Choking the Porn Money Chicken

Hmmm:

Despite being in good financial standing, adult film performers and others in the porn industry have had bank accounts abruptly terminated—and the U.S. Department of Justice (DOJ) may have had something to do with it.

Under “Operation Choke Point,” the DOJ and its allies are going after legal but subjectively undesirable business ventures by pressuring banks to terminate their bank accounts or refuse their business. The very premise is clearly chilling—the DOJ is coercing private businesses in an attempt to centrally engineer the American marketplace based on it’s own politically biased moral judgements. Targeted business categories so far have included payday lenders, ammunition sales, dating services, purveyors of drug paraphernalia, and online gambling sites.

Here are the details on Operation Choke Point:

The “chokepoint” in this operation is the nation’s payments infrastructure, the means by which merchants process nearly $5 trillion in consumer purchases in the U.S. each year. Federal law enforcers are targeting merchant categories like payday lenders, ammunition and tobacco sales, and telemarketers – but not merely by pursuing those merchants directly. Rather, Operation Chokepoint is flooding payments companies that provide processing service to those industries with subpoenas, civil investigative demands, and other burdensome and costly legal demands.

The theory behind this enforcement program has superficial logic: increase the legal and compliance costs of serving certain disfavored merchant categories, and payments companies will simply stop providing service to such merchants. And it’s working – payments companies across the country are cutting off service to categories of merchants that – although providing a legal service – are creating the potential for significant financial and reputational harm as law enforcement publicizes its activities. Thus far, payday lenders have been the most frequent target. Whatever the merits of payday lending – and there are valid arguments on both sides –it is legal in 36 states. And if payday lenders are today’s target– what category will be next and who makes that decision?

To anyone familiar with the way our thuggish government does business, this is not a surprise. When they can not get something outlawed — like payday lending or medical marijuana — they use the tools at their disposal to harass them to death. They threaten banks and financial services into not doing business with them. They pass onerous regulations. They launch inspections and raids to insure “compliance” with whatever regulations they’ve imposed. And they come down like a ton of bricks on anyone who has broken the rules to even a minor extent.

In this case, it appears that someone at the DoJ may have abused that power to go after an industry that is popular and legal. But … that’s what fucking happens when you give the government this kind of power. We shouldn’t be at all surprised that this power is being abused. We should be shocked if it isn’t abused every damned day. Think about it: through a campaign of subpoenas and legal demands, the DOJ can effectively impose massive fines on industries that have broken no laws. All that needs to happen is for someone in Washington to get a bug up their ass about an industry and they will be targeted for potentially millions in compliance costs.

Operation Choke Point needs to be ended immediately. It may turn out that this has nothing to do with Operation Choke Point. But the existence of a program like his is antithetical to the notion of rule of law. If the Obama Administration doesn’t like pay day lenders or porn sites, they can try to outlaw them through legislation (good luck with that). Allowing this kind of lawless harassment is simply wrong, no matter who is being targeted.

Update: To clarify something: the connection of this incident to Operation Choke Point is speculation at this point. It’s possible Chase is just engaging in some good old-fashioned slut shaming (in which case, fuck you, Chase). It’s also possible that the porn industry inadvertently triggered Operation Choke Point protocols since they are targeted at businesses that have high charge rejection rates and it’s likely a lot of porn users experience buyer’s remorse and try to reverse the charges (or that porn sites are a favored test bed for stolen credit cards).

Nevertheless, my criticisms stand. We have been here before. The reality that many drug dealers have lots of cash has been used to assume that anyone with lots of cash is a criminal and the cash can be taken without trial. The reality that some criminals structure bank deposits has been used to make structuring itself a crime, even when the money involved is legitimate.

The government is pressuring banks into shutting down accounts because they meet a profile of fraudulent business dealing. How is this anything more than an extension of the already abusive structuring laws?

The Taxman Taketh

This is pretty fucking outrageous:

A few weeks ago, with no notice, the U.S. government intercepted Mary Grice’s tax refunds from both the IRS and the state of Maryland. Grice had no idea that Uncle Sam had seized her money until some days later, when she got a letter saying that her refund had gone to satisfy an old debt to the government — a very old debt.

When Grice was 4, back in 1960, her father died, leaving her mother with five children to raise. Until the kids turned 18, Sadie Grice got survivor benefits from Social Security to help feed and clothe them.

Now, Social Security claims it overpaid someone in the Grice family — it’s not sure who — in 1977. After 37 years of silence, four years after Sadie Grice died, the government is coming after her daughter. Why the feds chose to take Mary’s money, rather than her surviving siblings’, is a mystery.

Across the nation, hundreds of thousands of taxpayers who are expecting refunds this month are instead getting letters like the one Grice got, informing them that because of a debt they never knew about — often a debt incurred by their parents — the government has confiscated their check.

The Treasury Department has intercepted $1.9 billion in tax refunds already this year — $75 million of that on debts delinquent for more than 10 years, said Jeffrey Schramek, assistant commissioner of the department’s debt management service. The aggressive effort to collect old debts started three years ago — the result of a single sentence tucked into the farm bill lifting the 10-year statute of limitations on old debts to Uncle Sam.

That law was passed when the Democrats controlled Congress. Raise your hand if you’re surprised.

It’s difficult to count the number of things wrong here: supposed overpayments of parents being extracted from their children; debts older than good scotch suddenly being valid again; the lack of any real evidence that an actual overpayment happened; plus, who wants to bet that they are primarily targeting middle class and poor people who lack the resources to fight it? Grice is taking them to court, but most people can’t afford that and it’s debatable whether the cost of fighting it would be more than the debt. And for a lot of people, tax refunds — correction, the return money they loaned the government interest-free — is a critical part of their budget.

In discussing student loans, I described our federal government as the world’s biggest predatory lender. Well, now they’ve become the world’s biggest predatory collection agency. Almost everything they are doing here would be illegal if a private agency tried to do it. But the gang of thugs who run our empire won’t be bound by rules. Rules are for plebs, not for the state.

Why the President’s College Plan Won’t Work

I’ve been thinking about the President’s recently announced plan to change the federal student loan program. Something about it bothered me and it took Alex’s post below to finally crystallize my objections.

It won’t work. Even if it works, it won’t work. It won’t work because Barack Obama, oddly enough for a Harvard man, misunderstands the nature of higher education and, not oddly at all for a Democrat, misunderstands the nature of the problem with student loans.

Here’s the plan:

The plan, which Obama rolled out as he opened a two-day campaign-style bus tour of college campuses, would create a rating system beginning in 2015 to evaluate colleges on tuition, the percentage of low-income students, graduation rates and debt of graduates.

Eventually, as an incentive for schools to make improvements in these areas, federal financial aid would be awarded based on those ratings. Obama said he could create the ratings system through executive action, but the plan to reallocate federal aid based on the ratings would require congressional approval.

In principle, this isn’t a bad idea. There are a lot of diploma mills out there that give out crap degrees and a lot of schools that really don’t care if your degree is useful or not as long as they get that sweet sweet federal money. So some form of accountability wouldn’t be a bad idea.

But in practice, it will fail. Badly.

Let’s put aside that such a system would inevitably be gamed by the colleges (most likely through grade inflation to bump up their graduation rates). Let’s put aside that rent-seeking universities will make sure that their school doesn’t get hit. Let’s put aside that this will only change how loans are allocated rather than the total amount — so the river of federal money will continue to flow. Let’s put aside that such rankings already exist in many publications. In fact, let’s put aside that the President’s plan is so dumb that even Kevin Drum can point out the flaws in it.

No, the bigger problem is that many people do not go to college to get an education. You can get a fantastic education if you want one. And for many specific professions — science, for example — you can learn a lot (although most of the necessary skills for me were learned in the lab and the library, not the classroom).

But most people go to school for credentialing: to get the bachelor’s degree that is a requirement for a steadily growing number of jobs that have little to do with education. Harvard could be giving out the worst “bang for buck” in America. But people would still line up to go because a degree from Harvard carries a cache in the business world that a degree from East Yachupetz Community College doesn’t (even though community colleges almost certainly give the best education bang per dollar). So let’s just say, for the sake of argument, that you use this system to cut down on student loans to Harvard in favor of schools that are more “efficient”. That won’t happen, of course, since Harvard has about three hundred friends on Capital Hill, but let’s pretend it does. What happens? Does Harvard care? They’ll have plenty of people who can pay. They have tens of billions in tax-free endowment to finance people who can’t. At worst, some people at the margins lose out on getting that ticket to the upper class that is an Ivy league diploma. Net benefit: nil.

Indeed, the exploding cost of education has nothing to do with education — faculty hires have been flat. It has been the result of growing administration and construction designed to make a university degree seem like a more impressive credential than it actually is.

The President has two more speeches to give on this subject but I doubt that he will address the real problem problem here which is that the federal government has slowly become the biggest predatory lender in the country. The simple fact is, as Matt Taibbi points out, we now have a system in which universities can charge what they want and the federal government will lock young people into massive loans for an eternity to pay for it. Loans that can not be discharged in bankruptcy but can tally up penalties and interest rapidly. Loans that are immune from Truth in Lending requirements. Loans that can destroy people’s lives by using powers that private lenders simply don’t have. Loans that make more profit for the federal government than they ever did for industry. The situation is so bad that even Taibbi is capable of seeing the truth:

Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.

I believe that the federal loan system has poisoned the education system. It has allowed naive young people take out six figure loans for useless degrees. It has bypassed all the consumer protections we have out there. If a private industry did this, they would be in prison (well, maybe not, given how the Obama Administration has dealt with the crooks in the mortgage industry).

Don’t fix federal loans; end them. Let private lenders subject to the same laws as everyone else take over. Let universities loan money and scale their reimbursement to future earnings of their students. In short, give the lenders and the schools a financial interest in providing a useful and affordable education. Because right now all the interests are aligned toward screwing the students, the taxpayers and the professors in favor of university administrators, big education lobbyists and politicians.

Our Shrinking Debt

This is good news:

U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.

Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private- sector borrowing is down by $4 trillion to $40.2 trillion.

So how can this be with trillion dollar deficits? Well, the private sector and non-federal public sectors are unravelling a tremendous debt bubble that built up in the last decade. Consumer debt is down by $1.3 trillion. Short term corporate debt is down by 55% as well. This isn’t as good as corporations need to borrow to grow. But for that much debt to be unravelled without a complete economic catastrofuck or massive inflation is remarkable.

It’s also helping with the national debt. Because consumer debt is so far down, the treasury has the loan market pretty much to itself. So all our borrowing is coming at low prices, despite the S&P downgrade.

I expect things to change soon. With debt down to much more manageable levels, people will start borrowing again. And if we can get control of federal finances, that will make borrowing even cheaper for private interests. Four years ago, I said that our economy would not move until we’d unravelled the tremendous debt we’d built up. We’re on our way to doing that, thankfully.

Modern Day Javerts

You know why I get irritated when people call Obama a Secret Communist Anti-Colonialist Crypto-Marxist Douchbag? Because if he actually were one, it would almost be preferable. At the very least, we wouldn’t have shit like this:

Richard Eggers doesn’t look like a mastermind of financial crime.

The former farm boy speaks deliberately, can’t remember the last time he got a speeding ticket, and favors suspenders, horn-rimmed glasses and plaid shirts. But the 68-year-old Vietnam veteran is still too risky for Wells Fargo Home Mortgage, which fired him on July 12 from his $29,795-a-year job as a customer service representative.

Egger’s crime? Putting a cardboard cutout of a dime in a washing machine in Carlisle on Feb. 2, 1963.

Now before you start bank bashing … and I’ll bash some banks later on, let’s go into exactly why Wells Fargo fired him for having done a stupid stunt before men landed on the moon. It’s not because they are an evil company.

Big banks have been firing low-level employees like Eggers since the issuance of new federal banking employment guidelines in May 2011 and new mortgage employment guidelines in February.

The tougher standards are meant to weed out executives and mid-level bank employees guilty of transactional crimes, like identity fraud or mortgage fraud, but they are being applied across-the-board thanks to $1-million-a day fines for noncompliance.

Banks have fired thousands of workers nationally because of the rules, said Natasha Buchanan, an attorney with Higbee & Associates in Santa Ana, Calif., who has helped some of the banking workers regain their eligibility to be employed.

“Banks are afraid of the FDIC and the penalties they could face,” Buchanan said.

The regulatory rules forbid the employment of anyone convicted of a crime involving dishonesty, breach of trust or money laundering. Before the guidelines were changed, banks widely interpreted the rules to exclude minor traffic offenses and some other misdemeanor arrests.

New rules have eliminated exceptions for expunged crimes and certain minor offenses and expanded the categories of employees covered, Buchanan said.

Of course, the bank executives — you remember those guys? — the ones who turned the financial system into a cat’s cradle made out of uncooked spaghetti and then came to us with their hands out when it fell apart? Yeah, this not sweeping them up. In fact, Wells Fargo agreed to pay the Feds $175 million to make a high-level investigation go away.

There’s a waiver process for people who have mended their ways — like Eggers, who has not put a fake coin in a laundry machine recently. But the process takes time … unless you’re a high-powered executive. And the banks are prioritizing getting those waivers for … high-powered executives. The FDIC may issue a grand total of 74 waivers this year. They are not going to people like Eggers.

This is not communism. It’s not capitalism either. It’s the Corporate Welfare State, where profits are privatized, losses are socialized, risks are encouraged and the wealthy well-connected bosses are never harmed. When the hammer does come down, for appearance’s sake, it comes on low-level employees and borrowers, not the big bosses or even the medium ones. And both parties are supporting this, as much as the GOP likes to pretend they opposed TARP.

Now about those banks. This is yet one more data point for the case that the big banks have gotten too big and too powerful for the health of our nation and our economy. This is not a case where the free market has created a oligarchic banking system. This is a case where the government, by bailing out big banks and letting them use that money to buy up small banks, has encouraged this; has created this. I have made this argument before. But this is again in the news with Simon Johnson making the case that breaking up the big banks should be part of the GOP platform (if necessary, they can make room by dropping the planks on Shariah law and outlawing abortion without exception). Here is John Carney, quoting the TARP watchdog on the problem. I’ll quote Johnson:

The big opportunity for presumptive Republican presidential nominee Mitt Romney and for conservatives more broadly is to choose this moment to pivot against big banks. Ryan is plugged into the Tea Party wing of the Republican Party, which has been consistently opposed to megabanks and the subsidies they attract through being too-big-to-fail (talk to Representative Ron Paul).

Ryan can draw on the intellectual support of senior figures in the Republican Party — including former Utah Governor Jon Huntsman, the presidential candidate who had the strong support of the Wall Street Journal editorial page for his approach to breaking up the megabanks. Senator Richard Shelby — ranking Republican on the Senate Banking Committee — is cagier, but seems inclined to be skeptical of the value of the largest banks as currently constituted. Two weeks ago, Senator David Vitter co-wrote a brilliant letter to Federal Reserve Chairman Ben S. Bernanke on the problems the banks pose.

In addition to politicians, the emerging consensus among heavyweight Republican intellectuals is that bigger banks should be forced to fund themselves with much more equity relative to debt — in other words, capital requirements should be significantly higher for any financial firm whose failure can cause broad damage. The argument is that too-big-to-fail is too- big-to-exist and the right way to pressure banks to break up is through capital requirements that increase along with a bank’s size.

A Romney-Ryan ticket has the opportunity to tap the Republican populist tradition (think Teddy Roosevelt). The megabanks — such as Bank of America Corp., JPMorgan Chase & Co. (JPM) and Citigroup Inc. — have become today’s government-sponsored enterprises. They receive large, opaque and dangerous subsidies, encouraging them to engage in excessive risk taking. The question is how best to remove those subsidies.

Removing the subsidies isn’t enough. The damage to our political, financial and legal systems is too extensive. I do like the requirement of higher capital requirements, which has some support. But I fear that if we don’t do something about this soon, we’re going to have a much worse situation on our hands.

Because firing people like Eggers isn’t working the problem.

(H/T to Maggie McNeill for the post title).