Next Financial Crisis

If you have been irritated by the current financial crisis and the ensuing bank bailout then you are really going to hate the next financial crisis which is already being formed thanks in large part to the remedy for the current crisis.

The major goal of the US Treasury is to enable the US banking sector to make sufficient profits to offset the losses suffered by the banks over the last 2 years thereby restoring the banking sector to financial health. Secretary of the Treasury Geithner would probably prefer to just give the banks a no strings attached check in an amount equivalent to what the banks have lost over the last 2 years but realizes that this would be politically unacceptable. So, he is pursuing a more convoluted approach which essentially accomplishes the same thing. The banks are borrowing hundreds of billions from the Federal Reserve and paying 0.25% (one quarter of one percent) and then lending the borrowed money to the US Treasury and being paid 2% plus (about 3.5% on a 10 year bond, less on 2's and 5's). The banks are also using the borrowed funds to buy foreign government bonds which are paying much more such as Brazilian bonds that are paying in excess of 8%. The banks are making a fortune using the money borrowed from the fed to make low risk, low cost loans to the US and foreign governments which explains in part why the banks have borrowed so much but lent so little to US businesses and consumers.

The problem is that the banks are doing the same thing now that got them in trouble a couple of years ago. They are currently borrowing short term and lending longer term and pocketing significant profits. However, if interest rates increase and/or the dollar strengthens significantly over the next couple of years, the banks are going to take massive losses. I'm sure that the fed realizes this but is focused on fixing the short term problem even if the fix leads to a larger, longer term problem. The current method of resolving the financial crisis is analogous to giving a heroin addict more heroin to avoid the pain of with drawl.

The really disappointing thing is that having suffered such a huge hit to the economy over the last couple of years due to the financial crisis, the US Congress is not able to develop any effective financial reform. Increasing the disclosure requirements on consumer loans is not going to make any significant difference to financial stability.

Are Seniors Paying their Fair Share of Taxes

I was reading a piece this morning about income growth slowing which was attributed in large part to Social Security (SSA) recipients not receiving a cost of living increase in 2010 due to the fact that prices (CPI) did not increase in 2009. On the face of it, I didn't think that an annual increase in SSA payments would make that much difference in gross income on a monthly basis but proceeded to check my assumptions. Per the Social Security Administration, payments to social security recipients in 12/2009 were $55.9 billion so a 2% increase in payments in 1/2010 would have amounted to only about $1.2 billion of additional income in 1/2010 which is a very minor amount in an economy of $13.6 trillion.

However, what I did notice was that per the Social Security Administration trustees, the total payments to social security beneficiaries in 2007 was $585 billion. Per the IRS, total social security income in 2007 reported by taxpayers was $382 billion or $203 billion less than paid by SSA. In some cases, the income of a recipient would be so low that they are not required to submit an annual tax return but I would be surprised if $203 billion was paid to people who are not required to submit a tax return. I would hope that the IRS and the SSA are exchanging info to ensure that recipients are paying their fair share of takes.

What I also noticed was disability payments in 2007 were $99,086,000,000 ($99.1b) made to 8,920,371 recipients. In 1990, there were 4,265,981 disability recipients which represented 10.71% of total social security recipients while in 2009 there were 9,969,398 disability recipients which represented 18.5% of total social security recipients. Are Americans really getting sicker and more disabled to the tune of almost twice what they were just 20 years ago or is there an issue with fraud and perhaps extreme generosity. Based on the experience of some people I know, it appears that anyone with a good lawyer can qualify for disability. For a program that we taxpayers are paying $100 billion per year (more when you add in Medicare for which disabled individuals qualify), I think that it is time to review the goals of the program with the way that it is being implemented.

In the context of the current health care reform debate and the Republican claims that a public option would lead to rationing and Washington bureaucrats determining the health care that you get, I think it more likely that our elected representatives would provide more than the private insurance industry and more than what the taxpayer can afford.