Category: Corporate Welfare

How To Think Differently About Housing

The Daily Escape:

Sunrise, Outer Banks, NC – June 2023 photo by Stephen P. Szymanski

Wrongo and Ms. Right have 12 grandchildren, only one of which is still in high school. The other 11 are out of school and pursuing their careers or are finishing their education. Only one of the 12 owns a home. Their experience with real estate is representative of what most younger Americans face in today’s real estate market. Ben Carlson uses data from Redfin to show us that mortgage payments are way up over prior years:

The median mortgage payment was up by more than $1,000 over four years. Carlson reminds us that this is just the monthly mortgage payment, it doesn’t include insurance, property taxes or upkeep. This is part of the reason that housing affordability is more excruciating — the pace of the increases has happened so quickly. We’ve simply never seen prices and rates rise this fast in such a short period of time. And asking prices are up as well:

Note that at the end of May 2023, the median asking price was $397k, up from $300k in May 2020, a 32% increase in four years.

But high mortgage rates and rising home prices aren’t deterring all buyers. John Burns Research shows buyers still outnumber sellers by a wide margin in today’s market. They report that as of April, even with 7% mortgage rates, 78% of all real estate agents say that buyers outnumber sellers in their markets.

And for rentals, the national median rent for a one-bedroom apartment has climbed to $1,504, according to research from Zumper. That’s significant: It’s only the second time in history that it has risen past $1,500. But the median doesn’t represent what you’ll pay in big cities:

In America, buying an investment property near work is more lucrative than actually working. The growth of asset values has outstripped returns on labor for four decades. Last year, one in four home sales was to someone who had no intention of living in it. Investors are incentivized to buy the type of homes most needed by first-time buyers: Inexpensive properties generate the highest rental-income cash flows.

Harvard’s Joint Center for Housing Studies found that in 2019, the median net worth of US renters was just 2.5% of the median net worth of homeowners: $6,270 versus $254,900. There’s no better example than the economic challenges to America’s young persons than trying to find (relatively) affordable housing near where they work.

A very interesting article in the May 23 NYT Magazine suggests a possible solution to housing inflation. Vienna, Austria began planning it’s now world-famous municipal housing in 1919. Prior to that, Vienna had some of the worst housing conditions in Europe. Vienna’s housing program is known as “social housing” (Gemeindebauten), a phrase that captures how the city’s public housing and other limited-profit housing are a widely-shared social benefit:

“The Gemeindebauten welcomes the middle class, not just the poor. In Vienna, a whopping 80% of residents qualify for public housing, and once you have a contract, it never expires, even if you get richer.”

Vienna isn’t a small town. Its population is just under 2 million, and if it were in the US it would be our fifth largest city, between Houston and Phoenix.

The availability of Vienna’s social housing also helps to keep costs down even for private housing:

“In 2021, Viennese living in private housing spent 26% of their after-tax income on rent and energy costs on average, which is…slightly more than the figure for social-housing residents overall (22%).”

One of the reasons Vienna’s social housing works is that it is not means-tested; it is open to middle class people. And as a result, the residents care more about whether their grounds stay clean and beautiful. In the US we restrict public housing to the poorest of the poor, making public housing something to escape from, not to enjoy.

Meanwhile, 49% of American renters are paying landlords more than 30% of their pretax income, In New York City, the median renter household spends 36% of its pretax income on rent.

The key difference is that Vienna prioritizes subsidizing construction, while the US prioritizes subsidizing people, like with housing vouchers. One model focuses on supply, the other on demand. Vienna’s choice illustrates a fundamental economic reality, which is that a large-enough supply of social housing offers a market alternative that improves housing for all.

Calls for a federal social-housing plan in America might sound far-fetched but the US government is already deeply involved in the housing market. There’s generous support for homeowners and deliberately insufficient support for the lowest-income households. In 2017, the US gave $155 billion on tax breaks to homeowners and to investors in rental housing and mortgage-revenue bonds, more than three times the $50 billion spent on affordable housing.

For many, housing expense can be an economic burden. And it’s hard to even contemplate what it would mean to have it not be a problem. What’s mind-boggling is how social housing gives the economic lives of Viennese an entirely different shape.

Imagine where the rest of America’s young adults’ income might go if they were able to spend much less of it on housing. Vienna’s program is a look into a world in which homeownership isn’t the only way to secure a financial future.

Facebooklinkedinrss

Saturday Soother – May 20, 2023

The Daily Escape:

Daffodils, Laurel Ridge, Litchfield CT – May 2023 photo by Dave King

The oil industry enjoys special economic status in the US. That is demonstrated by the tax breaks and outright subsidies we give them. Hannah Dunlevy notes that:

“In 2020, the explicit and implicit fossil fuel subsidies cost the United States $662 billion, around $2,006 per capita. Cutting just two tax breaks for the fossil fuel industry — the intangible drilling costs subsidy and the percentage depletion tax break — could generate $17.9 billion in government revenue over ten years, according to Congress’s non-partisan Joint Committee on Taxation.”

Biden’s fiscal year 2024 budget proposed cutting some of tax subsidies for oil and gas companies, which would save the US $31 billion over ten years. It will probably not survive the current Debt Ceiling and budget discussions.

One hidden subsidy that the oil industry enjoys is when wells are no longer productive – they are idled. If it’s no longer profitable to return idled wells to production, they need to be plugged. And the cost of plugging a well can be $100,000 or more.

The problem is that when wells start to decline, they are sold by Big Oil to smaller producers. When the well is sold, the plugging and cleanup liability passes to the new buyer. And often, the new buyer simply walks away from the uneconomic well, creating what the industry calls “orphaned wells”. But if a company doesn’t plug its wells before walking away, the cleanup costs will ultimately fall to taxpayers and current operators.

This has already happened with thousands of wells in California and may happen to millions more across the country. Pro Publica reports that there are more than two million unplugged oil wells scattered across the US. California is just the tip of the iceberg.

Petroleum reservoir engineer Dwayne Purvis laid out the reality at a recent conference. His research shows that more than 90% of the country’s unplugged wells are either idle or minimally producing and unlikely to make a comeback.

California is the canary in a coal mine. Shell and ExxonMobil recently agreed to sell more than 23,000 California wells which they owned through a joint venture, to a German asset management group IKAV for an estimated $4 billion. This means that a subsidiary of IKAV now owns about a quarter of California’s oil and gas production, largely in Kern and Ventura counties.

This ownership shift moves the subsequent environmental liability from Big Oil powerhouses to firms with smaller capitalization, increasing the risk that aging wells will be left orphaned, unplugged and leaking oil, brine and methane. For California and other states, this could repeat what was seen in coal mining, which led to taxpayers bearing all of the cleanup costs.

The oil industry has created layers of LLCs that are used to screen Big Oil from the dirty end of the oil business, like responsibility for cleaning up the messes that they make. And these firms can easily declare bankruptcy rather than pay for cleaning up orphan or idle wells.

ProPublica reports on an analysis by Carbon Tracker Initiative, a financial think tank that used the California regulators’ draft methodology for calculating the costs associated with plugging oil and gas wells and decommissioning them along with their related infrastructure.

The cost categories included plugging wells, dismantling surface infrastructure and decontaminating polluted drilling sites. That would cost California about $13.2 billion. Adding inflation and the price of decommissioning miles of pipeline could bring the total cleanup bill to $21.5 billion.

Meanwhile, Purvis estimates that California oil and gas production will earn only about $6.3 billion in future profits over the remaining course of operations; nowhere near sufficient to pay for the cleanup, even if those profits could be captured by the state.

That’s just California. These costs are what economists call “Externalities”. An externality is an indirect cost (or benefit) to a party (taxpayers) that arises as an effect of another party’s (Oil Companies) economic activity. The problem is that the price of their product doesn’t include the externalities. That means there is a gap between the profit of these corporations and the aggregate loss to society as a whole.

Republicans have a tried and true solution for this problem. Taxpayers pay the bills. We’re back to the “privatize profit, socialize the losses” game that corporations have played forever. Maybe the correct terminology should be socialism for the rich.

They prefer to call it keeping government off the backs of job creators.

Time to let go of California’s messy problem and find a few minutes to center ourselves before next week which will bring either financial Armageddon, or a diminished Biden. At the Fields of Wrong, we had a freeze last Wednesday that caused us to cover the newly planted vegetables and bring the Meyer Lemon tree indoors. Spring in Connecticut can always show up with a backtracking nod towards winter.

But on this rainy Saturday, grab a chair by a big window and listen to Debussy’s “Nuages” (‘Clouds’) from his “Trois Nocturnes”. Leopold Stokowski and the Philadelphia Orchestra made the first American recording of Debussy’s “Three Nocturnes” for a 1950 LP.

Here is the first “Nocturne”, a musical impression of slow-moving clouds:

Facebooklinkedinrss

Prepaying Taxes? Don’t Be Stupid

The Daily Escape:

Saguaro in bloom, Gold Canyon, AZ – May 2023 photo by Karin Ingebrigtsen Hetsler

In the discussion about the Debt Ceiling, it’s become clear that America has a problem with tax collections, which are running behind what was forecast. While tax receipts were always expected to be below 2021’s robust levels, they are even weaker than forecast, down around 35% so far.

That means absent a deal between the Parties, we will hit the Debt Ceiling sooner than we thought. This is largely due to a weaker stock market and lower economic growth than the country had in 2021.

But it’s also true that America has an enormously complicated tax code, built by decades of lobbyists working with the Congress to carve loopholes into the Code to provide legal tax avoidance strategies to their corporate clients.

Imagine a world where corporations and individuals didn’t try to weasel out on their tax obligations to the government…Impossible, you say?

Well, consider Ukraine. We’ve been told that Ukraine is rank with corruption and a large informal economy. Both may be true but read what The Economist has to say about tax receipts during their war with Russia: (emphasis by Wrongo)

“After Russia invaded in February last year, Ukraine’s finance minister, Serhiy Marchenko, braced…for government revenues to “plummet”. He says he expected them to fall by roughly as much as economic activity. That did not happen. Although Ukraine’s GDP plunged by 29% in 2022, the state pulled in just 14% less than the year before.”

Of course the war led to drops in tax revenues from imports and tourism. Blackouts caused by Russian attacks on power plants and the grid disrupted automated reporting of taxable transactions. More from The Economist:

“What, then, is behind the state’s “unique results”, as an official puts it, in wartime revenue collection? One explanation is that firms and taxpayers, eager to support their country’s defense, are paying more tax than required.”

Still more: (brackets by Wrongo)

“According to Ukraine’s finance ministry, in March last year such donations came to 26b[illio]n hryvnias ($880m), rising to 28b[illio]n in May.”

Why are Ukrainian businesses and individuals motivated not to avoid taxes like in the US, but to make donations and pay taxes in advance? The Economist quotes a tax partner with Price Waterhouse Coopers, with responsibility for Ukraine:

“…if Ukraine wins, you’ve got your country; if Russia wins, thuggish authorities will take your money anyway, so why not help out now?”

A lawyer at a Ukraine law firm says that many of his corporate clients have asked for guidance on how to prepay taxes. And now a year later, the lawyer says that nearly all the 100-odd clients he serves have begun to prepay. According to the lawyer, efforts to seek loopholes to lower tax bills have decreased.

Finally, The Economist reports that Ukraine’s State Tax Service continues to receive payments, through its online portal, from the territories occupied by Russia (except for Crimea). Despite the pressure to pay Russian taxes, apparently, last year 2.3 million individuals and organizations in occupied areas paid $9.5 billion in taxes to Ukraine.

They are doing this despite the risk of retribution from their Russian overlords. Can you imagine anything like this happening in the shell of a country we call the United States?

There are other factors at work. Taxes on gas production were raised last year. The Economist quotes Danil Getmantsev, chair of the Ukrainian parliament’s Committee on Finance, Taxation and Customs Policy, who says that a crackdown on corruption also may have had something to do with it.

No one should think that Wrongo is saying that Ukraine is a better place to live and work than is the US. The key point is they are demonstrating that in a country that was thought to be barely unified before the war, it now acts as one. Try to imagine how, under similar circumstances what it would take for companies and citizens in the US to freely prepay their taxes. (Wrongo knows about the need in the US for some Americans to file quarterly returns, which is a form of prepayment).

Or imagine people willingly donating to the government in an effort to keep us free.

Nope. We’re addicted to fiscal gimmickry. Anything to pay less to the government. After all, Trump said not paying taxes showed that he was a smart guy.

Facebooklinkedinrss

Late Stage Capitalism

The Daily Escape:

A 20 feet x 9 feet sign placed in Times Square, NYC in Sept. 2013. Created by Steve Lambert.

In yesterday’s column about Bed Bath and Beyond’s (BBBY) bankruptcy, Wrongo used the term “Late Stage Capitalism” to describe some of the factors that led to the firm’s demise. Several readers asked what Wrongo meant.

First, some history. A German economist named Werner Sombart seems to have been the first to use the term “Late Capitalism” around the turn of the 20th century. A Marxist theorist named Ernest Mandel popularized it in the 1960s. For Mandel, “late capitalism” described the economic period that started with the end of World War II and ended in the early 1970s, a time that saw the rise of multinational corporations, mass communication, and international finance.

In America the terms “Late Capitalism” and “Late Stage Capitalism” are used interchangeably. Late-stage capitalism is characterized by greed, corruption, and a focus on profits over people.

The current crisis of capitalism’s legitimacy stems from business pursuing the aberrant form of capitalism known as shareholder capitalism, which began in the 1970s. It causes firms to seek maximizing shareholder value as reflected in the current share price, at the expense of all other stakeholders and society.

Some of the problems with late-stage capitalism include wealth inequality, environmental destruction, and financialization. Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy. In the US, the size of the financial sector as a percentage of GDP grew from 2.8% in 1950 to 21% in 2019. The financial services industry, with its emphasis on short-term profits, has played a major role in the decline of manufacturing in the US. Financialization has created “unproductive” capitalism. According to economist Michael Roberts: (brackets by Wrongo)

“…financialization is now mainly used as a term to categorize a completely new stage in capitalism, in which profits mainly come not from…production, but from financial [engineering]

Today, capitalism is no longer the heart of a free market. Algorithms run the stock and foreign exchange markets. Large players in these markets operate freely with the expectation that they will eventually be caught. They then pay off the DOJ or SEC, chalking up the fines to the cost of doing business.

Lobbyists on Capitol Hill curry favor with politicians. Companies then receive substantial tax breaks and move their ever larger profits to offshore tax havens. The revolving door between Wall Street and the banking sector allows former Federal Reserve Chairs to charge speaking fees of $500,000 and earn seats on the boards of the algorithmic trading firms. The Pentagon continues to benefit from budgetary increases while the profits of Boeing, Lockheed Martin, and other defense contractors continue to swell.

Late stage capitalism helped create the current distortion of wealth. From the wealthy one percent living in multiple homes and flying private, to the plight of the working poor in America. In a 2020 survey by Edelman, a marketing and public relations firm, 57% of people worldwide said that:

“capitalism as it exists today does more harm than good in the world”

When you have money, capitalism is your wing man. It opens doors to business leaders and helps develop political influence, all with the goal of amassing more wealth and power.

Late stage capitalism has allowed oligopolies and the oligarchs that run them, to rig the system in their favor. They’ve won Supreme Court cases, such as Citizens United v. FEC (2010), that give corporations the same speech rights as people, allowing them to spend millions on political ads to elect compliant politicians.

In recent years, capitalism’s shortcomings have become more apparent: Prioritizing short-term profits has sometimes meant that the long-term well-being of society and the environment has lost out. Indeed, if you judge by measures such as inequality and environmental damage, as economists Michael Jacobs and Mariana Mazzucato wrote in their book “Rethinking Capitalism”:

“…the performance of Western capitalism in recent decades has been deeply problematic…”

There’s also no denying that this strain of capitalism has led to increased economic growth worldwide, while lifting a significant number of people out of poverty. At the same time, its tenets of lowering taxes and deregulating business has done little to support investment in public services, such as crumbling public infrastructure, improving education and mitigating health risks.

Watch Paul Tudor Jones, a successful hedge fund manager describe why we need to rethink capitalism:

He’s concerned about capitalism’s laser focus on profits. He says that it’s:

“….threatening the very underpinnings of society.”

More people are aware of the term “late, or late-stage capitalism,” due to the growing wealth gap. People now have access to information that exposes the defects of capitalism, and the effects of political and elitist interference in the monetary policy of a country. There is a popular Reddit community devoted to it.

And calling something “late” implies the potential for significant change or revolution, A “late” period always comes near the end of something. Calling it “Late capitalism” says:

“…This is a stage we’re going to come out of at some point…”

Perhaps we’re on the cusp of society dictating that capitalism provide us with a more equitable way of life. Or maybe the wealth gap will continue to grow, and the corporations will continue to seize more power.

Whenever late-stage capitalism eventually comes to an end, you can be sure of one thing – it won’t be a soft landing.

 

Sources and reading list:

https://wrongologist.com/2023/04/bed-bath-and-beyond-another-retailer-bites-the-dust/

https://en.wikipedia.org/wiki/Werner_Sombart

https://www.theatlantic.com/business/archive/2017/05/late-capitalism/524943/

https://www.investopedia.com/terms/f/financialization.asp

https://www.linkedin.com/in/prof-michael-r-roberts/

https://www.fec.gov/legal-resources/court-cases/citizens-united-v-fec/

https://www.wiley.com/en-gb/Rethinking+Capitalism%3A+Economics+and+Policy+for+Sustainable+and+Inclusive+Growth-p-9781119120957

https://www.bbc.com/future/article/20210525-why-the-next-stage-of-capitalism-is-coming

https://www.edelman.com/sites/g/files/aatuss191/files/2020-01/2020%20Edelman%20Trust%20Barometer%20Global%20Report.pdf

https://www.reddit.com/r/LateStageCapitalism/

Alternative Views:

https://tomdehnel.com/crushing-the-myth-of-late-stage-capitalism/

https://www.nytimes.com/2023/04/20/opinion/american-capitalism-good.html

Facebooklinkedinrss

Sunday Cartoon Blogging – April 23, 2023

Another busy week filled with news we didn’t want to hear. Fox’s huge $787.5 million payout in the Dominion lawsuit seems appropriate, but Lever News reports that Fox can take a tax deduction from the settlement. Ironically the financial consequences of lying are just a cost of doing business for Murdoch and Co.

Fox Corporation reported $1.2 billion in net income in 2022, so the $787 million Dominion settlement is equivalent to about two-thirds of the company’s profits last year. The Lever quotes Daniel Shaviro a tax professor at NYU:

“If your business model is to tell lies so that you’ll get viewers and have lots of advertising revenues, then, odious though this business model may be, the tax system’s job is to tax you on the profits that you actually make from it…”

Fox reported paying an effective income tax rate of 27% in 2022 (the  combination of federal and New York taxes). If Fox can write off the full settlement payment to Dominion, it could amount to an estimated $213 million in tax savings. On to cartoons.

Fox didn’t even have to do this:

Losing the lawsuit didn’t cost Fox any viewers:

Justice Sam Alito was in an especially grumpy mood after the other Justices on the Supreme Court ruled that access to Mifepristone will remain unchanged while the case continues to wind through the courts. Alito and Thomas dissented even though the underlying suit is frivolous:

Note that Thomas is drinking a coke.

That the SpaceX rocket crashed and burned was totally on brand for Elon:

Kevin McCarthy explains his position:

Dalai Lama must retire:

Facebooklinkedinrss

Final Thoughts On The SVB Situation

The Daily Escape:

Spring wildflowers, Four Peaks Wilderness, AZ – March 2023 photo by Chris Flores

(This will be the final column for this week as Wrongo and Ms. Right are heading to CA for the Napa Valley wedding of granddaughter Nicole. Columns will resume on 3/23)

Several readers commented on how Silicon Valley Bank’s (SVB) major problem went beyond Wrongo’s discussion of asset management. They’re all former bankers and former colleagues of Wrongo, and they rightly brought up liability management as a key contributor to SVB’s problem.

For banks, the deposits that people make are the bank’s liabilities. The essence of banking is borrowing short term (deposits, overnight borrowings and medium term borrowings) in order to lend that money out for a longer term (mortgages, long term loans or, investments in bonds and long dated US treasuries). The difference between what they pay on their liabilities and what they earn on their loans and investments (the spread) is how banks make their profits.

SVB had little risk that their loans wouldn’t be eventually paid back (credit risk), but they did have substantial interest rate risk if rates went up. That included the risk that the face value of the bonds they invested in would decline in value in higher interest rate scenarios.

This is a well-known challenge for all banks. They try to maintain enough of their assets in easily sold investments so if there’s an unforeseen need to pay out cash to depositors, they can meet that need. The bigger the expected (or unexpected) cash need, the more assets the bank must hold that are easily converted to cash.

It wasn’t a surprise to the banking industry that the Federal Reserve (Fed) was raising rates; Chair Powell clearly said they were going to do that until inflation was under control. Basic liability management principles should have told SVB to move to hedge the risks in a rising rate environment by investing more in very short term (near cash) assets. But SVB didn’t. Maybe they thought they knew better.

SVB isn’t alone. The Fed raised interest rates quickly and sharply during 2022, so the face value of bonds fell. According to the FDIC, US banks were sitting on $620 billion in unrealized losses (assets that had decreased in market value but were still on their books at purchase price) at the end of 2022.

Of that amount, Bank of America alone had unrealized losses of around $114 billion, or 18% of the total.

A major risk that the banks didn’t correctly anticipate was the effect of huge cash injections into the economy during the pandemic, along with a prolonged period of historically low interest rates that predated the pandemic. That had ripple effects on all banks. According to Marc Rubinstein:

“Between the end of 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion. With loan demand weak, only around 15% of that volume was channeled towards loans; the rest was invested in securities portfolios or kept as cash.”

Then came the Fed’s rapid rise in interest rates. From FDIC Chairman Martin Gruenberg:

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies….Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,”

Banks do not continually adjust the value of their bond portfolio to market. So their unrealized losses can be difficult for an outsider to see. It also means banks find that selling parts of the portfolio will bring in less cash than they may need, because the securities are worth less in the market than they originally paid for them. That happened to SVB.

From Michael Batnick at Irrelevant Investor:

“Without the pandemic, rates are not at zero for two years. Without the pandemic, $638 billion does not go into venture capital. Without the pandemic, rates don’t go from 0% to 4.5% in a year. And without the pandemic, we wouldn’t be talking about a run on the bank.”

So there’s plenty of blame to go around. The SVB management surely failed: More Treasury bills and fewer bonds would have helped, that’s for sure. They had to know that their customer base, which was concentrated in start-ups, were hemorrhaging cash. They knew that they had unrealized losses in their bond portfolio. Shouldn’t they have shortened their asset mix?

Should we blame the regulators or SVB’s auditors? KPMG gave them a clean bill of health just a few weeks before they went belly up. You would think KPMG should have seen what was coming. And the Fed just announced that they are leading a review of “the supervision and regulation of Silicon Valley Bank in light of its failure.”

For SVB, the government drastically changed its policy about insured deposits. Had SVB been “The Bank of Depositors With No Political Clout”, you can bet that the $250,000 insured deposit limit would have been enforced. And depositors with larger deposits would have had to wait for their money.

But, the exception was made, and now, it will certainly happen again. Ben Carlson says it best:

Facebooklinkedinrss

Another Bank Bailout!

The Daily Escape:

Pronghorn in Las Cienegas National Conservation Area, AZ  – March 2023 photo by Alan Nyiri Photography

More about the Silicon Valley Bank (SVB). A joint announcement by Treasury Secretary Yellen, Fed Chair Powell, and FDIC Chairman Gruenberg said:

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13…”

This appears to be the mechanics of the bailout:

  1. The Fed gives money to the FDIC as needed.
    2. The FDIC makes all deposits available on Monday. Not just those that are FDIC-insured.
    3. The FDIC then sells the assets of the banks, which will take time.
    4. The difference between the cost of bailouts and the net proceeds from the asset sales is the actual amount the FDIC will have lost.
    5. The FDIC will charge all other banks a “special assessment” to cover the losses.
    6. The FDIC will then pay the Fed back with the special assessment funds it collects.

Much about this makes Wrongo’s blood boil. We have a well-defined regulatory system for the US banking industry. But, as with our lax regulation of train traffic that resulted in the Norfolk Southern accident in East Palestine, these pesky banking regulations were considered a major impediment to Mr. Market.

Regional banks argued that they shouldn’t be held to the same standards as the biggest banks because if they failed, they wouldn’t pose systemic risks to the banking industry or the nation.

So in 2018, Dodd-Frank was amended by the Trump administration to raise the asset threshold at which a bank would be considered “too big to fail” from $50 million to $250 billion. The 2010 original law required that banks considered systemically important keep more capital on hand, undergo stress tests and produce a “living will” that would provide for their orderly dissolution.

But now five years later, the FDIC says that SVB and Signature Bank in NY really do pose a systemic risk to the banking system! The regulators are saying that the threat of a systemic risk gives them the authority to hold all SVB depositors harmless, even if their deposits exceed the current FDIC maximum of $250,000.

Few if any average Americans have $250,000 in a single bank account. Who has bank accounts above $250,000? Corporations.

The FDIC insurance on deposits is meant to assure retail customers, not companies that hold very large balances. Why? Because companies have the ability to perform their own risk analysis. This risk analysis should force them to ask questions about the business practices of the bank, to make sure the bank will properly manage their assets.

The US is going to protect the deposits of corporations in this bailout despite the fact that there’s a product called “Insured Cash Sweep” that cuts your large deposits into pieces that are FDIC insured (i.e. $250k each). In the event of a bank run, those deposits would not be over the limit, so they would be safe.

But, for reasons unknown, the Silicon Valley Venture Capital masters of the financial universe didn’t deign to use it.

American capitalism remains a system that privatizes profits until shit happens. And then? We socialize the losses, meaning it’s up to the federal government and taxpayers to handle the problem. When Biden says the banking system will pay fees via a special assessment, that means the cost will ultimately be paid by depositors and borrowers through higher fees and interest costs.

This is why people have so little faith in our government.

The very serious people in finance and politics were worried that the 2023 version of the US banking system might be close to another 2008-style collapse. So the Treasury, Fed and FDIC had to step in.

The basic problem relates to what’s called “asset management” in the banking biz. The goal of asset management is to maximize the return of the bank’s investment portfolio while maintaining an acceptable level of both liquidity and risk.

For banks, that means keeping a certain amount of cash available to meet the needs of depositors and investing the rest in loans or bonds. SVB invested in long-term bonds in order to realize better returns on their investment portfolio, because short-term interest rates were very low. They, like others, felt it was necessary to maintain a portfolio of higher yielding assets to offset the low market rates generally available to them.

But when mass withdrawals from depositors started to happen, they had to sell bonds at a loss, ultimately leading to default and FDIC takeover. Wasn’t it the job of the SVB executives to foresee this? And adjust their asset management accordingly?

This seems to mean that the $250,000 FDIC limit has effectively gone away. If true, there’s systemic risk that taxpayers will have to bail out bank deposits with uninsured deposits at any bank. Most of those depositors will be corporations. So, new rules must be written. And until then, we’re in trouble.

The big picture is that very few people of means in America ever pay a price for bad management.

And none go to jail.

Average Americans who get caught cheating on their taxes might go to jail if you were represented by an overworked public defender. But if you had the means to hire a high-priced lawyer, most likely, you will get community service, or probation.

It’s never been a fair system. Back in the 2008 Great Financial Crisis, then-Treasury Secretary Timothy Geithner worked to save his banker cronies; they didn’t lose money. They didn’t go to jail. The economy was saved, but no one who profited from blowing it up paid a price.

The bottom line: If I’m bad at my job, I’ll get fired. If these bankers are bad, they may get rescued by the government.

And one way or another, we’ll be paying for it.

Facebooklinkedinrss

Sunday Cartoon Blogging – March 12, 2023

Let’s talk about Silicon Valley Bank (SVB). The tech industry’s go-to lender just became the second-largest bank failure in US history. The bank’s customers withdrew $42 billion from their accounts on Thursday. That’s $4.2 billion an hour, or more than $1 million per second for ten hours straight.

We ancient, moss-covered former bankers call this a bank run. That occurs when a large number of customers of a bank withdraw their deposits simultaneously over concerns about the bank’s solvency.

Nearly half of all venture-backed US companies were SVB customers. We’re unsure why the run started, but on Thursday, several Venture Capital firms started telling their client companies that pulling cash from SVB was prudent, and the run began.

While bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, few of SVB’s deposits, by value, were FDIC insured, since its customers were overwhelmingly corporations with much more than $250,000 in the bank. By Friday, there was no cash left in SVB’s coffers. In fact, the cash on hand was negative, to the tune of $958 million.

Do you remember when Trump and Republicans rolled back some of the regulations Dodd-Frank placed on regional banks?:

“Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.”

Trump signed the bill despite a report from Democrats on Congress’s joint economic committee warning that under the new law, SVB and other banks of its size:

“…would no longer be subject to nearly any enhanced regulations”.

This also affects ordinary people. Wrongo has a California friend who banks with SVB. Here’s a quote from her:

“While I’ve been waiting to sign the purchase contract on a condo, I woke to the news that my lender Silicon Valley Bank has been closed and taken over by regulators. That concludes literally 8 months of working on this….and the end of my effort to buy a home.”

So don’t listen to the pleas for another bank bailout. Wrongo would be okay with bailouts if they were accompanied by personal accountability by management. Like, we’ll rescue your institution, but none of the bank senior management can ever work in finance again. On to cartoons.

Tucker’s mendacity:

It takes two teams to play:

Walmart’s OK with pills for boners, but not for pregnancy:

GOP wants to regulate Trans not Trains:

GOP loves doormats:

Most appropriately named movie of this or any year:

Facebooklinkedinrss

Saturday Soother – February 17, 2023

The Daily Escape:

Where desert meets mountains, near CA/NV border –  February 2023 photo by Austin James Jackson

Liz Hoffman at Semafor has a short analysis of the value of credit card loyalty programs to airlines. Many of us have them and we use them to purchase our everyday goods in order to earn air miles or points that we later use to get a seat upgrade, or to fly for free.

Everyone knows about this “perk” from the airlines, but few of us know just how profitable these programs are to the carriers. It turns out that they are the most lucrative assets on airlines’ balance sheets. The uncertain profitability of the airline business makes them very important since the airlines often lose money.

The airlines used to be secretive about just how profitable their frequent-flier programs were. But, when they were in deep financial trouble during the pandemic, several US carriers pledged their loyalty programs as collateral for new loans when other financing failed.

That required the airlines to open the books on their loyalty programs. And now we’ve learned that their credit card businesses are more valuable to shareholders than their basic business of flying planes. From Hoffman:

“It turns out that United’s rewards card program with JPMorgan Chase is valued today at $22 billion. But United’s market capitalization is $16 billion, meaning investors are assigning negative value to the part of its business that flies airplanes. The same goes for American and Delta.”

From a market valuation perspective, the basic businesses of the big three US airlines are under water. Hoffman provides an eye-opening chart showing that the airlines’ huge investment in aircraft and ground operations doesn’t produce a dime of market value for their shareholders:

As you can see, none of the big three US carriers get any incremental market value from flying planes. So should they either sell off all of that hardware, or spin off their credit card businesses?

They can’t. They need the flights to create demand for the points/miles. The secret sauce behind the success of their loyalty programs is that the actual value of an air mile isn’t clear. Customers think they’re getting a $3,000 upgrade to first class for a few thousand points, while the airlines know that the upgraded seat is unlikely to sell at all, and if it does, it won’t be for anything like that amount.

Foreign carriers have less reliance on their rewards programs. Many operate with government subsidies, so their flights are more profitable. And they serve consumers who are less comfortable with plastic. So their market valuation is less dependent on loyalty programs:

We have to assume that the board members of the airlines have always known about the value of their loyalty programs. But now everyone is seeing the potential value, and the airlines might be thinking that they can wring even more value from them.

What’s distressing about this is that the airlines needed bailouts only two years ago during Covid. The US airlines received $54 billion in federal aid to pay workers during the Covid pandemic. That agreement prohibited them from share buybacks.

That’s because they had continuously bought back shares in the years prior to the bailout. The four biggest US carriers — Delta, United, American, and Southwest — spent about $40 billion buying back their companies’ stock between 2015 and 2020. That effort to improve their market valuation failed spectacularly, since their loyalty programs are now worth more than the companies themselves.

America added a 1% tax on buybacks excise tax for buybacks this year, passed as a part of the Inflation Reduction Act. This will help reduce the deficit and might dampen American corporations’ appetite for stock buybacks. The largest US airlines are making money again, and labor unions don’t want them to spend it on more stock buybacks. In a public petition, some of the largest airline labor unions — representing more than 170,000 pilots, flight attendants, customer service agents — are urging carriers to stabilize operations and invest in workers before spending on buying back more of their stock. We’ll see if that ever happens.

Enough high finance, it’s time for our Saturday Soother. Here on the Fields of Wrong, we’ve had a few warm days that led to the beginning of our spring cleanup. To settle into your soother, grab a mug of coffee and a seat by the window. Start by forgetting about Nikki Haley’s campaign or what to do now that football is over.

Now listen and watch Renée Fleming sing “Nacht und Träume” (Night and Dreams) written in 1825 by Franz Schubert conducted by Claudio Abbado with The Lucerne Festival Orchestra in 2005:

 

Facebooklinkedinrss

Monday Wake Up Call – September 12, 2022

The Daily Escape:

Harvest Moon, Cape Cod National Seashore, MA – September photo by Tom Baratz

With all of the media’s coverage of the comings and goings of the British monarchy, Wrongo’s certain that you missed the reviews of a new book, “Slouching Towards Utopia” by Brad DeLong, an economist from UC Berkeley. Dylan Matthews in Vox quotes DeLong from the book:

“The 140 years from 1870 to 2010 of the long twentieth century were, I strongly believe, the most consequential years of all humanity’s centuries.”

Matthews thinks it’s a bold claim. After all, homo sapiens has been around for at least 300,000 years; DeLong’s “long twentieth century” represents 0.05% of that history.

But DeLong says an incredible thing happened during that sliver of time that had eluded our species for the other 99.95% of our history: Before 1870, technological progress was glacial, but after 1870 it accelerated dramatically. More from Vox:

“DeLong reports that in 1870, an average unskilled male worker living in London could afford 5,000 calories for himself and his family on his daily wages. That was more than the 3,000 calories he could’ve afforded in 1600, a 66% increase….But by 2010, the same worker could afford 2.4 million calories a day, a nearly five hundred fold increase.”

DeLong is speaking of the nations of the rich north, not about all nations. He’s saying that food surplus was the key driver of progress. What’s implied is that the greatest difference between the wealthy and everyone else was that the poor were living on the verge of starvation. Those basic economic facts shifted once having enough to eat ceased being society’s most critical status distinction.

Another interesting statistic from the book:

“…the average number of years of a woman’s life spent either pregnant or breastfeeding…has gone down dramatically, from 20 years of a typical woman’s life in 1870 to four years today.”

Most historians present modern history as a long 19th century (from the French revolution in 1789) to the crisis of 1914. Which is then followed by a shorter 20th century ending with the fall of communism. DeLong, by contrast, argues that the period from 1870 to 2010 is best seen as a coherent whole: the first era, he argues, in which historical developments were overwhelmingly driven by economics.

From the Economist:

“…despite the Industrial Revolution…for millennia, technological improvements never yielded enough new production to outrun population growth. Incomes had stuck close to subsistence levels. Yet from around 1870, growth found a new gear, and incomes in leading economies rose to unprecedented levels, then kept climbing.”

DeLong says that economic policy in this period was a duel between the ideas of Friedrich von Hayek, who extolled the power of the free market, and Karl Polanyi, who warned that the market should serve man, not man serving the market.

Before WWI, markets generated rapid growth along with soaring inequality. People pushed back, demanding greater political rights, which they used to pursue regulation of the economy and improved social insurance.

After WWII, a mix of a market economy and a generous safety-net made for a happy marriage of Hayek and Polanyi, improved by Keynes, who said that governments should act to prevent economic recessions. This led to a three-decade post-war period of growth unmatched before or since. DeLong calls them the Thirty Glorious Years; from 1945 to 1975, as the US and Europe recovered from World War II.

But when growth sagged and inflation rose in the 1970s, voters supported politicians promising market-friendly, or “neoliberal”, economic growth reforms, like lower taxes and reduced regulation. But those reforms didn’t keep economic growth high. And they also led to even worse inequality. Still, the US and other rich countries pressed on with them, right up to the 2008 global financial crisis, which marks the end of DeLong’s 20th century.

According to a paper by Carter C. Price and Kathryn Edwards of the RAND Corporation, had the more equitable income distribution that America experienced in those thirty glorious years stayed constant, the aggregate annual income of Americans earning below the 90th percentile would have been $2.5 trillion higher in just the year 2018. That’s an amount equal to nearly 12% of GDP.

Price and Edwards say that the cumulative inequality cost for our 40-year experiment in government-supported income inequality added up to $47 trillion from 1975 through 2018. And probably equaled $50 trillion by 2020.

That’s $50 trillion that would have made the vast majority of Americans far more healthy, resilient, and financially secure.

So, the big unanswered question is: Can we again return to a period where we see both economic growth and equitable growth? It’s highly doubtful. As DeLong says in Time:

“Our current situation: in the rich countries there is enough by any reasonable standard, and yet we are all unhappy, all earnestly seeking to discover who the enemies are who have somehow stolen our rich birthright and fed us unappetizing lentil stew instead.”

The problem here is that our entire culture, economy and even our civilization is predicated around growth and people haven’t known anything else. Hope you’ve enjoyed the ride.

Time to wake up America! We need to reimagine capitalism, our taxation policies and our welfare scheme if we are to survive. Expect a rough adjustment.  To help you wake up, listen, and watch Bruce Springsteen perform “Darlington County” live in London in 2013:

Facebooklinkedinrss