Return of FUD

In earlier posts I touched on the principle of FUD (Fear, Uncertainty, and Doubt) (here and here) and the negative effect it is having on this country's economy. Basically, when the FUD level is high, businesses and individuals concentrate on reducing debt and increasing cash reserves, because they have no idea what to expect in the future. When FUD is low entities spend, invest, and expand. This increases consumption and demand, which in turn leads to increased employment.

FUD is certainly pervasive today. While economic FUD clearly stifles growth, it is particularly crippling when combined with regulatory FUD. Some examples:

A spring 2011 report (the Semiannual Regulatory Agenda) lists 2,785 new rules (proposed and final) in the government's regulatory pipeline (emphasis added).

Of those, 144 were classified as “economically significant.” With each of the 144 pending major rules expected to cost at least $100 million annually, they represent at least $14 billion in new burdens each year.

Another negative impact of increased regulations is that it swells the growth of government.

• Regulatory staff at federal agencies (full-time equivalents) increased about 3% between 2009 and 2010, from 262,241 to 271,235, and is estimated to rise another 4%—to 281,832—in 2011.

• Federal outlays for developing and enforcing regulations are also expected to grow by 4% this year, from $46.9 billion in 2010 (in constant 2005 dollars) to $48.9 billion.

Reducing the regulatory burden would be one way Congress and the administration in Washington could relieve some of the uncertainty facing companies in the private sector. Additionally, reducing the growth of regulations would stem the growth of government.

(source)

Speaker of the House John Boehner agrees with me.

In a speech in Cleveland in August, Speaker of the House John Boehner said, “Right now, America’s employers are afraid to invest in an economy … hamstrung by uncertainty. The prospect of higher taxes, stricter rules, and more regulations has employers sitting on their hands.”

You can go here to read a more detailed explanation based on real options theory (when the future is uncertain, entities tend to delay investment decisions to allow the future path of events to be revealed), but trust me when I say that both empirical and anecdotal evidence support the FUD principle.

Here's a few more examples.

Main Street Bank lends most of its money to small businesses and is earning decent profits. But the Kingwood, Texas, bank is about to get out of the banking business.

In an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions, Main Street's chairman, Thomas Depping, is expected to announce Wednesday that the 27-year-old bank will surrender its banking charter and sell its four branches to a nearby bank.

Mr. Depping plans to set up a new lender that will operate beyond the reach of banking regulators—and the deposit-insurance safety net. Backed by the private investment firm of Microsoft Corp. co-founder Paul Allen, the company won't be able to call itself a bank, but it will be able to do business the way Mr. Depping wants.

Nearly all of Main Street's $175 million loan portfolio has gone to customers like dentists, owners of fast-food franchises and delivery-truck drivers, who use the loans to purchase equipment. The bank's average loan size is $100,000 to customers who have less than $1 million in annual revenue, Mr. Depping says.

Mr. Depping says that Main Street's focus on small-business lending has sheltered the bank from much of the devastation that has swept the industry, including 385 bank failures since the start of 2008.

Main Street had profits of $1 million in the second quarter and wrote off 1.25% of its loans as uncollectible. That is below the industry's charge-off rate of 1.82% in the FDIC's data for the first quarter, the latest available. The bank has earned nearly $11 million in the past year.

In July 2010, the FDIC slapped Main Street with a 25-page order to boost its capital, strengthen its controls and bring in a new top executive. Regulators also said the bank was putting too many eggs in one basket. Mr. Depping says regulators wanted the bank to shrink its small-business lending to about 25% of the total loan portfolio, down from about 90%.

So we have the federal government telling a bank that it should drastically reduce the loans it makes to small businesses, in spite of the fact that the loans are being repaid and the bank is profitable. Maybe that helps explain why loans to small businesses are drying up.

I guess they should make loans to large corporations like automobile manufacturers. They'll never go bankrupt.

Oh, wait...

Speaking of automakers:

Italian automaker Pagani was to begin selling its $1 million, 700 horsepower Huayra supercar in the U.S. later this year but federal safety regulators have said "Not so fast."

Pagani had applied for an exemption from federal auto safety rules requiring child-safe "advanced" airbags, arguing that complying with the rule would have caused "substantial economic hardship," according to documents from the National Highway Traffic Safety Administration.

NHTSA denied the request, essentially blocking the car from sale in the U.S., because Pagani failed to show that installing the airbags on the twin-turbocharged 12-cylinder carbon-titanium car would cause the company undue financial strain. Also, the Italian carmaker didn't show that serious efforts had been made to comply, the agency said.

Let's see. The car is a two-seat 700 horsepower 12 cylinder turbocharged high-performance sports car with a one million dollar price tag. I don't think there'll be too many buyers who put a car seat in it.

The auto safety agency sometimes grants temporary exemptions from specific safety rules, especially for automakers that plan to sell only a small number of cars.

Pagani created the Huayra as part of the automaker's plan to break into the U.S. market. ... With a total of only 60 employees, Pagani's small factory can only produce so many of the largely hand-built cars.

Initial deliveries in the U.S. were to be limited to about five cars a year during 2012...

Five cars!?! The federal government is worried that granting an exemption to five supercars will somehow create a wide-spread danger because the airbags aren't the equivalent of those in my wife's minivan.

Okay, the supercar example might be a little extreme. But here's a case that has a profound impact on jobs and the economy.

The Obama administration would be forced to decide by Nov. 1 whether to approve a proposed pipeline to deliver Canadian oil sands crude to refineries in Port Arthur and southwest Louisiana, under legislation the House passed Tuesday. 

Oil industry advocates complain that a final verdict is long overdue. TransCanada first asked for approval to build the pipeline nearly three years ago, during the Bush administration.

But critics argued that the bill would block federal agencies and the public from fully weighing in on an environmental impact statement that the State Department is set to issue in mid-August.

Say what??? Federal agencies and the public have had three friggin' years to comment on this. And why the heck is the State Department issuing an environmental impact statement? Isn't that the province of the EPA or the Energy Dept.?

The proposed Keystone XL would expand TransCanada's pipeline network, which now ends in Cushing, Okla., by adding a roughly 1,700-mile line from Alberta to the Gulf Coast. The $13 billion project would let up to 1.29 million barrels of oil sands crude flow into Midwest and Gulf Coast refineries - a 700,000 barrel-per-day increase over existing capacity.

Bill supporters touted the potential economic benefits - including a projected 10,000 to 20,000 construction jobs.

Supporters insisted that if the U.S. rejects the project, the Canadian crude would be delivered instead to energy-hungry Asian markets.

"If we don't build this pipeline, Canada will find another buyer," said Rep. Fred Upton, R-Mich. China is eager to snap up the oil, he added.

Isn't obama always prattling on about creating jobs? Here's ten to twenty thousand of them being handed to him on a silver platter, and what's he doing about it? 

Going on vacation.

At a time when many more cash-strapped Americans are stuck at home instead of vacationing at the beach, President Obama next week will lead an entourage of several dozens to exclusive Martha's Vineyard island at a cost of millions to taxpayers.

While technically he is paying for his estimated $50,000 a week rental of the 28-acre beachfront Blue Heron Farm in woodsy Chilmark, the dozens of U.S. Secret Service agents, communications officials, top aides, drivers, and U.S. Coast Guard personnel with him will be covered by taxpayers as with every other presidential vacation.

Obama's vacation comes at an awkward time because of the economic turmoil roiling the nation and Wall Street. Surveys show that a growing number of Americans can't afford even small vacations.

But former Clinton spokesman Mike McCurry says that every president needs a break from the confines of the White House.

"We do need to let these guys have vacations and do some reading and thinking outside the box," he said.

Obama will certainly have a lot of space to brainstorm. The $20 million farm on Cobbs Hill Road features four dwellings, a swimming pool and a basketball court. Google Earth shows that there is also a single hole golf area with two bunkers. The president, his wife and two daughters can also go to private Squibnocket Beach or Great Pond. There is an apple orchard, and flower and vegetable gardens.

Oh my achin' back...