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Will Collecting Delinquent Association Dues Get Easier? Soon?
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Minnesota Community Living May/June 2009

From the President
By Mark Schoenfelder

Featured Community: Gramercy Club at Elm Creek
By Sue and Fred Webber and Jessica Hamilton

Energy Savings
By Doug Dill, President, BFS Heating & Cooling

Navigating Through this Tough Real Estate Market
By Theodore J. Salgado

PCAM: Pinnacle Career As Manager
By Tom Engblom

Will Collecting Delinquent Association Dues Get Easier? Soon?
By John M. Rickel

A Blueprint for a Construction Defect Claim
By Mark J. Peschel

Member News


Will Collecting Delinquent Association Dues Get Easier? Soon? Back to Index

By John M. Rickel, CFA, CPA, Esq., Association Dues Assurance Corporation

Answer: No.

The U.S. economy on Main Street, where all of us are living and working, is not getting better. The U.S. Government is trying to bail out Wall Street, where none of us are, in the hope that Wall Street will provide loans and liquidity to Main Street, but that hope is not being realized as this article was written. Twenty (20) Banks had failed— just in the first three months of 2009.

Milton Friedman (1912-2006) won the Nobel Prize in Economics. He was not generally a believer in governmental solutions. A few of his quotes are:

  • “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
  • “Inflation is taxation without legislation.”
  • “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.”
  • “The black market was a way of getting around government controls. It was a way of enabling the free market to work. It was a way of opening up, enabling people.”
  • “The government solution to a problem is usually as bad as the problem.”

Is long-term government intervention in the financial markets helpful, or a problem, for us on Main Street? Since Milton Friedman is not here today to respond, three years dead when we need him (kind of thoughtless of him), I would suggest Milton Friedman might say:

“When I died in 2006, credit default swaps were in a high growth phase.

“From what I’ve been told, Credit Default Swaps began in concept, the first 10% of them, when Debtor companies borrowed money, and the Creditor needed assurance payment would be made. But State licensed insurance carriers could not legally insure this “default” concept under State insurance commission rules. So the “contract” credit default swap concept (which was essentially just a “contract” “insurance policy” against default) was created. The credit default obligations in the last 6 or 8 years or so went from about $0 to $60 Trillion (one of the large credit default swap insurers indirectly is AIG Insurance Co, which has the largest U.S. Government bailout).”

The next 90% or so of credit default swaps (once the U.S. Government and States did not challenge their legality) were just bets against survival of Debtor Companies, without offsetting loans, without “insurable interest.” That would have been illegal, except the concept of these being contracts, not insurance policy liabilities subject to State Insurance Commissioner jurisdiction, was permitted from 2000 to 2008 by the U.S. Government. Our government did it to us. In addition, the U.S. National “off balance sheet” liabilities for Social Security, Medicare, civilian and military pensions (the U.S. Government does not operate on Generally Accepted Accounting Principles disclosure), almost tripled from $20.4 Trillion to $56.4 Trillion, from 2000 to 2008. That includes the U.S. Government “on-balance sheet” liabilities, significantly from 9/11 and wars in Afghanistan and Iraq, starting at $0 in 1776 when George Washington galloped on his horse, through the Revolutionary War, Civil War, two World Wars, and all the other government debt producers, 224 years, 56 Presidential administrations, to year 2000, which were $5 Trillion, but now at the end of 2008 are $12.2 Trillion, more than double. So accumulated just over the past eight years, the U.S. Economy has to work out an increase of $60 Trillion of credit default swaps, and $36 Trillion of “on and off balance sheet U.S.

Government liabilities” (including increase of $7 Trillion of “on balance sheet liabilities”), $96 Trillion — close to $100 Trillion increase in additional liabilities in eight years — compared to $20.4 Trillion accumulated in the prior 224 years, nothing any reasonable person would expect to be digestible by the U.S. economy. This is governmental Money Mischief predicted by Milton Friedman.

The $1.5 Trillion projected 2009 U.S. Government deficit currently being debated probably is necessary to address the $97 Trillion or so U.S. Government financial dam breaking in the past eight years, drowning us, to get us back on track. As a percentage (%) of the prior money lost in the past eight years, and as a % of Gross Domestic Product, the 2009 Budget is a stretch, but maybe recovery is attainable ...or maybe not?

Why do we need a banking system that functions? Because without a functioning banking system, the commercial world of manufacturing and distribution and commerce the “real people” live in, Main Street, will not have the financial lubricant available to function, and an economic shutdown like the Depression is worse than the alternative of a bail-out of the Wall Street banks.

But here’s a rub: The reduction of regulation dating from U.S. Depression days, in the 1930s removed the Glass-Steagall Act of 1933 among other regulation elimination (Gramm-Leach-Bliley Act in November, 1999). Glass-Steagall had prohibited commercial banks from participating in brokerage firms or investment banking activities – a wall between banking and securities businesses — and established the Federal Deposit Insurance Corporation (FDIC). This repeal permitted and maybe even condoned a lousy level of conduct where the Wall Street Bankers took money (the “seed corn of depositors’ money”) for themselves, called compensation or “bonuses” or whatever, producing innovative mechanisms which had the effect of destroying parts of the American economy — “credit default swaps” — shorting good companies and their employees, and then drying up credit — so those companies could not survive. The credit default swaps probably would have been illegal violations of insurable interest or illegal insurance policies under prior State law. When they came due, some Debtor obligors of those credit default swaps did not have the money to pay, and the U.S. financial system came down and “froze.” And will again repeatedly in the future, if the system is not changed. Credit availability ended. Our own government did it to us. So in overview, we certainly do need a functioning banking system, but the U.S. population is feeling that Wall Street greed is in control of the banks. So if the U.S. can’t operate without a functioning banking system and the banking system is out of money, if the U.S. Government puts money back into the Banks (more “seed corn” to reload the system), how does the Country assure itself the Bankers won’t take “compensation and bonuses” and clean the banks out of money again? We need new people in the Banks, new Regulators, and the return of the old regulations and laws that worked in the past. Will there be rampant inflation down the road as a result of the U.S. Government putting in a “new load” of “seed corn”? Yes, for sure. In “reloading the seed corn” of the U.S. Banks, and hopefully in a common-sense way, going back to the Regulation and Statutes that kept the U.S. growing from the Depression to 2000, maybe there will be a minimization of Main Street pain and economic and physical loss — maybe circumstances could be worse, much worse.

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