Thursday, November 20, 2014

Cicero and Buckley to the Rescue

Blogging has had to take a back seat to the law, which (as they say truly) is a jealous mistress.

Nevertheless, there has not been all that much I care to blog about. The news is almost uniformly desultory, uninspiring and (dare I say) lacking in hope. The lawlessness at the very top has infected our institutions and governments down to the lowest level -- and they all seem to be getting away with it! What is the point of complaining if the checks and balances we used to be able to rely upon are out of order and dysfunctional?

[UPDATE 11/21/2014: Birds of a feather ....]

A few bright rays emerge from the Mordor-like fog. Ted Cruz quotes Cicero on the floor of the Senate, indicting Barack Obama as Marcus Tullius once long ago did Catiline. And former Senator and retired federal judge James Buckley has a new book forthcoming, that promises a straightforward way out of a lot of the mess. Called Saving Congress from Itself, its recipe is simple: put an end to every kind of transfer payment from Congress to the States. You may preorder it here (or get the Kindle version if you would like to start reading it now), and read more about it here.

May God save the United States of America.

Monday, November 3, 2014

SCOTUS Denies ECUSA's Bid for Review of Ft. Worth and San Angelo Decisions

Today the Supreme Court of the United States issued its order denying (without opinion) review ("certiorari") of the decisions rendered last September by the Supreme Court of Texas in the Fort Worth and San Angelo cases.

The order was expected, because neither decision by the Texas Supreme Court was final. The U. S. Supreme Court almost never agrees to review lower court decisions until they are final. In these two cases, the Fort Worth matter was sent back to Judge Chupp's court for a trial, and the Church of the Good Shepherd case was likewise sent back to the trial court in San Angelo for further proceedings.

The action by SCOTUS now frees both of those cases to move ahead.

In Fort Worth, Bishop Iker's attorneys have filed a motion for summary judgment which is scheduled for a hearing in December. Given the decision by the Texas Supreme Court, the only question remaining for the trial court to decide is whether or not ECUSA managed to create a valid trust in the Diocese's property which the Diocese did not revoke when it decided to withdraw in 2008. In Texas all trusts are deemed to be fully revocable at any time, unless the language creating the trust states otherwise.

ECUSA earlier claimed that its Dennis Canon imposed a trust upon each parish property whose title was held by Bishop Iker's corporate Diocese of Fort Worth, as well as on the Diocese's own property. But the Texas Supreme Court ruled that any Dennis Canon trust was not expressly irrevocable, and so the withdrawal of the Diocese and its associated parishes from the Episcopal Church (USA) effectively revoked any such trust.

Given that ruling, therefore, the outcome of Bishop Iker's summary judgment motion should be a foregone conclusion: there are simply no disputed facts requiring a trial. ECUSA did not ever try to impose an irrevocable trust in so many words, and its arguments that irrevocability was implied in its Dennis Canon, or alternatively in its long-standing relationships with its dioceses, will not meet the requirements of Texas' trust statute.

Once the Texas District Court grants summary judgment, the rump Diocese and ECUSA will of course be able to appeal, and could try again to raise the same grounds they urged before SCOTUS -- only now with a final judgment behind them. But the odds of succeeding with any such appeal will be long indeed, given that the U.S. Supreme Court has now rejected petitions for review in four recent cases (Connecticut, Georgia, Virginia, and Texas).

The same result should obtain in the Good Shepherd case from San Angelo, involving the Diocese of Northwest Texas. That parish effectively revoked any trust established by ECUSA's Dennis Canon when it decided to withdraw from the Diocese, and there is no evidence of any other irrevocable trust ever imposed on its property.

In front of SCOTUS, ECUSA and the Diocese of Northwest Texas tried to argue that the Texas Supreme Court's decisions, which adopted the "neutral principles" approach endorsed in the 1979 decision of Jones v. Wolf, caught them by surprise. However, it has been 35 years since Jones v. Wolf was decided, and the overwhelming majority of State courts now follow that case in deciding religious property disputes.

ECUSA's petition also mounted a frontal attack on the (5-4) Jones decision and its endorsement of the "neutral principles" approach. The national Church contended that the sanctioning of that approach, by which the courts do not simply defer to its authority, but actually dig down and examine deeds, chains of title, and governing documents and rules, interfered with its "free exercise" of its religion under the First Amendment. (As though, one notes, the holding of property and wealth could ever be a religion -- nevertheless, if there were ever any American church to profess such a religion, it would certainly be ECUSA.)

Neither argument -- the attack on Jones, or the one from surprise -- carries much weight, and neither  persuaded the justices of SCOTUS (even though ECUSA had seen fit to hire a former U.S. Solicitor General, Neal Katyal, to write its petition to the Court). Intermediate Texas courts -- if not the Texas Supreme Court itself -- had been applying "neutral principles" for quite some time. Moreover, ECUSA itself admittedly tried to implement the Jones v. Wolf scheme by hurriedly enacting its Dennis Canon within just a month or so of the decision. So its claim to have been taken by surprise rang rather hollow. And in passing its Dennis Canon, it neglected to include the language which Texas law requires about irrevocability (as well as ignoring certain other points in the Jones majority opinion -- see this post for details).

While we await the decision of the Illinois Supreme Court as to whether it will agree to review the Diocese of Quincy decision, it could happen, therefore, that Texas will become the first State after South Carolina to make the Dennis Canon absolutely a dead letter there. The trial judge in South Carolina is also due to render a decision in a few weeks -- which will not turn upon the Dennis Canon as much as it will involve issues of religious corporation law.

I will, as always, provide you with commentary and analysis as soon as any of these other proceedings are decided. On a side note: this Wednesday the Justices of SCOTUS will hear oral arguments in this unusual fish tale of a case. Stay tuned.

Thursday, October 23, 2014

Thoughts on Listening to Peter Schiff

Peter Schiff spoke today at a conference I am attending. I have heard him before, and also have read his recent book, so it is not as though he said anything that startled me -- but he did get me thinking.

His main point was simple: the Fed has a tiger by the tail, and cannot let it loose without disastrous consequences for America and for the world. The Fed has reached this point because it unwisely chose, back in 2008, to use its power to print money out of thin air to prevent the collapse and bankruptcy of America's biggest financial institutions.

The Fed bailed out those institutions by purchasing their worthless mortgage-backed securities and other derivative instruments. This put worthless paper on the asset side of the Fed's balance sheet, but allowed the financial institutions to show actual Federal Reserve notes as assets in that paper's place. The Fed could withstand the deterioration of its balance sheet because it is the Fed -- with an unlimited checking account, it literally can never go broke, no matter how worthless are its assets.

From buying worthless paper to buying Treasury bills and notes was a simple next step, once the Government started spending more money on bailouts than it was taking in from taxpayers. The Fed's then President, Ben Bernanke, called this "quantitative easing", or "QE" for short, but in reality that was just a circumlocution for "printing money." When the Fed buys T-bills directly from the Treasury (instead of going through the usual bond brokers), for example, here's how it works.

Every week, the Treasury auctions off a mixture of bills, notes and bonds (bills are short-term, bonds are long-term, and notes are in between) to meet the cash flow needs of the U.S. government. Normally what the Treasury has to offer is picked up by the bond market and by foreign governments (central banks) wishing to acquire dollar reserves.

But when the government runs a huge deficit, as it has during the latter Bush years and all of Obama's first and second terms, the Fed can step into the bond market to buy up any bills, notes or bonds that are not sold to dealers or central banks. By doing so, the Fed ensures that interest rates on the Treasury's borrowings remain stable in accordance with their maturity dates. (If, for example, the Treasury could not find a buyer for all of its long-term bonds at its offered rate of interest, it would have to raise the interest rate to find more buyers. But if the Fed steps in and buys what's left first, the Treasury does not have to offer higher rates -- it just pays the Fed the same rate it pays all the other buyers).

When the Fed buys, say, bonds from the U.S. Treasury, it simply credits the Treasury with cash from its bottomless checking account, and takes possession of the bonds. When the Treasury later buys back those bonds at maturity, as it must for every bond it issues, it has to pay the face amount of the bond plus the interest at the bond's stated rate. And to do so, it needs the required amount of cash in its accounts.

Now, think a minute: if the Fed buys $1 billion worth of 30-year bonds at 3% (say) interest per year, the Treasury is credited with $1 billion when it first sells them. But then it is has to pay the Fed $30 million each year in interest, for 30 years -- or a total of $900 million (almost as much as it borrowed in the first place). And when the bonds mature, it has to come up with another $1 billion to pay off the principal.

So by selling $1 billion of bonds to the Fed, the Treasury commits its budget to come up with a total of $1.9 billion over the next thirty years. And so it goes, week after week. As Sen Everett Dirksen once famously noted: "A billion here, a billion there, and pretty soon you're talking real money."

Now, here's the wrinkle: all interest the Treasury pays to the Fed gets turned over, at the end of each year to: (you guessed it) the Treasury! (The Fed simply deducts what it needs to erect and maintain all of its splendid marble buildings, and to pay all of its officers and staff the very best salaries and benefits.)

So it is not quite a merry-go-round, because of the Fed's needs for money to operate. Out of the $1.9 billion the Treasury pays to the Fed in my example, $1 billion (the principal) is a wash, and the Treasury might net, say, $870 million out of its original $900 million paid in interest. The figures don't matter as much as the fact: the Treasury still, after everything is said and done, has to come up with new money in order to clear its books with the Fed.

By using "quantitative easing" to help out the Treasury, therefore, the Fed is really simply delaying the ultimate day of reckoning. For if the Treasury did not have the Fed buying those bonds from it, it would have had to come up with a full $1.9 billion to pay them at maturity, instead of being able to use what the Fed returns to it each year.

The same result occurs in the end, however. As long as anyone keeps buying bills, notes and bonds from the Treasury, the Treasury has to come up with more cash to pay back the principal plus the stated interest.

The Fed's QE to date has kept the interest rates the Treasury has to pay artificially low, because the Fed always buys whatever bonds are left without demanding higher rates. But how long can the game continue?

And that is just what Peter Schiff points out. The Fed has thus far "phased out" QE three times. Each time, it said (at first) that there would be no more QE, but then as interest rates began to threaten to rise, and the stock market threatened to panic, the Fed would step in again and announce "another round" of quantitative easing. Thus we have had QE#1, QE#2 and QE#3 so far. The Fed is now almost done with the process of phasing out QE#3, as it has been buying less and less bonds each passing month.

And how has the stock market taken this? Exactly as it always has -- with panic drops and uncertain swings because of the inability to predict how high interest rates will have to rise for the Treasury to sell all of its bonds without the Fed being the buyer of last resort. And if bond interest rates rise, the stock market will really plummet.

Moreover, if interest rates rise, the Treasury will have to come up with ever more and more cash to pay the interest on each new bill, note or bond it issues. Since it cannot print money itself, the Treasury has to go into the market to borrow that extra cash. And the more it has to borrow, the more the interest rates will rise -- it is a vicious cycle.

Mr. Schiff therefore predicts the Fed will soon be forced to announce QE#4. Most agree with him, because the alternative is to let the Government default on its debt, which would lead to institutional and commercial failures of all kinds, all around the world.

But QE#4 will at best be a temporary solution. How long will the Fed be able to continue to tell gullible markets that each new phase of quantitative easing will be only "temporary"? The fact is that, having started down the QE road, the Fed cannot reverse course permanently without disastrous consequences for everyone.

And once the Fed's game is seen to be what it is -- the repeated printing of paper money with nothing to back it except the promise to print more paper money as needed -- the notion of inflation will begin to get a toehold on the economy. Would you accept the promise to be paid in a year with paper that will be worth less than what you turn over to your borrower today? Not without demanding a suitably high rate of interest, you wouldn't. And so the Fed's policies inevitably will lead to a war between the demand for more interest to compensate for the shrinking value of paper money caused by the printing of ever more and more paper money to pay that interest.

This is all so simple, yet very few financial advisers are talking about it besides Peter Schiff. The process embarked upon by the Fed can lead to no good, no matter how things turn out. The government must stop borrowing what it can never pay back, or else it must either default on that debt (which will lead to massive deflation on a scale never before seen), or it must print so much worthless paper that hyperinflation ensues.

The choice between hyperinflation and super-deflation is truly a Hobson's choice, but that is where the government's policies, and the Fed's willingness to abet them, have led us. Of course, if a new world war breaks out, then all bets are off until after it is over -- but who wants the devastation of a world war just to postpone the inevitable devastation of hyperinflation or super-deflation?

This may not be original with him, but Peter Schiff has a striking analogy to portray what the Fed is now doing. "It's as though," he says, "a pilot were to take credit for successfully getting a plane from A to B without being able to land it. He has all sorts of excuses for why he can't land: the weather is bad, the airport isn't properly equipped, the plane's instruments aren't working right. But the truth is he does not know how to land the plane -- he just knows how to make excuses. And eventually the plane is going to run out of fuel -- and crash."

The Fed is that pilot, and we are all passengers on the plane. Better start praying for a miracle, because neither the Fed nor the current government has a clue as to how to get out of this predicament. They know only how to keep doing what got us to this point in the first place. And they keep doing it, and keep doing it ...

(Readers who would like more background as to how we got here may want to read the series of posts linked at this page.)