Let the buyer beware

The Securities and Exchange Commission recently settled a fraud claim against the State of New Jersey.  The details are in this Bloomberg News article:

http://www.bloomberg.com/news/2010-08-18/new-jersey-settles-sec-claims-of-misleading-bond-investors-on-pension-fund.html

Here are the highlights:

New Jersey settled claims that it misled investors in $26 billion of municipal bonds by masking underfunding of its two biggest pension plans, in the first Securities and Exchange Commission case to target a state.

Documents for 79 bond offerings from 2001 to 2007 “created the false impression” that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded, hiding that the state couldn’t make contributions without raising taxes or cutting services, the SEC said in a statement today.

The suit marks the first time the SEC has sued a state for violating federal securities laws and marks an early salvo in the agency’s plan to crack down on fraudulent practices in the $2.8 trillion municipal bond market.

State and local governments all across America have substantial unfunded pension liabilities. Can bond holders now file claims against these bond issuers due to misrepresentation of their pension liabilities? If so this could be a bonanza for trial attorneys.

Tax exemptions for any cause

New York City will soon consider tax-free financing for the Ground Zero Muslim center:

http://www.reuters.com/article/idUSTRE67Q5BW20100827?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FtopNews+%28News+%2F+US+%2F+Top+News%29&utm_content=Google+Feedfetcher

The Muslim center planned near the site of the World Trade Center attack could qualify for tax-free financing, a spokesman for City Comptroller John Liu said on Friday, and Liu is willing to consider approving the public subsidy.

The mosque's backers hope to raise a total of $70 million in tax-exempt debt to build the center, according to the New York Times. Tax laws allow such funding for religiously affiliated non-profits if they can prove the facility will benefit the general public and their religious activities are funded separately.

Whether you support or oppose the building of this project the fact that it may be financed by tax exempt bonds is outrageous. This is what happens when someone else is allowed to spend your money. Just say no to government spending! (Please note that handing out tax exemptions has the same effect as increasing government spending).

Where are the Government ethics courses?

The following article "Business 'ethics' wrong focus, It's government, not the corporate world, that is inherently unethical" is written by Thomas DiLorenzo a professor of economics at Loyola College, Maryland, and a senior fellow at the Ludwig von Mises Institute:

http://articles.baltimoresun.com/2010-08-22/news/bs-ed-business-ethics-20100822_1_business-ethics-unethical-behavior-wrong-focus

Professor DiLorenzo offers a strong argument that teaching business ethics is counterproductive. What students should learn is that government is the root of all corruption, and that more government unavoidably leads to more corruption.

This is an excelent article, short but directly to the point.  I encourage you to read the entire article, but here are some of the highlights:

Under the dubious proposition that the current economic crisis was caused by a sudden outburst of greed (as though greed did not always exist), a new growth industry in America is the teaching of "business ethics" at the university level.

Business ethics courses typically combine anti-business moralizing with advocacy of more government regulation of business and, subsequently, a greater politicization of society. In doing so they actually encourage unethical behavior because it is politics, not markets, that is inherently immoral.

... when government uses its legal monopoly on coercion to confiscate one person's property and give it to another, it is engaging in what would normally be called theft. Calling this immoral act "democracy," "majority rule" or "progressive taxation" does not make it moral. Under democracy, rulers confiscate the income of productive members of society and redistribute it to various supporters in order to keep themselves in power. The government also pays itself very well out of these confiscated funds. Today the average federal bureaucrat makes about double the salary and benefits of the average private-sector worker according to the U.S. Department of Labor. State and local government bureaucrats make about one-and-a-half times their private-sector counterparts.

In order to finance a campaign, a politician must promise to steal (i.e., tax) money from those who earned it and give it to others who have no legal or moral right to it. There are (very) few exceptions, but politicians must also make promises that they know they can never keep (i.e., lie). This is why so few moral people are elected to political office. The most successful politicians are those who are the least hindered by strong moral principles. They have the least qualms about confiscating other peoples' property in order to maintain their own power, perks, and income. In his bestselling 1944 book, "The Road to Serfdom," Nobel laureate economist F.A. Hayek described this phenomenon in a chapter entitled "Why the Worst Get on Top."

In short, universities perform a disservice with their relative neglect of the real ethical problem in America — the politicization of society and the growth of government — while greatly exaggerating ethical problems in private enterprise.

The lone voice of reason

Thomas Hoenig the president of the Federal Reserve Bank of Kansas City may be the only member of the Federal Open Market Committee who is willing to honestly review the role of the Federal Reserve Bank in our recent financial crisis.

The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

The FOMC determines Federal Reserve polices that control short term interest rates.

In the following article Thomas Hoenig is quoted after the most recent FOMC meeting:


http://www.kansascity.com/2010/08/13/2149021/kc-federal-reserve-president-rips.html

Here are some of his remarks:

The Federal Reserve’s zero-interest-rate policy amounts to a “dangerous gamble” that may be holding back the recovery and risking a repeat of the financial crisis that put us here, the president of the Federal Reserve Bank of Kansas City said Friday.

Hoenig said low interest rates and lax regulation during a deflation scare in 2003 helped bring about the debt-driven boom and subsequent financial collapse. And the Fed is risking a future crisis.

“If we again leave rates too low too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring,” Hoenig said.

 I agree with Thomas Hoenig. The Federal Reserve held interest rates too low for too long causing an orgy of excess speculation. The current zero interest rate policies of the Federal Reserve will cause the same phenomenon to occur at some point in the future.

A deadly virus

The following editorial is from the 8/19/10 edition of the Washington Times:

http://www.washingtontimes.com/news/2010/aug/19/we-cant-afford-this-government/

The title “We can't afford this government” and subtitle “Costs of bureaucracy spread like a deadly virus” are strongly worded but are directly to the point.

Consider these 2 facts referenced in the editorial:

…Congressional Budget Office estimate that this year's federal deficit will be well above $1.3 trillion for a second straight year and remain above $1 trillion next year as well - causing as much debt in three years as government built up in the previous 219.

…the announcement by Americans for Tax Reform (ATR) that yesterday (8/19/10) was the 2010 "Cost of Government Day," which is "the day on which the average American has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government at the federal, state and local levels." Just two years ago, Cost of Government Day fell an astonishing 34 days earlier. This year, the average American worked 231 days just to support government, which consumes 63.41 percent of national income.

Our obsession with debt

I have often wondered why the United States Government encourages debt and consumption rather than savings and investment. The following article by Robert P. Murphy of the Mises Institute explores the basis of this paradox:

http://mises.org/daily/4631

The following 2 quotations that are referenced in the above article drive home Robert Murphy’s point:

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Federal Reserve got the money to purchase two billion dollars worth of government bonds in 1933. This is the exchange that followed.


ECCLES: We created it.

PATMAN: Out of what?

ECCLES: Out of the right to issue credit money.

PATMAN: And there is nothing behind it, is there, except our government's credit?

ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

Robert Hemphill, Credit Manager of the Federal Reserve Bank in Atlanta, wrote in 1936, "If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible — but there it is."

Sunlight is the best disinfectant

The Sunshine Review is a new project intended to provide a clearing house of information on state and local government spending. This is the link to the website:

http://sunshinereview.org/index.php/Main_Page

The level of detailed information that is available is surprising. This website gives you the ability to see how your hard earned money is spent.

Uncle Sam wants you

The Cato Institute’s newest project “Downsizing the Federal Government” has a website that is a treasure trove of useful information. Here is the latest post:

http://www.downsizinggovernment.org/federal-employees-continue-prosper

If you do not think that government spending is out of touch with reality you need to review this chart:

Clearly the Federal Employees have commandeered the levers of spending. This is one of the reasons that the Federal Government continues to grow larger as the rest of the real economy flounders.

Downsizing the Federal Government

The Federal Government is consuming a larger share of gross domestic product each year. Those who wish to study Federal spending may find it difficult to adequately research this subject. Thankfully the Cato Institute has codified the statistics and provided a website with a plan to downsize the Federal Government.

http://www.downsizinggovernment.org/

Cato describes the purpose of this website as follows:

The federal government is running massive budget deficits, spending too much, and heading toward a financial crisis. Without a change of direction in Washington, average working families will be faced with huge tax increases and a lower standard of living.

Some people have lofty visions about how government spending can help society. But the essays on this website put aside such “bedtime stories” about how government programs are supposed to work, and instead focuses on how they actually work in the real world.

Downsizing the Federal Government is a project of the Cato Institute. Scholars at Cato believe that cutting the federal budget would enlarge personal freedom, increase growth and prosperity, and leave a positive fiscal legacy to the next generation.