If Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all.  His mismanagement of these negotiations is wasting our money.

For instance last year, when Geithner, then operating through the New York Fed, decided to bailout AIG, the ailing insurance giant was already in negotiations with banks that would have retired their Credit Default Swaps with AIG paying 40 cents on the dollar.  Once Geithner took over the negotiations, he instructed AIG to pay 100 cents on the dollar.  The flubbed negotiations cost American taxpayers at least $19 billion (i.e. 60% of the $32.5 billion that AIG paid to retire the swaps).

During periods of unemployment, colleges generally see a surge of people who are either going back to school in order to retool for a different career, or who are attempting to wisely spend their time in gaining more education in order to better themselves.  What has changed over the years, however, is the nature of the education that is being afforded these return students.  We are required by the rise of on-line degree mills disguised as universities to ask questions about higher education—no longer are all bachelor’s degrees equal, and even a master’s degree is meaningless if it isn’t earned through graduate level work.

Perhaps we could chalk degrees from these institutions up to a kind of educational con game making students think that the MBA they’ve earned in less than a year will earn them entrance into a high paying profession.  In reality, however, the damage done by these degree mills amounts to more than just a personal tragedy for the student who believes they’ve received an education, it is a national problem.  Because much of the motivation to return to school during periods of economic downturn is related to federal grants, these return students are going back to school on the taxpayer dime.  While we may endorse paying for the retraining of someone’s obsolete or substandard skills in order to help them better fit the nation’s workforce, if, instead, we are paying for these students to receive substandard education or training for careers in an already flooded market, then we, as a nation, are quite simply throwing our money away.

The Federal Housing Administration will be the next financial disaster to fall on the shoulders of American taxpayers.  Created in 1934 to help low income and first time buyers get housing loans, the agency was designed to guarantee a relatively small percentage of mortgages, for instance, two percent in 2005.  Since its inception, FHA’s budget and operational infrastructure have followed this low-ratio model, and have been designed to absorb losses without having to ask for money or help from the Federal Government.  However, the GAO is now projecting taxpayer funded subsidies for the FHA of half a billion dollars over the next three years, if no changes are made to the agency’s program.

With the housing and credit markets in dire straights, private lenders are asking for better credit scores and higher down payments.  This means fewer people are able to qualify for conventional loans.  According to the website for Housing and Urban Development (the parent organization for the FHA), the FHA’s restrictions on the kinds of loans it will guarantee are more lenient relative to conventional loans, and as such, the FHA is being called into service more and more frequently in this particular economic climate.  Up by over 1200 percent since 2005, the FHA is now expected to back one quarter of all new U.S. mortgages.

Fair business practices and consumer rights in the credit card industry are being regulated by six different entities depending on the classification of the card issuer.  This fragmented system exists despite the fact that the rules regarding business practices and consumer rights laws are the same for all credit card issuers.

Imagine you discover a burglar in your house and call the police.  They arrive to make an arrest, but when they show up, they do nothing.  They tell you you’ve called the wrong police.  The police officers that arrived at your home only deal with criminals whose last name start with Q through S and this guy’s last name starts with a B.  Moreover, the officers who are in your home tell you they won’t call the officers who deal with bad guys with last names beginning in B because they’re in competition with each other.  Too bad too, because the guys who showed up are really good at prosecuting burglars but the guys you should have called are a little behind the times in that capacity.  And of course, because of the competition, the two different police departments don’t share information.

As we all know, the competitiveness of U.S. companies is measured by their ability to innovate and also by their operating costs.  Operating costs can come in the forms of labor and overhead, but they are also the result of less tangible forces like those produced by a nation’s laws, regulatory bureaucracies and taxes.  As a nation, we need to recognize that we are unlikely to meet competitive equality with China or India as far as labor costs are concerned.  Instead, we should focus our attention on reducing the other elements that contribute to the cost of doing business in the United States.  A large part of that can be traced to complying with the various regulatory bodies.

The insurance industry, which is regulated at the state level rather than the federal level, provides a prime example of how over-regulation can significantly increase the operating costs of a business.  If insurance were regulated at the federal level, the number of regulatory bodies would be reduced from 50 to 1.  This would allow insurance providers to both lower their cost structure and more easily compete on a national level.  Moreover, a single regulatory body for the U.S. insurance industry would monitor the industry more efficiently than would 50 such bodies working independently of one another.  The reduced bureaucracy, the increased efficiency in regulation and the resultant increase in market competition would pass savings on to American consumers.

Last week, Representative Barney Frank, Chairman of the House Financial Services Committee, made a push to scale back the proposal for the Consumer Financial Protection Agency (CFPA), part of a financial regulatory reform bill, which is expected to be voted on by the end of the year.  Some of the paring down of the CPFA includes the elimination of the requirement for financial firms to offer plain “vanilla” products and services, such as mortgages with simple terms and credit cards with easy to understand contracts.  Additionally, in the memo that was circulated by Rep. Frank, outlining the modifications he envisions with respect to the CFPA, it was noted that, “ the CFPA will not have authority to approve or change business plans” for financial institutions.  As one would imagine, plans for the CFPA have been amended in order to assuage industry concerns about its restrictiveness and to appease legislators whose support is needed if the full bill is to pass through Congress. 

This is par for the course in Washington, and we’ve all seen how much the healthcare bill has shifted over the past few months.  However, the CFPA has been doomed from the start because it is disjointed at its core, and no amount of amendments or adjustments will fix the problems that are inherent to this new regulatory agency.  The CFPA won’t work because its basis is the idea that consumer protection can be separated from the oversight of the soundness of the financial institutions themselves.  Thus, while Congress and the Obama administration have been spot on in their diagnosis of the problems that plague America’s financial regulatory system, embracing the CFPA as a solution will not help the industry nor will it protect consumers.

Recent waves of bank failures, and the expected continuance of those failures, has put the FDIC in an uncomfortable position.  Covering the accounts held by the failing banks is depleting the FDIC’s coffers, leaving them with only two options on how to get that money back.  Unfortunately, neither option is particularly attractive. 

On one hand, the FDIC could borrow the money from the Treasury, but the size of the FDIC and its position as a bedrock American financial institution loads its actions with enormous relevance for the rest of the economy.  If the FDIC has to borrow money from the Treasury for the first time in twenty years, it creates serious doubts concerning the strength of our economy and our recovery.  If there is another large collapse, moreover, having already borrowed money from the Treasury, the FDIC will be in a more precarious position to guarantee the safety of America’s bank accounts.  On the other hand, if the FDIC decides to turn to the industry to build up its funds by charging banks more insurance fees, it will end up putting more ‘at risk’ banks into further danger of collapse, which would, in turn, force the FDIC to cover those accounts.

All along it has been our contention at Wallet Blog, that the board of director’s system for American public companies is in need of significant repair.  Specifically, its problem is that shareholders lack the ability to control who serves on the board of directors of their own companies at any point in time.

Lately, we have seen more and more stories in the financial news telling us that the various boards of directors of American public companies have acted in ways that are either suspicious, irresponsible, or just plain illegal.  With each such story, we see the SEC attempting to curb the corporate excesses one problem at a time.  In a recent story, the SEC has begun investigating the role of consulting firms in setting salaries for CEOs.  Specifically, the question is whether recommendations about CEO pay packages are compromised when the same consulting firm hired by the board also provides other services to the company? In other words, are these consulting companies providing generous recommendations to the board about the CEOs pay packages in order to keep the CEO happy and minimize the chances that the CEO replaces them with another consulting firm for all the other services that they provide?

Each member of Congress, with an ear for his or her community will hear thousands of ideas about what they should or should not be doing, and where they should or should not lend their support.  With 535 members of Congress, it is only natural that the network of ideas, beliefs, stances, and opinions are fairly complicated.  We can expect that the majority rule will allow some of these ideas to make into law.  We cannot expect, however, that a change in the manner by which Congress conducts business will ever gather the steam necessary to become law. 

Congress is designed to make moves in the nation’s political game; it is not designed to change the rules of that game.  When the public votes for a Senator or Representative, they vote for an individual and not a vision of how Congress should conduct its business.

On the anniversary of the collapse of Lehman Brothers, President Obama warned the financial community that there wouldn’t be any more bailouts and that the age of Wall Street greed and reckless mismanagement would have to come to an end.  We completely agree with this position, but we also think that it is hypocritical that some modified version of this sentiment wasn’t delivered to Congress as well.  

Whatever is said about Credit Default Swaps and the other exotic financial products that caused the near total collapse of the global financial system, they were (and still are) legal.  Moreover, they were made legal after 91 years of being illegal by the  Commodity Futures Modernization Act of 2000 which was piggybacked onto a much larger bill, presented at the last minute before Christmas recess, allowed to bypass committees and was passed by Republicans and Democrats alike.  It was this law that created an unregulated $63 Trillion market  and set on its course to blow up in the face of the American taxpayer.   

Recently, a judge denied Bank of America’s attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch employee compensation packages.  The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all.  While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.

Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue?  Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests.  If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership. 

As Chair of the Congressional Oversight Panel, which has been charged with reviewing the current state of financial markets and the regulatory system, Harvard professor Elizabeth Warren has been quite vocal in her support of the administration’s proposal for a Consumer Financial Protection Agency (CFPA).  The CFPA would be the regulatory body that ensures that financial institutions provide clear and simple disclosures, which would ostensibly deter consumers from opting for risky and “exotic” financial products, and would be the eighth agency involved in consumer credit regulation.  While I agree that there has been little effectiveness in the regulatory system as far as consumer financial protection is concerned, this is no reason to create yet another agency.  The CFPA, which was actually conceived by professor Warren several years ago, would separate the regulation that provides consumer financial protection from the regulation that ensures the banks that serve these consumers are solvent, and do not introduce toxic products to the market.  If our hope is for a solid financial system, then it must be understood that these two areas of regulation go hand-in-hand.  Warren is right, “the credit market is broken,” but she herself proves that the CFPA won’t fix it. 

Warren lays out her arguments for the CFPA in two articles that appeared recently in Business Week and in The Baseline Scenario.  While she is spot on in her analysis of the nature of the problems that plague our financial system, her solutions do not address the problems that she identifies.  It’s true, traditional financial products cannot compete with “exotic” products whose terms seem attractive up front, but hide surprises and changes that are revealed only after the consumer has committed.  Further, the more complex these “exotic” financial products become, the less able consumers are to make comparisons.  Right now our financial system lacks a level-playing field, transparent in its operation, which encourages competition, and also engenders product innovation. 

What is the greatest issue facing America right now?  Is it the crisis of non-renewable energy sources, financial regulation reform, health care reform, or the recession and the stimulus package?  I think we’d all agree that all of these are major issues regardless of our viewpoints about the right solution.  The attention given by President Obama to these issues suggests that he, too, sees these problems as requiring immediate attention.  As such, his administration has set about dealing with all of them at once.

The result is that no particular issue gains the necessary momentum to answer opposition in Congress, and nothing can be done without Congress’s approval.  So, President Obama’s plans are taking far too long and are being swept under by waves of resistance despite the fact that the country needs solutions.  By attempting to solve all these problems in parallel, he is failing to decisively solve any of them.

According to Associated Press Economics Writer Christopher S. Rugaber, the recession is showing signs of recovery because 10,000 fewer people filed for unemployment benefits than the figure projected by economic analysts.  Another sign of recovery, according to Rugaber, is that the number of people receiving unemployment benefits fell 159,000 to 6.1 million.  Of course, that’s a tricky number as it’s clear by the rise in the overall unemployment rate that the drop in unemployment benefits wasn’t due to people finding jobs, but to people losing their benefits. In other words, they’re now out of work and out of income.  What I’d like to know is: how does Rugaber read these figures and determine that these are positive signs of recovery?

Let me first address the figure upon which Rugaber seems to base the lion’s share of his opinion:  analysts predicted that American companies would lay off 560,000 workers last month and as it turned out, they only laid off 550,000.  Let us be reasonable about this: both numbers are staggering.  Either number indicates half a million people.

The bulls are pointing to the end of a recession and a robust recovery ahead for the American economy.  Their optimism is based on a definition of the recession, in economic terms.  For economists, a recession ends when the economy ends its negative growth.   These terms, however, are theoretical.  In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons: 

• The Unemployment rate:  We hear a good deal of optimism coming from economists concerning the fact that the unemployment rate is slowing, but we ought to remember that it isn’t actually going down, but continues to rise.  According to the Associated Press, we are at the worst unemployment crisis since 1983 and economists are predicting the unemployment rate to peak above 10% by the middle of next year. 
• State Deficits:  We are suffering huge deficits at the state level which the Federal Stimulus package can not correct.  This means additional job losses for state employees.
• Unemployment Insurance:  Not only is America facing a dangerously high unemployment rate, but the unemployment level in this country has been high for so long that benefits are now running out.  We are in a situation far worse than simply having people who are out of work; they are out of work, have few prospects for new jobs, and are receiving no income.
• Continuing Bank Failures:  Despite the federal government’s intervention, we continue to see banks fail.  The number of banks on the FDIC’s “Problem List” (banks in danger of failing) has gone from 305 to 416 at the end of June ‘09.  Some analysts are afraid that the FDIC will go into the red by the end of this year.
• Continuing Credit Crunch:  In these uncertain times, credit markets continue to be very tight.  Because of the continuing failure of the nation’s banks, regulators and bank executive remain cautious, which means less credit availability.  Companies who need to deal with debts that are coming to maturity are likely to find less opportunity to refinance.  As a result, we can expect more corporate bankruptcies and more job losses.   
   

Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending.  We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.