However, there are a number of steps that could be taken to avert what could be the second half of the so-called Great Recession. These steps are not something the political class has done before, which is a good thing. If these actions had been done before and we were still in the same deteriorating condition, we would really be in trouble.
Yesterday, we reviewed the short term solutions to our economic malaise that need to be taken as soon as possible. Those solutions went on so long that we postponed the complimentary long term solutions that need to start being executed now. These long term solutions are listed below:
- Let's start with the repeal of the Dodd-Frank financial industry reform legislation that the political class passed, another 2,000 page monstrosity that has introduced a gigantic piece of uncertainty into the marketplace and business owners' minds, much like Obama Care has done. And as we all know, the more uncertainty there is, the less likely businesses are going to gamble on expanding and hiring more employees.
There are any number of excellent reasons for repealing this piece of trash besides the massive amount of new uncertainty it created:
1) The law was supposed to identify large and likely failing companies in the financial industry long before they failed so that proper government intervention could occur to ensure the disruption to financial markets and customers was minimized. After the legislation was passed, MF Global, a major financial investment company, suddenly went bankrupt without any warning, possibly taking over a billion dollars worth of customer wealth with it.
It is quite possible that the billion dollars was lost due to criminal activity. The bankruptcy is currently the eight largest corporate bankruptcy in the history of the country, certainly qualifying it for being under the watch and control of the Dodd-Frank legislation. Unfortunately, the legislation failed miserably to provide the hyped early warning signal to intervene.
2) Several weeks ago, JP Morgan quickly lost $2 billion in the market by making some bad investment calls. Dodd-Frank was supposed to curtail this kind of reckless investment style since similar moves helped lead to the bank bailout fiasco in the midst of the Great Recession. If Dodd-Frank had worked as it was supposed to, some sort of warning bells should have gone off before the bank lost $2 billion almost overnight.
3) Many times in this blog we have proven that the main culprits behind the Great Recession, the organizations that established the groundwork and led the charge into a financial disaster, was Fannie Mae and Freddie Mac, the Federal government's main mortgage entities(http://www.loathemygovernment.blogspot.com/2012/05/who-really-caused-great-recession-part.html.) Since: A) Dodd-Frank was supposed to ensure another Great Recession never occurred and B) Fannie and Freddie basically caused the Great recession but C) Dodd-Frank did not nothing to change or regulate Freddie and Fannie, what purpose does the legislation serve if it does not address the root causes of its supposed purpose?
So let's review:
- Dodd-Frank did not foresee the implosion of MF Global, something it was supposed to recognize and mitigate.
- Dodd-Frank did not foresee the types of quick and large billion dollar investment losses that JP Morgan recently incurred, something it was supposed to recognize and mitigate.
- Dodd-Frank did not address the root cause of the Great Recession, Fannie and Freddie, so what purpose does it serve if is missed the main drivers of the problem it is supposed to mitigate?
- Dodd-Frank has introduced much more uncertainty into the marketplace, further delaying business expansion and hiring.
- Dodd-Frank called for the implementation of the so-called Volcker Rule that is supposed to guide banks on the amount of capital they need to keep on hand to prevent future financial collapses. Although the rule is supposed to go into effect in July, it appears that the government bureaucracy has not yet written the guidelines for implementing the Volcker Rule and, even worse, according to most news reports, the Federal bureaucracy has no idea how to write the Volcker guidelines. Talk about uncertainty.
- Repealing Dodd-Frank cannot be done in a vacuum. A companion action is needed is to finally clean up the whole banking industry the right way, the simple way. That means we need to finally get to a stage where "too big to fail" actually becomes an ancient concept, not a continuing saga.
We have already reported on a recent article in The Week magazine where it was estimated that the largest five banks in this country control about 56% of the banking industry, making them still "too big to fail." Nothing that the political class has done since the Great Recession has mitigated the reason that politicians say the Great Recession occurred, some banks were too big to fail without crashing the whole financial system. Just another Dodd-Frank failure.
But it gets even worse. An article in the May 21, 2012 issue of Business Week, showed how much the big banks control the derivative market in this country, a dangerous type of investment that can lead to high risk and high reward investing behavior:
JP Morgan - 29.5%
Citibank - 21.9%
Bank Of America - 21.0%
Goldman Sachs - 18.6%
Sum of the Above Four Major Banks - 90.4%
Next Ten Banks - 5%
Next 1,604 Banks - 4.6%
Obviously, the big banks are even bigger when it comes to high risk derivative investing.
I am not a financial guru or investment expert. But it seems to me that today's banks do three major things:
- Make consumer and business loans.
- Underwrite company stock offerings and IPOs.
- Manage investment portfolios, somewhat like hedge fund operators do, in a whole host of different and sometimes exotic and risky financial vehicles.
Specifically, three parts of Glass Steagal addressed this desire to separate:
- Section 20 prohibited any member bank of the Federal Reserve System (whether a state chartered or national bank) from being affiliated with a company that “engaged principally” in “the issue, flotation, underwriting, public sale, or distribution” of securities.
- Section 21 prohibited any company or person from taking deposits if it was in the business of “issuing, underwriting, selling, or distributing” securities.
- Section 32 prohibited any Federal Reserve System member bank from having any officer or director in common with a company “engaged primarily” in the business of “purchasing, selling, or negotiating” securities, unless the Federal Reserve Board granted an exemption.
Thus, rather than trying to control these Hydras' tentacles, why do we just put Glass Steagal back in place? Under this approach, a financial institution could either be a bank (i.e. make business and business loans and maybe do some underwriting) or be a hedge fund/investment house (i.e. do some underwriting and invest the house's money in derivatives and other exotic vehicles), they could not be both.
Under this scenario, Dodd-Frank and its 2,000 pages of uncertainty and bureaucracy go away. The big banks would have to choose what they want to be, banks in the traditional sense or investment operations, and divest themselves of everything else. This breaks up the big banks into smaller chunks, finally blowing away the too big to fail problem. A simple solution vs. Dodd-Frank which was very complicated non-solution.
- Longer term, the tax code has to be revised, simplified and substantially cut down to something that is manageable. We have previously talked in this blog how the U.S. tax code:
- Is about 70,000 pages long and not remotely understandable by most Americans.
- Is so convoluted, a Wall Street Journal article, that was summarized in the April 29, 2011 issue of The Week magazine, estimated that U.S. taxpayers expend about $431 billion a year just to comply with the complexity of the U.S. tax code. This money could be so much better spent on productive expansion of the economy and employment rather than tax paperwork.
- Is so intense that an online article from U.S. News and World Report in April, 2010 reported that:
their tax returns.
*This is the equivalent of placing 3.8 million Americans into full
time jobs.
*This is six times larger than the auto making industry in this
country.
*The original Federal tax code from 1913 was 400 pages long,
making it about.6% the size of what we deal with today.
- Is so fraud friendly that according to a Business Week article from its Insider report for Spring, 2011, there is a $345 billion gap between what U.S. taxpayers are supposed to pay in Federal taxes and what they actually pay.
- Is so unfair that the effective tax rate on Apple, a traditional American company is just 9.8% but the effective tax rate for Walmart, a traditional American company, is 24%, according to an article in the May 11, 2012 issue of The Week magazine.
We have already done the heavy analysis work for the political class to simplify our burdensome tax code. That work can be found at http://loathemygovernment.blogspot.com/2012/02/united-states-of-purple-fixing-our.html. It reduces the 70,000 pages of current tax code down to a few dozen principles of fairness and ease.
- While all of the above is going on, the Federal government needs to go through a thorough spring cleaning, as suggested by Step 1 of "Love My Country, Loathe My Government." Step 1 would reduce spending in EVERY Federal government entity by 10% a year for five years.
This is the rate of annual shrinkage that the Federal government would have to attain just to get to about a balanced budget. At that point, we would have to start paying down the skyrocketing national debt that is rapidly approaching $16 TRILLION.
That 10% a year could be attained any number of ways:
- Reduce the amount of budget dollars lost every year to fraud in the big government social programs such as Medicaid, Medicare, and Social Security. These three programs alone lose over $200 billion a year of taxpayer wealth to fraud and waste.
- Terminate non-essential government programs that have outgrown their usefulness. The government has never had a good spring cleaning. For example, several years ago, headlines were made when the Federal government finally decided to shut down a World War I program that had existed for decades after the war ended. During the war, the government was worried that we would run out of helium gas for our military's dirigible balloons and passed a law that ensured that the U.S. military maintained a back up supply of helium for these balloons, long after that need became extinct. As another example, a Christopher Columbus-focused government agency which was temporarily created in the early 1990s to celebrate the five hundred year anniversary of Columbus discovering the new world was still being funded, more than fifteen years after it was supposed to be terminated. Spring cleaning time.
- Implement Step 44 from "Love My Country, Loathe My Government," a step that would prohibit the spending of Federal tax dollars on any project or program unless it substantially impacted the lives of a significant number of Americans in at least five states. No more local earmarks and wasteful Federal spending to build a local bike trail, build a local farmers' market, renovate a local theater, etc. Federal money for national projects, local and state money for local and state projects.
- Freeze hiring at all Federal organizations.
- Consolidate redundant Federal agencies and functions, trimming headcount and overhead in the process. According to a recent General Accounting Office Study, the Federal government has 15 different agencies overseeing food safety laws, more than 20 different programs to help the homeless, 80 programs for economic development spread across 4 different Federal agencies, 82 Federal programs to improve teacher quality spread across 10 different Federal agencies, 80 programs to help disadvantaged Americans with their transportation needs, 47 programs addressing job training and employment, 56 programs to help Americans understand finances, 20 programs that support business incubator, 19 different programs that support tourism, 18 programs, which spend a combined $62.5 billion a year, to address food and nutrition aid, 100 different programs across five divisions within the Transportation Department that all fund efforts for highways, rail projects, and safety programs, and there ware 130,000 government military medical professionals, 59 Defense Department hospitals, and hundreds of military medical clinics that could benefit from consolidating their overhead functions and expenses.
A similar target would also be imposed in this area: the number of Federal regulations would be reduced by 10% a year for five years, eliminating all redundant and unnecessary regulations, focusing only on those regulations that concern themselves with necessary citizen safety and necessary, not excessive, environmental protection.
Imagine how much freer and more vibrant the economy would be if we reduced wasteful government spending, streamlined unnecessary regulations, simplified the tax code, dumped the Dodd-Frank monstrosity in favor of a simple solution to the banking problem along the lines of Glass Steagall which seemed to work pretty well for many decades, and got the Federal budget and national debt under control.
These longer term steps, in conjunction with the short term acts we went through yesterday, are the only way to get the economy out of the ditch. Everything that the Obama administration and the political class in general has tried has failed, as witnessed by the dire economic circumstances we reviewed last week and earlier this week.
Doing more of the same, like Obama wants to do, is a continuing recipe for failure and reminds me of an old saying: "When you are stuck in a hole, stop digging." We are definitely in a hole so let's stop digging and start using the steps we have outlined to actually get out of the hole we find ourselves and our economy in.
We invite all readers of this blog to visit our new website, "The United States Of Purple," at:
http://www.unitedstatesofpurple.com/
The United States of Purple is a new grass roots approach to filling the office of President of The United States by focusing on the restoration of freedom in the United States, focusing on problem solving skills and results vs. personal political enrichment, and imposing term limits on all future Federal politicians. No more red states, no more blue states, just one United States Of America under the banner of Purple.
The United States Of Purple's website also provides you the formal opportunity to sign a petition to begin the process of implementing a Constitutional amendment to impose fixed term limits on all Federally elected politicians. Only by turning out the existing political class can we have a chance of addressing and finally resolving the major issues of or times.
Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.
Please visit the following sites for freedom:
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment/
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