Monday, April 28, 2008

Really Bad Financial Advice from Your Congressman

My suggested headline was "Fed Bails Out Bear Stearns -- And John Shadegg Wants You To Help!" but the editor went in a slightly less-assumed knowledge direction. And what does it mean that George Will -- George Will! -- is to the left of the Democrats on the Bear Stearn bailout, with his proposal that any investment bank that wants to get loans from, or guaranteed by, the Fed should limit its executives to the maximum salary for federal civil servants, about $125K per year. Want to pay your people more? Then don't borrow for the government, or you have to pay salaries like the government.

The online newspaper version is here. I recommended adding to my usual author identification at the bottom of the column the additional disclosure that “Of course he’s contributed to Bob Lord, running against Rep. Shadegg. What else would you expect?” But the editor played that straight as well.

East Valley Tribune, Apr. 27, 2008

Rep. John Shadegg, R-Ariz., has a fascinating plan (H.R. 5776, the “Homeowner Empowerment Act”) which he claims will help homeowners facing foreclosure. Fascinating not because it might help homeowners (of course not), but for what it says about Shadegg’s priorities.

Under the proposal, homeowners could use IRAs or pensions to pay mortgages. Taxpayers must repay the money within 10 or 15 years or pay taxes on the withdrawal, but without penalties. Shadegg calls it a “free market” response to the foreclosure crisis.

If by “free market” you mean “unhelpful, impractical, and regressive,” then yes it is. Maybe some homeowners facing foreclosure have plenty in their pensions, but how many? I’ll bet unicorns are more common.

For those with an upside-down mortgage and a well-funded IRA, Shadegg’s bill is bad investment advice. My annual 401(k) statement came with a big warning to diversify my savings, but Shadegg wants people to bet their retirement in not just one asset class, but one specific asset -- their house -- while house prices, he acknowledges, may drop another 15 percent in 2008 and 10 percent in 2009. Enron employees got similar advice to keep their pensions invested in Enron stock, and that worked out just swell.

The bill also would allow the rich to play games. Because of past abuses, people can’t invest pensions in their art collections or personal real estate. Shadegg would change that, allowing people to shift untaxed earnings between their pensions and house. The IRS or pension trustee couldn’t tell whether a person really needed, or just wanted, money for the mortgage. Instead of for retirement, an IRA could be used as an “investment” in one’s “lifestyle.”

Finally, taking money from a pension plan to pay a home mortgage is a bad move for the financially stretched. Retirement plan interests can’t be seized by creditors other than the IRS. Also, Arizona homeowners are protected by our “anti-deficiency” statute, which prohibits a lender from collecting any outstanding balance on the loan after foreclosure. The law is supposed to keep real estate bubbles from forming, because lenders have a stake in reasonable valuations -- but one state statute can do only so much when lenders shed risk by securitizing and selling “stated income” loans (or, more colloquially, “liar loans”).

So Shadegg wants you to use protected assets to pay a non-recourse debt that the lender couldn’t otherwise collect. While a terrible move for the borrower, it’s great for financial services companies. And according to the Center for Responsive Politics, that industry is the single largest source of Shadegg’s campaign contributions. Who could have guessed?

Shadegg calls his plan an alternative to the bipartisan Senate bill, and he’s right that the Senate bill is bad -- but not for his reasons. The Senate bill includes billions in giveaways, like a huge special tax-loss carryback for homebuilders and a tax credit for purchasing foreclosed properties, giving lenders an incentive to foreclose rather than working out loans. Shadegg has no problem with those provisions, only with those (block grants to local communities, raising the FHA loan limit, and funding for counseling for at-risk homeowners) that might actually help homeowners and not corporations.

Shadegg says he doesn’t want to reward “irresponsible” borrowers or lenders, but his response is to oppose anything that helps homeowners -- while showering corporations with tax credits. According to a Google search, he’s had nothing to say about the Federal Reserve bailout of Bear Stearns; apparently “moral hazard” means no help for homeowners, but for big business, gains are private but losses get socialized.

And that’s the point of Shadegg’s “plan.” It’s not supposed to work, or make sense. It’s strictly a vehicle for sound bites, whose sole purpose is to mask yet more GOP “reverse Robin Hood” business as usual -- in this case, “empowering” homeowners to give money to the financial services industry.

That’s Shadegg’s “Homeowner Empowerment Act.” Why let the Fed bail out Bear Stearns alone, when you can use your IRA to help?

Tuesday, April 22, 2008

I Got Your Red-Hot Earmarks Right Here!

More budget nonsense. McCain makes just about as much sense as Ken Cheuvront! Besides US aid to Israel, the other high-visibility earmark is for military housing. Newspaper link for the column is here.

East Valley Tribune, Apr. 20, 2008

Today's lesson in fiscal responsibility is, when evaluating candidates, budgets, and fiscal rhetoric, remember: A slogan is not a plan.

The latest example comes from John McCain's campaign. He gave a big speech on economic issues last week, and the reaction, even from his pals in the media, was lukewarm

The Washington Post noted that despite the talk of helping working-class Americans in their hour of need, McCain's actual proposals instead threw buckets of tax code goodies to "corporate special pleaders": cutting corporate tax rates, equipment purchase deductions, banning Internet and cellphone taxes, and a research and development tax credit. Only 4 million taxpayers would qualify for his so-called "middle-class tax cut," and 93 percent of them earn more than $200,000 -- which means McCain's proposal would benefit only the top 3.4 percent of taxpayers.

As for the other 96 percent of American taxpayers? They get the rhetoric, while those at the top get the cash. Hope you like the rhetoric, because money is for those who already have it.

There's the problem that all these special deductions and credits make the tax code more complicated, too. Once again, they say they want to make it simpler, but what they really want is to make it more complicated -- in favor of those at the top.

Then there's McCain's proposal for a gas tax "holiday" this summer. I thought McCain would avoid campaigning as the cranky old guy, but here he is recycling one of Bob Dole's less-sensible proposals from the 1996 campaign.

It's also a classic pass-the-buck GOP idea; McCain wants to cut taxes for a couple months this summer, then have the tax rate resume its original course, all well before he could possibly take office. He wants the credit; somebody else can do the work. (I suppose McCain might get somebody in the U.S. Senate to introduce his proposal and work hard to see it enacted; as blogger Ted Prezelski wondered, might McCain know anybody in that position?)

And it's a truly counterproductive idea. Dean Baker of the Center for Economic and Budget Research points out that the oil industry says that they have no spare refinery capacity; they're already producing as much gas as possible. So price is determined on the demand side; unless the oil companies are lying, there's just no way to increase supply anytime during the duration of the "holiday."

With a fixed supply, the magic of the market determines what price matches demand to that supply. Cut gas taxes, all that happens is that consumer demand keeps the price at the clearing price. There's billions less to build new roads and fix old ones; McCain's plan simply transfers money from the highway trust fund directly to the oil companies, without the need for messy campaign contributions and legislation.

Even the Arizona Republic, the house organ of the McCain campaign, called the idea a "clunker" that uses "tax policy to play with the heads of consumers."

But the best example of McCain's rhetoric colliding with reality is his claim that he could pay for his expensive menu of tax cuts by cutting wasteful spending and eliminating earmarks. McCain says he'll veto "every bill with earmarks, until the Congress stops sending bills with earmarks." Boo earmarks! Hooray cutting wasteful spending!

There's much confusion over how much earmarking is going on. McCain's campaign claims the amount is over $60 billion, but to get to that number, you have to include most foreign aid spending, which includes $2.9 billion annual U.S. aid to Israel.

So when McCain said he'd veto all earmarks, and somebody noticed that aid to Israel was an earmark, McCain's campaign quickly amended his statement to note that he certainly wouldn't veto that earmark. No sir, no way. That's a good earmark!

And so it goes, as with much so-called straight talk: Overblown statement of principle founders on the specific rocks of reality. Government spending generally: Bad, bad, bad. Government spending on a particular program: Not so fast, buddy.

Tuesday, April 15, 2008

Wine Bar Senator Serves Up Tax-Cut Kool-Aid

I'm posting a day late because I just got back this morning from talking politics and public service last night to students at Pomona College as a guest of the Pomona Student Union. Prof. David Menefee-Libey and I did an undergraduate political version of “Inside the Actor’s Studio” but the informal title among certain undergraduates (translation: my son and his buddies) was “The Beard and The Moustache Talk Politics”: I only hope the students enjoyed it half as much as I did.

For the column, my suggested headline is above but the editor gave me more room, and top-of-the-page placement, too. Now that I don’t have Dick Mahoney to kick around anymore, it’s time for a new target. Newspaper version is available here
. Insider comments show that I’m not the only person finding Sen. Cheuvront’s act less amusing these days.

East Valley Tribune, Apr. 13, 2008

Whenever I see state Sen. Ken Cheuvront, D-Phoenix, he insistently asks me why I don’t dine at his wine bar more often. Now I have a good reason.

What’s the GOP’s favorite cure for anything, whether recession or boom, war or peace, heartburn or halitosis? Why, tax cuts, of course. Cut taxes when government revenues go up. Cut taxes when government revenues go down. Cut taxes to keep the economy going strong. Cut taxes if the economy’s weak. The question is irrelevant; the answer is always tax cuts!

This year, with the state facing a $1.2 billion deficit for the current fiscal year (ending in a scant 11 weeks) and a $1.8 billion deficit for the fiscal year starting July 1, what’s the GOP’s top state legislative priority? Making permanent a temporary $250 million annual property tax break.

It’s a perfect GOP tax cut, for several reasons. First, dropping the state equalization property tax benefits big landowners, particularly utilities. Don’t want to risk putting money in the hands of ordinary consumers who might help spend us out of the recession. Second, it’s a distraction from the current fiscal crisis. Why bother with such dreary, eat-your-spinach work as the pending budget, when you can eat a huge tax-cut dessert instead?

Third, it’s a tax cut for future years. Today’s legislators take the credit, leaving future legislators and governors to find additional school funding. (The equalization tax is dedicated to education, and 3-year hiatus required that schools get the lost revenues from the now-stressed General Fund.)

Finally, it’s breaking a promise. The temporary cut was passed during the real estate boom, when state revenues exceeded projections and the General Fund could carry the extra load. The temporary nature was a feature, if future fiscal years got leaner and general fund revenues went south -- which has happened. And with Arizona’s two-thirds requirement for tax increases (but no similar supermajority requirement for tax cuts), it’s mathematically and politically far harder to raise taxes than to cut them.

But rather than let the temporary pause end, the GOP now says we need to make permanent what they promised (and voted for) would be temporary -- or it’s a tax hike, and Republicans can’t do that on a day ending in “Y.”

It’s all part of the Republican mythology, that cutting taxes increases revenues (no, it doesn’t), or that state tax rates are the sole determinant of a state’s attraction to businesses (no, forget about things like quality of life, wage rates, infrastructure, school quality, labor quality, proximity to markets -- a study shows that where the CEO owns a house matters more), or that state tax decisions determine how the state economy does (no, how can anyone paying attention to the real estate boom-and-bust think that anything the state Legislature does matters as much as how the national economy is performing?)

So that’s the GOP orthodoxy, impervious to reality (and if you doubt that, where are all the economic studies -- not sound bites, actual studies -- showing that cutting taxes works as promised?) But while Republicans have to believe this stuff, we Democrats don’t; we’re supposed to be reality-based.

Except Cheuvront, who decided to give the Republicans the final vote they needed for their eat-more-chocolate-to-lose-weight fiscal folly. Some say he was upset that House Democrats defeated his bid to eliminate a municipal tax break used to spur downtown development, which makes no sense. He claimed that small businesses needed this tax break, which doesn’t make sense, and that business valuations for tax purposes were somehow exceeding market valuations, which would be illegal -- and which also makes no sense.

He also left Sens. Tom O’Halleran, R-Sedona, and Carolyn Allen, R-Scottsdale, who bucked their party to vote against permanency, hung out to dry when he switched his vote after promising the Senate Democratic caucus the day before he would vote “no.” And that doesn’t make sense, either.

So as for patronizing Cheuvront’s Wine Bar? Now that the proprietor is serving up the same old GOP tax-cut Kool-Aid, I think I’ll pass.

Monday, April 07, 2008

Here’s One Way To Fight House Scammers -- And It’s Bipartisan!

This week’s column follows up last week’s. The good news is that I got a call from a friend in the state AG’s office, who says they’re interested in pursuing mortgage fraud cases. They’re having trouble assembling cases, because in many instances, the borrowers are either involved in the fraud, or are leery of participating in a state investigation, so they haven’t found many victims either willing or suitable for pursuing cases. But I got a name and direct-dial number to pass on to the victim.

The bad news is that a small, but worthwhile, state effort got thwarted by referral to the Judiciary Committee (of all places) for no apparent reason other than too much D support. (My suggested headline is above, but the editor went in a different direction.)

And I didn’t have much room to discuss the Senate bill, but the most absurd part is billions in tax rebates for the homebuilding industry, of all things, like we need to encourage the construction of more homes to counteract the correction of the bubble. Hey, everybody loves homebuilders, right?

East Valley Tribune, Apr. 6, 2008

“Hey, wise guy,” wrote one emailer after last week’s column, “So exactly what would you do about mortgage fraud?” Well, one thing is Senate Bill 1343, the Arizona Home Equity Theft Prevention Act, sponsored by Sen. Debbie McCune Davis, D-Phoenix.

SB1343 passed the state House Financial Institutions Committee on (gasp!) a bipartisan vote when Chairman Bill Konopnicki, R-Safford, joined 4 committee Democrats. The bill addresses the situation described in last week’s column, when a schemer comes to a distressed homeowner, claims he’ll refinance the house, but takes title and absconds with loan proceeds. (That scheme also was featured on the FBI’s website last month as the “Latest Scam on the Block,” called “house stealing (variation 2).”)

The bill is supported by key real estate trade associations, Citigroup, and the Arizona Attorney General and the Department of Financial Institutions. It would require licensing of commercial purchasers of houses in foreclosure (other than lenders foreclosing or purchasers buying their own principal residence). As DFI only can go after licensed entities, requiring licenses for commercial purchasers of distressed properties is the only practical way to create an enforcement mechanism. The bill also requires basic, uniform consumer disclosures to prevent homeowners facing foreclosure -- who have little experience and expertise with real estate -- from being lulled into equity-stripping under the guise of foreclosure protection or financial assistance.

It’s not a perfect bill, and a pure scammer could forge a license or ignore the law, but it would help. Homeowners would know to deal only with licensed individuals, and would get brief, large-print disclosures. Other financial intermediaries like lenders, title insurers, and real estate agents could avoid being left holding the bag.

Unfortunately, bipartisan ideas don’t get very far in the GOP-controlled House. The Republican House leadership decided to kill this good idea by assigning it to another committee, where it will die a quiet death by missing mandatory deadlines for bill progress. So SB1343, one good idea for dealing with this form of financial fraud, won’t be adopted because it suffers a fatal flaw: too many Democrats supported it.

SB1343 is a lot better idea than the U.S. Senate approach, which is the type of bipartisan compromise that takes completely disjointed ideas from both sides solely to claim the bipartisan mantle. The Dodd-Shelby bill provides billions in tax rebates to homebuilders, but little to homeowners facing foreclosure. Once again, we’re insulating really big institutions from the consequences of their bets, but efforts to assist individual homeowners would violate our principles.

Two final points. First, you could argue that Bear Stearns shareholders, at $2 per share, were bearing the risks of their investment. But once JP Morgan Chase upped the offer by five times, and with the Fed swallowing $29 billion of credit risk, that argument doesn’t hold much water anymore.

Second, the House GOP’s unwillingness to acknowledge the existence of Democratic members is somewhat puzzling, especially their insistence on spending all their time and effort on a doomed GOP-only budget, just like last year. The only way this tactic possibly makes sense is if House Speaker Jim Weiers is secretly smitten with Cong. Gabrielle Giffords, D-Tucson, which is understandable if you’re a guy -- but not if you’re a Republican.

Everybody knows that there has to be a budget deal with Democratic Gov. Janet Napolitano, and that it’ll get worked out again in the state Senate, whose GOP President, Tim Bee, has announced he’s running for Congress against Giffords. Every day that Weiers puts off compromising and developing a bipartisan budget is another day the Legislature has to stay in session, keeping Bee from fundraising and campaigning. If this year’s budget takes as long as last year’s, then Bee won’t have much time to generate buzz for his congressional race.

It’s not like this is going to be a good year for Republicans nationally, or that the National Republican Congressional Committee is flush with funds to spend on Bee. So why is Jim Weiers being Gabby Giffords’s best friend?

ETP 2008 Results

In Saturday's El Tour de Phoenix bicycle race, I did 3:41:56, for a gold finish for the first time since they lengthened the course (and made it more difficult) in 2005. This year the route was 72 miles, not 74, and dropping the extra 2 miles helped, as did managing to find groups to hang with for virtually the entire way, which was a result getting up 30 minutes earlier so I could line up closer to the front. Full results here; maybe some photos in a couple days.

Thursday, April 03, 2008

What's So Moral About "Moral Hazard?"

I’m getting this week’s column posted a couple days late because I spent Monday and Tuesday on my annual Congress-to-Campus visit, this time to scenic Washington University in St. Louis, which is home to a certain favorite Political Science major in the Class of 2008. I asked former Rep. Bob McEwen (R-OH), whom I met on one of my trips to Ukraine as an election monitor, to join me on the visit, and Bob agreed, and he was fabulous. I don’t think we agree on anything except maybe breakfast, but he’s truly a worthy adversary (and why Republican primary voters selected Jean Schmidt instead of sending Bob back to Congress, well, it’s a mystery to me).

Here’s a picture from the trip, from the WU student newspaper. We didn’t plan that I’d be on the far left and he’d be on the far right; it just worked out that way. Go Bears!

My suggested headline was above but the editor went in a different direction. If you want to see the
newspaper version, it’s available for another 10 days.

East Valley Tribune, Mar. 30, 2008

I got a call last week seeking help for a woman who’s about to lose her house due to mortgage fraud. That’s the first tragedy. The second is that nobody can help her. Unlike Wall Street investment banks, she is small enough to fail.

It’s a fairly typical story. Several years ago, she bought a house. It’s the American dream. She makes her payments.

But she doesn’t earn that much, and hasn’t got much saved. Her mother dies. She pays for the funeral and her mother’s debts. She falls behind on the house payments.

She sees an ad for “foreclosure assistance.” She talks with a very sympathetic guy who seems helpful. He says he knows an “investor” who could co-sign a new mortgage. The investor has good credit and can get a better loan than she could. After refinancing, she’ll pay the investor for using his credit. She’ll save her house. Everybody wins.


Except the papers she signed deeded the property to the investor outright. He and the promoter then refinance “his” house. They take the money, and run.

The refinancing is fraudulent. The scammers told the woman one thing, but did another. They probably submitted a false loan application, claiming the house was owner-occupied. They probably didn’t need an inflated appraisal; they could create a fake sale contract, justifying the higher loan.

The lender didn’t care; it was making as many loans as possible as quickly as possible, repackaging and selling them as soon as the ink dried. Nobody involved kept any risk, except our poor woman (who will lose the house) and investment bankers like Bear Stearns (which gets a government bailout).

Bear Stearns gets help from the Federal Reserve. But where can the woman, clearly a victim of fraud, go for help? Not a simple question.

I called the county attorney. They don’t prosecute mortgage fraud. Instead, they give you the main number for the Arizona attorney general’s office.

I called the attorney general. They have one -- one! -- assistant attorney general working on mortgage fraud. But the Arizona Legislature refuses to give the AG criminal enforcement powers. The AG can only prosecute fraud civilly, as if it were a contract dispute. The AG can try to take away licenses from mortgage brokers or lawyers, but the guys who pulled this scam either weren’t licensed or are long gone.

The Arizona Department of Financial Institutions has an email address you can write ( and a complaint form. But they can only go after state-licensed entities, and most foreclosure rescue scams don’t have state licenses. The best they can do is refer people to a national nonprofit with a 24/7 toll-free number (888-995-HOPE).

The AG’s office suggested calling the United States Attorney’s office, because the feds have both civil and criminal jurisdiction. So I called, which isn’t easy. I found a press release announcing a 2007 mortgage fraud indictment, and got a phone number for the prosecutor via a State Bar of Arizona database. The U.S. Attorney doesn’t investigate crimes, but I asked his assistant which agencies would investigate mortgage fraud. She said the FBI and IRS.


You can’t get specific phone numbers for the FBI. You have to call the main number for the Phoenix office, say “mortgage fraud,” and hope somebody can listen.

But that’s incredible openness compared to the IRS. I searched fruitlessly for any way to contact the IRS Criminal Investigation Division, even with the name of the head of the Phoenix office. I gave up and spoke with a very nice woman with the IRS Taxpayer Advocate. She explained that you can’t talk with anyone at the IRS about mortgage fraud. Instead, you file an IRS
Form 3949A, on paper, by mail. Maybe they’ll call you.

So that’s the mortgage crisis for you. If you’re big enough, the treasury secretary works all weekend to bail you out. If you’re a woman losing her home to fraud, well, we can’t help you. That might interfere with the workings of our awesome free enterprise system.