November 10, 2019

by Steve Stofka

All states require that automobiles be insured. Would you support a state law that stipulated that you had to provide proof of insurance in order to start your car? It might be a card reader or a fingerprint reader that interfaces with an electronic interlock system. An insurance card might be a small chip on a key ring. Insert the chip, the car verifies the insurance and is ready to start.

 Some states already mandate such interlock systems called IIDs for drivers convicted of DUI and DWI offenses (McCurley, n.d.). In their implementation just laws can become unjust. A New York Times investigation recently revealed that the breathalyzers used by police are unreliable (Cowley, Silver-Greenberg, 2019). Thousands of cases have been thrown out because the machines were not calibrated and gave high readings. Some states have ignored or tried to cover up the inaccuracy of their tests.

The federal government has mandatory Social Security payments that we must pay when we work. States have mandatory sales taxes that must be paid when buying many goods and some services. Mandates are part of our everyday lives and yet people vociferously protested the Obamacare mandate to buy health insurance. Why? Working and buying things are activities that have some voluntary component. Obamacare’s mandate was on the activity of breathing, on being alive.

Some people resent jury duty for the same reason. People are called every few years where I live. For those who are unemployed, the reimbursement is small (NCSC, n.d.). In some states, jurors are paid about the same as convict labor. However, there is some choice. I can choose to move out of the district and avoid the frequency of being called. On the other hand, how do I avoid an Obamacare mandate on simply being alive?

Should young people be subject to mandatory national service of some kind? When I hear that suggestion, it usually comes from an older person. Younger people, who don’t make as much money earlier in their careers, will vote for mandates that older people making more money should pay higher taxes so that the government will be able to afford more services for younger people.

Retired people want mandates for those who are working to pay more money into the Social Security system so that retirees can be assured of getting their full pension checks. It is part of the human condition that we like mandates imposed on other people more than we like them imposed on us. We want more prisons but not in my neighborhood because that might drive property values down. We want more housing for the homeless but not in my neighborhood. I want to be charitable, but I have an obligation to protect my property values more than the homeless. We want more money for the poor and unfortunate but don’t want to pay higher taxes because we’re already taxed enough. Can’t the government get the taxes from the rich guys and leave me alone? Elizabeth Warren thinks so.

This year’s election was held last Tuesday and now we have a year of election festivities before the Presidential election in 2020. Among the Democratic contenders, Ms. Warren speaks with greater ease and confidence on the stage. She has policies and plans to pay for those policies and it’s the rich guys who are going to pay. I like that. I pay enough already. Ms. Warren fights for middle class families but she fights just as hard for the idea of big beneficial government, a variation of the philosopher king who rules his people with temperance, strength and charity.

President Trump is now the spokesman and leader of the Radical Right. Mr. Trump believes he is the philosopher king, immune from all laws while he is president. So his lawyer argued last week to a dumbfounded courtroom. Republicans believe in a philosopher king of another sort – the free market. This king rules with the wisdom of crowds, the temperance of competing interests and the strength of competition. That’s the idea at least. In practice the free market is not free. Politicians pass legislation to protect market interests from competition both domestic and foreign.

This coming election will feature candidates who have captured the extremes of either party yet claim that they represent the center. It is the other side that is radical. That’s the rhetoric we have been hearing from a radical Republican, leader Kevin McCarthy. “We’re normal. They’re crazy.” Welcome to the crazy ward at Congress, whose job approval ratings are in the low 20s (Real Clear Politics, n.d.). Why is that? Well, it’s because those crazy Democrats are trying to impeach our President and not getting anything else done. That’s one sentiment. However, Congressional approval ratings have improved since the Republicans held the House last year.

Every time I hear a politician say the phrase “the American people,” I know that I am about to hear utter nonsense following that phrase. They often profess to know and speak the will of the American people but few of them have the slightest clue or their job approval ratings wouldn’t be so low.

230 years ago, a large multinational company like the East India Company needed a powerful government like England to protect its interests and profits. This country fought a war against England to check the dominance of the East India Company. Today, Republicans openly support corporate interests over much else. Democrats say they are for the little guy, but they supported large financial institutions, big corporations and big unions during the financial crisis. They believe in big government; they need the support of big corporations to enact their big plans with their big government. The Senate minority leader, Chuck Schumer, hails from New York City and helped soften laws and regulations designed to curb Wall Street’s abuses.

The Radical Republicans believe in a form of anarchy that they call small government. Small, however, does not include military spending or subsidies to their friends and constituents. When Republicans spend big, it’s small government. When Democrats spend big, it’s socialism. We’ll get plenty of this nonsense in the coming year.

 The Radical Democrats keep insisting that this country is a democracy. No, it’s not. Look it up. The country was specifically founded on the principle that this was not a democracy. It was a republic. Shortly after the Constitution was written, the French Revolution vindicated the founders’ antipathy toward democracy. Democracies lead to either pandemonium or paralysis. In a democracy, the majority rule and inevitably enslave the minority. James Madison pointed to the institution of slavery to prove his case (Feldman, 2017). A republic of competing sectional interests would provide a better balance between warring factions within the new nation.

The Radical Republicans run against wind and solar subsidies because they are serving the interests of the oil and gas industries who have received direct and indirect subsidies for more than a hundred years. Businesses which dominate market share in an industry generously support their friends in Congress. There was no free market 200 years ago, there is no free market today and there won’t be one 150 years ago.

Adam Smith published the Wealth of Nations the same year as the signing of the Declaration of Independence. The free market was an ideal that Adam Smith proposed after detailing the corruption that people and governments bring to any market. He didn’t like the idea of a free market but saw no better alternative. In his day, mercantilism dominated the economic and political system. Governments competed to protect the industries in their country against competitive pressures from those same industries in other countries.

These are our choices for next election: two philosopher kings. The big benefits of a strong, wise and caring government vs a market that can be efficient, just and cruel, that rewards effort and innovation but leaves many of the unprotected in despair. Those who don’t like mandates will vote for the market because they reason that markets can’t pass laws and mandates. Not directly, that’s true. However, dominant businesses try to get government to pass mandates which protect their profits. In either case, we are going to get mandates.


Works Cited:

Cowley, S. and Silver-Greenberg, J. (2019, November 3). These Machines Can Put You in Jail. Don’t Trust Them. N.Y. Times. Retrieved from

Feldman, N. (2017). Three Lives of James Madison: genius, partisan, president. [Print]. New York: Random House.

McCurley, J. (n.d.). Ignition Interlock Devices: Costs and Requirements. [Web page]. Retrieved from

National Center for State Courts (NCSC). (n.d.). Jury Management: State Links. [Web page]. Retrieved from

Photo by Willian B. on Unsplash

Real Clear Politics. (n.d.). Congressional Job Approval. [Web page]. Retrieved from

What Hides Below

November 3, 2019

by Steve Stofka

Think the days of packaging subprime loans together is gone? Nope. They are called asset-backed securities, or ABS. The 60-day delinquency rate on subprime loans is now higher than it was during the financial crisis (Richter, 2019). The dollar amount of 90-day delinquencies has grown more than 60% above the high delinquencies during the financial crisis. Recently Santander U.S.A. was called out for the poor underwriting practices of its subprime loans. In this case, Santander must buy back loans that go into early default because of fraud and poor standards.

Credit card delinquencies issued by small banks have more than doubled since Mr. Trump took office (Boston, Rembert, 2019). Did a more relaxed regulatory environment encourage these banks to take on more risk to boost profits?

In the last century, geologists have developed new measuring and analytical tools to better understand the structure of the Earth. GPS technology can now detect movements of the earth’s crust as little as ¼” (USGS, n.d.). The same can’t be said for human foolishness. During the past half-century, financial analysts and academics have developed an amazing array of statistical and analytical tools to understand and measure risk. Despite that sophistication, the Federal Reserve has mismanaged interest rate policy (Hartcher, 2006). Government regulators have misunderstood risks in the banking and securities markets.

Earthquake threats happen deep underground. I suspect that the same is true about financial risks. To gain a competitive advantage, companies try to hide their strategies and the details of their financial products. On the last pages of quarterly and annual reports, we find a lot of mysterious details in the notes. After the Arthur Anderson accounting scandal in 2002, the Sarbanes-Oxley Act was passed to bring greater transparency and accountability to financial reporting. Six years later, the financial crisis demonstrated that there was a lot of risk still hiding in dark corners.

The financial crisis exposed a lot of malfeasance and foolishness. Some folks think that investors are now more alert. After the crisis, corporate board members and regulators are more active and aware of risk exposures. Are those risks behind us? I doubt it. Believing in the power of their risk models, underwriters, bankers and traders become victims of their own overconfidence (Lewis, 2015).

Each decade California experiences a quake that is more than 6.0 on the Richter scale. Following the quake come the warnings that California will split away from the North American continent. Still waiting. The recession was due to arrive eight years ago. We did experience a mini-recession in 2015-16, but it wasn’t labeled a recession. The slowdown wasn’t slow enough and long enough. Eventually we will have a recession, and all those people who predicted a recession in 2011 and subsequent years will claim they were right. In many areas of life, being right is all about timing. Few of us are that kind of right.

The data demonstrates the difficulty of financial fortune telling. The Callan Periodic Table of Investment Returns shows the returns and rank of ten asset classes over the past two decades (Callan, 2019). An asset class that does well one year doesn’t fare as well the following year. An investor who can read the past doesn’t need to read the future. Does an investor need to diversify among all ten asset classes?  Many investors can achieve some reasonable balance between risk and reward with four to six index funds and leave their ouija boards in the closet.



Boston, C. and Rembert, E. (2019, October 28). Consumer Cracks Emerge as Banks Say Everything Looks Fine. Bloomberg. [Web page]. Retrieved from

Callan. (2019). Periodic Table of Investment Returns. [Web page]. Retrieved from

Hartcher, P. (2006). Bubble man: Alan Greenspan & the missing 7 trillion dollars. New York: W.W. Norton & Co.

Lewis, M. (2015). The Big Short. New York: Penguin Books.

Richter, W. (2019, October 25, 2019). Subprime auto loans blow up. [Web page]. Retrieved from

Szeglat, M. (n.d.) Photo of lava flow at Kalapana, HI, U.S. [Photo]. Retrieved from

USGS. (n.d.). About GPS. [Web page]. Retrieved from