Wednesday, February 18, 2009

Did a U.S. Congressman Really Ask Jamie Dimon, J.P. Morgan Chase's Chairman, Whether His Banks Have ATM's?

From the Desk of Joe Rollins

It was surreal last week watching eight chairmen from the largest financial institutions in the United States being questioned by members of the U.S. Congress. For the large part, Congress seemed uninformed as they posed unintelligible questions to some of our country’s brightest entrepreneurs. This should be an embarrassment to all Americans. It is disappointing that we elected such unqualified representatives for the tasks with which they seemingly have no clue.

The rest of the world must’ve been more than mildly amused when Congress asked some of the most educated and intelligent financial minds in the world irrelevant questions, like whether or not they had anti-virus software. What was their point? I don’t know about you, but I didn’t feel much patriotic pride when watching those hearings last week.

I’m also completely blown away by Congress’s misremembering when recalling the past. Last week, Congressman Barney Frank of Massachusetts stated on CNBC that he had absolutely nothing to do with the problems concerning Fannie Mae and Freddie Mac. He stated that he had only become Chairman of the House Financial Services Committee in January of 2007, and that all of the problems were directly traceable to the Republican Party. He further declared that he had lobbied to rein in Fannie and Freddie during his years in Congress. I must’ve really startled Shaft, Daisy and Sam when I jumped completely out of my chair from hearing Barney Frank’s outrageous comments.

To see if my memory was serving me correctly, I checked YouTube to see if I could find anything to prove Barney Frank’s statements to be incorrect. Low and behold, I found footage of Barney Frank proclaiming that Fannie and Freddie were on strong financial ground and that the government should do nothing to restrict them from loaning all the money they could to potential homebuyers. I’m beginning to wonder if members of Congress believe that if they say things enough, the public will soon believe something other than the truth. How stupid do they think we are?

The Senate passed the economic stimulus package this past Friday, and President Obama is expected to sign it this Tuesday. While I have vast disagreements with many provisions of the bill, there is no question that it will do a lot more good than harm. Unfortunately, due to the nature of the new stimulus package, not much of it will have much of an impact during this year, when it is most needed. For example, it is unfortunate that our representatives did not approve a payroll tax decrease that would positively affect all American individuals and businesses immediately. So much for bipartisan politics in Washington! There couldn’t have been a more partisan pork barrel bill than what was approved.

We can disagree on where the money is spent, but there really can be no disagreement that any money spent helps the economy. It’s unfortunate that many of the provisions approved will not be spent for years to come, but I suppose to get anything passed, the spending bills that couldn’t be approved over the last eight years had to be thrown into this stimulus package. We will see if the stimulus package is effective or not as the years progress, but at least it’s off dead center and we can start moving forward.

It’s amazing how immune we have become to the word, “billion.” As Senator Everett Dirksen (1896-1969) is so famously attributed to saying, “A billion here, a billion there, pretty soon adds up to real money.” No one should ever lose sight of the sheer volume that’s involved in this stimulus package. Nothing before this stimulus package, and likely nothing after, will ever reach this massive scale. I am not in the least bit concerned that this amount of money will not stimulate the economy. Clearly, I disagree with some of the provisions is includes, but I still believe that it will be successful in the long run.

The troublesome part of the stimulus bills is its direction. There’s significantly more money allocated in this bill for the arts than there is for small businesses that create three out of four new jobs in this country. In any event, the bill has been enacted and now it’s time to move forward.

To try to determine the magnitude that this amount of spending entails, I performed some research. As I have written previously, it was not the New Deal that pulled America out of the recession in the 1930’s; it was the beginning of the arming up for World War II. The United States first incurred deficit spending to provide the military armaments and personnel for World War II which pulled the sluggish U.S. economy back into positive GDP growth. It is well documented that the entire cost of World War II was $288 billion. To put that amount in perspective, it’s important to realize that the new stimulus bill is $800 billion – four times the actual amount of money spent over the entire duration of World War II.

In response to those who might point out that money in 1941 does not equal that of 2009, I have already taken that into account. The $288 billion spent in World War II would be $5 trillion in today’s dollars. However, the money spent on World War II was over a five-year period, so basically in 2009 dollars, $1 trillion per year was spent from 1941 through 1946. With the new stimulus of approximately $800 billion, along with the TARP ($700 billion) and all the other money dedicated to fixing the banking issues (about $2 trillion), we are talking about injecting almost as much money into our economy in one year than what was injected in the entire U.S. economy for the entire duration of World War II. Wow! These amounts are almost unbelievable!

One of the most encouraging provisions of the tax bill was a major help to the residential real estate sector. A provision was included in the stimulus package that provided a $15,000 tax credit for each and every home purchased in the United States. I have personal knowledge of three closings that have been delayed because they are awaiting the passage of this particular provision of the stimulus package. In the hearings, this provision was downsized to allow first-time homebuyers only to be eligible for a tax credit of $8,000.

It’s a shame that Congress did not approve the $15,000 tax credit, since it would’ve been an immediate help to most Americans as it pertains to homeownership. In fact, bills like protecting the wetlands outside of San Francisco – which has no stimulating impact on the economy – were instead approved. Likewise, while provisions to give money to colleges are worthwhile and noteworthy, they really has no effect on stimulating the economy. In any case, Congress had the opportunity to approve a helpful bipartisan economic stimulus bill, and they elected to pass.

It is somewhat discouraging that President Obama has become such a negative critic of the U.S. economy recently. For running his campaign on an agenda of hope and change, I think his desire to pass the stimulus package has hurt consumer confidence. Over the last several weeks he has been forecasting that a catastrophe would occur to the U.S. economy if the stimulus package was not passed. In fact, it is rare that you ever hear a sitting president be so over-the-top in a negative manner regarding the U.S. economy. I sure wish we had a cheerleader rather than a critic. I can’t help but think that over the last several weeks, this avalanche of negativism coming from the Obama Administration has further prolonged the recession by further diminishing consumer confidence. Hopefully we will start hearing a more positive spin out of Washington now that the bill has passed.

On the other hand, I was encouraged when the Obama Administration appointed some strong, smart individuals to be a part of the finance team. Many of these individuals have been around government and finance for decades and they have prior experience in economic chaos; their seasoned opinions are well-respected by the business community. However, I’m starting to question whether President Obama is following their advice.

I couldn’t help but be concerned by President Obama’s quote from last week when asked about additional tax cuts to be added to the stimulus bill: “We have tried that strategy time and time again of tax cuts for the wealthiest few Americans. It only helped us lead to the crisis we face right now.” I can only hope that the President’s comments were based on his lack of knowledge on the subject, because if it was anything other than that, it was a complete untruth. Any study of the U.S. economy regarding the effect of lower taxes has always yielded the opposite result. Giving President Obama the benefit of the doubt, hopefully his new finance team will advise him of this mistake – or maybe he’ll figure it out by reading our blog!

The facts are fairly easy to document: Since World War I, the United States has suffered five major downturns. In four of them, the government cut tax rates. In each of the four out of five, an economic boom ensued after the tax cuts. There was only one major downturn when the government responded by raising taxes, erecting trade barriers and enacting massive spending programs to get out of the slump. Today we characterize that period of time as “The Great Depression.” These facts are not economic hyperbole. While it may seem intuitive that increasing tax rates would increase revenues to the government, this has never held to be true. Hopefully President Obama will get that economic axiom correct.

The most clear example of how cutting tax rates positively impacts the economy was in 1963 when President John F. Kennedy (incidentally, a Democrat) said that lower taxes meant higher growth. He even proposed cutting the highest marginal tax rate in the United States from 91% to 70%. After his death, these cuts were enacted and the country enjoyed an economic boom through 1970. Due to lower tax rates, the economy was very robust from 1961 through 1970.

During the 1980’s, Ronald Reagan took over an economy with a 21% prime rate of interest, double-digit inflation and staggering unemployment. Due to his implementation of lower tax rates, the economy quickly picked up to a GDP growth that averaged 3.2% in his eight years in office.

Even more interesting is that the economy continued on an upward trend until George H.W. Bush (“Bush Part I”) increased taxes in the late 1980’s, throwing the country into a recession. Of course, this ultimately led to his failure to be reelected. Even during the 1990’s we had great economic years under President Bill Clinton. But once again, he fell for the axiom that higher taxes meant higher revenues to the government. Late in his second term, he pushed through massive tax rate increases which, in fact, did balance the federal budget, but threw the country into a recession by 2000, his last year in office.

Even going back to 1921 through 1925, the same economic axiom held true. Under Presidents Harding and Coolidge, tax rates were slashed 25% and GDP rose at an annual rate of 3.4% in the four years after the tax cut versus 2% with higher taxes. As you may recall, the Roaring Twenties were strong economic years with GDP going up almost 50% through the latter part of the 1920’s.

A closer time period proves this axiom once again. When President George W. Bush (“Bush Part II”) took office in 2001, the country was already suffering a serious recession due to President Clinton’s tax increases. This coupled with the tragic attacks on September 11, 2001 threatened the economic stability of the United States. Due to massive tax cuts instituted by President Bush, the economy only suffered a minor one-quarter negative GDP growth and turned up for a significant and large economic boom all the way through the end of his final year in office. The economic evidence is so overwhelmingly crystal clear that for anyone to assert anything different indicates an improper education in reality.

I am often questioned as to how we will ever balance the federal budget if taxes are constantly being lowered. I see enormous hand-wringing and consternation by Americans regarding the increasing deficit, and not once have I heard a politician discuss the real answer to the deficit issue. Frankly, diminishing the deficit is easily attainable through reduced governmental spending. If our government would quit talking about higher taxes and address reduced spending, budget surpluses could quickly be attained. However, not until government officials honestly discuss government waste will we ever have a chance to stop burdening Americans with higher taxes year after year.

There are many troublesome aspects to the new stimulus package. One of the most troublesome is the federal government’s intervention in local school districts and federal subsidies of state deficits. There are a few things that our federal government should not get involved in. One, in my opinion, is that the federal government should not be making decisions for local school districts. I also believe it’s not the federal government’s job to bail out states that have unscrupulously and unwisely controlled their own budgets.

There is no question that turning federal money over to local school systems and state governments will stimulate the economy. I have no doubt that each will figure out a way to spend that money as quickly as possible. The question on my mind is if that is appropriate, smart and if the taxpayers throughout the entire U.S. should be subsidizing local economic projects.

In closing, I want to put the usefulness of this bill in context. It’s not exactly what we needed, and as President Obama has said, “It’s not perfect a perfect bill,” but notwithstanding its shortcomings, it will stimulate the economy. By this time next year, we should all be back on solid economic ground. I just wish everyone would take a deep breath and allow these numerous governmental programs to take effect.

The economic recovery will come, but it won’t be overnight. Give it a chance; I strongly believe it’s definitely in the cards in the coming months.