Sunday, July 5, 2015

Made whole

One of the unique characteristics of the first Chrysler reorganization i.e., "Chrysler Corporation Loan Guarantee Act of 1979" was that it was a case of "everybody in."

One small banker in central Illinois told of receiving a call from the President of Manufactures Hanover, the lead bank in the loan guarantee process.  The bank held paper on some trivial amount....a few thousand dollars...and the loan could not proceed until he had signed off on renegotiated terms.  Simply put, he had to accept less than the amount specified in the contract.

While he would have been within his rights to refuse to sign, he determined that a day might come when he needed to be in good graces with Manufactures Hanover and all of the other mega banks.  He signed.

Fast forward

Today, everybody clamors to be "Made Whole".  That is, they will not concede a single penny of what they feel entitled to.  Somebody else, anybody else must make all of the concessions.

It is a game of financial "chicken".  Don't blink or swerve.

Sadly, the precedence set by the 1979 Chrysler loan gaurantees were ignored during the latest round of automaker bankruptcies.  Certain classes of people were "made whole".  Others lost everything.  A casual analysis suggests that the stakeholders that supported the incumbent party were made whole.  The stakeholders who traditionally aligned with the other party lost everything.   There was the appearance of politicizing of the wind-down process.

Back to the future

Humans do not change.  We will have ample opportunities in the future to experiment with  various ways of unwinding obligations that prove impossible to fill.

Clearly, my inclination is to have everybody share the pain.  It should not be possible to identify "winners" and "losers" during the postmortem.  No organ is a "winner" in a corpse.  The idea is nonsensical.

In the factory

Our environment shapes our thinking.

In times of stress....extreme weather, epidemics, even 99th% traffic jams....the thinking on the factory floor is to keep producing.  Yes, put qualified people in the jobs.  But perhaps it has been a while since the emergency operator actually operated that equipment.  Or perhaps two operators cycle between three stations.  But keep producing.  Somebody, somewhere has it worse that you do.

Somewhere in the plant a feeder line will not be able to run and the skilled tradesman who is needed to fix it is stuck in a snowbank.

Or perhaps a truck gets locked up in traffic behind a gasoline tanker that closed down an underpass.

Or perhaps that widget from Hamilton, Ontario got stuck in customs.

The line will stop.

Just make sure it is not you who stops it.

That is some of the thinking behind the demands to be "made whole".  It is the certain knowledge that anybody who attempts to be "reasonable" will be the patsy.  They will be the pivot man in a circle-jerk.  They will be the dirty, rotten dog and end up with nothing.

On the road

When driving, it is common sense that one can either make a minor adjustment to one's path as soon as hazard is detected or one can wait until cattails and muskrats are flying over the windshield before making a violent adjustment to the steering wheel.

The longer the driver delays the more violent the correction must become.


The talk on the 'net is that bank deposits in Greece are likely to take a 30% "haircut".

It is naive to assume that this will be the last or only raid on assets because none of the structural issues are being addressed:
  • Pensions, 
  • Public sector payroll and 
  • Tax compliance



It is no different here in the United States.

We had a guy (we will call him "John") drop into the morning coffee group.  John was gleefully relating that the "Agent Orange" lawsuit had been settled and it was his understanding that any US military personnel who so much as touched Vietnamese soil was "entitled" to $900/month.  John had flown through Saigon, with a layover, on his way to Thailand and was trying to reconstruct his order history in order to claim his "entitlement".

After a pregnant pause, one of the guys at the table, not me, pointed out that John's windfall was coming out of our taxes.  Or if not our taxes, then though confiscation of our assets by way of inflation.  The other guy at the table told John, "Our shared joy in your good fortune is tempered by the fact that is coming at our expense."

Some modest proposals

Social Security Disability:  Reconfigure it to make it look more like Workman's Compensation.  Fast track "back to work" and put some teeth into it.  SSD should not be a profession.

Social Security Retirement:  Float the "full benefit" age based on actual receipts.  Hey, that is how I run my budget.  I don't spend it when I don't have it.  The age for full retirement could easily slip back to age 69.  That would entail an approximate savings of 24%.

Healthcare:  50% of each healthcare dollar is spent on 5% of the patients with multiple, chronic conditions.   Culturally, we need to come to grips with the idea that our bodies will not live forever.

Public sector employment:  At the Federal level employees should be hired from a national pool in proportions that are approximately equal to regional populations.  This is how the Military functions.  There should not be a dynasty of third generation "Beltway babies" Federal employees.

Tax Compliance:  I actually think we do OK on this.  I don't want to see the code become more restrictive, nor do I want to see "imputed income" be used as the basis for taxation.  I am OK with using dissonance between reported income and "imputed income" as a basis for audits, however.

Welfare cliff: Get rid of them.  Every additional dollar earned should have incremental benefit to the person earning it.  According to this chart, earning one additional dollar, going from $29,500/year to $29,501/year costs the earner $7000 in lost "entitlements".  That is, earning that one additional dollar cost them $6,999 in resources.

The green line is the proposal.  A smooth ramp or "wedge" from earned-dollar zero to earned-dollar $56K

Here is a modest proposal:  Make all benefits taper from no-income to approximately $56K/year wages per year.  Adjust each month's payout based on the previous month's reported wages.  Lower the starting "benefits" package to $30,000 net.

The reason for making EVERY benefit taper is because I know how difficult it is to get competing departments and agencies to cooperate.  Making EVERY benefit taper eliminates all of the turf battles about who must lose what, and when they must lose it

You think $30,000 is draconian and inhumanly  low?  It is 2/3 the net of a parent grossing $28/hour, a parent who gives up a minimum of 40 hours a week working, a parent who must pay for daily transportation and daily "costuming", a parent who is time stressed and cannot always shop the sales. 

You might say that it will not work because netting 25 cents on each dollar earned is not sufficient incentive.  In which case you played right into the argument.  If +0.25/$ is not incentive than how can -7.0/$ be any greater of an incentive?

As a supporting argument, the readers who are most likely to argue against this proposal are the same ones who are most likely to favor a 90% marginal rate on top earners.  Their argument is that workers earning those higher incomes are sufficiently motivated that it will not deter their work ethic.  Isn't it a bit condescending to think so much less of the poor?

---to be continued---

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