May 17

It’s Not Enough to Blame Republicans

Obama - BoehnerIt’s an election year and the Democratic machine is in full-court-press rallying its troops. Criticisms of Barack Obama that were once greeted by spirited debate and congeniality are now met with vitriol and anger. The mantra goes something like this: It’s an election year and we have a choice to make between two candidates, Romney will be much worse on the whole, so you better get on board with Obama 2012, or else! Certainly a Mitt Romney presidency is more likely than not to benefit the wealthy and powerful at the expense of the rest of us than that of a second term of Barack Obama. Only the unabashedly disingenuous could argue otherwise. However, it is not enough to stand back and hurl epithets and blame at the Republican Party alone. I get it, I don’t believe a word that the Republican leadership utters on policy. The reason for that is simple, none of it jives with economics, science, or morality. I know who they are, and it doesn’t naturally extend that I support them simply because I criticize the President. The Democratic Party on the other hand owns much of the blame for losing the support of progressive minded folks like me, and it did not have to be that way. We never expected political capital to be expended on each and every issue of import to us, but we did expect lines to be drawn where appropriate.

The Democratic Party diverges from the Republican Party in many respects. It is a diverse party with many distinct points of view on issues across the political, environmental, economic, and social spectrum. The Republican Party–since the mid-1980′s at least–walks in lockstep. As it’s positions on issues change, its elected officials and its base follow blindly and obediently. Obviously, if given a choice between only the two governing ideologies, no sane human being would support the Republican Party. Yet, rather than take a stand on any of the core principles to which the Democratic Party is moored, it either overtly acts in direct conflict with those principles, or it capitulates and “compromises” in the name of political expediency. Governing and legislating is a messy process. I do not harbor any illusions about that. I understand that Barack Obama and the Democrats can not wave a magic wand and implement a progressive agenda and rest on the seventh day. I also do not ignore many of the positive regulatory and legislative changes that have taken place on Obama’s watch.

It is a common and by now expected line of attack. Nothing that the Republicans do makes any sense, so all of our problems and each of the failed efforts to enact reasonable legislation or regulation  is not the Democrat’s fault. The media plays along by fashioning a narrative of “gridlock,” blaming each party equally. While there is no shortage of evidence to support the Democratic minions’ position that nothing is their fault, it isn’t an appropriate response to hold your nose and take whatever is offered by the crazies in the GOP. It also is not genuine or helpful to romanticize the bygone days of compromise and moderation.

Since the 1980′s, the Republican Party has employed a strategy of extreme ideology and intransigence in an effort to solidify its power. Newt Gingrich hatched a plan early on in his congressional career to berate and intimidate Democrats in Congress in order to force them into poor decisions. He also corralled his caucus into uniformity with never before seen effectiveness. He exploited every Democratic scandal far out of proportion to the actual dalliance. He drafted trite yet impossible to argue against lists of items he promised to accomplish. He then took his case to the public, promising to restore efficacy and responsibility to the legislative body if only the voters would send Democratic incumbents packing. It worked. It worked not because Newt Gingrich is brilliant, but because the American voter is not. Advertising wouldn’t be nearly a trillion dollar industry if people didn’t fall for preposterous claims.

Enter the marriage of the Republican Party to the likes of Grover Norquist and various other right wing and evangelical groups. The groups promised financial support and an unprecedented get-out-the-vote effort on behalf of Republicans. In return, the Republicans were only asked to champion, and more importantly, to never deviate from the political policy positions held by the groups. In Norquist’s case, he cleverly cajoled Republicans into signing a contract–called a pledge–memorializing their allegiance. Americans for Tax Reform, Norquist’s front group, has been able to recruit nearly every Republican member of Congress. If a Republican failed or fails to hold up his or her end of the bargain, all support disappears. In more drastic cases, a Republican challenger is knighted to take over the seat, no matter the tenure or leadership positions held by the traitor. It is a terribly irresponsible way to manage a major political party. Moreover, it lends itself to ultimate marginalization as greater society moves further and further from its political posture. However, at the end of the day it is the Republicans who have made a conscious decision to carry on down this path. It is really of no consequence to the Democrats.

Rather than use this radicalization to its benefit, the Democratic Party has instead chosen to capitulate to the very same individuals and groups to to which the Republicans are beholden. Democrats falsely believe all sorts of things these days. Democrats are so fearful of attracting an even harsher attack from Republicans, that they have bended to Republican will on several important issues. It is why the party will not support the legalization of medical marijuana notwithstanding the fact that nearly 74% of Americans support it. It is why the President did not close down the prison at Guantanamo Bay. It is the reason that the President has chosen to renew the Patriot Act. It is the reason that Democrats supported the JOBS Act. It is why the the United States military still holds sham trials of suspected terrorists and hands down unequal justice in secret proceedings. It is why the President condones domestic wiretapping and the mining of Americans’ private electronic communications. Democrats will tell you that they did not want to be cast as weak on terrorism or the economy, but the fact of the matter is that they fear attacks more than they relish defending such attacks with common sense and principled policy positions. They have in effect adopted for themselves a pledge of sorts, a pledge to move further enough right so as not to attract too much attention. They have done this notwithstanding the fact that history and common sense are on their side on each and every issue.

Let’s look at an example. At the end of 2010 the Bush tax cuts were set to expire. The President and the Democrats in Congress initially refused to allow the tax cuts for the wealthy to continue. It was shouted far and wide that no one making more than $250,000 would be receiving a tax beak on their watch. Republicans shot back with claims that the Democrats were hell bent on killing jobs, that they were beholden to unions and the labor movement, and that they hated small businesspeople. Republicans refused to negotiate on the Bush tax cuts if the tax rates on the wealthy would be raised, and further they demanded an end to the Making Work Pay tax credit, a tax credit that assisted poor families. The Republicans accused the Democrats of stifling the economy and worsening the deficit. While Obama did propose an alternative which held many of the middle income tax rates at the lower levels and marginally raised taxes on higher earners, bipartisan investigation revealed that Republican claims concerning the effect on small businesses were false. Democrats also proposed a dangerous 2% reduction in the Social Security withholding. While a laudable attempt to secure some relief for the middle class, a Democratic administration should at no point tinker with the funding mechanisms of Social Security. Quite frankly, I abandoned the President at least temporarily over this issue. More importantly however, the Republicans also demanded capitulation from Democrats if unemployment insurance was to be extended. This strategy was reprehensible at best, and downright hateful at worst.

What the Democrats could not do however, was to call the Republicans’ bluff. The Democrats agreed to maintain the Bush income and capital gains tax rates as is in exchange for a one year extension of unemployment benefits and a horribly irresponsible payroll tax cut for the middle class. If the Republicans wished to be responsible for a failure to extend unemployment benefits and an across the board increase on the middle class, the Democrats should have allowed them to have their way. You simply can not allow yourself to be bullied and not design a plan to wrangle the bully. Throughout the tax cut debate the Republicans were loudly echoing the Tea Party concerns over the deficit and the national debt. In refusing to allow the Bush tax cuts to expire in the face of Republican intransigence, the Democrats all but guaranteed that the national debt would grow as government revenues failed to keep up with expenditures. It was a horribly naive political calculation. The fruits of the miscalculation are before us this very instant, as renewed debate is unfolding surrounding the tax and spending adjustments that the nation faces at the end of 2012.

The Democrats solved nothing in 2010. The Party accomplished nothing of note for its constituency, and it guaranteed that it would become fully embroiled in the identical debate two years later, during a hotly contested election. If the Bush tax cuts had expired, the arguments and name-calling would be a distant memory by now. Instead, the Democrats will be forced into a position of renewing the cuts yet again at the end of 2012 in the face of threats of economic catastrophe. In fact, in 2011 when the one year extension of unemployment benefits negotiated in 2010 was set to expire, the President and Democrats did in fact call the Republicans bluff. And you know what, it worked. The Republicans did not want to be accused of allowing millions to be removed from the unemployment rolls and cast out into the street, so they negotiated another extension. They would have extended unemployment benefits alone in 2010 had the Democrats stood firm on taxes and allowed the Bush cuts to expire. The result would have been a reversion to Clinton era tax rates, hardly the worst possible outcome, rather, at the end of the day the most responsible outcome.

Yet here we stand again, having the same debate. During the debt ceiling fight in 2012, Republicans threatened to play chicken with the full faith and credit of the entire government if the Democrats didn’t agree to hatchet Medicare, Medicaid, and social spending. Democrats failed again to stand firm against ridiculous and outlandish requests. Instead, the two parties agreed to form a bipartisan Superfriends Supercommittee in order to draw up a plan for cutting an arbitrary amount of money from federal spending. No one in Washington held out any hope that the committee would actually reach an agreement, so as an incentive, the parties agreed to automatic idiotic and random cuts from defense and domestic spending if the committee failed in its efforts. This is the world famous “sequester” that House Republicans now illegally refuse to honor. The combination of the Democratic failures to stand firm in 2010 and 2012 have been referred to as 2013′s “fiscal cliff,” when the Bush tax cuts expire and the automatic spending cuts go into effect. Already Republicans are threatening Democrats that if they do not agree to cuts to offset the increase in the debt ceiling next year when an increase will again be required, that no deal will be reached. Obama and the Democrats, should they win re-election, must allow the Republicans to make good on their promise or force a compromise. Threats of a United States credit downgrade should not deter Democrats from preventing a dismantling of Medicare, Medicaid, and other programs. Bring the fight to them and let the American people decide.

It is without doubt a lugubrious fact that the Republican Party is no longer capable of taking part in a functioning democracy. There is no question that a greater degree of dysfunction exists in Washington D.C. and in state legislatures than at any period in the recent past. It is also unquestionable that the Republicans bear a greater degree of the blame for the current state of affairs than the Democrats. However, the Democratic response can not be to throw up its hands and accept the status quo. The party can not allow itself to be bullied time and time again into short term fixes that are not only poorly constructed, but also assure a similar battle into the indefinite future. It is not responsible for the party that holds itself out as the embodiment of the hopes and dreams of the middle class, the poor, the disabled, the oppressed, and the disenfranchised to allow those interests to be trampled upon over the long term in exchange for short term trinkets. It is not admirable to allow widely accepted economic realties to be cast aside and replaced by platitudes and failed policies.

It is always best to be on the right side of the historical record. If Obama is able to win re-election this November, the political calculations must give way to ideological concerns. As a self described non-ideologue, he must set aside his inherent belief in compromise and focus instead on right versus wrong. Compromise is not a victory in and of itself. It must include a degree of sound economics, and a heavy dose of morality. This is after all what the Democrats stand for, or stood for. The Republicans must not be permitted to drive policy decisions based on nothing more than the lunacy of a few insane and sociopathic contributors. If the full faith and credit of the United States is compromised for some short period as a result, so be it. If taxes must be raised across the board in order to force the wealthy to pay a larger share in order to stabilize the treasury, so be it. To accept pebbles in exchange for gold under threat of murder is no way to to negotiate.

It is time to set aside the op-eds and the punditry pushing the theme of Republican consternation as the foundation of all that ails our government and its ability to function. It is time to stand in front of the tank as it rolls down Pennsylvania Avenue and say no, we won’t take it anymore.

Mar 23

JOBS ACT: The Next Bubble

Charles Ponzi

In yet another example of the Democratic and Republican parties working together to screw the American people, the United States House of Representatives last week passed a set of bills formally referred to as the JOBS Act, but colloquially known to insiders as an enormous early holiday gift to entrepreneurs and Wall Street. The Senate passed the bill with minor modifications yesterday. Therefore, it heads back to the House and certainly shortly thereafter will find its way to the President, who has voiced his support for the measure.

Essentially, Democrats and Republicans alike tout the JOBS Act as addressing many of the problems that investors and start-ups have for years said plague the venture market–that they cannot easily raise capital from hundreds and thousands of small investors, and that financial disclosure requirements make it difficult for them to take the companies public. The Chamber of Commerce and several other business groups strongly support the measure, which should be an initial clue that the measure will intimately result in crap for the public, and more wealth for the powerful. In essence, small companies wish to be able to raise capital through a method called “crowdfunding.” It allows hundreds or thousands of investors to invest small amounts in a “promising startup” rather than pigeon holing the startup to only pitch their ideas to “angels” and large investors. Of course, this method is preached everywhere as opening the equity markets to the small investor, when essentially it only serves to separate them from their money when the startup goes belly-up.

The JOBS Act would also loosen regulatory requirements for smaller companies seeking to go public by creating a new classification called “emerging growth companies.” If a company has annual revenues of less than $1 billion—the lion’s share of all businesses—the financial statements required for an application to go public would be reduced and the companies would be exempt from having to hire an external auditor. It also provides for so-called “mini” public offerings for which companies raising $50 million or less. These companies would be permitted to avoid some of the financial disclosure requirements.

In other words, the investor and the SEC would have to rely upon the company’s word and its own accountants and statements as to the financial solvency of the company. No regulation would exist that would serve to verify any of the claims set forth in the reports. A company could essentially cook its books without any oversight. Ultimately, when the company folds or its fraud is exposed when its IPO draws near, the small investors would have little or no recourse as all of the company’s assets would likely have been exhausted, if it ever had any assets.

Only a tiny fraction of startup businesses in the United States are still in business 10 years after launch. Allowing these companies access to grandma’s equity is not going to change that. What it will do however, is make grandma poorer as part of this proposed ponzi scheme. In an effort to woo you away from your savings, emerging growth companies would also be able to solicit investments with incomplete information permitted by provisions exempting emerging companies from many of the regulations enacted to limit boiler-room activities. These provisions allow the company to use fancy heretofore-banned presentations and sales techniques in order to convince small investors to support their endeavor. A company could hire teams of pitchmen stationed in an office or at home whose only job is to contact potential investors and extract their capital.

Jeffrey Stibel, CEO of Dun and Bradstreet Credibility Corp recently said: “Under this bill, you can now go to my grandmother and say, ‘I want you to invest in a company,’ but the whole thing can be effectively a scam and you’ve just created the air of legitimacy to skirt the law.” Previously, you had to go to a qualified investor, who has enough sophistication to sniff out fraud.”

To be clear, the reason U.S. stocks today, and historically, trade higher in terms of profit to equity ratios than foreign securities is quite simple: our regulations provided confidence to worldwide investors that unsavory or illegal practices would be minimized. Our stringent reporting requirements also provided a level of clarity to would be investors of the financial solvency of any publically traded corporation.

This legislation, which has bi-partisan support, seeks to undo a century of securities reporting requirements in an effort to compete with foreign corporations. The legislation does so under the guise of job creation and small business “incentives.” The legislation is nothing more than a regulatory race to the bottom that will result in thousands of bankrupted investors and a more volatile and less trustworthy stock market.

Update March 27, 2012: Well, it passed through the House, without changes, so it is on to the President. Let the games begin.

Update March29, 2012: Ian Masters conducted an interview with Jeff Mahoney, the General Council of the investor watch dog group the Council of Institutional Investors. He assesses the damage that this de-regulation of Wall Street in the name of job creation will do to unsophisticated investors.  

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.