Milwaukee Biz Blog

Everyone is entitled to their own opinions, but not their own facts.

Too many political types bloviate about the Bush and Obama bailouts during the 2008 subprime crisis. They claim it failed, didn’t work and cost us taxpayers a lot.

I beg to differ.

In late 2008, people stopped spending...Restaurants were empty. Shopping malls were abandoned. Businesses froze. It felt like lemmings charging over a cliff.

Wall Street was in panic. Market makers were compromised because many were out of business or did not have the capital to buy and sell securities- essential to making markets. Wachovia, Merill Lynch, among others went into “arranged marriages” without a dowry. Washington Mutual went under as did Lehman Brothers. Banks refused to take each other’s credits.

The Great Depression of 1929 is in our DNA and seemed real.

There were runs on money markets. Liquidity disappeared. Hedge funds abandoned Morgan Stanley and Merrill Lynch because they didn’t want to have their funds tied up and lost. Goldman Saks was about to collapse, as were Citigroup and BankAmerica.

I lived through this and found that there were no safe places to hide.

While I had predicted the sub-prime crisis in 2006 (and had alerted the Federal Reserve, numerous elected officials and the Milwaukee Journal-Sentinel and New York Times), I had not anticipated AIG’s fall or that corporate bonds would be hit as hard as they were.

Mr. Paulson and Mr. Bernecke panicked like the rest of us. They reacted by throwing a lot of stuff against the wall to see what stuck. Finally some of what they did did stick, and the worst of the panic subsided. Obama and his crew continued with programs to stabilize the markets and the banks and to save the auto business and their suppliers.

I mention what happened because we have short memories and because I want to set the stage for my belief that what both the Bush and Obama governments avoided a 1929-like depression.

But don’t take my word; look at the July 25, 2011, article in Fortune Magazine titled “Surprise! The Big Bad Bailout is Paying Off.”

Fortune Magazine is not a tool of Occupy Wall Street or Liberals. Like most business people, they need to look at the world objectively. Their research showed that the
bailouts were a success.

The Fortune article considered the entire bailout, not just the 3 percent TARP (Troubled Asset Relief Program). TARP cost $19 billion, including a $13 billion restructuring cost for homeowners that stabilized neighborhoods. TARP was authorized to spend $700 billion but never spent more that $410 billion.

The Treasury guaranteed money market funds when the largest such fund, Reserve Prime Fund, fell to .97 cent. In plain parlance, Reserve broke the buck. The Treasury stopped a run on these funds when they guaranteed $3 trillion.

Hedge funds ran for the doors when Lehman Brothers - one of the top “Prime Brokers” - went under and their assets were frozen. There was a run on Goldman Saks and Morgan Stanley - also “Prime Brokers” that was stemmed when the government made them “banks” so the Federal Reserve could loan them money. 

Merrill Lynch joined Bank of America in a shot-gun marriage as did Countrywide.

GE Capital couldn’t rollover its borrowings, a problem other large companies faced. The government became the lender of last resort for these firms. 

AIG through a British subsidiary guaranteed a lot of AAA-rated bad CMOs and other mortgage backed bonds. As the country’s largest insurer, they needed time to unravel their assets. The Treasury got 563 million shares of AIG for making $85 billion in credit available. These shares are worth about $14 billion.

Was it smart to pay Goldman Saks, one of the worst offenders in the subprime crisis 100 percent on the dollar? Probably not, but to allow AIG to go belly up would have had a negative affect on the economy in part because other insurance companies would have had to take over their policies and annuities and they did not have the capital to do so..

The most critical and largest expense was for Fannie Mae/Freddie Mac. Shareholders were wiped out, but debt holders (many of which were banks) were saved. The cost as of last summer was $130 billion ($154 billion, less a $24 billion dividend). The Congressional Budget Office and the Treasury, according to Fortune, expect this number to shrink.

There were many problems with these two organizations. Fannie Mae was for the Democrats and Freddie Mac was for the Republicans. The original idea was that they would be a clearinghouse for mortgages on the secondary market (something I advocated for more than four decades ago).

These two organizations then became quasi government-private companies, combining the worst that public and private offers. Management was rewarded for short-term performance so they manipulated the system to ensure that their numbers looked good. Both Fannie Mae & Freddie Mac were generous in their political contributions and lobbying. The function of these two organizations should not be privatized.
Fortune believes that the negative part of the bailout was a ruling that AIG, Citigroup, GM and Ally Financial (formerly GMAC) could use their tax losses in full and could shelter $35 billion in income. Of course, they need to earn money to shelter them.

The current “losses” in Chrysler, GM and AIG are offset by gains from the banks (who were anxious to pay off their debt so that their top executives would not have a ceiling on their compensation). These bailouts fell from $$411 billion to $104 billion Final judgment is still out on Chrysler, GM & AIG.

Imagine for the moment the damage to our economy and society if GM, Chrysler and AIG failed. The actual cost to the government and taxpayers for unemployment and other expenses would have been higher than the bailout.

On the “Plus” side, Fortune included “bailout” profits from the Federal Reserve.

The Federal Reserve bought $1.25 trillion of mortgage backed securities in QE1 
(2008-9) and $600 billion in QE2 (2010-11). The Federal Reserve owns about $2 trillion for which they did not have to borrow. In 2007-8, the Fed returned to the Treasury $193 billion (which Fortune calculates as $102 billion in excess “profit”). The size of this portfolio is falling slowly. The Fed should generate at least $30 billion in excess profits in 2012.

Treasury received $15 billion in fees for insuring money market balances and the $150 billion in the mortgage backed bonds it owns. And the FDIC made $8 billion between the increased fees on insured deposits and what it has paid out.

Fortune said that it was not the bailout that was bad, but the excesses of the financial system. Looked at objectively, this is obvious.
 
One reason for this success is that government has only had to make good on a fraction of its guaranteed loans. The Treasury also had advantageous deals with the banks that were profitable.

In the end, the taxpayers will end up whole or ahead. But the success of the bailout is that it prevented a depression-like situation like we had in 1929. It rescued GM and Chrysler and allowed Ford to survive because it saved the suppliers of the auto companies. It set up a situation where confidence in the banking system and money markets came back and where we could address the problems of our economy.

These are the facts. The rest is propaganda. As Sun Tzu said in The Art of War: “He who does not understand himself or his enemy is doomed to fall.” To understand how to prevent these problems from occurring in the future, we need to know what has been successful. The fear is that politicians and others will believe the lies they are telling others. 

That is a roadmap to disaster. For if we do not see what causes problems and what works, what have we learned?

Bob Chernow is a Milwaukee businessman, a former River Hills Trustee and the former chair of the Regional Telecommunications Commission, the North Shore Cable Commission and the Milwaukee River South Rivershed Commission.

It amazes me how politicians disconnect their acts from the results they think they want.

Folks like Congressman Jim Sensenbrenner criticize President Barack Obama for the government’s investment in Solyndra, a “venture capital” failure. I agree with the Congressman. But he conveniently forgets that his party under President George W. Bush created the exact program in 2005 that Obama used to fund stimulus money into “green” industries.

And Sensenbrenner is quiet on the awful CAPCO program sponsored by Wisconsin Gov. Scott Walker, or similar frauds in Rick Perry’s Texas, Haley Barbour’s Mississippi, Mitch Daniels’ Indiana or Bobby Jindal’s Louisiana. Sensenbrenner says that he doesn’t comment on state issues, but he does when he can make a partisan point. .

All of these “venture capital” deals reward the shim sham supporters of both parties. The promise these deals make is that they will create jobs, but the system is set up so that the only jobs CAPCO deals create are for CAPCO. These deals are non-partisan boondoggles, approved through false promises, lobbying and political contributions to elected officials who do not know how businesses get started and thrive (or fail). State Senator Glen Grothman deserves credit for “outing” these deals.

If we want to solve the problem of capital for small and mid-sized businesses, there are easier, better and faster routes to take.

For example, Steve Grossman, Massachusetts’ Treasurer, uses his state’s free cash by making deposits in local financial institutions who agree to make loans. He wants the same market rate returns that the state would get from money markets. Grossman comes from a family business background and has used his experience there to solve problems. His program has had successes in his home state because he knows that small and mid-sized businesses need access to capital. Tax breaks are only useful if you have profits.

Another example is the U.S. Small Business Administration’s 90-percent loan guarantee without “points.” Banks love these ‘non-risk’ loans. The program has expired and should be extended.

A third approach would match the low interest rates that the Federal Reserve has with common sense underwriting and a limitation on bank use of leverage to arbitrage with Federal Reserve money. This will take some effort on the Federal Reserve’s part to retrain regulators to be reasonable.

These steps ought to be effective in getting working capital to small and mid-sized businesses. Money is tight now, and many suppliers are not extending credit for purchases. I believe the enforcement of regulations is good, and I lobbied our elected officials in 2006 to do so. Now regulators have gone to the other extreme and need to come back to a middle ground.

Lastly, our elected officials need to understand that limiting stem cell research - one of Wisconsin’s most promising new industries - will kill what we have here. It is a classic example of government butting its nose where it does not belong. If Wisconsin’s economy is to grow, can we afford to chase away the cream of our intellectual “capital”?

There is a place for government to help business. Research & development funding, Small Business Innovation Research (SBIR) grants, special tax incentives for purchasing equipment, and a “one stop” for all paperwork for business are examples of what I refer to. But CAPCO is not one of these steps. Haven’t we learned that by now?

Bob Chernow is a local Milwaukee businessman.

The Federal Reserve has one last good arrow in its quiver.

It costs nothing. It involves little risk. It will jumpstart the economy.

The Federal Reserve can enact reasonable underwriting standards for its banks. It can also encourage reasonable underwriting standards from Fannie Mae/Freddie Mac and restart the secondary market in residential mortgages.

While the Fed has reduced interest rate dramatically with an eye to make credit available, it has directly and indirectly restricted credit to small and mid-sized business. And it has given great incentives for banks not to lend.  At the same time, Fannie Mae/Freddie Mac have made the issuing of mortgages difficult through restrictive lending standards.

To make myself clear on this issue, I am not for non-regulated, free markets. In 2005 and 2006 I warned our elected government officials in Washington and Wisconsin about the non-enforcement of regulations already on the books. These were common sense regulations that balanced risk with good underwriting standards.

I also pointed out that our history is that we move from one extreme to the other. First we go from not enforcing our own rules and regulations to going overboard with enforcement. This is what we are doing now.

This is our pattern. We close the barn door after the horses get out. This is human nature, of course. But this practice generates unintended consequences, such as the current restriction of credit.

Here are a few current examples:

• A Mequon, Wisconsin manufacturer needs to borrow $30,000 short-term to purchase raw materials for a $100,000 government contract. The company needs to pay for the materials in advance, but cannot wait the month or longer it will take to get it from a bank. In fact, he does not know if he can get credit. Instead, the owner is forced to dip into his retirement plan to borrow the money.
• A South Carolina business executive buys a home in foreclosure. He and his wife have liquid assets of more than $5 million. The house is on the market for $1.7 million, but appraised by the bank at $1.3. The executive buys the home for $1.2 million and wants (for tax reasons) a $300,000 loan. The bank refuses him. They won’t include a business he bought that cash flows $200,000 a year because he hasn’t owned it for three years nor his personal account which they say he could move or the income from several boards he sits on. They will count his IRA if he annuitizes it (he is not 59½ yet). He finally goes to a mortgage banker who makes the loan and then sells the loan to the original bank that refused him!
• NPR reported that American Natural Foods of Kyle, S.D., couldn’t get loans for its expanding business after visiting 11 South Dakota banks. The banks wouldn’t even take an application! This company makes energy bars, organic buffalo jerky and buffalo hot dogs. They have annual sales of $1.5 million and distribute to 4,500 stores. They needed to borrow $80,000 to buy meat for their hot dog line that is expanding 12 times faster than expected. Their 6,000-square-foot headquarters cannot be used for collateral since it sits on an Indian reservation. At last, they obtained financing from a wealthy Minnesota tribe and a community development fund.
• A Michigan man refinances his home. His mother has just died, and a trust that had been set up by his father dissolved. The bank’s underwriters required details on the transfer. After stalling the man for five months, they required a copy of his late mother’s will. They are not convinced that her will has nothing to do with the funds he has received.

 

In none of these examples was the lender at risk.

Banks have a Tier 1 capital requirement, which as been raised for banks. For most banks, this means that they cannot hold the mortgages they make but must sell their loans to Fannie Mae/Freddie Mac, who now have unrealistic and unneeded requirements. Underwriters are scared to death to make a mistake. This has led to caution in the extreme.

Fannie Mae & Freddie Mac were created to make a secondary market in mortgages. This market has lost its prominence because mortgage-backed bond and pass-thru paper have been tainted by complicated manipulations that far exceeded what they were designed for. This market needs to be revamped so that it is again liquid.

The Federal Reserve has a new program called Operation Twist. Here, they are buying longer termed bonds in hope of giving banks more liquidity. But that is all this is – a hope. What many banks are doing is to borrow from the Fed window at 0 to .25 percent and then leveraging 10- to-1 (and higher?) to buy three-year paper. Leverage is up 14 percent this year. It is a “riskless” way to make money, but it is not pushing out loans to those who need it to move the economy. This is another of the unexpected consequences of Fed policy. Low interest rates encourage arbitrage, not lending.

Much of this problem stems from the leadership of the Federal Reserve, which is led by very intelligent men who are far removed from the actually economy of small businesses. They may sympathize with these groups, but frankly they socialize with the wealthy and the well-educated, and have forgotten the lesson that J P Morgan taught us - that character above all else is the key to successful lending.

So what steps should the Federal Reserve and the government take to expand lending?

• First, the Federal Reserve should encourage its member banks to use common sense underwriting and not underwriting designed to cover the backs of the banks. This same approach should permeate Fannie Mae/Freddie Mac. Does anyone think that a $1.2 million home with only a $300,000 mortgage presents a risk to the lender? This loan has a $900,000 cushion! Look at risk. Confirm what information has been given. Check character.
• Second, discourage member banks from borrowing from the Federal Reserve by using leverage to make a profit. Require these banks to make a specific number of loans before they can use leverage. United States policy under both Bush and Obama was designed to buy time for surviving banks and such businesses as General Motors and AIG. The purpose was to generate liquidity and to allow the unbundling of assets in an orderly manner. In this respect, both U.S. government policy and Federal Reserve actions were successful.

Now it is time to get back to normal business.

Bob Chernow is a Milwaukee business and futurist who identified both the S&L crisis and the sub-prime crisis. He was recently elected to the Board of the World Future Society.

There are two things you can’t get back: your virginity and your credibility.

Investors buy the debt of the United States because it is liquid and is backed by a strong economy and military. Investors assume they will get their money back, that there will no doubt (no doubt at all) that they can sell this debt at any time. This belief is our reputation. If we default on our debt, few will trust us not to play games in the future.

This needs to be readily understood.

The U.S. Congress continues to battle over raising the debt ceiling. Many Republicans think that a taste of default will force Democrats to cut spending. This is like teaching your kid “responsibility” by letting him go to jail for six months with hardened criminals for coming home an hour late after a date. The consequences will be much, much worst than the “crime.”

Is it just petty blackmail involved here, or it something much worse, a blindness to how foreign buyers of our debt view this game? This worldview needs to be taken into account, especially in light that AAA-rated mortgage debt had before it defaulted.

We are not an island unto ourselves any more, no matter how much we convince ourselves that other's opinions do not count. They do.

Moody’s, the rating agency, has warned of a downgrade of our debt. They have warned of the disaster a default would have on U.S. debt. Some have dismissed this. They should not.

China holds $1.14 trillion of our debt. They see a default as a real risk, viewing this as greatly a political situation, since Republicans want to hurt Obama. They and others will   be harmed, especially in light of the fragile recovery. The very successful bond mutual fund company Pimco understood this and exited the U.S. Treasury debt market.

It reminds me of the story of the blonde who caught her husband with another woman. She points a gun to her head as if to shoot. Her husband yells, “Don’t do it!” She screams back: “Don’t worry. You’re next!”

Raise the debt ceiling. Argue about cutting expenses, raising taxes and having the government operate more effectively. But don’t play dice with the economy. All of us will lose.

 

Bob Chernow is a Milwaukee businessman.

When did corruption influence overtake state politics?

My guess is that it started during Tommy Thompson’s last two terms when the road builders co-opted the Department of Transportation (DOT). This is why the last State DOT Audit pointed out that almost all DOT projects were over budget and behind schedule. It explains why two of the State’s largest contractors only got slaps on their wrists for splitting up state road contract bids.

Wisconsin had two Supreme Court elections where Wisconsin Manufacturers & Commerce (WMC) spent more than $4 million to elect Annette Ziegler and Michael Gableman. Neither of the justices rescued themselves in cases of importance to the WMC. The first was for Menasha Corporation. WMC filed an amicus brief in the case. Mrs. Ziegler wrote the majority opinion, worth $350 million to WMC. The other case concerned the payment of sales tax on customized software.

Excluding the merits of the two cases, the WMC spent more money in the two elections than the candidates themselves. No wonder people believe that Wisconsin justice is for sale and that we are worst than West Virginia where Massey Coal’s leader spent $3 million to elect a Supreme Court justice who voted for a $50 million case. That is 16 times more than the cash invested. WMC had an 87.5times return!

One of the first appointments made by Gov. Scott Walker was Stephen Fitzgerald to head the Wisconsin State Patrol. Fitzgerald had just lost an election as Sheriff of Dodge County by a 2 to 1 margin! Were his superior qualifications linked to the birth of his sons: Assembly Speaker Jeff Fitzgerald and State Majority leader Scott Fitzgerald?

A special exemption to avoid a DNR ruling on wetlands was put through by a State Assembly Committee for a new shopping center in Green Bay. This was a favor for a well-connected developer who hoped to get Bass Pro Shop as an anchor. Bass Pro Shop had not been consulted, but they made clear that their core values never would permit them to destroy wetlands.

Phil Montgomery was appointed to head the Public Service Commission (PSC). His executive assistant will be R J Pirlot, formerly director of legislative relations at the WMC. Montgomery was an anti-consumer State Representative who led cable deregulation. In my opinion, his flat earth interpretation of economics will harm both business and consumers. He uses bully tactics to get his way. Mr. Pirlot is probably there to keep Montgomery on track for the WMC.

Corruption knows many names. One is the disregard of the law. While Mr. Walker was Milwaukee County Executive, he illegally reduced worker’s hours. He knew that he would be out of office by the time the courts said it was illegal. More recently, he and his administration ignored a court order to “interpret” the publishing of the union decertification law (until the Judge planned to issue personal contempt of court citations). As some wag once said: “Everyone is entitled to his own opinions, but not his own facts.”

And who “owns” Wisconsin? The prank telephone call between “David Koch” and Scott Walker tells us a lot about that point. Walker thought he was conversing with a source of money to fuel his election.

Corruption is bad for everyone. It stacks the deck against honest businessmen. It raises costs and often generates poor results. It makes people feel that they will not get equal justice or a fair hearing. Corruption needs to be addressed regardless of who is in office, and it needs to be addressed now.

Bob Chernow is a Milwaukee businessman.

Milwaukee and Wisconsin businesspeople know that our biggest problem is attracting and keeping skilled and creative workers. This has been a constant theme at the Milwaukee Metropolitan Chamber of Commerce and the motivating force behind school reform and integration.

In the brokerage industry, there is an industry wide 85 percent failure rate for new trainees. A typical training class has ten people with an average cost of $150,000 per trainee. This is almost $13 million tossed down the drain per class. It is no wonder that successful brokers are paid so much to move from one firm to another. The industry is not replacing brokers; it is cannibalizing them from each other.

We have a nursing and doctor shortage, with the shortfall for nurses projected to be one million. Welders are in great demand. Indeed, Wisconsin industry imports welders from Indiana.

There are many reasons for these problems, but the situation will worsen. And one reason is the demographic realities of our aging society - and especially Wisconsin’s.

The growth rate of the working age population - that is 21 to 62 years old - is in flux, only masked by the 2008 stock market crash that has forced people to work longer.
Here are some startling figures:

Decade     Average Annual Change

1980’s      1,007,000

1990’s         882,000

2000’s         702,000

2010’s          (3,000)

2020’s         218,000

As David Pierce Snyder pointed out in a recent talk, birthrates and household formations have fallen 6%-7% since 2007. He expects this to remain low until the unemployment rate drops below 7.5%. This means fewer people coming into the work force.

Three years ago, we graduated 1,524,000 bachelor degrees, but only 450 petroleum engineers and 4,492 chemical engineers. 50% of graduate students are foreign born, but many are returning home where they feel their opportunities are better.

In Wisconsin we have a special problem. Young adults and recent graduates do not find opportunities here and as a result leave. I have talked to a dozen young adults (25 to 35 years old) who are aghast at what Governor Walker is doing. One young lady - a creative - just turned down a job in Wisconsin because of the atmosphere; she already has a higher paid job in Chicago. The problem is really two fold. We are educating and raising our smart young adults, but they are leaving the state to find more attractive prospects. In many ways, Wisconsin is repelling folks from pursuing careers here and building a brighter future for our state.

There is more on Mr. Walker’s agenda here than labor concessions. Labor was so demoralized after the last election that he could have gotten the economic concessions he demanded. No, this is political. He wants to break the unions, legally or otherwise. In Milwaukee County which the Greater Milwaukee Committee says he left in shambles, Walker unilaterally forced workers to take a reduction in pay. The Court of Appeals ruled against his work hour reduction, but Walker knew he would not be around to see the consequences of his actions.

One dangerous outcome from breaking the teachers and public sector unions is that Wisconsin is currently rated #2 in ACT/SAT scores. There are only five states that do not have collective bargaining for educators and have deemed them illegal. Here is a list of those states and their rankings on ACT/SAT scores:

 South Carolina 50th
 North Carolina 49th
 Georgia  48th
 Texas   47th
 Virginia  44th

Many years ago, Briggs & Stratton had a new “leader” who decided to break their union. The firm’s quality and productivity fell until Stratton returned and worked co-operatively with the union.

Ironically, Walker’s actions have re-energized the union movement as workers see their situation as “good against evil.”

Walker’s anti-union measure coincides with the voter suppression law that was passed and the rejection of the $810,000,000 high speed rail that would have generated about 29,000 jobs for $702,000 a year cost to Wisconsin if the Federal subsidy is included. This is what Walker just gave to a political supporter to expand his business.

Few businesspeople like taxes, but we like what taxes do for us. Few of us like regulation, but all of us know that often these regulations put competitors on an even footing with us and keep the crooks out. We start and operate businesses because we have an idea or invention that we are passionate about. We might want to be independent or we want to acquire wealth for ourselves and our families. These are our motivations.
Taxes and regulations do not top this list. So look closely at what is happening to our state and how this damages our ability to attract the people who will create and build our future.

Bob Chernow is a Milwaukee businessman and futurist.

The Milwaukee Journal-Sentinel ran an editorial Friday on transit titled, “New Ideas Required.”

They called for money and the creation of a regional transit authority. These are old, tired ideas.

First of all, the Milwaukee County Transit System mostly serves those who have no alternatives for transportation. Many routes are antiquated, but political pressure maintains them. Their approach is to load the most people on each bus, but this way reduces ridership because then routes are unreliable and slow because too much time is needed.

Here are common sense ideas to create a system that transports people better.

1- For morning rush hours, institute an express pick-up service that stops every 6th stop. Rotate these stops. Clearly mark pick-up schedules. Use the terminal downtown to distribute passengers to work locations.

2- For the evening rush hours, use feeder buses to pick up passengers at work places and drop off passengers at the terminal. The key to both of these suggestions is to pick passengers up during rush hours with little wait and faster delivery. Use clear schedules and instructions as to what bus to board.

3- Co-ordinate with major users of cheap labor their work schedules and the locations of their staff. St Luke’s and the Medical Center are examples. According to one worker at St Luke’s, she needs to catch a 4:30 a.m. bus to get to St Luke’s by 7 a.m. She had similar wait times to go home. She arrives at work already tired. She lives less than 10 miles from work. The benefit for the hospitals would be more productive workers who they could count on to be at work on time. A similar co-operative arrangement could be made with MSOE, MATC, UWM, certain places of business, other hospital systems, etc. Some of these organizations might wish to supplement transit, or, at least, transit could be supported pre-tax. Indeed the Transit folk are already doing this with rides to Summerfest and baseball games.

4- Coordinate with businesses, such as those in Brookfield. Theses businesses need good, hard working people, but many of these potential workers have no transportation. Provide the transportation at affordable rates and add in training as well. It is cheaper than unemployment or welfare.

5- Use some of the wasted advertising dollars to pinpoint customers and fulfill their needs.

These ideas are not unique. The idea is:  Serve your customers.

Move people to where they need to go or where they are in a fast, safe, and affordable manner.
The solutions for transit are not difficult. These ideas are not new. They just haven’t been implemented.

Bob Chernow is a Milwaukee businessman and futurist. He also chaired the Regional Telecommunications Commission, the North Shore Cable Commission, and the Milwaukee River South Rivershed Commission. He is a former River Hills trustee and heads up The Tellier Foundation.

“Scriptures, n. The sacred books of our holy religion, as distinguished from the false and profane writings on which all other faiths are based.” - Ambrose Bierce

A few years ago, a third grade teacher asked her students to tell what their religions were.

“I’m a Baptist,” one boy said. Other children told her: Catholic, Lutheran, Assembly of God and Methodist. To each she responded “Praise be the Lord!” Then two girls who were sisters said: “We are Muslims.”

“Ah,” said the teacher, “Now that you are in America, you should have an American religion.”

These children were third-generation Americans. The teacher thought she had done nothing wrong, even when parents and her principal protested.

The Catholic Church came to Boston in the early 1800’s and only Ellery Channing of the Unitarian Church came to its defense. Catholics started parochial schools because society discriminated against them.

The Mormon Church’s founder, Joseph Smith, was killed by a mob. The Acadians were exiled from eastern Canada and escaped to Louisiana. The Puritans sailed to America for religious freedom, but returned the favor by exiling non-conformists to Rhode Island and Connecticut. Prejudice against Jews is well documented.

My point is that every religion has faced intolerance and prejudice at some time. 

Being different, makes you a target.

This was one of the reasons that our founders made religious freedom the cornerstone of our Republic. They knew history and had witnessed religious persecution in Europe and elsewhere. Additionally, many were Unitarians or Deists and had an open approach to religion.

The hateful attacks on Muslims and the Muslim center and mosque that is being built a few blocks from the 9/11 site illustrates this lack of tolerance. In part this is a wedge issue created in time for the November elections, but it also reflects the darker side of American society.

Terrorists attacked the World Trade Center, not Muslims. “All” Muslims do not want to destroy America, as one intolerant person I know claims, forgetting that people of his own faith were told to “go back from where they came.” Indeed when I hear someone using the word “all,” I know that I am talking with a closed minded person.

There is self-interest in being tolerant. Business and society thrive when people can choose how they worship. With the demographic changes in our country, power is changing.

But the real reason to be tolerant is because it is the right thing to do.

“Once there was a time when all people believed in God and the church ruled. This time is called the Dark Ages.” - George Bernard Shaw

 

 Bob Chernow is a Milwaukee businessman.

One of my guilty pleasures is attending Congressman Jim Sensenbrenner’s town meetings. Our politics differ greatly, but I like Jim, who is a month older than me, and the give and take is fun to listen to.

Four or five years ago, the Congressman would have been the most conservative in the room. Now he has become a moderate…at least in comparison to those who attend these events in Grafton, Germantown and Mequon.

There are always a few “birthers.” These are folks who, despite the evidence, deny that President Obama was born in the United States. At the last meeting I attended, a lady droned on for 10 minutes, listing Supreme Court cases that proved that Obama wasn’t President. She even, ironically, cited the Dred Scott case. For those of you who slept through History class, this was a Supreme Court decision in 1857 that said that people of African descent were not protected by the Constitution and could never be US citizens. Furthermore, Congress could not prohibit slavery in federal territories. If she had actually read the case, she was forgetting that the Civil War answered this question with the 13th, 14th and 15th amendments.

Sensenbrenner has responded to the birthers that he has seen Mr. Obama’s birth certificate, that this has been brought to the Supreme Court many times and rejected, and that Obama is his President (although he is part of the “loyal opposition). Furthermore, he has said that we lost the election, accept it, and if you want change, go out and get people to vote.

I have heard his constituents begging to get “the government’s hands” out of Medicare. Another, a lady I judged to be in her late 70’s or early 80’s, complained that she had to dip into her IRA to pay for Obama’s health care plan (despite the fact that it has not taken place and that this lady appeared to have few assets).

In short, many of these folks are angry, frightened, and are lashing out against forces they do not understand. But this is more than an adherence to conspiracy theories or frustration with a weak economy. In my opinion, the birthers and many tea party folks are reacting to the shift of power that they are witnessing, but cannot define.

This shift is from a world run by older white males to a society where women, minorities and youth will be our new leaders.

Part of this has to do with demographics. Asians, Hispanics and blacks now make up 30 percent of our workforce. 45 percent of all children under 5 are minorities. By 2042, the white population will be reduced from 67 percent to 47 percent. Hispanics and Latinos now make up 15 percent of our population, but will increase to 30 percent by 2050. Asians will almost double from 5 to 9 percent. The surprise here is that the Black population will only increase 1 to 15 percent.

In addition, our economy has moved from mass production to mass customization. The number of workers in manufacturing was 28 percent 35 years ago; it is less than 10 percent today, thanks to tremendous increases in productivity gains (and not so much to job exports). Women are better suited as managers in this environment because they work collaboratively rather than in the top down hierarchical approach that men like.

In short, your new boss is likely to be female. Twenty-four percent of all family businesses are now run by women, and 2.5 percent of Fortune 1000 companies are run by women, but this should increase to 30 percent by 2020.

Demographics - the retirement of the baby boomer-indicates a younger leadership. The young have a very much different view of race, religion, and sexual orientation than older Americans. This is a hopeful sign for our society.

Lastly, many business and government leaders have shown themselves to be incompetent, incapable and unethical (as well as clueless). You have automobile executives flying to Washington, D.C., in leased jets and being picked up in stretch limos before getting their begging bowls. You have bankers and brokers who were blinded to practices in their organizations that destroyed them- Merrill Lynch, Bear Stearns, Lehman Brothers, Washington Mutual or Wachovia. Do I need to cite the head of Goldman Sachs’ Lloyd Blankfein who said, “I’m doing ‘God’s work.”

Then there are government leaders who failed to enforce regulations on the books or their hypocritical sex scandals.

Demographics, economic shifts, and the failure of leadership are driving the frustration of the Tea Party people, who are mostly retired, upper middle class white males. They see a young, Black president and a strong female head of the House of Representatives. Their economic and social status is changing. Is it a question that they are threatened by the possibility of someone doing better than them? What else can they do but lash out?

Ironically, the movement might affect more Republicans than Democrats. Utah lost an establishment Republican Senator. In Pennsylvania you had an old and ill politician running again a vigorous, younger man. Dr. Paul- an attractive, tell it as it is- guy ran and won against the Republican’s establishment’s candidate. 

What will happen in November is anyone’s guess. Will the anger of the Tea Party folk, estimated at 20 percent of the population, translate into votes? It is anyone’s guess. But the change in power and values, as the root cause of this movement, bears looking at.

Bob Chernow has worked in the financial industry for over 40 years. As a futurist in Milwaukee, he identified the S&L and mutual savings bank and subprime crises prior to them “happening.”

We need real reform in the financial markets. This reform should include how we regulate and how we audit and enforce these regulations.

Reform will not prevent another crisis that we have just witnessed or the S&L/Mutual Savings Bank crisis some three plus decades ago or frauds such as Madoff’s. But reform can catch these problems before they get out of hand which will reduce the impact on our economy.

First, we must restore confidence to the secondary mortgage market. Liquidity in mortgages provided by the secondary market is essential to our economy. Banks and S&Ls should not be holding mortgages for long periods of time and should have a market to which they can sell.

• Require escrow for real estate taxes and homeowners insurance for all homes where the home buyer does not have a 20% down payment.
• Require that the buyer have a 20-percent cash down payment or that another entity, such as a mortgage insurer, the VA, FHA or Farmers Home Loan Agency is covering the 20-percent difference between appraisal and mortgage.
• Forbid financial institutions from lending borrowers their 20-percent down payments.
• Ensure that income and assets listed are verified.
• Ensure that appraisals are realistic
• License all appraisers and mortgage brokers nationally, or at the very least, create a standardized system for appraisers and mortgage brokers, including the personnel of any firm issuing paper to be sold on the secondary market.
• Strictly regulate mortgage insurance companies. There have been too many incidents where these firms have had conflicts of interest (using subsidiaries as collateral) or have made risky business decisions that affect their contingent liability funds.
• Require that all use the standardized underwriting and forms issued by Fannie Mae and Freddie Mac.
  Make full disclosure and other paperwork simple to understand. Reduce this paperwork to 1 or 2 pages that are understandable.
• Where possible, require that homeowners with less than a 20-percent down payment receive counseling so that they have a budget and so the mortgages they receive are fair, that charges required of them are reasonable and that the property they are buying is worth what they are paying.
• Restrict such practices as ‘interest only mortgages,” balloon mortgages or variable mortgages with teaser rates.

In regards to regulation of the financial industry, it is important to separate the audit and enforcement functions from the influence of politics and business as much as is possible. Politics influences enforcement.

A recent example was the firing of Gary Aguirre, a Securities and Exchange Commission attorney lauded for his excellent work. He was fired because he wanted to interview John Mack for allegedly giving inside information to Pequot, a hedge fund. (I could have used examples from both Democratic and Republican administrations).

The NYSE, NASDAQ, the Federal Reserve and the SEC did little to go after abuses on Wall Street. For years, Eliot Spitzer was a lonely crusader against Wall Street abuses.
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Self-regulation” by the industries themselves has been not been successful. The Federal Reserve failed to stop abuses in the banking industry through its audits. Their “objective” is to protect banking, but too often this means avoiding confrontation by the few banks that control most of the country’s assets.

My suggestion is to create an independent agency that has many features of an inspector general or the General Accounting Office. Fund their budget for seven years at a time. Give a single ten or twelve year term to its leadership. Forbid its civil servants from becoming lobbyist or working in the industries they have regulated for five years.

This will not be perfect, but it will go a long way in isolating political influence on the agency.

Furthermore, I suggest that we separate regulation and oversight by an industry’s function. Credit, life, health and property-casualty insurance companies manage risk; banks, S&Ls and mutual savings banks lend money. Mutual funds and annuities deal in collective investments. Money managers, hedge funds, financial advisors and stock brokers manage money or offer advice.

Multiple and contradictory regulations need to be reduced, but there should continue to be competition in enforcement. National tests, continuing education and licensing should be national. Licensing by states based on the national model should continue.

 

Bob Chernow is a futurist who predicted the S&L/mutual savings bank crisis, the future of mortgage backed bonds and the recent sub-prime crisis. He works in the financial industry. His opinions are his own.