I’m very busy in my new role with Tripp-Lite in Chicago. I have published many book reviews on Amazon.com in the last 2 months, including:
Pontoon, Garrison Keillor
Pere Goriot, Balzac
The Limits to Power, Bacevich
The City, Kotkin
Hitchhikers Guide to Universe, Adams
Ragtime, Doctorow
Siddhartha, Hesse
What’s the Matter with Kansas?, Frank
The American, James
No Ordinary Time, Goodwin
Prize Winner of Defiance, Ohio, Ryan
Enjoy!
Many of America’s highest income, politically conservative suburbs have successful pursued high amenity public service strategies. How is this high spending approach economically and politically justified?
http://en.wikipedia.org/wiki/Tiebout_model
In 1956, economist Charles Tiebout developed a model of competing suburban governments providing different levels and combinations of services to match the varied preferences of groups. Subsequent research on suburbs and private real estate communities has confirmed that individuals prefer to choose amenity/payment bundles which match their values.
http://www.springerlink.com/content/r1v378785j2588j8/
Why would members of this usually tax and government-averse high income group willingly choose to live in a high amenity suburb?
The sociological observation that individuals prefer to belong to groups of like individuals is a partial explanation. Exclusive communities are more homogeneous.
Brand name communities also provide some luxury goods type value from their exclusive status as high income, wealth and service communities.
High income, wealth, tax and service communities screen out criminal elements and benefit from low service costs to security services, delivering a safe environment.
High service communities provide signaling benefits in a world of imperfect information. Transferred corporate executives rely upon education and amenity cues in choosing a residence. Universities rely upon the reputation of school districts in selecting among applicants.
Most importantly, a high service strategy delivers a great financial return on investment – especially for the initial group of residents. High service communities proactively pursue strategies to minimize the cost to existing residents.
They invest in all service dimensions to ensure that the community is recognized as “a” or “the” leader in the metropolitan area and region. Schools, roads, utilities, zoning, parks, transportation, libraries and cultural institutions achieve recognition.
They increase the tax base through annexation, selective density increases and attracting commercial firms.
They pursue “good government” initiatives, outsourcing services, consolidating services, utilizing volunteers and boards, leveraging regional, state and federal funds, employing specialized consulting firms and retaining highly qualified staff that benefit from the community’s growth and financial stability.
They invest in economic development, using Tax Increment Financing districts, user fees, economic development incentives, balanced zoning and negotiation to take advantage of the economic value of their attractive locations. Retail, office, distribution, services, logistics and light manufacturing firms are welcome in the right zoned areas.
High service communities make capital investments to provide future economic returns. Schools, parks, roads, libraries, utilities, cultural services, transportation and recreation assets are created through donations, local and regional government actions.
Suburbs compete with other metropolitan suburbs for residents and with other regional centers for commercial investments. The right investments provide an atmosphere with low taxes, high services and a high quality of life.
A Midwestern suburb of 75,000 has invested almost $1 billion in the last 20 years in its schools, roads, utilities, library, parks, infrastructure, cultural institutions and economic development incentives. In essence, each of the existing 25,000 households has made a $40,000 bet on the future. There has been some political and journalistic opposition. A typical residence is valued at $250,000. There are another 3,000 commercial firms with $250,000 property investments, making the total property value $7 billion.
The community has annexed the unincorporated areas, increased density, attracted new businesses and continued its build-out towards a 120,000 population. The number and value of commercial enterprises is expected to grow from .75B to $4B in 20 years. Through zoning measures, growth and increased demand for a singular resource, the average residence will be valued at $400,000, with the existing residences appreciating from $250,000 to $325,000. The built out residential market value will be $16B, for a total property value of $20B.
The original 25,000 households will gain a real $75,000 on their housing values. Because of the community’s economic and population growth, their capital investment will be reduced to less than $20,000. The early residents will clearly benefit from this high service and investment strategy. The new residents will benefit from the investments and have the opportunity to “vote with their feet” in determining if the services delivered are worth the property values and taxes required.
High income families demand high quality services and are willing to pay for them. They also require their municipal governments to take all possible steps to increase the cost effectiveness of these services.
California voters in every county except far left San Francisco County and far right Orange County approved Proposition 14 which changes the state constitution to require the primary election to select the two highest vote recipients, without respect to their political party.
http://en.wikipedia.org/wiki/California_Proposition_14_(2010)
California may once again be on the leading edge of American history. This change seems to be a rejection of the current primary system where candidates in both parties are required to pander to the extremists and activists before tacking back to the center to win in general elections. Ironically, the Tea Party movement seems to be tapping some of this frustration by the average centrist voter, while at the same time pulling the Republican Party even further to the right.
In the shadow of “The Great War”, William Butler Yeats wrote:
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
http://www.online-literature.com/donne/780/
http://en.wikipedia.org/wiki/The_Second_Coming_(poem)
The optimistic progressive consensus of 1880-1910 among the leading classes had been severely weakened by the war. World War II shattered the last idealistic sentiments in Europe, leading to the post-war time of European community, skepticism and limited idealism. The United States picked up the progressive banner with the New Deal, WWII, post-war global organizations and economic recovery, the cold war, New Frontier and Great Society. Temporarily derailed by the Vietnam War, Energy Crisis and Japanese competition, the U.S. once again embraced the optimistic progressive spirit in the 1980’s, but with a distinctively right-wing flavor following the Reagan revolution. Twenty years of economic and geopolitical progress delivered a new sense of American exceptionalism, leading to the Bush administration’s overreach in Iraq in response to the perceived terrorist threats after 9/11. Most commentators agree that we now face a more uncertain multi-polar future (see 2/1/2010).
How did the American public reach this point where most voters clearly see that the political system does not work (see 1/26/2010)?
Congressional and state legislator gerrymandering has played a major role. The average voter can see that many legislators are simply incompetent party hacks with extremist, populist rhetoric, but no sense of responsibility for governing on behalf of the citizens. The advantages of incumbents have lead to their re-election and increased voter cynicism (see 12/12/2009). This year, unprepared voters elected Alvin Greene as the Democratic SC senate candidate and nominal Democrat, 29 year-old Tim Crawford to oppose Dan Burton.
http://en.wikipedia.org/wiki/Gerrymandering
As the financial and volunteer resources required for election have grown, the power of extremist/activist groups in both political parties has grown significantly. As the country’s population and standard of living have grown, narrow economically rational voters have reduced their participation, thereby increasing the power of those with strong ideological views.
Citizens of all political views have become more independent, decreasing the role of many individual and institutional influencers who once promoted the center (think US News & World Report in the 1960’s). Politicians and political parties have become far more sophisticated in identifying and capturing the resources of those with the strongest beliefs.
After the break-up of the Democratic Party’s “solid south” position following passage of the 1960’s civil rights legislation, the Republican Party developed a more philosophically consistent right wing position on all economic, military and cultural issues. The Democrats have tried to move towards the center, but the left-right and Democratic-Republican dimensions of American politics have become synonymous for almost 40 years. The Republicans have effectively attracted millions of Catholic, Baptist, working and middle class voters from Democratic strongholds, while the Democrats have rode demographic trends and recaptured some socially moderate and upper middle class voters on the coasts.
The modern media has returned to its 19th century roots, adopting explicit political and populist positions in order to sell advertising. This promotes partisan posturing and coverage.
Politics no longer attracts citizen legislators with moderate views. Political positions have very low compensation compared with other options for highly competent citizens. The price of entering a campaign is so high that only individuals with hopes for a 20 year political career, radical idealists or the very wealthy rationally pursue elected office.
Non-party primaries, campaign finance reform, independent districting commissions and grass-roots political participation can all help to return our political system to the center, where reasonable compromises can be found for the benefit of all. Without some structural changes, we run the risk of having the divisive and unproductive political results seen in Italy, Greece, Mexico, Venezuela, Japan and Germany. A solid majority of the American people desire centrist solutions to our challenges. Structural changes can help to ensure that we have a self-improving system, or at least that we do not see “things fall apart”.
Graduates, I encourage each of you to “Live a Great Life”. This is your right, your choice and your destiny.
We each live in three worlds: the world of commerce, the world of choice and the world of community. I believe that “a great life” comes from balancing these three worlds. In eighth grade, our industrial arts teacher, Mr. Laurie, told us that our first project would be a foot stool and that it would have three legs. One student spoke up, “Mr. Laurie, I think it would be better with 4 legs”. Mr. Laurie calmly responded, “Tom, I have found that 3 legs provide the proper balance for a successful footstool. If you tried 4 legs, it would take you the whole semester to make them the same length and the final stool would be 3 inches tall”. As I learned in this school, balancing the three legs of commerce, choice and community is essential to “living a great life”.
World of Commerce
The world of commerce is important as we emerge from the Great Recession. Completing high school is a great accomplishment. But it’s not the end of learning. You will continue to build your problem solving and communications skills and you’ll pursue new degrees and certifications. Lifelong learning is now required for everyone.
Our guidance counselor, Mr. McGinnis, urged us to be serious about our careers. He said “choose something which interests you, build skills in that field and focus on one industry”. In spite of the many options and uncertainties in life, pick that one path and treat it like it’s the only one.
Securing employment is difficult today. You can improve your odds by thinking about jobs from the employer’s point of view. Employers want clear “yes” answers to three simple questions: “Can you do the job? Are you self-motivated? Are you manageable?” Focus on these and you will always be an attractive job candidate.
Be confident about your economic future. Don’t listen to the nightly news. The sky is not falling. The U.S. economy grows by 3% per year on average. That doesn’t sound like much, but since the Diamond Alkali factory in Fairport closed 30 years ago, the US economy has grown by 160%, from $5 trillion to $13 trillion dollars. There will be recessions, but you will succeed.
Education, career skills and positive attitudes will make you succeed in the world of commerce. Always invest in yourself first. Save the first 10% of every paycheck. Invest it for your retirement. When you are 53, you will thank me.
World of Choice
We also live in a “world of choice”. In 1974, we were emerging from a “world of tradition” and sought a “world of choice” where we could “express ourselves”. Our parents cautioned us to “be careful what you wish for”. The number of choices and options today can be overwhelming. You now have great responsibility for your own future.
First, you must accept and love yourself as you are. Believe that you were created just as you are for a purpose. My classmate, Jim Kulma, shared a book with us in 1972. It was titled “I’m OK, You’re OK”. It sold 15 million copies because its advice was very sound.
This is not an invitation to be self-centered. We all need to become more self-aware. Discover your talents and your non-talents. Listen to others. Seek feedback and advice.
Because we have so many choices, engagement in life is critical. Many adults, in their roles as workers, family and friends, choose to not fully engage in life. They try to avoid responsibility for themselves and their choices because they are afraid of making mistakes. Unfortunately, “there is no place to hide”. Others will hold you accountable anyway. Embrace responsibility and make it a habit.
Engage in life; explore and experiment. When you are older, you will not regret these adventures, but you might regret the things you missed. Have the confidence to “take the road less traveled”. As we learned playing “Milk League” baseball, “you can’t get a hit, if you don’t step up to the plate.”
View life as an exciting journey. Don’t make it a death march in pursuit of a single goal, like career success. Don’t think “If I only had a better job, a winning team, a better spouse, a bigger house or a full head of hair, things would be different”. Joy comes from living life, not from dreaming about or even from reaching goals.
Accept that “life is not easy”. Life remains a challenge. Use the “in spite of” strategy. In spite of the challenges, risks, hurts and pains, I will choose to do X. If the challenges become too great, get help. Family, friends and counselors are ready to help. They all want you to succeed.
World of Community
We all need to earn a living and make wise choices. But, to be happy, we must also live in the world of community. We live in a world that glorifies material success and the individual. However, history, science and common sense tell us that happiness does NOT come from wealth and introspection. Happiness comes from relationships. Every wisdom tradition, including psychology, has found that people are truly happy ONLY when they live for something outside of themselves.
In our everyday lives, family matters most. Family life is difficult. But, we were created to live with others. We give and we get even more in return. On my wife’s nightstand, there is a picture of two identical dogs sitting on a beach, much like the Fairport beach, at twilight, with the quote: “Love does not consist in gazing at each other, but in looking outward in the same direction”. Invest in a high quality family life. It will provide the greatest rewards.
Fun social groups matter. Make time for bowling leagues, youth sports, church groups, boy scouts, girl scouts and playing cards with friends. These low-cost activities create a high quality life.
Your local community matters. There is great value in the familiarity, pride, loyalty and common interests of the local community. Village residents already know this. Your big city neighbors yearn to find this sense of place, security and belonging.
Our national community and government also matter. In a society with 300 million members, it is tempting to be a “free rider”. We have found that democracy is the best form of government. It allows the hopes and values of the people to be translated into laws to guide society. Society needs your active involvement in the political process. Our future depends upon it.
Finally, spiritual belief matters. We all have a deep need to matter and to be significant. This is fulfilled by connecting to something larger than ourselves. We all ask the same questions: “what is the meaning of life?”, “where did the world come from?”, “why was I created?”, and “what happens in the long-run?” These religious questions are part of our deepest nature. Finding your relationship with eternity, mankind, truth and god is a vital part of your journey.
We live in these three worlds of commerce, choice and community. Your generation inherits a world that is more complex, fast-paced and demanding than those of the past. Some scholars wonder if we are “in over our heads”, with the demands of life exceeding our capabilities. I believe that we are blessed to be able to lead even richer lives today. I agree with the author Harold Kushner who says that God always provides each of us with the strength and capacity to make our journeys with confidence.
On behalf of the “class of 1974” and the Fairport community, I wish each of you success on your journey. I am confident that you are very well-prepared for the exciting worlds which lie ahead.
It will take some time for the official 2010 Indiana census to be complete. The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.
Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050. The population will increase from 5.2 to 6.4 to 8.0 million residents.
In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000. These four counties contained 1.9M people, or 36% of the 1970 population. They grew to 2.0M in 2009 and an estimated 2.2M in 2050.
By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list. By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.
Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%. Ten of the 92 counties will experience two-thirds of the growth across the next four decades. Based on recent trends, Hamilton County will add 300,000 residents. Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%). Marion and Allen counties will add 80,000 residents at 10-20% growth. Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.
Five Indianapolis area counties will experience 70% or higher growth. Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind. The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M. This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050. The Indianapolis area will grow from 28% to 33% of the total state population.
Eleven counties will change population ranks by three or more places. Boone and Hancock Counties will climb 9-10 places. Shelby, Clark and Hendricks Counties will rise 3-4 places. Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places. Howard County may drop 7 places.
Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050. Growth will be highly concentrated in a small number of urban counties. The top ten counties, each with 200,000 or more people, will account for 50% of the state population. The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population. These 21 counties will capture 80% of all growth,
averaging increases of 60,000 people. The remaining 71 counties will experience growth of 4,000 people each on average.
| Pop | Pop | Est | 2009-50 | 2009 | 2050 | Chg | ||||
| SMSA | County | City | 1970 | 2009 | 2050 | Growth | Pct | Rank | Rank | Rank |
| Vincennes | Knox | Vincennes | 42 | 38 | 38 | – | 0% | 37 | 37 | – |
| Terre Haute | Vigo | Terre Haute | 115 | 106 | 106 | – | 0% | 17 | 19 | (2) |
| South Bend | Elkhart | Goshen | 127 | 201 | 273 | 72 | 36% | 6 | 6 | – |
| South Bend | Kosciusko | Kosciusko | 48 | 76 | 104 | 28 | 37% | 19 | 20 | (1) |
| South Bend | LaPorte | LaPorte | 105 | 111 | 120 | 9 | 8% | 15 | 16 | (1) |
| South Bend | Marshall | Plymouth | 35 | 47 | 59 | 12 | 26% | 31 | 31 | – |
| South Bend | St. Joseph | South Bend | 245 | 268 | 289 | 21 | 8% | 5 | 5 | – |
| Richmond | Henry | Newcastle | 53 | 48 | 48 | – | 0% | 30 | 34 | (4) |
| Richmond | Wayne | Richmond | 79 | 68 | 68 | – | 0% | 25 | 29 | (4) |
| Muncie | Delaware | Muncie | 129 | 115 | 115 | – | 0% | 14 | 17 | (3) |
| Louisville | Clark | Jeffersonville | 76 | 108 | 148 | 40 | 37% | 16 | 13 | 3 |
| Louisville | Floyd | New Albany | 56 | 74 | 94 | 20 | 27% | 21 | 23 | (2) |
| Lafayette | Tippecanoe | Lafayette | 109 | 168 | 248 | 80 | 48% | 8 | 8 | – |
| Kokomo | Cass | Logansport | 40 | 39 | 39 | – | 0% | 36 | 36 | – |
| Kokomo | Grant | Marion | 84 | 69 | 69 | – | 0% | 23 | 27 | (4) |
| Kokomo | Howard | Kokomo | 83 | 83 | 83 | – | 0% | 18 | 25 | (7) |
| Indianapolis | Boone | Lebanon | 31 | 56 | 114 | 58 | 104% | 27 | 18 | 9 |
| Indianapolis | Hamilton | Noblesville | 55 | 279 | 579 | 300 | 108% | 4 | 2 | 2 |
| Indianapolis | Hancock | Greenfield | 35 | 68 | 144 | 76 | 112% | 24 | 14 | 10 |
| Indianapolis | Hendricks | Danville | 54 | 141 | 261 | 120 | 85% | 11 | 7 | 4 |
| Indianapolis | Johnson | Franklin | 61 | 142 | 242 | 100 | 70% | 10 | 9 | 1 |
| Indianapolis | Madison | Anderson | 139 | 131 | 141 | 10 | 8% | 13 | 15 | (2) |
| Indianapolis | Marion | Indianapolis | 794 | 891 | 971 | 80 | 9% | 1 | 1 | – |
| Indianapolis | Morgan | Martinsville | 44 | 71 | 101 | 30 | 42% | 22 | 21 | 1 |
| Indianapolis | Shelby | Shelbyville | 38 | 45 | 61 | 16 | 36% | 33 | 30 | 3 |
| Ft. Wayne | Allen | Ft Wayne | 280 | 354 | 434 | 80 | 23% | 3 | 4 | (1) |
| Ft. Wayne | De Kalb | Auburn | 31 | 42 | 54 | 12 | 29% | 34 | 32 | 2 |
| Ft. Wayne | Noble | Albion | 31 | 48 | 68 | 20 | 42% | 29 | 28 | 1 |
| Evansville | Vanderburgh | Evansville | 169 | 175 | 189 | 14 | 8% | 7 | 11 | (4) |
| Evansville | Warrick | Booneville | 28 | 59 | 84 | 25 | 42% | 26 | 24 | 2 |
| Columbus | Bartholomew | Columbus | 57 | 76 | 96 | 20 | 26% | 20 | 22 | (2) |
| Columbus | Jackson | Brownstown | 33 | 42 | 45 | 3 | 8% | 35 | 35 | – |
| Cincinnati | Dearborn | Lawrenceburg | 29 | 51 | 71 | 20 | 39% | 28 | 26 | 2 |
| Chicago | Lake | Gary | 546 | 494 | 534 | 40 | 8% | 2 | 3 | (1) |
| Chicago | Porter | Valparaiso | 87 | 164 | 232 | 68 | 41% | 9 | 10 | (1) |
| Bloomington | Lawrence | Bedford | 38 | 46 | 50 | 4 | 8% | 32 | 33 | (1) |
| Bloomington | Monroe | Bloomington | 85 | 131 | 171 | 40 | 31% | 12 | 12 | – |
| Subtotal | 37 counties | 4,091 | 5,125 | 6,543 | 1,418 | 12% | ||||
| All Others | 55 counties | 1,104 | 1,298 | 1,459 | 161 | 12% | ||||
| (Pct of State) | 21.3% | 20.2% | 18.2% | 10.2% | ||||||
| Indiana | 5,195 | 6,423 | 8,002 | 1,579 | 25% | |||||
| 24% | 25% | |||||||||
| Indianapolis | 1,251 | 1,824 | 2,614 | 790 | 43% | |||||
| (Pct of State) | 24.1% | 28.4% | 32.7% | 50.0% |
In simplest terms, the mortgage lending industry collects deposits to make loans possible. As mortgage lending has grown increasingly complex, the checks and balances of a simpler time have been lost. Like the proverbial frog boiled as the water temperature rose, bankers did not perceive the changes in systemic risks. Like the subjects in Hofstadter’s “Escher, Gödel and Bach”, a strange loop has been formed that could not be predicted from its components.
http://en.wikipedia.org/wiki/G%C3%B6del,_Escher,_Bach
In place of the original triplet of depositor, banker and borrower, today we have no less than 14 actors to consider: borrower, mortgage broker, mortgage product, mortgage broker firm, mortgage lender, guarantor, consolidator, mortgage-backed security, securitized asset, credit default swap, credit rating agency, investment banker, investors, regulators and auditors.
In 1776, Adam Smith provided scientific, philosophical, ethical and political support for free markets of independent buyers and sellers. Academic economists from Alfred Marshall through the Chicago School provided sophisticated theoretical, historical and statistical support for free markets. Ronald Reagan and Margaret Thatcher consolidated political support for free markets. NONE of them had a 14 step conga line in mind.
http://www.youtube.com/watch?v=RKtPrOiMj3o
At every step, we have the risks of self-interest creating failure rather than an efficient market with optimal social welfare.
Borrowers have an incentive to lie to mortgage brokers about their income.
Mortgage brokers have an incentive to process as many successful mortgages as possible, coaching borrowers and appraisers.
Mortgage lenders and firms have an incentive to devise mortgage products that are most attractive to borrowers, including no money down, variable interest rates and negative amortization beauties.
Mortgage broker firms have an incentive to generate volume, without regard to the risks that will be born by the lenders or investors.
Mortgage lenders have an incentive to book as much volume as possible; locking in profit spreads for 30 years.
Fannie Mae and Freddie Mac serve a pivotal role, consolidating and guaranteeing individual loans and collections of loans in support of the American ideal of home ownership. As quasi-government agencies, they have an incentive to capture congressional support through campaign contributions.
http://www.diffen.com/difference/Fannie_Mae_vs_Freddie_Mac
Mortgage backed securities provide the key gap in the chain of responsibilities. They allow the mortgage brokers and lenders to transfer liability for mortgage defaults to investors. Theoretically, these financial instruments greatly increase the sources of funds and through the portfolio effect reduce risks for everyone.
http://en.wikipedia.org/wiki/Mortgage-backed_security
The most sophisticated financial engineering is used to transform a portfolio of mortgages into a new set of securities that separate risks into layers, theoretically allowing some investors to have low risks and returns while others assume moderate and higher risks and returns. This financial alchemy also increases the pool of potential investors and fine-tunes the risks assumed.
http://en.wikipedia.org/wiki/Securitization
Investors in mortgaged backed securities and their derivatives are not fools. They understand that risks accompay these innovative instruments and that there are inherent underlying risks. As sophisticated investors, familiar with derivatives of all flavors, they seek ways to limit their risks. Credit default swaps were created to provide them with additional security about the risks involved in investing in securitized mortgage based securities.
http://en.wikipedia.org/wiki/Credit_default_swap
Credit default swaps and mortgage-backed securities are evaluated by credit rating agencies. The growing complexity of financial instruments greatly increased their business volume and relations with investment banks. They provided overly positive ratings historically. They were paid by the firms that created the securities. No one should be surprised by the results.
http://en.wikipedia.org/wiki/Credit_rating_agency
Investment bankers have played a key role in the growth of the securitized mortgage industry. They collect fees as advisors in the creation of products and as advisors to mortgage brokers, mortgage lenders, guarantors, consolidators and investors.In their banking role, they have invested directly in these securities, provided funds for others to invest and developed derivatives to allow bets against the securities. Investment bankers have supported both political parties.
The securitization of mortgages has allowed a wide variety of individuals and firms to invest in these assets, including banks and investment banks as part of their overall portfolios.
Regulators have tried to keep pace with these innovations, but failed.
Auditors have invested their resources complying with the details of the Sarbanes-Oxley legislation, but missed the change in risks in this complex system.
The mortgage world has become very complex in the last 30 years. The proponents of “financial reform” in both parties need to closely review the reality of a 14 actor system. There is a trade-off between the benefits of financial innovation and the regulatory costs of financial complexity. We have clearly crossed the line where the costs of complexity (regulatory and risk) have exceeded the benefits of innovations (funding and reduced risks).
As the Great Recession moves along into its third calendar year, the focus in Washington is on “Financial Reform”. The backlash at Democrats and Republicans alike over the “bank bailout” continues to grow. The politicians are posturing to allocate credit for the so-called reforms, but seem destined to “give the people what they want”. It might help the politicians and the people if there was a shared understanding of the inherent factors universally at play in the home lending market.
I propose that everyone take an evening off and watch the classic 1946 film “It’s a Wonderful Life”, starring James Stewart as George Bailey, the initially reluctant but eventually heroic, manager of the Bailey Building & Loan Association in Bedford Falls.
http://en.wikipedia.org/wiki/It’s_a_Wonderful_Life
The essentials of banking are exhibited in this film. Bedford Falls is the whole universe. All of the actors know one another. The cast is composed of depositors, owners, board members, bankers, borrowers, regulators and landlords.
There are inherent conflicts between the roles. Depositors don’t really trust the bank as shown by the bank run. Landlords would like to see lending restricted to boost rents. The owners are motivated by self-interest (enlightened or not) and set policy accordingly. The board seeks a trustworthy banker to be its agent, and provides incentives to attract and retain him. The banker has fiduciary and personal motives. The regulators enforce the laws, unaware of all key facts. The borrowers want loans, even if they can not afford them, in order to escape the costs of the landlords. People act out of self-interest. They respond to incentives. There are trade-offs to be evaluated and decisions to be made.
A bank fills a valuable social role, attracting deposits in order to lend money. A bank profits by the spread. A bank is in business to lend money whenever it sees a profitable opportunity, irrespective of the moral concerns of owners, depositors or borrowers. Banking is subject to real risks such as bank runs. Banks are subject to poor decisions by bankers, mistakes by employees and fraud by anyone involved in any transaction.
Historically, banks have operated by the 4 C’s of credit: capacity/cash flow, capital/collateral, conditions and character. This is especially effective in a small town such as Bedford Falls. Although George and the audience might hope that every citizen should qualify for a loan, some may not have the earnings to cover the principle, interest, insurance and maintenance of a home. Some may not be able to save for a down payment to create adequate collateral. As business conditions change, the income of the citizens is at risk and the ability of the bank to manage its affairs fluctuates. A banker with a long-term perspective and proper incentives adjusts lending accordingly. Finally, character counts. Past financial and personal performance are good predictors of future performance. Character is part objective and part subjective.
Even in this simplified setting, risks abound. Public pressure for universal home ownership can result in too many loans. Regulators can enforce laws mechanically while missing larger problems. Institutional knowledge can be lost through staff turnover. A single fraudulent act can threaten a bank. Changing external business conditions can disrupt the bank. Lending policies can be too loose or too tight. Business judgments can be wrong.
The film delivers an escapist, idealist, overly simplistic view of life. Mr. Potter is the evil bank owner and plotting, fraudulent landlord. George Bailey is the selfless hero. Yet, behind the scenes, we have a social institution performing a social function. We need banks to provide the social function of collecting deposits, allocating credit and collecting from borrowers. In spite of the vastly more complex institutional structures today, the role of a “building & loan association” is essentially the same. As a society, we allow these institutions to connect savers and borrowers across varied time frames because this is a necessary function. Our laws and regulations should be based on this real-world understanding, not upon the simplistic dualism of “good and evil”.
The U.S. labor market remains mired in a post WWII land of large employer paternalism that is unsuited to the needs of global competition. Major changes to labor laws should be made to lower the full costs of hiring employees. At the same time, major changes to unemployment insurance should be made to provide a meaningful safety net, without reducing the incentives for the unemployed to actively seek re-employment, even at lower wages when needed.
In return for a variety of actions to reduce the unit cost of labor by more than 20%, employers should be required to fund one-half of an unemployment insurance fund that provides meaningful benefits. Employees would fund the other half through payroll deductions. Unemployed workers would receive an initial payment of one-half of six months’ worth of wages. Additional 50% payments would be made at the beginning of third and fourth quarters of unemployment. This lump-sum approach maintains the incentive to actively seek new employment, while providing a true safety net in a world where 6 month bouts of unemployment are recurring career experiences at all levels.
The federal government could lower the transaction costs of employment by maintaining a national ID card system that qualifies individuals for employment and removes the hiring cost and risk to employers. The federal government could certify 3-5 firms to operate a standardized resume/profile system that records and certifies the basic education and employment history for individuals in one place.
Employees would be more attractive to employers if they invested more in their professional skills. A continuing education tax credit would improve candidate skills and remove the need for employers to offer most internal training and educational benefits.
Employers would hire more individuals if the terms of employment were more flexible. Labor laws could more clearly allow “paid time off” banks to be used in place of overtime compensation. The trigger for required overtime premiums could be raised from 40 to 48 hours for the first 10 weeks of annual overtime. Seasonal positions could be exempted from employer unemployment compensation responsibility. A new employment category could be created to clearly allow 100% incentive based sales positions. The IRS rules defining employees and contractors could be simplified to reduce administrative costs and risks.
Federal labor laws and regulations could be simplified to reduce administrative costs and limits could be placed on potential liabilities. The equal employment opportunity, family medical leave, disability and other employee “rights” acts incentivize employers to take extreme defensive steps and avoid hiring in order to avoid potential liabilities.
The federal government could incentivize the creation of new positions directly by paying half of the first six-months of wages. The rules for unpaid internships could be clarified, allowing students to work up to 700 hours per year within win-win educational programs which lead to employment. The labor laws could be clarified to allow “no fault” dismissals within 180 days.
In a globally competitive environment, labor laws need to benefit employers and employees. Steps can be taken to reduce the total cost of employment and protect employed and unemployed workers. The cost to employers and society through taxes is modest.
In addition to macroeconomic steps to improve the economy and administrative steps to provide meaningful unemployment compensation benefits and lower employment costs and risks, the federal government could change tax policies to significantly reduce the incremental costs of employing workers.
The federal government could incentive continuing education through tax credits. Unemployment compensation insurance could be shared by employers and employees. Family medical leave benefits could be funded by the federal government as is done in other developed nations.
Tax changes could be made to incentivize individuals to invest in their own life and disability insurance plans. Tax credits could be used to promote individual charitable contributions and reduce the need for corporate gifts and matching programs. The dollar and percentage limits for tax –deferred retirement plan contributions could be raised, increasing the value of compensation. The rules for qualified plans could be modified to allow a greater share of “highly compensated” employee pay to be made on a pre-tax basis.
Finally, the two biggest fringe benefits – social security and health benefits – could be migrated to government and employee funded programs over a decade, releasing employers from this responsibility. Social security can be funded from federal income tax revenues or simply made employee deduction. Health care insurance programs could lose their tax-deductible status. If no better option is found, employer contributions to consumer choice (HAS/HRA) plans could retain their tax-deductible status.
Allowing American employers to focus on creating jobs, operating their firms and making money will unleash incentives to increase productivity, competitiveness and our standard of living. Finding the political will to fund desired public services will not be easy, but the total benefits justify the short-term challenges.
http://www.latimes.com/news/nationworld/nation/la-na-obama-drilling31-2010mar31,0,4617559.story
Creating a “jobs boom” is within the power of the government if the legislators and president are ready to create confidence in the government and economy, incentivize job creation and business investments, make a long-term commitment to transportation/energy and stimulate the government and not-for-profit sector.
Confidence in the Future.
1 Start the process to set a constitution maximum marginal tax rate at 50% of income.
2. Start the process to set a constitutional maximum spending limit for all government budgets at 30% of GDP.
3. Drastically simplify the federal tax for incomes below $200,000, maintaining the current level of progresseness and number of tiers.
4. Eliminate the corporate income tax, replacing lost revenues with personal income tax rate increases at higher incomes.
5. Complete a health care cost reduction bill, based upon cross-state insurance competition and limits on lawsuits.
Direct Job Incentives.
6. Move the full benefits social security retirement and medicare age up 2 years for 2010-2011.
7. Allow direct tax expensing of all capital investments for 2010-2012.
8. Provide firms with 50% tax credits for hiring college graduates in minimum wage, full-time internships.
9. Provide a $10,000 tax credit to firms for hiring engineers and IT professionals in project positions.
10. Sign the country to country free trade agreements that are ready.
Investment Incentives
11. Increase the life of patents and trademarks by 5 years.
12. Allow direct tax expensing of all capital investments for 2010-2012.
13. Cancel 25% of federal regulations within 90 days and 50% within 6 months.
14. Improve the value of tax loss carryforward benefits from business losses.
15. Fund the property acquisition in 10 cities to stimulate blighted area development.
Long-term Transportation/Energy Direction
16. Make a 3 year commitment to continue the stimulus level of funding.
17. Loosen the energy regulations for offshore drilling and nuclear power.
18. Select one national highway project, such as I-69, and commit to 7 year completion.
19. Make a 10 year finding commitment to the high-speed rail network.
20. Create a carbon tax scheme for the next 2 decades with a 10% per year transition to full effectiveness.
Government and Not-for-Profit Effectiveness
21. Loan states the money to start independent board governed rainy day funds.
22. Privatize Fannie Mae and Freddie Mac quickly.
23. Privatize large state and federal agencies: post office, licenses, air traffic control, and community colleges.
24. Allow first $10,000 of charitable donations as 50% tax credits.
25. Tighten inheritance tax limits, but allow doubled charitable deductions.
Any ten of these easily understood policy changes would jump start the economy, benefiting everyone.
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