Federal Government Policy Issues

Discussion and information on selected policy issues concerning tax, foreign relations, energy and other significant policies. The intent is to provide data and analysis that will assist in determining the appropriateness of the policy. Any posts containing rants, personal attacks on officials or other posters or which do not concisely present a point of information will not be published.

Tuesday, May 12, 2009



It is likely that regulation can be established that will be at least moderately effective in preventing the financial industry from engaging in the practices that led to the most recent financial crisis. Regulations can be established that will reduce leverage, increase reporting, increase capital ratios and prevent the use of off-balance sheet entities. However, it is unlikely that regulation can address what is arguably the primary cause of the current financial crisis which was the failure of corporate governance. Executive management and the boards of directors either were unqualified to manage the business that they were responsible for or knowingly approved practices which had the possibility of destroying their businesses. Alan Greenspan, during congressional testimony in 2008, stated that he was against increased regulation as he relied on banking management to exercise their considerable skills in avoiding business endeavors which would risk the survival of their institutions. He found it illogical that the industry engaged in the risky practices which led to the failure or near failure of so many financial institutions. But, were their decisions really so illogical? It may be that the boards and CEO’s knew that they were risking the long term survivability of their businesses but they also knew that, at least for a short but indeterminate period of time, these risky business practices such as sub-prime mortgages and high leverage ratios would return significant profits. Any CEO who took the long term view and avoided the profitable short term risk would find his firm under-performing competitors resulting in lower share prices, lower CEO pay and the distinct possibility that he would be replaced and not survive in his position long enough for his caution to be proven the correct strategy.


Friday, October 31, 2008



Some analysts believe that the outcome of the 2008 presidential election will turn on the way that the surprising number of undecided voters cast their ballots. Many analysts are perplexed that there are so many undecided voters this late in the campaign when there has been so much information on the candidates presented to the electorate.

I expect that a higher than expected number of the undecided voters will break for Obama. There is a strong possibility that the reason that there are so many undecided voters is that a number of people who would otherwise support the Republican candidate are internally split between their emotional preference for presidential candidate and their rational preference. Polls have consistently shown that Obabma supporters are more enthusiastic in their choice than McCain supporters. For these voters, the economic proposals from Obama are more attractive intellectually but the traditional values of McCain/Palin are more attractive emotionally. These people want to find a reason to vote for the Republicans but can not find the reason to do so.

Time will tell.

Saturday, September 20, 2008



The current structure of the bailout of the investment and commercial banks being discussed involves the US government purchase of distressed mortgage backed securities which has a cost estimate of approximately $700b. However, it will not be possible to save these institutions without the US government also purchasing perhaps trillions of dollars worth of other financial instruments such as synthetic CDO's (collateralized debt obligations), actual and synthetic CDS's (Credit Default Swaps), auction rate securities, covenant lite loans and foreign transactions. Especially in the case of synthetic CDO's and CDS's, these were instruments that were closer to casino bets than financial transactions.

If the government does not structure the bailout carefully and correctly, there is nothing to prevent these investment banks from using their new found cash and borrowing abilities to create new investments that get us back into the same situation while making some very wealth people much wealthier with only the taxpayer losing.

An alternative to the approach being discussed is to setup a new Government Sponsored Entity (GSE) that would purchase only the financial instruments that will help the US economy. Remember that Fannie and Freddie were initially setup as GSE's and that Fannie was sold to private investors in 1968 to fund the Vietnam war. Let the investment banks go into bankruptcy, the new GSE would purchase at very low prices the appropriate assets required to keep banking and lending operating in the US and the stockholders and managers of the bankrupt institutions would not benefit. The advantages of this approach are:

- The taxpayer would not have to purchase trillions of synthetic instruments.
- The taxpayer would not have to purchase assets that are owned by a foreign country.
- The issue of encouraging this type of action in the future via moral hazard would not be an issue.
- The taxpayer would gain when the GSE was spun off into new financial institutions via an Initial Public Offering (IPO).
- The essential assets held by the banks would be purchased at a lower price.
- The new GSE would not have to be concerned with investor law suits.

The exact same operating practices that required a bailout of Long Term Capital in 1998 created the problem that we are currently facing in the investment banks. The investment banks, many of whom were involved with Long Term Capital in 1998, knew better but failed to act responsibly.

Friday, August 22, 2008


Russia and US Policy

Why has Russia become engaged in Georgia, what does Russia hope to achieve and what can the US do to counter the Russian incursion?

Russia's incursion into Georgia appears to be a no risk adventure with significant upside gain. The US would not intervene militarily even if the US was able to, the incursion has caused oil prices to jump about $8 bbl/d which financially benefits Russia which produces about 10 million bbl/d and the threat of future incursions by Russia into former Soviet satellites will most likely cause these former satellites to avoid becoming closer to the West than they would like to. There is a possibility that Russia intends to extend their occupation of Georgia so as to control the oil and gas pipelines that run to the Black sea which Russia does not already control. Russia has been working over the last several years to control the energy (oil and gas) transmission infrastructure that feeds the European market which gives Russia more control over the European energy market than Russian produced energy exports would otherwise confer. Russian oil production is forecast to drop off sharply over the next few years but control of the transmission infrastructure will ensure that Russia is still able to use energy as a negotiating tool.

The US might have been able to avoid the Russian incursion into Georgia and negotiated safeguards against incursion into other former Soviet satellites by offering to suspend the US installation of US missiles in the Czech Republic and Poland. Longer term, the best way to blunt Russian assertiveness is to reduce the ability of Russia to use energy as a negotiating tool. The easiest and quickest way to do this is to develop the oil and gas industry in Iraq. Iraq has proven reserves of over 115 billion barrels and much of the country has not yet been explored for energy reserves. Iraqi oil also lies very close to the surface so if cheap to extract and Iraqi production can be developed much more quickly than the deep water fields in Brazil and other places. The holdup in developing Iraqi reserves has been the oil companies demands for a percentage ownership and corresponding profits of the fields which they develop. The Iraqis are strongly inclined to a 100% state owned oil industry. The US should work to resolve this impasse even if resolving the impasse requires that the Iraqis own all of the oil produced. The huge increase in global supply would result in significantly lower oil prices to all countries in general and to the US in particular which consumes about 25% of global oil production. Iraq has increased production by about 400K bbl/d with very little effort but daily oil production at 2.4 million bbl/d is still below Iraqi production before the US invasion of about 3 million bbl/d which was achieved while Iraq was operating under international sanctions.


Friday, May 16, 2008


Consumer Purchasing Unexpectedly Strong

Consumer purchasing has unexpectedly continued to be strong in spite of the various challenges to the health of the general economy posed by the credit crunch, foreclosures, falling real earnings and energy and food price increases. In part, it was the fear of a negative impact on the general economy that prompted the FOMC to cut the federal funds rate by 2.75% since September 2007.

The fact that consumer purchases have remained strong continues to perplex the market analysts so the question is, how has the consumer continued to fund the spending spree given that borrowing on increasing home equity is no longer an option. It may be that the housing crisis has provided a significant although temporary benefit to consumer purchasing ability.

Consider that in June 2007, 87% of all mortgage loans in default were on owner occupied homes with the remaining 13% primarily on homes purchased by the owner as an investment. Also consider that in 2007 the number of new foreclosure filings was 2.2 million. Given the declining values of homes and the glut of homes on the market, the holders of delinquent mortgages have been very slow to foreclose. If a mortgage holder forecloses on a home then the mortgage holder will be responsible for paying property taxes and utilities and, in the case of condos, maintenance fees until the mortgage holder is able to resell the property.

If someone has quit paying their mortgage and property taxes then this money is available for other purposes such as paying for gas, clothes, etc. I suspect that the foreclosure problem has unexpectedly put a large amount of extra cash into consumption. Additionally, credit card debt is up and a higher percentage of credit card spending is going for essentials.

Now, in the case of owner occupied homes that are delinquent on their mortgage payments, assume that the owner is no longer paying any of the monthly mortgage payments or the property taxes, that owners continue to live in 50% of the homes on which the mortgage is delinquent and that the average mortgage and property tax payment for these people was $1,500 per month. This situation makes $19.8 billion per year that was previously spent on mortgage payments and taxes available for other purposes. The $19.8b only represents home in foreclosure. The number of homes in foreclosure represented 0.83% of all mortgages in 4Q07. Additionally, the mortgage delinquency rate (mortgage payments more than 30 days past due that are not in foreclosure) was 5.82% in 4Q07. Using the same assumptions above, the total value of delinquent payments would add approximately $143b in additional funds available for consumer spending. Note that total consumer spending runs about $8 trillion per year but much of this spending is non discretionary (income taxes, government paid medical care, etc.).

Neither the increased credit card debt nor the continued residency by non-paying owners in foreclosed homes can last forever.

Thursday, December 14, 2006



What are the issues and facts related to US immigration policy and what priorities concerning same should the federal government adopt?

Tuesday, November 14, 2006


National Politics

Comments on national elections, candidates and election results.

Sunday, September 10, 2006


Policy Priorities

Generally, the Federal Government actively pursues policies that have significant voter support. The typical voter will only support policies dealing with topics that they understand and are familiar with. While this may make sense poitically, policy makers are not necessarily serving their constituents in the best manner possible. In some cases, policy makers need to explain topics that there constituents are not familiar with to help their constituents adjust their priorities. What priorities are not currently being addressed by the federal Government that should be?

Monday, July 03, 2006



Posts on all other topics related to Federal Policy issues should be placed here.

Saturday, June 10, 2006


Tax Issues - Miscellaneous Tax Issues

This topic covers miscellaneous proposals to reform tax policy such as the repeal of the Estate Tax.


Iraq - What Can the US Do Now?

Whether the invasion of Iraq was or was not warranted, we still have the problem of what the US should do now. Staying in Iraq for many years or withdrawing immediately or in the near future are both options but there must be better options. What other options are there?

Sunday, May 28, 2006


National Sales Tax

There is currently a renewed discussion of replacing the personal income tax with a National Sales Tax (NSA). Given President Bush's focus on making major changes to the US tax code, there is a significant possibility that he will attempt to do this after the 2008 mid term elections. The benefits discussed by the supporters of such a change are an easier tax to administer, abolishing the IRS and stimulating economic growth. Estimates of what the rate of a NAS would be range from 15% up to 30% on top of existing state and local sales tax rates.

Politics <br />Blog Top Sites

Tuesday, May 16, 2006


Truth In Fact

When you read the news, you frequently come across soundbites which contain specific statements about a Federal Government policy decision. Although most of the facts presented in these soundbites are accurate, they are frequently misleading to the point of being deceptive. This post presents the truth on these types of "facts".

Saturday, May 06, 2006


Energy - Pricing and Supply

Prices of oil and products refined from oil such as gasoline are near all time highs in the US and there is concern that the high prices will negatively impact the US economy. The President states that the current high prices are caused by a global shortage due in part to strong economies globally especially in China. The President has proposed several policies that will increase supply, reduce demand and will moderate prices.

Will the proposed policies improve supply and reduce prices, what are the problems caused by the current prices and energy situation and what other policy alternatives might be considered?

Wednesday, May 03, 2006


Tax Policy - Long Term Capital Gains Tax Rates

Congress significantly reduced the long term capital gains tax rate in May 2003. The Democrats voted against the legislation claiming that 60% of the benefit would accrue to the wealthy. The Republicans supported the legislation claiming that 60% of taxpayers would benefit, that people who earn the money should be able to keep the money and that the change would stimulate the economy.

Was this good policy and what are the facts?


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