The Slippery Slope of Using Banks to Advance a Political Agenda

On October 29, 2020, the New York State Department of Financial Services (DFS) issued a letter to all depositories and non-depositories regulated by them regarding climate change and financial risks. This post is not about climate change. It is about how an unchecked bureaucracy can implement an agenda it cannot get through duly elected legislative bodies by wielding the power of regulation.

In her letter, Linda Lacewell, the DFS superintendent, said she expected regulated depositories under DFS supervision to:

1. Start integrating the financial risks from climate change into governance frameworks, risk management processes, and business strategies. For example, institutions should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization's assessment and management of the financial risks from climate change. This should include an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors such as credit risk, market risk, liquidity risk, operational risk, reputational risk, and strategy risk; and

2. Start developing their approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures framework and other established initiatives when doing so.

I visited the Task Force for Climate-related Financial disclosures website and downloaded their report to see what Superintendent Lacewell was talking about (see picture). 

Not sure what they mean by metrics and targets. But the report does suggest that financial institutions in their annual reports disclose all of the above, including how much lending they do to climate related industries. Meaning how much lending do you do to industries that a partisan might not like, so that the power of the mob could agitate such a high level of reputational risk that the reporting financial institution would reduce or eliminate serving the out-of-favor industry(s).

A reminder, this is a far bigger issue than climate change. So don't come at me if you want to talk about climate change. This is about using the power of regulation to exert political will that does not have enough popular support amongst the governed to enact legislation.

In response to this alarming tactic, the OCC proposed in November a rule to ensure fair access to banking services provided by national banks, federal savings associations, and federal branches and agencies of foreign bank organizations. In its letter, acting Comptroller of the Currency Brian Brooks said "Fair access to financial services, credit, and capital are essential to our economy. This proposed rule would ensure that banks meet their responsibility to provide their services fairly since they enjoy special privilege and powers because if the system fails to provide fairness to all, it cannot be a source of strength for any."

The OCC's proposal would apply to the largest banks (>$100B in assets) in the country that may exert significant pricing power or influence over sectors of the national economy. If that last sentence isn't a testament to the importance of diversifying financial services, not sure what is. The proposal would require a covered bank to ensure it makes its products and services available to all customers in the community it serves, based on consideration of quantitative, impartial, risk-based standards established by the bank. Under the proposal, a covered bank's decision to deny services based on an objective assessment of the person's creditworthiness, ability to pay, or other quantitative, impartial, risk-based reasons would not violate the bank's obligation to fair access. Not sure what's worse. Bank's being bullied to "not lend" to industries based on the shrill of the mob or being forced to lend to industries that are against their values.

Now you may be in full agreement with strong-arming financial institutions to not lend to coal burning utilities. 

But what about when you don't agree? Think about an industry or issue that you favor. And a bureaucrat waves the magic wand to cut off financial services or make it so difficult for the financial institution to bank your "favored" cause that it wouldn't be worth it.

The top 10 banks already control over 50% of all US banking assets. This is a testimony to decentralize banking. It's also a glimpse of how governments, without a will of the people mandate, can advance their agendas without consulting the people. It's a glimpse into tyranny.

~ Jeff

Politics: Can We All Just Get Along?

I do not venture into politics much, either in this blog or in person. But our environment is so toxic, I would like to take a crack at identifying shared goals by most of us.

1. We all want to reduce the number of impoverished people. We have different ideas on how to do it. I think capitalism is a better solution than socialism, as the latter creates so much more of an underclass. Except for the bureaucrats. They tend to do well in socialism. The more you disperse economic power in a society, the better, in my opinion.

2. Many successful capitalists turn into jerks. I think, by and large, this is because they want to solidify their position, and the by-product is keeping others from achieving it. That is why in large corporations executives might make it difficult for up and comers, fearing they might be unseated by them. This is also why top executives get paid so much. I wouldn't stop companies from paying executives so much, but would insist on transparency and not allow a company to deduct executive comp that is greater than some multiple of company average compensation on their Federal taxes. But better to have many, many successful capitalists, than a few successful bureaucrats. Successful capitalists are the "do-ers" of society. They create jobs. Not government. If you don't trust me on this, study economics. At most colleges. Not all. I also want to encourage a society where capitalists do well, and give their excess to charitable endeavors. Like Warren Buffet is trying to make happen.

3. Our tax system is way too complex. I would make the personal and corporate marginal tax rate the same. Somewhere around 20%. I put a simple tax solution in a post way back in 2012. See it here. This will cause disruption among accountants and tax lawyers. Taxes would be so easy and transparent, these professionals wouldn't be needed by individuals or corporations. Think of all the tax compliance savings!

4. Government spending. Until we reverse the alarming trend of national debt to GDP, we must spend less than revenue growth, and balanced budgets have to be the norm rather than the exception. I wouldn't do a balanced budget amendment, because elevating infrastructure investments and spending during recessionary periods makes sense to me. But until that time, Federal spending growth should be less than GDP growth. Oh, and the last balanced budget under President Clinton was spurred, in part, by Pay-Go. That system where new "programs" would have to be paid for by eliminating other programs that cost the same or more. I would put that structural discipline in place right away.

5. Federal government operation. Our rules are ridiculous. Bills would be cleaner, and more linear. No slapping on stupid amendments for pork. If it has enough support, have the pork get its own bill. And bringing a bill to the floor for vote would be easier. One requirement I would insist on is having a litmus test for programs designed to help society. If they don't meet a pre-agreed upon social objective over a reasonable time period, they automatically die. No vote needed. We tried to fix a social ill. It didn't work. Let's move on. And not worry about those that lose funding sending out press releases that we don't care "for the children".

6. Speaking about lawmaking, there are way too many laws and regulations for society to follow. Nobody, and I mean nobody, knows them all. In fact, most if not all of us break the law every day. This creates a ripe environment for tyranny, that we see playing out in front of our eyes. Don't like someone? Figure out a law they broke and go after 'em. Think about it. If I were in charge, there would be less, and the objective would be far less, rules and regs to follow, reducing the ability of powerful law enforcement and government bureaucrats to move against its citizens. And making it easier to enforce and comply, both individually and economically. Watch the bureaucrats squirm about this one.

7. World relations. We want to influence societies to be free. But our own freedoms are being eroded by the growing body of laws and regs, mentioned above, and political correctness which has curtailed our ability to solve problems. So we should take care of our own problems to show the world that, as our society matures, we make corrections to enhance freedom. And create a worthy example that other countries would like to emulate. But dictators. We have to be active in keeping them in check. If we were isolationist, our world would be a different, and much worse place, in my opinion. But our international forays would be selective, proportional, and  given the resources and the fortitude to win. Isolated cells of terrorists need not worry about a US Army battalion. But they would have to worry if they actively seek to harm our citizens. Their end will not be pleasant. But it may not be all over the news media, either. Oh, and trade. Free trade works. Few economists believe otherwise. The rub is that they must be enforceable and punitive for cheaters, making cheating so unpalatable that parties to the agreements abide by what they signed. There is a lot of angst against free trade now, but as a society we voted for free trade by buying less expensive stuff that must be made by labor that is less expensive than our own. And lets face it, union work rules made us noncompetitive in manufacturing. Shame on us.

8. Elections. Any candidate that wants to run for office, must complete a two-page resume to a non-partisan website. Page one denotes the candidate's experience. Page two has the candidate's answers to five key questions for the office sought (i.e. federal questions for federal office), in 50 words or less for each question. This is so voters like me can review candidate's qualifications and positions before getting into the voting booth. In PA, where I live, there is a tough US Senate race underway, and the ads the candidates run are ridiculously irrelevant and designed to stir up emotion, and not make us better voters. I say ignore that idiocy. Read the two-page, vote smartly.

9. Safety Net. I'm all for a transitional safety net to help our fellow citizens pick themselves up and get on their feet again. I'm all against turning families into lifelong government dependents, which I think is the consequence of a safety net without the transitional philosophy. If someone hurts their elbow and can no longer do the manual job they once did, we don't re-train to do other jobs not dependent on the elbow. We put them on disability for life. C'mon. This makes so much common sense, that the cynic in me thinks those that support lifelong government assistance (either in word or deed) are just bribing people for their vote using other peoples' money. And relegating the lifelong "drawers" to the lower economic rung for life. Sad.

Why doesn't the media cover much of the above? Instead, they assemble a panel of talking heads to discuss a tweet. 

Not sure there would be many that object to the above. Ok, accountants and lawyers, and union leaders. Other than them, why is everyone else shouting at each other?

Who's onboard?

~ Jeff

The Jeff For Banks Federal Income Tax System

This is not a political blog. I do not express political opinions, at least overtly. Because I have opinions. Oh I have opinions. But this presidential election season had me whaling and gnashing teeth for it to be over, much like that toddler on YouTube. I would much prefer to analyze personal relationships on Jersey Shore than be subjected to more taunts and finger pointing from presidential hopefuls. Much less having to read about it on Twitter and Facebook. So for Thanksgiving, I'm thankful it is over. Or is it?

I thought Wednesday would mark a new day. But no. Now I have to hear about the Fiscal Cliff. The result of Congress and the President not being able to do their jobs earlier resulted in this mess now. So now we're back at it.

Well let this blog save you time and effort Mr. President and Mr. Speaker. I am putting forth the Jeff For Banks (jfb) Federal Income Tax system that is fair, easy, and balanced. Lest I hear from the Oracle of Omaha about how he pays a lower tax rate than his secretary, I have your fix Mr. Buffett.

Here it is:

Rows 1 - 4: All income is taxable, whether it be from earned income, interest, dividends, or capital gains. There is no distinction between them.

Row 1: Pre-earned income deductions include health insurance and retirement plan contributions. Each will be capped at a certain level, so those with greater disposable income can't sock suitcase fulls of cash away, and those that have Taj Mahal medical coverage can't use all as a pre-tax deduction. I am not married to treating this prior to row 1. I can compromise. These deductions could be included in the income numbers in Row 1-4 and deducted in the deductions section. But for treatment similar to today's, I have deducted them prior to Row 1.

Rows 5-8: Aside from pre-income deductions listed above, there are only three deductions. Boom.

Row 5: Households can deduct the poverty rate for the same size family for the area which you live, up to a maximum amount of children. So if you're a good Catholic family and fielded a baseball team full of kids, too bad. I'm not subsidizing you. Control yourself. 

Row 6: You maintain the mortgage interest deduction up to the median house value where you live. So if you bought a McMansion and have a $300,000 loan, but the median home value where you live is $200,000, then you can only deduct two-thirds of the mortgage interest you paid. No deduction on second homes. Sorry Mitt.

Row 7: An ideal America would have its citizens earning what their skills and efforts would allow, taking what they need, and giving the rest away to help those less fortunate. Unfortunately, if high earners did this today, it could drop their effective tax rates below that of their secretaries. We all know how that turned out in the court of public opinion. Poor Mitt had an effective tax rate of 17%. But he gave $4 million to charity last year. If he only kept it in his pocket, or offshore account, his effective tax rate would have been higher and he could have avoided the whole fracas. But no. So we have to cap the deduction on what we give to charities. The jfb system proposes 10% of total taxable income up to a maximum of $100,000.

Not for profits will hate this idea. But I propose it to shut Warren Buffett up about his tax rate.

Economists might not like the idea, saying losing this deduction or that will sap the economy. But isn't our economy sapped already?

Politicians will hate the idea, because it will make us think we can go back to the days where politicians actually had real jobs and were only in session part time. Without all this tax code tinkering, they may not have enough to do. Not that they have a lot to do now. Maybe they can slowly dismantle the ridiculous amount of laws on the books that we have to comply with, and law enforcement is tasked with enforcing.

There you have it. The jfb Federal Income Tax System. It sets one rate, 20%, with few easy to calculate deductions. Heck, if the IRS got its act together, it could have an app on its site so we can do it in 15 minutes or less. Think of all the tax code compliance costs that would hit the bricks.

Let's just do it.

~ Jeff

P.S. Since this is a bank blog, I should make a link to banking. Put the amount of money you now spend on tax compliance in the bank and sleep soundly at night. There.