Questions For Bill de Blasio And His Progressive Supporters

Here at the Manhattan Contrarian I extend my congratulations to Bill de Blasio on being elected New York City's new mayor.  On the other hand, I disagree with him on almost every policy idea he has put forward.  (Exception: He proposes to reduce or eliminate corporate relocation and retention subsidies.  Yes to that one.)   He has put forth one completely impossible pie-in-the-sky idea after another, and his attempts to deliver are likely only to make a mess of things.

So let's turn to his main themes, the ones that have dominated his campaign.  So far, he has been exceedingly unspecific in his actual proposals.  That's important because he seems to think he can solve problems that have defeated all of his predecessors and that are very likely beyond the competence of any government, let alone local government, to solve.  So, Mr. de Blasio, a few questions: 

  What exactly do you propose to do about income inequality?

If there is one theme that dominated the de Blasio campaign more than any other, it was what he called the crisis of income inequality.   The Villager, reporting on de Blasio's victory speech on the night of his election, had these quotes:

 “That inequality, that feeling of a few doing very well while so many slip further behind — that is the defining challenge of our time. …

 “But the challenge today is different. The creeping specter of inequality must be confronted, and will not weaken our resolve.”

On de Blasio's campaign website, he had posted an article from August 15, 2013 by David Sirota in The Nation with the following statistic:

The scope of [the "rich class"'s] victory in New York City is breathtaking. According to Census data, New York . . . is a place where the top 1 percent of income earners make an eye-popping 44 percent of the city’s total income.

Assuming for the moment that this is a crisis, what is the proposed solution?  I have seen four from de Blasio and his supporters: (1) more taxes on the high earners,  (2)  more in kind distributions to the low earners, (3) increased unionization and support for labor unions, and (4) higher minimum wage.  Let's take these one by one:

Those who propose more taxes on high earners as a solution to income inequality don't seem to realize that the inequality numbers they rely on, like the one from de Blasio's web site above, are pre-tax numbers.  In other words, increasing the tax rate, even doubling or tripling it, doesn't change the measured inequality at all.  The same concept applies as to in kind distributions at the low end of the income spectrum -- things like public housing, food stamps, Medicaid and education grants do not count in the income statistics. 

How about unionization as a way to raise up the lower earners?  An article in the current issue of de Blasio's big fan The Nation says that "A comeback for New York's working class will require the revival of unions."  Good luck with that.  Here's some history I'll bet de Blasio does not know.  In 1965 New York had over 1 million heavily-unionized manufacturing jobs.  The number today is 49,500.  That's a decline of over 95%.  A reasonable way of looking at this is that the unions forced their employers out of business.   And the process continues in other industries.  New York's construction unions continue to lose ground, and are almost completely gone from residential construction.  When the World Trade Center is finished during de Blasio's first term, will there be any comparable union job to replace it?  In supermarkets, the old-line union shops (D'Agostino, Gristede's) are still staving off Wal-Mart and Target by political action, but meanwhile non-union Whole Foods gains ground rapidly.  The unionized Postal Service is imploding before our eyes.  During his campaign, de Blasio attended rallies for fast food and car wash workers seeking unionization.  There's a reason that those kinds of very small businesses have essentially zero union penetration, namely, that any such business that accepts a union will quickly go under in a hyper-competitive environment.  Manhattan office workers, our big growth area for decades, are in a race for advancement that unions would only obstruct.  No union even tries to organize them.  It's very hard to see how the future for private sector unions in New York is anything other than continued decline, no matter what de Blasio does.

The minimum wage?  I expect a large increase to clear the City Council and be signed by de Blasio shortly after he takes office.  Immediately following will be a jump in unemployment among young members of minority groups, from already unacceptably-high levels.  The effect of these two things on measured income inequality will be to increase it.  De Blasio will not recognize the cause and effect.

In the end, there's really only one thing de Blasio can do to reduce measured income inequality, and that is to drive the high earners away.  According to that Nation article, back in 1980 and before, when New York's combined state and city income taxes approached 20% (today they're about 12%) and Connecticut had no income tax (today Connecticut's top rate is 6.5%),  the top 1% of earners only reported 12% of the income.  Another way of looking at that is that nobody making a big income in that era was stupid enough to report it in New York City.  Of course, total tax collections were also a lot lower.  Is that really where de Blasio wants to go?

How do you propose to generate "affordable housing"? 

The same article in the current issue of The Nation contains a striking but I think inadvertent contradiction.  In its section on income inequality, it advocates "persuading the state to end tax breaks for luxury properties."  And then a few paragraphs later under "Housing" it describes de Blasio's pledge to build 200,000 units of affordable housing over ten years a "laudable goal."

They don't seem to realize that the whole mechanism by which Bloomberg got "affordable housing" built was tax breaks for luxury developers.  I agree that this is a terrible idea, and leads to way excessive subsidies for small numbers of people, hidden off-budget where no one can find them.  Yet The Nation proposes no alternative method, nor have I seen any workable alternative from de Blasio.  Is the City to get back into the development business itself on a massive scale?  If you think that's a good idea, check out any of many articles on the current financial crisis facing New York's previous adventure in the development business, the New York City Housing Authority.  Here's one.  Guess what?  If you charge people almost no rent, they will never move out, and meanwhile you will gradually run out of money to maintain the buildings.  Eventually you get where Chicago found itself a few years ago, and you have to dynamite the buildings. 

And what's the plan for the hospitals? 

De Blasio's second signature issue above the others may be his advocacy on behalf of "saving" the many hospitals around New York threatened with closure due to insufficient revenues to pay their operating expenses and debts.  In the heat of the campaign, de Blasio actually got himself arrested in a protest over the closing of a hospital in Brooklyn Heights called Long Island College Hospital.  Today, that hospital remains open under court order, although it has few remaining patients and is hemorrhaging money. 

The problem here is that, up to now, the question of hospital closures has been for New York State, not the City.  The small amount of money in the City budget for hospitals, other than the City-owned hospitals, has been required Medicaid sharing.      

I can't even imagine a proposal for the use of City tax money or other resources for these hospitals that makes any sense.  The reason that certain hospitals are going broke is that the hospital industry has over-expanded, and the weaker hospitals are therefore half (or more) empty.  Shouldn't we recognize it as a good thing that there aren't enough patients for all the hospitals?  Any subsidy program that keeps hospitals open will never go away -- the need for subsidy will only increase with time.  It's a black hole.  Is de Blasio capable of recognizing this? 

And finally, what about the pensions? 

And of course, the biggest issue of all is the exploding cost of city worker pensions.  De Blasio has never even mentioned it.  Well, he has gotten lucky this year with a 20+% run up in stock market prices.  Unfortunately that may take the pressure off him, at least for the first year or two of his term.  I say unfortunately because delaying addressing this problem is only going to make it worse.  But I will be very, very surprised to see de Blasio address it. 

Obamacare And Its Marks

Conservative news sources, led by Fox News, are all over the falsifying of the President's big lie ("If you like your plan, you can keep your plan, period.") with the opening of the Obamacare exchanges.  So now the tune has changed.  The new party line from the President in the past week has been, the risk of cancellation of policies only applies to "about 5%" of the population in the individual market, whereas "the majority of folks will end up being better off" under Obamacare. 

I can't seem to find any calculation of how that "majority" thing has been determined.    But it's at least as dishonest as the "if you like your plan you can keep your plan" thing.  At very best they have a model projecting that effective premiums for healthcare will go down for 50+% of the population, but that's only one piece of whether a given individual will be "better off."   To figure that out honestly, you need to take into account that the subsidies in the system must be paid for either in taxes or inflation, and attribute those costs to individuals over time.  There is no way that the President and his crew have even tried to do that.    Their way is to treat government subsidies as free money that doesn't have any cost to anybody.  Same with the loss of freedom from the various mandates.   

So you are in your mid-20s and healthy, and with few assets.  Your income from your starter job or freelancing this year is only $25,000.  You're entitled to a big subsidy.   According to a chart of New York healthcare exchange prices here, it looks like you can get a plan for close to free, or perhaps $100 a month.  Are you "better off" with Obamacare?  Counting only the premiums for your healthcare, the answer is, maybe this year, and maybe for a few years, if you're planning to keep your income at that $25,000 for the foreseeable future.  But if you're like almost everybody your age, you are not planning to earn the $25,000 per year for very long.  As soon as you start moving up, you are on the hook for rapidly escalating premiums (the same chart shows monthly premiums of over  $300 by the time your income reaches $40,000) plus the taxes to pay the subsidies to the people who keep their incomes low.  Plus, of course, Medicare and Social Security taxes to support your parents.  And don't forget your student loans!  They are trying to convince you that you are "better off", but yes, you are the mark, the sucker. 

And by the way, did I mention that the effect of the subsidies is to make your escalating healthcare premiums function as a gigantic additional marginal tax as your income rises from about $25,000 to $40,000?  While your income goes up by that $15,000, existing taxes are going to take about $3000 of that, leaving maybe $12,000, and then as the subsidies phase out your healthcare premium is going to go from $100 to $300 per month, an increase of $2400 per year, which is a full 20% of what otherwise would have been your increase in take-home pay.  You are 27 years old, earning a lower-middle class income, and facing an effective marginal tax rate of 50%.  HAHAHAHAHAHAHAHA.       

A few days ago I predicted that people in the private economy would quickly get to work to find ways around the Obamacare debacle.  I came up with a few ways they might do that, from family re-definition to buying black market insurance from Canada.  But of course, the big idea is something I didn't think of, yet spotted on a tv commercial a couple of days ago.  This idea is prepaid care from a large medical group.   It's not "insurance" from an "insurance company," so it looks like Obamacare does not apply.  (In fact, the pre-paid care model is how the Blue Cross plans got started back in the 1920s.)  A group in this area called AMG is now offering unlimited doctor visits for a flat pre-paid fee of $79 per month, below even the cheapest Obamacare subsidized plans for people making as little as about $30,000.   OK there's no pediatric dental coverage, and no maternity care for young men.   More importantly, it doesn't cover hospitals, but your risk of needing hospital care is small and if you have the big accident they have to treat you and you can just not pay the bill.  Not perfect, but clearly a far better solution for many many young people than the Obamacare ripoff.

Don't Try To Draw Any Conclusions From Government Poverty Data

One of my favorite sites, Instapundit, has two links today to posts that attempt to draw conclusions from government poverty data.  Unfortunately, as I have discussed many times, the government poverty data are completely fraudulent.  These data provide no meaningful information as to how many people suffer from some kind of financial or physical deprivation or hardship.  If you attempt to draw conclusions about deprivation or hardship from government poverty data, you are just showing that you don't know what you are talking about. 

In linked article number 1, we have Jordan Weissmann of the Atlantic opining that "Yep, Being a Young, American Adult Is a Financial Nightmare."   That's a proposition I could agree with, but I would base my agreement on the fact that young adults are getting buried by student loans, and they also have to pay for their parents' social security and Medicare, and they are set to be gouged by Obamacare, and then none of the entitlements will still be around when today's young adults need them.  But Weissmann has something completely different in mind -- he's talking "poverty." 

Poverty is an astonishingly common experience here in the world's richest country. As I wrote this morning, almost 40 percent of American adults experience it for at least a year by age 60.

But you know who poverty is especially common among? Young adults.

Jordan, it's only "astonishing" because government-defined "poverty" has nothing to do with poverty.  Weissmann presents some graphs based on government "poverty" data that he claims "illustrate the difficulty of making ends meet in your twenties and early thirties."  Along the way he calls living "under the actual poverty line" the equivalent of being "really truly broke."  The key statistic he cites, from a forthcoming book by Rank, Hirschl and Foster called "Chasing the American Dream," is that some 41.3% of Americans will "spend at least a year earning less than 150% of the poverty line" between ages 25 and 34.  

Sorry, you've just been duped by the government's fraud.  By the way, his article has over 300 comments as of this writing, and not a single one of them has picked up on the problem.  The big problem here is that the "poverty" data count most adult students as being in "poverty."  Federally-measured "poverty" is determined by "cash income" of your "household."  If you are over 21 and living apart from your parents, then your "poverty" status turns on your own cash income.  Of course, students don't have much of that.  Are you a medical student whose parents pay for everything?  That's poverty.  A graduate student with a fellowship?  Fellowships don't count as income -- you're in poverty.  Getting a big government-subsidized student loan?  Doesn't count -- poverty!  Harvard Law student who works for "Big Law" for the summer at $3000 per week?  OK, you will earn enough to not be in poverty.  Harvard Law student who takes one of those really nifty unpaid internships with a federal judge for the summer?  Poverty!  Parents send you an allowance of $300 per week?  Doesn't count -- you're still in "poverty."  You get food stamps?  (Why not?  You qualify!)  They don't count either.  You're in "poverty."

Are there really enough students in the 25-34 age group to swing these data meaningfully?  Absolutely.  According to Education Department data here, the number of 25-34 year-olds enrolled in a degree-granting institution in any given year is about 4 million, out of total population in that age cohort of about 40 million.  That's about 10% in any given year.  But Weissmann is quoting a statistic based on being in "poverty" or "near-poverty" in any one year out of the ten from 25 to 34.  So how many people will be a student for at least one year out of the ten between 25 and 34?  It could easily be 25% or more, plenty to swing Weissmann's statistic by as much as half.  (Think about this:  if everybody were a student for the one year from age 25 to 26 and not after, and therefore in "poverty" for that one year out of the ten from 25 to 34, then the education statistic would be exactly as we see -- 10% of the 25-34 cohort in school each year -- and Weissmann's statistic would show that 100% of 25-34 year-olds spent "at least one year in poverty" during that decade.)  

And of course that's far from the only problem with the government "poverty" data.  As big problem number 2 we have the failure to count in the measure of poverty all in kind handouts.  As relevant to young adults, these include not only food staps but also educational grants, even the part of the educational grants that pay for housing and food.  Weissmann's statement that being in federally-measured "poverty" means "difficulty in making ends meet" is just appallingly ignorant. 

As with my previous posts on poverty, I am not saying that no young adult in the United States suffers from real poverty, by which I mean financial or physical deprivation.  I'm only saying that the official "poverty" data are wildly inflated and do not provide any useful information on how many people are in the category of actual deprivation.  Nobody can say how inflated the data are, because the government does not provide enough information to figure it out.  I'm just trying to educate people a little so that they can stop making fools of themselves.

Then in Instapundit-linked article number 2, we have cnsnews.com reporting on September 17 on the Census Bureau's release that day of the household income and "poverty" data for 2012.  The official number of people in "poverty" in the U.S. in 2012 was 46,496,000.  That represented an increase of 6,667,000 people in "poverty" from 2008 to 2012. 

Now that's rather a large increase on Barack Obama's watch -- almost 17% in four short years.  Can you recall reading about this a month and a half ago when it came out?  It did appear somewhere in most major news sources, but somehow was not really big news.  Am I just a cynic in thinking that if there were a Republican president a 17% increase of people in "poverty" during his first term would be gigantic news?  

On the other hand, I also don't think that the increase in Census-definition "poverty" has much if anything to do with real poverty, in the deprivation sense.  Far more likely that it derives primarily from people's efforts to manipulate their reported income and/or their family definition in order to qualify for various handouts.  The hugely anomalous statistic from Obama's first term is the explosion in food stamp recipients from under 30 million to almost 50 million, with recruiters combing the country looking for people to sign up.  Could there be some family re-definition going on?  (Hey, if sonny is away at college, he could qualify for food stamps if we say he is not part of the family!) 

If I'm right about why "poverty" has increased (and I am), better look for more big increases to come.  Obamacare gives tremendous incentives to manipulate income below thresholds and/or define families into smaller units in order to qualify for subsidies and "free" plans.  I'm predicting a very big jump in "poverty" in the coming few years.

New York Bent On Self-Destruction

Tomorrow is our day to dodge the bullet of Bill de Blasio, and in the best New York tradition we're not going to do it.  The good news is that even the worst left-wing policies do not lead to immediate economic collapse, but rather to slow gradual decline.  It took decades of Rockefeller/Wagner/Lindsay overtaxing and overspending before New York City lost 10% of its population in the 1970s, and that one proved possible to correct.  Still, you would think we had learned those lessons. 

To prove that the New York mind is incapable of learning, the Daily News serves up one of the most preposterous editorials imaginable, endorsing de Blasio for mayor.  The gist of the editorial is that they are against every specific policy proposal that de Blasio has put forward, yet they support him because, I guess, he can't really mean it and he seems like a bright guy and we hope that he will wise up once in office.  They characterize his expensive and vapid educational agenda ("after-school programs!", "parental involvement!", "teacher retention!") as "wishful thinking."  They point out that Bloomberg had educational reforms that actually worked (charter schools, closing failing schools), but at the demand of the teachers union de Blasio opposes continuing with them.  Well, he'll just have to "be a fast learner."  They characterize his approach to security (a federal monitor for the Police Department!) as "display[ing] a frightening ideological bent."  Massive retroactive raises for the workforce (the unions are demanding $7.8 billion)?  de Blasio has refused to rule them out, even though "the right response is zero."  No mention in this editorial of the actual main issues confronting the city government, overspending on education and on pensions and retiree healthcare.  From all indications de Blasio has never heard of these issues.  It would be way too impolite to point such things out to him.  He's too busy crusading to "save" a hospital in Brooklyn that is way beyond saving.  And by the way, there are four more behind it in deep financial trouble and not a chance the city can or will divert money from other needs to save any, let alone all of them.        

Conclusion: "De Blasio's potential to rise to that challenge is the critical factor for an endorsement extended with trepidation.  Great good luck to all."  Well, I've got news for them: de Blasio is a true believer in his rhetoric.   You make your own luck, and we're making ours here, but not the good kind.

Also not mentioned by the Daily News is another of de Blasio's favorite causes, "affordable housing."  The Wall Street Journal surprises over the weekend with some information on how much this game costs.   I previously estimated the cost of "affordable housing" in Manhattan at $40,000 to $80,000 per beneficiary family per year, based solely on the differential between the subsidized rents and market rents for similar apartments in the same buildings.  But of course the direct and indirect subsidies are far greater even than this, although very difficult to find and quantify.  But the WSJ got hold of Housing Finance Authority board materials for a meeting in October that approved financing for a project on Sixth Avenue with 375 apartments, 75 of them "affordable."

Board materials show that the 80-20 program would allocate $2.5 million in tax-exempt financing, plus $18,573 in federal annual tax credits for 10 years, for each of 75 affordable units.

Assuming a 2% interest rate differential between the tax-exempt financing and what would be available in private financing, that's $50,000 per subsidized apartment, plus the $18,573 makes $68,573.  And did I mention that in return for making 20% "affordable" apartments they get to pay no real estate taxes on the whole building for at least 10 years?  That could easily be $2 million per year, or another $27,000 per "affordable" apartment.  Seems like the total comes pretty close to $100,000 per year per apartment.  And the beneficiaries are not even poor!

Can someone here in New York possibly notice?  Yes.  Here in the WSJ article, we have Benjamin Dulchin of the Association for Neighborhood and Housing Development, referring to this 80-20 program in Manhattan, saying "It is about the most inefficient way from the taxpayer's point of view to provide affordable housing."    This is actual real progress, since ANHD is basically a coalition of "affordable housing" promoters.

But don't worry:  de Blasio will not notice.  

Obamacare And Progressive Disdain For The Peasants

In the disastrous Obamacare rollout, there has been much reporting on the falseness of the president's promises ("If you like your plan, you can keep your plan."), but much less on what that falseness reveals about the underlying game.  That game, of course, is to force some large percentage of the population to overpay for healthcare so that others can be subsidized. 

But with all the publicity about the false promises, and the accompanying cancellation of millions of policies now deemed non-compliant with Obamacare, it seems that more people are starting to catch on.  And now we are starting to learn what is the Official Progressive Answer upon exposure of the lie:  We had to do this to you because you are too stupid to do what is good for yourself. 

So one after another the spokesmen for the administration put forth the new line, that we are protecting you from your own folly.  The rhetoric attempts to direct anger at the evil insurance companies, but no one was forced to buy these prior policies.  So in fact what we have is a demonstration of oozing progressive contempt and disdain for the ignorant peasants.  As example number one, here is President Obama himself yesterday in Boston:   

One of the things health reform was designed to do was to help not only the uninsured, but also the underinsured.  And there are a number of Americans –- fewer than 5 percent of Americans -– who've got cut-rate plans that don’t offer real financial protection in the event of a serious illness or an accident.

Or Jay Carney in his daily press briefing:

What the President said and what everybody said all along is that there are going to be changes brought about by the Affordable Care Act that create minimum standards of coverage.

Or Congressman Henry Waxman (D, Hollywood) at yesterday's House hearing, who characterized what is going on as no longer "allowing insurers to continue offering deficient plans next year." 

So the peasants have been buying "cut-rate" and "deficient" plans that don't meet "minimum standards."  Good try, but the peasants as usual aren't as dumb as their masters think.  Take a look at the list of "essential health benefits" that must be included in any Obamacare plan.  The majority of them are things that no rational person would insure against, any more than you would insure against the cost of buying lunch.  Insurance for "preventive and wellness services" is a license for neurotic hypochondriacs to force you to pay for their many useless doctor visits.  Prescription drugs are exactly the sort of ongoing and non-catastrophic expense that nobody would try to "insure" against outside the weird healthcare world; ditto for laboratory services.  Then there are the things that you can know with 100% certainty that you will not use during the coming year, for example, maternity services or birth control if you are a single man, or substance abuse services if you are a teetotaler. 

In fact the peasants know exactly what they are doing, and the elite progressives are the fools.  But the peasants are going to have the last laugh, because starting now from day one, people are going to do what they always do, which is to behave rationally to maximize their position in the world given the various constraints that they face.  The people will do lots of things, some of which are good for the country and some bad, but all of which are bad for the survival and success of the Obamacare coercive enterprise.  As a few examples: 

(1) As mentioned here many times, if you are young and healthy (with few assets), don't sign up.  Wait until you are sick and then sign up. 

(2) Will some enterprising people in Canada please set up a few black market insurers up there and sell policies over the internet?  The Canadians are doing this right now with ridiculously overpriced U.S. prescription drugs, making a bundle and completely getting away with it.  There are billions of dollars to be made here.   If Canada cooperates with the U.S. goons to shut this down, try Cyprus.  What are you guys waiting for?

(3) In one of its much underappreciated idiocies, Obamacare defines the entitlement to government subsidies based on "household income."  The concept of the "household" is subject to manipulation and redefinition by intelligent enterprising individuals seeking to maximize their government handouts.  Are a man, woman and two children with a $50,000 income one middle-class family or a middle-class man and a woman and two children in poverty?  If it enables you to qualify for a $10,000 per year subsidy, then get a divorce or build a temporary wall through the middle of the apartment.   The handout-receiving "poor" in this country have long since figured this out, and thus have a reported 72% "illegitimacy" rate; now the middle class can have that too! 

And those are just the ideas that occur to me off the top of my head.  We now have 300 million people at work in the best tradition of capitalism to get around this monstrosity.  Social structures that are based on demanding people to act against their own economic interest to benefit others do not work.  They won't work here either.  I'm betting on the peasants, and against their would-be masters. 

Should A Federal Prosecution, Or Even A Guilty Plea, Entail Reputational Damage To The Target?

When you read about the latest federal prosecution or investigation of some or another big alleged wrongdoing, do you find yourself instinctively thinking that the target undoubtedly must have done something wrong?  After all, our prosecutors and regulators are trained experts lacking even a hint of self-interest.  Why would they conceivably invest all this energy in a major prosecution if there wasn't something really bad going on? 

And beyond that abbreviated thought process, it's very difficult for even the well-informed citizen to invest enough time and energy in studying the facts of any of these prosecutions to form a real independent judgment on whether the defendant did anything wrong.  So our instinct is to trust the government, and thus for the reputations of entities under investigation or prosecution to suffer or die, along with their businesses.  Combine this dynamic with a few dozen rounds of piling on useless and destructive regulation (see, e.g.,  Dodd-Frank), so that now scores of federal and state regulators and prosecutors have been given life and death powers over most large businesses, and you have an environment ripe for extreme corruption.     

How bad is the corruption?  Fortunately, from time to time big cases come along that are so obviously preposterous on their face that no great amount of study of the facts is needed to know that something is going terribly wrong here.   

I have previously written about the government's "sick game" with the big commercial banks.  That is the game whereby the government passes the banks billions upon billions of dollars by artificially keeping their cost of funds at or near zero for years (aka QE I, II, III,. . .,n) and then every prosecutor in the country gets to go collect a few hundred million, or a few billion dollars from one or more of them every so often in order to keep the prosecutor's name in the papers.  And thus, to take the example of just one of the banks, I commented on July 1 on J.P. Morgan's participation in a $25 billion settlement with 49 state AGs, Justice and HUD over alleged wrongful practices in enforcing underwater mortgages; and then on July 25 on JPM's settlement with FERC for about $500 million for alleged manipulation of trading in the California electricity spot markets (the alleged manipulation having had the potential effect of raising electricity prices to any given consumer by perhaps a few dollars, all while the state of California and the Obama administration seek an artificial doubling of electricity prices by imposition of a "cap and trade" carbon restriction regime);  and then on September 24 on JPM's settlement for $920 million with the SEC, where the SEC decided that the right "remedy" to punish JPM for the "London Whale" trading losses of about $6 billion was to force JPM to fork over yet another $920 million to the SEC.   

Each of these three settlements had some rather obvious facial absurdities.  But now we're coming to the big one:  the criminal -- yes, criminal -- investigation of JPM by U.S. Attorney Preet Bharara of the Southern District of New York, for alleged failure to discover and report the Ponzi scheme of Bernard Madoff.  The New York Times covered the story on October 23, and Professor Richard Epstein of NYU Law School has a long comment on the affair at the Hoover Institution site here.

The central irony of this one, of course, is that the government itself, in the person of the SEC, had both better information and better access to information about Madoff than JPM or anyone else.  The SEC had the right to inspect books and records.  The SEC had subpoena power.  The SEC actually sent people in to Madoff's offices no fewer than five times to conduct examinations or investigations.  The SEC had a well-informed guy named Harry Markopolos writing it one letter after another setting forth in layman's terms why Madoff's operation was and had to be a Ponzi scheme.  And compared to JPM or anyone else, it's actually the SEC's job, if they have any job, to figure out which operators are crooks and stop them. 

In 2009 the SEC's Inspector General put out a 457 page report on the agency's incredible failure to figure out Madoff over three decades (linked in Epstein's article).  Epstein summarizes the report as follows:  

 [T]he OIG found that the SEC had ample information in the form of “detailed and substantive complaints” from 1992 to 2008, all of which raised “significant red flags” about Madoff’s operations that the SEC then overlooked in “three examinations and two investigations” that turned up nothing. JPM is not mentioned once in that 457-page study.

But of course the SEC is the government so nobody can do any wrong.  Nobody even got fired!  Well, what good would that do, since they've never discovered any other single Ponzi scheme ever?  Could the next group of bureaucrats really do any better?

Epstein points out that Bharara is working on this one hand in glove with the Office of the Controller of the Currency, which has the ability to suspend JPM's charter and put it out of business without need for evidence, proof, or a trial.  So how much will JPM fork over on this one?  A good bet would be multi-billions.  If there's one sure bet, it's that JPM will not submit itself to a criminal trial and take any risk whatsoever of conviction, even .0001%.

The question is, when JPM (or some other big company) settles this one or the next five, to what extent should the informed public consider its reputation to be diminished by the assumption that it may have done something wrong?  There really isn't any reason to think that any one of these coerced settlements had any more solid basis than any other one, or than this latest absurdity.  Way too many ambitious prosecutors have figured out how easy this is.   Really, to the informed public, it's only the government's reputation that should be getting diminished.