Taxpayers Shouldn't Pay for Worthless Degrees

by Brian Johnson on October 30, 2009

fake-college-degreeDuring 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.

Taxpayers paid once for subprime mortgages and soon they will pay again

by Odysseas Papadimitriou on October 28, 2009

Finance AnyoneThe 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.

Who Regulates Your Wallet?

by Odysseas Papadimitriou on October 16, 2009

ConfusionFair 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.

All Drivers MUST Have Car Insurance & All Citizens MUST Have Health Insurance

by Brian Johnson on October 14, 2009

medicalThe latest version of the health care legislation has weakened the requirement that all Americans must have health insurance. Coupled with the inability under the proposed law for health insurance companies to deny coverage to people for poor health, this concession would mean that Americans could purchase insurance at any time and therefore would have little or no motivation to get health insurance while still healthy.

What Washington has failed to account for is that the very idea of insurance is based on the idea of spreading the costs between people who file a claim and those who do not. The cost of premiums is kept down precisely because some people will not die within the span of a term life insurance policy, or will not have a car accident, in the case of an auto insurance policy.

Regulatory Redundancy Hurts Consumers

by Odysseas Papadimitriou on October 8, 2009

RedundancyAs 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.

Congress Can't Police Themselves

by Brian Johnson on October 5, 2009

ScandalRecently, we’ve printed a number of articles concerning the need for Congress to change the way they do business and the overall difficulty of putting such changes into effect.  The current laws concerning politicians and the disclosure of funds raised by lobbyists is a perfect example of just what happens when Congress decides to police its own excesses.

First, some explanation.  Lobbyists want the ear of politicians so that they can convince them to vote their way on some issue.  How do they convince politicians that their side is in the right?  Strong rhetoric?  Sound argument?  No.  They use money and campaign contributions.  They, essentially, attempt to buy votes.

Consumer Protection & Prudential Protection Go Hand in Hand

by Odysseas Papadimitriou on October 1, 2009

hand-in-handIn response to my recent blog post, “Modified Plans for the Consumer Agency Still Doomed to Fail,” I received an email from Reuters blogger Felix Salmon that questioned the idea that consumer protection and prudential protection can coexist.  In layman’s terms, Felix’s challenge was that what’s bad for the card issuer is inherently good for the consumer and vice versa.  Given that this is a question that many people likely have, my response to Felix follows:

It’s important to remember that one of the best ways to protect consumers is to prevent them from securing loans that they clearly cannot afford (i.e. “toxic loans).  As you very well know, when someone gets a loan that is significantly higher than what they can afford, they get into all kinds of trouble, including being forced into bankruptcy and/or foreclosure.  As it stands now, prudential protection and consumer protection are combined, and there are various regulatory agencies that have the knowledge, experience and authority to prevent toxic products to the market. Unfortunately they’ve been asleep at the wheel. Under the CFPA prudential protection and consumer protection will be split.  This means that the very agency responsible for protecting consumers won’t have the required data or experience, not to mention the authority, to protect consumers against toxic products. 

Modified Plans for the Consumer Agency Still Doomed to Fail

by Odysseas Papadimitriou on September 30, 2009

Consumer Financial Protection AgencyLast 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.

How Congress Crippled the FDIC

by Brian Johnson on September 30, 2009

FDICRecent 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.

Credit Card Laws That We Don't Need

by Brian Johnson on September 29, 2009

swiping-credit-cardIf you are like most Americans, you often use credit cards for your purchases.  Behind the scenes, when you swipe your credit or debit card through the machine, the merchant pays a small fee to their bank (i.e. interchange fee) for the ability to accept credit card transactions.  Let us be blunt about this: if the business wants your money, then they would be smart to pay these fees because cash transactions are becoming rarer with each passing day.  ‘Cash only’ businesses are becoming a thing of the past. 

The merchants themselves are becoming increasingly irate that they have to pay these fees to allow their customers to use credit cards and are now turning to the nation’s lawmakers for help.  Bills are already headed for Congress which would allow merchants to enter into collective bargaining with the banks and would make it easier for merchants to steer customers to other forms of payments and let them set minimum and maximum amounts for credit card purchases.

The SEC Can Not Fix Broken Governance - Shareholders Can

by Odysseas Papadimitriou on September 28, 2009

share-holdersAll 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?

Bring Change to Congress

by Odysseas Papadimitriou on September 25, 2009

CongressEach 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.

Politicians Forget Their Accountability for the Financial Mess

by Odysseas Papadimitriou on September 23, 2009

HypocrisyOn 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.   

The Consumer Financial Protection Agency -- A Step in the Wrong Direction

by Odysseas Papadimitriou on September 16, 2009

Wrong WayAs 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. 

Obama Needs to Borrow Some Military Strategies

by Odysseas Papadimitriou on September 15, 2009

Military StrategiesWhat 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.

The Associated Press does it again! Do they even know how to read statistics?

by Brian Johnson on September 10, 2009

UnemploymentAccording 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 Wrong About Our Economic Recovery

by Odysseas Papadimitriou on September 10, 2009

RecessionThe 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.

Cash-For-Clunkers Wrap-Up

by Lynn B. Johnson on September 1, 2009

gas-guzzlerWell, the Cash for Clunkers program, aka CARS, ended on August 24th. The original $1 billion, which lawmakers thought would last until October, was gone within two weeks, which prompted lawmakers to grant another $2 billion towards the program.

Ultimately, CARS increased car sales, and the sales of more environmentally friendly cars, while removing junkers from the road. It offered a shot in the arm to ailing car dealerships and the U.S. auto industry at large.

Leave Capitol Hill to Congress and Detroit to Detroit

by Brian Johnson on August 20, 2009

ChryslerOne of the ways that Chrysler and GM have set about to recover is by taking the opportunity afforded to them by their bankruptcies to shrink the number of car dealerships to a managable level.  Before the bankruptcy, this reduction in dealerships could only have been managed on a dealer-by-dealer basis through painstaking renegotiations of contracts and would have proven a very expensive undertaking.  In response, the House of Representatives passed a bill that would make it illegal for these bailed out giants to sever those ties.  Should the bill become law, the auto companies will be forced to re-up contracts which they can no longer afford to maintain.  Essentially, Congress is telling the automotive industry how to conduct its business with an eye to keeping voters happy and without acknowledging the very real threat of this legislation: that it could force Chrysler and GM  into bankruptcy again.

Like others, I believe that the people responsible for running America’s automotive industry are also responsible for their companies’ bankruptcies.  Furthermore, I am not overly confident that they can do what it takes to turn the industry around now. However, I have no doubt than they know more about their particular business than Congress does. 

An Innovative Healthcare Plan

by Odysseas Papadimitriou on August 17, 2009

medicalI’ve been criticizing the Obama administration’s healthcare plan recently without really offering an alternative solution.  Rather than continuing to point out the faults within the plan currently being offered up, I’d like to lay out my vision of what a comprehensive, national healthcare plan should look like.  This is a plan that I think will work, particularly because it is driven by the fundamentals that shape any successful free market economy.

The healthcare system I am proposing is designed to fix the elements of our current system that don’t work, and leave the elements that do work with relative effectiveness as they are.  One rarely hears complaints about the quality of U.S. healthcare; rather the complaints are centered around coverage and cost.  And so, I feel that if a healthcare system is to work, it should strive to maintain the level of quality we currently enjoy, while at the same time driving down costs and increasing coverage. 

From Newspaper to Blog

by Brian Johnson on August 13, 2009

newspapersThe end of an industry is always the beginning of its replacement. When the typewriter went out, it was replaced by the personal computer which could do everything the typewriter could do, and more.  The replacement is supposed to improve on the original. 

We are now losing the industry of print journalism to its replacements: the online newspaper, the talk show, the entertainment news industry, and the blogs.  Whereas, print journalism held itself to a high standard of objectivity, investigation, and fact checking, the vast majority of internet writers self-publish their opinion (and sometimes their solicited opinion).  Their views are not expert, nor are they generally supported by interviews with experts.  Instead, what passes for news is either the author’s views unmediated by an editorial staff or even a publishing company, or a biased entertainment news industry whose main concerns are spectacle and the money that spectacle brings. The collapse of print journalism has started a race to the bottom for news reportage.

'Cash for Clunkers' Gets $2B Vote from House

by Lynn B. Johnson on August 1, 2009

gas-guzzlerThe U.S. House of Representatives voted 316-109 Friday to augment the Car Allowance Rebate System (CARS) program by $2 billion. The additional funding will be transfered from energy stimulus funds.

Fears that the “Cash-for-Clunkers” program would die within days of its initial approval spurred the House to call a vote, an action that came within hours of Transportation Secretary Ray LaHood’s report that the program would soon run out of funding.

Experts Agree that Current Healthcare Plan Does Nothing to Lower Costs

by Odysseas Papadimitriou on July 30, 2009

High CostsThe pending health care plan being debated currently in Congress lacks, according to  the director of the Congressional Budget Office, Douglas Elmendorf “the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.”

Elmensdorf is not alone.  The previous Secretary of Health and Human Services (Mike Leavitt) and the head of a Medicare advisory commission (Glenn Hackbarth) have both said that the plan does nothing to stop the escalation of health care costs which, once under the jurisdiction of the government, will cause a massive budget deficit which will, eventually, be passed on to the tax payers.

No More Economic Bubbles - Let's Focus on Fundamentals

by Odysseas Papadimitriou on July 23, 2009

economic-bubbleOur country’s economy has been operating from bubble to bubble.  From 1996 until 2000, we were in a tech bubble.  Our faith in the financial potential of the dot com industry was boundless, though it ultimately proved ill placed.  From 2000 until 2006, we were in a housing bubble which, when it burst, laid the foundations for the current recession.  During these periods, the country placed its economic hopes on new, seemingly plentiful, frontiers that promised new means by which to make money.  Older values were made to seem, by comparison, out of touch and out of date.  As a result, we, as a nation, allowed ourselves to slip further and further away from the fundamentals necessary for a healthy economy.

Now, we stand on a precipice.  We could create another of these economic bubbles to put our financial hopes into – an option as illusory as ever – or we could find some way to return to the fundamentals that have, historically, made our nation’s economy strong.  Over the last decade, we allowed our exports to slip and made our economy deeply reliant on imports from the rest of the world.  We have let the trade deficit grow too wide without finding new products or new technologies to export, and as a result have found ourselves without a significant industry to insure future success in the global economy.

California Tells Government to Fix its Budget...America Should Follow that Lead

by Brian Johnson on July 23, 2009

cut-wasteful-spendingHere’s what happened recently in California.  First, some basics:  in order for taxes to be increased in California the citizens of the state have to vote.  Without support, the government cannot simply raise taxes.

Recently, five propositions came up for raising taxes in California to help cover the costs of that state’s ridiculous budget problems.  All five were shot down with something close to a two-to-one margin.  The state government wanted more money, and the people refused to give it to them.  Their answer?  Cut spending, balance the budget, and trim waste.  For Californians, the reasoning was obvious:  why should they foot the bill for a government that refuses to spend within its means?

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