Wednesday, June 5, 2013

Creating Supply and Demand At the Expense of the Working Poor

Creating Supply and Demand At the Expense of the Working Poor

The North Carolina General Assembly is rushing to make the life of the working poor ever more difficult, and at the same time making sure that the State Pension plan is in a position to take full of advantage of the distress.  Having absorbed a 2% increase in the payroll tax, thanks to the Federal Government, the working poor are likely to see their sales tax burden rise in North Carolina.  While the State House and Senate have slightly different approaches to “tax reform”, both bills broaden the sales tax to cover a variety of services.[1]  The sales tax is, of course, about as regressive as a tax can get.

However, our esteemed legislature has a solution to the problem.  The State House is preparing to pass a slightly modified version of a personal loan bill already passed by the Senate.[2]  I wrote about the Senate bill in a post entitled “Our State Senate at Work:  Personal Loans for Hedge Funds [May 5, 2013].”  The bill increases the maximum size of personal loans as well as interest rate charged on these instruments. 

Design (2013)

The bill’s sponsors claim that the legislation will be good for North Carolina’s economy.  Really?  They also argue that the loan industry hasn’t been allowed a rate increase in a long time.[3]  The industry, which mainly consists of banks like BB&T hiding behind subsidiaries, can borrow money at ridiculously low interest rates.  As a result, their spread (what they charge customers versus what they pay to borrow money) is extremely wide.

The banking industry owes the General Assembly a series of big thank yous.  First, their corporate rate is going to go down(6.9% to 5.4%).  Second, banking executives will see their personal tax rate cut (7.75% to 5.9%).  Third, the tax bill will drive up loan demand because the working poor will have even less money.   Fourth, the personal loan bill will allow for bigger loans at higher interest rates for longer periods of time.

Of course, the banks aren’t going to want to hold onto these loans, so they’ll be selling them to hedge funds (a process known as securitization).  When the loans are first made, they’ll wind up in the hands of credit hedge funds, and when they inevitably start to go bad, they’ll be acquired by distressed hedge funds.  Fortunately, the House Committee on State Personnel is likely to advance the State Treasurer’s proposal to increase the alternative investment authority of the State pension plan.[4]  Thus, the pension plan will be in a good position to hire more hedge managers to hoover up the loans made to the working poor. 

Indubitably, the North Carolina pension plan won’t limit its acquisition of personal loans to North Carolina.  Their hedge fund managers will want to achieve a degree of diversity by investing in these types of securities all over the country.  Meanwhile, public pension plans in the rest of the country will take up their share of personal loans as they also rush headlong into alternative investments.   The personal loan machine will be well greased.

While elected officials exploit the working poor (some of whom are undoubtedly beneficiaries of the pension plan), the rest of us can enjoy our summer.  Most of us will be looking forward lower income tax rates, while the bankers dream of bigger bonuses, and the hedge fund managers salivate at the chance to manage a bigger piece of our pension plan. 

[1] Without debate or discussion, the State House restored unlimited deductions for mortgage interest, property taxes and charitable deductions, which will cost $500 million. The chief beneficiaries of this largesse are the wealthy.  In total the tax reform bill costs $1.5 billion that will have to come out of state expenditures in the coming years.  See,
[3] I’m a bit surprise that Attorney General Roy Cooper is the only member of the Council of State opposing this bill.
[4] SB 558, Treasurer's Investments

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