Tag Archives: banking

Heads Up Nevada, We Could Once More Join The Sand States

Heads up, Nevada!  There’s another storm on the horizon, and it’s not meteorological, nor is it related to the proliferation of high powered rifles and stockpiles of ammunition.  It has to do with a crisis we thought we’d withstood and overcome.

We were one of the Sand States eight years ago, those with massive development projects in which homes were constructed, mortgages were offered, and then sold into secondary markets to be sliced, diced, tranched, and manipulated into financial products in the Wall Street Casino.  We know what happened next.  The investment banking sector collapsed, the financial markets were in ruins, and Nevadans felt the aftermath with unconscionable unemployment levels and lost income.

The response was the Dodd Frank Act, a set of regulations to control the excesses of the Wall Street Casino and investment banking practices.  The first major assault came from the House of Representatives last June:

“The House legislation, called the Financial Choice Act, would undo or scale back much of Dodd-Frank. The bill was approved 233 to 186. All but one Republican — Walter Jones of North Carolina — voted for the bill. No Democrats supported it.

Its major changes include repealing the trading restrictions, known as the Volcker Rule, and scrapping the liquidation authority in favor of enhanced bankruptcy provisions designed to eliminate any chance taxpayers would be on the hook if a major financial firm collapsed.

The bill also would repeal a new Labor Department regulation, largely still pending, that requires investment brokers who handle retirement funds to put their clients’ interests ahead of their own compensation, company profits or other factors.”

Representative Mark Amodei voted in favor of this bill, HR 10, on June 8, 2017.   What Representative Amodei voted for was to allow banks to play in the stock market with depositors money (remember deposits are guaranteed up to $250,000) and to allow financial advisers to recommend products to their customers which are not necessarily to the advantage of their retired clients, but which may happily enhance the financial advisers’ bottom lines.   In light of what happened to this Sand State in 2007-2008 Nevadans should be especially concerned about this.  But, wait, there’s more

Remember that one of the major problems for working Americans, Nevadans included, was the burden of pay-day lending?  The Consumer Financial Protection Bureau, created by the Dodd Frank Act, is seeking to limit the negative impact of some of the more egregious practices in this sector of the banking industry.  Now the Comptroller of the Currency has another idea, publicized on October 5th:

“…the Office of the Comptroller of the Currency surprised the financial services world by making its own move—rescinding guidance that made it more difficult for banks to offer a payday-like product called deposit advance.”

Lovely, so now banks can “offer” those insidious high rate pay-day loans, only changing the name to “deposit advance,” and consumer will be right back on the hook.  At almost the same time as the CFPB issued a rule preventing pay day lenders from handing out loans without reviewing a customer’s capacity to repay the loans, the bankers get the green light to hand out “deposit advances.”

There is one bill in the US Senate which does offer some improvements on Dodd Frank, Senator Claire McCaskill (D-MO) and Senator David Perdue (R-GA) have introduced a bill to address some of the problems for community banks.  There are more reasons to support this legislation than to oppose it, but beware of the rationalizations and gamesmanship.

Those who want to eliminate the CFPB, gut its authority, or toss the Dodd Frank Act altogether may wish to convince us that (1) the entire act needs to be repealed to “enhance the free market,” or some other euphemism for re-opening the Wall Street Casino, (2) the CFPB places “burdensome” regulations on those pay day lenders who (bless their hearts) are only trying to provide more “options” for consumers.   This isn’t the most interesting or engaging story of the moment, but it is an issue Nevadans would do well to follow very closely.

We don’t need to be ground into the sand again.

 

 

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Filed under Amodei, Economy, financial regulation, Nevada, Nevada economy, Politics

Senator Heller’s Choke Point

Heller Amendment Operation Choke Point

One thing in life is almost more certain than death and taxes – if there is legislation that the banking industry wants then Senator Dean Heller (R-NV) will be quite happy to sponsor it, carry water for it, vote for it, and then remind anyone who is still listening how he’s a Man for the Consumers because he once voted against the “bail-out.”   To see Senator Heller’s latest foray into playing the Banker’s Boy one needs to dig a bit, unearthing S.Amdt 4715 to S.Amdt 4685 amending HR 2578, the Commerce, Justice, Science and Related Agencies Appropriations Act of 2016.

Senator Heller has teamed up with Senators Vitter, Crapo, Paul, Lee, and Cruz to insert the following: 

Sec. __.  None of the funds made available in this Act may
    be used to carry out the program known as “Operation Choke
    Point”. [Cong.gov]

What is Operation Choke Point and what was it intended to do?  The Department of Justice was disturbed by reports that fraudulent merchants had found a way around federal banking regulations and once they inserted themselves into the banking system they could team with payment processors to initiate debit transactions against consumer’s accounts and have the amounts transmitted to their own accounts.

Even more disturbing, the Department’s investigations revealed that some third party processors knew that the merchants with whom they were working were frauds but they continued to process their transactions in direct violation of federal law.  [Harris pdf]

So, for example, Quickie Check Instant Lending could get a customer to sign a loan agreement for some outrageous amount of interest, and then hand the item over to a payment processor.  With some cooperation from the bank (usually garnered by providing a handsome fee thereto) the payment processor would have the bank make automatic debits to the person’s account.  Or, say, the Fast Weight Loss Pill Factory got an order from John Q. Public, and the payment processor + bank would insure that John’s bank account was regularly debited for the fraudulent product, or for products not delivered, or whatever scam was being run.

The idea behind Choke Point was to gather information from banks which appeared to be engaged in fraud, or might have evidence of fraudulent conduct by others. Subpoenas were issued, and indeed there were some banks doing some rather obnoxious business.  [See Fair Oaks Bank]  The Fair Oaks Bank had received hundreds of notices from consumers’ banks that the people whose bank accounts were being charged had NOT authorized the payments; had evidence that more than a dozen merchants served by the payment processor had “return rates” over 30% and one had a “return rate” over 70%; and, Fair Oaks had evidence of efforts by merchants to conceal their real identities.

One of the obvious targets are payday lenders who were operating in violation of state regulations regarding the amount of interest that could be charged to a customer.  As the New York Times explained back in January 2014:

“The new, more rigorous oversight could have a chilling effect on Internet payday lenders, which have migrated from storefronts to websites where they offer short-term loans at interest rates that often exceed 500 percent annually. As a growing number of states enact interest rate caps that effectively ban the loans, the lenders increasingly depend on the banks for their survival. With the banks’ help, the lenders that typically work with a third-party payment processor that has an account at the banks are able, authorities say, to automatically deduct payments from customers’ checking accounts even in states where the loans are illegal.”

The object of Choke Point was to cut the insidious relationship between the banks, the processors, and the fraudsters – or choke it off.  If one wanted to promote the interests of the payday lenders, third party processors, and banks willing to turn a blind eye toward the nature of these transactions – there are fewer ways much better than to hamstring the Department of Justice’s investigations into these kinds of transactions.  However, that is precisely what Senator Heller is proposing.

The DoJ’s investigations were also reviled because some of the ammosexuals among us got the idea that if pawn shops couldn’t use the untraditional routes for payment, therefore the whole operation was one giant gun grab. Senators Cruz and Lee bought this horse and have been riding it for some time now.  One quick visit to Politifact will demolish the SunTrust Bank/Brooksville Pawn shop story that made the rounds in 2015.

“SunTrust announced in a Aug. 8, 2014, press release that the bank had “decided to discontinue banking relationships with three types of businesses – specifically payday lenders, pawn shops and dedicated check-cashers – due to compliance requirements.” The bank still works with firearms dealers, according to the release.” [Politifact]

Hence, the policy decision made by SunTrust was no more “anti-gun” than it was anti-jewelry, anti-guitar, anti-CD, anti-work out equipment, or anything else  in a pawn shop.

There are some salient features of this story – once again Senator Heller who delights in his description as a “moderate,” has teamed up with some of the most radical members of the GOP in the U.S. Senate (witness his previous alliances with Senator Jim DeMint (R-SC).  Once again Senator Heller has sided with the payday lenders against any action taken to regulate their relationships with their customers. And, once more Senator Heller has demonstrated his willingness to carry any water in any bucket the American Bankers’ Association wants him to transport to the Senate floor.

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Filed under banking, Economy, financial regulation, fraud, Heller, Nevada politics

From CDO’s to BTO’s: Wall St. tees up the next financial disaster

Wall Street Greed CDO

Think Progress picked up on a piece from Bloomberg News which ought to be raising eyebrows on Main Street.  The banksters are at it again, only this time those pesky Credit Default Obligations which brought down our financial system in 2007-2008 have been repackaged and served up under a new label: Bespoke Tranche Opportunities.

As the Think Progress analysis reports, these derivatives were an extremely important part of the last mess:

“The Financial Crisis Inquiry Commission concluded that derivatives “were at the center of the storm” and “amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities.” In 2010, the total on-paper value of every derivative contract worldwide was $1.4 quadrillion, or 23 times the total economic output of the entire planet.”  [TP]

Let’s be careful here, not all of that $1.4 quadrillion is in BTO’s, but the newly labeled derivative has that same capacity to “amplify the losses” when the underlying value of the securities becomes volatile.  For those who would like this explained in really clear diagrams, click over to the Wall Street Law Blog and follow along with the  White Board Wine Glasses Explanation – one of the best I’ve discovered to date.

Now, we can move on to what makes these BTO’s a problem, beginning with their creation:

“The new “bespoke” version of the idea flips that (CDO) business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced.” [TP]

Now, why would anyone want to buy one of these products, much less order a special one?  In the Bad Old Days  fund managers could choose to purchase some tranched up CDO, those blew up, so why go out and order one tailored to their specifications?  Let’s return to the Bloomberg article:

“Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds.

The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe.”  (emphasis added)

Translation: Because interest rates have been kept low by central banks hoping to keep struggling economies moving ahead, banks haven’t been able to make what they deem to be enough profit off corporate and Treasury bonds, and therefore have started playing in the “financial product” game again (not that they ever really stopped for long) and have started making ‘bets’ (derivatives) in the Wall Street Casino – with ‘products’ (BTO’s) which aren’t subject to the reforms put in place by the Dodd Frank Act.

So, what’s the problem? A hedge fund manager wants to buy a structured financial product from a bank which has a higher yield than what he can get by investing in corporate bonds or Treasuries… what could go wrong?  Let us count the ways.

#1.  These securities aren’t tied to the performance of the real economy as corporate bonds would be.  In the jargon du jour, the BTO portfolio is a table of reference securities.  Here come the Quants again, there are formulas for determining the ‘value’ of these securities which may or may not be valid, and they certainly weren’t during the Housing Bubble.

#2. The yields are related to the the ratings.  Here we go yet again. One of the major ratings services, Standard & Poor, is ever so sorry (to the tune of a $1.5 billion settlement with the Justice Department) they helped create the Derivatives Debacle of ‘07-‘08, but that hasn’t stopped them from continuing to get involved in evaluating derivatives. [See the FIGSCO mess]

#3. The BTO encourages the same Wall Street Casino behavior we saw in the last Housing Bubble/Derivatives Debacle.  It’s explained this way:

“The trouble with this game is that the value of most structured finance products is opaque and subject to sharp and violent change under conditions of financial stress. So when they are “funded” in carry-trade manner via repo or other prime broker hypothecation arrangements, the hedge-fund gamblers who have loaded up on these newly minted structures are subject to margin calls which can spiral rapidly in a financial crisis. And that, in turn, begets position liquidation, plummeting prices for the “asset” in question, and even more liquidation in a downward spiral.” [WolfStreet]

Sound familiar? Sound a bit like Lehman Brothers?  Remove the jargon and the message is all too familiar – no one really knows the value of the structured product, and if the product is purchased with borrowed funds it’s subject to margin calls (people wanting their money back) which in turn leads to sell offs and the price for the “thing” drops off the financial cliff, and…. down we go. Again.  We’ve seen this movie before, and the ending wasn’t pleasant.

#4. The BTO is a way around financial reform regulations. The offerings, be they FIGSCO or BTO’s are being peddled at the same time the Financialists are trying their dead level best to (a) get Congress to whittle down the regulations put in place under the Dodd Frank Act financial reforms; and (b) figure out ways to get around the Dodd Frank Act provisions – witness the BTO.

The profit motive is perfectly understandable. If I can invest in something that pays more than a Treasury bill or bond, or more than a corporate bond, then why not?  However, at this point, as an investor, I need to make a decision – Am I investing or speculating?  If I’m investing then it would make more sense to take a lower yield on something that has a more credible value. If I’m speculating (gambling) then why not borrow some money and purchase some exotic structured financial product the value of which is far less credible (or even comprehensible) and “make more money?”

It’s speculation that tends to get us into trouble. This new round of creative financial products shows all the elements that got us into financial trouble the last time in recent memory.  Formulaic determination of value which ran head first into the wall of reality. Valuations which were based on “what’s good for business,” rather than on what might be other plausible outcomes.  Emphasis on speculation rather than investment – or on financialism rather than capitalism.  Short term yields as opposed to long term investment.

It was a recipe for trouble in 2007-2008 and it’s still a recipe for trouble in 2015.

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Filed under banking, Economy, financial regulation

Death and Resurrection: Attacks on Financial Regulation Reform

Avarice Dante

Watch enough television and a person could get the impression that the greatest threats to mankind are bloody minded terrorists and crashing aircraft.  However, the “If It Bleeds, It Leads” brand of modern journalism tends to distract us from some much more realistic threats to our well being.

The odds of being killed in a terrorist attack are approximately 1 in 20,000,000.  The odds that our financial and economic well being are in jeopardy are being created right now in a Congress which has thus far in its short existence catered to the Financialists – those “weary souls” who will never have enough gold (wealth) to relax.   Witness the attempt at unraveling the Dodd-Frank Act financial regulation reforms during the first week in the 114th Congress.  [Business Day, NYT]

The bill was called the “Promoting Job Creation and Reducing Small Business Burdens Act.” [H.R. 37]  Nothing could have been much further from the truth of the matter. The opponents of bank regulation are depending on a public which doesn’t know a “counter-party” from a “counter-pane.”  This bill was an attack on the imposition of the Volcker Rule, and would have allowed some private equity funds from having to register with the S.E.C.   There is nothing in the bill about “creating jobs” except the old hoary delusion that making bankers more wealthy will “trickle down” eventually – sometime after the Second Coming?

Nor are any “small businesses” being “burdened,” unless of course we mean wealth management, hedge, and other financial services corporations with a small number of employees and massive amounts of money under management.  We are not, repeat NOT, speaking here of Joe’s Garage, Maria’s Dress Shop, or Anderson’s Bodega and News-stand.  In addition to the two big blasts at the Dodd Frank Act reforms, H.R. 37 contained provisions for lots of other goodies the financialists would like to find in their 4th Circle.

There were changes in margin requirements, changes in the accounting treatment of affiliate transactions, the registration of holding companies, a registration threshold for savings and loan holding companies, a ‘brokerage simplification act,’ a registration exemption for merger and acquisition brokers, a repeal of indemnification requirements for SWAP repositories and clearinghouses, changes to benefit “emerging growth companies,” – an EGC is any company with less than $1 Billion in gross revenue in a given year, extended deadlines for dealing with collateralized loan obligations, and various provisions to make fewer required reports from the financial sector EGC’s to the regulators.   In short, nothing in the bill had anything to do with the garage, the dress shop, or the neighborhood bodega.  This was a bill BY the financial services industry, FOR the financial services industry, or as Minority Leader Pelosi called it, “An eleven bill Wall Street Wish List.”

The good news is that this bill was defeated in the House on January 7, 2014 [rc 9] – the bad news is that the defeat came because the Republican leadership went for expedited passage and Democrats who had previously supported some provisions bailed out on them leaving the leadership without the 282 votes necessary for passage.  [Bloomberg] And, there’s more bad news – next time the Republican leadership won’t make the same error, and the bill will come up in another form, this time requiring only a simple majority.

As the bills come back in resurrected form, perhaps a short glossary of Republican rhetoric is desirable:

Small Business – any private equity or wealth management firm with less than a BILLION dollars in annual revenue.

Job Creation – any bill which allows financial sector (Wall Street) banks to make more money; see “Trickle Down Hoax.”

Burdensome Regulation – any requirement that a private equity or other investment entity doesn’t want to follow, even if it means leaving the public (and investors) in the dark about financial transactions.

Simplification Act – provisions in a bill to make it easier for private equity or any investment/wealth management firm to conceal what it is doing from financial regulators – and from anyone else.

Improving Financing – provisions in a bill to let the Wall Street bankers revert to the old Casino format of complicated, convoluted, and “creative,” financing of the variety best known for crashing and burning in 2007 and 2008.

Encouraging Employee Ownership – a provision in a bill to — “to increase from $5,000,000 to $10,000,000 the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required under such section to deliver an additional disclosure to investors. The Commission shall index for inflation such aggregate sales price or amount every 5 years to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, rounding to the nearest $1,000,000.”  (This is NOT a joke.)

Since the people who want the enactment of these provisions are not satisfied with “all the gold under the moon, or ever has been,” the specifics of H.R. 37 will be resurrected, re-introduced, and the Republicans will seek passage of every item on the Wall Street Wish List.

Voting in favor of the H.R. 37 Wall Street Wish List were Representatives Heck (R-NV3), Amodei (R-NV2), and Hardy (R-Bundy Ranch). Representative Titus voted against the roll back of the Dodd Frank financial regulations reforms.

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Filed under Amodei, Economy, financial regulation, Heck, Titus

What Small Businesses Really Need

Small Business SignIf some of the erstwhile Defenders of Small Business were truly, deeply, and sincerely concerned about the issues faced by small family owned commercial enterprises — some of the following questions might be under discussion.

#1.  Small businesses need financing The cash flow of any small business is calculated by finding the difference between the income and the expenses.  If the difference is positive, the company is making a profit.  Negative numbers indicate a company with problems.  Most small operations are subject to the overall commercial cycles; but for well managed companies will obviously be in positive territory.  However, the oldest rule in the books still applies:  It takes money to make money.  Funds for sales promotion, for business expansion, or for restructuring the firm which can’t be self-funded have to be borrowed.   The trends in small business lending have been disturbing for some time now:

Small Business loans

As the graph from FDIC data indicates, banks have been making fewer small business loans since the mid 1990’s.  In 1995  banks issued loans at a rate of 52%, which declined to 29% as of 2012.   Why?

Securitization and Speculation are two elements, as explained by Small Business Trends:

“…banks have dramatically increased their securitization of loans – packaging of loans into bonds that can be sold to third parties. Small business loans are not easily securitized because the terms of the loans are heterogeneous and different banks have different underwriting standards. As a result, the desire to securitize might have led banks to reduce their small business lending relative to loans that are easier to package into securities.”

Many pixels have given their all on this blog to the shift on the part of major lenders into securitized loans and the speculation thereon.  As long as there is more money to be made by packaging student loans, mortgages, credit card debt, and auto loans into securitized products, and yet more money to be made by packing, slicing, dicing, and dividing these up into tranches… then major lenders will have far more incentive to play in their markets than they have to make loans to Mom and Pop operations seeking to expand their firms.

Bank consolidation means more than Too Big To Fail, it can also mean Too Big To Pay Attention.   Smaller local banks are more likely to make loans to smaller local companies.   The problem these days is to find a small local bank.  There’s a chart for that trend too:

Bank consolidation

As the study reported in December 2011:

“The number of U.S. commercial banks and savings institutions declined by 12 percent between December 31, 2006, and December 31, 2010, continuing a consolidation trend begun in the mid- 1980s. Banking industry consolidation has been marked by sharply higher shares of deposits held by the largest banks—the 10 largest banks now hold nearly 50 percent of total U.S. deposits.”

We can be even more specific about lending institutions if we look to the December 2012 report from the FDIC: (pdf)

“Consolidation in the U.S. banking industry is a multi-decade trend that reduced the number of federally insured banks from 17,901 in 1984 to 7,357 in 2011. Over this period, the number of banks with assets less than $25 million declined by 96 percent. The decline in the number of banks with assets less than $100 million was large enough to account for all of the net decline in total banking charters over this period. Meanwhile, the largest banks—those with assets greater than $10 billion—grew elevenfold in size over this period, raising their share of industry assets from 27 percent in 1984 to 80 percent in 2011.”

Thus we have two problems — fewer banks and more large banks controlling more of the money which might be lent to small business owners.   Too big to fail becomes not only Too Big To Fail and Too Big To Nail, but also too big to be all that interested in making small business loans as well.   Larger banks have couched parts of their opposition to provisions of the Dodd-Frank financial reform act in terms of “protecting community banks,” but that obscures the obvious — that the Big Banks control more of the money available for the kinds of loans community bankers could be lending.

The lovely vision of the Local Community Banker functioning in West Deer Breath rural America is something out of a Grant Wood painting, but also something with basic issues unrelated to the interests of the Big Banks.

Community Banks more often depend on traditional lending and savings practices, and this is problematic for their bottom lines:

“One element of the performance gap has been a narrowing of the traditional advantage that community banks have had in generating net interest income in recent years as the net interest margin (the spread between asset yields and funding costs) has narrowed. Because of their focus on traditional lending and deposit gathering, community banks derive 80 percent of their revenue from net interest income compared with about two-thirds at noncommunity banks. Accordingly, the narrowing of net interest margins places a significant drag on the earnings of community banks.”  [FDIC pdf]

While the Big Banks can generate revenues from non-traditional activities, the community banks are more reliant on depositors and local loan holders for their revenues; this means that it is more difficult for the community banks to pass along the benefits of lower interest rates to their customers.  Thus, while the Big Banks sob crocodile tears over the pressures on smaller community banks created by financial regulation, their own consolidation and income generating activities are vacuuming up the money necessary for small banks to lend…to small local firms.   We can put this in Banker-Speak:

“Another factor contributing to the earnings gap between community and noncommunity banks has been the ability of noncommunity banks to generate noninterest income from a wider variety of sources. These include trading, venture capital and investment banking activities that are not typically part of the community banking model. Noninterest income averaged 2.05 percent of assets at noncommunity banks over the study period compared with only 0.8 percent at community banks.”  [FDIC pdf]

Perhaps it’s not too much to ask those Champions of Small Business, to question the merger and acquisition activities of the Big Banks, and to regulate the activities (venture capital and investment banking) which are not usually the province of smaller community banks?

#2. Small Businesses depend on local infrastructure.   The category of infrastructure relates to the nature of the business, but there are some universals.

Security:  Most truly small businesses do not hire their own security firms.  Though they may install security cameras and burglar alarms, they are ultimately dependent on local law enforcement to secure their property and inventory.  Cuts in patrols, layoffs of personnel, or other reductions which increase response times have a more immediate effect on small family owned businesses than on larger corporate firms.

Communications:  There is no functional marketing plan unless the business owner can communicate with prospective customers and clients.  As more of these prospective customers rely on Internet based information, the local business without a web-site is functioning at a distinct disadvantage.    The availability (or lack thereof) of broadband access is critical.  At this point the community banking and the communications problems merge.  Most community banks operate in non-metro areas, and the biggest gap in broadband access is in — non-metro (often rural) areas.   The Hudson Institution looked at the problem in December 2012:

“…our nation faces a “broadband gap,” not only with regard to the lack of access in  rural areas to service that meets the broadband threshold, but also with regard to the lack of availability of faster service between urban and rural America.”  [Hudson pdf]

Specifically referring to business needs, the report states:

For businesses and institutions, broadband makes possible real-time interaction with customers and suppliers. “E-commerce” is heavily circumscribed in areas without broadband. “E-services,” such as education and health care, which come with expectations of using data-intense graphic and video content, cannot be delivered without broadband. [Hudson pdf]

Education and health care aren’t the only realms in which the lack of broadband access is a problem in rural areas.  Not only are rural residents unable to participate in e-commerce efficiently, but rural business owners lack the capacity to fully develop components of e-commerce as well.  As of 2010 approximately 40% of the U.S. population (both urban and rural) had no broadband access.  [CNET]  While the ARRA provided some funding for improving the situation, there is no guarantee further appropriations will be available, and there are already attacks on broadband access at the state level from the major tele-com corporations. [NC Think Progress]

Physical Infrastructure:  As the following chart from the Bureau of Transportation Statistics indicates, most American commerce moves by truck.

Trucking

It would stand to reason that that which improves transportation will be of value to all businesses, and small businesses in particular.  Since trucks need highways it would seem that attention to our highways and roads would be in order.

A report from the McClatchy publishers this past month is not encouraging.

“Five years after an interstate highway bridge collapsed in Minnesota, killing 13 people and injuring 145, the country still has a bridge repair backlog of $65 billion, according to the Federal Highway Administration.

At a time when Congress is proposing significant budget cuts and tax increases have little support, states are canceling or scaling back highway projects. They’re looking for private partners to help finance construction, and still coming up short. Motorists are discovering that the roads they thought were free are anything but.”

We have a situation in which the gasoline tax isn’t covering the cost of construction and maintenance, the oldest part of our vaunted Interstate Highway system is reaching the end of its “life cycle,” and states have been all to eager to make political decisions as opposed to structural decisions concerning the application of highway funds.   Those with an perverse sense of adventure might want to traverse the 17 bridges which have been declared the worst in the country. [Business Insider]  They are the most visible examples of the inadequacy of pursuing these policies.

For those who are specifically interested in the bridges over which our commerce is conducted, the Transportation for America (pdf) report is illuminating.  While only 2.2% of Nevada’s bridges are considered structurally deficient, this happy statistic obscures the fact that bridges are essential in the process of getting goods to Nevada.   The following chart from the TA report is disturbing:

Deficient Bridges

Those not concerned about the “annual daily traffic” over “structurally deficient bridges” must be those who have never considered purchasing any form of insurance.   Yet, materials, supplies, and finished goods needed by American small businesses must traverse some of these “structurally deficient” bridges.

What Do American Small Businesses Really Need?

For all the high-flying rhetoric about “freedom,” and “free enterprise,” and  the equally vague touting of “freedom from government interference,” small businesses need INCOME.  In order to find financing for the operation or expansion of their businesses they need banks interested in and sympathetic to their financial needs.  All the “freedom” rhetoric on this planet won’t replace the necessity of controlling the urge of the Big Banks to consolidate and place less and less resources within reach of truly small companies.

We can wave the banner of “Free Markets,” but it must be done in an environment in which small businesses, especially those in non-metropolitan areas, can communicate with their prospective customers and clients.

We can shout the virtues of “Freedom” from the roof tops, but we can’t ignore the fact that commerce requires transportation infrastructure, in order to keep the lifelines of commerce open and efficient there are roads to be built and maintained, and bridges which require our attention.

What we can’t do is to ignore the absolute necessity of financing, communication, and infrastructure in the operation of a functional economy.  In other words: Austerity cannot create Prosperity.

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Filed under Economy

A Little Regulation Can Go A Long Way: Protecting Those Vulnerable to Predatory Lending

Yesterday’s post concerned the efforts of the House Republicans to de-regulate the payday lending industry in the guise of H.R. 6139.  With nearly a third of Las Vegas, NV individuals availing themselves of high interest short term loans the problem of predatory lending deserves more than a passing critique of an individual piece of legislation.  Additionally, if we truly believe the function of government is to protect its citizens, then the de-regulation of the high interest lenders stands in high contrast to that goal.

This isn’t a call for a nanny state, it’s more like an extension of the point made by President Reagan: “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.”  Predatory lending practices definitely fit in the former category.

With this in mind, who are the targets of high interest lenders?

The targets are the unbanked and the underbanked:The highest unbanked and underbanked rates are found among non-Asian minorities, lower-income households, younger households, and unemployed households. Close to half of all households in these groups are unbanked or underbanked compared to slightly more than one-quarter of all households.”  [FDIC pdf]

Those who are unbanked are families in which no one has a checking or savings account; the underbanked are families in which there might be a small savings and checking account, but financial needs are augmented by non-bank money orders, check cashing services, rent to own firms, RAL’s (refund anticipation loans), and pawn shop services.

The Federal Deposit Insurance Corporation found that the unbanked, and underbanked, are predominantly in ethnic minority communities.

As the FDIC graph indicates, those likely to fall into the unbanked and under-banked categories are predominantly Hispanic and African American.

The unbanked and under-banked also tend to be low income, and low education.

And, there’s no surprise here… most of the unbanked and under-banked are younger people.

Fully 57.5% of the unbanked are under the age of 44, with 37.3% under the age of 34.   11.1% of the unbanked are new to the work force, aged 15-24 years of age, and 8.1% of the under-banked are 15 to 24.

The unremarkable conclusion is easily reached: Those who are most likely to fall prey to predatory high interest lending are young, minority group individuals, with lower rates of educational attainment.  The vulnerable at risk of running into the vultures.

Advocates of “alternative banking” complain that since the high interest rate lenders deal with higher risk borrowers they must, of necessity, charge higher rates to cover their risk of default.  No one would make a sound argument based on an inversion of the risk and reward model of consumer lending.  However, the amount required to cover potential expenses doesn’t automatically justify rates which might make a loan shark lose his appetite.

The argument that making many small loans incurs more cost than making fewer larger loans founders on the same shoals.

Pilot Whales and Loan Sharks

In February 2008 the FDIC launched a pilot program with 28 volunteer banks to offer small dollar loans with restrictions on interest rates and provisions.
The agency reported: “Since the pilot began, participating banks made more than 34,400 small-dollar loans with a principal balance of $40.2 million. The pilot tracked two types of loans: small-dollar loans (SDLs) of $1,000 or less and nearly small-dollar loans (NSDLs) between $1,000 and $2,500. All pilot banks offered only closed end installment loans.”   The FDIC used initial information to produce a template for small and nearly small dollar loans:

The Pay Day lending lobbyists promptly dismissed the FDIC’s efforts as too little (only 31 banks participating) and insufficiently differentiated from pay day lending.  The critique failed to note the program was a PILOT project to create templates for the banking sector and not an attempt to initiate a broad banking program for the unbanked and under-banked.   Also missing from the criticism was the information that the pilot program yielded results necessary to create banking guidelines for small dollar loans.

“In June 2007, the FDIC issued the Affordable Small Dollar Loan Guidelines (Guidelines) to encourage financial institutions to offer small-dollar credit products that are affordable, yet safe and sound, and consistent with all applicable federal and state laws.”  [FDIC]

What the FDIC discovered in the course of its pilot project was that regulated banks could issue small dollar loans, which didn’t break either the lender or the borrower, and which didn’t involve stretching — or avoiding — federal and state consumer protections.

And, still protect the vulnerable from the vultures.

For further informationFDIC, “2011 FDIC National Survey of Unbanked and Underbanked Households,” pdf.   FDIC Small Dollar Loan Pilot Program.

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Filed under Economy, financial regulation

Broad Strokes and Narrow Visions

The ubiquitous “47% discourse” is generating commentary ranging from a focus on short term political tactics to broad exegetic discussions about political theory.   One line of analysis concerns the utility of a distorted perspective defining what constitutes “redistribution” of wealth and for what legitimate purposes that might be done.

How is it possible for any sentient being to hold up a sign in 2010 saying “Keep the Government Out of My Medicare,” or for a presidential candidate to offer this message:  “Mitt Romney has a different idea. He knows that we need to foster growth and create wealth, not redistribute wealth, if our economy is to grow the way it has in the past.” [USAToday]  The paucity of thought is obvious in the first example, not so evident in the second.

Message to the supposedly business oriented Republican Party:  All economic transactions are a transference and redistribution of wealth.

One of the more interesting aspects of the ideological arguments between Republicans and Democrats is the variation in the meaning of the terms of the debate.  For example, the manipulation of the term “Entitlement” has reverts the meaning to a definition held in the late 19th century — i.e. any government activity designed to sustain individuals in poverty, or likely to become poor.  A brief historical review —

The Social Security Example

The argument took flight when the Roosevelt Administration proposed the enactment of legislation to create Social Security in the 1930’s.  The right wing Liberty League, small businesses in the American south, and the National Association of Manufacturers were vehemently opposed to the implementation of the program.  [DB]

“James A. Emery, chief counsel for NAM, articulated the views of the opposition business well when in 1935 he declared: “General recovery depends on our ability to enlarge our production, to employ more people, and to cut down and not raise up the price of goods. Every time we increase the price of goods in a diminishing market, we are diminishing the possibility of employing other men, because we are making it more difficult, not less, to sell goods. Until we can market goods, we cannot employ men.” [Ezine]

The Liberty League, NAM, and their allies argued that transferring government resources to, and the creation of payroll taxes for, the sustenance of Social Security would be such a burden on American business as to forestall any economic recovery.   Conservatives of the time also argued that Social Security reduces individual ownership by redistributing wealth from working people to retired persons, thereby bypassing the “free market.”   The “free market” in this instance is, of course, banks and brokerages which offer retirement savings programs.

Failing to demonstrate that Social Security didn’t work to keep elderly U.S. citizens from abject poverty, the opponents shifted in the 1980’s back to the free market line of attack.  The political verbiage included messages like “Social Security is Going Bankrupt,” and “You’ll Get A Better Return on Private Savings Accounts.”  Both are demonstrably false, not that the Right Wing is particularly interested in the facts of the matter.   This, combined with the “Creeping Socialism” line, is a classic reversion to the rhetoric of the Depression Era, with bit of xenophobia tossed in for good measure:  “Warning us against the dangers of Social Security in 1935, GOP Sen. Daniel Hastings stated, “I fear it may end the progress of a great country and bring its people to the level of the average European.” [CCT]

Packing the transference of wealth argument into the same suitcase as their “creeping Socialism” attack, the Republicans added another element by seeking to reclassify Social Security as an “entitlement” program — changing the definition from meaning that one was entitled to benefits because the person had paid payroll taxes to support the Trust Funds during their working lives to one which conflated it with welfare — a classic conflation dating back to the Liberty League and NAM opposition of the 1930’s.

The bottom line is still the bottom line.  The opponents of Social Security in the 21st century are the ideological descendents of the opponents of Social Security of the 1930’s — both seek to establish a system in which the banks and financial institutions are the means by which wealth is distributed — to their profit; and not one in which a non-profit agency (in this case government) is responsible for the distribution.

Out of Thin Air

Second message to supposedly business oriented Republicans is wealth cannot be created if it is not distributed.  The question is not IF wealth will be distributed but where.  The only thing that generally happens over the long haul to wealth that is not distributed in some way is shrinkage.  Inflation happens.

Those seeking to foster growth and create wealth have no choice but to redistribute it.   Where?  Consider the following illustration of the income level of tax return filers in 2009.

We know that in 2009, the most recent for which complete data is available from the Internal Revenue Service, some 8,461,137 filers reported adjusted gross income of less than $50,000.  6,738,675 households filing income tax returns reported adjusted gross income between $50,000 and $200,000.  That leaves approximately 338,103 homes in which the adjusted gross income over $200,000 annually. [IRS]

How does it make any economic sense whatsoever to argue that promoting (distributing) more accumulation of wealth within a small minority of the total number of households will cause economic growth?

In 2011 there were 2,966,133 automobiles manufactured in the United States of America.  [WrldMtr]  Those reporting income above $200,000 per year would have had to purchase about 9 cars apiece in one year to clear the sales lots.   What makes more sense in terms of economic growth — having the top 2% accumulate more wealth, or pursuing policies which leave more discretionary income in the hands of those reporting less than $200,000 annual income?

All the lamentations of the arch conservatives clutching the economic elitism of a bygone era notwithstanding, in the simplest possible terms — the U.S. economy will not see significant growth if we “Double Down on Trickle Down.”

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Filed under 2012 election, Economy, Politics, Romney, Social Security