The Supreme Court Rules on Obamacare

In a 5-4 decision, the U.S. Supreme Court upheld the constitutionality of Obamacare (the Patient Protection and Affordable Care Act).  Lawyers, politicians, journalists and citizens are scouring the judicial rulings to understand its implications.  The law is exceptionally complex, so it will take time fully comprehend the ramifications of the ruling.

Here are a couple of the most significant elements of the Court’s ruling.

  • The penalty for failing to purchase health insurance is equivalent to a tax, which Congress has the authority to assess.  Thus, the individual mandate is Constitutional.
  • Congress does not have the power under the Commerce Clause to force you to purchase insurance.
  • Congress can require states to increase their Medicaid roles and provide financial incentives to do so, but it can’t withhold all Medicaid funding if it doesn’t.  It seems confusing and contradictory and will likely lead to further litigation.

Here are a couple of quick thoughts and observations.

  • The logic of the Court regarding the individual mandate was interesting.  Apparently, Congress can’t force you to purchase something, but they can tax or penalize you if you don’t.
  • The Medicaid issue is one of the most unclear parts of the ruling.  Unlike the individual mandate, it seems Congress can require the states to increase their Medicaid roles, but can’t penalize them if they don’t.  The issue hinges on state sovereignty, and it will be interesting to see how this plays out, especially since several states have already passed legislation opting out of Obamacare or the individual mandate.
  • The split ruling was no surprise, but it was a shock that Chief Justice John Roberts upheld the constitutionality and Justice Anthony Kennedy did not.  The unpredictability of judges and juries is what’s often referred to as the hazards of litigation.  No matter how strong you think your case is, a judge or jury may see it differently.

Today’s ruling by the Supreme Court isn’t going to end the discussions or fights over Obamacare.  There is still a lot more to come.

I welcome your comments and thoughts regarding the Supreme Court decision.  Click here if you would like to take a quick poll on whether you agree or disagree.

Is The Fed Giving a Pass on Sovereign Debt?

Part of the role of the Federal Reserve (the Fed) is to provide oversight to their member banks.  Approximately one-third of all U.S. commercial banks are members of the Federal Reserve.  All national banks are required to be members, and certain state chartered banks can choose to become a member.

Fed oversight involves a variety of bank operations.  Recently, the Fed conducted stress tests of the large national banks.  The purpose was to assess the strength of the bank and their ability to withstand another major economic calamity, like what happened throughout 2008.  One of their goals is preventing any bank from becoming “too big to fail.”

Bank capital is one of the measures regulators use to measure bank strength and stability.  Bank capital requirements are intended to guarantee a bank is able to withstand certain losses in its investment and loan portfolio and still meet the withdrawal demands of its depositors.

The following article describes a Citigroup analysis which discovered a recent trend in the U.S. and Europe regarding bank capital requirements and sovereign debt.  The Citigroup study revealed that bank regulators at the Fed and their European counterparts were not counting sovereign debt as part of the bank capital requirements.  The Citigroup analysts concluded the primary reason for excluding the sovereign debt was to help guarantee a market for sovereign bonds.

The United States and European countries are currently experiencing huge budget deficits.  In order to keep their respective governments operating, the nations’ treasuries and central banks are issuing new government bonds on a daily basis.  Thus, there is a constant need for someone to purchase these bonds.  If the market for a particular nation’s bond were to disappear, catastrophe would quickly follow.  Consider what would happen in the U.S. if investors stopped buying the additional $100 billion of new bonds it takes to keep the U.S. government operating each month.

Just imagine what would happen to inflation and the U.S. economy if investors are reluctant to purchase U.S. Treasuries.  You only have to look at the current problems in Europe.  Spanish 10-year bonds issued this past week carried an interest rate in excess of 6% while 10-year U.S. Treasuries were selling around 1.75%.  If the U.S. had to pay interest on our $15.8 trillion debt at a 6% rate, the annual interest cost would be near $1 trillion.  Think that might negatively impact the economy?

The Fed and European Central Bank are largely responsible for the monetary policy of their respective nations.  Interest rates and inflation are critical factors affecting monetary policy and economic results.  Consequently, you can see the vested interest the Federal Reserve and European Central Bank have in making sure there is a steady market for sovereign debt.   As a result, it appears these institutions are willing to give favorable treatment to sovereign debt when measuring bank capital.

I’m not implying there is collusion amongst the bankers.  Contrary to what some people believe, I don’t there is some grand conspiracy.  With a few exceptions, most of the people involved are honest people doing their best in a very difficult economic and political environment.  Central bankers are given tremendous responsibility for a nation’s economic health, yet they are seldom the people making important decisions on taxes, spending and debt, which greatly impact the economy.

My primary purpose in writing this article is sharing information.  I haven’t seen many articles addressing this topic, so I thought it was worth discussing.  Additionally, I think it’s another indication of the long-term problems of deficit spending and huge national debt.   Without realizing it, policy makers can make poor decisions in order to encourage people to buy sovereign debt, because it will be catastrophic if it ever stops.  It’s like a house of cards that’s growing and requires more effort to keep it from collapsing.

Time will tell, but it seems like exempting sovereign debt from bank capital requirements might be one of those decisions.

The Mortgage Mess: It’s Still Messy

Even though the U.S. economy officially came out of recession in mid-2009, do you wonder why it doesn’t feel that way?  There may be a lot of reasons, but I think the continued turmoil of the residential real estate market is one of the key factors.

The housing market and mortgage industry may not be as messy as it was in 2008 and 2009, but it’s still messy.  TARP, HAMP and other government policies and programs may have stabilized the banking system and the financial markets, but the financial situation of many homeowners hasn’t improved much in the past five years… and for many, it’s gotten worse.

As this article cites, Zillow estimates approximately 16 million (one-third of all U.S. homeowners) owe more than their homes are worth (a.k.a. underwater).   It’s quite discouraging to think that after years of slugging through this challenging economy, you might be further behind today than you were five years ago.  Some areas of the country have definitely been hit much harder than others, but on a national basis, if you have positive equity in your house, one of your neighbors does not.  In Las Vegas, where I live, even though thousands of people have lost their homes to foreclosure and values have decreased by approximately 50% from the peak, a whopping seven out of ten homeowners are still underwater.

There are significant economic implications for having so many homes underwater.  It impacts people’s ability to relocate, puts them in a perilous financial position if their income decreases, limits their ability to refinance, and pares back their spending.  However, I think the most significant factor is the psychological effect it has on their outlook about the economy, the nation and their future.

For many people, their homes represent a significant portion of their wealth.  They may have spent years saving up for a downpayment or building the equity in their home, and it’s frustrating to see it wiped out in a matter of months.  Granted there were some people who bought homes they shouldn’t have, took out mortgages they couldn’t afford or treated their home like a personal piggy bank.  However, for millions of Americans, they simply bought at the wrong time and their homes lost value through no fault of their own.

The psychological effects of the mortgage mess should not be underestimated.  Owning a home is considered to be part of the American Dream.  It’s one of the reasons home ownership is much higher in the U.S. than in many other industrialized nations.  Sadly, the dream of millions of Americans turned into a nightmare.  Consequently, it’s only logical for people to feel apprehensive and fearful of the economy and the future, when something they thought was a sure thing (owning their home), turned out to be much more uncertain than they could have imagined.  Furthermore, home ownership is a very personal matter.  It’s unlike any other investment, because it’s the place where your family connects and memories are made.

Unlike the empty promises politicians often make, I won’t say there is an easy solution to the mess, nor do I think it’s likely to get cleaned up any time soon.  If there were an easy solution, it would have already been done by now.  Therefore, I think it’s going to be a long and arduous process to reduce the number of homeowners who are underwater.

Consequently, I don’t think we’ll see a resurgence in optimism about the economy, until the number of underwater homes is dramatically reduced.  It’s hard to feel positive about the future when you feel insecure or afraid of losing the place where you live and raise your family.

Family, Faith and Finances

Had a great conversation with Rob Ekno about faith, family and finances on Rob’s radio program, In Your Face, which can be heard on Indie104.com.  Click here if you would like to listen to the conversation.

Can credit card debt management help you to save dollars?

People in this part of the world are used to using credit cards rather than cash for their day-to-day expenses. The proportion of credit use is far more than their retirement savings. Credit cards have given them immense portability and convenience to make frequent purchases. However, this has given rise to several financial diseases which is affecting the fragile US economy. One of the major setbacks is the accumulation of credit card debt. This makes it imperative for the people to know the ways of credit card debt management to avoid getting into a financially sticky situation.

The ways of credit card management

Here are few methods of reduce credit card debt as well as save dollars:

  1. Transfer your credit card balances – This means transferring all your multiple credit card balances into a zero interest credit card. This may be for a year or so as offered by the credit card company. This creates a great opportunity to clear out all your outstanding bills within the promotional period. In this process, you’ll be paying for the principal balance and not for the interest. However, there is a transfer fee for this procedure which hovers around 3-5% of the balance amount. By this method, you’ll save a lot of money even after paying the transfer fee.
  1. Create a budget: Start developing the habit of spending less. Vow to start living a frugal life. This is because the more you spend on useless things, the less you save. Therefore, to fight back such irresponsible behavior, plan a budget that will be comfortable for you to follow. Keep in mind that this budget should not become a burden for you; instead it should motivate you to spend smartly and save money for the rainy day. Use those savings towards debt repayment and you’ll see a remarkable decrease in the number of outstanding bills.
  1. Lower your interest rates: This is one of the most effective steps in the credit card debt management plan. Be vigilant and do your market research to learn about the recent market offers which various creditors are making. After a getting a thorough knowledge of the market offers, contact your current creditors. Request them to lower your card’s interest rate. The creditors will welcome this sort of gesture from you and will readily oblige. If you’ve been a good customer who has been punctual in making the payments, then the creditors will surely consider your request.

During the negotiation phase with your creditors, tell them that you are considering balance transfer as an alternative to lowering the interest rate. This will give them the necessary nudge to accept your terms.

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This article was written by Grace Ruskin.  Grace is a financial writer and is associated with DebtCC Community.

Is the Unemployment Rate Misleading?

The April employment statistics were released by the Bureau of Labor Statistics (BLS) last Friday.  The official U.S. unemployment rate for April 2012 dropped to 8.1%.  It hasn’t been this low since January 2009.

According to the BLS, 115,000 new jobs were added to the workforce in April.  Certainly that is good news for the 115,000 who are now employed, and after three years of high unemployment, it’s encouraging to see the rate dropping.

The report has been out for a week, which has given people more opportunity to dig into the numbers.  Unfortunately, the headline is much more encouraging than some of the supporting data.  Here are a few facts to consider

  • 310,000 people left the workforce in April (that’s nearly 3 times as many jobs which were created).  People who are no longer looking for a job contributed more to the reduction in the unemployment rate, than those who obtained a new job.
  • There are 968,000 people looking for work, who are classified as “discouraged.”
  • 7.8 million people are working part-time for economic reasons.
  • 5.1 million people have been unemployed for more than 39 weeks.
  • 324,000 women dropped out of the labor force in the past two months.

So is the unemployment rate misleading?  Personally, I don’t think it’s misleading, but you also shouldn’t take it at face value.  A deeper understanding of the supporting data will provide a better picture of what’s really happening.

Realize the unemployment rate is only an estimate.  No one knows for sure how many people are truly unemployed and looking for work.  For example, many people think it’s misleading to exclude those who have given up looking for work.  While that may be the case for discouraged and frustrated people who can’t find a job, what about those who retire, start their own business or decide to stay home to take care of a family member?  Those people may have no intentions of re-entering the workforce, at least in the near term, so it would also be misleading to count them as unemployed.  Thus, the quandary of who should be classified as unemployed.

I don’t think the unemployment rate is misleading, unless the BLS changes its data collection and classification measures, which happened at the beginning of 2011 (read more here).  Since the BLS hasn’t changed their methodology recently, the drop in the unemployment rate can be considered legitimate.  However, you should investigate some of the supporting data, and draw your own conclusions about the U.S. employment situation.

Since it’s an election year, expect politicians and political pundits to quote the rate as a measure of their job performance or some other elected official and make their political argument for supporting a particular candidate.  Don’t be misled by a headline or political statement, since they rarely tell the whole story.  The unemployment rate may not be misleading, but other people can be.

Social Security Groundhog Day

You may have seen the movie “Groundhog Day” which was released in 1993.  In the movie, Bill Murray plays weatherman Phil Connors who was sent to Punxsutawney , PA to cover Groundhog Day, only to find himself repeating the same day over and over again.  No matter what he does, he can’t seem to escape Groundhog Day.

The annual report from the Trustees of the Social Security Administration seems like its own version of Groundhog Day.  Every report seems to be a repeat of the prior one.  The reports warn of the coming insolvency of Social Security and Medicare, but it’s projected to be far enough into the future, that no one seems to worry too much.

The 2012 report estimates the Social Security system will become insolvent in 2033, three years earlier than what was predicted a year ago.  The fiscal status of Social Security has been known for years, yet Congress and President Obama reduced the employee’s contribution rate to the Social Security system from 6.2% to 4.2% for 2011 and 2012.  The rate reduction was intended to stimulate the economy, and they argued it would have no long-term impact on the solvency of Social Security.  Anyone with a rudimentary understanding of economics and finance could tell you paying less taxes into a system that is already paying out more than it receives, will have a negative effect.  Only Washington politicians are surprised by the updated figures, or at least act surprised.

The staunch defenders of this ridiculous argument also contend the system is solvent for more than the next two decades.  They point to the trillions of dollars in the Social Security Trust Fund as the saving grace to the system.  You can read this article to learn the fallacy of this belief.

There are a couple of other facts in the report which might cause concern.  In 2011, the government collected $691 billion of Social Security Taxes and paid out $736 billion in benefits.  It appears there was a $45 billion shortage in 2011, but there wasn’t.   The Social Security Administration collected $111 billion of interest on its IOU’s from the US government, so it reported a surplus of $66 billion, rather than a deficit.  So where did the $111 billion of interest come from?  It’s part of the $1 trillion of additional debt the U.S. Treasury issued over the past year.

It’s easy to get lost and confused by the Federal government’s accounting methods, which may be intentionally arcane.  So here is the bottom line… call it what you want, but the U.S. government borrowed an additional $45 billion to pay out Social Security benefits in 2011.  If you read the report and analyze the projections, you’ll see this number is only going to grow exponentially over the next two decades.

What is it going to take to change the situation?  I really don’t know if we’ll ever realize what’s happening as long as the government keeps sending out checks.  But what happens if they stop?  It’s unlikely to occur, at least for a long time, but what would have happened if the U.S. Treasury wasn’t able to borrow the additional $45 billion? Since there are no real assets in the Social Security Trust Fund, $45 billion in checks would not have been sent.

So in essence, it’s like we’re stuck in our own Social Security Groundhog Day, but there is a difference between us and the character Phil Connors; Phil Connors recognized he was stuck and tried to change it.  Sadly, most of us don’t believe we’re living our very own Groundhog Day.