At no point in recent memory have I been more proud to be born and raised a Hoosier. No, not a graduate of Indiana University, but to be a resident of the great State of Indiana, one of the last remaining bastions of common sense in this country we call the United States of America.
Political convenience is being placed ahead of common sense and rules, laws, and ordinances that have existed for centuries. Common sense and tradition are being hurriedly tossed to the wind. To what do I refer? I am referring to the recent lawsuit filed by no other than Indiana’s State Treasurer to stop the bankruptcy fire sale of Chrysler to Fiat.
I have intentionally avoided writing anything about the automotive industry on my blog site. My father-in-law retired from GM, my grandpa, uncle, and cousin all retired from Chrysler, and many, many friends and clients are either employed or retired from Delphi, Delco, GM, Chrysler, or work in auto sales. The automotive industry has been a staple in Indiana for decades, but for many Hoosiers it is a love-hate relationship with the carmakers. Employees, retirees and their families all love the industry; others blame the UAW for the current automotive crisis and are more than willing to say that "they are getting what they deserve." Knowing that I would receive hate mail or fan mail from one side or the other, regardless of what I would write, I have tried to avoid the situation altogether.
However, this article, while dealing indirectly with the automotive industry, deals directly with the property rights and legal rights of every American citizen. Why does real estate in the US cost more than like properties in most other areas of the world? Because we have a long-standing tradition of actually recognizing the legal owner. Anyone that buys a piece of property knows that our government will not just arbitrarily come in and take our property away. That is, until recently…..
There is a pecking order in the structure of capital. A company could issue common stock, preferred stock, senior debt and junior debt. If a company were to go belly-up, the long-standing rule is that senior debt holders could seize any assets that have been pledged as a security, and then sell them to satisfy claims. If any value remains in the company, holders of senior debt are then paid. Junior creditors are next in line, followed by preferred shareholders, and common shareholders are last in line, getting paid only if everyone else has been paid back first. For example, let’s say you have a first mortgage and a second mortgage. If you had to declare bankruptcy, the first mortgage would be paid back from the sale of your property before the second mortgage would get a single penny. And, all things being equal, the interest rate you pay on a first is generally less than you pay on a second. Why? Just like most securities, the more perceived risk, the higher the expected return. A first mortgage (being senior debt) has less perceived risk than a second mortgage (junior debt).
And so it was with Chrysler. They had senior creditors and junior creditors. The senior creditors should be the first to be paid back in a bankruptcy. And this is where the State of Indiana comes into play. The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Movers Construction Fund represent approximately 100,000 civil servants, police officers, school teachers and their families. These three funds were senior creditors to Chrysler, investing millions of dollars, receiving less interest in return than junior creditors, and are now being told that they will not be paid back before junior debtors; in fact, it is just the opposite!
Now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being told that they will get roughly 30 cents on the dollar. But the UAW, an unsecured junior creditor, will get approximately fifty cents on the dollar. Doesn’t quite sound equitable, does it? Would it be fair for your second mortgage or home equity line to be paid back before your first mortgage? No. Common sense tells us that this is wrong. So why was it just Indiana making a fuss?
Turns out the major holders of secured senior debt to Chrysler were none other than the big banks – you know, those same big banks that received billions of dollars in TARP money. The President has already demonstrated that he IS the CEO of every firm receiving federal aid: remember, the President fired the CEO of General Motors not long ago, and the CEO’s of the banks would like to remain in their positions. So the big "I took the TARP money" banks reluctantly agreed not to fight for more than 30 cents on the dollar for their secured debt.
The powers that be in Washington knew that with the banks out of the way, they could brush away any investors – including the State of Indiana – that would try to hold out for what is rightfully theirs. What truly amazes me is that the Supreme Court agreed to the sale, and effectively slapped Indiana – and all secured creditors throughout the United States – in the face. This decision will change the way that companies will issue debt in the future, and it will change they way that foreign investors view the United States indefinitely. From now on, there may be better places to invest – countries that have more solid property rights and contract rights than we do.
The President helped out the UAW at the expense of other unions, such as the Indiana State Teacher’s Association. But what has he done to capitalism as a whole? Why would anyone be willing to accept a lower yield as a "secured" debt holder, after the junior creditors with Chrysler were paid back before the senior creditors? Why become a bond holder at all? How will future companies raise capital?
My hat goes off to State Treasurer Richard Mourdock for displaying common sense. He lost the battle, but hopefully common sense will eventually win the war.
Of course these are just my thoughts – Clark’s Thoughts.
Thursday, June 11, 2009
Friday, June 5, 2009
It's a gas!
I am not an energy expert. I have no training in the subject, and I have never been involved in any industry that has had to worry about carbon emissions. There are many more people in our community better suited to write a column on this topic than I am, but since most Hoosiers, as well as the majority of Americans, are nearly as clueless as I am on the subject, I decided to look into it a little bit in hopes of gaining a better understanding.
HR 2454, the American Clean Energy and Security Act, sets the groundwork for a "cap and trade" system when dealing with carbon emissions. What exactly is cap and trade?
Each individual company will have a limit on the amount of carbon it can emit into the atmosphere. The company would have to have a permit for every ton of carbon dioxide it emits. The permits then serve to limit, or cap, the greenhouse gas pollution that the company is permitted to emit.
Keep in mind that a company will have to pay for these permits. The government may dictate how many permits a company can purchase, and then it is up to that company to either make sure they comply with not emitting more carbon than the permits allow, or buy purchasing additional permits from other companies that reduced their emissions quicker than anticipated. This is where the "trade" comes into play.
For some companies, it will be easy to reduce their amount of emissions and sell their extra permits to companies that are less fortunate. Other companies, in other industries, will be forced to purchase those permits at market price or face hefty fines.
Why does the government want to issue a cap and trade program? Maybe they really want to reduce the amount of greenhouse gasses, but my guess is they are really looking for an income stream. Each year the companies must purchase the permits. Each year the government rakes in some extra cash.
About two weeks ago, the Governor of Indiana, Mitch Daniels, wrote an outstanding Op-Ed in the Wall Street Journal. (May 15, 2009 – "Indiana Says ‘No Thanks’ to Cap and Trade") Regardless of your politics, I think that Mitch did an outstanding job in the letter, and if you are interested in this subject, I would recommend that you look it up on the internet.
Mitch believes that passage of this bill, a bill that would penalize some of our alternative energy initiatives in Indiana, would do little more than to double electric bills in our state. Not only does Mitch argue that Indiana would lose plenty of jobs because of this system, but a study by Buckley and Mityakov show that estimates of job losses attributable to cap-and-trade range in the hundreds of thousands, with the price for electricity, natural gas, and gasoline also increasing exponentially. Mitch goes on to call this an "imperialistic" bill, with states like California, Massachusetts and New York reaping the benefits of these new taxes at our expense.
I know that this discussion on cap and trade may seem one-sided, and I am as much in favor as being green as the next guy, but Indiana has been a frontrunner in biodiesel, ethanol (take CIE in Marion for instance), and clean coal technology. We are working for a greener world. Why should we be penalized for our efforts?
One final quote from Mitch on this topic, and again, I would encourage you to read the May 15, 2009 article:
"And for what? No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world’s thermometer by so much as a tenth of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won’t save a single polar bear."
Those are not my thoughts; they are Mitch’s. But from what little I do understand on this subject, I would tend to agree with him.
HR 2454, the American Clean Energy and Security Act, sets the groundwork for a "cap and trade" system when dealing with carbon emissions. What exactly is cap and trade?
Each individual company will have a limit on the amount of carbon it can emit into the atmosphere. The company would have to have a permit for every ton of carbon dioxide it emits. The permits then serve to limit, or cap, the greenhouse gas pollution that the company is permitted to emit.
Keep in mind that a company will have to pay for these permits. The government may dictate how many permits a company can purchase, and then it is up to that company to either make sure they comply with not emitting more carbon than the permits allow, or buy purchasing additional permits from other companies that reduced their emissions quicker than anticipated. This is where the "trade" comes into play.
For some companies, it will be easy to reduce their amount of emissions and sell their extra permits to companies that are less fortunate. Other companies, in other industries, will be forced to purchase those permits at market price or face hefty fines.
Why does the government want to issue a cap and trade program? Maybe they really want to reduce the amount of greenhouse gasses, but my guess is they are really looking for an income stream. Each year the companies must purchase the permits. Each year the government rakes in some extra cash.
About two weeks ago, the Governor of Indiana, Mitch Daniels, wrote an outstanding Op-Ed in the Wall Street Journal. (May 15, 2009 – "Indiana Says ‘No Thanks’ to Cap and Trade") Regardless of your politics, I think that Mitch did an outstanding job in the letter, and if you are interested in this subject, I would recommend that you look it up on the internet.
Mitch believes that passage of this bill, a bill that would penalize some of our alternative energy initiatives in Indiana, would do little more than to double electric bills in our state. Not only does Mitch argue that Indiana would lose plenty of jobs because of this system, but a study by Buckley and Mityakov show that estimates of job losses attributable to cap-and-trade range in the hundreds of thousands, with the price for electricity, natural gas, and gasoline also increasing exponentially. Mitch goes on to call this an "imperialistic" bill, with states like California, Massachusetts and New York reaping the benefits of these new taxes at our expense.
I know that this discussion on cap and trade may seem one-sided, and I am as much in favor as being green as the next guy, but Indiana has been a frontrunner in biodiesel, ethanol (take CIE in Marion for instance), and clean coal technology. We are working for a greener world. Why should we be penalized for our efforts?
One final quote from Mitch on this topic, and again, I would encourage you to read the May 15, 2009 article:
"And for what? No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world’s thermometer by so much as a tenth of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won’t save a single polar bear."
Those are not my thoughts; they are Mitch’s. But from what little I do understand on this subject, I would tend to agree with him.
Wednesday, June 3, 2009
Robbing Peter to Pay Paul
Raising taxes of any kind is not a good move for a politician. Politicians fear that if they vote for tax increases, then they will not get reelected. The problem is, sometimes they really do need to raise taxes. In today’s demographic shift, in my opinion, there is only one direction for taxes to go, and that direction is up!
Let’s look at it this way: When JFK was in office, the highest marginal tax bracket was at 90%. Ninety percent!! Can you imagine? Can you imagine that for every dollar you earned, you only brought home ten cents? But here comes the Baby Boom. A huge mass of Americans all entering the workforce at once. As more and more Baby Boomers entered the work force, there were more and more people paying taxes. The more taxes they paid, the lower the top marginal tax bracket could go. Today, the highest bracket is right around 35% - quite a huge difference than it was during JFK’s tenure.
Now we have to realize what is happening. The Baby Boomers, as big of a blessing as they once were, are now entering into retirement. They are earning less money per year. They are paying fewer taxes than they did during their working years. Now what happens? We have a deficit. Our government is used to operating on "x" dollars, indexed for inflation of, of course, and now the Baby Boomers are being replaced by younger workers, earning lower wages than the Boomers were getting, and obviously paying less taxes than the Boomers were paying in recent years. "Houston, we have a problem!"
I believe wholeheartedly that no matter who became President, taxes would have to head north. But politicians on both sides of the fence are scared to death of raising two types of taxes: income and property taxes. They know that by raising either of these taxes, they will face a tough time getting reelected. But they need tax revenue. How can they get it? My belief is that we are seeing a huge trend toward consumption taxes.
A consumption tax is simply a tax based on the good or service that you purchase. Some consumption taxes are also called "sinners taxes" – taxes on alcohol and tobacco, for example. But there are other types: the City of Marion just recently began giving a surcharge on trash disposal. The counties surrounding Indianapolis face additional taxes when dining out. Citizens of Indiana already pay a pretty hefty bill when getting license plates.
In the future I can see more taxes for utilities, gas, license plates, trash, water, cell phones, internet access, retail sales tax, restaurants, etc. They will raise whatever they can to help prevent raising income and property taxes, since those are such critical issues. But call it what you want, disguise it however you want, a tax is a tax. Whether they put it on income or property, we are still paying it. They will be robbing Peter to pay Paul, so to speak.
One form of consumption tax that I think we will see eventually is that for Police services. It only makes sense that we will eventually be charged. When an ambulance shows up at your house, who pays for that service? We do. Some of us have insurance, some of us don’t. But we pay. What will happen when the municipalities start charging to send officers to your door? Maybe everyone gets one free visit. But think about it – the third time the officer has to come to a home because of a domestic violence dispute - that costs the taxpayers money. Why shouldn’t the disputing couple have to pay for that visit? Why should the taxpayers have to pay for the firemen to rescue a cat out of a tree?
In no way do I want you to think that I support consumption taxes; in no way do I want you to think that we should have to pay to call out the local sheriff. But I do think fees like this will be heading our way. It is a growing trend that we will unfortunately see more and more of, not just at the federal level, but state and local municipalities, as well.
Of course, these are just my thoughts, Clark's Thoughts.
Let’s look at it this way: When JFK was in office, the highest marginal tax bracket was at 90%. Ninety percent!! Can you imagine? Can you imagine that for every dollar you earned, you only brought home ten cents? But here comes the Baby Boom. A huge mass of Americans all entering the workforce at once. As more and more Baby Boomers entered the work force, there were more and more people paying taxes. The more taxes they paid, the lower the top marginal tax bracket could go. Today, the highest bracket is right around 35% - quite a huge difference than it was during JFK’s tenure.
Now we have to realize what is happening. The Baby Boomers, as big of a blessing as they once were, are now entering into retirement. They are earning less money per year. They are paying fewer taxes than they did during their working years. Now what happens? We have a deficit. Our government is used to operating on "x" dollars, indexed for inflation of, of course, and now the Baby Boomers are being replaced by younger workers, earning lower wages than the Boomers were getting, and obviously paying less taxes than the Boomers were paying in recent years. "Houston, we have a problem!"
I believe wholeheartedly that no matter who became President, taxes would have to head north. But politicians on both sides of the fence are scared to death of raising two types of taxes: income and property taxes. They know that by raising either of these taxes, they will face a tough time getting reelected. But they need tax revenue. How can they get it? My belief is that we are seeing a huge trend toward consumption taxes.
A consumption tax is simply a tax based on the good or service that you purchase. Some consumption taxes are also called "sinners taxes" – taxes on alcohol and tobacco, for example. But there are other types: the City of Marion just recently began giving a surcharge on trash disposal. The counties surrounding Indianapolis face additional taxes when dining out. Citizens of Indiana already pay a pretty hefty bill when getting license plates.
In the future I can see more taxes for utilities, gas, license plates, trash, water, cell phones, internet access, retail sales tax, restaurants, etc. They will raise whatever they can to help prevent raising income and property taxes, since those are such critical issues. But call it what you want, disguise it however you want, a tax is a tax. Whether they put it on income or property, we are still paying it. They will be robbing Peter to pay Paul, so to speak.
One form of consumption tax that I think we will see eventually is that for Police services. It only makes sense that we will eventually be charged. When an ambulance shows up at your house, who pays for that service? We do. Some of us have insurance, some of us don’t. But we pay. What will happen when the municipalities start charging to send officers to your door? Maybe everyone gets one free visit. But think about it – the third time the officer has to come to a home because of a domestic violence dispute - that costs the taxpayers money. Why shouldn’t the disputing couple have to pay for that visit? Why should the taxpayers have to pay for the firemen to rescue a cat out of a tree?
In no way do I want you to think that I support consumption taxes; in no way do I want you to think that we should have to pay to call out the local sheriff. But I do think fees like this will be heading our way. It is a growing trend that we will unfortunately see more and more of, not just at the federal level, but state and local municipalities, as well.
Of course, these are just my thoughts, Clark's Thoughts.
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