.  It was poisoning American government and society and polarizing the nation, but neither Congress nor President was willing to take it on directly.  Sure, there were several grand compromises, the heart of which was to avoid the problem rather than solve it.  The problem was pushed off to another day for someone else to solve.

Keeping millions of people in servitude was increasingly untenable and at odds with the governing morality of the nation, the morality that comprised the central spirit of both the Declaration of Independence and the Constitution.  Neither of those documents ended slavery, but both set in place governing principles intolerable with slavery and that progressively undermined it.  That is why it took one last grand breaking of the Constitution—the southern rebellion—to try to preserve slavery.  Fortunately it was met by an even greater struggle to enforce the Constitution and as a result bring an end to the South’s “peculiar institution.”

We should be able to imagine that kind of an exercise in political catastrophe, because we have a no less intolerable situation threatening our nation today, a situation that only grows worse by the month as too many leading politicians fail to address it.  Those who try are lambasted by a media sympathetic to the whole evil business.  We have our grand compromises that in fact do very little other than put off dealing with the real problem.  The social welfare society of Franklin Delano Roosevelt and his political heirs down to President Obama cannot be afforded by any nation, not even the United States, the wealthiest and most prosperous of them all.  A much less prosperous Europe is coming unglued over their social welfare system.  The process of buying votes with government programs and benefits paid for by future generations may make for temporarily clever politics, but it is fundamentally immoral, destructive of society and individual character, and economically unsound and unsustainable. 

President Obama hopes to buy a few more years before the day of reckoning (enough to get him past 2012 elections) by talking of taxing the rich.  Unless he is stupid, he knows that higher taxes—whether on the rich or anyone else—cannot solve the problem.  Today 48% of the population pays little or no net Federal taxes.  What happens to our republic when the line crosses 50% and the majority come to believe that they can live by taxing the rest of the population?  How long will the working minority put up with that modern slavery?

But here is another slavery that the government welfare society is creating.  Even if we stop the whole process now, ending all government deficits where they are—no new debt—my children and grandchildren will still have to be twice as productive as we are today just to maintain current standards of living.  Today there are 4 workers for every retired person in America.  Current projections show that during my time in retirement (should I ever reach it) there will come the day when there are only 2 workers for every retired person.  At that time, more than half the production of my grandchildren will go to support other people and pay the debts piled up in many cases before the children of today and tomorrow were born.

Anyone care to predict how America’s social fabric will be held together then?

Of Good Times on Wall Street and Standing Out from the Crowd

The lot of people engaging in the “Occupy Wall Street” (OWS) party in New York City are a lot of things to a lot of people, particularly if you rely upon the glowing news reports about them.  Most Americans, let’s say 99% of them, have not been near any of the party goers, so we have had to rely upon the news media to tell us who and what they are.  A colleague of mine witnessed their march in Washington on a recent Saturday.  There were about 30 of them matched—or even overmatched—by the number of reporters accompanying the march, so in terms of numbers the parties seem to be well covered.

Still, for all that coverage I have to confess that I have not been able to get any specific or focused idea on who they are and what they want.  That is why I am indebted to Democrat pollster Douglas Schoen, who had the bright idea of sending his polling team to the party to ask the attendees themselves who they are, what they believe, and what they want.  As far as I know he was the first to come up with such an obvious idea and remains the only one to have tried it.  The occupiers were fortunately candid and forthcoming in the interviews.  I expect that they may be more on their guard in the future to repeat the party line, whatever that might be.

I understand that the OWS party goers represent 99% of the population (I am not sure if they mean 99% of America, or of the World, or of just New York City—the lack of Yankees baseball caps in the media photos casts doubt on this last possibility), 99% because they said so and the news coverage has repeated it, over and over again.  I suspect that puts me in the 1%, at least that is the percentage of fat in the milk I drink (I prefer whole milk, but my wife refuses to buy it).  In case you are wondering whether you are in the 99% that the OWS groupies represent, here is a list of characteristics of the New York City party goers, care of Douglas Schoen’s polling team, who interviewed 198 of them in their New York City party venue.  See whether you fit the list, keeping in mind that, in the words of O.J. Simpson’s attorney, if the glove does not fit you must acquit.

·         The majority are male.

·         More than half are 30 years old or older.

·        None of them are Republicans, although 14% are either anarchists, socialists, or belong to the “Working Families Party” (that sounds socialist to me, but maybe that just means that they are not Democrats).

·        Somewhat more than half of them, 56%, voted in the 2008 presidential election, and 74% of those for Barack Obama.

·       When asked what bugs them the most, 30% claimed the influence of corporate/moneyed/special interests; 5% claimed “everything” (sounds like the teenagers or maybe the college students); 3% identified America’s democratic/capitalist system; 2% each for bureaucracy, Bush tax cuts, military spending, the Federal Reserve, and Obama abandoning the left; that gets us up to 53% without moving on to the rest of the gripes that they offered.

·       When asked what this was all about, there was a similar variety of answers, with the lead going to the 44% who said mobilizing progressives or influencing the Democrats the way that the Tea Party has influenced Republicans (that may seem ambitious, but I suspect that it is as tough as pushing on an open door given the rest of the OWS demands); curiously, 5% favored a flat tax, a favorite of many conservatives; but 4% called for dissolution of representative democracy and capitalism, and another 4% were for a radical distribution of wealth, which amounts to the same thing; and that brings us to 57% without getting to the rest of the somewhat confused list.

·       When asked who is to blame, George Bush, Barack Obama, and Wall Street tied at 7% each (suggesting that 1600 Pennsylvania Avenue should be as much of a focus for them as Wall Street); while the Republican Party only just edged out “The American People”, 16% to 15%; 5% identified the “Citizens United Supreme Court ruling”; which again gets us to 57% without going any further down the rather long list.

·       The closest point to unanimity among the party goers was that 98% agreed that civil disobedience was a good idea to achieve their goals, and even 31% believed that violence would be O.K., too.

·       Surprising to me was that these anti-Wall Street protesters were almost exactly evenly divided over whether giving TARP money to banks was a good idea, 51% opposed but 49% in favor.

·       Last point here, though there were several other questions, 65% agreed that government had a moral responsibility to guarantee healthcare, college education, and a secure retirement for all, no matter what the cost.

You are excused if you have trouble finding a clear theme in all of this.  If your head is spinning to some degree, just watch some TV or pick up a newspaper and you will learn once again what this is really all about.  I doubt that the reporters or commentators will note that there is almost a universal attitude at the OWS party that someone else is to blame for all things blameworthy.  Nor are they likely to point out that the demands of the unwashed 99ers revolve around getting others to do something for them or give them something.

This latter point seems to me to be one of the more distinguishing points separating the OWS Gimmees from the TEA Party activists.  The hundreds in the OWS crowd predominantly want to have government dictating to people how to live—while they have their hands out or want to put their hands in your pocket (a common complaint among the campers is that their stuff is constantly getting stolen by other campers).  The tens of thousands of TEA Party activists want to be left alone, want to keep what they have earned, want government to step back from making rules to control their lives.

Maybe at this point you are feeling very special, which is not a bad achievement for any writer.  If you feel that you do not fit into the Gimmees 99%, congratulations on being one in a hundred.

Of Inflation and Words of Offence

The professional political commentators were all atwitter today about a word. It was one word from a comment that new presidential candidate, Texas Governor Rick Perry, said yesterday in discussion with some likely Republican voters in Iowa. The subject was Federal Reserve Chairman Ben Bernanke and the monetary policies of the Federal Reserve Board. These are the monetary policies that affect the price of everything in the United States and the value of the dollar abroad.

This is what Governor Perry said. Read it carefully, and see if you have any difficulty figuring out what Perry’s message was:

If this guy prints more money between now and the election, I don’t know what y’all will do to them in Iowa, but we would treat him pretty ugly down in Texas . . . I mean printing more money to play politics at this particular time in American history is almost treasonous in my opinion. Because all it’s going to be doing—we’ve already tried this—all it’s going to be doing is devaluing the dollar in your pocket. And we cannot afford that. We have to learn the lessons of the past three years.

Have you figured out what he was talking about, what his message was? This is not a trick question. His message seemed clear and obvious to me. That message was not what the professional commentators were largely talking about. I guess they missed it. As they interviewed each other, pretending that they were somehow reporting news, they zeroed in on Governor Perry’s use of the word “treasonous”. Was Governor Perry accusing the Federal Reserve Board Chairman of “treason” they all asked?

Having been interviewed by the TV talking heads on numerous occasions, I could not help imagining myself responding to their question. Of course they did not ask me, or anyone like me. They were busy interviewing each other.

But if I had been asked what seems to be the important question of the day—or, like Sesame Street puppets, the word of the day—I suspect I might have answered something like this:

“Are you asking me about a word or about the principle that Governor Perry was emphasizing? My religion teaches me not to make a man a transgressor for a word (see Isaiah 29:20, 21), but it is the principle, his message that we should consider if we want to evaluate his candidacy for President. What principles would likely guide him while in office? That is what we need to know if we want to have an intelligent conversation about who should be president.”

I would then add that it seemed to me that Governor Perry’s message was very clear:

Inflation is a bad policy, an especially bad policy at this time of a weak economy. We have tried it before, and it hurts the nation and the people. It would be particularly wrong for the independent Federal Reserve to choose inflation for political purposes.

That would be my recitation of Governor Perry’s message. I think I got it right. And I think that Governor Perry got it right.

Inflation is terrible. It breaks the promise embedded in money and makes it a lie. Remember that money is just a certificate of a promise between two people: I will give you my labor or goods or service in exchange for a promise that I can obtain something of equal value later. That becomes a lie if inflation means that when I redeem that promise I get something that government has reduced in value by depreciating the money that carries that promise. I provide $20 of labor and only get $18 of value in return. That is what inflation means. It corrupts that value of our goods and services. Even worse it corrupts the value of the promises we make and receive.

Inflation is particularly hard on retired people. These are people who set their money aside for 20, 30, 40, 50 years or more so that they could live off of it in their old age. Inflation cheats them, giving them only a fraction—sometimes only a small fraction—of the value that they set aside and hoped and relied upon for the rest of their lives. They lived a lower standard of living so that they could save for the future, only to find inflation make that future poorer for them. That is a life-time theft, when it is all too late to be reclaimed.

So if you want, go ahead and choose whatever word you want to describe inflation and its effects, especially if that inflation were inflicted on the nation for short-term political gain. Choose your word if that political inflation were to be inflicted by those public servants—the Federal Reserve Board—who took on the legal duty and responsibility to maintain stable prices, to fight inflation.

Whichever word you may choose, the policy of national inflation is wrong. Even if governments throughout history and into the modern era frequently resort to inflation when their national debt becomes too heavy to carry, it is still wrong. It is destructive and undermines the economy and robs the people who rely upon honest money.

Governor Perry was right to say, in very clear language, that it would be a major mistake for the Federal Reserve to choose that road, that the Federal Reserve must guard its independence from political pressure and hold to its legal mandate to fight inflation, not promote it.

If you must choose a word to describe it, go ahead. To quote Gilbert and Sullivan,

I conceive you may use
Any language you choose
To indulge in without impropriety.
(Iolanthe)

Of Dishonest Money and a Poorer Future

Interest rates in the United States are low, far lower than they would normally be. The Federal Reserve has been pumping hundreds of billions of dollars into the economy to keep them low. Is that a good thing? For the federal government it might be—in the short run—but for savers it is bad. One percent back on your savings is pretty low. The persistent, artificially low interest rate policy of the Federal Reserve Board has become a major transfer of wealth from private savers to the federal government. Low interest paid by the Treasury means low interest earned by savers. Measured against inflation, you may be letting the federal government use your money for less than nothing.

Perhaps even worse, the low interest rate policy of the Federal Reserve is supporting the colossal spending binge of the federal government. The federal government can spend trillions of dollars it does not have, because the cost of government borrowing is so cheap.

It is not naturally cheap. Normal markets would not support the continued massive deficits from Washington. When the government spends more than it takes in it has to borrow from you and me, or more particularly from our pension plans and insurance programs, as well as from banks (and foreigners, a subject for another day). Savers and banks do not, however, have an unlimited appetite for lending to the government, especially at the low rates that the government offers. In past decades, persistent federal deficits would result in rising interest rates, as investors would demand a higher return to keep them willing to buy more government bonds.

Some months ago, when the ballooning federal deficit showed no signs of easing, the Federal Reserve stepped in and started buying up hundreds of billions of dollars of government debt just as investors were backing away. Interest rates on government borrowing would have gone up, but the Federal Reserve bought up the oversupply of debt and pushed interest rates down. Interest rates on government borrowing today remain at historically low levels, six-month Treasury securities going for about one-tenth of one percent. That is way below the rising rate of inflation, which lately is at about 2.5% and going north. That means that many investors in government debt are actually losing money, the return on their government debt falling behind the rate of inflation, the government paying back the money it borrowed with dollars that buy less than the ones that they took in. Federal Reserve policies are helping this go on.

Speaking of inflation, the Federal Reserve announced this past week that it is O.K. with inflation of 2.5%, that in fact the Federal Reserve sees inflation trending toward 3% for the coming years. Some of us who remember back to the Jimmy Carter days when inflation approached closer to 20% than 10% might be tempted to think that 3% inflation sounds pretty good. Keep in mind, though, what inflation means.

Remember what money is. Money is an exchange of promises. I promise that I will give you, say, $100 worth of value, whether my goods, my time, or my services, in exchange for which you give me a certificate—money—that can be exchanged for $100 worth of goods, time, or services with someone else. Money lets me take that promise and put it in my pocket and carry it around to where I think that it will be of most use to me. Money is enormously efficient. I do not work for the grocery store. I work at my job and get paid and then take my money to the grocery store and exchange it for groceries. The store exchanges that money, in turn, for more goods, as well as to pay the salaries of the people who work there. They in turn take that money and use it for what they want.

Inflation makes all of that dishonest. I get paid the $100. If I wait a year to spend it, and there is a 3% inflation rate, that $100 dollars will then only by me what about $97 would have bought when I got paid. Of course, that is an even bigger deal if the inflation rate is 10%, my $100 only being worth some $90 of goods and services in my example. But even 3% can be a very big deal, a far bigger deal than the Federal Reserve seemed to acknowledge this past week.

Consider retirement. Not enough people do, but you should. Perhaps you are an average couple saving and investing and hoping to have a retirement income of say $80,000 per year. You have figured that you can live on that. With an inflation rate of 3%, you had better think again. Your $80,000 retirement income will only be able to buy what $40,000 or less buys today. Setting aside adequate money to save and invest for retirement is hard enough. Inflation makes it all much harder.

Massive government deficits are already driving the Federal Reserve to cheapen the return on your investments (in order to keep the federal deficit from snuffing out the weak recovery). The inflationary pressures that they are building up inside the federal volcano will undermine your retirement even further. The longer we wait to solve the deficit problem, and the interest rate and inflation dangers it spawns, the worse it all gets. Government may not be able to create wealth, but it can surely take it away.