The Federal Reserve

     Our Federal Reserve System is also referred to as the Federal Reserve or Fed, and is one of the most confusing and misunderstood things about our federal government.  Some things are almost unbelievable.  Do we need to make some changes?

     The Federal Reserve Act was passed on December 23, 1913 creating the Federal Reserve.  It was rushed through Congress when many Representatives and Senators were gone for the holidays.  Woodrow Wilson was President.  Why does this not surprise me?

     The Federal Reserve was to act as the central banking system for the country, government, and private banks with the objective of providing financial stability for the country.  This action was prompted by several financial panics including a severe one in 1907.  The Act specifically stated three objectives.  They were: maximum employment, stabilize prices, and moderate long-term interest rates.  The Fed clearly did not achieve its objective and changes were made after the Great Depression.  The powers of the Fed have continually been expanded including the power to regulate banking institutions.  The Federal Reserve is a compromise between a government agency and a private corporation.

     The Federal Reserve structure is a Board of Governors, a Federal Open Market committee (FOMC), and twelve regional Federal Reserve Banks.  The Board of Governors consists of seven Commissioners appointed by the President and confirmed by the Senate.  The FOMC is made up of the seven Board of Governor Commissioners and the twelve regional bank presidents.  Only five of the regional bank presidents hold a vote.  The New York Fed President always has a vote.  The other four votes rotate among the other eleven regional bank presidents with one-year terms. 

The face of the Federal Reserve is the Board of Governors Chairman.  The current chairman is Janet Yellen.

      As the central bank for the country, the Federal Reserve loans money to the government, the twelve regional banks, and other organizations like Fannie Mae and Freddie Mac.  The Fed also makes loans to prevent catastrophic bankruptcies.  The interest rate charged by the Federal Reserve is normally referred to as the Prime Rate. 

     The government has given the Federal Reserve the authority to expand or contract the nation’s money supply.  They can print money.  Actually the paper currency and coins are produced by the U.S. Treasury Department and sold to the Federal Reserve.  The price for all paper currency is the actual manufacturing cost and coins are sold at face value.  

     The twelve Federal Reserve banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.  There are also 24 Federal Reserve branch banks.  All profits of the Federal Reserve are transferred to the U.S. Treasury after a statutory dividend of 6% is paid on member banks’ capital investment. 

     The Federal Reserve does make an annual report to the House of Representatives and is subject to audit by the U.S. Government Accountability Office, but is not regulated by or required to file a report with the Securities and Exchange Commission (SEC).  Federal Reserve capital investors are not public knowledge.  The Federal Reserve plays a huge role in the economic well being of this country and some people feel it should be more transparent and/or be subject to regulation by the SEC.   

      The Federal Reserve should not be confused with the Federal Home Loan Banks, which also have twelve banks located in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka.  Federal Home Loan Banks (FHLBanks) make loans to their member institutions to support housing and economic development and are owned by their members.  Unlike Fannie Mae and Freddie Mac, the Federal Home Loan Banks’ business is self-capitalizing in nature, requiring that their members invest in the capital stock of the FHLBanks based on a percentage of outstanding indebtedness to any particular member.  Moreover, the stock of the FHLBanks is not publicly traded, and therefore the FHLBanks are not subject to the same earnings pressures that in part led to the conservatorships of Fannie and Freddie.  

       

Nepotism and Cronyism

Usually people hired for a job in the private sector are qualified for that job. One exception is nepotism where favor is granted to relatives.  We have all seen examples of this.  How many times have we seen thriving businesses fail after being turned over to the founder’s children?

Nepotism is also prevalent in the public sector.  Many politicians hire their family in spite of the fact they have zero qualifications.  Politicians often appoint family to bureaucratic positions.  This is very frustrating to qualified public servants that are trying to do the job.  When the political elite hire or appoint unqualified people, they are wasting our tax dollars and more importantly, it is not in the best interest of the people they serve, or the future of the country.

        Another problem is Cronyism, which is the practice of hiring or doing business with friends.  Cronyism is a factor in the private sector when contracts or business are given to family or friends when there are better options.  As a new car dealer in a small town, I found it challenging to take business from long established competitors that were well known in the area.    

        Cronyism in the public sector is even more dangerous.  Many contracts, loans, grants, and political positions are given to companies and individuals supporting and donating to campaigns.  This crony capitalism between corporate leaders and the political elite threatens the entrepreneurial spirit that made this country great.  More recently, many recipients of stimulus money were large campaign donors.  The return-on-investment for these donations was extremely good in many cases, but some are criminal in my opinion.  Big government controlling the economy results in short-term benefits for the political elite and politically connected, but hurts the country for future generations.

In the public sector, problems with nepotism and cronyism probably date back to the founding of the country.   Ulysses S. Grant is a good example.  He may have been an honest man, a great General and a good President, but nepotism and cronyism filled his Presidency with corruption.

I am an advocate for personal freedom, the capitalist system, and the entrepreneur.  That is what made this country great, not big government.  The problems with nepotism and cronyism in both the private and public sector are not new. 

In the private sector, we must avoid these situations and not make these mistakes as a manager.  In the public sector, we can control nepotism and cronyism by electing individuals that are qualified for the job and will hire and appoint other qualified individuals.  Do your homework, get the facts and vote accordingly.

The Seven Ps

      The seven Ps are often stated as: Proper Prior Planning Prevents Pitifully Poor Performance.  The word Piss is often substituted for the word Pitifully.  The seven Ps are applicable in both the public and private sector of our economy.  I believe it was originally a British Army adage:  Proper Planning and Preparation Prevents Piss Poor Performance. 

        “I wish I would have read the book before …” is a comment I often receive about my book, Business Fits; How to Find the Right Business For You!  Obviously, these people had started or bought a business without proper planning.  They have encountered problems they could have avoided if they had read Business Fits first.

Many mistakes are made with small business because entrepreneurs do not know what they don’t know and thus are not prepared.  I have a chapter in Business Fits titled “Myths about Starting a Business.”  The new entrepreneur often fails to hire the needed expertise because they think they can do everything themselves. 

        I feel the most important responsibility of any manager in the private or public sector is planning.  Crisis management is not good management.  If management is competent and a good system is in place there will be very few unanticipated problems.  I hate the copout statement often given in partisan politics: “What could anyone do differently at this point.”  The real question is, “Why do we put up with the incompetence that got us to this crisis?”

The small business manager is often the owner, and plans for the long-term health of the company.  That is not always the case with CEOs of large corporations.  Large corporations are owned by stockholders, but run by CEOs.  The CEOs are paid a salary and a bonus, and decisions to maximize their bonus are sometimes not in the long-term best interest of the corporation.  The bureaucracy of large corporations can give the small businesses an advantage because they can react to market conditions faster. 

The Peter Principle is another problem that contributes to lack of planning, poor management, and poor performance.  Laurence J. Peter with Raymond Hull wrote a 1969 humorous book called, The Peter Principle: Why Things Always Go Wrong.  They first introduced the Peter Principle as the concept where people are promoted to a level of incompetence.  Often people are promoted on the basis of seniority, and not ability or qualifications for the new job.  This is a problem in both the private and public sectors.  In the private sector it is more of a problem in large corporations and with some unions.  It is also one of the reasons people want to leave the corporate world for self-employment. 

        The seven Ps are even more of a problem in the public sector.  We elect representatives that are likable, can give a good speech, and can raise a lot of money for their campaign.  These politicians often are totally unqualified for the job they have been elected to perform.  Why should we be upset when they fail to plan for the future of the country?  We elected them. 

        Appointed bureaucrats in the public sector are also a problem.  These individuals are often the supporters and contributors of the politicians that appoint them to the position.  Sometimes they are totally unqualified for the job.  The only explanation for their poor performance is often incompetence and/or a cover-up. 

        We can change the management of the public sector with our vote.  Don’t be taken in by a likable individual and false advertising.  Get the facts and elect an individual that is qualified to do the job.

Solutions To Affordable Health Care

      I did a similar blog July of 2012.  Now it is almost two years later and health care is in worse shape than ever.    The primary reasons for rising health care costs are huge service and administrative costs, and the lack of competition.  How do we fix it? 

The solution is simple.  We eliminate the majority of service costs.  This means taking the cost of filing insurance claims away from the health care provider, and eliminating the majority of the claims service cost from the insurance provider.

        We promote true catastrophic major medical insurance, and make changes to eliminate first dollar billing medical insurance.  It does not matter if there is a deductible. The cost starts with the paperwork.  We promote and encourage medical savings plans.  Medical savings plans will give people cash reserves to pay predictable, routine and preventative health care costs.  This will encourage competition and eliminate the cost of insurance company involvement. 

    How do we do it?  Actually, it is quit simple.  I think I could write the legislation myself and it probably would be less than ten pages long. 

1.          Make the practice of health care providers discounting to insurance companies illegal.  Individuals paying for their normal routine health care must not be penalized. 

2.          Make it illegal for any health care provider to have direct contact with any medical insurance company, or ask a patient for their medical insurance.  Service companies or accounting firms can provide this service if the patient desires, but it will not increase the cost of health care from the health care provider.  These companies can hire the displaced workers from the claims departments of the insurance companies and health care providers.

3.          Encourage true major medical policies with high deductibles of maybe $50,000 or more per injury or disease.  Deductibles must be per injury or disease and NOT annual.  These policies will have no benefit limit and no co-pay.  No predictable, routine or preventative health care costs will be covered with medical insurance.

4.          Individual medical savings accounts that accumulate over the years must be encouraged.  Money put in these accounts would be tax exempt if we continue with our present archaic tax system.  These savings accounts can be used to pay predictable, routine and preventative health care costs.  They could also be used for major medical insurance premiums in the event of an emergency.   

5.          A luxury tax will be imposed on any first dollar coverage medical insurance.  This will have to be implemented in stages based on a person’s age, as older people do not have the medical savings accounts in place.  Eventually this “Luxury Tax” should be as high as 100% of the premium. 

6.          Private charity and/or government run clinics and hospitals similar to the present VA hospitals and clinics will provide health care for the poor. 

 This solution may seem radical, but think about it.   It will work, and it will reduce health care costs.  The biggest roadblocks for this workable solution are politicians and medical insurance executives, which will fight the change, because it will cost them money and power.  Most health care providers will welcome the change.

 I believe this solution could reduce health care costs by 40% in the first year and as much as 80% when fully implemented.  It makes sense.  Do we want our healthcare controlled by the government?  Do we want affordable health care or more partisan politics?

Independent Payments Advisory Board

        The Independent Payments Advisory Board or IPAB is part of Obamacare.  The job of the IPAB is to make recommendations to limit Medicare’s budget by reducing payments to doctors and health care providers.  The IPAB is consists of fifteen members that are appointed by the President.  These members are neither elected nor approved by Congress.

        Under the Affordable Care Act, (what a joke that name is) the recommendations made by the IPAB will become law unless Congress passes legislation making equal or greater cuts to Medicare.  There is a very limited time that Congress can eliminate or change the IPAB or it’s recommendations. 

        Anyone benefiting from Medicare now or in the future should be very concerned with the power of the IPAB.  We may be forced to pay for the large majority of our health care out of pocket because Medicare will only pay for a small portion of the cost.  Many people have already seen examples of this. 

        Health care is a business.  Health care providers must be able to cover costs and make some profit, and doctors must be able to make a living or they will not accept Medicare.  Many companies providing home healthcare to the elderly on Medicare will be going out of business.  What happens when people on Medicare can’t get healthcare? 

        I believe President Obama has now delayed implementation of portions of the Affordable Care Act twenty-seven times.  I do not feel any President has the authority to take this kind of liberty in choosing which laws or portion of a law to enforce. 

This is especially interesting considering we had a government shutdown because Congress was asking for some of these same delays, but they could not be granted at that time.  Why the delays now?  Simple, we have mid-term elections this year and the Democrats are in trouble with Obamacare.  If Obamacare were fully implemented and people saw how badly it would affect them personally, they would be voting for repealing the Affordable Care Act.

        I am realistic enough to realize most people do not have the time and energy to get all the political facts, until they are affected personally.  It is natural to think, “It won’t affect me.”  Unfortunately, many people will not know how Obamacare will affect them personally until after the 2014 elections.  Obamacare will affect everyone in time, and not in a good way. 

        I think Obamacare is unconstitutional, but the Supreme Court got around this by calling it a tax.  If the penalties (tax) have been delayed, does that make it unconstitutional?  Even if it is legal, it is not fair, affordable, or workable.   If we don’t get rid of Obamacare, it will evolve into a single payer system and finally, government provided healthcare. 

        I get a little mad at Obamacare supporters saying no one offers any alternatives.  First dollar medical insurance and the government caused high health care costs.  The solution is not complicated.  It is simply catastrophic medical insurance with routine health care being paid out-of-pocket or from medical savings plans.  Obama care supporters make fun of this real solution.  They have to use ridicule because they cannot refute the option with facts and data.  Sounds like politics as usual to me. 

        I hope the lie, “If you like your healthcare plan, you can keep it. Period.” has affected enough people that we can make the needed changes before it is too late.  Some politicians think if they repeat the same lie over and over again, most people will believe it, and unfortunately, many people do believe the lie.  Get the facts and vote accordingly.

FCC and First Amendment

     The Federal Communications Commission (FCC) is an independent agency of the federal government.  Congress formed the FCC in 1934 to replace the Federal Radio Commission.  The mission of the FCC is to regulate interstate and international communications by radio, television, wire, satellite, and cable.  The wire and cable part would include the wire services for newspapers.  Your favorite web site and the Internet are also under the FCC’s control.  The mission and scope of the agency was revised and expanded in 1948 and 1996.  The Public Safety and Homeland Security Bureau was added in 2006. 

Five commissioners appointed by the President and confirmed by the Senate for five-year terms direct the FCC.  The FCC has an annual budget of over $300 million with close to 2,000 employees so it is not a small agency.  The FCC performs a necessary function of the federal government as allowed and restricted under the Constitution and the Bill of rights.  

The First Amendment to the Constitution is most often referred to of the Bill of Rights.  It reads: 

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people to peaceably assemble, and to petition the government for a redress of grievances.”

        This is pretty simple.  Freedom of religion, which is often misquoted (and violated) as “separation of church and state.”  Free speech is simple as long as it is not libelous.  Freedom to peaceably assemble and petition the government are just as important, but not as often quoted. 

        Freedom of the press is where the Federal Communications Commission gets involved.  Our founding fathers felt the press played an essential role in keeping the public informed of what was happening in government.  This would insure the Constitution was followed, and prevent the political elite from turning the country into a totalitarian state.  Freedom of the press was and is essential for our great republic to survive.

        Here is the problem:  The FCC recently started to implement a program to monitor newsrooms.  What?  Isn’t this a direct violation of First Amendment?  Every news media in the country should have been in an uproar, but that did not happen.  To my knowledge it was not even covered except by that evil Fox News.  The FCC has now backed off and says the program needs further evaluation.  What a joke! 

Considering history with the IRS and NSA, do we want the FCC monitoring our news?  In addition to the obvious violation of the first amendment, this program would expand the size, scope and cost of the FCC thus increasing the size and power of the federal government. 

What has happened to our national news?  If you want know what sports team won, or the outrageous behavior of some celebrity, or who is wearing what at the Academy Awards, fine.  Don’t expect accurate news about the government and the political elite that may affect your freedom and the freedom of your children.  Most of our media has already become more a lap dog to government than a watchdog.  I normally refer to one of three lame stream television networks as the Government Network. 

We must follow the Constitution to protect our liberties.  The FCC has no business monitoring newsrooms.  We need a free press to protect our freedom.  The press is already too biased in my opinion.  We all have an obligation to get the facts about what is happening in government.  Considering history with the IRS and NSA, do we want the FCC monitoring our news?

Social Justice and Economic Equality

         Social Justice is one of the new Progressive terms used today and taught in our schools.  It is another term for Economic Equality.  This sounds good in theory.  World leaders advocate this on a global basis, and why not?  We live in comparative luxury in this country.  Even people that have never worked a day in their life and live on welfare have a higher standard of living than much of the world. 

        “From each according to his ability, to each according to his need.”  This sounds good.  Is this what Progressives are trying to achieve with big government and wealth redistribution?  Who used this slogan?  It was Karl Marx.  Some modern Progressives say they admire Karl Marx and believe his teachings.  Karl Marx was a communist.

        Theoretically, Karl Marx’s teachings could work in an economy of abundance.  Unfortunately, that has never happened and can never happen, because in a socialist society there is little motivation to produce goods and services.  What does happen is the majority of the population is reduced to a minimal existence, and only the political elite and the politically connected super rich get richer.  President Yanukovych of the Ukraine is an example of how the political elite live in luxury at taxpayer expense.  We have some pretty good examples in our country too.

        It would be nice if our political leaders actually were interested in doing what was best for their country, but it does not work that way.  As Lord Acton said in 1887, “Power corrupts, and absolute power corrupts absolutely.”  This is what happens with big government when a small number of political elite decides how the rest of us must live.  As the government becomes larger and the political elite becomes more powerful, the government becomes more and more totalitarian or fascist.  Communism or a dictatorship is the final stage.

        The number of people killed in the 20^th century exceeds the number of people killed in all previous history.  Most died in a time of peace in Marxist countries in the name of social equality.  Many died of starvation in a land of plenty.  Here are some of numbers:

·       Communist China - 70 million people dead

·       Communist Russia - 20 million people dead

·       Japan - 12 million Chinese civilians dead

I am amazed Modern Progressives can convince so many people that big government with the political elite telling us how to live our lives can lead to a world of Milk and Honey.  This has never worked in the history of the world.  What is different now?  Power corrupts.

It is even more contradictory to advocate the control of big government, but complain about the capitalist system and the power of big corporations.  Big corporations control big government now with lobbyists and campaign donations.  Government is getting bigger with more government regulations helping big business, and hurting small businesses.  We need smaller federal government with less regulatory interference in the private sector. 

The dedication of my book, Business Fits reads:

“This book is dedicated to all the small farmers and small town business owners that played a huge part in making this country great.  Unfortunately, they are both disappearing.”  Lets go back to what made this country great. 

      Our founding fathers recognized the danger of big government.  That is why they formed a republic with a three-part government creating a system of checks and balances.  We must comply with the Constitution and the Bill of Rights.  They are as relevant today as when they were written.  The alternative is not good.