Keeping Banks Safe For Our Money

March 31, 2020

As anyone who has read the papers or seen the news in the last few years knows, banks around the world have broken numerous serious laws, have had to be bailed out with taxpayers money, and yet still pay millions of dollars to inept executives and billions more to stockholders. Many of their problems involve their connection to complex financial transactions that do nothing but make money for already-rich individuals. There has to be a better way, and there is.  The economic melydown created by the covid-19 crisis seems a perfect time to reorganize the sector.

I would oblige all banks to become credit unions and I would strictly limit their functionality.

Credit unions are not-for-profit institutions cooperatively owned by their members. They operate solely for the benefit of their members rather than for outside shareholders, of whom there would be none.  Their senior management is elected by the members and their policies are offered up for approval at regular meetings of the membership. Senior management remuneration would require members’ approval. The billions of dollars that are currently paid out in dividends to outsiders would be used to increase services and lower costs for the members. Any surplus could be re-paid to the members or added to the credit union’s capital.

I would limit their functionality to the taking, managing and disbursement of members’ deposits, and to the issuance of personal loans (including credit cards) and personal mortgages.  Any member or corporation that required business loans, corporate mortgages, investments or insurance would turn to investment companies, mortgage brokers and insurance companies designed specifically for that function.

No one would be limited in their desire to engage in stock market or other investments.  But these would be handled entirely by companies separate from banks.   No longer would bank depositors’ cash be at risk in the marketplace for derivatives, for example.

Competition between credit unions, if such were needed, would become a function of service and accessibility.  I believe this would get us more branches on the streets and a more personalized service between member and bank.  It would bring banking back to the people, to a smaller scale that we can understand and control — after all, it is our money they are using.

 


Bailout Rules for Infected Corporations

March 17, 2020

Some years ago, I wrote a piece about Bombardier receiving tax-payers subsidies. In that piece I suggested some rules that should be put in place for such loans and subsidies.  As we are about to grant similar multi-billion handouts to major corporations, I thought I would repeat the rules as to how we should deal with the current crisis.

My own position is that no corporations should receive public funds, period.  However, until we straighten out our economy to be self-supporting, I would be prepared to lend affected industries the money they need, but only under certain conditions:

  1. The company cannot issue dividends or share buy-backs or any other kind of profit-sharing until the loan is repaid in full;
  2. No executive bonuses or similar payments to be paid until the loan is fully repaid;
  3. No executive salaries or other payments to be increased until the loan is fully repaid;
  4. If the company goes bankrupt (or similar), the taxpayer loan is in first place for repayment after wages and salaries.

Who on earth could object to this?  It gets the company the cash it needs and gives executives every incentive to repay the taxpayer as quickly as possible.  I would push this idea for any and all companies seeking tax-payer assistance.


Interest Rate History

February 4, 2020

The often interesting Visual Capitalist has published a graph of nominal interest rates from the 14th century through to today:

Select image for a larger look.

“Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England, shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.  Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Centennial Averages of Real Long-Term “Safe-Asset”† Rates From 1311-2018

% 1300s 1400s 1500s 1600s 1700s 1800s 1900s 2000s
Nominal rate 7.3 11.2 7.8 5.4 4.1 3.5 5.0 3.5
Inflation 2.2 2.1 1.7 0.8 0.6 0.0 3.1 2.2
Real rate 5.1 9.1 6.1 4.6 3.5 3.4 2.0 1.3

*Real rates take inflation into account, and are calculated as follows: nominal rate – inflation = real rate.
†Safe assets are issued from global financial powers

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%.”

The current rash of negative interest rates that we see today is therefore in line with historical trends.


The State of Inequality

January 16, 2020

The Pew Research Centre has published interesting results from a survey on inequality — or rather, attitudes to inequality — in the United States.

 

Views on the importance (or lack thereof) of tackling economic inequality tend to be a function of the respondent’s current economic situation:

 

“Asked about what contributes to economic inequality in this country, Democrats are more likely than Republicans to point to structural factors, such as the tax system (56% of Democrats vs. 30% of Republicans say this contributes a great deal) and problems with the U.S. educational system (49% vs. 38%). In turn, Republicans are more likely than Democrats to say that the different life choices people make (60% of Republicans vs. 27% of Democrats) and some people working harder than others (48% vs. 22%) contribute a great deal to economic inequality.”

I guess I shouldn’t be surprised that no-one seems to have mentioned it, but capitalism is inherently unequal. The tax and education systems, the choices and the effort one puts into work are almost irrelevant to the systemic inequality that capitalism requires for it to function.


A Photo Essay on The Collapse of Malls

January 4, 2020

I have been writing about malls and their economic problems since the summer of 2008.  Further discussion, most of it 10 years old, can be found here, here, here, and here.

Philip Beuhler now gives us a photographic essay on the decline of one particular mall in Wayne, New Jersey.

Artworld, Philip Beuhler (2019)

There are some fascinating images here and, as the article states they are “neither a nostalgia fest nor disaster porn, but an unsparing documentation of the decay that marks time and cultural change.”


Turn Corporate Taxes Into Licences

December 16, 2019

A recent story in the Washington Post and republished in Greenwich Times shows that, once again, major profitable US corporations are playing the tax code to their own advantage and to the cost of the rest of US taxpayers.

  • 91 of the Fortune 500 paid NO taxes at all on earnings of $101 billion;
  • Amazon made a profit in excess of $10 billion but received a tax rebate of $129 million;
  • Video game maker Activision Blizzard had $447 million in profits but received a tax rebate of $243 million, resulting in an effective tax rate of -54.4%.

The new Trump tax code,

“lowered the U.S. corporate tax rate from 35% to 21%, but in practice large companies often pay far less than that because of deductions, tax breaks and other loopholes. In the first year of the law, the amount corporations paid in federal taxes on their incomes – their “effective rate” – was 11.3% on average, possibly its lowest level in more than three decades … [T]he new law introduced many new breaks and loopholes.”

Corporations around the world play the same tricks. Often they reside in tax havens and levy enough “corporate service charges” on their overseas subsidiaries to ensure that no taxes are paid.

And this all comes at a cost to the rest of us.  As corporate taxes fall and government deficits grow, there is increasing pressure to reduce those deficits by reducing spending on welfare services, health, and education.

Centre-right politicians have suggested that lowering corporate tax rates will encourage more companies to stay in-house as it were.  That is just an excuse to make the rich richer as the new Trump tax code proves.  There is a simpler and much more efficient way.

I suggest that corporate income taxes be eliminated completely. They should be replaced by a “license to operate” fee equal to, say, 10% of revenues earned in the country no matter where the head office is based. Simple to understand, simple to manage, and, I suspect, very difficult to get around.

Country of ownership becomes immediately irrelevant, and transfers to an offshore HQ will be pointless for tax purposes. Indeed, they may well create a double taxation situation in which those transfers become taxable revenue in the home country. It also gives corporations the right to NOT operate in any particular country if they choose to forgo the revenues.

Finally, I would make this tax law bullet-proof by including a provision that, should some smart accountant or lawyer find a loophole, then that loophole is closed retroactively to the dater of the law’s passage.

We should give this a try. It is a commonsense approach, eliminates the need for accountants, lawyers, and an army of regulators. It will produce fairness across the board.


The Cannabis Stock Market

December 10, 2019

The legalization of marijuana in Canada and various US states has created a market for cannabis related stocks.  As the following graph from Visual Capitalist shows, it is an extremely volatile market.

 

Select image for a better view.