Hamilton And Sovereign Debt

Bastard_OrphanHow does a profane, hip-hop, hit of a show, and a chapter, dropped in the middle of a behemoth book on Alex Hamilton, by Ron Chernow capture the current zeitgeist, show us to treat our debt with sacred honor?

Hamilton, the musical by Lin-Manuel Miranda, swept through my household this Summer like a hurricane, buffeting us as if we lived in a forgotten corner of the Caribbean. While the beautiful nerds of my household joyfully sing about the Revolutionary War, I tackled Ron Chernow’s biography Alexander Hamilton, upon which Miranda based his amazing show. A story Chernow tells about national debt illustrates Hamilton’s particular genius.

Serving President George Washington as the first Treasury Secretary of the United States, when the new country flirted with financial ruin, every action Alexander Hamilton took carried particular weight. He faced a terrible choice.

Soldiers in the Revolutionary War had received state IOUs in return for their military service. Years after the end of fighting with the British, many of these debts remained unpaid. In addition, different states had repaid debts to different degrees. Virginia was nearly debt-free for example, while Massachusetts still owed tremendous amounts to soldiers.

Some believed this new federal government would not, and could not, pay off its debts to soldiers. Chernow writes that these debts traded at fifteen cents on the dollar as former soldiers sold early, in part because they needed the money, and in part because full payment seemed doubtful. Speculators bought the debt at extreme discounts, hoping to make money if the young government could restructure the debt somehow. At that price, even a settlement of thirty cents on the dollar offered a financial windfall to debt-buyers.

What kind of deal would Hamilton, as Treasury Secretary, offer on the debt? Should he restructure it and offer a lesser amount? Should he seek a way to punish the speculators? Could he track down the former soldiers who had sold their IOUs, to compensate them, instead of the investors? Wait for it…

Let’s pause for a moment and really wallow in the awful optics and politics of Hamilton’s choice. Nobody deserved more respect than the first patriots who suffered and died under Washington, when his “ragtag volunteer army in need of a shower” defeated a global Superpower, in Miranda’s purposefully anachronistic phrasing. But most of the government debt issued to soldiers wasn’t owed to them anymore, but rather to buyers of their debt. These were some of the least sympathetic people. You know, Wall Street-type people.

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Jefferson and Madison

The most powerful member of Congress, James Madison, and the Secretary of State, Thomas Jefferson, vehemently opposed rewarding the speculators. As Virginians, they also argued that consolidating the debts at the federal level would reward less prudent states at their state’s expense.

Picture, as well, Hamilton’s childhood as a near-destitute orphan in the Caribbean. He was not a natural friend of Wall Street. He’d served as a captain of an artillery company under fire in the Battery in Manhattan and the Battle of Kips Bay; he had personally led a bayonet charge on an entrenched position of Redcoats at Yorktown. Was Hamilton prepared to honor commitments that would enrich these greedy speculators who bought government debt at pennies on the dollar from his fellow soldiers? Wait for it…

He was, and he did. He consolidated the states’ debt into federal debt. On his first and second days after confirmation as Treasury Secretary in 1789, he took out fresh federal loans from the Bank of New York and The Bank of North America in Philadelphia.

Hamilton understood the value of communicating a policy of honoring one’s debts, a policy that strengthens the nation. “In nothing are appearances of greater moment than in whatever regards credit. Opinion is the soul of it and this is affected by appearances as well as realities,” he wrote in his 40,000-word Report on Public Credit, delivered to Congress in January, 1790.

He further set the precedent that the government does not interfere in private transactions of its public securities, even if the optics and politics would make it expedient to change terms, after the fact.

As Chernow reports, Hamilton reframed the moral issue into one of honoring private property and “security of transfer.” The soldiers were not as heroic as they seemed, nor the speculators as greedy. Investors after all, had risked their capital. The ex-soldiers, in turn, had shown little faith in the government. That the buyers of soldiers’ debt made extraordinary short-term fortunes was, in the far-seeing perspective of Hamilton, irrelevant to the more important work of establishing a solid financial footing for the country. Meanwhile, Madison and Jefferson fumed.

The United States has never defaulted on its debt. Not through the ruin of a burned capital in 1812, nor through a crippling Civil War, nor the World Wars and Depression of the Twentieth Century. Hamilton’s honoring of national debts – against all the political, fiscal and moral pressure of his day – bolstered us as a nation. It set us up for national prosperity.

As the fictional Jefferson of the Hamilton musical ruefully admits: “I’ll give him this: His financial system is a work of genius. I couldn’t undo it if I tried, and believe me, I tried.”

Or the fictional Madison: “He took our country from bankruptcy to prosperity. I hate to admit it, but he doesn’t get enough credit for all the credit he gave us.”

Contemporary debates

Shifting to 2016 for a moment, what would Senators Bernie Sanders or Elizabeth Warren have done with Hamilton’s conundrum? Historical hindsight isn’t necessarily fair, but I’ve listened to their views on Wall Street, the industry where I previously worked, and which they consistently attack as a cesspool of greed, corruption, and speculation.

unhappy_trumpWe also have GOP presidential candidate Donald Trump’s views on the record on our national debt. In stark contrast to Hamilton, Trump presented his approach in an interview with CNBC in May. He explained “I’ve borrowed knowing that you can pay back with discounts. [As President,] I would borrow knowing that if the economy crashed, you could make a deal.”

See, that’s not really how the bond market works. Hamilton had the foresight to know that once you default on debt – which is what “pay back with discounts” means – you set a precedent for how lenders view your credit in the future. I would even argue that once you even say that out loud – if anyone takes you seriously – you risk submarining your nation’s future ability to borrow.

Think about how lucky we are to be alive right now, with Hamilton on our side.

A version of this post ran in the San Antonio Express News.

 

Please see related post:

Trump: Sovereign Debt Genius

 

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Money and Politics – 2016 Edition

Money_and_politicsWe are deep into Presidential primary election time, so I thought I’d share my views of candidates and the system with my green eyeshades on.

I don’t have a ‘unified theory’ of money in politics, but rather a series of thoughts, some connected, the rest not.
For starters, I have a fetish about honesty when it comes to money. Like, if I know an elected official or candidate accepted money illegally or unethically, that candidate is dead to me.

Direct bribes, however aren’t usually our problem (at the federal level). Rather, grey ethical areas as well as the wholly-legal weight of money are our system’s problem.

My goal, as always, is to offend all sides of the political spectrum in roughly equal measure. If I have been too gentle on your preferred political enemy, please let me know in an angry email. (Also, feel free to use ALL CAPS so I know you really mean it.)

The Republicans

Ted Cruz had the cleverness to marry a Goldman Sachs executive (a big plus in my household!). The meanest money-related thing I can think of about him is that he has not once but twice under-reported loans to his campaign from banks, first from Citibank and later from Goldman Sachs. For the moment I’m willing to chalk this up to sloppiness rather than a pattern – but be forewarned, Cruz, I’m watching you.

Ted_Cruz_for_presidentI apply personal financial prejudices when it comes to political candidates.

Marco Rubio’s well-known struggle with personal debt affects my view of him as a potential leader. I know he has presented this weakness is a strength, as it makes him ‘relate-able’ to average Americans. But I don’t want ‘average Americans’ – at least in this sense – winning the Presidency. Frankly I don’t want someone who is financially vulnerable in that way to wield so much power (and maybe to face so much temptation.) And yes, Thomas Jefferson and Winston Churchill were both amazing leaders with out-of-control personal financial situations. Still, I maintain my prejudices.

Jeb!’s anointing as the GOP favorite through mid-2015 followed logically from his ability to quickly raise a $100 million Super-PAC war chest for his candidacy. That same war chest allowed him to hang around as a moderate alternative to the rest of the field long after his less-funded rivals folded, despite his deep unpopularity with actual, you know, voters. This is interesting and troubling.[1]

In the 2012 contest, we learned that a single billionaire – in that case Sheldon Adelson – can keep a candidate afloat – in that case Newt Gingrich – long past his due date or viability with the electorate.

I think the “billionaire primary” conducted throughout 2015 – as ably reported by the New York Times, in which just 158 families contributed half of the total money raised by political campaigns – should scare the heck out of us.

A little history

I understand that the Founding Fathers of the United States went to great lengths to ensure that wealth remained a key criteria for participation in the new democracy, through gender, race, and property-based restrictions on voting. Elites of the time greatly feared “Democracy” – that radical 18th Century notion – because the disenfranchised could theoretically vote their financial interests to the detriment of the aristocratic powers-that-be. The slaughter of The French Revolution seemed to confirm all of these fears, strengthening the resolve of elites to control the political process from start to finish.

Jefferson_and_money
Jefferson had issues with banks. In a related story, he was always broke.

I mention this to acknowledge that we have a long tradition of drastically tipping the scales in favor of the wealthy when it comes to politics, so what I’m talking about with the billionaire primary is not entirely new, but a certain shift on an existing spectrum. I just have this tingly spider-sense that in the 21st Century we’ve gone a bit too far back to the Aristocratic roots of our Founding Fathers.

The Democrats

Speaking of these themes, Bernie Sanders’ appeal – as the underdog who raises $75 million in 2015 at an average campaign contribution of $27 per person – remains powerful. I really admire it. I’m totally annoyed with Sanders’ understanding of Wall Street, however, which remains cartoonish in its sophistication, at best. If you really believe, as Sanders claims, that “The business model of Wall Street is fraud,” then we’re not friends and you’re not coming to my birthday party anymore.

Hillary Clinton, on the other hand, has a sophisticated view of money, to both her advantage as well as grave disadvantage. I have a hard time getting over the idea that large donors to the Clinton Foundation – like members of the Saudi royal family or a Ukrainian oligarch, as previously reported – don’t at least believe they have purchased access and influence over Clinton through their donations. I’m not saying she or her husband have done them direct favors, but I am saying it’s reasonable to assume that’s exactly why certain people donated to the Foundation while she was Secretary of State and a strong prospective presidential candidate. She should have anticipated that clear conflict, and she should have avoided it.

The Trumpians

trump_for_presidentThe Donald, meanwhile, presents an interesting money case. His supporters, I suppose, overlook his misogyny, racism, bullying and demagoguery because he’s a “successful businessman,” who would presumably apply his “negotiating skills” to solving the country’s ills. This admiration from supporters – despite some analysis that shows he would be as wealthy today had he taken his inherited wealth in 1974, bought an all-stock index fund – and amused himself by affixing gold-lettered nameplates to Lego towers he built in his playpen. That analysis is an oversimplification that probably isn’t fair to Trump or the value of his businesses today. Put it this way though: my problems with Trump aren’t money-related.

My choice

Bloomberg_for_presidentSpeaking of billionaires, I enjoyed Mike Bloomberg’s mayoralty of New York City in part because of my belief that he cannot be ‘bought’ for any price. In fact I would vote for him for President over any of the declared candidates, in a New York minute. Sadly, I expect he wont run, and if he did run, he wouldn’t win.

 

[1] Right up until the point when he retired from the campaign Saturday night I thought there was an outsider’s chance that he would suddenly sweep in as everyone’s third choice, kind of like Romney did after outlasting Santorum, Gingrich, Huckabee, etc in 2012. I wasn’t actually disappointed Jeb! dropped out, I was just disappointed that my contrarian bet didn’t earn me “I told you so” credibility for the next year. I would have been insufferable had I been right about Jeb! though, so it’s all probably for the best.

 

A version of this post ran in the San Antonio Express News

 

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Book Review: The Way To Wealth by Benjamin Franklin


My father once said to me “One of the interesting things about getting older is realizing that the clichés, prejudices, and popular wisdoms that we rejected as young, educated, independent thinkers turn out, in the end, to be true.”

I love this idea, in part, for its double-contrarianism.

The Way to Wealth by Benjamin Franklin reminds me of my father’s world-view, formed as a Depression-era child, delivered in Franklin’s 18th Century style.

Also, these clichés are true.

We know “Early to bed, early to rise, makes a man healthy, wealthy, and wise,” and a few others, but I had not heard most of them.

The Way to Wealth originally formed the preface to Franklin’s Poor Richard’s Almanack.  The book’s conceit is that Franklin’s alter-ego Richard overhears an old man (Father Abraham) quoting his favorite parts from the Almanack to a group gathered together before an auction.  As such, the farmer gives a kind of fast-and-furious greatest hits of aphorisms, tied together by the themes of Industry, Care, Frugality, and Knowledge.

Some of my favorites from this book, which I hadn’t already heard:

On complaints about government taxes:

Friends, the taxes are, indeed, very heavy; and, if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us.  We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly; and from these taxes the commissioners cannot ease or deliver us, by allowing an abatement.

On the urge to buy things that seem cheap, on sale, or a bargain:

Here you are all got together at this sale of fineries and knickknacks.  You call them goods; but, if you do not take care, they will prove evils to some of you.  You expect they will be sold cheap, and, perhaps, they may [be bought] for less than they cost; but, if you have no occasion for them, they must be dear to you…He means, that perhaps the cheapest is apparent only, and not real; or the bargain, by straightening thee in thy business, may do thee more harm than good.  For in another place he says ‘Many have been ruined by buying good penny worths.’

On the relativistic nature of time, if you owe money at the end of the month:

When you have got your bargain, you may, perhaps, think a little of payment; but, as Poor Richard says, ‘Creditors have better memories than debtors; creditors are superstitious sect, great observers of set days and times.’  The day comes round before you are aware, and the demand is made before you are able to satisfy it; or, if you bear your debt in mind, the term which at first seemed so long, will, as it lessens, appear extremely short: Time will seem to have added wings to his heels as well as his shoulders. ‘Those have a short lent, who owe money to be paid at Easter.’

The little book’s scant thirty pages could, with smaller type and larger sheets, condense to about five pages.  So you’re looking at about 10 minutes of dense wisdom from a founding father of the United States.

Please also see related post All Bankers Anonymous book reviews in one place.

Benjamin_Franklin_money
It’s all about the Benjamins

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The USA of I.O.U.

usa of iouEvery once in a while I read a finance article that sticks in my head and never goes away.  An article about the historical intersection of debt and the United States from the New Yorker from four years ago by Jill Lepore is just one of these.[1]

The USA of IOU

Jill Lepore’s article explains that in many ways the United States was founded of the debtors, by the debtors, for the debtors.

We know from English literature that the United States represented a fresh start for insolvents from the lower and upper classes, which makes sense when we learn that both Dickens’ father went to debtor’s prison and Trollope’s father fled England to avoid it.

What I didn’t know is that as many as two-thirds of Europeans arriving in the Colonies were debtors, paying their way as indentured servants.  The colonial governments of Virginia and North Carolina for their part, eager for laborers, passed incentives by promising 5 years’ worth of debt protection.  The founder of Georgia, James Oglethorpe, specifically started the colony as a debtor’s refuge in 1732, as an alternative to English debtors’ prison.

Lepore makes the interesting comment that Founding Fathers Jefferson and Washington were so up to their necks in debt to London bankers that the Declaration of Independence from England not only served democratic Enlightenment ideals but also their own balance sheets.[2]

Debtor’s prison

Before reading Lapore’s article I had no idea that the English tradition of locking up debtors in prison jumped the Atlantic and came to the American colonies and the young United States.  Debtors through colonial times and the first 40 years of the Republic routinely got locked up in brutal prisons, – often for very small amounts.  There the debtor would stay, half-starved and dependent upon alms from passers-by, until someone – usually a relative – paid the debt.

New York became the first state in the nation to outlaw debtors’ prisons in 1831, paving the way for other states to follow suit.

Debtors’ prisons largely predated proper bankruptcy law, which makes sense as bankruptcy would always be preferable to prison.

Bankruptcy for Traders vs. Everybody Else

You are not going to believe this[3], but in the 1800 to 1830 period, financial traders typically received preferable treatment, by law, over everybody else, when it came to insolvency.

If you were a stockbroker in 1800s Wall Street, for example, or you engaged in financing merchandise shipping and trade, or trading in agricultural commodity futures[4], you could declare bankruptcy if the business went awry.  But, if you were not a financier, you had no way of getting clear of your debts, and you might face debtors’ prison.

In essence when debts became overwhelming, Lepore explains, a bankruptcy law in 1800 allowed financiers to declare bankruptcy and receive a fresh start, freed of their debts.  Presumably lawmakers justified this disparity through a logic similar to today’s “Too Big To Fail” principal.  If the brokerage houses in turn of the 19th Century Wall Street couldn’t work through their financial distress, well then my goodness, what would happen to the economy????[5]

Since the bankruptcy law only applied to traders, everybody else was liable to be thrown into debtors’ prison.  Indefinitely, in fact, until their debts got paid.  Not until 1841 did Congress pass a permanent bankruptcy law so that ordinary folks could declare bankruptcy in the event of insolvency.[6]

So, if you were wondering whether the bailout of Wall Street in 2008 while Main Street suffered represented the nadir of financial inequality and injustice, you’d be wrong. Early 19th Century injustices were even worse. There, doesn’t that feel better now?

debtors prison



[2] Before reading Lepore’s piece I knew about the historical train of thought that the Founding Fathers were greatly motivated by selfish private interests, such as keeping taxes low and protecting their own private property, something that British sovereignty increasingly impinged upon in the years leading up to the Declaration of Independence.  As a recovering banker, however, I find the we’re-up-to-our-necks-in-debt-let’s-cut-ties-with-our-bankers argument plausibly intriguing.  I’m sure Jefferson and Washington were great guys and all, but any time you can simultaneously establish a radical new experiment in non-Monarchical government based on Enlightenment ideals and wipe out your personally huge debts at the same time?  Wow, I mean, that’s a two-for-one.  You kind of have to do it.

[3] Yes, that’s sarcasm.

[4] Yes, the concept and use of commodity futures are not hundreds, but thousands of years old.

[5] Does this sound familiar to anyone?

[6] Lepore relates the story of a clever insolvent who found a loophole in the bankruptcy law of 1800 that offered unequal treatment between traders and everyone else.  With extraordinarily large debts that had previously landed him in jail, her hero John Pintard managed to get a temporary reprieve from prison through a loophole in the debtors’ prison laws.  He took out an advertisement in a newspaper that he was doing business as a stock broker.  Pintard then traded a single stock, pocketed the fifty-eight cents profit (later donated to charity), and filed for bankruptcy as a trader.

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