Wouldn't it be nice to learn from past mistakes and get proactive about regulation using common sense?
The Great Depression was caused by the conjunction of unbridled trading in securities, unregulated banking practices and a severe drought that brought us the Dustbowl that had been the breadbasket of the planet.
All three of these things should have been foreseen but none were. I suspect that they went unforeseen because, hey, times were good! It's was the Roaring 20's, what could possibly go wrong?
The S & L crisis of the 80's was caused when the federal reserve bank (a regulator) steeply raised interest rates in 1979 to control inflation. The savings & loan institutes who were loaning money at long term rates lower than the new rates started cooking their books in a feeble attempt to make themselves look more profitable to draw more investment since they were actually losing money. The resulting Ponzi schemes backfired and the whole thing came tumbling down.
This was obviously foreseeable but the environment of deregulation that followed during the Reagan administration made it hard to track.
This is also what happened at the end of the last century. The last provisions of the big financial regulations (Glass-Steagall) put in place during the Great Depression were struck down by the Reagan and Clinton administrations. This, in conjunction with the boom in broadband communications (aka the Internet), the demise of the Bell Telephone monopoly and the dot-com and Wall Street shenanigans (insider trading, for example) that followed led to a bursting bubble. This was amplified by the attack on the World Trade Center. Hey, times were good again!
These things were also foreseen but all of the supposed protections had already been stripped away and the securities ratings agencies were in cahoots with Wall Street. Buy, buy, buy was all they could say and more unsophisticated Americans (including us) were in the market and many were harmed (most definitely including us).
This is also what happened in 2008. The banks which were allowed to grow into mega-banks (again, no more Glass-Steagall) started trading in European sovereign debt and bundled securities comprised largely of government-mandated, overvalued sub-prime mortgages (in existence due to the single largest regulatory failure in history, sparked by the altruistic goal of increasing home ownership). Times weren't that good for most of us but financial markets will always misbehave, especially when nobody is watching too closely.
Everyone, it seems, saw the mortgage trouble brewing but government regulators.
Now we have Dodd-Frank, another law passed as a work-in-progress like the Affordable Care Act (aka Obamacare). I don't hold much hope for Dodd-Frank since Dodd was in bed with the banks for far too long to escape uncontaminated and since the mega-banks are still with us. Besides, any law passed with a "this is better than nothing" attitude is probably worse than nothing.
http://www.usnews.com/opinion/blogs/economic-intelligence/2013/01/07/10-ways-dodd-frank-will-hurt-the-economy-in-2013
Now for concrete examples of regulation at the consumer level that have gone astray.
Electric Power
Back in 2000, Connecticut (at least the democrat-controlled government thereof) decided to deregulate the electric power industry. Since we've been living in the same house for 14 years, it's easy to see the impact of this since then. Sadly, I only started using accounting software in April, 2000.
The good news is that the electric bill (average shown by the blue line in graph below) hasn't changed much in 12 years. The swings of +/-20% are harder to explain.
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| Yearly Electric Bills |
There was an article in the NY Times recently that showed historic wholesale electricity prices for New England, where I live. You can see from the graph (from ISO New England) that from 2009 through 2012, wholesale electricity averaged about $50/megawatt-hour or 5 cents per kilowatt hour. You can also see that the peaks and valleys of wholesale costs do not correlate well with those on our bill.
We used:
Usage Charged (cents/kWh) Cost (Wholesale cents/kWh)
1128 kWh 8.1 6
976 kWh 8.7 4
811 kWh 8.7 4
652 kWh 8.7 4
...and so on for the whole year. That's because we're on a one-rate regulatory scheme with our deregulated utility. No breaks for nighttime usage, just a flat rate all year. The most recent bill has two rates, reflecting the price change on January 1st (our billing period starts mid-month).
Now the bad news: for most of the year, the utility regulators allowed the utility to charge us more than twice what they paid for electricity. Our regulator is called PURA (Public Utility Regulatory Authority). I don't know what these folks are thinking but they certainly aren't protecting us. I'm also not clear how PURA exists in an unregulated market; only in America.
It doesn't stop there either.
Getting back to our bill, we can also see that the charge for power transmission is 1.7 cents per kWh. This doesn't sound like much until you realize that this should essentially be the cost to insure and maintain the transmission grid. As I noted in my previous post on Energy Infrastructure, the US spends about $10 billion per year to maintain the grid for total transmission of about 4,000 tWh: this works out to a quarter of a cent per kWh. How this 600% overcharge is allowed in the interests of the consumer is unfathomable.
http://www.tulsaworld.com/business/article.aspx?subjectid=49&articleid=20120513_49_E1_CUTLIN461596
It doesn't stop there either.
The charge for power distribution is 6.3 cents per kWh. Distribution is like transmission except it covers the local wires and poles instead of the regional ones and the US spends about $3 billion per year to maintain it (see previous URL). It also covers billing, meter-reading, payroll and other charges. Specifically, my bill averages nearly $200 per month, much like the sample bill above (FYI, we heat with oil). This means the utility is spending about $80 per month on us?
I don't think so. Reading the meter takes about 5 minutes. Billing is (or should be) automated. We've lived here for 14 years and we had a tree-cutting crew here in our neighborhood once. Anything more than a penny per kWh would be criminal yet, again, a 500% overcharge is permitted. I'm starting to see how those executives can receive (receive, not earn) such fabulous pay packages!
http://www.ctpost.com/local/article/Loophole-keeps-utility-executives-pay-secret-2198492.php
Recently, our utility petitioned PURA for a 36% distribution rate hike because of the recent hurricane and also to upgrade their distribution system. They claim to want to make nearly $1 billion in improvements to their distribution equipment over 5 years when the entire country spends only $3 billion per year. Connecticut is only 1% of the country by population and our utility services less than 20% of the state. What's that smell?
Since they charge me more than 500% more than they pay for distribution, I'd say this is ridiculous.
I can only hope that the petition is quashed but these folks clearly have no shame.
It doesn't stop there either.
They also charge us for having deregulated back in 2000 by charging us for selling off obsolete generating plants (CTA) as stranded costs. They charge us for living in a place where the electric load sometimes exceeds the supply (FMCC) and finally, they charge us for combined public benefits. These three charges tally up to about 3.3 cents per kWh. I view these charges as a tax of roughly 66% on electricity that costs 5 cents per kWh.
In the end, we pay 19.4 cents for something that costs about 5.34 cents. Clearly unregulated and clearly not beneficial to us.
That covers the effects of regulation, or lack thereof, on electric power if we exclude the fact that we could have electric power virtually free from the sun after an initial investment equal to last years' federal spending deficit.
WaterOur water bill is similar except that only one third of the bill is not for water (as opposed to nearly three quarters for electricity). Water is free but we were still charged $550 for it last year. This works out to about 5.1 cents per gallon given our usage of about 2.5 gallons per day for two people: I'm honestly shocked by how little we use. We are also charged and additional 1.8 cents per gallon for service and other charges. We used to buy insurance on the main water valve under the front lawn for $68/year too.
This is the only bill that seems remotely reasonable to me except that I'm not sure how they came up with the per-gallon cost: it's free, right?
The disturbing thing is that a desalination plant in Carlsbad, CA is selling potable water for 0.6 cents/gallon. How can manufactured water cost less than the stuff that falls from the sky?
Health Insurance I've written in another post about health insurance and healthcare in general. The insurance companies are allowed to profit by about 30% on what they sell. Hospitals take profits of about 40% on what's left. This amounts to a 54% profit right off the top.
Are we feeling the benefits of regulation (Obamacare) yet? Wait until next year. I expect to see shifts in the way companies provide health benefits for employees: many, if not all, will stop providing health insurance and pay the fines instead. My last employer shelled out $16,000/year for a high-deductible health plan with a Health Savings Account for my wife and me: the deductible was $5,000. Compare this to the $2,000 fine they'll pay and I'm pretty sure they'll drop us all. Don't expect salaries to rise commensurately either.
The possible good news: maybe this will force us to a single-payer, non-profit system that costs half of what we have now.
This is all about politics and campaign contributions and profits, not about us. We need to put a stop to profiteering on health care. Period.
This is a simple regulation: thou shalt not profit. It would save the federal government $500 billion/year.
Telephone & Internet How about communications? We pay about $330/month for satellite TV, internet service, two land lines and two cell phones.
I remember bitching about paying $12/month for a land line.
Cell phones are cheaper (and lower quality) than land lines. I get my internet service over one of my land lines with ADSL, a 15-year old technology. Accounting for inflation, these services should cost about $50/month so how does regulation make it cost $198?
When I think about it (I was a communications systems architect before retiring), telephone and internet service is really no different from basic electric service if wireless is excluded. Indeed, wireless should be even less since there's less wiring to maintain: Duh!
Internet content is different; agreed, but we pay separately for Netflix. I would argue that the costs to insure and maintain the telephone distribution grid are no different than the costs to maintain the electric distribution grid. This is about 0.09 cents per hour.
Since there are no kilowatts being delivered, a regulator should just measure hours of availability and charge, say, two cents per hour per end user for a land line ($175.20/year) and one cent per hour for cell service: in our case, we have 5 end-users (4 phones and an ADSL modem for Internet) so our bill should be $526/year for the land lines and $175/year for cell ($701/year total) instead of the $2323.97 we paid last year.
This rate would still be about 11 times greater than the maintenance cost of $0.0009/hour. What good is the FCC doing us here?
TelevisionBroadcast TV was never very good in southwestern Connecticut. We've lived here for most of our lives so when we became homeowners we wanted something better. We had CATV for years but when we moved here we found that CATV in this city is awful and we switched to DirecTV, mostly for the NFL Sunday Ticket (which we dropped two years ago over excessive pricing).
As for satellite TV, it's all about content and we pay for no premium channels. We do have HDTV but we also have about a hundred channels that we don't watch. Basic service is only $25/month so how do they manage charging us $140?
Back in the day, broadcast TV was free except for the TV itself (and maybe a roof antenna) and broadcasters made their money with advertising. Well, there's no shortage of advertising on non-premium channels so why do we have to pay so dearly for satellite TV?
It must be driven by the cost of satellite broadcasting since most of the content used to be free broadcast TV and the other content should live or die on its own advertising revenue. So, how much does it cost them?
Satellite transmission costs are based on bandwidth. To find how much satellite bandwidth is needed, I'll use our Internet connection as a model.
By the way, Netflix costs just over $100/year and is commercial-free. The downside is no news, sports or mindless network shows.
We can watch two simultaneous HDTV movies from Netflix over our ADSL link. I have measured the download speed of our ADSL link at just over 5 megabits/second so an HDTV signal uses less than 2.5 megabits per second. Using many-years-old 16QAM modulation (4 bits per Hz) with moderate 3/4 forward error correction (3 bits of TV for every one bit of error correction), a single movie would consume roughly 1.2 MHz of satellite transponder bandwidth.
The 150 or so DirecTV channels would therefore require about 225 MHz of satellite transponder bandwidth. Transponder bandwidth goes for about $1.4 million/year/36MHz so DirecTV needs about 7 transponders costing about $9.8 million/year per market. For the New England spot beam metro market (see spot beam map below), there are millions of customers. Even if there are only 1 million customers in this market, the yearly cost should be about $9.80 each.
http://www.euroconsult-ec.com/news/euroconsult-in-the-news-34-3/232.html
Even if they were allowed the ridiculous 2 cents per hour I suggest for telephone and internet service, this would make the yearly bill $175.20 instead of the $1682.80 we paid last year.
They'll argue that they have to pay for the shows they broadcast. I'm not sure why they should have to pay since the satellite operators should be selling their audiences to content providers. DirecTV has an audience of 30 million customers after all. But that's a different question.
Assuming the current business model, take the recent rate dispute with Viacom. Viacom jacked up its prices for its 27 channels to $600 million/year. Scaling this up to 150 channels, the probably pay $3 billion/year for content for all markets. Dividing by 30 million customers, this is just $100/year/customer. Added to the $9.80 transmissions cost, the proposed $175.20 gives them a tidy profit.
Now, I'll admit that they should have charged a lot more than I suggest when they started and had few customers but that was a long time ago. Prices should come down with volume. FCC are you listening?
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| Satellite Spot Beam Markets |
The foregoing discussions relate largely to ways that regulations could benefit ordinary folks by reducing the monthly expenses. To summarize the results:
Expense Current Should Be
Electric Power $200 $54
Healthcare $1,750 $875
Telephone/Internet $198 $58
Satellite/CATV $140 $15
Total $2,288 $1,002
Savings $1,286/mo $15,432/yr
Since this savings is dominated by healthcare, most people would benefit by about $12,000/year. Given the current workforce of about 135 million, the overall economy would benefit by over $1 trillion/year while reducing the unjustifiable and enormous profits of a few businesses. That's what regulations should do.
Financial Markets
Now I'll address regulatory functions at the national level. At this level, if one player sneezes, we all catch a cold. At this level regulations can be very expensive in many ways so we have to apply some common sense; something clearly lacking in our nations' capital these days.
The financial markets are like the wild west these days.
- Global finance driven by news cycles instead of reason
- Increasing frequency of crisis situations
- Multi-hundred point swings on the Dow
- $85 billion/month expenditures by the Federal Reserve to buy toxic securities
- Colossal bank failures
- National debt that is more than 7 times federal government annual revenues
- Washington now speaks of deficit reduction, not debt reduction
- Trade deficits exceeding $40 billion/month
- Unchecked insider trading
- Rigged inter-bank lending rates
- Pyramid schemes and fraud running amok
- Government-mandated predatory lending
The regulators have clearly been doing a crappy job.
To think about how to get a handle on this mess, I have to categorize the players.
Megabanks
As I noted previously, these things have to be broken up so that when (not if) they do something stupid, the impact is confined to shareholders. Break them into smaller pieces that do the jobs of the entities described below and make sure none of them are larger (in assets) than the economy of the smallest state economy (Vermont has a GDP of $26 billion, big but not dangerously so). This will probably have the side-effect of businesses rushing to Vermont; this should be a good thing since, with global warming, the ski resorts will soon be out of business.
Look at the growth in the big banks since Glass-Steagall was repealed. Three of them have assets greater than the GDP of California but, unlike California, are single-minded in their pursuits. This is not good.
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| Market Shares of 10 Largest Banks |
Commercial Banks
Commercial banks hold depositors' money and make loans for things like homes, cars, education and small businesses. These banks must be forced to service their own loans and not be allowed to sell them to government-backed clearing houses like FNMA. This will stop predatory lending and give incentive to study loans before making them.
If they borrow money from the Federal Reserve (the Fed) to make loans and the Fed rate subsequently drops, make them pass the drop to the borrower: this will end the refinancing treadmill. Conversely, if the Fed rate goes up, the borrowers rate stays the same; this will be incentive for the Fed to go easy on rate changes and avoid things like the S&L crisis since the Fed is ultimately responsible for bank failures. Ban adjustable-rate loans and cap the banks' vig to the Fed rate plus, say, 3%. Also make the banks pay half of the vig to the depositors.
We maintain a healthy balance in our checking account and we get jack shit for it. This is nonsense.
Federal Reserve Bank
The Fed was required to pay commercial banks interest on their reserves as a part of the 2008 Emergency Economic Stabilization Act. This needs to stop now.
What is the incentive to make loans at 3% when the Fed pays 6% to do nothing? What bonehead came up with that idea? It had to be the banking lobby.
More importantly, why are the politicians and media so surprised that the banks are reluctant to make loans?
Banks need to keep sufficient reserves to cover their losses and taxpayers should not have to pay them to do it. If they fail, tough luck for the bank's shareholders; the depositors are backed by FDIC. The Fed has to pay attention, not interest.
As noted above, the Fed needs to moderate the rate at which interest rates climb to avoid what happened in the 80's S & L crisis.
The Fed also has to pay dividends to member banks. This is an anachronism left over from the formation of the Federal Reserve Bank as an enticement for banks to become members.
Although these dividends are capped by law at 6%, this practice also has to stop: the Fed is owned by us and is a non-profit: if anyone gets a profit, it's us, not the member banks. They make their money on their vig or they die. Plain and simple.
Investment Banks
The biggest investment banks currently range in size from $1.5 - $5.5 trillion.
The top 10 have assets nearly equal to US GDP!
Breaking them up to smaller entities no larger than Vermont ($26 billion) would substantially limit the damage they can do. The 2008 crash was almost directly attributable to them and led to $700 billion in bailouts and more than $13 trillion in taxpayer assistance overall. It also cost normal homeowners 10 years' growth in their primary asset. Since we won't jail the leaders, we have to reduce their arsenals.
These banks should not be allowed to trade on their own behalf, thus reducing the threat of insider trading.
Stock Brokerages
These things are more or less of an anachronism too, if you ask me. With internet-based trading, people should be allowed to buy and sell securities on their own without paying commissions and fees. Trading in securities is really no different from gambling in a casino (or online in New Jersey).
These folks are only interested in making trades, they get paid whether the trades are wise or not. The government should operate the exchanges as an impartial third party and be done with it. As with investment banks, brokerages should also not be allowed to trade on their own behalf.
High-frequency trading should be banned on US securities.
Can people get themselves in trouble trading securities? Sure, but they do it every day at casinos and convenience stores with lottery tickets too. No nanny state needed. You can't regulate stupidity.
Use a certified financial planner. They're not perfect either but they know more than the average Joe.
Corporations
Corporate debt (bonds) and corporate stock are risky things. Sadly, there is no shortage of people who make a living in the confidence game. Outright fraud and pyramid (Ponzi) schemes are uncovered every day. I don't see a way to stop it since, face it, people are greedy and stupid when it comes to money. Government regulators haven't shown themselves to be any better.
Make the penalties much, much stiffer and call it a day.
By having the government (the SEC, for example) step in as the referee on all securities, investors could get an impartial opinion on the security of interest: any investment not rated by the SEC should raise a warning flag to even the dumbest investor. Of course, this does not necessarily prevent corruption but it does leave legal recourse to those that get cheated: it's hard to sue a fly-by-night. It's also hard to sue the government but that can be fixed and government it a lot easier to find.
Corporations should also not be allowed to trade on their own stock since this will severely limit their ability for market manipulation.
Corporations should also have size limits just like banks. The Bell Telephone company was broken up because of monopoly. Other large companies should be broken up to prevent economic catastrophes. There are a lot of companies bigger than Vermont. There are 220 that are bigger than $2 billion and more than 50 bigger than $100 billion.
The added benefit that this brings is the reduction of lobbying power that any single institution can bring to bear on our legislators.
Congress
As the maker of laws, congress has to make the laws that put these controls in place.
Congress (and the executive and judicial branch) has to be forbidden from having any interest in private industry: all members and their staffs. Discovery of a breach is grounds for immediate ejection, imprisonment and forfeiture of all emoluments (I've wanted to use that word ever since I read the Federalist).
Congress also has to end all subsidies to all private industry. Last year, government gave away subsidies totaling $80 billion. This is sequester going the wrong way.
The job of government is to provide security for its citizens to engage in commerce. Our national compassion wants us to protect the weak; I'm OK with that but not when it get in the way of economic equilibrium.
Just ending these subsidies has the net effect of the sequestration with the net benefit of culling the herd of the weak performers.
Congress has to stop making government bigger!
In a time of crushing debt, we don't need new agencies like the consumer protection thing currently in the works or the Homeland Security whatever: make the existing government do its job. The consumer protection agency is part of the FTC and we already have FBI, CIA and DoD to make us secure.
I believe this should be the job of the Supreme Court: congress makes laws, the executive branch carries them out and the court should either ensure that the executive does what the law requires or either strike down the law or jail those who fail to enforce it. Balance.
Congress also has to get its own fiscal act together. I suggest balancing the budget and paying off the national debt within 20 years as a reasonable goal. This debt ceiling crap is like advertising that we're all a bunch of idiots: it may be true but that doesn't mean we should brag about it.
State & Local Governments
I hate to lump these together since each one spends about 10% of national GDP.
Financially though, they have to wean themselves from the national teat. The reason is simple: what congress giveth, congress can (and will) take away. In other words, a budget built on the largess of Washington is a house of cards.
Take what the federal government gives us and put it away for a rainy day because the rainstorms are getting closer and closer in time.
1929, 1973, 1987, 1989, 2001, 2008...this is not a good progression!
Non-federal governments also have to get out of the business of subsidizing private industry. If you want business to come, fix the business climate, don't offer bribes. Here's the list of usual things to attract business.
- Low taxes for all, not just newcomers
- Educated workforce
- Reasonable regulations
- Quality of life
- Transportation
- Cooperative government
Schools are a big part of the financial picture too. Here in Connecticut, the state budget is $20 billion/year and public schools cost $8 billion. The schools need major restructuring. Please see my post on Public Education where I show how to cut that cost in half.
Summary
If regulation worked as it should, working people would save $12,000 or more every year in after-tax dollars. This would tend to cut into the enormous and unjustifiable profits of a few businesses but that is the intended function of regulation, right?
Additionally, government has a duty to provide common sense, proactive regulation of businesses, the financial institutions and itself. Thoughtful regulation will dial down the rapidly rising frequency of national economic upheaval and will also reduce the influence of mega-banks and mega-corporations on the lawmakers so that that can get back to working for all Americans.
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