Achieve or Receive?

I heard a guy on television this morning say that Americans needed to decide whether they wanted to achieve or to receive.  He was talking about politics and the upcoming election, but I think it goes for us as individuals as well. 

One of my favorite lines from the movie Citizen Kane is "It's no trick to make a lot of money if all you want to do is make a lot of money."  Nearly anyone of average intelligence who is willing to sacrifice everything else can do it.  But that doesn't usually them happy, and it sure doesn't make them successful in my book

The most successful people I know don't seem to be motivated that much by money.  They have plenty of it, but most of them acquired their money as a result of achieving some important goal.  The goal is what motivated them, not the money.  One person sets out to make a great tasting food product.  When he succeeds, lots of people buy it and he makes a lot of money.   Another wants to figure out which companies will succeed and which ones won't.  When he figures it out, lots of people want him to invest their money and he makes a ton of commissions.  A third wants to write great stories.  When he does, lots of people buy his books and he makes a fortune in royalties.

These people, and many more who didn't make nearly as much money, are successful because they set out to achieve something and did it without sacrifing their families, their fun or their integrity.

The "Buffet Rule"

The latest tax proposal coming out of the White House is being called the Buffett Rule, based on Warren Buffett's statement that his tax rate was lower than his secretary's.  The proposal is to effectively add a second Alternative Minimum Tax rate of 30% on income in excess of $1 million. 

In reality, the only reason someone making a million dollars would be paying less than 30% is because most of the income consists of dividends and capital gains, i.e. investment income.  The main rationale for taxing investment income at lower rates is to encourage investment in our economy.  This means that the real message of the Buffet Rule is "We will give you an incentive to invest in America and help us grow out of the current downturn unless, of course, you have a lot of income to actually invest."

Check Your Credit Report, Especially if You've Been to the Doctor

In the last week I've shocked two different people by telling them what is in their credit report.  In both cases, they had several medical bills that had been sent for collection.  Both of them told me that they didn't have any outstanding medical bills and that their insurance had paid for everything.  Maybe so, but I'm sitting there looking at their credit histories that have been devastated. 

Maybe they really paid everything owed and the doctor's billing is in error.  Maybe they paid their part and the insurance fouled up and didn't pay everything it was supposed to.  Maybe they thought insurance was going to pay more than it did and they really do owe the money.  When they are at the point of applying for a loan, though, it doesn't matter.  Whatever the reason, if it's on the credit report they aren't getting the loan.

Medical bills are the most common errors I see on credit reports, but certainly not the only ones.  Check your credit report BEFORE you want a loan.  If there is an error it will probably take you 30 days or more to get it cleared up.  The website www.annualcreditreport.com will give you a free credit report from each of the 3 reporting agencies once a year.  (This is not the site you see advertised on TV that makes you sign up for a program with a monthly fee to give you your "free" credit score.)  This site will sell you your score, but you really don't need it.  Keep answering "no" when it wants to sell you something in in a few clicks you will see your actual credit history.  They even have instructions about how to correct any errors.

Foreclosures Are The Answer, Not The Problem

At least weekly I read about the latest attempts to stop foreclosures.  Every one of these plans is well-intentioned but every one harms the economy.  The biggest housing problem in our economy is underwater homeowners, not those being foreclosed.  Estimates say that over 28% of homeowners owe more on their mortgage than their house is worth.  Diana Olick has an article on the CNBC website that uses the term "effectively underwater."  In order to sell a home, pay a 6% realtor commission, and have a 20% downpayment on a new home, your house has to be worth nearly 30% more than you owe.  Her article says fewer than half of all homeowners have this much equity.

That means that over half of all homeowners are stuck in their current homes.  They can't sell it and buy a bigger house when the new baby comes.  They can't move to take advantage of that great job opportunity in Dallas.  This kind of mobility is what normally fuels the housing market.

The largest factor holding home prices down in many areas is the overhang of foreclosures constantly dribbling onto the market.  Prices will not start rising again until these homes have sold at a market-clearing prices, many probably to investors who will rent them out.  This can't happen as long as lawsuits and federal programs keep delaying the process.  As painful as it is, more and faster foreclosures is the only way out of this mess.

A Jobs Program That Works

I hear all about this candidate's Jobs Program and that party's Jobs Program, and I think they are all full of crap.  The best thing our government could do to encourage job growth is to prove to business owners that they are not on dope and have some kind of handle on the federal budget. 

I talk to business owners every day and most of them are doing OK.  Not great, but OK.  Most of them are convinced that the government is out of control, though, and that they are the ones who will be targeted to fund the runaway spending.  In that environment, who in their right mind would invest in new facilities, new equipment or new employees?

A long-term plan to bring federal spending under control would do wonders for both consumer and business confidence.  Even tax reform that cost them money in the form of lost loopholes and deductions wouldn't deter them if the new structure made sense and if there was some confidence that it was relatively permanent and could be used to forecast future tax consequences of different investments in people and equipment.

So, my advice to the Super Committee, with apologies to Nike's ad agency, is this:  Just Do It!  Come up with a plan that puts us on the path to long-term sustainability and don't worry about the short-term consequences. 

Ralph Nader and the Stock Market

I can usually get quick laugh from anything Ralph Nader says, but this time he's talking about an idea I've thought about more than once.  The idea is to impose a small tax on securities transactions.  For example, if I buy 1,000 shares of Renasant Bank stock at $15, a .01% tax would cost me $1.50 - not even noticeable on a $15,000 transaction. 

Where this would really come into play would be with trading computers that initiate millions of transactions a day.  These transactions take advantage of tiny anomalies in the market and are often opened and closed in less than a second, with the profit locked in before the transaction starts.  I'm also convinced that these trading programs are the reason our markets regularly gyrate more than 1% a day.  Remember when a 100 point move was big?

Reducing the number of computer-driven trades and the day-to-day volatility of the stock market would be a blessing for us small investors.  Still, I can't get comfortable with taxing these transactions.  Liquidity is the lifeblood of our market, and one thing I don't have to worry about when billions of shares a day are trading is whether or not I can find a buyer if I want to get out of a stock. 

I disagree with Nader as usual, but I'm not laughing at him this time.

Greek Philosophy

A few years ago when I heard the word "Greece" I thought about ancient philosophers and beautiful islands.  My, how things change.  The Greeks of today are in real trouble and none of them seem to understand it.  France for some reason is leaning toward bailing out Greece rather than French banks that will lose if Greece defaults, and Germany for some even stranger reason is going along.  The only problem is that the Greeks themselves don't understand they need bailing out. 

Bailing out the banks that own Greek debt rather than Greece might be more expensive for the EU, but unless the Greeks go along with the proposed economic reforms it's probably the best action.  Letting them fall would be devestating, but no amount of austerity will work over the long run without the support of the population.  Maybe the upcoming referendum is a good thing.

Occupy Wall Street

I can't help feeling a little sorry for the Occupy Wall Street crowd.  These misguided kids have spent a fortune on their educations and have absolutely no marketable skills.  They know nothing of how the world works, how money is made, or whom to blame for their lack of knowledge. 

At least they're getting a little education at their camp-ins.  Seems like the protestors are upset that the homeless are camping with them and eating their food without contributing anything to the movement.  They are learning quickly about earners, takers, and productivity. 

One question, though - why would anyone with $30,000 in debt and no job have a $500 North Face tent, a $3,000 MacBook and an iPhone with a $100/mo data plan?

Student Loans

The President announced today that he would start a new program under which the government would buy private student loans and reduce the interest rates and payment amounts.  Even more interesting, he said he was going to change the PPACA (the Obamacare law) to make its student loan provisions effective in 2012 rather than 2014. 

Whether one agrees with these policies or not, my question is "Can he do that?"  Can the President obligate the U.S. Treasury to buy loans without an appropriation from Congress?  Can he unilaterally decide that the effective dates passed into a law can be changed?  This seems to clearly contradict the Constitution's separation of powers.  What am I missing here?

Flat tax

The idea of a flat tax is appealing.  Putting it into practice is much tougher.  Every change involved will have unintended consequences that must be addressed.  First, if you start taxing at the first dollar of income most low income families will see huge tax increases.  If not, how much income do you exclude?  Making the exclusion a significant amount raises the flat rate to 15-20%, again, higher than most people's rate now. 

What about deductions?  Taxing charitable contribution deductions harms charities, not taxpayers.  Taxing mortgage interest drives down the value of houses even farther.  Taxing retirement contributions decreases savings and increases dependence on Social Security.  Taxing municipal interest increases costs for roads, bridges, sewers, and so on. 

Like I said, I like the idea of a flat tax but I just don't think we can get there from where we are without major economic disruptions.  The best we can hope for is to get rid of the deductions and subsidies that make the least sense, flatten rates by as much as we can, and take another bite at the apple in a few years. 

What a Country

The federal poverty level for a single person is a little over $11,000 in income.  For a couple with three kids it’s $26,000 and change.  Let’s face it, that’s not much money.  But the interesting thing is that our “poverty” level would put a person in the top 30% of income in the world.  Next time I start griping about our government, our economy or our nation, someone please tell me to shut up.  How great is a country that can create so much wealth that our poor have among the highest living standards in the world?  Poor people in the U.S. have it tough, and those of us who are able have a duty to help them, but I think back to mission trips on which I saw hungry kids living in huts with dirt floors and I am very thankful that the things I complain about are the only things I have to complain about.

We need a new name for banks.

Goldman Sachs lost a billion dollars last quarter, and all the talking heads on television are yakking about what this means for the “banks.”  But Goldman Sachs doesn’t do branches with friendly tellers, ATMs on the corner, loan officers in the glass-fronted office, or anything else that most people associate with banks.  They are an investment bank.  Bank of America and Citigroup do have very large commercial banking operations, but their earnings are buffeted back and forth by their investment banking gains and losses.  BofA released earnings today that had a $9.8 billion gain on one thing and a $2.2 billion loss on something else, neither of which had anything to do with loans and deposits. 

Since retail banks claimed the name first, I think we should make investment banks call themselves something else.  If they’re going to operate like hedge funds let’s give them a name that CNBC anchors and the public can distinguish from your local bank where everybody knows your name.   "Trading Banks" is too long and, besides, it's still confusing.  How about “Tranks”?

Political Partisanship

I have concluded that all of our current political problems can be traced to the development of better computers.  I know that sounds stupid, but stay with me on this:  As computers and software get more and more powerful it is easier and easier to gerrymander congressional districts that are "safe" for one ideological viewpoint.  With the census recording everything from my race to the color of my dog's eyes, that data can be used to draw districts with inclusions and exclusions down to the street level.

Over time, more and more districts are skewed to concentrate voters who don't agree with the party doing the redistricting.  The party in power cedes the concentrated district but gains a stranglehold on the rest.  As a result, all of the districts become concentrated in one direction or the other.  Legislators from liberal districts have to be extreme to make sure their base gets out to vote, and have no incentive to compromise with conservatives because there are not enough conservatives in their districts to vote them out.  Legislators in concentrated conservative districts are also bound to be more extreme in the other direction.  Naturally, our politics become more divisive as computers crunching the census data get better and better.

The solution is two parts:  First, the census should count the number of residents as the Constitution requires.  That's it.  Nothing else.  No one needs to know my sex, race, religion, or ethnicity to determine how many people my Congressman should represent.  Second, those computers should be programmed to draw districts as compact as possible.  In addition to making voting easier, that would mix races, ethnicities, and ideological views within districts.  No legislator could take far left or far right stands without angering a significant number of people whose vote he needs next November.

The Solyndra problem

The collapse of Solyndra illustrates every reason I've ever heard for not allowing the government pick winners and losers.  First, it turns out some of the Solyndra investors have connections to the Obama administration.  Next, it now surfaces that Solyndra was using political connections in an attempt to garner big Navy contracts.  Third, many people warned the DOE that Solyndra was heading in the tank, but the politics outweighed economic logic.  Finally, once it was obvious that Solyndra was going down, some law that evidently no one sponsored and no one voted for magically came into existence and moved private investors ahead of taxpayers in a bankruptcy liquidation.

I didn't know until I read a WSJ article today, though, that the "green energy" loan program that Obama used to fund Solyndra was a Republican idea enacted in 2005 - at the height of the Republican spending binge.  Corruption and stupidity are bi-partisan in Washington, even if nothing else is...

Income Disparity

I have heard many people try to explain the reasons for the increasing gap between the wealthiest and the average in the U.S.  It seems that every one of them had some explanation that fit their pre-conceived politcal ideology and none were very convincing.  Today I finally heard two numbers that instantly crystallized the answer in my head.

We already know globalization is the ultimate cause, but the guy on Bloomberg I heard today said that 25 years ago there were about 500 million people participating in the global economy, most of them in the U.S. and northern Europe.  Today that number is 2.5 billion.  I started thinking about that and came up with the answer:  Globalization can allow few producers to reach many consumers or many producers to reach few consumers.  Mark Zuckerberg, the guy behind Facebook, can reach over a billion customers through the internet, with virtually no competition.  No one else can do what they do.  A t-shirt factory, on the other hand, can only produce enough t-shirts to reach a few thousand consumers a year, and there are billions of people who can do that work.  Who is going to make more money?

The guy being interviewed used the phrase "scalable ideas."  When an entrepenuer comes up with an idea that can be scaled up to serve consumers all over the planet with little or no additional fixed costs, the leverage is enormous.  As the pool of global consumers expands, the value of this leverage is going to continue to increase, and that disparity is going to keep widening.

What's with the Cardinals?

I'm not a rabid baseball fan, but I watch some games and usually follow the standings until the Cards are out of contention.  This year I gave up on them and looked up a month later and they're the wildcard.  Then they win the division series.  Now they're up 2-1 in the NLCS after winning a nail-biter 4-3 tonight.  Last time they won the Series they were a wildcard.  Could it happen again? 

Government Backed Mortgages

Read an interesting statistic today.  Before the mortgage market, and subsequently the real estate market, collapsed in 2008, over half the mortgages in the U.S. were "subprime", defined by me as low credit scores, low or no downpayment, not enough income to service the debt, etc.  My first thought is to blame the underwriters who approved these loans. 

The other stat I read was that of the loans above, over 70% were guaranteed directly or indirectly by the federal government.  If you were a mortgage broker in 2007 and had some control over the underwriting process, why wouldn't you send in every crappy loan you could get your hands on?  Yeah, there is plenty of blame to go around in that mess but the incentives were completely nuts.  If the government subsidizes bad loans you get more bad loans.

Note:  This stuff happened legally in most cases, but some mortgage originators and borrowers flat-out lied on applications.  I have no sympathy for anyone involved in fraud.  Some have gone to jail and I hope more follow.

Nobel Prize in Economics

I was reading today about the guys who won the Nobel Prize in Economics.  One made his chops with "rational expectation" theory.  The theory says that people's behavior is governed by what they expect to happen in the future, not what is happening now.  If someone expects to have a good job in the future, they spend now even if they don't make much money now.  If they aren't sure of their future income, they don't spend even if they have the money now. 

That explains a lot about the last couple of years.  No matter how much money the government throws at the economy nothing is going to get better until folks have confidence in the future.  Could it be that "austerity" could actually boost the economy more than stimulus spending?