At least the attorneys are busy

Once again Illinois provides a view into government's use of your hard earned money.  The 4/30/12 issue of the Chicago Tribune contains the following article:

Summer youth job money misspent on community organizing, golf course work

 Everyone's favorite Governor Rod Blagojevich was unable to convince the state legislature to fund a public works project that included a youth job program.  So Blagojevich created the program using the Illinois Department of Transportation (IDOT) budget.  IDOT receives the majority of its funding from the gasoline tax. This gas tax money is set aside into a trust fund that is to be used for transportation projects only.  The summer youth jobs program clearly does not qualify for IDOT funding.  To make matters worse the $7.8 million that was diverted from IDOT was not put to any productive purpose.  The following are some of the details from the above news article:

 The Office of the Executive Inspector General review concluded the $7 million program in which Blagojevich promised to hire up to 10,000 youths for eight-week jobs ended up costing $7.8 million and resulted in only 3,500 youths getting jobs.

The report said transportation officials conducted an audit of the jobs program and findings were referred to Attorney General Lisa Madigan. In December 2010, Madigan’s office “responded to the referral stating that the matter as the subject of an active federal investigation” and would not take action, the report said.

The report said five Chicago nonprofit social service agencies that deal with minority, ethnic and disadvantaged youths administered the program for more than 100 service providers, including neighborhood churches.
Though transportation officials had questioned making a second round of payments because of “red flags” about the jobs workers had performed, one unidentified agency official said “there was considerable pressure from… (Blagojevich’s office) to just keep this program going,” the report said.
An unidentified top transportation official interviewed by the state executive inspector general’s office was quoted as calling the program “a disaster” and “thrown together at the last minute.”

It appears that this has indeed become a jobs program.  Of course the jobs are held by government inspectors and attorneys.

Of taxes and feathers

Now that you have had a few days to recover from the noble duty of paying your taxes, please contemplate the poetic motto of a famous tax collector.

Jean-Baptiste Colbert

Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV

"The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing"

The futility of banking regulation

A very enlightening article was published in the 4/16/12 issue of Barron's.  The title of the article is "The Big Flaws in Dodd-Frank" and it is written by Gene Epstein .  This article is an interview with Charles Calomiris the Henry Kaufman professor of financial institutions at Columbia Business School.

The purpose of the interview was to discuss the latest in federal regulation of the banking industry, the "Dodd–Frank Wall Street Reform and Consumer Protection Act". The interview quickly evolves into a historical discussion of banking regulation and the effects of banking regulation in the recent financial crisis. This article is an excellent source of information on these topics. I highly recommend that you spend the 10 or 15 minutes required to read it in its entirety. The article is at this link:

The Big Flaws in Dodd-Frank 

If you do not read the whole article the following are some of the highlights:

A section of Dodd-Frank was suggested by Former Federal Reserve Bank Chairman Paul Volcker.  This is some of the discussion of this new regulation:

The Volcker Rule tries to ban proprietary trading within banks. The first problem with that -- which I foresaw along with many others -- is that it would be hard to define proprietary trading, because obviously, an essential role of banks is to help make markets in various financial instruments and to execute trades for their clients.

So the question is, how do you define the limits of proprietary trading? From the hundreds of questions that they asked people and the thousands of complicated responses that they have gotten, it's become clear that there is no hope of being able to describe what it is they are trying to prohibit in a way that can be predictably identified, so that banks can know whether or not are they are in violation.

Even if it can't be done, might it still be helpful to get rid of proprietary trading by banks?

I don't think so. One thing for sure: there is no story about proprietary trading having anything at all to do with the crisis. Even Paul Volcker practically admits that.

Then what do you think was motivating Volcker?

We all have our laundry lists of what we would like to see done. Paul Volcker is somebody who has been around for a long time, and has a long laundry list. Proprietary trading by banks is just something he doesn't like, and Barack Obama wanted to hear Volcker's ideas. So basically he gets a free pass to bring his laundry list to the Dodd-Frank bill.

You don't let the crisis go to waste. 

You put it to a lot of different uses, except the ones that matter. Did the crisis have anything to do with women and minorities not being hired sufficiently by financial institutions? ..... I haven't heard anyone make this argument, so why has Dodd-Frank created new quotas for financial institutions to hire women and minorities? I don't think any of us believe that was a crisis-mitigation policy. It was just politics.

In the above passage we find that a "celebrity" in the field of financial regulation has a pet theory that he would like to impose upon society. Now that the government is trying to prevent any future crisis they decide to include this proprietary trading ban even though there is no evidence that proprietary trading made any contribution to the recent financial crisis. Even worse is the fact that no one is able to define proprietary trading, so now under Dodd-Frank no bank will know whether they are in violation of this statute.

Are you surprised to learn that this new regulation (that was passed to prevent a future financial crisis) includes employment quotas for hiring minorities and women?

Now the article moves on to the historical underpinnings for our current banking regulations:

Do you think the partial repeal of Glass-Steagall had anything to do with the crisis?

No, and the irony is that even the original of the Glass-Steagall Act, as passed in 1933, had nothing to do with the crisis it was supposed to address. Senator Carter Glass, who had been Chairman of the House Committee that drafted the Federal Reserve Act under President Woodrow Wilson in 1913, in 1933 played the same role as Volcker did some 75 years later.
On Carter Glass's laundry list was the notion that mixing investment banking with commercial banking was a bad idea. There was no evidence for that, and all subsequent research has rejected Glass's view. It's not even a close call. The Bank of United States' failure here in New York in 1930 had nothing to do with securities markets; it was exposed to Manhattan real estate and suffered losses related to the New York real-estate crash in Manhattan in 1929. Most of the other U.S. banks that failed in the 1930s did so as a result of farm problems and especially farm real-estate problems.

The Steagall part of the 1933 Act was federal deposit insurance, which was actually opposed at the time by Glass, the secretary of the treasury, the Federal Reserve, and President Franklin D. Roosevelt himself. But who did want it? Small banks in rural areas; Steagall was from Alabama. So we had ideology without evidence combined with special interests, and we got Glass-Steagall.

But what about the Glass part of Glass-Steagall? Did the ability of commercial banks to merge with investment banks have anything to do with the crisis?

Probably even less than the under-representation of women and minorities. Remember some of the illustrious names that got into deep trouble during the crisis -- Bear Stearns, Lehman Brothers, Merrill Lynch. They were all stand-alone investment banks at the time, unaffected by the partial repeal of Glass-Steagall. And we can only wish that commercial banks had done more of the relatively low-risk underwriting of securities that the repeal of Glass-Steagall permitted them to do, instead of accumulating toxic mortgages, which Glass-Steagall had not prevented them from doing.

And to make the whole argument about Glass-Steagall even more ludicrous, the repeal of the Act in 1999 made it possible for JPMorgan Chase [ticker: JPM] to acquire Bear Stearns and for Bank of America [BAC] to acquire Merrill Lynch, which helped stabilize the system.

You mention toxic mortgages. How does Dodd-Frank address that problem?

Not at all. There is no attempt in Dodd-Frank to address the key problem of government subsidization of mortgage risk, and the exposures of Fannie Mae [FNMA], Freddie Mac [FMCC], and the Federal Housing Administration are still growing.

How do you explain the omission?

There is a powerful political interest that wants real-estate lending to be sponsored by the government........Organizations like Acorn [the Association of Community Organizations for Reform Now] and other urban community activists led the fight to subsidize risky mortgage lending. Christopher Dodd and Barney Frank of Dodd-Frank, our supposed reformers, have been poster-politicians for this movement.....But Democrats were not the only ones; President George W. Bush and Speaker Newt Gingrich were also prominent proponents of subsidizing mortgage risk and facilitating the political deals that made so many risky mortgages possible.

The experience of the 1980s alone should have taught us to limit government subsidies of real-estate lending risks. There was the savings and loan crisis, which was all about speculation in real estate. There was the commercial real-estate crisis in the east after the 1986 Tax Reform Act caused some problems in commercial real-estate values.
So what did we do? In 1989 and 1991, we tinkered with capital ratios. But did we do anything to limit government subsidization of real estate risk? Quite the opposite -- the government doubled down.

Doubled down as in blackjack?

Yes, except the blackjack player doubles down by just doubling his original stake. The government effectively multiplied the bets many-fold.

How so?

The government geared up Fannie Mae and Freddie Mac -- "government sponsored enterprises" -- by allowing them to operate on very thin capital and by imposing new mortgage-lending mandates through the Department of Housing and Urban Development beginning in 1995. These mandates set growing minimum proportions of Fannie Mae and Freddie Mac mortgage lending targeting inner cities, low-income borrowers, and minority groups.

Dodd-Frank is the latest in a long history of government regulation of banking.  As  we examine these regulations a pattern appears.  The regulations are passed after a financial panic but the new regulations do not address the root cause of the recent panic.  Worse is that the regulations serve merely as a vehicle for politicians to extend favors to their supporters.  As Charles Calomiris so vividly stated " ideology without evidence combined with special interests".  Each round of government intervention has created a more fragile financial system.

Consensus science

On 3/28/12 fifty former NASA employees signed a letter to Charles Bolden, Jr., NASA Administrator.  The letter requests NASA to refrain from making claims that CO2 is impacting global climate.  The fifty employees that signed this letter have a combined total of over 1,000 years of professional experience.  The entire letter can be read at this link:

NASA employees letter

The following are some of the highlights:

We believe the claims by NASA and GISS (Goddard Institute For Space Studies), that man-made carbon dioxide is having a catastrophic impact on global climate change are not substantiated, especially when considering thousands of years of empirical data. With hundreds of well-known climate scientists and tens of thousands of other scientists publicly declaring their disbelief in the catastrophic forecasts, coming particularly from the GISS leadership, it is clear that the science is NOT settled.

 As former NASA employees, we feel that NASA’s advocacy of an extreme position, prior to a thorough study of the possible overwhelming impact of natural climate drivers is inappropriate. We request that NASA refrain from including unproven and unsupported remarks in its future releases and websites on this subject. At risk is damage to the exemplary reputation of NASA, NASA’s current or former scientists and employees, and even the reputation of science itself.

Why is this important?  We have seen other letters and petitions authored and signed by noteworthy scientist who question the link between man-made CO2 and global climate change.  This letter is important because Dr. James Hansen, director of GISS is one of the most outspoken advocates in favor of government action to restrict CO2 emissions.  Dr. Hansen's congressional testimony in 1988 began the political process of regulating CO2 emissions.  The fact that Dr. Hansen's peers now are publicly calling for him to "cease and desist" is stunning.

Among the many who signed this letter are 8 astronauts and 2 Flight Directors.  These are not people who make decisions without research and thought about the consequences.  One of the Flight Directors who signed the letter is Dr. Christopher C. Kraft who spent 24 years as Flight Director and Director of Johnson Space Center.  Dr. Kraft was Flight Director for the Apollo 13 mission.  He was responsible for the engineering decisions that save the lives of the crew after an explosion on the spacecraft in route to the moon.

The letter finishes with the following:

For additional information regarding the science behind our concern, we recommend that you contact Harrison Schmitt or Walter Cunningham, or others they can recommend to you.

Dr. Harrison Schmitt is a former astronaut who left NASA to serve as a US Senator from New Mexico.  He now teaches at University of Wisconsin.  Walter Cunningham is also a former astronaut.  Walter Cunningham writes a blog titled "Space Views".  This post from his blog is very well written:

Climate change alarmists ignore scientific methods

This post should be read in its entirety.  The following are some of the highlights:

The question of human caused global warming should not be resolved on the publicized opinions of influential journalists, but in the court of scientific inquiry, based on the scientific data.

It is the job of science to develop the theories that explain our natural world. Scientific, theories, even those that evolved over centuries, are subject to challenge and change—when supported by the appropriate scientific data. This enables new hypotheses to modify, or even replace currently accepted “theories.”

For a new hypothesis to be accepted by the scientific community, it must be confirmed by considerable evidence and must survive all attempts to disprove it. The hypothesis claiming that human-generated carbon dioxide is a principal driver of the earth’s temperature has not satisfied either of these criteria.

Global warming alarmists could have made their case quite simply by 1) collecting and making available solid evidence to support their hypothesis, and 2) by defending it in the court of scientific inquiry, not in the court of public opinion. Instead, they refused to release their data that would permit other scientists to replicate their results--if possible. 

Modern science has expanded human knowledge by extensive use of peer review.  Any new discovery or theory is published along with all supporting methods and data.  Then independent researchers try to duplicate the results.  If confirmed by independent experiment the new discovery or theory is accepted as valid.  Man-made global climate change has never been submitted to independent peer review.  The Intergovernmental Panel on Climate Change (IPCC) has resisted all requests to allow peer review of the models or data used to make its prediction.  The IPCC has instead resorted to promoting its theory as consensus science.

Consensus science was the leading method for scientific discovery throughout much of history.  In 1491 consensus science believed that the earth was flat.  In 1542 the consensus in science was that the earth was the center of the universe and that the sun orbited the earth.

It is time for IPCC and the rest of the man-made global climate change alarmists to submit their theories, models, and data for peer review.

It’s a travesty

Illinois State Representative Derrick Smith was formally indicted today by a federal grand jury for allegedly accepting a bribe.  Smith is charged with accepting $7,000 in cash from a trusted campaign worker that he thought was a payoff from a day care operator who wanted him to write an official letter supporting a bid for a $50,000 state grant.

That is quite a high fee for writing a letter, it is 14% of the total loan amount.  Representative Smith must have exceptional penmanship.

The Chicago Tribune published a news report about this subject today and it can be read at this link:

Lawyer: Rep. Smith has no plans to quit, despite indictment

I am in complete agreement with the defense attorney when he says: “A lot of things are troubling about this case.”

Chicago politicians once again provide us a view into the inner workings of government.  In this case the state government creates a program to give away taxpayers' money.  Of course to receive this "grant" the person or firm will need the support of influential politicians.  Inevitably when the influential politician intervenes on behalf of the grant recipient there will be a quid pro qou.

For those who do not speak Latin quid pro qou means this for that.  In Chicago it is more commonly understood as "where's mine?"

So we have a situation where politicians create programs to take money from the taxpayers and give it to their supporters, taking a commission for themselves.  It beats working for a living!

Another interesting part of this story is that the Democratic Machine Politicians did not request that Representative Smith withdraw from the primary election.  In fact the Democratic Machine supported Representative Smith in the primary election.  If Smith had withdrawn prior to the primary an outsider may have won the nomination and the Machine may not have been able to control that new Representative's vote.  Now the Machine will throw Representative Smith under the bus.  When Representative Smith is all gone the Machine will be able to appoint his replacement, thus insuring the new Representative's unwavering alliance to the Democratic Machine's agenda.  And that my friends is the heart and soul of Chicago politics.

After the verdict

And what shall we do after the Supreme Court rules on Patient Protection and Affordable Care Act (PPACA) (commonly referred to as Obama care).  I have heard many of our fellow citizens worrying that if the Supreme Court finds PPACA unconstitutional  we will be back to "square one".

An article was published in the Wall Street Journal on 4/3/12 which discusses this subject.  The author of the article is John H. Cochrane a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar at the Cato Institute.  The complete article is available on the Cato Institute website at this link:

What to Do on the Day after ObamaCare

The following are some of the highlights of this article:

The country can have a vibrant market for individual health insurance. Insurance proper is what pays for unplanned large expenses, not for regular, predictable expenses. Insurance policies should be "guaranteed renewable": The policy should include a right to purchase insurance in the future, no matter if you get sick. And insurance should follow you from job to job, and if you move across state lines.

Why don't we have such markets? Because the government has regulated them out of existence.

Most pathologies in the current system are creatures of previous laws and regulations. Solicitor General Donald Verrilli explained as much in his opening statement to the Supreme Court: "The individual market does not provide affordable health insurance," he noted, "because the multibillion dollar subsidies that are available" for the "employer market are not available in the individual market."

Start with the tax deduction employers can take for their contributions to group health-insurance policies — but which they cannot take for making contributions to employees for individual, portable insurance policies. This is why you have insurance only so long as you stay with one employer, and why you face pre-existing conditions exclusions if you change jobs.

Continue with the endless mandates (both state and federal) on insurance companies to provide all sorts of benefits people would otherwise not choose to buy. It sounds great to "make insurance companies pay" for acupuncture. But that raises the premiums, and then people choose not to buy the insurance. Instead of these mandates, at least allow people to buy insurance that only covers the big expenses.

.....But the expenses of emergency room treatment for indigent uninsured people are not health-care's central cost problem. Costs are rising because people who do have insurance, and their doctors, overuse health services and don't shop on price, and because regulations have salted insurance with ever more coverage for them to overuse.

Meanwhile, staggeringly inefficient markets for health care itself need a thorough, competition-focused deregulation. Americans will know there's a healthy market when hospitals post prices on their websites, and when new hospital and health-care businesses routinely enter to challenge the old ones. Here too regulations keep competition at bay.

The number of new doctors is still restricted, thanks to Congress and the American Medical Association. Congress caps the number of residencies, the AMA has fought the expansion of medical schools, state tests make it difficult for foreign doctors to work here, and on and on.

There are hundreds of government impediments to competition. New hospitals? In my home state of Illinois {this is the case in Hawaii also}, every new hospital, expansion of an existing facility or major equipment purchase must obtain a "certificate of need" from the Illinois Health Facilities Planning Board. The board does a great job of insulating existing hospitals from competition if they are well connected politically. Imagine the joy United Airlines would feel if Southwest had to get a "certificate of need" before moving in to a new city — or the pleasure Sears would have if Wal-Mart had to do so — and all it took was a small contribution to a well-connected official.

Judicial activism and unintended consequences

President Obama's recent comments about the US Supreme Court's review of the Patient Protection and Affordable Care Act (PPACA) (commonly referred to as Obama care)  has led to what I assume are unintended consequences.  The highlight of his Rose Garden statement on 4/2/12 was:

“I’d just remind conservative commentators that for years what we’ve heard is, the biggest problem on the bench was judicial activism or a lack of judicial restraint — that an unelected group of people would somehow overturn a duly constituted and passed law,” Obama said during a Rose Garden news conference. “Well, this is a good example. And I’m pretty confident that this court will recognize that and not take that step.”

The initial consequence of this comment is to display this Presidential Administration's disdain for the separation of powers.  We are protected from imperial rule by the fact that our three branches of government hold each other in check.  The US Supreme Court has as it's most important function the ability to overturn laws passed by Congress and Signed by the President that are unconstitutional.  The fact the our current President finds this an act of "judicial activism" by "an unelected group of people" is an affront to our concept of limited government.

The unintended consequence of this statement is to draw attention to a little publicized section of PPACA.   There is currently a case before the U.S. 5th Circuit Court of Appeals contesting Section 6001 of PPACA.  This case has now received nationwide publicity as Judge Jerry Smith a member of the 5th Circuit Court of Appeals has brought President Obama's statement into the trial.  The details of Judge Smith's ruling are in this Associated Press article:

Judge upset by Obama's comments on health care law

What the Judge has to say about President Obama's comment means little in this discussion.  What is of great importance is the case before the 5th Circuit Court of Appeals.  The case before the appeals court was brought in part by a spine and joint hospital in East Texas that is challenging the constitutionality of a portion of the health care law that restricts physician-owned hospitals from expanding or building new facilities.

The full text of PPACA can be viewed at this link:

http://housedocs.house.gov/energycommerce/ppacacon.pdf

You will find the text of section 6001 by entering 639 as the page number in your pdf reader.

We all are now aware that PPACA Section 6001 prevents physician-owned hospitals from expanding or building new facilities.  This is an act of Congress that has been advertised as a means to expand health care availability and reduce its cost.  In reality the law restricts competition in the field of health care.  If the supply of a service is reduced or artificially prevented from increasing then the price for that service will increase.  There can be no other outcome.

Nancy Pelosi was not kidding when she said that we would have to pass the bill to find out what is in it.  It is turning out that we have to litigate the bill to find out what is in it.