Thursday, September 29, 2011 - Conforming Loan Limits

Conforming Loan Limits: I'm a car guy. Most of you know this. However, I’ve recently become the housing guy in Washington. This is not due to any direct background or experience. I have only bought 3 and sold 2 houses in my life, all of in which the captivating Mrs. Campbell and I have lived. It is partly because I serve on the committee that deals with such issues. But, it is mainly because I know we never go into recessions without housing and cars leading us in, and we never recover without housing and cars leading us out. These two industries are just too big a part of the economy and too important to the psyche of consumers. The car business is doing better of late, but housing is not. There are many reasons our economy stinks, but one of them is certainly because the housing market is still in a decline. The economy will not be strong again until we turn it around.

When you have a sick patient, the first rule is, "Do no harm". The housing market is sick. Much of what is causing this sickness is the fact that the housing finance system, anchored by Fannie Mae and Freddie Mac, failed. We have to replace that system.  As many of you know, I have a Housing Finance Reform Bill (H.R. 1859) to deal with this problem. I am making progress with that bill, but it is not ready to move yet.

So, until we are ready to move forward with a replacement system, we should do no harm to the current one. But, unfortunately, harm is about to befall the housing market. The limits on "conforming loans" (which are loans guaranteed by one or more government agencies) are scheduled to drop on October 1st. Many people think that this just affects houses at the higher end of the market. It does not. The expiration of the current conforming loan limits will mean that houses priced as low as $250,000 will no longer be eligible for FHA loans - and FHA is now financing 22% of all home loans made nationally.

The practical consequence of all this is that, effective October 1, if you are selling a house, a prospective buyer in many cases will have significantly fewer financing options. This may require that buyer to have a higher down, or better credit, or accept higher payments on a much shorter-term and variable rate loan. In other words, fewer people will be able to buy your house, and potential buyers will need more out of pocket to do so even if you don't lower the price. Experts predict that this will result in prices falling nationally by another 2-7%.

This is bad news, and not just for people buying or selling a house. It will affect consumer confidence, household wealth, and the stability of the banking sector - all in a negative way. I have been working daily with people of both parties in both Houses to get these loan limits extended. But, a bipartisan consensus has not emerged yet.

No one likes the current system of housing finance. We need to protect the taxpayer more, create many more purchasing options and engender private sector involvement.  But, until we replace the current housing finance system with a better one, we should not make what we have worse. I hope we can restore these conforming loan limits in the next month or so before too much more damage is done to the economy.

Put Your Money Where Your Mouth Is:  This is the name of a bill I introduced 3 sessions of congress ago and have re-introduced in every congress since. But, it seems more apropos now than ever. Warren Buffett has recently been so vocal about his desire to pay more taxes that the President's latest tax increase proposal is being called the "Buffett tax".

The thing is, though, Warren Buffett can pay more taxes right now. He does not need to wait for this Congress or the President or anybody. He can voluntarily pay any additional amount he wants. But, he doesn't do so. Neither do any of the others out there who believe they pay too little. Instead, they continue to fill the airwaves with messages about how, because they think they are under taxed, they think everyone is under taxed and should pay more.

Well, maybe this is because they either don't know that they can pay more right now or simply just don't know how to do it. That must be it, right? Otherwise, they would lead by example and pay more, wouldn't they?

So my bill, H.R. 1541, the "Put Your Money Where Your Mouth Is” Act, would add a line after the total tax line on your tax form 1040 that would read, "Voluntary additional tax I would like to pay". I'm sure that if this bill becomes law and this line is added, Buffett and others will immediately pay the additional tax they feel they ought to be assessed. Then, the government will get more revenue….

....and Mr. Buffett can then leave the rest of us alone.

Monday, September 26, 2011 - Neither Snow nor Sleet nor Dark of Night

Neither Snow nor Sleet nor Dark of Night...: We all are familiar with the rest of the variations on this phrase describing the dedication of the US Postal Service (USPS) in delivering the mail. Well, snow and rain may not be keeping the Post Office from delivering the mail, but financial problems within the USPS may soon halt delivery.

This has not gotten much publicity, but the USPS is in real trouble. The USPS is an independent, but wholly-owned entity of the federal government. It is designed to be self-supporting such that the rates it charges will cover the costs of delivering the mail. This worked for a long time. Obviously, for over 200 years. But, not so now. After earning modest profits from 2004-2006, the agency started hemorrhaging money in 2007. Between 2007 and 2010, it has lost over $20 billion. These losses are now accelerating in 2011 with a loss, in the first 3 quarters of this year, amounting to $5.7 billion. The USPS has already borrowed the maximum $15 billion it is allowed to borrow under the law and has already deferred another $4 billion in payments to its employee retirement fund to cover these losses. The Continuing Resolution adopted by the House last week will have the federal government make another roughly $7 billion in payments for retirement and worker's compensation that the USPS does not have the cash to make. In other words, the USPS has run a deficit of $26 billion combined from the last several years, which has been covered by borrowing from various sources, and there is no turn-around in sight. The fact is that the USPS has both run out of cash and borrowing ability, and will be completely out of cash by the middle of next year.

Why is this happening? Part of the reason is the impact of e-mail, Fed-Ex and other competitors, and the general economy on mail volume. Mail volume has dropped from a peak of 213.1 billion pieces in 2006 to 170.6 billion in 2010. That's a drop of nearly 20%. Much of this drop is unlikely to be reversed as the alternatives to "snail mail" increase and as younger generations increasingly communicate online or by text or cell phone. Fifteen years ago, these missives would have been "snail mailed" to you. But, volume alone does not account for the entire problem. 80% of the costs incurred by the USPS are employment costs. Although its employees are covered under the same benefits package as all other federal employees (including members of Congress), they are required to contribute a smaller share of their benefits than all other federal employees (including members of Congress). Recent law changes now require that they “catch-up” on their pension contributions and "fully fund" their retirement plan. This will require a payment of between $5-6 billion every year through 2016. And, postal workers are shielded from layoffs. Furthermore, the law places a lot of restrictions on the USPS's ability to increase revenue through price increases, required subsidies, and permitted advertising.

OK, I know that I may have gotten a little bean-counterish on you all right there with all the numbers and such. But, many of you like this stuff! Anyway, if I lost you for the last two paragraphs, come back to me now for the bottom line here.

In other words, this is a classic business failure scenario. New technology has made obsolete much of this business’ core products. An intractable union refuses to adjust above-market benefit packages and requires unsustainable staffing levels. Government restrictions and tradition prevent the business from pursuing other avenues of income generation. New competitors are more flexible and have lower costs. Sounds just like the car and steel businesses (amongst others), huh? And, a classic business failure needs a classic business turnaround.

This means expenses have to be cut, unprofitable business units discontinued, and new profitable ones started. Services will need to be changed, employee costs reduced and renegotiated, and the USPS must become more lean and agile. Some of you may think that rates can just be raised and that will take care of it all. But, it will not. There are too many alternatives to mail these days, and increasing rates too much will result in further declines in mail volume, which will spiral into further losses. The structure of the business needs to change. But, since this is a wholly-owned government entity, many such changes unfortunately require Congressional action, which is action that rarely moves quickly.

Darrell Issa (R-CA) is chairman of the relevant committee in the House with jurisdiction over the USPS. He and Dennis Ross (R-FL) have introduced the "Issa-Ross Plan to Save the Postal Service". I will not go into detail here, but you can read details at the Committee on Oversight and Government Reform’s website. Darrell Issa is a guy who created and ran a number of businesses, and I am glad that someone with his experience is in charge here. Congress needs to vote on a bill like this in the next few months to prevent either total collapse or another huge taxpayer bailout costing many, many billions of dollars - and which will only postpone the inevitable.

I support the Issa-Ross plan as a good start. But, in order to be able to respond more quickly to new technologies and a changing environment, the USPS may need to be spun off from the government in one way or another in order to be free of the necessity of congressional action for every business plan change. Likewise, it may also need to be free of government civil service restrictions for employees in the future. However, what kind of entity this should be will be the subject of much debate in the months to come.

Now, if you will excuse me, I'm going to lick a stamp now……just for old times’ sake.

Tuesday, September 20, 2011 - Taxing the Rich

Taxing the "Rich": The President's latest proposal to make "the rich pay their fair share" is just another awful idea in a series of awful ideas from this Administration. First of all, it again defines a taxpayer making $200,000 as "rich". I know a number of such people and I suspect you do too. They live comfortable lives, but I don't think they deserve the suddenly pejorative term "rich", particularly if they come to that income by way of 2 working spouses and some investment income because they have saved money over time.

But, the new wrinkle here is the so-called "Millionaires" tax on incomes over $1 million. Obama's rhetoric explains that he will only require that these incomes pay the same tax rate as "middle class families". Well, obviously, the tax rate on these incomes is already much higher than for lower tax brackets. Most deductions for higher income people have already been largely eliminated through the alternative minimum tax and other tax laws over the last 20 years. There are really only 2 ways to get the tax rate on your $1 million income down. The first is if a bunch of that income is derived from capital gains taxes which are taxed at 15% currently. The second is if you give away a bunch of your money in charitable contributions, which is the only deduction that is not currently limited for high incomes. What the President is proposing to do is establish a new minimum tax rate on the gross incomes (not net incomes) of individuals regardless of their charitable contributions or the character of their income.

This will have two very negative effects.

First, it raises capital gains taxes significantly on assets with large gains. This will result in many taxpayers choosing not to sell assets because their income will actually drop when they reinvest the after-tax proceeds of the sale. No sale not only means no revenue for the government, but it also means an asset cannot be moved from an owner who no longer wants it to a new owner who may maximize its value - and that means less growth and fewer jobs.

Second, it actually penalizes high income people who give away a lot of their money and does nothing to high income people who don't. This is unbelievable! If you make a big salary and keep it all, you won’t see any tax changes. But, if you make a lot of money and give a bunch of it away, you get a penalty tax for so doing. You will actually be taxed on money you made but didn't keep and don't have any more because you gave it away. This will have a chilling effect on charitable giving by those who give the most.

As an example of the inequity in the Obama/Buffett proposal, an actor who earns a $20 million salary for starring in a movie and gives little to charity would see no tax increase under this plan. Same thing for a basketball star under the same circumstances. But, a business owner who works for 20 years to build up a business and then sells it for a one-time profit of $5 million and gives $1 million of it to charity would see a gigantic tax increase. Is this incredible unfairness unintentional on the President’s part, or is he making sure some of his high-income friends are shielded from his own tax increase? As I often do, I’ll let you draw your own conclusions.

This is another in a long line of proposals by this President that would have the effect of reducing contributions by individuals and businesses to private charities. Does the President not understand what he is doing or the effects thereof? Or, does he want to reduce the work of charities so that more people and causes in need have only the government to turn to? Or, is it both? I suspect both.

One other point needs to be made here. The President says that all his tax increases on the "rich" and on businesses, who he is counting on to employ people, will raise $1.2 trillion over 10 years. To put that in perspective, the federal deficit this year…that's just one year… is more than $1.2 trillion. So, in spite of all the soaring campaign rhetoric, Obama's tax increases plug less than 10% of the deficit.

So, what's he going to do to get the other 90%? He is very, very quiet on this point. That's because he doesn't want you to know that the only option for him is to TAX YOU! No matter who you are and what your income is. You see, if you don't reform the entitlements to reduce their cost and cut other spending, you have to tax everybody to balance the budget. The "rich" just don't have enough money, even if you confiscated it all. That's why, in spite of the current rhetoric, they will eventually propose new taxes on everyone - no matter your income level.

Tuesday, September 13, 2011 - The President's Speech

The President's Speech: As regular readers of this missive know, I am a lifelong Republican. Accordingly, I have never been to a Democrat campaign rally. That is to say at least until last week. Last Thursday, I attended one…..on the floor of the United States House of Representatives. President Obama made a special request to speak to a Joint Session of Congress and I assumed it would be a major policy address. Far from it. It was a campaign speech. There was scarcely little serious policy content present. The first indicator of this was when Obama asked us to "pass this right away", a line which appears on the first page of an 8 page speech, before saying what was in his plan. That's like demanding that someone buy something inside a box without telling them what is in the box. Another indicator of lack of substance was his repeated assertions that the $450 billion one-year cost of the bill would be "paid for". He also made this assertion on the first page of his address. Three pages later he says, "It will be paid for. And here's how: The agreement we passed in July will cut government spending by about $1 trillion over the next 10 years. It also charges Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I'm asking you to increase that amount so that it covers the full cost of the American Jobs Act."

Are you kidding me? He outlines $450 billion in new stimulus spending in one year and then says it will be "paid for" over 10 years by something the rest of you guys need to figure out later? This is ludicrous! He says it is "paid for", but in this speech had no proposal on how to do it? And, of course, he is trying to match one year's spending against 10 years of paying for it. But apparently, he can figure out how to spend the money in one year, but not how to save it over the next 10 years. This, of course, is part of how we got into this problem in the first place. Spend money right now and pay for it later over many years. It's like taking a 30 year mortgage out to buy groceries.

However, just yesterday, the President did outline his own “pay for” that may cover part of the costs. Naturally, it is a bunch of tax increases, largely on businesses, that he has already outlined in the past and used repeatedly to “pay for” many times more spending than said increases could ever raise. Now, he is using them again. And, the tax increases are permanent and take 10 years to “pay for” one year’s spending. And, of course, they are the same tax increases that Obama used months ago to make his budget look better, which budget, of course, did not include this new spending. Because he has previously used these tax increases in his baseline budget, this really is no proposal at all.  But interestingly, all the “tax cuts” and spending and giveaways in his program will all occur before the next election and then stop. But, he has postponed all of his proposed tax increases until after next year's election when he will stand for reelection. So, a lot of people get money from the government before the election and no one pays any more taxes. Then, after the election, taxes go up literally for every single American by a lot and permanently. Coincidence? I’ll let you be the judge.

If he had been serious about seeking a bipartisan job creation agreement, maybe he should have included a few of the 13 job bills passed by the House so far this year that would each individually stimulate job creation in some sector of the economy without spending a single dime of taxpayer money. But no, despite at least 13 bills to choose from, he did not include a single proposal passed by the House in his "plan". In other words, he ignored every single Republican proposal, many of which have been out there for months.

This "proposal" (and I hesitate to dignify it even with that designation) is simply Stimulus II. And, since Stimulus I was $1 trillion spent over two years, this $450 billion spent over the one year until Obama's reelection is at about the same level. It is universally recognized that Stimulus I failed. It served only to deepen our debt crisis. Obama's Stimulus II would fail also, if enacted. In fact, with the exception of the trade agreements, I cannot readily point to a single element of his plan that I support separately or in combination with the others. Even the "tax cuts" are all one-year only. The economy needs certainty and permanence in tax policy, not more one-year only giveaways that will soon expire and be replaced by tax increases. But then again, it's not serious policy.

The really sad part here is not that the President used the House floor for a campaign speech. Or, that he made factual errors and misstatements and that his proposal doesn't add up and won't work. The real tragedy is that while this political theater is going on, the government actually needs to do some things to try to shake loose this stagnant to declining economy. We need to remove many of the uncertainties and government burdens that are holding back capital deployment, risk taking and job creation. The President did not try to reach across the aisle here. If anything, his lack of interest in any Republican proposal and the tone of his speech served to place further distance between the parties. We do need to take action. That action clearly must contain some Republican priorities and some Democratic priorities because the government is divided. Obama is clearly not ready to do that now. I certainly hope that he changes his position and his tone in the coming months and leaves the campaign trail to be president instead of candidate for a while.

One other thing stuck me during the campaign rally. At one point, he described Abraham Lincoln as the "founder of the Republican party". Interestingly, I could not find this remark in the pre-printed written text of the speech. Presumably, he ad-libbed it. Problem is, he is wrong. Lincoln was not even the first nominee for president of the Republican Party. That honor belongs to Californian John C. Fremont. This is not the first time this President has stood on the House floor or elsewhere and uttered "facts" that were blatantly wrong. As a "car guy", I remember when he said that we Americans "invented" the automobile. Well, we invented many things, but not that. No one is actually credited with said innovation although the first self-propelled, internal combustion engine, 4 wheeled vehicle is recognized as being built in Germany by Mercedes in 1886 - a fact that that the current Mercedes-Benz Corporation gently pointed out to the President after his remarks. I'm not upset that he made a mistake. We all make mistakes. What drives me crazy is how unequally the mainstream media (MSM) treats such errors. Every such error made by President Bush was treated to huge media coverage and proof of his supposed lack of intellect. But, when this President makes numerous and egregious factual misstatements, nary a word is uttered by the media lest it interfere with his carefully crafted image of intelligence and infallibility.

By the way, the President also said, "We have to reform Medicare to strengthen it.” I'm sure that will make a cold chill run up the spines of some more liberal readers of these missives. He is right about this. But, he has never proposed such reforms.