Book Review – “Dismantling America” by Thomas Sowell

I recently read Thomas Sowell’s “Dismantling America.”  This is the first book I’ve read by him, but I do read his columns as I’m able.  The book is a collection of some of Sowell’s syndicated columns during (mostly) the early years of the Obama presidency.  Each column is about three pages, which is nice because I can think of a column as a chapter and I like short chapters.  Note there were some multi-columns series, which made for a good change of pace, as well.

It’s a tough book to review because what you think of the book depends almost entirely on what you think of his columns.  If you like his columns, you’ll like the book.  If you hate his columns, you’ll hate the book.  It’s really that simple. 

Personally, I like his content and style.  I don’t always agree with the content and I do spot logical flaws from time to time, but on the whole, I think Sowell is one of the best mainstream, right-leaning columnists out there. 

The book explores economic, social, cultural, historical, and legal matters.  It also explores politics from both tactical and strategic perspectives, as well as taking a look at the reality behind the rhetoric.  There are a lot of great columns here.  The economic section is particularly strong, which makes sense given Sowell’s background as an economist. 

Beyond the “typical” right-wing line of thinking, there are some key takeaways.  Whether I/you agree/disagree with them is out of scope here.  I’m just highlighting them.

1.     There is no free lunch.  Said another way, the transfer of cost from one party to another is not the same as the elimination of cost.  Transferring cost from party A to party B does eliminate it from A’s expenses, but it does not eliminate it from the overall system.

2.    America has the best medical care system in the world.  This is not to be confused with healthcare.  Medical care starts upon arrival at the doctor/hospital, but healthcare includes lifestyle considerations.  Thus, the medical care system has very limited control over our overall healthcare.   

3.    There is a difference between attempting to “level the playing field” and equalize results. 

4.    The notion of “fairness” sounds easy and concrete at first glance, but it entails far more than meets the eye.

I think this book would be a better read for left-leaning people, to be honest.  It’s a relatively quick read that forces them to actually sit down and take in the arguments of the right versus ignoring and/or reflexively denying them based on source.  Similarly, people of a more neutral political orientation would benefit by reading this book because they would see the right-wing argument presented by a right-winger.  Right-leaning folks would gain out of it, as well, even if only to sharpen their positions.  I don’t know of an equivalent book by a left-leaning columnist on Sowell’s level, but if I did, I’d pick it up.

Note that this doesn’t automatically mean that someone on the left/right is always correct/wrong on an issue because sometimes both can be correct and sometimes both can be wrong, so don’t fall into that logical trap. 

So, the bottom line is it’s a worthwhile read. 

The Consumer Financial Protection Bureau Part 1 – A Flawed Structure

The fight over the Consumer Financial Protection Bureau (CFPB) has dragged on since it was first created in the Dodd-Frank Act (HR 4173 – full text here).  The GOP has been successful thus far in preventing this agency from getting off the ground, including blocking the nomination of Elizabeth Warren and Richard Cordray to lead the CFPB.  That is, until Barack Obama illegally appointed Cordray this year with a recess appointment.  He also did three illegal appointments to the National Labor Relations Board (NLRB) through the same process (the NLRB is a whole other topic).  I’ll make this a two-parter, with this post looking at the CFPB’s structure and the second post looking at the (il)legalities of Obama’s appointments.

The Democrats have been complaining about GOP obstructionism and creating the perception that the GOP just wants to stick it to Obama.  They’re trying to make the GOP look like they don’t care about protecting consumers and the GOP is just trying to protect “Wall Street”.  In essence, they’ve made the GOP appear as though they oppose any CFPB structure rather than the current CFPB structure.  The Democrats, to this point, appear largely unwilling to discuss structural issues with the CFPB.  They don’t even appear to care why the GOP is opposing it.

The GOP contends there are significant structural flaws in the CFPB that render it largely unaccountable to the American people that must be addressed first.  Such structural issues include the fact that the organization would be lead by a single director for a five-year term and the fact that the CFPB would get its funding from the Federal Reserve Board rather than congressional appropriations.  Remember, many agencies are led by multi-member boards of directors and are funded through the congressional appropriations process, both of which provide vital checks and balances to reduce abuses. 

I think the GOP makes some very valid points, but the Democrats are winning the public relations battle.  The GOP has done a terrible job of articulating their reasons for opposing the CFPB’s structure and have allowed the Democrats to control the discussion.  That’s a problem because the valid points the GOP is raising are being lost.  Let’s leave aside the issue of whether a CFPB is necessary (it probably is in some form because people do not have the financial savvy and responsibility/accountability that they should have, but this is a whole other topic) and examine the structure of the current CFPB. 

The current structure of the CFPB basically means that one person would be able to make sweeping decisions effecting the lives of millions of Americans and thousands of businesses with zero accountability, as the legislative branch would have no real oversight and even the executive branch would have very limited oversight.  The single-director structure is the most troubling part.  I can understand the need to have the CFPB insulated from political considerations to a degree, like the Supreme Court and Federal Reserve are.  However, the Supreme Court and Federal Reserve (and even the aforementioned NLRB) are made up of multiple members with appointments by the White House and confirmations by the Senate.  Creating such a powerful organization headed by only one person is an unacceptable concentration of government power.  It needs to be run by a board of at least five members like we see elsewhere in the executive branch.  Even Elizabeth Warren’s original idea for the CFPB revolved around a five-person board. 

Addressing this now is just prudent governance.  It’s much easier to address problems with a bill before it’s fully implemented than after.  I know it’s not the government’s typical mode of operation to try to address problems proactively.  I know they prefer to do so reactively (usually only after what was a minor issue turned into a major or even catastrophic problem due to inaction or, even worse, government policies that exacerbate the condition).  Besides, it’s not as though legislation is a one-and-done kind of deal.  We do have the ability to pass bills that amend or repeal other bills that were previously passed – like we just did with the two-month payroll tax cut extension. 

The bottom line is the CFPB has vital structural flaws that must be addressed first.  It never should have been structured with a single director and we have the opportunity now to change it to a multi-member board.  These issues were present in the original law and should have been dealt with then, but they were not.  They must be dealt with now before someone is appointed to lead the bureau.  Obama and the Democrats are putting politics above prudent governance by being unwilling to address these issues.

Links:

Full text of Dodd-Frank Wall Street Reform and Consumer Protection Act

http://thomas.loc.gov/cgi-bin/query/z?c111:h4173:

The Financial Crisis Blame Game

Personally, I’ve grown weary of the blame game for the causes of the US financial crisis of 2008.  Some place the blame entirely on the private sector.  Others place the blame entirely on the government.  The pattern I’ve noticed is that one’s political orientation tends to determine who blames whom.  In other words, if you’re left-leaning or Democrat, you’re more likely to blame the private sector and if you’re right-leaning or Republican, you’re more likely to blame the government. 

The blame game is ridiculous and it misses the whole point because the debate is inherently flawed.  It’s not an either/or proposition because both the public and private sectors deserve blame (if I had to make the choice between the two, I’d blame the government more than the private sector, but I don’t have to).  So, both sides are actually right, however they still don’t tell the complete story.  Consider your mind blown. 

I’m not denying the private sector had major responsibility here.  We know they relaxed their 3C’s of credit (collateral, character, and capacity) and thereby relaxed their historically-effective lending standards.  We know they overleveraged.  We know they bundled derivatives and other creative products that were dysfunctional from the start, be it due to the actual design of the product or its constituents.  We know the ratings agencies were asleep at the wheel and managers failed to do their own due diligence.  I’ve written about all of this before, so I’m not going into much more detail here. 

I want to take some time to look at the government’s role in the crisis because, in order for the private sector to do what it did, it had to be allowed, maybe even encouraged, to do so by the government.  At a minimum, the private sector needed the government to look the other way, and at worst, it needed the government to actively encourage and facilitate such activity.  Note that these topics could easily be whole posts in and of themselves.

The natural counter is that the private sector bought the government.  Even if true, it doesn’t change the fact that it’s the government’s collective job (as legislators, regulators, judges, etc.) is to be the ‘adult in the room’ and remain vigilant against danger.  The government is not supposed to be an enabler, facilitator, and/or cheerleader here.  It is the government’s job to look out for the well-being of the nation at large.  In this sense, the government deserves blame and failed to do its job.  We can’t absolve the government from responsibility by saying they were bought out. 

So, what did the government do to deserve its share of blame?  The repeal of Glass-Steagall is really what set this in motion because it broke down the divide between commercial and investment banks.  A commercial bank is where you and I go for a mortgage or car loan or a checking/savings account while an investment bank is where a company goes to sell bonds or stock to the market.  Glass-Steagall was passed during the Great Depression by FDR to separate commercial and investment bank activity and it was a good thing to have in place.  It’s one of the few things FDR actually did right in the New Deal, but I digress. 

There were also various other lapses in regulatory judgment.  These include the Securities Exchange Commission (SEC) allowing the big five investment banks (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns) to expand their leverage to very high levels, which I’ve discussed previously.  We’re talking 30-1 or worse in some cases.  There was also the unwillingness to regulate derivatives and various non-bank lending institutions, of course.  Additionally, there were breakdowns regarding interstate banking restrictions.

The government not only did its part to undo key regulations like Glass-Steagall and turn a blind eye on derivatives and non-bank lenders as discussed above, but the government also encouraged the reckless behavior.  It was very clear that the government wanted to see the homeowner percentage elevated from its historical norm.  Various statements and reports from Fannie Mae, Freddie Mac, Congress, and the White House (under both Clinton and Bush Jr.) show this pattern. 

Clinton wouldn’t have expanded Jimmy Carter’s Community Reinvestment Act (CRA) if the goal wasn’t to break down barriers to home ownership, for example.  We can’t fully ignore the CRA’s role in the crisis because, even though some are quick and correct to point out that the non-bank lenders were often not subject to the CRA, many of the banks that ended up with the non-bank loans were subject to the CRA.  It was at the bank’s discretion whether or not it wanted to try to treat the non-bank loans as CRA loans, thus creating an incentive for the non-CRA lenders to ensure their loans could be counted under the CRA. 

And, with that, we come to the Federal Reserve.  In the early 2000’s, the Fed cut their rates to a then-historic low of 1%.  They left them there for a while, and in hindsight, we see they left them there too long.  Alan Greenspan’s Fed also was very hands-off about regulating, figuring the self-interest of the market was enough to police itself.  The most dangerous thing the Greenspan Fed did, however, was create an expectation of bailout in the event things went bad.  Easy Al was willing to step up during several incidents, such as the Long Term Capital Management debacle and emerging market bubble of the late 1990’s or the post-tech bubble era of the early 2000’s.  This is known as the Greenspan put (simply, puts are options contracts that can be bought as a hedge against a decline in value or a play on the asset declining in value).  More recently, Big Ben Bernanke has continued this trend, as we saw in 2008 and with the recent coordinated global intervention for Europe.  It’s now known as the Bernanke put. 

Basically, the Fed’s low interest rate and easy money policies caused asset bubbles, and then the Fed used those same tools to address the aftermath of said bubbles, thereby creating a new bubble somewhere else.  Furthermore, they’ve created a culture that expects to be bailed out if things go awry.  If bad actors aren’t allowed to fail, it’s not really capitalism.  This is where ‘capitalism on the way up and socialism on the way down’ comes from because they keep the profits as they rally, but they look for a bailout from the government as we plunge. 

Again, I’m not absolving the private sector of responsibility because it definitely did its part.  All I’m saying is we can’t absolve the government, either.  Sure, we can quibble over which side was more at fault (and we probably will for years to come), but this either/or framework for discussion has done a tremendous disservice to America in terms of our ability to understand and address the crisis.  Oddly enough, the conflict also protects both the government and private sector from meaningful reform efforts.

As I said above, this doesn’t tell the entire story because it’s not just about blaming the government and private sector.  I’ll go into this in greater detail in future posts about the rest of the story, including cultural/psychological aspects that enabled the crises and a simple takedown of the common argument that because the crisis was global, it has to be mainly the private sector’s fault. 

Obama's Student and Mortgage Loan Actions

Recently, Barack Obama announced a pair of executive actions, one related to mortgage loans and one related to student loans.  Let’s take a look at these two actions separately before we look at how they’re related. 

First, the mortgage plan is an effort to help people be able to refinance and take advantage of these historically low interest rates.  That’d be a great thing for millions of homeowners if they could because they’d be able to shave hundreds off their monthly mortgage payments.  We all know how big of a problem the housing market is right now.

It’s useful to think of credit in terms of 3C – character, capacity, and collateral.  They’re measured by credit score, a debt/income ratio, and other assets like home equity, savings, etc.  Over the past few years, all three requirements have tightened up and reverted back to historic norms.  From the late 1990’s well into the 2000’s, we had a nationwide relaxation of credit standards for housing, which we’ve begun to undo over the past couple years by returning to those historic norms.  Gone are the days where no minimum credit score, proof of income, and down payment are required.  Now, just like in the days of yore, people need higher credit scores, higher documented incomes, and down payments.  This tightening of requirements back to the historic (and proven effective) norm is a big deal because the people who need mortgage modification the most are the ones with subprime loans.  They ended up with subprime loans because of a low credit score, low and/or undocumented income, and/or low/no collateral. 

But, here’s the thing.  In the program’s current form, I don’t think many will be able to take advantage.  The criteria for eligibility are far too stringent based on 3C.  Credit scores and documented income will be issues on a case by case basis, but two other requirements worry me.  The ratio of the loan amount to the value of the house, or loan-to-value (LTV) ratio, cannot exceed 125%.  It may be able to eventually, but not yet.  Such a low LTV ratio won’t do much good in the worst housing markets like California, Nevada, and Florida.  It’s simple math.  If you buy a house and its value gets cut in half, as has happened in many of the aforementioned trouble areas, the LTV is going to be 200%.  Obviously, it’ll be lower if we assume some down payment and principle reduction, but it’ll still likely be well above even the 125% level.  Lastly, and this is a big deal, the mortgage must be current, meaning no payments over 30 days past due in the past year.  This is an important characteristic because it makes it so that the taxpayers are helping people who are trying their best to stay current in their payments versus helping squatters who stopped paying a long time ago.  It’s a necessary trait, but it will diminish the program’s effectiveness because it’s a huge hurdle to clear. 

Next, we move onto Obama’s student loan action.  Starting in 2012 under the plan, borrowers will be able to reduce their monthly payment from 15% to 10% of discretionary income, debt would be forgiven after 20 years instead of the current 25 years.  It will also allow borrowers to consolidate their loans to obtain lower rates. 

We hear the numbers about how dire the student loan situation is and we’ve heard the calls that higher education is the next bubble to burst, so I’m not going to belabor that point.  We all know this is a major issue.  The debt is overwhelming and it will suffocate our economy if we allow it to.

As with the mortgage plan, the devil is in the details.  Note that we are talking about discretionary income, not total income.  Discretionary income is a subset of total income.  Discretionary income is generally defined as income left after taxes and personal necessities have been paid.  Because of this key distinction, it cannot be thought of as an instant 5% raise to borrowers.  Again, it’s simple math.  Suppose discretionary income is 20% of a person’s total income.  A reduction from 15% to 10% of discretionary income sounds like a lot, but it only translates to a 1% gain in total income.  A gain in income is a gain in income, but I don’t think it’s that big of a deal.

Shortening the duration of loans from 25 years to 20 years will have no meaningful effect, either.  Yes, college costs have been handily outpacing inflation for a couple decades, but the major increases in student debt really only began within the past 10-15 years (not coincidentally, as the costs of college have spiraled even further out of control).  A meaningful chunk of student loan debt won’t go away for another 5-10 years under this plan, versus 10-15 in the current plan.  The timelines just don’t mesh right now to make this effective.

Consolidating college loans into lower rates is also generally not going to be that effective because many college loans are at very low rates to begin with.  Because the rates are generally very low, the concept of diminishing returns becomes an issue (this would apply for the mortgage program, too, but it would be even more pronounced here because the rates are generally lower).  The rate reduction would be minimal and all that would really be gained here is the convenience of only having one bill. 

What common connections do I see between these two plans?  

First, these plans are nothing new.  The mortgage plan is a modified version of Obama’s previous mortgage plan and the student loan plan is merely an acceleration of the timetable of an existing plan from 2014 to 2012.  Along with his jobs bill, this is further evidence that Obama is simply not willing to try anything new and merely continues to tweak or expand existing ideas. 

Second, as I’ve outlined above, I question the effectiveness of both plans.  Because I do not view either program as terribly effective, I could take two lines of thought.  I could say that it’s because he can only do so much without Congress.  Given the blatant disregard for the rule of written law Obama has displayed throughout his presidency, I don’t see this as an issue.  Instead, I naturally suspect this is yet another case of Obama wanting to look like he’s doing something, but in actuality doing nothing.   It’s all about reelection and perception trumps reality.

Third, I view both of these measures as clear efforts to pander to the Occupy Wall Street (OWS) crowd because student debt and mortgage debt have been two central issues for that movement.  It’s an effort to energize Obama’s base.  Young voters (early 30’s and younger) tend to be overwhelmingly Democrat or liberal, with the 2008 election being a notable example.  I hope OWS is smart enough to see this for what it is, and many of them probably are. 

I know I’ve only pointed out the flaws with Obama’s actions here and not provided viable solutions of my own.  My solutions are out of scope for this post and I will provide them in the future.  In a nutshell, these two measures are focusing on merely the symptoms and papering over the problems versus actually addressing the root cause of both the housing and college issues, but like I said, that’s another topic for another day.  The bottom line is Obama has put forth actions to address two major problems, mortgage debt and student debt, that will prove ineffective and were only implemented to help his reelection by creating the appearance that he is trying to solve problems