by Jim Parker, Vice President

The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.

At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.

So, developed world equities, oil and industrial commodities, emerging markets, and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold, and Swiss francs.

It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.

As to what happens next, no one knows for sure. That is the nature of risk. But there are a few points individual investors can keep in mind to make living with this volatility more bearable.

Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor’s of the US government’s credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.

Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks,” remember someone is buying them. Those people are often the long-term investors.

Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive of months of gains totalling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.

Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving.1 A globally diversified portfolio takes account of these shifts.

Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.

_________________________________________________

1. World Economic Outlook, IMF, April 2011.

For example, Amazon.com has thousands of affiliate marketers who sell product through Amazon by placing links from their web sites to the promotional item at Amazon.com. When a consumer makes the purchase, a percentage of the purchase is paid to the web site as a commission for marketing that item. Governor Brown just signed into law a requirement that on-line retailers like Amazon begin collecting sales tax on transaction where a California based affiliate will receive payment. This law will force retailers to set up new systems to collect, track and forward tax revenue to California.

Tax Changes Behavior

Will this change Amazon’s behavior? It already has. All California based affiliate contracts with Amazon were canceled as of today because of this law.

What will that mean to California?
1. Website owners who rely on affiliate revenue will no longer promote Amazon.com since they no longer have an affiliate contract.
2. This will result in less sales and less revenue to California residents who are also affiliates. California will have less income to tax as income tax.
3. While it may be relatively small, it will have a negative impact on business activity and hurt our struggling economy.

I am sure about the facts since Capitalmarketsu.com Magazine is, or rather was, an Amazon affiliate. It won’t mean a great deal to this site since we didn’t sell many books anyway. But, there are many Internet businesses that are the sole business of the owner and they cannot stay in business if they have no affiliate contracts. For  Capitalmarketsu.com Magazine this has been more of an accommodation to our readers and an attempt to monetize to some degree the site and offset the expenses of operating. At the end of this column are the pertinent parts of two letters I received from Amazon detailing this termination and its cause.

Increasing or decreasing taxes does change behavior of both consumers and businesses. Tax policy is, therefore, very important in the process of bringing the United States out of the current extreme slowdown. Our politicians should be looking at the way to use tax policy to increase economic activity, not slow it down. Increased economic activity will result in additional revenue to government through increased sales and income.

For some politicians, the word “revenue” is a euphemism for “higher taxes.” They equate higher taxes with increased revenue, but that isn’t necessarily true. On the other hand, increased economic activity does always result in increased revenue – to the individual family/tax payer and to the government. I wish politicians would quit using deceptive language and speak plainly. When they mean higher taxes, they should say higher taxes. When they say increased revenue they should mean increased revenue.

So much for my soap box.

PC Magazine ran this story today, California Passes Law Forcing Web Retailers to Charge Sales Tax and CNN Money ran this story, Amazon drops California associates to avoid sales tax.

Hello,
For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by on-line retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.
We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.
As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule…

Regards,
The Amazon Associates Team

Hello,
Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned before today will be processed and paid in full in accordance with the regular payment schedule…
To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.
We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.
Regards,
The Amazon Associates Team

To change behavior, add or delete a tax.

By LAURA SAUNDERS of the Wall Street Journal

In a rare show of leniency, the Internal Revenue Service (IRS) on Thursday announced new rules designed to make it easier for people struggling with tax debts to climb out of the hole.

Among the changes, the IRS said it would place fewer claims on taxpayers’ property and would make such “liens” less damaging to taxpayers’ credit ratings. Other changes are intended to help small businesses and forgive debts of more people who are unable to pay.

Commissioner Doug Shulman called the changes an effort to “stand in taxpayers’ shoes” following “the worst recession in a generation.”

“This is a real effort to consider taxpayers’ needs,” said Benson Goldstein, a tax expert with the American Institute of CPAs.

Nina Olson, the National Taxpayer Advocate tapped by Congress to monitor the IRS, was more muted in her response. She called the changes “a significant step in the right direction,” but added that “they are not sufficient to address the problems we have seen.”

The changes affecting the largest number of taxpayers concern liens, or notices that give the IRS a legal claim to a taxpayer’s property in the amount of an unpaid tax debt. The new rules generally prohibit the IRS from filing a lien unless unpaid taxes exceed $10,000, doubling the previous limit, which had been in effect since the mid-1980s.

The IRS also will ease the damage to taxpayers’ credit scores after the full amount of the debt is paid. In an important technical move, the agency will grant more taxpayers “lien withdrawals”—a higher level of forgiveness than the current “lien release.”

According to Ms. Olson, full withdrawal is often better for taxpayers’ credit ratings because it expunges the lien from the record immediately, whereas a release leaves it on the record for at least seven years. A tax lien can knock 100 points off a person’s credit score. The highest credit score is 850 at FICO, a leading credit scorer. Borrowers often need a score in the 700s to qualify for the best rates on loans.

In addition, liens now may qualify for full withdrawal even if the debt isn’t fully paid, so long as the amount is less than $25,000 and the taxpayer enters into a “direct debit installment agreement.”

This typically allows the IRS to make an automatic monthly withdrawal of a scheduled payment from the delinquent taxpayer’s bank account. Taxpayers may apply for a direct debit agreement online at www.irs.gov.

Mr. Shulman said the agency has found that taxpayers with direct debit agreements are good risks and therefore full withdrawals of liens are appropriate.

To continue reading Lien on Me: IRS Eases Debt Rules at the Wall Street Journal

Brian Harris, Senior Editor, Dimensional Fund Advisors

US Monetary Policy since 2000

Source: Federal Reserve Board

Nevertheless, investors may be growing anxious in response to media coverage of the Fed’s continuing expansionary policy. For those who are certain QE2 will be inflationary, perhaps the recent example of Sweden’s monetary base run-up will offer some reassurance.
In the 1990s, Sweden’s central bank, the Riksbank, more than doubled the country’s monetary base during the Nordic banking crisis, but inflation remained moderate during and after the expansionary period. The graph below documents that even as the monetary base jumped from 1994 to late 1996, inflation did not follow suit, and in fact, remained flat before falling in 1996.

Swedish Monetary Policy in the 1990s

Source: Sveriges Riksbank

Sweden’s monetary base expansion is one of several international examples of quantitative easing over the past two decades. These case studies, which include past expansionary periods in the UK, Switzerland, Japan, Australia, New Zealand, and Iceland, are discussed in a recent Federal Reserve Bank of St. Louis review.³ The researchers concluded that doubling or tripling a country’s monetary base does not lead to high inflation if the public views the increase as temporary and expects the central bank to maintain a low-inflation policy.
Of course, many factors may come into play, and we cannot know whether the US will share the same fortune. But at least we know that quantitative easing has occurred without triggering high inflation.

___________________________________

1. Monetary base is the total amount of the liquid currencies circulating in the hands of the public, deposits in financial institutions, and the deposits of the commercial banks in the central bank of the respective country.
2. One indicator of expected future inflation is the difference in rates between US Treasury bonds and Treasury Inflation Protected Securities (TIPS), also known as the TIPS spread. As of December 16, the 10-year zero-coupon TIPS spread was 2.35% (http://www.federalreserve.gov/econresdata/researchdata.htm). Consider, however, that the spread also includes an inflation risk premium, so the spread is not an exact measure of the market’s inflation expectations.
3. Richard G. Anderson, Charles S. Cascon, and Yang Liu, “Doubling Your Monetary Base and Surviving: Some International Experience,” Federal Reserve Bank of St. Louis Review 92, no. 6 (November/December 2010): 481-505.

By Janet Hook and John McKinnon

WASHINGTON—Congress passed the most far-reaching tax bill in a decade late Thursday, averting across-the-board tax increases, enacting new breaks for individuals and businesses and laying a marker for how Washington might work in an era of divided government.

The bill goes to the White House for President Barack Obama’s signature after the House overcame persistent liberal opposition and passed it with an unexpectedly large bipartisan majority of 277-148. The measure passed the Senate earlier in the week also with an overwhelming majority.

The bill reaches deeply into the life and economy of the U.S., more so than might have been expected when Congress first started tackling the matter. Wage-earners will get a new payroll tax break; wealthy heirs get a lower estate-tax rate; and businesses gain an unexpected plum—a big tax write-off for new equipment purchases.

The $858 billion bill breaks a stubborn political impasse prompted by the Bush-era tax cuts, which were due to expire at the end of this year. The bill provides a two-year extension for all income brackets, kicking the issue into the next Congress and into the middle of the 2012 election. Lawmakers, especially Republicans, said the current economy was too weak to withstand a tax increase.

Obama’s success in moving a tax plan through Congress is the opening step on a new, more centrist course White House officials hope will yield results. Jonathan Weisman discusses. Also, Nick Timiraos says higher mortgage rates, soaring due to rising Treasury yields, are likely to hurt any housing recovery.

In the bill’s sweep, Congress signaled a return to tax cutting as a principal engine of driving economic growth, especially compared with Mr. Obama’s 2009 stimulus bill, which put more emphasis on government spending…

For the complete article, go to Congress Passes Tax Deal at the Wall Street Journal.

Dealing With US Debt

If you want to watch something alarming, look at the U.S. Debt Clock (http://www.usdebtclock.org/), which calculates, second-by-second, America’s rising debt (approaching $14 trillion), federal spending (nearly $3.5 trillion a year) and budget deficit (roughly $1.3 trillion).  Second-by-second the numbers increase, and you can also watch (more slowly) the inexorable rise in the average debt per U.S. citizen — currently more than $44,000 — perhaps more by the time you read this and check for yourself.

The Debt Clock also lists the largest budget items and THEIR growth, and you can quickly see that they are not where most of the politicians have focused their attention and public statements.  While incoming Congressional leaders talk about ending earmarks and cutting foreign aid, the back-breaking line items on the federal budget are Medicare/Medicaid, Social Security, Defense and war expenditures.  At the bottom of the Debt Clock screen are some truly frightening statistics: add up all the future unfunded liabilities for Social Security, the federal prescription drug program and Medicare liability, and you get a future cost of $111.5 trillion.  That’s a little over $1 million per taxpayer.

Painful Debt Choices

Like any debtor who gets in over his head, the U.S. Congress faces painful choices.  They can either make very difficult decisions now — and possibly alienate voters — or kick the can further down the road and leave a bankrupt country or crushing debt for our children or grandchildren to pay.  The problem is great enough that a coalition of the very rich, including Bill Gates and Warren Buffet, are doing something unheard of: they are publicly arguing that Congress should end the tax cuts for them and others of the wealthiest Americans.

Is there a way to get both political parties talking about the hard choices?  On December 1, a bipartisan National Commission on Fiscal Responsibility and Reform, made up of 18 prominent Republican and Democratic leaders, released “The Moment of Truth,” a set of recommendations that would, if enacted, achieve a $4 trillion reduction in government debt.  The group includes the chairmen and ranking members of the Senate and House Budget committees, the chairman of the Senate Finance Committee, a former White House budget director and a vice chairman of the Federal reserve board.  To achieve their deficit reduction goals, the commissioners put everything on the table — Social Security, Medicare, tax rates, government spending, even the elimination of popular tax deductions.

The Moment of Truth

You can read the full 49-page report here: The Moment of Truth.  The report lists, on page 10, some of the considerations that went into the decisions, which you may or may not agree with: “We all have a patriotic duty to make America better off tomorrow than it is today;” “Don’t disrupt the fragile economic recovery;” “Cut spending we cannot afford — no exceptions;” “Demand productivity and effectiveness from Washington;” “Don’t make promises we can’t keep;” “Keep America sound over the long run.”

The plan would cut government discretionary spending and impose spending caps, including annual limits on war spending, impose 15% reductions in Congressional and White House budgets, a three-year freeze on annual Congressional pay raises, and eliminate all Congressional earmarks (9,000 in FY 2010, costing close to $16 billion).

The commission also recommends lowering tax rates and eliminating many deductions.  There are actually several alternatives in the final proposal (pages 25-27), depending on which deductions are eliminated.  One possible plan is to bring us down to three tax brackets of 12%, 22% and 28% — replacing five brackets ranging from 15% to 39.6% that is due to take effect in 2011.  Corporations would pay at a flat rate somewhere between 23% and 28%, and lose most of their special subsidies and tax loopholes.

To get there, the Commission proposes that Congress eliminate all itemized deductions (everybody would take the standard deduction) and replace today’s mortgage interest deduction with a 12% tax credit for mortgage loans up to $500,000.  Capital gains and dividends would be taxed at ordinary income rates (rather than the preferential rates under current law) and the dreaded AMT would be eliminated altogether.

More controversially, charitable donations, which are currently deductible for itemizers, would only qualify for a 12% tax credit, and only then to the extent that the gift exceeded 2% of a taxpayer’s adjusted gross income.  The Commission also proposed replacing the current melange of retirement plans (Roths, IRAs, 401(k)s, 403(b)s, defined benefit plans etc.) with one type of tax-favored retirement account for everybody; the maximum tax-preferred contribution would be $20,000 or 20% of income, whichever is lower.

The commission proposes to raise the age at which you could receive full Social Security benefits by indexing it to life expectancy.  The Normal Retirement Age, which reaches 67 in 2027, would go up to age 68 by the year 2050, and 69 by 2075.  The Early Retirement Ages, when people could opt for lower annual benefits, would go up to age 63 by 2050 and 64 by 2075.  The taxable maximum wage cap on Social Security taxes, currently $106,800, would grow more rapidly than it has in the past, reaching $190,000 in 2020, versus roughly $168,000 under current law.

Finally, the current federal gas tax would be increased by 15 cents per gallon, a figure which is still significantly lower than most European countries.  Among a variety of Medicare reforms, the Medicare physician payment formula would be changed to reward quality of care and outcomes, rather than the quantity of visits or procedures.  And the government’s civilian workforce would gradually be cut by ten percent.

The Vote

If 14 of the 18 members of the Commission had voted to endorse the recommendations, then the full report would have been sent to Congress for a vote.  As it is, only 11 endorsed their own recommendations.

Endorsing: Senate Majority Whip Richard Durbin (D-IL); Senate Budget Committee Chairman Kent Conrad (D-ND); House Budget Committee Chairman John Spratt (D-SC); former Federal Reserve Board vice chairwoman Alice Rivlin, Republican Senators Tom Coburn (OK); Mike Crapo (ID) and Judd Gregg (NH), plus Ann Fudge of Young & Rubicam, and Dave Cote of Honeywell International.  Co-chairs Erskine Bowles (former Clinton White House Chief of Staff) and former Republican Senator Alan Simpson also voted for the proposal.

Opposed: Senate Finance Committee chair Max Baucus (D-MT); Rep. Xavier Beccera (D-CA); Rep. Jan Schakowski (D-IL); Rep. Dave Camp (R-MI); Rep. Paul Ryan (R-WI), Rep Jeb Hensarling (R-TX) and Andy Stern of the Service Employees International Union.

Nevertheless, even the dissenting members of the Committee believe it will change the debate in Washington, and focus Congressional attention on the hard choices rather than the easy sound bites.  Let’s hope so for the sake of our children and grandchildren.

Sources:

Market News: http://imarketnews.com/?q=node/23235

Associated Press: Deficit Reduction Committee Issues

Wall Street Journal: http://online.wsj.com/article/SB10001424052748704594804575648503541856136.html

Tax us more: http://abcnews.go.com/ThisWeek/billionaires-buffett-gates-tax-us/story?id=12259003

Votes pro and con: http://www.miamiherald.com/2010/12/03/1955486/debt-commission-majority-endorses.html

The following is adapted from a lecture given at Hillsdale College on February 2, 2010, during a conference on the New Deal co-sponsored by the Center for Constructive Alternatives and the Ludwig von Mises Lecture Series. A version of this lecture was delivered as the Hayek Prize lecture in 2009.

The Monopoly board game originated during the Great Depression. At first its inventor, Charles Darrow, could not interest manufacturers. Parker Brothers turned the game down, citing “52 design errors.” But Darrow produced his own copies of the game, and Parker Brothers finally bought Monopoly. By 1935, the New York Times was reporting that “leading all other board games … is the season’s craze, ‘Monopoly,’ the game of real estate.”

Most of us are familiar with the object of Monopoly: the accumulation of property on which one places houses and hotels, and from which one receives revenue. Many of us have a favorite token. Perennially popular is the top hat, which symbolizes the sort of wealth to which Americans who work hard can aspire. The top hat is a token that has remained in the game, even while others have changed over the decades.

One’s willingness to play Monopoly depends on a few conditions—for instance, a predictable number of “Pay Income Tax” cards. These cards are manageable when you know in advance the amount of money printed on them and how many of them are in the deck. It helps, too, that there are a limited and predictable number of “Go to Jail” cards. This is what Frank Knight of the University of Chicago would call a knowable risk, as opposed to an uncertainty. Likewise, there must be a limited and predictable number of “Chance” cards. In other words, there has to be some certainty that property rights are secure and that the risks to property are few in number and can be managed.

The bank must be dependable, too. There is a fixed supply of Monopoly money and the bank is supposed to follow the rules of the game, exercising little or no independent discretion. If players sit down at the Monopoly board only to discover a bank that overreaches or is too unpredictable or discretionary, we all know what happens. They will walk away from the board. There is no game.

Relevance to the 1930s

How is this game relevant to the Great Depression? We all know the traditional narrative of that event: The stock market crash generated an economic Katrina. One in four was unemployed in the first few years. It resulted from a combination of monetary, banking, credit, international, and consumer confidence factors. The terrible thing about it was the duration of a high level of unemployment, which averaged in the mid teens for the entire decade.

The second thing we usually learn is that the Depression was mysterious—a problem that only experts with doctorates could solve. That is why FDR’s floating advisory group—Felix Frankfurter, Frances Perkins, George Warren, Marriner Eccles and Adolf Berle, among others—was sometimes known as a Brain Trust. The mystery had something to do with a shortage of money, we are told, and in the end, only a Brain Trust’s tinkering with the money supply saved us. The corollary to this view is that the government knows more than American business does about economics.

Another common presumption is that cleaning up Wall Street and getting rid of white-collar criminals helped the nation recover. A second is that property rights may still have mattered during the 1930s, but that they mattered less than government- created jobs, shoring up home-owners, and getting the money supply right. A third is that American democracy was threatened by the rise of a potential plutocracy, and that the Wagner Act of 1935—which lent federal support to labor unions—was thus necessary and proper. Fourth and finally, the traditional view of the 1930s is that action by the government was good, whereas inaction would have been fatal. The economic crisis mandated any kind of action, no matter how far removed it might be from sound monetary policy. Along these lines the humorist Will Rogers wrote in 1933 that if Franklin Roosevelt had “burned down the capital, we would cheer and say, ‘Well at least we got a fire started, anyhow.’”

To put this official version of the 1930s in terms of the Monopoly board: The American economy was failing because there were too many top hats lording it about on the board, trying to establish a plutocracy, and because there was no bank to government became the bank and pulled America back to economic health.

When you go to research the 1930s, however, you find a different story. It is of course true that the early part of the Depression—the years upon which most economists have focused—was an economic Katrina. And a number of New Deal measures provided lasting benefits for the economy. These include the creation of the Securities and Exchange Commission, the push for free trade led by Secretary of State Cordell Hull, and the establishment of the modern mortgage format. But the remaining evidence contradicts the official narrative. Overall, it can be said, government prevented recovery. Herbert Hoover was too active, not too passive—as the old stereotypes suggest— while Roosevelt and his New Deal policies impeded recovery as well, especially during the latter half of the decade.

In short, the prolonged Depression can be put down to government arrogance— arrogance that came at the expense of economic common sense, the rule of law, and respect for property rights.

Arrogance and Discretion

Consider the centerpiece of the New Deal’s first 100 days, the National Recovery Administration (NRA), which was in effect an enormous multisector mechanism calibrated to manage the business cycle through industrial codes that, among other things, regulated prices. The principles on which its codes were based appear risible from the perspective of microeconomics and common sense. They included the idea that prices needed to be pushed up to make recovery possible, whereas competition constrained recovery by driving prices down. They held that big firms in industry— those “too big to fail”—were to write codes for all members of their sector, large and small—which naturally worked to the advantage of those larger firms. As for consumer choice, it was deemed inefficient and an inhibitor of recovery. The absurdity of these principles was overlooked, however, because they were put forth by great minds. One member of the Brain Trust, Ray Moley, described the myopic credentialism of his fellow Brain Truster, Felix Frankfurter, in this way:

The problems of economic life were to Frankfurter matters to be settled in a law office, a court room, or around a big labor-management bargaining table . . . . The government was the protagonist. Its agents were its lawyers and commissioners. The antagonists were big corporate lawyers. In the background were misty principals whom Frankfurter never really knew at first hand . . . . These background figures were owners of the corporations, managers, workers and consumers.

One family that was targeted by NRA bureaucrats was the Schechters, who were wholesale chicken butchers in Brooklyn. The NRA code that aimed to regulate what they did was called The Code of Fair Competition for the Live Poultry Industry of the Metropolitan Area in and about the City of New York. And according to this code, the Schechters did all the wrong things. They paid their butchers too little. They charged prices that were too low. They allowed their customers to pick their own chickens. Worst of all, they sold a sick chicken. As a result of these supposed crimes, they were prosecuted.

The prosecution would have been comic if it were not business tragedy. Imagine the court room scene: On one side stands Walter Lyman Rice, a graduate of Harvard Law School, representing the government. On the other stands a small man in the poultry trade, Louis Spatz, who is afraid of going to jail. Spatz tries to defend his actions. But he barely speaks English, and the prosecutor bullies him. Nevertheless, Spatz is now and then able to articulate, in his simple and common-sense way, how business really works.

Prosecution: But you do not claim to be an expert?
Spatz: No.
Prosecution: On the competitive practices in the live poultry industry?
Spatz: I would want to get paid, if I was an expert.
Prosecution: You are not an expert!
Spatz: I am experienced, but not an expert . . . .
Prosecution: You have not studied agricultural economics?
Spatz: No, sir.
Prosecution: Or any sort of economics?
Spatz: No, sir.
Prosecution: What is your education?
Spatz: None; very little.
Prosecution: None at all?
Spatz: Very little.

Then at one point this everyman sort of pulls himself together.

Prosecution: And you would not endeavor to explain economic consequences of competitive practices?
Spatz: In my business I am the best economist.
Prosecution: What is that?
Spatz: In my business I am the best economizer.
Prosecution: You are the best economizer?
Spatz: Yes, without figuring.
Prosecution: I wish to have that word spelled in the minutes, just as he stated it.
Spatz: I do not know how to spell.

This dialogue matters because little businesses like Schechter Poultry are the natural drivers of recovery, and during the Great Depression they weren’t allowed to do that driving. They weren’t allowed to compete and accumulate wealth—or, in terms of Monopoly, to place a house or hotel on their property. Instead they were sidelined. The Schechter brothers ultimately won their case in the Supreme Court in 1935. But the cost of the lawsuits combined with the Depression did not go away.

Regarding monetary policy, it is clear that there wasn’t enough money in the early 1930s. So Roosevelt was not wrong in trying to reflate. But though his general idea was right, the discretionary aspect of his policy was terrifying. As Henry Morgenthau reports in his diaries, prices were set by the president personally. FDR took the U.S. off the gold standard in April 1933, and by summer he was setting the gold price every morning from his bed. Morgenthau reports that at one point the president ordered the gold price up 21 cents. Why 21, Morgenthau asked. Roosevelt replied, because it’s 3 x 7, and three is a lucky number. “If anyone knew how we set the gold price,” wrote Morgenthau in his diary, “they would be frightened.”

Discretionary policies aimed at cleaning up Wall Street were destructive as well. The New Dealers attacked the wealthy as “money changers” and “Princes of Property.” In 1937, after his re-election, Roosevelt delivered an inaugural address an instrument of “unimagined power” which should be used to “fashion a higher order of things.” This caused business to freeze in its tracks. Companies went on what Roosevelt himself resentfully termed a “capital strike.”

These capital strikers mattered because they were even more important to recovery than the Schechters. Consider the case of Alfred Lee Loomis, who had the kind of mind that could contribute significantly to Gross Domestic Product and job creation. During the First World War, he had improved the design of firearms for the U.S. Army. In the 1920s, he became wealthy through his work in investment banking. He moved in a crowd that was developing a new form of utility company that might finally be able to marshal the capital to bring electricity to the American South. But when Loomis saw that the Roosevelt administration was hauling utilities executives down to Washington for hearings, he shut down his business, retreated to his Tudor house, and ran a kind of private think tank for his own benefit. We have heard a lot about a labor surfeit in the 1930s. Here is a heresy: What if there was a shortage of talent brought on by declarations of class warfare?

Another challenge to the Depression economy was tax increases. While these increases didn’t achieve the social equality at which they aimed, they did significant damage by confiscating too much individual and corporate property. As a result, many individuals and businesses simply reduced or halted production— especially as the New Deal wore on. In the late 1930s, banker Leonard Ayres of the Cleveland Trust Company said in the New York Times: “For nearly a decade now the great majority of corporations have been losing money instead of making it.”

As for big labor, the Wagner Act of 1935 proved to be quite destructive. It brought on drastic changes at factories, including the closed shop—the exclusion of non-union members. Another innovation it helped bring about was the sit-down strike, which threatened the basic property right of factory owners to close their doors. Most importantly, it gave unions the power to demand higher wages—and they did. A wage chart for the 20th century shows that real wages in the 1930s were higher than the trend for the rest of the century. This seems perverse, considering the economic conditions at the time. The result was high paying jobs for a few and high unemployment for everyone else. The reality of overpriced labor can be seen in several stock phrases coming out of the Great Depression—“ Nice work if you can get it,” for example, was the refrain of a Gershwin song performed by Fred Astaire in The Damsel in Distress, a film released in 1937 at the zenith of union power.

To return to the Monopoly board metaphor, the problem in the 1930s was not that there was no bank. It was that  there was too much bank—in the form of the federal government. The government took an arbitrary approach to the money supply and made itself the most powerful player. It shoved everyone else aside so that it could monopolize the board. Benjamin Anderson, a Chase economist at the time, summed it up in a book about the period: “Preceding chapters have explained the Great Depression of 1930 to 1939 as due to the efforts of the governments and very especially the government of the United States to play god.”

Relevance for Today

It is not hard to see some of today’s troubles as a repeat of the errors of the 1930s. There is arrogance up top. The federal government is dilettantish with money and exhibits disregard and even hostility to all other players. It is only as a result of this that economic recovery seems out of reach.

The key to recovery, now as in the 1930s, is to be found in property rights. These rights suffer under our current politics in several ways. The mortgage crisis, for example, arose out of a long-standing erosion of the property rights concept—first on the part of Fannie Mae and Freddie Mac, but also on that of the Federal Reserve. Broadening FDR’s entitlement theories, Congress taught the country that home ownership was a “right.” This fostered a misunderstanding of what property is. The owners didn’t realize what ownership entailed—that is, they didn’t grasp that they were obligated to deliver on the terms of the contract of their mortgage. In the bipartisan enthusiasm for making everyone an owner, our government debased the concept of home ownership.

Property rights are endangered as well by the ongoing assault on contracts generally. A perfect example of this was the treatment of Chrysler bonds during the company’s bankruptcy, where senior secured creditors were ignored, notwithstanding the status of their bonds under bankruptcy law. The current administration made a political decision to subordinate those contracts to union demands. That sent a dangerous signal for the future that U.S. bonds are not trustworthy.

Three other threats to property loom. One is tax increases, such as the coming expiration of the Bush tax cuts. More taxes mean less private property. A second threat is in the area of infrastructure. Stimulus plans tend to emphasize infrastructure— especially roads and railroads. And after the Supreme Court’s Kelo decision of 2005, the federal government will have enormous license to use eminent domain to claim private property for these purposes. Third and finally, there is the worst kind of confiscation of private property: inflation, which excessive government spending necessarily encourages. Many of us sense that inflation is closer than the country thinks.

If the experience of the Great Depression teaches anything, it is that property rights must be firmly established or else we will not have the kind of economic activity that leads to strong recovery. The Monopoly board game reminds us that economic growth isn’t mysterious and inscrutable. Economic growth depends on the impulse of the small businessman and entrepreneur to get back in the game. In order for this to happen, we don’t need a perfect government. All we need is one that is “not too bad,” whose rules are not constantly changing and snuffing out the willingness of these players to take risks. We need a government under which the money supply doesn’t change unpredictably, there are not too many “Go to Jail” cards, and the top hats are confident in the possibility of seeing significant returns on investment.

Recovery won’t happen from the top. But when those at the top step back and create the proper conditions, it will happen down there on the board—one house at a time.

Reprinted by permission from Imprimis, a publication of Hillsdale College.

What the new credit card law means for you

by Connie Prater – FoxBusiness.com

Credit card users can expect the most dramatic changes in credit terms, interest rates and fees in decades now that most major provisions of a new federal credit card law have gone into effect.

The new normal for credit cards is more transparency and easier-to-understand terms, but at a higher upfront cost. Credit card issuers and credit industry analysts say the credit card reform law makes credit cards more costly for all users and unaccessible for low-income families and people with bad credit. The law likely means the return of routine annual fees, fewer rewards cards and the possibility that credit card bills will be payable immediately rather than after a month-long grace period.

The new normal for Credit Cards

President Obama signed the Credit CARD Act of 2009 into law May 22, 2009, following passage days earlier in the Senate and the House.

What does the credit card law mean for cardholders? Millions of credit card users will avoid retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and the right to opt out of significant changes in terms on their accounts. That will take the surprise out of “gotcha” fine print and give consumers time to shop around for better deals if they don’t like the new terms. The requirements are being phased in. The first batch took effect Aug. 20, 2009, and the majority of provisions started on Feb. 22, 2010, while some begin on August 22, 2010.

The Fed just announced final rules for the third phase of the Credit CARD Act — which takes effect on August 22, 2010. Those rules say, among other things, that late payment fees will be capped at $25 in most cases. Also, if consumers exceed their spending limits, they can’t be charged more than the excess amount.

The law has fundamentally changed the way credit card issuers market, bill and advertise credit cards.

Here are the highlights of the credit card law:

To view the rest of this article go to What the new credit card law means for you

America’s baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they’ll have to spend in retirement.

Policy makers have long worried that Americans aren’t saving enough for old age. And lately, current and prospective retirees have been hit on many fronts at once: They have less money, they earn less on what they have, their houses aren’t rising in value and the prospect of working longer to make up the shortfall has dimmed significantly in a lousy job market.

“We will have to learn to make do with a lot less in material things,” says Gary Snodgrass, a 63-year-old health-care consultant in Placerville, Calif. The financial crisis, he says, slashed his retirement savings 40% and the value of his house by about half.

Banks, home buyers and bond issuers are all benefiting as the U.S. Federal Reserve holds short-term interest rates near zero to support a recovery. But for many of the 36 million Americans who will turn 65 over the next decade—and even for the 45 million who have another decade to go— the resulting low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse.

Low yields present retirees with a difficult choice: Accept the lower income offered by safer bonds, or take the risk of staying in the stock market. Either way, their predicament could put a long-term damper on the consumer spending that typically drives U.S. growth.

“If these rates stay as low as they are, then a lot more people are going to be hurting,” says Jack Van Derhei, research director at the Employee Benefit Research Institute. The non-partisan outfit estimates that if current conditions persist, nearly three in five baby boomers will be at risk of running short of money in retirement. “There are going to be many luxury items that will simply have to be eliminated,” for retirees to make ends meet.

Despite the market’s rebound from the lows of 2009, nest eggs remain severely impaired. As of the first quarter of 2010, net household assets—homes, 401(k) plans, pension assets and other investments minus debts—stood at $54.6 trillion, down 18% from the end of 2007. That’s an average of about $171,000 per person, much of which is concentrated in the hands of the wealthiest.

At the same time, the return people can hope to earn on their assets has fallen, particularly for those who switch into bonds or annuities to guarantee a fixed income. The average yield on U.S. government, corporate and mortgage bonds stands at about 2.4%, while stock-market valuations suggest a long-term return of about 6%. At those levels of return, some 59% of people aged 56 to 62 will be at risk of not having enough money to cover basic living and health-care costs in retirement, estimates Mr. Van Derhei. If market returns are higher—8.9% for stocks and 6.3% for bonds—the picture isn’t a lot better: The percentage at risk falls to about 47%.

Before the recession hit, many economists assumed people would solve their retirement problems simply by staying in the work force longer. Now, “the recession has blown that idea out of the water,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of a 2008 book that advocated working longer.

Older workers, who typically fared better than their younger counterparts in recessions, have been hit just as hard by layoffs this time around. As a result, the fraction of people 65 or older who are working has leveled off after a long period of growth. As of July, it stood at 15.9%, down from 16.3% in mid-2008.

For the rest of this article, go to the Wall Street Journal.

The Financial Impact on You of Renewable Energy

Some may wonder why we would be posting a story about renewable energy on a site that is dedicated to Investor Education for Main Street America. It is precisely because there is a huge financial impact on Main Street America if we continue down the current path of forcing the consumption of energy that is scarce, unreliable and expensive. Unfortunately, in the current environment in America, if you are to watch out for your own pocketbook, you have to engage with politicians – otherwise they will pick you pocket clean. Some would say this has always been the case. I say the problem has multiplied in recent years and citizens who want a financially secure and reasonable future must take action to reverse the direction this country is headed in regard to energy, environmentalism and “green jobs” (read temporary jobs). What follows is an analysis of potential new legislation that will cost us all dearly if enacted. Read on…

Renewable Energy: Free as the Wind?

The Senate Committee on Energy and Natural Resources met this morning and, among other things, discussed a national renewable electricity standard (RES). The RES, which mandates that a certain percentage of our nation’s electricity production come from wind, solar, biomass and other renewable energies, already passed out of committee but is likely to be a part of any energy agenda this year. A new Heritage Foundation study analyzing the costs of an RES finds that a national mandate for pricier, less reliable electricity would be harmful to American families, American businesses and the American economy.

Heritage analysis on Renewable Energy

The Heritage analysis models the effects of an RES that starts at 3 percent for 2012 and rises by 1.5 percent per year. This profile mandates a minimum of 15 percent renewable electricity by 2020, a minimum of 22.5 percent by 2025, and a minimum of 37.5 percent by 2035. It looks solely at onshore wind, which is currently the cheapest renewable energy source that can be scaled in significant fashion…

For the full article, go to Renewable Energy: Free as the Wind?