Monthly Archives: March 2015
“We reached a resting point and my friend stopped me and demanded to know what I was doing: “Carl, that was irresponsible. You should have put in more protection.” I assured him that we were just fine. I’d been up here a number of times, and the chances that we would fall were minimal. His next words hit me hard. “Yeah,” he said, “but if I did, I’d die.” That climb changed the way I view risk forever…
…look past the low probability to the real consequence. What if your income doesn’t go up or you lose your job? Could you lose the car, too? Do you have enough savings to tide you over, or people who would help you out? Until we put the risk in context, we have a difficult time weighing whether we can actually afford to fail. For me, a simple conversation on the side of a mountain changed my perspective and represented a big turning point in my life. Now, I try really hard with every decision I make to consider both the probability and the consequence of failure. What will it take for you to start looking past the risk and weighing the consequences?”, Carl Richard, “Finding Surer Footing”, New York Times
“For me, it took the painful experiences of the 2008 financial crisis to consider both the probability and consequences of failure. Even today, I don’t think many Americans who take out low or no-down payment (mostly government) mortgages and have little savings after, have considered that they might fail(default), let alone weighed the consequences. If they did, I think some would think twice about taking on this big risk, especially in this era of more job and economic instability and housing price volatility.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Finding Surer Footing
Grand Teton National Park, near Jackson Hole, Wyo., where the author’s climb changed his view. Credit Michael Kirby Smith for The New York Times
We left the trail head at 1 a.m. and headed for the summit of the Grand Teton. I had made this climb several times, but my friend was still new to mountaineering. This trip was his first attempt at the popular peak. Our goal was to reach the top by sunrise so we had enough time to get back down before afternoon thunderstorms made the trail dangerous.
Reaching the summit involves some hiking, followed by a more technical climb. When the time came to climb, we pulled out our harnesses, ropes and other safety gear. Being the more experienced climber, I headed up the mountain first.
My job was to put in what climbers call protection. This protection would catch the rope in case of a fall. The harder the climb, the more protection climbers add. However, if the climbing is really easy, it’s not unusual to move long distances before adding more protection.
Since I had been up this route so many times, I didn’t spend a lot of time adding protection. In my mind, I had placed the probability of falling at next to zero. Yes, we were up high and we were really exposed, but my experience suggested you would almost have to try to fall while climbing this route.
We reached a resting point and my friend stopped me and demanded to know what I was doing: “Carl, that was irresponsible. You should have put in more protection.”
I assured him that we were just fine. I’d been up here a number of times, and the chances that we would fall were minimal.
His next words hit me hard. “Yeah,” he said, “but if I did, I’d die.”
That climb changed the way I view risk forever. For most of my life, I looked at risk simply as the probability that a catastrophic event would occur. Whether it was climbing, buying a house or starting a business, I carefully analyzed what I believed the chance of failure to be and then moved ahead based on that one factor.
My friend taught me that identifying the probability of something happening is simply the first step. We also need to consider the consequence of what will happen if that risk becomes reality. For instance, the chances that we would fall off the Grand Teton were minimal, but if we did fall, we’d die. That’s a different consideration than if we were to fall and the consequence was skinning a knee.
The same rules apply to our finances. Let’s assume there’s a low risk, maybe 20 percent, that the business I plan to invest in will fail. That seems like a reasonable risk. But if I’m investing my life savings in that business and there is any chance it will fail, that’s a huge thing to consider. We’re talking about a complete change to my life if that 20 percent becomes reality.
The conversation is very different if there is a 20 percent risk the business will fail, but I invest only a small portion of my savings. The business’s failure will still hurt, but not in the same way as if I had invested everything.
I see something similar when people talk about making a major purchase, like buying a car. The discussion tends to focus on the best-case situation. Certain assumptions are made, such as, “My income will grow at 5 percent every year, so I can afford the bigger payment on the more expensive car.” After all, you assure yourself, the probability that something major will happen to your job is minimal.
But look past the low probability to the real consequence. What if your income doesn’t go up or you lose your job? Could you lose the car, too? Do you have enough savings to tide you over, or people who would help you out?
Until we put the risk in context, we have a difficult time weighing whether we can actually afford to fail. For me, a simple conversation on the side of a mountain changed my perspective and represented a big turning point in my life. Now, I try really hard with every decision I make to consider both the probability and the consequence of failure. What will it take for you to start looking past the risk and weighing the consequences?
Carl Richards is a financial planner in Park City, Utah, and the director of investor education at the BAM Alliance. His latest book is “The One-Page Financial Plan.”
A version of this article appears in print on March 26, 2015, on page F4 of the New York edition with the headline: Finding Surer Footing.
“Finally, someone honest says it’s not the banker’s fault!!! Rapper Slim Thug says it was his own personal decisions regarding SEX that cost him his home and hurt his net worth and credit.”
Slim Thug’s Real Estate Game Plan, Dashed by a Dalliance
By SLIM THUG
Slim Thug in concert in New York in 2012. He says a relationship a few years ago with his real estate agent soured a chance to avoid foreclosure on his Houston home, ruining his credit. Credit Shareif Ziyadat/FilmMagic, via Getty Images
HOUSTON — There’s never much surprise when hearing stories of artists mixing business with pleasure, but it is surprising when too much mixing results in the artist ending up with financial losses.
A few years ago, I was living in a five-bedroom house. Because of the delicate real estate market Houston was facing, I was interested in selling my house to buy another one. While planning this business move, I heard about an opportunity the Obama administration was offering that would assist homeowners with short-sale deals, where the lender settles for a sale price below the amount owed on the mortgage. I jumped on the opportunity and reached out to a real estate agent to assist with the process.
It didn’t take long to find an agent, and over time we became very close. In fact, we became too close and found ourselves at a point where pleasure became more important than business.
The result was hurt feelings, mixed emotions and resentment, and once feelings are involved, business takes a back seat. After the end of our personal relationship, the deadline expired for taking advantage of the short-sale program. I ended up in foreclosure. So not only did I lose out on money from a potential sale, but I ruined my credit as well. I’ve suffered financially from not being able to do business in my own name and probably lost around $200,000 directly and indirectly through my mistake.
Who would have known that sex would lead to losing money? Obviously, I didn’t. But this is one of the many mistakes that led me to talking more about money as part of my work. It’s 2015, and my credit still isn’t the same. Neither is my net worth, but the lesson I learned is certainly priceless.
The rap artist Slim Thug counts down the financial lessons he’s learned, some the hard way.
Slim Thug is a Houston rap artist. His documentary and latest album are “Hogg Life: The Beginning.”
A version of this article appears in print on March 26, 2015, on page F6 of the New York edition with the headline: A Real Estate Game Plan, Dashed by a Dalliance.
“Mayor Ed Lee Faces Fire Over Who Benefits As S.F. Booms” is an article on the front page of LA Times today. I read it because with a college grad daughter living and working in SF, I have some idea of rents and housing prices…
…Also, I am interested in government affordable housing policies (rent controls and mandates to build below market housing in new developments) and generally think I am against them, because they distort the marketplace and frankly make very little difference, except to the few individual, lucky lottery winners. (And rent controls benefit generally longer and wealthier residents at the expense of newer, younger, less wealthy residents.)
The other thing that struck me about this article is that despite SF being one of the most liberal/progressive places on the planet, the article had noted that income inequality had worsened significantly. The article said that SF had the biggest wealth gap.
“But think about it, it isn’t because any San Franciscans are making less money…..almost everyone in SF is making more (the article notes that SF had the fastest wage growth in the country!!!), it’s because the new economy entrepreneurs are making a LOT more money.”
So the real problem is that huge economic success by some SF area residents (no comment here on the merits of the tech boom and whether it might be a bubble) is causing housing and others goods and services to be bid up beyond the reach of “average” San Franciscans (a real misnomer for SF anyways!). I also think there is more than a little jealousy.
This article notes that the liberal/progressive government of SF is being derided (by even more liberal and progressive citizens and groups) for not taxing these entrepreneurial riches more and not putting more wage and price controls in place. (They really hate the idea that the mayor has mostly cajoled these millionaire and billionaire entrepreneurs to voluntary gift tens of millions to publicly benefit SF in ways they individually see fit, rather than use the force of government to mandate that they hand over a portion of their new found riches to uses that that are determined by the city and state.)
As I see it, no one has a right to live and work anywhere. If a city becomes too high cost, because of its economic success (which is good for jobs, the city, the state and the country), those who voluntarily choose not to pursue careers that keep up with this (financially), will need over time to find another place to live and/or work.
And as it becomes too expensive, the market will take care of itself…as companies will relocate workers and/or their offices to lower costs cities and regions around the country and SF growth could slow, stabilize, or even decline.”, Mike Perry
MAYOR ED LEE FACES FIRE OVER WHO BENEFITS AS S.F. BOOMS
By LEE ROMNEY
The 656-condo Lumina complex promises a “transcendent living experience,” with a club lounge, climbing wall and pet grooming station. The smallest units start at about $1 million. The penthouse is priced at $49 million, a city record.
But on this day, San Francisco Mayor Ed Lee had donned a hard hat and orange vest to tour a development farther away from the bay that satisfies the affordable-housing obligation for Lumina’s developer, Tishman Speyer: a complex that will sell 190 condos at below-market prices.
As the elevator doors clanged shut, Carl D. Shannon, Tishman’s senior managing director, told him: “Not everyone in City Hall agrees with me, but I think that building housing solves the housing crisis.”
Two other housing developments could be seen rising to the east and north. Just to the south, on a stretch of Market Street blighted for half a century, sat the headquarters of Twitter, Uber and Square.
Lee, 62, a former tenants’ rights lawyer who spent more than two decades as a city bureaucrat before reluctantly becoming interim mayor four years ago, was ushered into a three-bedroom unit that will be sold for $300,000 — an unheard-of price in a city where the median price for a house or condo last month topped $1.1 million.
He quipped: “What world are we living in?”
“We’re in Nebraska!” said Donald S. Falk, executive director of the Tenderloin Neighborhood Development Corp, a partner on the project.
Then Lee got serious. “This really helps with the crisis,” he said, offering to hand over the keys to the buyer when one is chosen. Thousands are expected to apply.
In the years since Lee became mayor and cozied up to tech, San Francisco’s unemployment rate has been more than cut in half, the skyline has been transformed, city coffers are plump, and philanthropists are stepping up to help fund everything from hospitals to schools.
But anxiety is skyrocketing along with housing costs, as many fear the city they love is vanishing. “Evict Ed Lee” graffiti abounds.
The boom, in short, is his legacy, his problem and his opportunity.
Lee was applauded by a regional business group here recently for an honor any mayor would envy, particularly one gearing up for reelection: Thanks to the fastest wage growth in the country, San Francisco (together with San Mateo and Redwood City to the south) had topped the Milken Institute’s list of “best performing cities, 2014.”
“Creative and scientific” positions — largely in the tech sector with a boost from biotech and medical research — accounted for nearly half of the 56,100 jobs created between 2008 and 2013, according to the index compiled by the Santa Monica think tank. Tech salaries averaged $160,000.
Known for his 5-foot-5 stature, folksy jokes and remarkably rectangular mustache, Lee is attempting a delicate balancing act: stoking the city’s racing economic engine while pushing to direct new wealth “right back into our neighborhoods” — to low- and middle-income housing, job training, education and transportation.
He must act on his “shared prosperity” agenda as San Francisco’s character is altered by tenant displacements and soaring housing costs that close off a city long a haven for vulnerable seekers and misfits to all newcomers but the wealthy.
The city topped a different index last year — for the fastest-growing wealth gap. Sara Shortt, executive director of the Housing Rights Coalition, said that at this late stage, “all the mayor can do is mitigate.”
“The freaks and the hippies and the queers and the immigrants that really helped shape San Francisco into an exciting, cool, fun city of substance, all of that’s being chipped away at daily,” she said.
Lee and his six siblings grew up in a Seattle public housing complex before his father, a cook, and his mother, a garment worker, built a modest home. As a youth helping with deliveries from the family restaurant, he had listened to hostile customers berate his dad with racial slurs.
“It was an awakening,” Lee said.”‘Why do we as people take this?'”
As a young lawyer, he joined the San Francisco Asian Law Caucus, helping in 1978 to organize a rent strike by residents in Chinatown’s decrepit Ping Yuen public housing project after a young woman was raped and killed there.
The UCSF medical campus at Mission Bay is formally opened. (David Butow / Special to the Times)
In 1988, then-Mayor Art Agnos hired Lee to run a whistle-blower program, followed by a stint heading the Human Rights Commission, where he pressed for fair hiring practices for women and minorities. In his next post, as city purchaser, he opened contracting doors to those same groups. Later he became public works director and city administrator.
“Not once” did he consider elected office, he said. But when Mayor Gavin Newsom left his post in January 2011 to become lieutenant governor, Lee agreed to be an interim caretaker, promising not to run that November.
He did run, though, and won in a landslide.
His earliest welcome signal to the tech sector — designed to keep Twitter from leaving town — was a payroll tax break on new hires for companies that moved into underused buildings in the blighted mid-Market and Tenderloin districts. A citywide tax break on stock-option compensation followed. Many point to a recent ordinance to regulate Airbnb — criticized as too soft — as an example of another tech giveaway.
Lee quickly realized that the tech sector could not only play a key role in economic recovery, but “also be a key partner in the mayor’s effort to build public and private partnerships,” venture capitalist Ron Conway, who founded San Francisco Citizens Initiative for Technology and Innovation, wrote in an email.
Critics see it differently. David Talbot is the founder of Salon.com and author of “Season of the Witch,” which tracks the tumult of San Francisco from 1967 to 1982 — and lauds that other Lee, the young tenant defender.
“The tech elite has bought Ed Lee,” he said.
Lee’s mantra when he took office was “jobs, jobs, jobs.” But by early 2014, as protesters blocked the white buses that ferry tech workers to Google and other companies to the south, he revised it to “housing, housing, housing.”
He has unveiled a plan to build or rehabilitate 30,000 housing units by 2020, a third of them affordable to low-income residents and half to middle-income. He is pushing a housing bond for the November ballot and will seek a philanthropic match.
Luxury building helps, he argues, by preventing super-rich newcomers from displacing those in dwindling rent-controlled units.
But some believe the high-end housing must be slowed. “At some point we will run out of land,” said Supervisor David Campos, who is calling for a market-rate freeze in the Mission District until affordable housing is expedited.
Lee conducts a staff meeting in his office at City Hall. (David Butow / Special to the Times)
Over the last year, Lee has beefed up the rent board and bolstered resources for eviction defense. He has pledged to fight in Sacramento to reform the Ellis Act, which allows owners to evict in order to get out of the rental business.
But Shortt calls the efforts “too little, too late” to stem the loss of housing due to tenant buyouts, evictions, demolitions and short-term vacation rentals.
Even some of Lee’s allies believe his numbers don’t pencil out.
Gordon Chin founded the Chinatown Community Development Center and once fought for tenants at Lee’s side.
“It’s not enough,” Chin said. “Housing cuts to the core of our values as a city. Who lives here now, who lived here before, and who’s going to live here tomorrow?”
If tech is part of the problem, Lee believes it is also part of the solution.
Lee often prods companies to hire locally. And at a diner over French toast and omelets, he pitched Salesforce.com CEO Marc Benioff with a vision to improve San Francisco middle schools.
The billionaire had invested in the schools before, with what he called poor results, so he was reluctant. But Lee swayed him. The city’s largest tech employer has since put in $10 million of what he expects will be a $50-million contribution over a decade and urges others in the tech sector to give back.
Benioff, Conway and Facebook’s Mark Zuckerberg have collectively poured more than a quarter of a billion dollars into city hospitals. Meanwhile, Google has funded free Wi-Fi for city parks and donated $6.8 million toward free transit for city youth. Now, Lee plans to ask tech leaders for help in funding housing — as well as a program that aims to break the hold of “intergenerational poverty” on as many as 500 families.
Lee visits the scene of a fire in the Mission District. (David Butow / Special to the Times)
But the reliance on private dollars makes many uncomfortable. They would prefer tax dollars and the public vetting that comes with deciding how they are spent.
“While we believe that the philanthropic approach has a role, to truly address this growing inequality you have to do more than simply ask corporations to do the right thing,” said Campos, the supervisor. “You actually have to hold them accountable.”
Even Benioff, who has deep city roots, said Lee “has to be cautious not to be bullied by these young billionaire CEOs who want their way.”
So far, Lee faces no significant opposition in the fall. He hopes to see his vision through, riding the boom to help “those who have suffered most.”
“You have to kind of take a look at where the waves are,” he said, “and see whether or not you can use them in a way that helps a lot of other people get lifted out.”
Every year the GAO goes through this exercise and observes that “the federal government is unable to determine the full extent to which improper payments occur (estimated by the GAO at $124.7 billion, a 4.5% error rate, in 2014) and reasonably assure that appropriate actions are taken to reduce them.” The GAO calls this a “material weakness in internal control.””, The Wall Street Journal Editorial Board, March 2015
Government Love . . .
. . . means never having to say you’re sorry you misplaced $125 billion.
The Obama Administration often claims to be a careful steward of taxpayer dollars, and today’s punch-line is the collective $124.7 billion program called “improper payments.” That’s the Washington circumlocution for money that flows to someone who is not eligible, or to the right beneficiary in the wrong amount, or vanishes to fraud or federal accounting incompetence.
The Government Accountability Office reported the new 2014 figure last week, which is a $19 billion or 17.9% year-over-year increase. The overall error rate ticked up to 4.5% of outlays from 4% in 2013. Improper payments are spread across 124 programs among 22 agencies, but some 65% are concentrated in three areas.
One is the earned-income tax credit, the transfer program meant for the working poor with its error rate of 27.2%. That means nearly three of 10 dollars were in some way undeserved—and the Treasury Inspector General thinks the real share is closer to four or even five of 10. The GAO says the causes are “inability to authenticate requirements, improper income reporting, and inability to verify income before processing returns.” Is that all?
Naturally, the White House has proposed a major expansion of this credit, and there’s bipartisan support in Congress.
The other two big culprits are traditional Medicare and Medicaid fee-for-service reimbursements. Compared to the earned-income credit, these are roaring successes with respective error rates of 12.7% and 11.6%. Then again, for a program as large as Medicare the error rate translates into $45.8 billion of annual waste, fraud or abuse.
Every year the GAO goes through this exercise and observes that “the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them.” The GAO calls this a “material weakness in internal control.” Another term is a scandal.
The White House budget office estimates improper payments differently than GAO and claims overall error rates have steadily improved since spiking to 5.42% in 2009 from 2.81% in 2007 amid the hurly burly of the stimulus. Still, we are instructed to accept—and even expand—a tax credit that allots 27% of its dollars illegitimately as well as a government capable of losing an extra $19 billion in a single year. For a sense of the scale, Apple posted earnings of $18.04 billion in the first quarter of this year, which set the highest profits record of any company in history.
Results rarely matter for government work; what counts is not how well dollars are spent but how many. At some point, though, year after year, you’d think liberals who love government would realize that the public would have more confidence in their agenda if the government was better run.
“Have you noticed that Krugman has a big logic flaw in his macroeconomic/political opinions? He regularly derides free market capitalism and like Shiller believes that market participants sometimes aren’t very rational, yet constantly cites current sovereign bond market prices (e.g. declining and extremely low, current yields of U.S. Treasuries) as evidence that market participants aren’t concerned about government spending and deficits (which he wants a lot more of, at least right now)…
…and he uses these low yields to deride fiscally-responsible world governments. By the way, he ignores the fact that many of these sovereign bond market yields have been manipulated (temporarily) lower by the world’s central bankers (like the Fed’s massive quantitative easing). I have learned the hard way, as a result of the 2008 financial crisis, to ignore most short-term market price movements and focus on long-term prices, your experience, and history. How can a government being fiscally responsible today (years after the Great Recession) be wrong? If not now, when? I think liberals like Krugman look at sovereign debts, held by domestic individuals and institutions, as income redistribution: “If they can’t be repaid, who cares? Poor Americans generally benefit from government deficits and aren’t really on the hook for government debts anyway (as they pay little in taxes). They are just owed to “rich” institutions and individuals and they can easily be reduced through monetary inflation or default, if a real crisis occurs.””, Mike Perry, former Chairman and CEO, IndyMac Bank
This Snookered Isle
Britain’s Terrible, No-Good Economic Discourse
The 2016 election is still 19 mind-numbing, soul-killing months away. There is, however, another important election in just six weeks, as Britain goes to the polls. And many of the same issues are on the table.
Unfortunately, economic discourse in Britain is dominated by a misleading fixation on budget deficits. Worse, this bogus narrative has infected supposedly objective reporting; media organizations routinely present as fact propositions that are contentious if not just plain wrong.
Needless to say, Britain isn’t the only place where things like this happen. A few years ago, at the height of our own deficit fetishism, the American news media showed some of the same vices. Allegedly factual articles would declare that debt fears were driving up interest rates with zero evidence to support such claims. Reporters would drop all pretense of neutrality and cheer on proposals for entitlement cuts.
In the United States, however, we seem to have gotten past that. Britain hasn’t.
The narrative I’m talking about goes like this: In the years before the financial crisis, the British government borrowed irresponsibly, so that the country was living far beyond its means. As a result, by 2010 Britain was at imminent risk of a Greek-style crisis; austerity policies, slashing spending in particular, were essential. And this turn to austerity is vindicated by Britain’s low borrowing costs, coupled with the fact that the economy, after several rough years, is now growing quite quickly.
Simon Wren-Lewis of Oxford University has dubbed this narrative “mediamacro.” As his coinage suggests, this is what you hear all the time on TV and read in British newspapers, presented not as the view of one side of the political debate but as simple fact.
Yet none of it is true.
Was the Labour government that ruled Britain before the crisis profligate? Nobody thought so at the time. In 2007, government debt as a percentage of G.D.P. was close to its lowest level in a century (and well below the level in the United States), while the budget deficit was quite small. The only way to make those numbers look bad is to claim that the British economy in 2007 was operating far above capacity, inflating tax receipts. But if that had been true, Britain should have been experiencing high inflation, which it wasn’t.
Still, wasn’t Britain at risk of a Greek-style crisis, in which investors could lose confidence in its bonds and send interest rates soaring? There’s no reason to think so. Unlike Greece, Britain has retained its own currency and borrows in that currency — and no country fitting this description has experienced that kind of crisis. Consider the case of Japan, which has far bigger debt and deficits than Britain ever did yet can currently borrow long-term at an interest rate of just 0.32 percent.
Which brings me to claims that austerity has been vindicated. Yes, British interest rates have stayed low. So have almost everyone else’s. For example, French borrowing costs are at their lowest level in history. Even debt-crisis countries like Italy and Spain can borrow at lower rates than Britain pays.
What about growth? When the current British government came to power in 2010, it imposed harsh austerity — and the British economy, which had been recovering from the 2008 slump, soon began slumping again. In response, Prime Minister David Cameron’s government backed off, putting plans for further austerity on hold (but without admitting that it was doing any such thing). And growth resumed.
Given all this, you might wonder how mediamacro gained such a hold on British discourse. Don’t blame economists. As Mr. Wren-Lewis points out, very few British academics (as opposed to economists employed by the financial industry) accept the proposition that austerity has been vindicated. This media orthodoxy has become entrenched despite, not because of, what serious economists had to say.
Still, you can say the same of Bowles-Simpsonism in the United States, and we know how that doctrine temporarily came to hold so much sway. It was all about posturing, about influential people believing that pontificating about the need to make sacrifices — or, actually, for other people to make sacrifices — is how you sound wise and serious. Hence the preference for a narrative prioritizing tough talk about deficits, not hard thinking about job creation.
As I said, in the United States we have mainly gotten past that, for a variety of reasons — among them, I suspect, the rise of analytical journalism, in places like The Times’s The Upshot. But Britain hasn’t; an election that should be about real problems will, all too likely, be dominated by mediamacro fantasies.
A version of this op-ed appears in print on March 23, 2015, on page A21 of the New York edition with the headline: This Snookered Isle.
“NewDayUSA is aggressively advertising a VA (government insured) mortgage program that it says allows veterans to borrow up to 100% of their home’s current value (pulling all of their home equity out to pay off other debts or for any reason)! How can the government offer this risky and irresponsible mortgage program? This VA program is only viable if housing prices always rise…
…And post-crisis, we know that national home prices can fall (even without a Great Depression) and fall precipitously, causing massive mortgage defaults and foreclosures. Again, have we learned nothing from the 2008 crisis? In the LA MSA in which I live, FHFA’s historical home price data over the past two decades shows that over 45% of the time home prices have fallen (on average about 5% a year) rather than risen. How can 100% loans (after housing prices have run-up in recent years) make any sense to the government/taxpayers and lenders? (It actually may make sense to the borrower, as they can pull all their home equity out at the top of the market with this VA loan and if home prices decline, “walk away” with no liability in many states.) To those who love to blame the private sector, isn’t this a clear example of our government mortgage programs/housing policies leading home borrowers and lenders to make risky and irresponsible economic decisions? I think so.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“What the government did to our little group in Wetumpka, Alabama is un-American. This isn’t a matter of firing or arresting a few individuals. The individuals who sought to intimidate us were acting as they thought they should in a government culture that has little respect for its citizens. Many of the agents and agencies of the federal government do not understand that they are the servants of the people. They think they are our masters…
…And they are mistaken. I’m not interested in scoring political points. I want to protect and preserve the America I grew up in, the America that people cross oceans and risk their lives to become a part of. And I am terrified that it’s slipping away.” Becky Gerritson of Wetumpka, Alabama, who was singled out by the IRS because as president of the Wetumpka Tea Party she was attempting to get 501 (c)4 status for the organization. The IRS harassed and tried to intimidate Gerritson, and it took nearly two years for her to receive the tax status she sought. The above is the conclusion of her testimony to the congressional committee investigating IRS abuse. (The above was taken from a March, 2015 donation solicitation letter from John A. Allison, the President and CEO of the Cato Institute.)
“Millions of Americans fear that our nation is in danger of losing what has made us the envy of the world. We are in danger of losing what all of us at Cato believe in, namely the idea of American Exceptionalism…in reality, American Exceptionalism is unrelated to military prowess. It is found in the iconic words of the Declaration of Independence that proclaim legitimate governments exist for the sole purpose of protecting our rights to life, liberty, and the pursuit of happiness. That may sound like a cliché these days, but is a profoundly radical statement that, when it was written, flew in the face of human history. A history in which human beings were not much more than cannon fodder…for the state, the monarchy, the church…..whichever institution presumed to rule society. But that would not be the case here in our new society. Life, liberty, and the pursuit of happiness meant the individual…not the state…was primary. And yet we look around, we see the state claiming ever greater control over our lives. How could it have come to this? We need look no further than our own political failings, on the left and the right. Jefferson once wrote, “Experience hath shewn, that even under the best forms of government, those entrusted with power have, in time, and by slow operations, perverted it into tyranny.” Too many of us take our freedoms for granted. We have not paid attention to what the political class is up to.”, John A. Allison, President and CEO of the Cato Institute, March 2015
Here are other Key Excerpts from Mr. Allison’s (donation solicitation) Letter:
“There is no institution, person for person, dollar for dollar, idea for idea, that has been even close to the Cato Institute, in advancing fundamental principles.”, Frederick W. Smith, CEO, FedEx Corp
“The Cato Institute is the foremost upholder of the idea of liberty in the nation”, George F. Will, syndicated columnist
“The chief culprits in the financial crisis…the Federal Reserve, Fannie Mae, and Freddie Mac….are at it again. Short-sighted monetary and regulatory policy is laying the foundation for another housing bubble. Look what happened last time…government policies created a bubble in residential real estate that caused the financial crisis. The Fed printed too much money that ended up in the housing markets thanks to Fannie and Freddie…Cato Institute scholars understand that government manipulation of our monetary policy…the value of the dollar, credit, and interest rates…fatally compromises the free market.”
“…support Cato’s libertarian agenda of free markets, a strict respect for privacy and civil liberties, and a strong national defenses that also has strong constraints on any efforts to be the world’s policeman.”
“We believe that most Americans share a belief in dynamic market capitalism (as opposed to crony capitalism), social tolerance, and peaceful international relations.”
“We seem to be at a critical point in our nation’s history. Most leaders of both parties still cling to the thoroughly discredited notion that government can solve all of our problems.”
“Sure most politicians today still pay lip service to what John Adams call the “rule of law over the rule of men,” but you’d never guess it by their actions. In America, the basic framework of law is found in the Constitution.”
“The essence of the Constitution is found in the Enumerated Powers Doctrine…..the idea that the powers of the federal government are specifically enumerated, and therefore limited. Indeed, the Tenth Amendment makes sure that point is clearly understood by saying that those powers not granted to the national government are reserved to the states or to the people. The powers granted to the federal government, James Madison said, are “few and well-defined.”
“Yet the growing lawlessness we see in Washington reflects a complete rejection of that core principle.”
“When 20-term congressman Pete Stark was asked where Congress got the constitutional authority to control something as personal as health care, he responded: “I think that there are very few constitutional limits that would prevent the federal government from rules that could affect your private life. The federal government, yes, can do most anything in this country.”
“Even more disturbing than the disregard the federal government has for the Constitution is the utter disdain it increasingly shows for the American public, particularly the growing arrogance government officials demonstrate to those for whom they supposedly work.. Maybe you’ve noticed it.”
“No major organization as committed to free markets as Cato is also as committed to a strict respect for civil liberties and the rule of law…this (positive legal rulings) trend recognizes the right of adult Americans to make their own choices…a trend that Cato scholars will promote across the board.”
“To state the obvious, saying that our lives have meaning only in terms of what we supply the state is hardly consistent with the role of government described in the Declaration. At the same time, America is not a nation of atomistic individualists as so many statists complain we are. On the contrary, as Tocqueville made clear, Americans love to work together…without government involvement. American exceptionalism is predicated on the individual. And what the Declaration proclaimed is that such dignity requires liberty…the liberty to pursue your own dreams; reap the benefits of your efforts (you did build it, where you’re a bricklayer or a neurosurgeon); choose your retirement system, health insurance policy, and schools for your children. It is your life, which means, in America you should make the important (and unimportant) decisions regarding it.”
“In his final appearance before an MBA audience, at the MBA 97th Annual Convention & Expo in Atlanta in 2010, Mr. Gramley, with characteristic frankness and humor, noted he was among the many U.S. economists who failed to see the warning signs of the 2007-2008 recession. ‘In 2005 and 2006 problems were brewing in the mortgage industry, and I didn’t see it coming…
…Many of us believed that we had figured out the economy, and (how to prevent) economic adversity.’ But Mr. Gramley also sounded a characteristically optimistic note, saying ‘we haven’t done any long-term damage. I think three to five years from now, we will look back at this and acknowledge that we learned some hard lessons that benefited us in the long term.’”, “Former MBA Chief Economist, Federal Reserve Governor Lyle Gramley Dies”, MBA NewsLink, March 24, 2015
Former MBA Chief Economist, Federal Reserve Governor Lyle Gramley Dies
Lyle Gramley, who served on the Board of Governors of the Federal Reserve System under two presidents and later served as chief economist of the Mortgage Bankers Association, died Sunday. He was 88.
“Lyle Gramley was a wonderful man. He served on IndyMac’s (and its predecessor mortgage reit’s) board as an independent director from before I came aboard in 1993 until we were seized by the FDIC on July 11, 2008, in the midst of the unprecedented, global financial crisis. He courageously wrote me the beautiful letter below within weeks of IndyMac Bank’s failure. I have cherished it and it has helped me survive the aftermath. For that and so much more, I will be forever grateful to my friend and colleague Lyle Gramley. Thank you Lyle and rest in peace.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“The audit’s (an independent audit of The Federal Reserve’s monetary policies) goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”…
…History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed’s actions over the last century represent the greatest systemic risk of any financial organization in the world. These actions include the runaway inflation after World War I and the overreaction leading to the depression of 1921; the failure to liquefy the banking crisis of the 1930s; setting off the internationally disastrous great inflation of the 1970s; and more recently stoking a housing bubble while failing to recognize that it was a bubble……Opponents say an audit would threaten the Fed’s “independence.” That’s precisely why it’s necessary. The promoters of Fed independence, which of course include the Fed itself, must believe that the Fed is competent to have the unchecked power of manipulating money and credit, or in a grandiose variation, of “managing the economy.” They must believe that the Fed knows what the results of its manipulations will be, when manifestly it does not. The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power…… The historical argument against letting Congress play a role in monetary issues is that elected politicians are always inflationist, and it takes an independent body to stand up for sound money. Yet now we have the reverse of the historical argument: a sound-money Congress confronted by an inflationist central bank—a Fed that endlessly repeats its commitment to perpetual inflation at its “target” rate of 2% a year. This means prices will quintuple in a normal lifetime. What then?….. “The money question,” as fiery historical debates called it, profoundly affects everything else. It is far too important to be left to a fiefdom Fed.”, Alex J. Pollack, “It’s High Time to ‘Audit’ the Federal Reservce”, The Wall Street Journal (Mr. Pollock is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago, 1991-2004.)
It’s High Time to ‘Audit’ the Federal Reserve
Since 2008 the Fed has run vast, and risky, economic experiments without effective congressional oversight.
U.S. Federal Reserve Chair Janet Yellen Photo: Reuters
By Alex J. Pollock
The calls in Washington to “audit” the Federal Reserve are not for a narrow, bean-counting review of the institution’s financial statements. The audit’s goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”
History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed’s actions over the last century represent the greatest systemic risk of any financial organization in the world. These actions include the runaway inflation after World War I and the overreaction leading to the depression of 1921; the failure to liquefy the banking crisis of the 1930s; setting off the internationally disastrous great inflation of the 1970s; and more recently stoking a housing bubble while failing to recognize that it was a bubble.
The Federal Reserve, established in 1913, was a prime example of the dream-world that President Woodrow Wilson imported from the theorists of the German Empire—the notion of government based on the superior knowledge of independent experts that bypasses the messy and undisciplined world of democratic politics. The fatal flaw? The Fed has no superior economic knowledge. It has only forecasts as unreliable as everybody else’s, and theories as debatable. Hence its many mistakes.
Since the Great Recession ended the Fed has been in overdrive. It is running an unprecedented, giant monetary experiment. This experiment includes years of negative real interest rates, the creation of a huge asset-price inflation, and the monetization of real-estate mortgages and long-term bonds. Should the Fed, or anybody, be allowed to carry out such vast and very risky experiments without effective supervision? The correct answer is: no.
Opponents say an audit would threaten the Fed’s “independence.” That’s precisely why it’s necessary. The promoters of Fed independence, which of course include the Fed itself, must believe that the Fed is competent to have the unchecked power of manipulating money and credit, or in a grandiose variation, of “managing the economy.” They must believe that the Fed knows what the results of its manipulations will be, when manifestly it does not. The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power.
The historical argument against letting Congress play a role in monetary issues is that elected politicians are always inflationist, and it takes an independent body to stand up for sound money. Yet now we have the reverse of the historical argument: a sound-money Congress confronted by an inflationist central bank—a Fed that endlessly repeats its commitment to perpetual inflation at its “target” rate of 2% a year. This means prices will quintuple in a normal lifetime. What then?
Here is the reality: The Fed is a creature of Congress, which created it and has since amended the legislation that authorizes its existence on numerous occasions. In the 1970s, Congress, with Democratic majorities, made two efforts to bring the Fed under more control. In the Humphrey-Hawkins Act of 1978, it required regular reports to Congress by the Fed. These hearings achieve nothing but the Kabuki theater of scripted presentations and sparring over questions and answers.
In the Federal Reserve Reform Act of 1977, Congress defined a triple mandate for the Fed to follow: stable prices, maximum employment and moderate long-term interest rates. The Fed has dropped any mention of one-third of its assignment—“moderate long-term interest rates”—and redefined “stable prices” to suit itself. It tells us in remarkable newspeak that “stable prices” really means prices that always go up.
How is Congress effectively to oversee its creation? Congress is too big and on average not sufficiently knowledgeable to do so directly—that’s why it has committees. But the House Financial Services Committee is also very large, with 60 members, and both congressional banking committees have numerous other difficult areas of jurisdiction, not least being the crisis-prone housing-finance sector.
So I propose that Congress should organize a new Joint Committee on the Federal Reserve. The Fed would be its sole but crucial jurisdiction. All Humphrey-Hawkins reports should be made to this joint committee, and it should have the power to audit whatever about the Fed it deems appropriate.
Such a committee should have a relatively small membership, made up of senators and congressmen who become very knowledgeable about the Fed, central banking, the international relations of central banks and related issues. Like the Senate Select Committee on Intelligence, it should include ex officio members from the leadership, but in this case, from both houses.
“The money question,” as fiery historical debates called it, profoundly affects everything else. It is far too important to be left to a fiefdom Fed.
Mr. Pollock is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago, 1991-2004.
“These days, Mr. Cohen (Sullivan & Cromwell Senior Chairman H. Rodgin Cohen) says the strained relations between government regulators and bank officials stems from “the myth of regulatory capture.”….“Recently, this supposition of regulatory capture has become as pervasive as it is false,” he said, speaking alongside panelists from the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Bank of New York…
…and the industry-funded regulator Finra. “I have never experienced a situation that an examiner was so close to an institution that the examiner went easy on that institution,” Mr. Cohen said at the conference sponsored by the Securities Industry and Financial Markets Association, a trade group representing Wall Street firms.”, Justin Baer, “Top Wall Street Lawyer Slams Regulatory Environment”, The Wall Street Journal
“There are a lot of false narratives about banks and the financial crisis and that’s why I established this blog; so that the facts and truth can be read and understood by anyone who has interest. I can tell you for a fact (and did so under oath) that our regulators at the OTS were smart, organized, and capable. And they were completely independent. They wouldn’t even accept a bottle of water!!! Home lending was just at the epi-center of the financial crisis, with Fannie, Freddie, FHA, and the FDIC (among many others) all becoming insolvent and needing government assistance/bailouts.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Top Wall Street Lawyer Slams Regulatory Environment
Rodgin Cohen calls environment ‘confrontational and skeptical’
By Justin Baer
One of Wall Street’s top lawyers says strains between banks and regulators have never been greater.
After the record mortgage-related fines paid by banks over the last two years, “the regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career,” Sullivan & Cromwell Senior Chairman H. Rodgin Cohen said Wednesday at a banking legal conference in Phoenix.
Instead of blaming regulators themselves, Mr. Cohen said the acrimony stems from the fight over a phenomenon called regulatory capture, in which watchdogs essentially get too close to the subjects they regulate. Many policymakers have expressed concerns about such capture, but Mr. Cohen says the fears are overblown.
Almost on cue a few hours later, a top regulator criticized banks.
Federal Reserve Chairwoman Janet Yellen, asked about banks’ culture and recent regulatory fines at a news conference in Washington said: “It’s certainly been very disappointing to see what have been some really brazen violations of the law.”
She added that the Fed was keeping a close eye on bankers’ bonuses to make sure they didn’t encourage bad behavior.
So it goes in the postcrisis world of banking. On one coast, a top banking watchdog pushes bankers to reduce risky actions, while thousands of miles away, bankers and their lawyers discuss how regulators are being tougher than ever.
Mr. Cohen is on the front lines of the battle. The veteran attorney has represented many, if not most, big banks. In the days when bank mergers were common before and during the financial crisis, he was usually representing one side, keeping in close touch with government officials.
In the wake of the financial crisis, he’s advised banks being investigated by regulators and helped them settle allegations of various improprieties for billions of dollars. He’s also counseled them on capital rules and dealing with new financial laws such as the Dodd-Frank Act in the U.S.
These days, Mr. Cohen says the strained relations between government regulators and bank officials stems from “the myth of regulatory capture.”
“Recently, this supposition of regulatory capture has become as pervasive as it is false,” he said, speaking alongside panelists from the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Bank of New York and the industry-funded regulator Finra.
“I have never experienced a situation that an examiner was so close to an institution that the examiner went easy on that institution,” Mr. Cohen said at the conference sponsored by the Securities Industry and Financial Markets Association, a trade group representing Wall Street firms.
Earlier this month, Ms. Yellen flagged the “the risk of regulatory capture” as “something the Federal Reserve takes very seriously.” The central bank “works very hard to prevent” any bias toward the industry, stressing that Fed employees should “feel safe speaking up when they have concerns.”
As a bank lawyer, Mr. Cohen in some ways is talking his book, trying to keep the huge fines that have hit the industry at bay. The six largest U.S. bank holding companies have paid about $130 billion in settlements, fines and other costs related to mortgages and the financial crisis, according to a February report in The Wall Street Journal. Continuing investigations into alleged rigging of currency markets could add hundreds of millions more to the tally for some global firms.
Recently, J.P. Morgan Chase & Co. Chairman and Chief Executive James Dimon said the overlapping work of regulators was a “hard thing to deal with” and made bankers feel they were “under assault.”
Mr. Cohen, a longtime lawyer, said the confrontational tone that has grown in recent years makes it harder for bank supervisors to do their jobs and understand the specifics of how banks are generating profit.
“The consequences of such as approach are likely to be less effective examinations, not more,” he said. “Unless we deal with the canard of regulatory capture, we will inevitably be placing pressure on examiners to disprove this charge.”
The debate bubbled to the surface last year after a lawsuit filed by a former New York Fed examiner raised questions on whether the regulator had failed to scrutinize Goldman Sachs Group Inc. adequately in its oversight of the Wall Street firm.
Then, in October, the Fed’s inspector general criticized the New York Fed for failing to identify the risks taken by J.P. Morgan Chase’s chief investment office before it lost some $6 billion in the “London Whale” trades.
At a November hearing called to address capture, U.S. Senate Democrats grilled New York Fed President William Dudley over his regulator’s oversight. At one point, Sen. Elizabeth Warren (D., Mass.) suggested that Mr. Dudley should be replaced if the New York Fed didn’t toughen up. “Either you need to fix it, Mr. Dudley, or we need to get someone who will,” she said.
At Mr. Cohen’s panel, the financial regulators present didn’t address Mr. Cohen’s arguments directly.
One noted however that bank supervisors and bankers work closely together, even though investigations and billion-dollar settlements have pitted regulators against banks in recent years.
“If people are expecting my group of 40 to understand every single risk without the help of the [banking] institutions, that’s an impossible task,” said Michael Walsh, an assistant Vice President in the New York Fed’s legal and compliance group.