Howzit Howard

Brooksley Born again

In my Oct. 23, 2008, post "Brooksley Born and the Economy of Doom," I told you how the Wall Street meltdown was predicted 11 years earlier by Brooksley Born when she was head of the Commodity Futures Trading Commission. In one Congressional hearing after another, Born tried to explain that unregulated financial instruments called derivatives, which include credit swaps, could bring down the economy. Let me regulate them, she said, or at least require Wall Street investment houses to report how much money they're putting into them. But absent any understanding of what she was talking about, senators and congressmen consulted people they trusted to see what they thought, and those people, led by then-Fed head Alan Greenspan, assured them that the risk was spread out too much to be a problem, and Greenspan in particular told them that Wall Street firms cared too much about their good names to let anything bad happen. By the time I wrote about this in October, Lehman Brothers was bankrupt, several other Wall Street firms were being absorbed by more solvent houses, and Greenspan had publicly apologized for his misjudgment. Greenspan stands out today, not only for his primary role in making Born a Cassandra, but for his manning up to admit he had gotten it wrong. Wall Street executives cared more about their lavish bonuses than about the good names of the institutions they worked for. But he wasn't the only one taking a stand in favor of an unregulated market for derivatives. Clinton advisors Larry Summers and Robert Rubin also told members of Congress that Born was wrong -- indeed that her very warnings could cause a market panic. Texas Senator Phil Gramm, an economist by training, sponsored a bill in 2000 to make it the law of the land that derivatives were not regulated. The bill moved through Congress with Gramm lining up Republican votes and Clinton officials working the other side of the aisle. One of those aides was Gary Gensler, Treasury undersecretary for domestic finance and a former executive of Goldman Sachs. President Obama's nominee for head of the Commodity Futures Trading Commission, the job Brooksley Born did so well or tried to, is...Gary Gensler. Obama has also made Larry Summers his main behind-the-scenes economic advisor. There is an argument in some political circles that Obama needs people with experience to manage the financial crisis, even if they made mistakes in the past. As far as mistakes go, I buy that. Mistakes can make someone smarter later on. But Greenspan and these other guys were driven in part by an almost theological belief in unregulated markets that is unjustified by the facts. They read too much Ayn Rand. They have not recanted their beliefs. They remain heretics, non-believers in the sensibility of basic rules for any game. We need not burn them at the stake, but they have certainly burned us, and so much is at stake in the current economic crisis that I worry what further harm they can do.

Have you earned the Earned Income Tax Credit?

The more complicated the financial world gets, the more the average person tends to get victimized, not merely by the unscrupulous and predatory but by our own ignorance, while others, who make a hobby of knowing all the rules, game the system for all its worth. This applies to the tax code, too, because it's as complicated as the rest of the financial world, and I've heard stories from tax preparers and IRS personnel alike of people who think they're gaming the system with their nickel and dime tax fraud while leaving bigger money on the table that they actually qualify for. And then there is the Earned Income Tax Credit. The Council for Native Hawaiian Advancement, recognizing that many Hawaiians have low enough taxable income to qualify for the credit, is spreading the word Friday about its availability. On behalf of my son and daughter who are part-Hawaiian I'm happy to pitch in. The Earned Income Tax Credit and Child Tax Credit apply to single filers or families who have less than $38,646 taxable income. See what I mean about complexity? Who worked this up so it would be $38,646 instead of $40,000? How do you spread the word about something for which the cutoff is $38,646? But I digress. With one child the credit can be as much as $2,917 -- with two or more keiki, up to $4,824. If you owe $1,000 on your taxes, and you qualify for $4,824, the tax service sends you $3,824. Really. You can wind up paying negative taxes, getting money instead of paying it. For more information you can call 596-8155 or 800-709-2642 and ask for Rosalee Puaoi. If you're not Hawaiian and don't want to burden the council with your questions, see a tax preparer. This money was appropriated to aid lower income families.

The bankruptcy-foreclosure myth

This blog post will expand on an "Ask Howard" question Wednesday morning -- whether you can keep your home in bankruptcy. The answer is, not necessarily. It's a myth that the primary residence in off-limits to creditors. Bankruptcy is complicated. There are several forms of it for individuals -- Chapter 7 liquidation, Chapter 13 restructuring of all debts, and even Chapter 11, like companies use, in some cases. The rules for each are different. But one general principle is that bankruptcy puts all debts on hold TEMPORARILY but sooner or later you have to face your debts, either paying them off in full or making other arrangements with creditors that would have to abide by instead. A company can always go out of business altogether, or threaten to, but an individual expects to go on living, and that kind of changes the expectations of creditors. Not only is it a myth that your residence is automatically off-limits to creditors in a bankruptcy, but a mortgage creditor in some cases has more power to collect than some other creditors do. This could change, however. Over the anguished protests of the mortgage industry, the House Judiciary Committee is recommending that Congress empower bankruptcy judges to order changes to the terms of mortgages.

The busted moral compass of Rod Blagojevich

Have you ever watched a daytime talk show and wondered what motivates those people to appear on TV? Many of the guests flaunt character flaws that would mortify any normal person. Some have the good grace to be abashed but all seem to relish getting national attention. It is, however, something of a new twist when such a person is a sitting governor. Rod Blagojevich, whose responsibility it was to appoint someone to serve the remainder of Barack Obama's term in the U.S. Senate, allegedly tried to trade the seat for material benefit to himself. Prosecutors have tapes. Blagojevich does not deny that he said what he said, arguing only that it was taken out of context. Claiming his impeachment is "rigged," Blagojevich said he would take his case to the people, and flew to New York to make the rounds of the talk show circuit. On show after show he has made his "out of context" argument, without, however, saying what the context was. This is the quote that grabbed my attention, and made me want to write about this. Blagojevich said this on ABC's "Nightline." "If you do an exchange of one for the other, that's wrong," he said. "But if you have discussions about the future and down the road and what you might want to do once you're no longer governor in a few years, what's wrong with that?" Are you kidding? Is that your defense? Are you that stupid? Have you at last no moral compass whatever? What's wrong with that is that is, in fact, an exchange of one for the other. It makes no difference whether the quid pro quo is a cushy job after leaving office or a suitcase full of Hamiltons in the trunk of your car today. It's crooked. The answer, of course, is that Blagojevich IS that stupid. This is the same guy who compares himself to Ghandi, who says he's doing what he's doing now because he doesn't want to send the wrong message to his children, who struts and preens like he thinks he's a movie star. Oh, yes, he really is that stupid. For example, I think he may actually believe the impeachment process is rigged, rather than accepting that the wrongness of what he did is the reason why the only lawmaker to vote against impeaching him in the Illinois House of Delegates (of 118 voting) was his sister-in-law.

Handing out money vs. handing out work

The "economic crisis" is different now. What used to be about borrowing is now about working. The new crisis is even more profound then the former one. The good news is that the new crisis is easier to understand and easier to respond to that the former one, which was driven by estoric investment instruments. A few months ago, "economic crisis" referred to lack of credit -- the unwillingness of shell-shocked lenders to lend. Whether you were a consumer trying to buy a home or a company borrowing to meet payroll in a lean stretch or an investor borrowing to buy a hotel or a developer borrowing to build a condo high-rise, you couldn't borrow because your usual lender was afraid to lend at any price. The Federal Reserve Board cut the price of money 95% in about a year's time, yet lenders remained reluctant, afraid that you might not pay back the loan if the recession got worse. Because credit was frozen, the recession DID get worse. The consumer spending that makes up more than two thirds of all U.S. economy activity fell off sharply, and companies began cutting jobs as their sales plunged. General Motors is cutting 2,000 more jobs. Home Depot, shutting down its Expo design and decor division, is cutting 7,000. Sprint Nextel is cutting 8,000. Caterpillar is cutting more than 19,000. And that was just Monday's announcements. The previous form of the economic crisis was tricky. It grew because of sophisticated investments that were riskier than people realized including the professionals we thought were knowledgable about such stuff. Solutions were tricky, too, because most involved putting money in the hands of the very people who made the mess. But the problem now is even more fundamental -- people are being thrown out of work at an alarming rate and new work must be found by them or the jobless rate will soon top 10% nationwide. It's already over 9% in California. President Obama has the advantage of knowing, from watching what President Bush did, that in desperate times no business will "do the right thing" against its own corporate interests unless required to. Its own management and board may be grateful for the requirement, which allows it to do the right thing without fear of shareholder uprising, but absent such a requirement they may absolutely be relied upon to put their fiduciary responsibility to shareholders ahead of the mere national interest.  We saw how banks, not required to use bailout money to make loans, mostly didn't, preferring to use the money to improve their bottom line or even for acquisitions. President Obama proposes a 40% improvement of vehicle fuel efficiency by 2020. The Bush administration subverted tough fuel efficiency rules, believing it was helping Detroit and the oil industry. It did not help Detroit, as we have seen, and the effect on the oil industry has been mixed. The effect on the nation has been calamitous. The president offered, among other things, a national security argument. "It bankrolls dictators, pays for nuclear proliferation and funds both sides of our struggle against terrorism," he said of U.S. consumption of foreign oil. Sen. George Voinovich, an Ohio Republican, worried aloud that President Obama was "piling on" and his policies would hurt Detroit. I doubt it. On the evidence of Detroit's shrinking market share, and the growing market share of Japanese automakers, what has hurt Detroit has been its disinclination to make fuel efficient vehicles. It has been pretty clear from the behavior of U.S. auto executives that they need a push to reinvent their companies. This is it. Obama said the savings from his proposals would reduce U.S. oil consumption by an amount equal to what we import from the Persian Gulf. I would like to have some independent analysis of this claim, because if it's true then he's really onto something. Obama said the Bush administration "put corporate interests ahead of the public interest" and House Republican Leader John Boehner said Obama's plan would cost Detroit billions just when automakers are struggling to stay afloat. Both comments miss the point. Making gas guzzlers has been bad for the nation and bad for U.S. automakers themselves. The old policies were very good for business interests... in Japan, China and the Middle East. They weren't good for business interests in America.

Update on current (HEI) events

Hawaiian Electric Industries now confirms there is technology that would probably shorten islandwide power outages, but says it would cost tens of millions of dollars. I commend to your attention a blogpost by Rick Daysog of the Honolulu Advertiser... http://bizbites.honadvblogs.com/ I would still like to see a more specific cost accounting, but this seems to be at least slightly more detailed than whatn HEI has said before. The business community may not feel it's too expensive. As I wrote in a previous post, there may be a detailed explanation for NOT doing it which is entirely acceptable to the community. I just haven't heard it.  Some executives inside the electric company are having a hard time getting past their annoyance that people (not just me; I claim no special role in the public debate on this) have the temerity to question their decisions about this. Wanting to make something happen rather than merely to make trouble, I have deliberately confined my own criticism to this blog rather than raising cane before the wider audience on television. But I get the impression HEI management remains so convinced in the self-evidence wisdom of everything it does, it has not felt able to embrace the idea that it might do better. (There is a possibility that the company IS rethinking all of this, but in its own conference room.)

Obama and the global melting pot

Americans, to some extent, and the rest of the world, to a great extent, could use more knowledge of our how multicultural and multiethnic and multiracial most of the world is and has been for a very long time. No one who lives in Hawaii, where the definition of family has been expanded to its greatest and most loving extent, will be surprised to hear, as I did this weekend, that residents of the Obama clan in Africa consider the new American president to be family and extend to him the same warm feelings they would to a relative who lived in the next village. Since Obama has lived in Hawaii he will have no trouble appreciating this. Reporters covering the inaugural noted that Obama chose to use his full middle name in taking the oath, and interpreted this as a subtle message to the Arab world that America wasn't necessarily so different as might be thought. Certainly it will be good for all sides for the world to have a deeper understanding of the American melting pot, the full details of which are not entirely known even to all Americans. It doesn't erase past wrongs but it may lay the ground for future rights to know that almost all so-called African Americans are part-Caucasian, and a very large percentage of so-called white Americans are part-Native American. If your forebears lived on the frontier, that's probably where you got your excellent cheekbones. But it's not just in America that this happens. The world is a melting pot. Most Filipinos have some Spanish blood and some have Chinese blood. But then, many Chinese have Mongol blood and most Spanish have Arab blood. Many Britons have French or Scandanavian blood. The Welsh may originally have come from the Alps. Poles tend to have German or Russian blood. Bosnians often have Turkish blood. Lebanese often have European blood. Columbus was an ethnic Italian with ties to Portugal, sailing for Spain with a mostly Basque crew. You can't make up stuff like that. Since I like classical music, let me offer some more examples from the ranks of the great composers. The great French composer Lully was Italian. The great Austrian composer Haydn was part-Croatian. The great German composer Beethoven was part-Flemish. The great English composer Holst had a German grandfather while the great Norwegian composer Grieg was the son and grandson of English consuls to Bergen, though both "married local" giving him some actual Scandanavian blood. Cesar Cui, the member of the Russian "Mighty Handful" who wrote polemics for a Russian classical music, was the son of a deserter from Napoleon's army. The French composer Ravel had a Basque mother and the French composer Erik Satie was half-Scottish and the French composer Cesar Franck was really Belgian and the French composer Arthur Honegger was actually Swiss. Percussion in "European" music came from the Middle East and as late as the time of Brahms was referred to as "Turkish effects." Dave Brubeck, who had a hit with "Blue Rondo a la Turk," is part-Native American. The great African American jazz composer Charles Mingus was also part-Chinese and part-Mexican and part-white. For a long time Americans have had a knack for making enemies around the world by allowing an us-and-them mentality to grow in their minds and ours. It happens. But it does no harm to remember from time to time, and perhaps especially when there is a fresh administration of one sort or another, that there is a lot of them in us, and a lot of us in them, and that this not a recent development or a New Age touchy-feely conceit but the simple fact of many centuries' standing.

Could cooperation break out on Capitol Hill?

News coverage of Friday's meeting of President Obama and Congressional leaders has focused on two jocular but in-your-face comments the new president made. I found another quote far more interesting. Obama at one point is said to have told some Republican leaders that if they want to get something done they have to stop listening to Rush Limbaugh -- and when House Minority Whip Eric Cantor pressed his argument, Obama drew laughter by saying, according to one account, "We have a difference of opinion, and I won." But the really important quote came from Senate Minority Leader Mitch McConnell of Kentucky, a true believer on the Republican side. "Anyone who belittles cooperation resigns him or herself to a state of permanent legislative gridlock, and that is simply no longer acceptable to the American people," he said. "Republicans will choose bipartisan solutions over partisan failures every single time." Regardless of their radio listening habits, if Congressional Republicans listen to McConnell there is some possibility that something will actually get done. Lest some stories you read or hear give you the impression that Obama swatted Cantor down like a fly, he read a handout from Cantor on Republican proposals, and while he disagreed with some points he also said, "Eric, I don't see anything crazy here." Some Republicans will have to work very hard to compromise and still be re-elected. For Republican senators it's not a big problem. Most red states have enough moderate voters for that. But on House side there are a number of Republicans whose districts could replace a compromising Congressman with someone more hardline. For the non-partisan, opinion is likely to tilt in favor of the Obama stimulus proposals because lower income recipients of federal largesse are more likely to spend it, and that's what the economy needs at the moment. (In a growing economy, it would make more sense to adopt Republican tax cuts for the affluent and rely on trickle-down.)

The real reason why " the media " don ' t cover certain stories

Ever heard of Vint Cerf and Bob Kahn? They drew the TCP/IP protocol on a napkin and today the whole Internet runs on it. Both men are still alive and lending their considerable intellects to thinking about ways we can be better served in cyberspace. Cerf these days is a vice president with Google, but when I lived and worked in Washington, D.C., he was with Washington-based MCI and I interviewed him a couple times. Both MCI then, and Google now, hired him to think. He's good at it. He's also a genial man who speaks well. The Pacific Telecommunications Council this week held its annual telecoms conference at the Hilton Hawaiian Village and Vint Cerf was its main speaker, speaking of the rapidly approaching wide adoption of Internet protocol version 6 and interplanetary Internet connectivity. So I walked over there and interviewed Cerf, asking him about the effect of computers and the Internet on the recent Wall Street meltdown. Describing computer trading the way an engineer would instead of a broker, he made it clear how inevitable market volatilility is when "everybody gets the same information really fast and then acts on it using similar programs." He also predicted that some e-commerce sites -- Hawaii is replete with those -- could actually benefit from the recession because online sales can be done cheaply. Good story. But this was Monday, and everyone was focused on the next day's inauguration of President Obama, so the producer suggested I file the package for Wednesday, when the presidential stuff would die down a little. Okay, fine, no one has the story. But the package was bumped again and did not run until Thursday. I'm done talking about Vint Cerf and ready to get to my real point. Newspapers have finite paper and TV stations have finite time, and sometimes stories don't run because other stories run instead. Everyone who learns about something that he thinks should have been splattered all over the news seems to become convinced that the story was "suppressed" by some Star Chamber of evil editors, but what really happens behind the scenes is not so malignant as that. My story was reasonably interesting, but not compared to the excitement in Washington. During World War II, intelligence analysts used a process called "content analysis" to try to learn more about the Soviet Union. They knew officials controlled the newspapers. They knew that newspapers have finite space. So they measured what percentage of newspaper space was devoted to various issues. The thinking was that issue X could not get a lot of play without bumping issue Y from the news, and calculating this could provide hints to official thinking. Even in American newspapers, with virtually no centralized control even in large chains, content analysis specialists found that new issues tended to bump old ones. Broadly speaking, gay rights bumped feminist issues which in turn had bumped civil rights issues. If you analysed network television coverage over the past year you may find that war coverage lessened as economic crisis coverage grew. One interesting complication. Let's say every story's importance can be rated on a scale of 1 to 10 and everyone would agree on the rating. Well, the story you care about may be a 4, while the guy across the street cares about a story that's a 6. Yet your story led the news tonight, since all the other news today was a 3 or less, while his story, a 6, didn't on at all because there were three stories worth a 7 and one worth an 8 on the day his story broke. Official Washington likes to announce bad news on Friday afternoon because some people don't bother to watch the news on Friday night and lots of people don't very carefully read their Saturday morning newspapers. And did you notice how many companies made layoffs announcements on inauguration day?

Can we tax our way out of recession?

In the course of this one week, Hawaii officials have suggested (1) reducing the scope of the state's technology tax credits, and (2) hiking the state gasoline tax by a dime to 27 cents a gallon. Most people who discuss these and other revenues will adopt cookie-cutter views we have heard before. It might be helpful to approach the issues from this angle -- what's the objective? Will it work? What else happens? At the heart of the matter is this dilemma for politicians and public alike: everybody wants economic stimulus but nobody wants to raise taxes. So where does one get the money for stimulus? And let's not waste time pretending that cutting taxes will stimulate the economy. You can take less money from people and businesses, or hand money to them, but it doesn't automatically follow that they will spend it. Last spring's mass-mailing of checks to Americans provided a brief sales bump to Wal-Mart, nothing more. More recently, Washington has pushed money at banks, and most banks have been sitting on it. As a practical matter, what Hawaii and the nation need are stimulus plans the effects of which can be depended upon. There isn't enough money left to hand it to someone and hope they do what you want them to with it. "We want them to spend it on booze and women but all they do is keep it in their accounts!" Where was I? Oh, yes, the two proposals made this week. Technology tax credits Department of Taxation officials have been arguing for years that the state's technology tax credits "cost" Hawaii megamillions and the credits should be abolished or narrowed. The technology tax credits have created some of the best jobs Hawaii has -- jobs that pay well, jobs that enable our children to return home from jobs in California, jobs that are practically immune to the recession. The number of jobs is greater than any published figures because much of the work has been created in the local film industry, in which many of the workers are freelancers. Affluent Hawaii residents who previously made most of their investments on the mainland were induced by the technology tax credits to put some of the investment money right into the Hawaii economy. State officials had tried for years to achieve this through other means. They also paid a lot of money outright to lure movie projects, though no one ever mentions that in discussions of the tech tax credits. I concede the possibility of a hypothetical alteration to the credits, X, which would close alleged loopholes while still keeping the credits as a job-creating, economy-diversifying machine. But it hasn't been justified yet. Road projects Governor Lingle and the Democratic transportation committee chairmen this week jointly announced that they wanted to raise billions by hiking the gas tax 10 cents a gallon to improve more than 100 roads across the state. They enumerated the projects, gave a price tag for each and every one, and further stipulated that the tax hike would only be triggered after two consecutive quarters of at least 1% job growth. The knee-jerk negative reaction to gas tax increases is, I think events have proven, something of a sham. Gas prices have changed more than 90 cents a gallon in the past year, based on the AAA statewide price averages, and the majority of Hawaii motorists did not change either the vehicle they drive or the amount they drive. Representatives of the oil industry have been in the habit of telling us that taxes are the main reason gasoline "costs so much," but they raised prices several times as much as the tax and expected us to understand. Now the economy needs stimulus and road work will put people back to work, and we expect them to understand. Will putting construction workers back on the job stimulate the economy? It has to. The employed worker cannot simply sit on his income. He must buy or rent lodging, get clothes to wear, yes, and fill the tank to get to work. And we would have to repair these roads eventually anyhow.