Is new banking regulation a good idea? Reply


Wall Street is bad.

New government regulation of large financial institutions is good.

Right?

Not so fast.  Government’s expanded reach into our financial lives has consequences, and some of them are bad.  Before we increase the power of government even more over our economic lives, I encourage you to read the guest column that follows by my son, Mark Quiner.  He is a reporter in the energy industry.

Wall Street Greed: The True Consumer Advocate Reply


By Mark Quiner

Public outrage at Wall Street Banks has been apparent for more than a year. Democrats are capitalizing on this opportunity as they seek to pass a financial reform bill that increases regulations on large financial institutions. One of these key provisions being debated is to ban banks from having their own financial derivatives trading desks.

This is no time to stifle financial innovation. This is the time for Congress to reduce regulation and enact policies that foster innovation in new financial derivatives and support Wall Street profitability. It’s in the interest of the country.

The argument goes that speculation in financial derivatives caused the economic meltdown. Therefore this speculation is only good for banks profitability and bad for the average citizen. As a nod to the fundamental purpose of these instruments, Democrats say laws will be written that only allow banks to trade derivatives for the purpose of client risk management – hedging to offset fluctuations in raw material prices.

Democrats are missing the boat. Speculation and hedging go hand in hand and one cannot exist without the other.

Hedging is a strategy where companies buy securities to offset risks associated with fluctuating raw material prices. For example, a farmer will sell corn futures to offset the potential for declines in corn prices, effectively locking in a price. This is a fundamental business strategy that can be employed in any industry from energy, to agriculture to debt markets.

Financial derivatives are tools that are used for hedging purposes. A financial derivative is a piece of paper that gets value from the underlying commodity it represents. Instead of making or taking delivery on the commodity at expiration, the derivative is settled against an index that represents the physical commodity price. Derivatives are a key component to effective hedging as they allow companies to manage risk without worrying about the financial and logistical burdens of dealing with the physical commodity.

Another key component to effective hedging is market liquidity. Regulating or outright banning banks’ financial derivatives trading desks could have crippling effects on these markets liquidity and efficiency.

Effective hedges are not possible without speculators – the companies that make the markets. Wall Street banks run speculative trading desks for physical and financial commodity products. These companies act as market makers, always willing to buy and sell at a certain price. They place bets not only on the direction of a single commodity, but on the differentials between physical commodities and financial derivatives, and on the differentials between products along a supply chain. For example, a speculator could bet that the spread between crude oil and motor gasoline is undervalued and could widen.

This speculation brings efficiency to commodity supply chains by providing liquidity. A ready supply of speculators willing to buy and sell at a given price ensures that markets stay in line with supply and demand fundamentals. Speculators smooth out ups and downs in markets by taking contrarian positions. Market liquidity ensures a narrow gap between a buy and sell price, called a bid/ask spread. A narrow bid/ask spread ensures that a hedger can unwind a position in a financial derivative at will with minimal risk. When bid/ask spreads widen due to lack of market liquidity, the risk to a hedger of participating in the market is greatly enhanced.

Without financial speculators market efficiency breaks down. Companies that sell key goods from gasoline to corn to plastic bags cannot predict profitability. They will go out of business. Supply chains fall apart, gas stations run out of fuel and grocery store shelves will become bare. For all of Congress’ talk about consumer protection, trying to stifle speculation will achieve the exact opposite.

Wall Street speculation is the true consumer advocate. If a financial reform bill bans banks from trading derivatives, Congress needs to kill it.

Iowa needs tax relief 1


As seen in the Des Moines Register March 21, 2010

I’ve enjoyed a life long love affair with Iowa. I think it’s the best place in America to live.

From the beauty of our land to the down-to-earth  people with good values and common sense, Iowa offers me what I want out of life.

We’re faced with some problems, though.

I’ve had the pleasure of having my oldest son in town on a visit in March. Unfortunately, he decided to leave Iowa upon his graduation from the University of Iowa a few years ago.  Opportunity first led him to Alaska and then to Houston, where he now lives and works.

I hope opportunity leads him back to Iowa some day.  Same goes for my daughter in North Carolina, and my son at Iowa State.

Does Iowa offer opportunity?  Yes it does, but it could offer more.

We need more jobs in Iowa.

Our tax policies may be holding us back according to the Tax Foundation, a Washington D.C. think tank specializing in tax policy.

They produce the Tax Foundation’s State Business Tax Climate Index.  The index ranks states on the basis of five facets of their overall tax systems, including corporate and individual  income tax rates, sales tax, unemployment insurance, and property tax rates.

According to the Tax Foundation, Iowa ranks number 46.  Our neighbor, South Dakota, has the most favorable tax climate for business in the country.  Does tax policy affect employment?

Let’s compare.  From 2000 to 2008, the number of full and part time jobs in South Dakota increased by 9.9% according to the U.S. Department of Commerce.  In Iowa, these jobs only increased by 5.4 percent.

The rate of growth in business ownership is faster in South Dakota than Iowa this past decade.  So is personal income.

The Tax Foundation offers insights as to why.  Here are key findings from their research:

• Local and state taxes can have an adverse impact on employment.

• Corporate income tax rates have the greatest negative affect on job creation.  (South Dakota has no personal or corporate income tax).

• High property tax rates are a major deterrent to new business start ups, because they are paid regardless of the businesses’ profitability.

The bottom three states on the Tax Foundation’s index in order are New Jersey (#50), New York, and California.  What do they have in common?  They’re bleeding jobs.  Why?  An unfavorable tax environment for business is a major reason.

The next governor of Iowa needs to get it right on this issue.  I was able to reach one gubernatorial candidate prior to deadline. Bob Vander Plaats told me the number one issue he hears on the campaign trail from business owners concerns our high property tax rates.  He would like to see property tax relief to spur economic development throughout the state.  Even more, he’d like to get government out of the business of picking winners and losers by dangling carrots in the form of tax credits and incentives.  He advocates a level playing field with lower personal and corporate income tax rates coupled with property tax relief.  In other words, economic development without gimmicks.

Last year, the U.S. News and World Report rated Iowa the second worst state in the county in which to start a business (West Virginia finished last).  They were critical of our high level of government interference in the guise of very high capital gains taxes, high corporate income taxes, and high unemployment taxes on wages.

It doesn’t have to be this way.

We have the best people in American living right here in Iowa.  And yet we’re not realizing our full potential because of unsound economic policy.  Iowa’s policy encourages business decisions on the basis of political forces as much as market forces.

There is more to economic development than tax policy. But in light of our current standing, tax relief is the place to start.

Grassley knows how to create jobs. Obama doesn’t. 1


When President Obama was sworn in as President, America’s unemployment rate was 8.5 percent.  Fifteen months later, it had climbed to 10.2 percent.

When President Obama was sworn in as President, Iowa’s unemployment rate was 6.2 percent.  Fifteen months later, it had climbed to 7.4 percent.

The President’s economic initiatives aren’t producing jobs.

I wrote the piece that follows for the Des Moines Register last December.  It appeared on December 13th, 2009.  The piece was based on a telephone interview I had with Senator Charles Grassley.  Senator Grassley presented a proven path to job creation:  an expansion of free trade.  Specifically, the Senator discussed the merits of the pending Korean Free Trade Agreement.

The bill has been held up by Democratic Party politics.

Since then, unemployment for the U.S. has increased a half a percent  and the unemployment rate for Iowa has increased even more.

While Democrats dither, Iowans are losing their jobs.

The President believes increased taxes, increased government spending, and increases in government regulation are the path to job creation.  He said as much this week when he was in Iowa.

There are legitimate pros and cons to pending Wall Street reform, but they’re not the key to job growth.

Free trade is.  And it doesn’t increase our taxes.  It doesn’t increase government spending.  And it doesn’t increase government regulation.  Senator Grassley gets it.  He’s worked in the private sector.

The President is too beholden to unions and Democratic Party pressure groups to advance the Korean Free Trade Agreement.

He doesn’t get it.  Our job as voters is to promote the positive message of free trade to the rest of our congressional delegation.

Iowa needs jobs.  Read the piece that follow for details.  Then get on the phone and call your representatives in Congress to support the Korean Free Trade Agreement.

Be sure to rate this post.

My Tea Party Introduction 2


I attended the Tea Party rally at the State Capital in Des Moines last Friday, my first.  I had three specific things I was looking for:

  1. What is the single biggest issue of concern to this movement?
  2. How many people would show up?
  3. Are the people in this movement normal?

Let me answer these questions in reverse order.  Yes, the people in attendance were normal.  I wanted to see for myself, because Speaker Pelosi and President Obama suggest otherwise.

It is true that they recited the Pledge of Allegiance without flinching.  And they belted out a heartfelt rendition of the National Anthem.  Are those normal occurrences at rallies attended by liberals?  Perhaps.

One fellow had a small American flag protruding from his hat.  The overall sense that I had from the crowd is that they love America.

The Des Moines Register reported that about 1200 people attended the rally.  Sounds good.  It’s hard to estimate large crowds for me.   The group was energized by the speakers, passionate about the message.

So what is the message?  Is there a single theme?  Yes.

The Tea Party Movement is all about independence.

The speakers talked about the size of government, about runaway government spending, about government intrusion into our lives in ways never intended by the Founding Fathers.  To quote Ronald Reagan, they want big government off their backs.

Ultimately, they agree with the first Democratic President, Thomas Jefferson, who said the government that governs least governs best.

Ultimately, they believe a government governs best when it makes people stronger by breeding independence.

Ultimately, they believe that the current direction of the country is exactly wrong, that we are weakening the very fiber of America by breeding government dependence.

I saw several Republican candidates at the rally.  However, Republicans would be sadly mistaken if they think this is a Republican crowd.  The Tea Party exists partly because Republicans didn’t act like Republicans when they controlled the Congress and the White House.

A reminder to Republicans:  President Obama is still more popular than you according to the RealClearPolitics polling averages (http://www.realclearpolitics.com/).

Republicans can pick up a lot of Tea Party votes if they act like Republicans.  If they regain power, will they exhibit the same political resolve that Mr. Obama and Ms. Pelosi have demonstrated in advancing their big government agenda?