For decades, William Isaac’s insights on the U.S. financial system have been featured in leading news publications. Now, you can browse them all in one location.

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A Former FDIC Chair Walks Into a Bank

A Former FDIC Chair Walks Into a Bank

May 16, 2020

It sounds like the start of a joke.

William Isaac, the chairman of the Federal Deposit Insurance Corp. during the savings and loan crisis of the 1980s, walks into a bank. It’s mid-March, and he wants cash.

He doesn’t take out a “massive amount” but “enough to get by for a month or so, if there was some problem or some issue in the economy, and the banks were not available.”

The former chairman of the insurance fund — who oversaw the closure of more than 1,000 institutions, including the first “too big to fail” bank — felt the need to withdraw cash as states began shutting down to slow the spread of the coronavirus.

That’s the joke.

“I wasn’t concerned about the banks; I know they’re safe, and what I took out was not nearly as much as I left in,” he says. “I just felt that stores may close, and banks may [reduce their] hours, and I wanted some cash on hand.”

Isaac felt the same impulse to hoard cash in a crisis that others have. The irony is that he, better than anyone, knows the consequences for banks if others follow his lead.

Too much hoarding leads to liquidity crunches in markets big and small. Enter the Federal Reserve Board and its alphabet soup of facilities.

“One thing the Federal Reserve does is trying to make sure that there’s so much money in the system that it will satisfy even the most conservative of people,” he says.

Isaac points out that regulators have never faced a crisis like this. The Fed was only five years old when the Spanish Flu broke out in 1918, and the FDIC wasn’t created until 1933.

“The Fed is basically creating pages in their playbook that nobody thought were there,” Isaac says.

It’s been two months since regulators opened their playbooks and pulled out their toolboxes, with several of the lending facilities they created already acquiring assets. This is on top of the billions that Congress has offered in two rounds of stimulus, with the potential for more.

Much uncertainty remains, but the outlook for financial markets seems to have reached a precarious equilibrium.

Now we wait. For people to get better. For cities and businesses to reopen. For it to feel safe to be near strangers again. For the toilet paper to return to shelves.

At least the banks (and William Isaac) are flush with cash.

Kiah Lau Haslett / managing editor for Bank Director

Trump wants negative rates — but what would that mean for your wallet? by Ben Popken published by NBC News

Trump wants negative rates — but what would that mean for your wallet? by Ben Popken published by NBC News

May 16, 2020
Previously seen as a sort of theoretical thought experiment and a line that should never be crossed, some countries have experimented with setting negative interest rates.

Imagine a backward world of “negative interest rates” where banks charge you to save your money and pay you to take loans. Now forget it, because that’s never going to happen, even though that seems like the back-of-the-envelope implication of the unconventional monetary policy called for by President Donald Trump in tweets and rejected by Jerome Powell, head of the Federal Reserve, which sets U.S. monetary policy.

One of the main levers the Federal Reserve uses to influence the economy is by setting the federal funds rate, the interest rate banks charge each other to borrow. This one rate is in turn used as a benchmark for banks on a wide variety of products from the credit cards in consumers’ wallets to the loan for the car they drive and the interest earned by the nest eggs in their accounts.

Loans are more expensive for a borrower when rates are high, and cost less over time when rates are low. The only thing less than zero is a negative.

That’s got some people excited that negative rates could be the secret to juicing an American economy reeling from coronavirus shutdowns, skyrocketing unemployment, and plunges in spending and risk-taking.

“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT.’ Big numbers!” Trump tweeted on Tuesday.

Despite the pressure, Powell maintained his course of action, saying Wednesday that negative rates are “not something we’re looking at,” during a webcast with the Peterson Institute for International Economics.

Social media has reacted to the prospect of ever lower rates with jokes about “negative interest rate credit cards” that earn you money the more you shop.

“Will the interest rate on my credit card and student debt go negative too? Will I receive interest payments for borrowing money!!!? Is this a dream!?” tweeted Twitter user PubliusValerio.

“Stimulus for the people, everyone gets a 10K limit 25% negative interest rate credit card,” tweeted Twitter user Ken Wood.

Previously seen as a sort of theoretical thought experiment and a line that should never be crossed, the central bankers of some countries, notably slow-growing economies such as Japan and Switzerland, have experimented with setting negative interest rates.

“Negative interest rates are intended as a disincentive for people to hold cash instead of using money to purchase goods and spend money,” said William Isaac, a former Federal Deposit Insurance Corporation chairman, and co-chairman at the Isaac-Milstein Group. “The central banks of the world have gotten into a very bad place, beginning with highly unorthodox monetary policies during the crisis of 2008-2010. They don’t have many tools left to stimulate economic activity.”

These tools were effective in avoiding deflation, according to a paperby the Committee on the Global Financial System, though they did squeeze bank profits.

But “there is little if any evidence that negative rates actually stimulate growth, inflation, or improve bank lending,” said David Lebovitz, a global market strategist at JPMorgan Asset Management.

Long-term effects of negative interest rates can’t be fully determined either, the paper also warned.

It can be determined that setting rates to negative wouldn’t upend the cornerstone of banking where banks charge you interest on loans and pay you interest on deposits.

“Negative interest rates won’t filter down to the consumer level,” said Greg McBride, chief financial analyst for Bankrate.com. “No one is going to pay you to take out a loan, and banks will not charge money to put in a savings account.”

No one is going to pay you to take out a loan, and banks will not charge money to put in a savings account.

Banks could make up for the loss in lending income by increasing fees on checking accounts, overdrafts, ATM withdrawals, wealth management and mortgages.

“If we did see negative rates here, they would probably not impact the average consumer right off the bat,” Lebovitz said. “The experience in Europe suggests that only bank clients of a certain size would be subject to negative rates; everyone else would simply earn zero.”

For now, the Fed continues to push back against suggestions of a negative interest rate, and Powell said he believes it has plenty of tools left in its toolbox to help guide the economy.

Even if the rate is not negative, it does appear that a low interest rate environment is here to stay. Consumers with savings can try to stay competitive with inflation by putting their money in a high-yield online savings account.

But they should avoid money market funds, which “become an even worse alternative than they are now the lower rates go,” McBride said. “The yields are currently racing toward zero — and what happens to those funds in a negative rate environment is the trillion dollar question.”

FDIC tool to prevent bank runs goes unused vs. coronavirus by Brendan Pedersen published by American Banker

FDIC tool to prevent bank runs goes unused vs. coronavirus by Brendan Pedersen published by American Banker

May 15, 2020

WASHINGTON — Congress gave the Federal Deposit Insurance Corp. approval in March to intervene if the coronavirus pandemic triggered bank runs or other liquidity strains, but nearly two months into the crisis deposits are through the roof and the FDIC has shown no sign of acting on its expanded authority.

The culprit for now is a lack of need, analysts say. Unlike in the 2008 financial crisis, there is currently no shortage of liquidity in the nation’s banks.

“The banking system doesn’t have a liquidity problem like it normally would in an economic crisis where banks have made a bunch of bad loans,” said William M. Isaac, former chairman of the FDIC and co-founder of the Isaac-Milstein Group. “This is a crisis that started in hospitals and in nursing homes.”

Research shows that 37% of all consumers, and more than 50% of millennials, prefer to open a new account online.
The onset of the virus brought fears of deposit outflows on top of other liquidity concerns. The Federal Reserve acted quickly with emergency liquidity backstops for key areas of the financial system, such as corporate and municipal bonds.

For an added safeguard, the Coronavirus Aid, Relief, and Economic Security Act authorized the FDIC to reinstate 2008-era programs to back all noninterest bearing transaction deposits as well as bank-issued debt.

But in stark contrast to the 2008 financial crisis, the pandemic crisis hasn’t threatened bank liquidity. On the contrary, bank deposits have ballooned to unprecedented levels, likely in part because investors have fled a volatile stock market in search of safety.

“It’s possible a liquidity crisis will develop, so regulators will probably watch from the sidelines and be ready to bring out tools if they’re needed,” Isaac said. “But I’m not sure they’ll be needed.”

In 2008, the FDIC used authority it had at the time to launch the Temporary Liquidity Guarantee Program — made up of the Transaction Account Guarantee Program and Debt Guarantee Program — as the credit crunch brought on by massive mortgage losses shook the nation’s confidence in the banking system. Congress in 2010 required the FDIC to seek approval before re-launching the programs.

Yet since Congress reauthorized those backstops in March, the FDIC has not appeared to consider launching either program.

In the two months since the pandemic first took hold in the U.S., deposit levels have exploded. According to the most recent data from the Federal Reserve, deposits at commercial banks hover around $15.1 trillion dollars, up from $13.2 trillion at the start of the year, or an increase of about 14% in just under four months.

On a week-to-week basis from mid-March to late April, deposits grew at a clip never before seen in available Federal Reserve data. Since 1973, the nation’s deposits in commercial banks have grown by an average of about 0.13% a week. But in the seven weeks between March 11 and April 29, weekly growth averaged 1.57% — roughly 12 times the historic average, and the largest seven-week period of deposit growth on record.

Today’s picture of bank liquidity is a far cry from anecdotal reports of cash runs and deposit outflows that percolated in the early days of the pandemic. Fears of a cash crunch were palpable enough that the the FDIC sought to address depositors in a March 24 video bulletin from Chairman Jelena McWilliams, who told bank customers that the “last thing you should be doing is pulling your money out of the banks now, thinking that it’s going to be safer someplace else.”

Some observers pointed out that the FDIC’s nod from Congress to redeploy liquidity programs was not a mandate so much as an unlocked door.

“The CARES Act was the first major piece of the federal response and was meant to be a stabilizing force with the crisis. Part of that is going back to your old tools and making sure they’re ready when they’re needed,” said one industry source. “It was Congress’s way of saying, if you need this, we support it.”

Others cautioned that a full-fledged financial crisis as a result of the pandemic was still a distinct possibility, particularly for community banks.

“Even if the 2008 financial crisis was fundamentally different than the current public health crisis, COVID-19 could have the same ultimate impact on banks that the last crisis did if this drags out and creates concerns about the financial strength of banks in the marketplace,” said Brian R. Marek, a partner at Hunton Andrews Kurth. “Community banks are still concerned about the potential for their customers to start withdrawing large amounts of cash.”

Marek said that it was “a bit disappointing” that the regulators hadn’t signaled how they were prepared to act if any temporary liquidity action became necessary for the financial system to weather the economic slowdown.

“Some kind of action from the FDIC, especially in this low interest rate environment, that expanded deposit insurance for all non-interest-bearing accounts would be a much more persuasive sign to consumers at large that their money is safe,” he said. “This is about the FDIC demonstrating the strength of the financial system and assuring depositors that their banks are a safe haven.”

But others emphasized that given the uncertainty in the months ahead, it may be too early for measures like the FDIC’s temporary liquidity guarantees. They note that the 2008-era programs were born of a financial crisis and focused on keeping the financial system’s plumbing intact.

“Right now, the interbank lending market is working,” said Luigi De Ghenghi, a partner at Davis Polk. “The big thing about the Temporary Liquidity Guarantee Program during the last crisis was, more than almost any other tool, it allowed bank holding companies and banks to issue debt in the capital markets and helped unblock the interbank lending market.”

Isaac | Milstein Letter to Congress, May 8, 2020

Isaac | Milstein Letter to Congress, May 8, 2020

May 8, 2020

 

 

We recently shared an article with you written by us for the American Banker expressing our deep concern about the Current Expected Credit Losses standard (“CECL) and about the role played in setting accounting standards by the Financial Accounting Standards Board (“FASB”).

As you might know, FASB is a completely private sector board created in 1973 by the accounting industry without any meaningful oversight from Congress, the Administration, or the government agencies charged by Congress with regulating the financial system, including the Federal Reserve, the FDIC, the Comptroller of the Current and the Department of Treasury, and the National Association of Credit Unions.

FASB proposed in the 1990s to require financial institutions to adopt market to market accounting rules. The heads of the Federal Reserve Board (Alan Greenspan), the Department of the Treasury (Nicolas Brady), and the FDIC (William Taylor) unanimously spoke out against the proposed new accounting rules, arguing, correctly, that our nation had mark to market accounting rules before and during the Great Depression, and the rules were eliminated by President Roosevelt in 1938 because market based accounting was preventing a recovery from the Depression. There is no question in the minds of unbiased/knowledgeable observers that FASB’s mark to market rules (mislabeled by FASB as “fair value accounting”) forced regulated financial institutions to needlessly write off $500 billion of private capital at the beginning of the economic downturn in 2007-2009. This $500 billion write down created massive instability in the financial system and wiped out roughly $5 trillion of lending capacity, forcing Congress to enact the $700 billion TARP program. We need to put the accounting rules governing our nation’s federally insured depository institutions back into the hands of the SEC, which must be required to work closely in developing and overseeing these rules with the Federal agencies charged with supervising our nation’s critically important financial institutions.

Finally, we are pleased to provide another compelling article on this topic written by Scott Shay, Chairman of Signature Bank, and published earlier this week by the American Banker entitled, “Time for Congress to Put an End to CECL.” We hope you will find FASB’s usurpation of regulatory and accounting rules affecting Federally insured depository institutions of significant concern, as we certainly do. We will be available to discuss in further detail as appropriate.
Best regards and hope you are safe and healthy.

William M. Isaac
Co-Chairman
Howard P. Milstein
Co-Chairman


Time for Congress to put an end to CECL

by Scott A. Shay

The Financial Accounting Standards Board is considered by people who actually do business to be ridiculously out of touch.

Sadly, FASB has proved this again. The FASB seems to spend its time deriving increasingly more fiendish and complex accounting standards. These new rules place an even heavier burden on the private sector, with little regard for cost versus benefit or practicality for a typical company. Neither does it recognize relevance to banks and investors who use the financial statements.

The FASB standards best suit the largest corporations: those that have large accounting staffs and can afford to pay a myriad of consultants and modelers to cope with the latest pronouncements. The recent 
FASB-induced fiasco is the imposition of its so-called Current Expected Credit Losses accounting standard, with a first quarter 2020 implementation that comes at the worst possible time.

The CECL standard requires U.S. companies to pretend to employ prophets as it mandates that banks predict and set aside reserves at the closing of loans for potential losses throughout the life of the loan.

In the absence of certifiable prophets, firms must hire modelers to make predictions over extremely long-term periods. These models are typically very precise and broadly inaccurate. And the models do not relate to the changing real world, especially what is confronting businesses and the economy now — a massive recession induced by COVID-19.

According to the FASB, these models have to be constantly tinkered with over time and will presently force banks to significantly reduce their capital. With CECL, capital is reduced in bad times and increased in good times.

It is exactly the type of pro-cyclical accounting that any country should avoid for its own good.

Contrary to the objective of all the stimulus efforts being put forth by the U.S. government and the private sector, the CECL standard will likely reduce loans which could have otherwise been made during this crisis.

The CECL is built in a way in which the effects will continue to reduce lending by decreasing capital in accelerating amounts as loan loss reserves are added. Therefore, the deeper the COVID-19 recession gets, the less capital CECL will make available for lending.

Even with this clear and present crisis, FASB is moving full steam ahead with its implementation.

There are bills in Congress designed to delay or abolish CECL. But the fact that the FASB has not taken one step to at least delay CECL is astonishing.

One wonders if the FASB is so socially distanced from the real world that they think they are living on another planet, and are merely clinically curious about the crisis happening to everyone else. In fact, it is the FASB’s own actions, or inaction in this case, which will make the crisis worse.

Furthering the problem, the CECL standard could become more difficult to compare results across U.S. banks and financial institutions; or at least between the U.S. and the rest of the world.

The multitude of employed reserve methodologies make comparison almost impossible. The FASB, undeterred by any of this, seems so convinced by its own brilliance that it has ignored the groundswell of many comments from practitioners and investors who’ve overtly pointed out the obvious issues in creating such a model-intensive component of financial statements.

Congress must take action to help rebuild the economy without spending even one dollar of taxpayer funds: abolish CECL.

Scott A. Shay
Chairman and Co-founder, Signature Bank of New York

Source: https://www.americanbanker.com/opinion/time-for-congress-to-put-an-end-to-cecl

Suspend the Payroll Tax by Steve Forbes, Arthur B. Laffer, Ph.D. and Stephen Moore

Suspend the Payroll Tax by Steve Forbes, Arthur B. Laffer, Ph.D. and Stephen Moore

April 24, 2020

The best economic idea we’ve heard in response to the coronavirus crisis is a payroll-tax suspension. President Trump restated his support for it at a recent press briefing, and for good reason: It would reward work and production rather than the growth of government. Republicans should rally around the idea as the centerpiece of their next economic revival plan.

The plan we recommend would cancel all payroll-tax collections from May 1 to the end of the year. This would suspend the Social Security and Medicare tax, known as FICA, which takes 7.65% from a worker’s paycheck, with another 7.65% paid by employers, up to $137,700 of income. Self-employed Americans, usually socked with the full 15.3% payroll tax, would also find relief.

Every worker in America would get a substantial pay raise for the remainder of the year, but because the tax is regressive, lowest-wage workers would be helped the most. The majority of low- and middle-income workers pay more payroll tax than income tax. Even minimum-wage workers would see a nice boost in their paychecks while their employers would pay less too.

By reducing employer payroll costs, this plan would encourage firms to start hiring. Several economic studies document what common sense would tell us: Lowering the tax on employment leads to more of it. Because the tax relief would be temporary, businesses would gain an incentive to hurry up and hire right away, or as soon as their work resumes. There is no time to waste: The U.S. needs to put perhaps 20 million people back to work.

This would help firms without picking winners and losers. Unlike almost every other “stimulus” plan—to bail out airlines, banks, Boeing, energy companies and the rest—suspending the payroll tax provides an equal benefit to every company in America.

Also important is its ease of implementation. By simply not taking some $800 billion from the businesses and workers on Main Street, this plan cuts out the bureaucratic middlemen who plague spending programs. Our previous research leads us to expect that this would be at least 20% more efficient than collecting the money from taxpayers, running the funds through the federal maze, and then distributing them through various spending programs.

We have heard the objections. One is that this will drain the Social Security and Medicare trust funds. But the Treasury would transfer money from the general fund to these programs, fully making up the shortfall. Benefits for seniors now or in the future wouldn’t be threatened.

Another is that it would be too costly to let workers and businesses keep $800 billion of their own money. But compared with the few trillion dollars Congress would otherwise spend on more government relief programs, the payroll-tax suspension is a bargain.

The other complaint is that House Speaker Nancy Pelosi would never go for this plan. Maybe, but this would forfeit the moral high ground completely. Suspending the payroll tax would give every minimum-wage and middle-class worker—most of whom have faced great hardship this year—a swift rise in their paychecks, starting immediately. If Mrs. Pelosi and her colleagues want to oppose that, let them.

Small Business and the Crisis: What We Are Doing Isn’t Fair . . . or Smart by Brian Graham, Co-founder and Partner in The Klaros Group

Small Business and the Crisis: What We Are Doing Isn’t Fair . . . or Smart by Brian Graham, Co-founder and Partner in The Klaros Group

April 20, 2020

Last Thursday, the Small Business Administration officially announced the inevitable: the Paycheck Protection Program (PPP), the Federal government’s only large scale initiative targeting small businesses, ran out of money less than two weeks in. Untold numbers of businesses, particularly the smaller firms, were left out in the cold.

Small businesses drive just under half of jobs and the U.S. economy. Yet we allocated them only $349 billion of relief, less than 15% of the total funding in the CARES Act. What a surprise that the funding would wind up woefully short.

Through a blizzard of liquidity programs, the Federal Reserve has thrown money at the crisis as well, orders of magnitude more than Congress. Unfortunately, here too the interventions have been skewed to the disadvantage of small businesses. Thanks to its responses to the 2008 crisis, the Fed was able almost instantly to reactivate programs for interest rates, quantitative easing, bank liquidity, repos, asset backed securities, money market funds, and investment grade corporates almost instantly – delivering trillions almost overnight to big banks and corporations. The Fed’s liquidity program for PPP loans and the Main Street Lending program for middle-market companies are both a tiny fraction of the overall assistance (it is hard to calculate an exact share given the unlimited nature of some of the Fed programs but to date clearly well below 15%) and also remain very much a work in progress.

In addition to being a dollar (or, more precisely, hundreds of billions of dollars) short, our efforts to aid half the economy have sadly been a day (or, more precisely, weeks) late. It took us weeks to stand up PPP, with many banks struggling to process loans. Thank goodness for the community banks that stepped up as larger banks faltered. And, by initially freezing out the non-bank private lenders (including fintechs) and community development financial institutions that actually serve small businesses and are the best distribution channel to reach this sector, we made it unnecessarily hard for small businesses to access any assistance that was available. Of course, even if as expected Congress ultimately adds some money, the stoppage as of Thursday has injected even more delay and uncertainty.

For small businesses struggling to meet payroll, days matter and weeks can easily be the difference between survival and extinction. If they go down, so do the jobs that they have created.

There’s always a lot of rhetoric from politicians and policymakers about the importance of small business. So why would a politically potent and substantively critical sector of the U.S. economy get the short end of the stick when it comes to real relief? Drawing on experiences from past crises, I can see three basic reasons. First, in a crisis, policymakers tend first to pull out and re-purpose the playbooks they already have; in this case, their existing playbooks were created in the last financial crisis when large banks and companies were in fact the center of the problem and thus the target of government assistance. Second, again in part driven by the last crisis, policymakers tend to equate big with both risky and important. Even though small businesses, in the aggregate, are clearly hugely important and hugely at risk. Finally, it is simply easier to figure out and deliver aid to a few hundred

sophisticated large firms than to hundreds of thousands of small enterprises; like all of us, policymakers tend to do the easiest stuff first.

While this unintended but real neglect of half the economy can be explained, it should not and cannot be tolerated. According to the US Chamber of Commerce, as of the beginning of April – two weeks ago now – one in four small businesses had already shut down and another 40% expected to have to shut down within two weeks. That means that roughly two-thirds of small businesses, which again account for half of the jobs in this country, face ruin without assistance – which is to date has been both inadequate and late.

I am not arguing that large banks and corporations do not merit support; they do. But American small businesses need, and deserve, at least as much help as the banks or large companies. What we have done to date is not fair, smart, nor sustainable substantively or politically (certainly, with respect to the latter, in the long run if past fallout from crises is any guide). We have to get this right immediately, which means three simple but challenging steps:

  1. Add money to PPP. Proposals are circulating in Congress to add another $300 billion. But we probably need at least twice that amount or another $600 billion more. I could be wrong, but why would we take the risk of falling short again? So what if the SBA has unused authority that it returns. Every qualified small business should receive their fair share and have confidence that they will get it. That confidence is critical to protecting these jobs. Why nickel and dime the most important sector of our economy and risk falling short – again? Go big.
  2. Aggressively utilize responsible non-bank small businesses lenders to distribute the aid to their customers. These lenders include traditional players, fintechs and community development financial institutions. And these firms, more than large or small banks, have the connectivity and in many cases the technology chops to get it done right and quickly. Yet they have in practice to date been cut out. If every depository in the country was made eligible by default, why wouldn’t we do the same for every state licensed lender? The point is to get the aid to the small businesses fast. Shouldn’t we bend over backwards to make use of the best channels available to do that?
  3. Require the Fed to craft and implement new programs that deliver support to small businesses and the middle market. This is admittedly complex and hard. And the Fed should be commended for the scope and pace of what they have done to date in response to the crisis. But we were able to figure out rapidly how to expand the safety net in the last crisis to banks and large corporations; we can do so now for smaller businesses. The right place to start is to get the only two programs so far aimed at small businesses, the nascent PPP liquidity and Main Street Lending programs, actually out there. While both programs need big changes, and just need to be bigger, something is better than nothing at this point. And we can build from there.

Coronavirus, and the Media’s Lies, Damned Lies, and Statistics by Edward Pinto

Coronavirus, and the Media’s Lies, Damned Lies, and Statistics by Edward Pinto

April 15, 2020

[My friend Ed Pinto, Resident Fellow of the American Enterprise Institute, is one of the nation’s foremost authorities on the housing markets and the giant government  housing agencies.  Ed took time off from his day job to write the op-ed piece below on the geographic distribution in the US of the Covid-19 virus.  Ed’s analysis paints a vivid portrait of where the virus is and where it is not, which suggests which markets might be re-opened soon and which ones might remain closed for a while longer.  I found Ed’s analysis enlightening.]

“US has more known cases of coronavirus than any other country” – CNN

Reading breathless headlines such as this, one would never know that the on a cases per million population basis, the United States  is on par with Germany, often held out as European country with a low incidence of cases, and well below the rates for Spain, Italy, France, Belgium, and Switzerland.

But wait, this must be because of the US’s low testing rate, notwithstanding that our testing rate per million is above that of Spain, France, the UK, and Switzerland.

“The United States is reporting 20,000 coronavirus deaths, more than any other country” – CNN

This headline gives no hint that the US has one of the lowest death rates per million when compared to Western European countries.  In fact, the rate for Spain is about 6 times the US, with Italy, France, Belgium, and UK, being 5 times, 4 times, 6 times, and 2.5 times respectively.  Only Germany has a rate lower, at about half the US’s.

“What California is doing right in responding to the coronavirus pandemic” – CNN

Yes, California does have a low rate per million of cases and deaths.  But Texas is lower on both metrics and is little praised.  In terms of cases, California is at 572 per million, but Texas, the second most populous state, has an even lower rate of 474.  What about the much maligned state of Florida? Yes, its rate is higher at 939, but this is about half the rate in Pennsylvania, and one tenth the rate in New York.  The multiples for New Jersey, Michigan, Massachusetts, Louisiana, Illinois, Georgia, Connecticut, Washington, Maryland, Indiana, and Colorado.   Of the 16 states with the largest number of cases, Texas, California, and Florida have the lowest numbers of cases per million.

How California Has Avoided a Coronavirus Outbreak as Bad as New York’s…So Far: Earlier stay-at-home orders and a less dense population have helped state manage pandemic, but risk remains high, particularly in L.A.” – WSJ

This reporting on California seems to confuse correlation with causation. Texas’s stay-at-home order (March 31) came much later than California (March 19), yet, as already noted, its metrics are much better that even California’s. Florida’s order came a day later than Texas’s and as already noted, it has the third lowest case per million.  Its deaths per million stands at 22, only somewhat higher than California’s 16.  And Texas’ stands at 10, one of the lowest rates in the country. The facts around California, Texas, and Florida, suggest that stay-at-home orders be unnecessary in these large, less, densely populated states.  Social distancing, limits on crowd size, and a focus on vulnerable populations may be a much more sensible solution, one that inflicts much less damage on the economy and economic well-being of most American households.

Providing the complete facts to the American people is of the utmost importance as we debate and decide how and when to start reopening the economy and begin some normalization of activities.  The data demonstrate that the pandemic has been most severe in 7 states with the highest number of cases per million population: New York, New Jersey, Massachusetts, Michigan, Pennsylvania, Illinois, Louisiana, and Connecticut.  These 8 states account for 67% 0f all cases and, as recently as April 11, accounted for 71% of new cases.  With the exception of Mardi Gras –plagued Louisiana, 7 of these hard-hit states are in the Northeast and Midwest.

The sooner we begin to take measured steps in the weeks ahead to start reopening the economy and begin some normalization of activities, the sooner we will stop inflicting incalculable harm on our economy and American households.

Ex-Regulator and New York Banker Establish Advisory Firm William Isaac and Howard Milstein identify risk management as central focus by Ted Knutson published by GARP on March 27, 2020

Ex-Regulator and New York Banker Establish Advisory Firm William Isaac and Howard Milstein identify risk management as central focus by Ted Knutson published by GARP on March 27, 2020

April 10, 2020

William Isaac, a former chairman of the Federal Deposit Insurance Corp. and of Fifth Third Bancorp, and Howard Milstein, a prominent New York banker and real estate developer, have formed a strategic advisory firm specializing in corporate governance, risk management and compliance for the global financial sector.

“The key service is consulting on what risks banks face and how to guard against risks and minimize the effects,” said Isaac, who is co-chairman, along with Milstein, of the Isaac-Milstein Group.

According to a March 12 announcement, they aim to “offer critical guidance and counsel to institutions in today’s rapidly evolving global regulatory and competitive environments.”

Their timing coincided with the coronavirus crisis, but Isaac said he did not want to “oversell” on that specific issue. Expertise would be sought from outside if required.

He did recently co-write, with Thomas Vartanian of the program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School, “How Regulators Can Kick COVID-19’s Bank Shock into Remission,” for American Banker’sBankThink. They contend that the banking system was hobbled in the 2008 crisis by mark-to-market accounting rules, and that the now-unfolding current expected credit loss (CECL) standard is “another form of mark-to-market accounting . . . [that] is almost certainly going to diminish longer-term bank lending at the worst possible time.”

“Long Track Record”

“I have a long track record in this field. I know most of the risks,” said Isaac, citing involvement in such areas as banks’ dealings with governments, and how risks are addressed in board governance and senior-executive-level oversight.

An Ohio State University law graduate, Isaac was general counsel of First Kentucky National Corp., a bank holding company, before President Jimmy Carter appointed him to the FDIC board in 1978, at age 34. He was elevated to chairman by President Ronald Reagan in 1981 and served until 1985, his tenure marked by significant financial industry upheaval and reforms, and bank and thrift institution failures.

Isaac moved on to law firm Arnold & Porter; founded consulting firm Secura Group, of which Arnold & Porter was a founding partner; and sold Secura to FTI Consulting, where he stayed on as senior managing director from 2011 through 2019.

He was chairman of the regional banking group Fifth Third from 2010 until 2014, when he reached the mandatory retirement age.

Milstein Affiliations

“Bill has an impeccable reputation for integrity and is among the most experienced leaders in the world when it comes to financial regulation, compliance and risk management,” said Milstein, chairman, president and CEO of New York Private Bank & Trust and its operating bank, Emigrant Bank.

“Our experience in these areas will prove invaluable to institutions worldwide as they confront a world where financial security, transparency and regulatory risk management is paramount,” added Milstein, who also has real estate development, merchant banking and philanthropic interests.

Isaac has joined the board of New York Private Bank & Trust and Emigrant and is chairman of two other entities under the NYPB&T umbrella: Sarasota Private Trust Co. (Isaac resides in that Florida city) and Cleveland Private Trust Co. They plan to add more trust companies to the group.

Isaac has joined the board of New York Private Bank & Trust and Emigrant and is chairman of two other entities under the NYPB&T umbrella: Sarasota Private Trust Co. (Isaac resides in that Florida city) and Cleveland Private Trust Co. They plan to add more trust companies to the group.

Global Scope

Isaac-Milstein said more information about its growth plans will be forthcoming. Isaac said in an interview that it will be looking for people or groups who can grow with management assistance and capital. “We know what the good firms are. We’re not going to hire 40 people. We don’t have that appetite,” he said.

“Our goal is to provide a level of service to the financial and corporate community that is unmatched,” said Richard Wolf, a governance, risk and compliance expert who has joined Isaac-Milstein as managing director.

The firm is stressing “deep hands-on experience in strategic planning, risk management, information governance, organizational culture, business ethics and regulatory compliance,” and serving financial institutions and their boards, domestically and internationally, along with central banks and regulatory agencies.

Banks “face heavy fines and damaged reputations if they do not proactively nurture corporate culture, as well as measure and remediate compliance weaknesses,” Isaac-Milstein noted in its announcement. “The Isaac-Milstein Group will also focus on data security issues and global financial transparency in a world where the stability of economic systems depends upon the trust companies build with their shareholders, regulators, creditors and clientele.”

Laffer Associates: Expanded comments on the Corona Virus-Induced Economic Crisis based upon my side of a Conversation with the President by Arthur B. Laffer, Ph.D.

Laffer Associates: Expanded comments on the Corona Virus-Induced Economic Crisis based upon my side of a Conversation with the President by Arthur B. Laffer, Ph.D.

March 24, 2020

 [Art Laffer and I have been friends for quite a few years, and I have great respect for his brilliance intellectual honesty.  He has advised a number of Presidents, and  I thought you might enjoy reading about this latest conversation with President Trump.]

 On Thursday night, March 19th, 2020, after my bedtime, I missed three calls from the President. While I missed the last call, I did hear my phone ring (which was downstairs) and I tried to call the number back. Finally, at 9:18 CT (10:18 ET), the President called back and we were able to talk. We talked for about 20 minutes. The President directed me to call Larry Kudlow after our conversation and set up a conference call with both Larry and me and Steve Mnuchin. I did just that but to no avail. No one picked up their phone and the White House operator did not come online. On Friday, I also tried and tried to make contact. Finally, on Saturday, I received not one, but several calls from Larry and one from Steve. 

I’d like in this note to give you my part of the conversation with the President. I’ll leave it up to President Trump to tell you his thoughts and comments. That’s not my job or my right. Before I start, let me just say that the President is amazing: even at that hour, he was alert, fresh and laser focused. And he “gets it” right away, if you know what I mean. My points: 

A) I (Arthur Laffer) have experienced firsthand up close and personal any number of similar (but not identical) crises. I was in the White House as George Shultz’ economist at the OMB during the 1971-72 economic crisis first resulting in the Camp David edicts: a.) devaluation of the dollar, b.) America going off gold, c.) the 10% import tax surcharge, d.) the Job Development Tax Credit (an ITC which excluded foreign made capital) and of course e.) wage and price controls. The catastrophe that ensued is the stuff of legend. The stock market fell by over 50% and people were running around and squealing like five-year-olds in a scary movie—except, of course, for George Shultz. 

I was also heavily involved in the inner circles in the 1972-74 Watergate fiasco. I’ve always said (probably with some, but not too much, exaggeration) that 18 of the 25 staffers in the White House back then were convicted of some transgressions. My only excuse for not being one of the 18 was that my boss wouldn’t let me join the others. George Shultz is the most honest, straight-shooting, ethical person I believe I’ve ever met. Someday I’ll tell you all the anecdotes I have. 

I was also in the mix with President Ford’s Whip Inflation Now (WIN) set of policies that sank his presidency. My close friends and constant contacts were Don Rumsfeld and Dick Cheney (my classmate at Yale). In fact, it was with the two of them and Jude Wanniski that I drew “The Curve” on a cocktail napkin at dinner in the Washington Hotel. I worked closely with the Reagan campaign as an insider in 1976. 

I was an active member of the “resistance” during the Carter debacle. In Reagan’s 1980 campaign, I was a member (and the note taking secretary) of the Reagan Executive Advisory Committee (some 15 members at the outset) from 1979 through the election. I was also a member of President Reagan’s Economic Policy Advisory Board (PEPAB) for both of Reagan’s terms in office. In 1984’s re-election campaign, I was one of 12 members of the executive committee of the Reagan/Bush Finance Committee. 

I was intimately involved in the 1981 tax bill, the Crash of 1981-82 and in staving off the elimination of the third year of the tax cut attempted in the 1982 tax bill. It was lonely for me being an insider back then. But if you had the support of George Shultz, you knew you were right, and, in addition, if you had the support of Ronald Reagan, you knew you would ultimately prevail. 

In 1987 with the market crash in November, as a member of the President’s Economic Policy Advisory Board, I was part and parcel of all the inside discussions and brouhaha which ended in the correct decisions—“Don’t just stand there. Undo something!” As a result, Reagan won his third term in office under the pseudonym George Herbert Walker Bush. One second after winning, President Bush 41 showed his true colors and four years later lost to Bill Clinton in 1992. Nonetheless, the decisions President Reagan didn’t make in 1982 and 1987 led to a prolonged period of prosperity. 

During the Clinton Administration, I was one of 25 members of the Congressional Policy Advisory Committee, most of whom were foreign policy experts: Wolfowitz, Rumsfeld, Cheney, etc. etc. We economists were few in number. I believe our presence was instrumental in how the Republican leadership (Gingrich et al.) handled President Clinton’s economic agenda. A great period of prosperity was kept from being derailed by ill-conceived policy actions. When the economy has been doing well, doing nothing is a wise policy. 

Lastly, I was a party to—unsuccessfully—the policies of Bush 43 at the onset of the Great Recession. This led to the weakest recovery in U.S. history under President Obama. 

B) There is no one whom I know in the Trump inner circle who has any experience with or has any idea what it is like being a decision maker in times of crisis. This in no way is meant to be a put-down of President Trump’s wonderful team. It’s a fact. His people—who, I believe, are world-class professionals—are in way over their heads and, like previous crisis participants, are either too ashamed or too proud to ask for help. Having Secretary Mnuchin sell his plan is painful, pitiable and scary. It takes only five days of bad decisions to ruin a lifetime of success. Calling helicopter money a stimulus is like calling a nuclear bomb “the peacemaker.” Government spending is taxation, as Milton Friedman repeatedly said. Platitudes and bromides are no substitute for good policies. It’s easy being a top government official during peacetime prosperity, receiving accolades from adoring crowds. In times of crisis, being the point person sucks and no one admires or likes you. All that happens is that everyone yells at you and blames you. 

This current crisis is deadly serious and has within it the wherewithal to wreak massive economic damage that could last for years and years. This current crisis also contains an essential opportunity for any leader who makes good decisions to become a legendary hero of biblical proportions. Just think of Winston Churchill, Thatcher, MacArthur, or Ronald Reagan. It’s a choice between the tiger or the lady. The issue quite simply comes down to the experience, competence, knowledge and content of character of the decision making inner circle. I’m worried. It is a matter of great consequence who prevails in the internal debates. The House, Senate and President Trump need cool, calm and clearly thought-out advice. 

Whenever politicians make decisions when they are either panicked (which today they are) or drunk (which I hope they aren’t), the consequences are rarely attractive. We are still living with the disastrous consequences of bad policy from Nixon, Ford, Carter, Bush 41, Bush 43 and Obama. We need more Reagans, Kennedys and Clintons. Let’s let Trump be Trump. He has what it takes. 

It is clear that the response to the Coronavirus precipitated this ensuing crisis, which is now more economic than medical. But whatever its origins, the economy and our economic future are up-for-grabs. The near-term outlook is dark dark dark. What we now face is the question as to how we address the future which will determine the long-term prosperity of this great country and the political future of one of America’s best presidents. Our “five days of decisions” are at hand. Just look at the chart below of U.S. Real GDP per adult detrended and you’ll see what I mean. 


C) One huge part of the crisis that faces the U.S. (and other countries) is the short-term need for liquidity faced by otherwise solvent industries and companies. These companies had the rug pulled out from under them with huge overnight shortfalls in revenues and what now looks like excess leverage on their balance sheets. Industries like cruise lines, airlines, hotels and healthcare, all of which had heretofore been highly profitable and comfortably solvent, now face a credit crunch of unimaginable proportions. If everything goes right, which it can and should, these industries and companies will be back on their feet in no time—within 12 months. If the government acts judiciously and carefully, those companies who were unprepared and vulnerable will have new owners. Those companies who were intrinsically solvent will get the liquidity they need and will prosper. It is not the role of government to pick winners and losers, especially not in a time of crisis. Free markets and the removal of government intervention is never more needed than it is in a time of crisis. 

The worry is if these industries and companies don’t get the liquidity they need and deserve, their liquidity crisis will morph into a solvency crisis and will spread to every nook and cranny of the U.S. economy. Inherently solvent companies need temporary access to liquidity. 

Without the liquidity, these inherently solvent companies will terminate too many employees and will sell assets in a fire sale way below their replacement costs. Depression will permeate every aspect of the economy bar none. This happened in 2008-09 and 1930-31. You should have seen what happened in Chile in 1970 and the following two plus years when Salvador Allende replaced Eduardo Frei as president and before the Chicago Boys moved in. Unsuccessful companies with inherently insolvent businesses should not be bailed out. Who cares who owns Boeing? As long as someone owns it and runs it well, America is fine. 

What needs to be done and can be done quickly by the Federal Reserve, the Treasury, the Small Business Administration, Housing and Urban Development, etc. is for the government to lend to these good companies or to provide loan guarantees to these good companies to tide them over these unforeseen hard times back to normalcy. The good airlines, cruise lines, hotel chains, restaurants, etc. should have ready access to liquidity. 

Paraphrasing the words of Walter Bagehot, “In times of crisis, discount freely.” No words are more true. These companies don’t need bailouts, they need access to liquidity to tide them over this deep downturn. Already, some companies that see the writing on the wall are choosing bankruptcy. Remember that bankruptcy is not the destruction of capital, it is the reorganization of capital. Schumpeter said it best—this is creative destruction. 

Extending credit to otherwise solvent firms is what the Fed and others should do right now. Banks that extend credit to small companies should be given backstops by our financial institutions, especially the Fed. 

D) What shouldn’t be done: 

a.) Dumping liquidity into the overall economy by open market operations or interest rate cuts is not warranted. The U.S. banking system has plenty of excess reserves. 

b.) Intervention in the foreign exchange markets to prevent the dollar from rising is also unwise and will disrupt much needed trade. 

c.) Purchasing equity in private companies is always a bad idea. Once the government takes over, it doesn’t leave easily. 

Just help good companies with their liquidity needs. And, make sure that they pay the government back when they are back on their feet. 

E) The equally large second part of a recovery process has to be making working more attractive and making employing workers more attractive. Today, there is only one policy that can achieve both of these objectives: a temporary payroll tax (Social Security and Medicare) waiver for both employers and employees through December of 2020. This policy also has the added benefit of providing widespread benefits across all segments of the population. No one is to blame for the Coronavirus and no one should be selected for special dispensation at the expense of others. 

The payroll tax for employees is roughly 7.65% of the employee’s gross wage and for employers, it is also 7.65%. Just think of it, virtually every worker or employee in America pays this tax. Likewise, every single employer in America also pays this tax. Nothing could be more broad-based than this tax. It is the perfect vehicle to recreate the prosperity we lost. We have a supply problem today, not too little demand. If you need more production, reward all producers—both employers and employees—more for producing. It ain’t rocket surgery. 

By waiving the employee contribution to the payroll tax, each and every employee will receive an increase of 7.65% in their after-tax wages. For a $50k per year employee, this is an after tax bonus of almost $4k annually. 

Also, by waiving the employer contribution to the payroll tax, the cost of hiring or retaining an employee is reduced by 7.65%, as well. Again, for a $50k per year employee, the cost savings to the employer will be roughly $4k per year. 

The second part of the crisis caused by the consequences of protecting Americans from the Coronavirus—the loss in output and employment—can best be reversed both in magnitude and timeliness by a temporary waiver of the payroll tax through December of 2020. 

By making sure the waiver is only temporary, what happens is that both workers and employers know that these benefits won’t last long, and, therefore, they will have an enormous incentive to put as much production as they can into the eight-month period when the payroll tax is waived. They will pull 2021 production forward and increase 2020 production as much as possible. This will make the bounce back as large and as fast as possible. Helicopter money such as $2,000 per family (needs-tested, of course) will reduce the bounce back. When Steve Mnuchin asked me “what harm” can helicopter money do, my response was “lots and lots.” Just look at Europe and Japan over the post-World War II era to see the enormous damage done by helicopter money. The Treasury Secretary then blurted, “Let’s agree to disagree.” Huh? 

The total static cost of a plan to waive all payroll taxes through December 31st will be scored in budget terms at around $750 billion. But believe you me, in dynamic terms, the total cost will be a lot less than $750 billion. If one includes the costs of welfare payments and other tax revenue losses—federal and state and local—the feedback effects on the budget will be very large indeed. And if you only consider the human suffering that will be alleviated, I can’t think of any policy more compassionate than the quick reversal of the economic downturn brought on by the health policies implemented to stop Coronavirus. 

Spending other people’s money indiscriminately is not compassion. It would be symbolic pandering if only it weren’t so damned serious in damaging the economy. 

F) In addition to the two policies listed above that we should do—1) discounting freely and loan guarantees for liquidity needs and 2) waiving the payroll tax to redress production losses—there is a much larger set of policies we shouldn’t do. But these bad policies have been done time and time again in crises when panic freezes rational thought. 

When panic (or alcohol) freezes rational thought, rash actions rarely have good consequences. Take, if you will, President Nixon’s set of policy decisions made at Camp David in 1971. The damage they did to the economy and markets was immense. And yet, everyone at the time was screaming “we’ve got to do something!” The correct answer should have been to do nothing. Doing nothing is very hard, but it is often correct. In medical terms, i.e. Latin, it is called primum non nocere: first, do no harm. Also President Nixon’s and his advisors’ panicked policies around Watergate reverberate today as causing a terrible crisis for America, the likes of which we’ve never seen before. Wouldn’t it have been better if President Nixon et al. had just told the truth right away and not tried to cover up the Watergate break-in? 

We could add to the set of panic faux pas in policy President Ford’s Whip Inflation Now, Jimmy Carter’s wellhead price controls, excess profits tax and gasoline rationing. It doesn’t get any worse (oh yes it does). Jimmy Carter’s attempt to free the hostages was a panicked decision gone bad. Remember that? If you’re going to use the military, think it through carefully. And the same goes for economic policies. Take your time and do it right. 

With President Reagan, when confronted by panic situations, the response was very different. We had the huge market and economic crash in 1981 and 1982 brought about by our phase-in of the 1981 tax cuts. Everyone—except for a few of us—recommended eliminating the third year of the tax cuts and increasing social spending à la George McGovern. Reagan, to his credit, was well-aware of the problems created by mistaken, fear-driven policies and didn’t succumb to the emotional stampede. The recovery, starting on August 14th, 1982 for the stock market and January 1st, 1983 for the economy was a wonder to behold. 

Reagan (with Shultz at his side) also resisted the screams and hollers of panic-driven howler monkeys and uttered the phrase, “Don’t just stand there. Undo something.” A profound response to a panic situation. In medical terms, i.e. Latin, this response is called vis medicatrix naturae: the healing power of nature. 

But then we had George H.W. Bush’s panicked response to his situation in 1992 by raising corporate and personal income tax rates plus lots of other distasteful initiatives, and lo and behold the economy went in the dumpster and he lost the election to Clinton. Bad policies forged in panic have consequences, both political and economic. You cannot be warm-hearted if you aren’t also clear-eyed. It’s not compassionate to give away other people’s money, and it doesn’t do any good either. In fact, it does a lot of harm. 

President Clinton, upon taking office in 1993, stupidly passed a tax increase. It’s amazing how well he handled himself in economics after making that initial mistake. The 1993 tax increase caused the Democrats to lose the House, the Senate and governors’ seats in 1994, but Clinton, like Reagan, learned an economic lesson. Unfortunately (for him), his panicked decisions to lie about sex hurt him badly. The lesson is simple: think things through carefully, be modest, recognize your own limitations and don’t lie. 

And then we come to “W” and Obama. Yikes! Just how bad decisions can be when people make them in a panicked state was sorely tested by these two losers. In five days, a panicked government can enact enough policies to ruin decades of prosperity. These two Presidents and their actions are sufficiently recent to not require recounting. 

What one must remember, whether you make a panicked decision or not, a year from now all the buildings and people and computer code and trains and factories and airports etc. etc. will all still be there. They may be owned or reorganized in very different ways, but they will still all be there. The potential of the economy will barely be affected. When people say the economy will be destroyed, they are simply wrong. Who cares who owns Boeing a year from now as long as all the component parts of Boeing still exist? Unless they are solvent, why should we ever bail out the company’s current owners? We shouldn’t! 

Remember that financial crises are just that—financial crises. Financial destruction and collapse does not affect a country’s production capacity one iota. But once you try to help losers, whether their circumstances are their fault or not, by underwriting their losses, you set into motion a process that is destructive of growth. We live in a profit and loss economy where losses are just as important as profits. The financial system can be rebuilt quickly with only a pen and a ledger. That’s not true of the real economy. 

G) We should not give demogrants (George McGovern’s phrase) or helicopter money à la Larry Summers’ $600 per capita income-tested “tax rebate”, cash for clunkers, $2,000 plus gifts to all families, $50 billion bailout for Boeing, special compensation for sick (Coronavirus) people etc. etc. etc. 

We need only i.) protect solvent companies with extended lines of credit or loan guarantees to stave off a liquidity crisis and ii.) waive the payroll tax for both employees and employers until December 31st, 2020. 

If either political party wants to block this bill, let them make that clear so we all know who is to blame. In the words of the political savant James Carville, “keep it simple…” (KISS). People do deserve the governments they get. 

 

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