News muse Views-Farm Subsidies, JP Morgan Bank Losses

The 2012 Farm Subsidy. Proposed legislation offers another opportunity to assess the idiocy of picking and supporting favored political constituencies. It changes the legalized embezzlement of taxpayer funds in the form of paying farmers for NOT planting crops to one of subsidies for crop insurance, not only for the insurance payments, but for the deductibles that farmers must pay in the event of a failure to collect on the underlying insurance. Kind of like the auto insurance deductibles you pay when you have an accident, generally used to minimize fraud through unauthorized claims, and to reduce premiums by having the insured pay for part of the loss in order to collect the much larger amount of actual loss.

But why any such program in the first place? Congress (wouldn’t you know it?) designed crop insurance programs  in the 1980s to get away from an older program of directly paying farmers for crop losses due to disasters. (Why?-we don’t pay manufacturers when their products fail, or when they lose plants to disaster, they are supposed to have insurance!). Nevertheless, Congress designed a plan with private insurers to generate crop insurance, which farmers, making logical business decisions, could buy. Along come the “vote getters” (re-election time, don’t’ you know) and farm state representatives and the farm lobby, heavily subsidized plans that cover 85% of a farm’s yield (real or imagined-fraud is rampant) or expected revenue (who guesses?).

Now, they want to subsidize the deductibles! Let’s end this in favor of a 1% tax on farm crops, each and every one, no exceptions, to fund a crop insurance fund, obviously paid for by those who benefit from it, which would insure losses (through claims and audits) and be charged with the mission of scientific and environmentally friendly farm support.

Bank Regulation, Volcker Rule, JP Morgan speculative losses. The recent reporting of a Two Billion dollar loss  (that’s Billions with a big “B” folks!)in bond trading operations (hedging) at JP Morgan reinforces the need for re-institution of the separation of investment banking and non-standard banking activities from standard banking activity-savings, mortgages, small business lending.  There could be another way, which is to limit any bank’s speculative and highly leveraged hedging operations to “prudent man” levels, i.e. 10-15% of total bank assets, AND limiting leverage to say, five-to-one or ten-to-one (unlike now, where leverage can go up to 99/1 (risk 1 Billion dollars (routine) by putting up collateral (shareholder’s and sometimes Depositor’s  money!) of just 5% or less of the transaction’s value. The risk-and potential reward-is large and growing. There are up tp 600 Trillion (that’s Trillion with a big “T” folks! )outstanding of “derivatives” at any one time, ten times the Total World GWP (Gross World Product), and Trillions more (that’s Trillions with a big “T” folks!) in other security and investment trading categories. Virtually all these transactions are un-regulated, not cleared (tracked and recorded, like stock trades)  through any licensed exchanges, like the NYSE, or CME (Commodities Exchange), and really, just “chips” in a very large casino, meaning no “transparency” for investors to judge. (Whose value is sometimes determined AFTER the trade is made, or whose value is subject to the whim of a trading desk which trades in advance of client trades to ensure a profit opportunity even before the customer’s trade is executed.

Solution? Require banks and financial institution to limit leverage of investment operations to less than 10%; require increases in shareholder investment equity to 15-20% of capital and Prudent Man investing regulations limiting investment to 10% of any issuer or class of securities thereby limiting loss potential significantly, so that ALL losses are borne by equity owners (including executives) not by taxpayers- no more “Too Big To Fail!”

While the expected gnashing of teeth and rending of $2,000 suits would be loud, it pales by comparison to the cries of  governments (translate taxpayers) when called to rescue the future over-leveraged speculators!

Bankers will always find a way to make money, even with these restrictions, and will absolutely undertake risk-management behavior that reduces their personal exposure as equity owners. Shareholders will make sure that those who persist in the kind of risk-taking behavior that leads to shareholder losses find new employment more suitable to their (now demonstrably limited) talents.


About BarryWDennis

Solutions oriented, practical and pragmatic thinker, financially conservative, free-market enthusiast devoted to marketplace transparency.
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