What is happening when nothing is happening in Washington?

This week's agenda for the house includes 3 bills that all appear to improve the energy security of the United States. Looking at the last bill, H.R. 4899, one can only ask the question "Why?".

H.R. 4899 is named the "Lowering Gasoline Prices to Fuel an America That Works Act of 2014". It has two titles. The first title promotes leasing on the Outer Continental Shelf for Oil and Gas production. The second title promotes onshore oil and gas permitting, including access to the Alaska strategic petroleum reserve. The bill is structured to default leasing and permit to applications to be accepted if nothing is done by the Administration and there are fees both to submit an application as well as to protest an application. 

As of today, this bill has passed through the Rules committee of the House, which means that Rules have been created which determine how this bill will be debated by the House. In this case, there appear to be no amendments for the bill, so the bill will essentially be subject to an up or down vote by the house.

So where does this paragon of legislative achievement go from here?

First assumption: Since this bill is co-sponsored by 14 Republicans and 0 Democrats, this appears to be a partisan bill that was brought to the floor by the House majority party for a vote.

Second assumption: The House majority party has enough votes to pass this in the House.

Third assumption: This bill will not be brought up by the Democrat controlled Senate. Thus, it won't become law.

Why does our government insist on going through this exercise for no effect? I can think of only a few reasons for the House majority party to proceed:

First reason: Improve the standing of the majority party with their constituents. Voting on this bill allows members of the majority party to claim that they tried to improve the lots of their constituents. However, given the dirth of press on this issue, the majority party doesn't appear to be trying very hard to get the word out.

Second reason: Lower the standing of the minority party with their constituents. Voting on this bill allows members of the majority party to claim that the other party that controls the Senate is being obstructionist. Again, this would seem to require press. Also, given that this bill doesn't align well with the policy positions of the minority party anyway, working against the bill doesn't really lower the standing of the minority party. 

Third reason: Improve the standing of members of the majority party with specific lobbies. This reason makes sense, especially given the lack of press coverage. In this case, lobbyists may provide either legislative help (writing bills) or electoral help (cash) in return for taking a vote on this bill.

Note that nowhere in this article have I debated the merits of the bill in question. However, since bills go through this process all of the time (think of the 50 or so bills to repeal, restructure or defund Obamacare in this Congressional session), it is important for citizens to understand why their elected officials act the way they do. Hopefully, this will help citizens understand whether the "actions" of their representatives are meaningful to their constituents and who their constituents really are.

So, what are the alternatives?

ResultsUSA: Spreading Influence in Congress

Background

Recent polls show that Congress is regarded more dismally than ever before in the history of such polling. Citizens of the United States seem to feel that either Congress isn't paying attention to their needs, or that the two parties in Congress are so polarized that no one can have any meaningful affect.

Lawrence Lessig, in his recent TED talk, We the People, and the Republic we must reclaim, argues that the corrupting influence of money given by a small segment of the population is blocking anything else from being done. Before any other reform can be effected, campaign finance reform must first be addressed.

While many people have been looking at systems we can create to ensure fairer elections, herein I present an idea to implement within the current system, by which I mean that this idea should be implementable within current laws and regulations, whether or not legislators, political parties or lobbyists approve of the idea. Being able to implement ideas within the current system is valuable because, as legislators are human beings, it is reasonable to expect that they would never choose to relinquish power voluntarily.

Legislators spend between 30% and 70% of their work time fundraising for the next election cycle. Without this activity, they can't expect to hold their jobs as legislators. Such fundraising is primarily reaching out to donors to secure large donations.

This idea is a work on progress. Any improvements in either the content or the presentation are welcome and I hope that many people can contribute to realizing this idea.

The Big Idea

Changing the behavior of legislators can be done by giving them a different set of incentives. As citizens, we should not be paying for promises; we should be paying for results. Legislators need money to maintain their positions; we should provide it to them as best we can. We need a means of encouraging legislators to legislate. The idea is to provide a mechanism for such encourage on a result-by-result basis, instead of aggregating such encouragement against promises of future activity once in office.

An example: assume that 90% of Americans support universal background checks for purchases of firearms. What if each citizen had the opportunity to monetize that support for that particular result and distributed that money to the legislators that made that result happen? In a simplified scenario, one million citizens each pledge $10. 400 of the 535 legislators cast votes on the legislation to make this happen, so each of the 400 gets a contribution of 25,000 dollars for this result. If a legislator needs to raise $250,000/year for their party to get party support, that result gets then 1/10 of their fundraising goal, or about 5.2 weeks of fundraising time that can be devoted instead to legislating.

This operation would provide citizens with a range of results to which they could contribute. Examples could include:

• Universal Background checks for the purchase of firearms.
• Confirming a director for the EPA
• Passing a budget for FY 2013-2014
• Removing a particular loophole from the tax code
• Naming the new bridge that connects St. Louis to Illinois

It is important that each result be clear and measurable.

Implementation

FEC

How would it be legal to get this money to candidates? According to the FEC, there are contribution limits from one entity to another according to this chart. Thus, there are different ways that different sources might try to fund elections, as shown by the New York Times.

One intriguing detail is that there is no limit between national political parties. Thus, this operation could be organized as a political party with the following attributes:

1. Limits in contributions to the party would apply according to the FEC. In 2013-2014, the party could collect total pledges from one individual in the amount of $32,400.
2. Contributions could be distributed to candidates either according to the candidate's wishes, or using a default priority: 
• The Primary authorized campaign committee of a candidate ($5,000 House or $45,400 Senate)   
• The Leadership PAC established by a candidate (next $5,000)
• The political party associated with the candidate (any remaining contributions)

The proposed name of the party is ResultsUSA.

Technology

The big differences between this kind of operation and something like the DSCC or the NRSC are as follows:

1. Instead of collection donations, this operation would collect pledges.
2. This operation must provide support for citizens to associate pledges with results of their choosing.
3. Pledges would be collected and distributed upon getting specific results.

Arguments For

Citizen Alignment to Issues

This idea allows citizens to provide feedback to legislators on distinct issues. It also provides a way for citizens to reward a legislator who they might disagree with on some issues for working on those issues where there is agreement.  

Works within Current Laws

This idea does not require lobbying legislators to change the rules governing how they have to spend their time to keep their jobs. Thus, other reform efforts can continue in parallel.

Transparent Relationship between Legislation and Funding

With this idea, the relationship between a legislator's actions and the source of his funding can be clear and public. Because the funding is only provided for results, legislators need not make promises that may be broken later with relatively little consequence to the legislator, which should diminish citizen frustration with legislators.

Arguments Against

Supporting Incumbency

Because this idea only provides incentives for incumbent legislators, and not other potential candidates for office, it gives incumbents an advantage. However, I feel that the knowledge gained by a working legislator to provide results has value in making our democracy work and, as long as a legislator is doing the work, then they deserve the reward. This makes the job of legislating more similar to other types of work where people are paid for results. It also doesn't require a legislator to adopt a particular position if they feel the position is not aligned with their own moral, ethical or legal compass. It only provides a measurable incentive that can reflect a broader base of citizens than are currently being listened to in the fundraising phase of elections.

Financial Crisis 2000s: Reason Number 2

In a previous post on this blog, the first reason for the financial crisis was discussed: housing prices don't always go up, and lots of people bought houses assuming that they could re-finance their mortgages when housing prices go up.

Financial service companies, such as Goldman-Sachs, created a new way to earn money from mortgages. They figured out how to buy a bunch of mortgages and then create new bonds whose interest and principal were paid by those mortgages. Each new bond was rated based on the likelihood that interest and principal payments could be collected from the mortgages backing that bond. If only a few mortgages backing a particular bond defaulted, then the bond could still be paid (though the financial service company that created the bond might make less money). Once each new bond was created, it could then be divided into shares and sold to multiple buyers, just like other types of bonds.

One of the complexities of these new bonds which were backed by a group of mortgages was that each mortgage could be allocated to several of the new bonds, spreading the risk of any particular mortgage defaulting among several bonds. However, this splitting makes it very hard to figure out who owns each mortgage. Suppose, for example, 10% of a mortgage allocated to each of 10 new bonds and those 10 new bonds each are split into 100 shares. If that mortgage defaults, there are 1000 owners of the 10 new bonds which are affected by that one default.

The company that created each new bond could buy an insurance policy for each bond in case to many of its underlying mortgages defaulted. The insurance policy could then be used to pay the holder of the new bond. Thus, for the company creating the new bond, there was no apparent risk.

Finally, a company (not necessarily one that created the bond) could make even more money by entering into a contract that behaves like insurance on a bond even if they didn't hold the bond. This kind of contract pays the company if the bond defaults. One insurance company, AIG, sold a lot of these contracts to a variety of companies.

When lots of mortgages started to fail, this started a whole series of failures in the bonds created by the financial services companies. When those bonds started to fail, anyone who had contracts that either insured against such failure or just paid off when the bonds failed, tried to collect on their contracts. So many of these contracts were with AIG that when all of the underlying bonds defaulted, AIG didn't have enough money to pay for these contracts. As a result, AIG went bankrupt. When AIG went bankrupt, nobody could figure out how much money these contracts were actually worth. Because of that uncertainty, banks stopped lending money to each other. And, when banks stopped lending to each other, they also stopped lending to the businesses that depend on them, freezing business activity and resulting in a financial crisis in 2008 that affected the entire economy.

Financial Crisis 2000s: The Basics of Financial Services

Financial Services companies are a fundamental part of a capitalist economy. These businesses make money by helping their clients (people and businesses) use money productively. There are lots of different kinds of financial services businesses, and they all work together, so it is important to understand what they each do so you can understand why they act the way they do and how the financial system is supposed to work. This won't tell you why the system failed and the crisis unfolded. For that, see the next post.

A bank is a common financial services company that many people interact with. You can deposit your money into a bank, the bank keeps a record of your money and you can get it back when you need it. The bank may also pay you a fee for keeping your money with them. That fee is called interest. The bank may also loan that money to someone else who needs it (collecting a larger fee for loaning the money).

Many large financial companies help their clients borrow money from one or more different clients. The legal framework for this is called a bond, and that bond can be bought and sold until the bond is paid off by whoever borrowed the money. This way of making money is called brokering a bond.

When a bond is created, part of the definition of that bond is how much extra money the borrower will pay for the right to borrow the money. That extra money is also called interest. A second way that financial service firms make money is by agreeing to collect the money that borrowers owe and distributing it to whomever loaned the money (and therefore, owns the right to get that money). This way of making money is called servicing a bond.

A third way that companies make money is by providing an expert opinion on how likely a borrower will fail to pay the interest and the original amount of the loan. This way of making money is called rating a bond. A rating company is profitable as long as the fees it collects to rate bonds is more than the cost to rate those bonds. One important fact in how a rating company makes money is that it is paid by a borrower to rate a bond. So, if you were a rating agency competing to rate lots of bonds, borrowers may be happier the higher you rate their bonds.

A fourth way that companies make money is by providing financial protection against lenders losing their money if a borrower can not pay back his bond. This kind of protection is one form of insurance. An insurance company is profitable as long as the fees it collects to provide this insurance is more than the amount it will have to pay out because borrowers can not pay back their bonds.

So, when everything goes well, all of these different kinds of financial services companies make money. The brokers collect brokerage fees; the rating agencies collect rating fees; the insurance companies collect enough in premiums so that when bonds aren't paid then the insurance companies have enough money to pay instead; the bond service companies are paid enough to take payments from borrowers and distribute the money to lenders. So what went wrong?

Financial Crisis 2000s: Reason number 1

Why did financial crisis of the 2000s occur?

One reason was that people forgot that housing prices do not always go up. Sometimes housing prices go down. Consider a person named Jose, who has a steady job, rents an apartment, but doesn't have any savings.

In the early 2000s, Jose can now get a mortgage that doesn't cost much more each month than his rent. He doesn't have to spend any money buy a house, which is good, because he doesn't have any savings. He just has to pay a small amount each month. He has to pay this amount each month for three years, but after that, he is going to have to pay more each month. At that point he is going to have a problem, because the new amount is more than he can afford.

But Jose doesn't need to worry. His home is probably going to be worth a lot more in three years (since prices for homes will probably keep going up), so he will be able to get a new mortgage with a new low rate that he can continue to afford. No one will have a problem loaning him money as long as his house is worth more than his mortgage.

It is three years later. Jose still makes about the same amount of money, but, home prices stopped rising a year ago. Jose has been making his payments diligently, but he doesn't have much more than he had three years ago because most of the money he gives the bank each month pays the bank. (That part of his payment is called interest.) Very little of the money he pays each month reduces the amount of money loaned to him. (That part of his payment is called the principal).

Now Jose has to pay more, but he can't afford it. So Jose tries to get a new mortgage. When he goes to get a new mortgage, he is told that his house isn't worth as much, so he can only get a mortgage for less money. But, if he gets a new mortgage (for less money), then he has to pay off his old mortgage (for more money), and where is he going to get the money to make up the difference? Jose struggles each month to pay his mortgage, and eventually he can't do it anymore. When he can no longer pay, he has defaulted on his mortgage, and he will lose his house.

In 2005, more than 1.5 million mortgages were created with low rates that were set to have higher rates in 2007 or 2008 according to a paper by the Federal Reserve.

That's why things started to go wrong in 2007 and 2008, but a new way that certain financial services companies tried to make money off of mortgages ended up making things a lot worse. But first, how are financial services companies supposed to work?