Broken News – Is The Crazy Weather Getting To Our Collective Sanity?

Isn’t it strange that the GOP, the political party that has heretofore consistently and vociferously opposed frivolous lawsuits, spurious malpractice claims and the trail lawyers’ lobby, has now decided to spend taxpayer money to hire trial lawyers to bring what is essentially a frivolous malpractice lawsuit against President Obama?

Why ‘frivolous’ you say? Well, the lawsuit accuses the President of illegally waiving, for a year, the very same employer insurance mandate under the Affordable Care Act (ACA) that the GOP itself fought tooth and nail — i.e., they are accusing the President of what might be called ‘malicious compliance’ with the GOP’s own platform. If that isn’t the very definition of frivolous, what is?

Why is it that Democrats can’t stop talking about the possible impeachment of President Obama by a Republican Congress, while Republicans, who are even suing the President for abuse of power, don’t want to discuss the subject (but won’t take it ‘off-the-table” when given the chance by their own captive TV network)? Perhaps the Democrats are not so crazy after all; not because the talk of impeachment obviously is designed to energize their ‘base,’ but more because there may be some reality to the chatter after all notwithstanding the GOP reticence. It could be far more politically tempting to the GOP than it lets on to install VP Joe Biden in the Oval Office just to mess up Hillary Clinton’s march to the Democratic nomination in 2016, since she would have to challenge a sitting President assuming Biden would seek election in his own right.

Nobody else seems to have noticed that knocking off both Obama and Clinton with one blow might be very tempting to the dominant Tea Party wing of the Republican Party if it were to win control of the Senate and gain seats in the House this November. Yet such a spectacle might finally shock the Congress and, it must be said, the US electorate, out of its decline into bitter hyper-partisanship.

Why does a country that has lived for decades with regret for not doing more to provide shelter to Jews fleeing Nazi extermination (even turning away a boat full of helpless men, women and children in the run-up to World War II) now consider passing what can only be called a civil form of ‘ex post facto’ law exterminating the legal rights of child refugees to hearings on their cases for asylum from uncontrolled violence in their home countries? The whole issue of migrant children at the border is replete with absurdities, but also evidence a malign moral bankruptcy.

Let’s start with Governor Rick Perry’s decision to order National Guard troops to the Texas-Mexico border to stop the flow of child migrants. We could put a line of armed soldiers from one end of that border to the other and it would not matter. Because these children are not seeking to elude capture at the crossing but are simply turning themselves in as refugees to the first authorities they see! Surely it’s a waste of military resources to deploy the National Guard as a welcoming committee.

Then there is the ‘not in my back yard’ response of so many states and communities to the prospect of moving these migrant children out of makeshift border shelters to foster care or other temporary housing while their cases are pending. If it’s the expense they are concerned about, they can pressure Congress to pass the emergency budget proposed by the Administration. If it’s more than about money, what is then the concern? Race? Or is it a misperception of where voters stand on this issue? The latest survey, published by the Public Religion Research Institute, shows Americans, by a 7 to 1 margin, support treating the current surge of child migrants as true refugees. Meanwhile, the Drudge Report is raising the specter that the US is being exposed to the deadly African Ebola virus by some of the recent southwest border crossers!

The current topsy-turvy news environment is also reflected in the stock and bond markets. Broadcasters like CNBC’s Rick Santelli constantly attack the Federal Reserve Board’s measured pace of reducing economic stimulus by means of gradually tapering its monthly bond purchases rather than ending them all at once, and intending to maintain accommodatively low interest rates even as unemployment falls and job creation increases. But Santelli and his daily parade of hand-picked ‘puppets’ (his is the best children’s morning show since the Muppets) are talking out of both sides of their mouths on this issue. First, they say interest rates remain low despite tapering because the economy under Obama remains a disaster and any good numbers must be faked or flawed; just watch the same refrain any given morning between 11AM and 12 Noon any day any week. Then in almost the same breath, they claim the Fed is so far behind the curve of the improving economy that they should be raising interest rates right now to head off the threat of inflation from an economic bubble. Which is it, guys?

Such a level of blatant intellectual self-contradiction can only be explained by a desire to help out hedge funds who have wrongly bet on a stock market correction for the past two years, and lost. Only one CNBC commentator – Steve Leisman – the only one who understands the Fed – stands up to this nonsense.

More incoherent nonsense is evident in the stock market’s reaction to the July 29 announcement of the imposition of tougher sanctions on Russia by both the European Community and the United States, the first time they have been in lock-step in terms of efforts to force Putin to retreat from his mischief-making in Ukraine. The market fell from an opening of plus 70 to a closing of minus 70. Yet the market has also experienced similar inter-day downturns whenever the combat news comes in ugly from the Eastern Ukraine zone where the Malaysian commercial airliner was recently shot down. What does the market want – it doesn’t like the war – but it also doesn’t like the best efforts to force an end to the war and a diplomatic solution. Of course there is legitimate concern with a European recession being triggered by either eventuality: more fighting or Russian economic and energy blackmail in response to sanctions. But sanctions are the only way to the outcome the market would find positive – namely, peace on the Russia/Ukraine border.

With all this nutty news, it’s a blessing that professional football training camps are now open for the season, so we can get back to observing the relative sanity of Richard Sherman versus the 49ers!

Recently published on The Huffington Post

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

DC Circuit Decision Isn’t Just About Obamacare Subsidies: It Also Kills The Employer Mandate

There are some real-life occurrences that are so absurd that the phrase ‘you can’t make this stuff up’ comes readily to mind. Yet the July 22 decision of a divided three-judge DC Federal Circuit Court panel invalidating the Affordable Care Act’s (ACA) premium tax credits for anyone purchasing insurance on a Federal Exchange proves that you can ‘just make this stuff up.’ Which is what the two-judge majority did in Halbig v. Burwell.

This case, and the Fourth Circuit’s opposite ruling in King v. Burwell, concerned the IRS rule which made Federal insurance premium subsidies in the form of tax credits available under the Federal Exchanges established by the Department of Health and Human Services (HHS). The ACA provisions required HHS to set up such Exchanges for and in States that did not elect to do so, even though another section of the Act defining how subsidies would be calculated said that subsidies would flow through Exchanges ‘established by the State.’ Essentially, the DC judges decided the only possible interpretation of this apparent conflict was that the Federal Exchanges do not in fact stand in the shoes of the State Exchanges for subsidy purposes because they were not literally ‘established’ by ‘the State.’ The Fourth Circuit held that the IRS was entitled to deference in resolving the ambiguity in the statute the other way, honoring the legal fiction that the Federal Exchanges are the equivalent of State Exchanges in order to allow such subsidies nationwide.

What these two Republican jurists on the DC Circuit invented was a version of the ACA that even their own political party never considered to be reality: namely, a statute that contains its own self-destruct poison pill that would invalidate the very provisions the GOP most detested: the employer mandate, the individual mandate, and the Federal subsidies. By these judges incredible reading of the entire statute, the ACA’s only possible meaning was that:

(1) If all 50 States of the Union simply exercised their right not to establish an insurance Exchange, then no subsidies could be provided to low-and moderate-income individuals mandated to buy insurance. This means that they would likely be eligible for the exclusion from the individual mandate that applies when the premium for the cheapest policy available exceeds 8% of annual family income;
(2) Accordingly, employers with 50 or more employees that would ordinarily be subject to the mandate to provide health insurance meeting Federal standards or pay a significant penalty tax for each uncovered employee would likewise escape the mandate. The mandate is triggered if just one employee buys subsidized insurance on an Exchange – an impossibility under the DC Circuit judges reading on the Act if the only Exchanges turned out to be the Federal version.

The majority on the DC panel made clear that such a broad reading was their intention by specifically observing that under the IRS rule in question ‘the individual and employer mandates’ would have ‘broader effect than they would have if credits were limited to State-established Exchanges’ and that their decision to void the IRS rule would ‘likely have significant consequences…for insurance markets more broadly’ (see Halbig v. Burwell at pp. 8-9 and 41).

Likewise the GOP plaintiff seeking to overturn the IRS rule in King v. Burwell also expressly stated that denial of tax credits for individuals shopping on Federal Exchanges would ‘throw a debilitating wrench’ into the ACA’s ‘internal economic machinery,’ resulting ultimately in an adverse-selection ‘death spiral’ in States with Federally-run Exchanges (see King v. Burwell at p. 33).

But surely under this reading of the ACA, House Republicans would not have needed to conduct 40 votes to repeal in order to show their displeasure. Nor would they have had to try to shut down the entire Government as a ploy to force defunding the ACA. All they would have had to do to cut the heart out of ObamaCare would have been – and still would be — to get 14 more States and DC to dismantle their Exchanges. Game over!

But the GOP never played that game, because they never once thought that was the game. Indeed, the apocalyptic vision of ObamaCare’s massive intrusion into the health care system and the economy as a whole, promulgated by the Republican Party consistently since the ACA’s passage, is the best evidence that the DC Circuit majority opinion in Halbig v. Burwell indeed just made up its version of the Act out of whole cloth, as the dissent observed. If the entire ObamaCare structure was subject to an automatic, self-enforcing veto by the States, it would mean that the ACA’s mandates and subsidies would not be effective right now in 72% of the States and subject to the whim of State legislatures and governors in the other 28% at any time going forward.

Not only did the GOP — the fiercest opponent of ObamaCare — never read the ACA the way the DC Circuit panel majority did, neither did the US insurance industry, their shareholders, nor HHS. Since the DC Circuit reading of the stature did not address or effect the various mandates the ACA imposes on insurers (like no lifetime caps, no pre-existing condition exclusions, no sexually-based premium differentials, etc.), the insurance industry would be stuck with those mandates without the compensating benefits of employer and individual mandates and Federal premium subsidies for their low-and-moderate-income customers.

Had the industry ever understood the statute in that way, their legion of lobbyists would have been up in arms. Harry and Louise of HillaryCare fame would have been back on every screen urging viewers to write to Congress to repeal this awful ACA burden on their friendly neighborhood insurance companies. But that obviously didn’t happen. And likewise equity investors in insurance companies never read the ACA that way either, sending many health-care insurers to all-time highs in the years since the passage of the ACA.

In the same vein, HHS could have saved itself all the bother of the botched launch of the Federal Exchange website and the huge political price paid by the President for that debacle. There would have been no need to launch it or fix it (and Kathleen Sebelius might still be Secretary of HHS), because under the DC Circuit panel decision, the Federal Exchanges contemplated by the ACA to stand in the place of State Exchanges if States elected not to set them up, would have had no power to sell subsidized insurance anyway. Why bother to create a Federal Exchange if it was essentially there only to serve those who could easily afford insurance on their own. Yet this is the version of ObamaCare the DC judges said was so patently clear there can be no other rational interpretation of the statute. Which means, I guess, that the entire Republican Party, the health insurance companies, their equity shareholders, HHS – and even Justices of the US Supreme Court who would have voided the ACA – have been living in delusion for five years now.

As noted above, a unanimous panel of the Fourth Circuit Court of Appeals that ruled on the same day as the DC Court that the Federal Exchange subsidies can stand because deference should be shown to the IRS’s interpretation of statutory language subject to multiple possible interpretations in order to achieve the Act’s central purposes, ruling that it is ‘clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of this importance when drafting the bill.’ This Court noted that even the dissenters in the only Supreme Court decision on the ACA saw that without the Federal subsidies, individuals would lose the main incentive to purchase insurance. Some insurers may be unwilling to offer insurance inside of exchanges. With fewer buyers and even fewer sellers, the exchanges would not operate as Congress intended and may not operate at all (see King v. Burwell, above at p. 33). No mention there of the putative Congressionally-intended ‘State veto’ the DC Circuit found that somehow eluded Justices Alito, Kennedy, Scalia and Thomas!

The two GOP judges on the DC Circuit have had their fun. Now it’s time to call in the adults on the DC Circuit and reverse this grotesque re-imagination of the purposes, intent and even the very language of the ACA. Insurance companies of America – call your lawyers, because you are the ultimate losers here as well. Thanks to their lobbyists, the chances of a Congressional fix of this ruling, if it stands, might not be so hopeless after all.

Recently published on The Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

Can Obama Pardon Undocumented Immigrants And Let Them Stay? (Maybe) He Can — Civil War Cases Point The Way

Article II, Section 2 of the United States Constitution states that the President “shall have Power to grant Reprieves and Pardons for Offences against the United States, except in cases of Impeachment.” It has been suggested in some quarters that President Obama use this power, which is “essentially unfettered” according to a report from the Congressional Research Service, to grant amnesty and permanent residency to all or a subset of illegal immigrants. Legal scholars have objected that the President’s pardon power only applies to crimes per the usual legal definition of ‘offences,’ and an immigrant’s unauthorized presence in the United States is a civil not criminal matter under the US Code and thus not ‘pardonable.’

The civil remedy for unauthorized presence is deportation. But the system is overwhelmed by sheer numbers — with deportation capacity of about 400,000 per year versus up to 11 million cases: a 25 year docket — and thus ultimately unworkable while always a threat. This has led to the current conventional wisdom that the shadow reality of the undocumented can only be resolved by act of Congress, which is highly unlikely given the refusal of the Republican-controlled House of Representatives to even allow a vote on immigration reform.

While many in Congress and elsewhere would be surprised to learn that undocumented presence of aliens is not a crime, under US law, that reality is not necessarily the end of the analysis of whether there is a Constitutional way for the President to use the pardon power to address the prevailing Congressional gridlock over the status of over 11 million residents of the United States who are otherwise not legally entitled to be here but who are otherwise not criminal offenders except by way of their entry here.

Under Title 8 US Code, section 1325, any alien “who (1) enters or attempts to enter the United States at any time or place other than as designated by immigration officers, or eludes examination or inspection by immigration officers, or (2, 3) attempts to enter or obtains entry to the United States by a willfully false or misleading representation or the willful concealment of a material fact, shall, for the first commission of any such offence, be fined under title 18 or imprisoned not more than 6 months, or both….” Clearly, therefore, those who, in common parlance, “sneak across the border” to get into the US, clearly are committing a criminal “offence” pardonable by the President. Even Governor Chris Christie of New Jersey, back when he was a federal prosecutor, got mixed up on this issue when he stated that being undocumented isn’t a crime — a statement later walked back to refer only to undocumented presence, which as noted is not a criminal violation but which, as a civil matter, the government may punish by deportation (but the President can’t pardon).

It is at this point where the conventional legal wisdom seems to break down. The thesis is that even if the President were to pardon the illegal border crossers for their offence of sneaking in to the US in violation of Title 8, Section 1325, immediately upon the effectiveness of that pardon they would yet remain present in the US without proper authorization and therefore subject to the civil deportation penalty. So argues Professor John Harrison of the University of Virginia, a legal scholar cited above, who concludes that “a pardon can’t make someone a …lawful resident” (as reported in the Washington Post blog post by Suzy Khimm, 12/06/2011). The same point of view has been taken up among strong opponents of “amnesty” like callers to Rush Limbaugh’s daily radio broadcast; but even Rush seems to disagree with this reasoning!

Mr. Limbaugh is not a legal scholar, of course, but he does seem to have settled law on his side. According to CRS Annotated Constitution (published by Cornell Law School), the ‘great leading case’ on the extent of the President’s pardon power is Ex parte Garland, decided by the Supreme Court shortly after the end of the Civil War. Congress had proscribed the practice of law in federal courts by as any person who could not affirm that he or she had never taken up arms against the United States or given aid or comfort to its enemies. The petitioner was a Confederate sympathizer who could not take such an oath but had been among those granted a ‘full’ pardon by President Johnson “for all offences…arising from participation, direct or indirect, in the Rebellion.” The Court had to decide whether Garland was subject to the Congressionally-enacted fitness test, or, instead, armed with the pardon, entitled to practice in the federal courts.

For a divided Court, Justice Field stated that “as to the effect and operation of a pardon …all the authorities concur. A pardon reaches both the punishment …and the guilt of the offender; when the pardon is full, it releases the punishment and blots out the existence of the guilt.” Most critically, he went on to hold that “in the eye of the law the offender is as innocent as if he had never committed the offence”. If granted before conviction, the full pardon “prevents any of the penalties and disabilities consequent upon conviction from attaching…..if granted after conviction, it removes the penalties and disabilities” (Citing Ex parte Garland, 4 Wall (71 US) 333, 380 (1866).

It would seem that the civil penalty of deportation for unlawful presence in the US ‘attaches’ to the criminal act of illegal entry (except in the case of overstaying a visa – see below). Thus a ‘full’ presidential pardon would seem to put the person who does so in an innocent position “as if he had never committed the offence,” not in a virtually permanent state of illegality interrupted only the infinitesimal, momentary effect of a pardon, as Professor Harrison argues, and thus ‘prevents’ or ‘removes’ the possibility of deportation.

A future GOP President, for example, would seem to lack power to enforce deportation of those pardoned by President Obama under the Supreme Court’s decision in another case relating to Civil War penalties (U.S. v. Klein, 13 WALL (80 U.S)) 128 (1872), where the court majority held that Congress cannot limit the effects of a Presidential amnesty.

One class of those whose presence in the US is unauthorized would seem to be truly beyond the pardon power, namely, those who have overstayed their visas. These individuals, who may comprise as much as 40% of those in the US without authorization, did not in fact enter the country illegally, so they have indeed committed no ‘offence’ under US law subject to pardon.

Surely any decision taken by President Obama to pardon undocumented immigrants and spare them deportation would invite vociferous political attack. He can impose conditions on the pardons like paying a fine, and certainly cannot pardon future illegal immigrants prospectively, but those limitations would not silence critics. Because Congress’s only remedy would seem to be impeachment, such an effort would be predictable, if not likely to end in conviction even if Republicans win control of the Senate in 2014. Obama could wait until his last day in office to obviate such an outcome. But if his legal scholars concur with the analysis in this blog, he might also take action during this August’s Congressional recess, thus virtually assuring that the coming Congressional election will be a referendum on whether the country would want to go down the impeachment road again.

While immigration is obviously is a highly emotional and visceral political issue, Presidential pardons have been resorted to before in just such highly-charged circumstances: Ford pardoned Nixon; Carter pardoned Vietnam War draft evaders. Neither was reelected. But President Obama does not have that problem.
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Previously published on The Huffington Post

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

The Hobby Lobby Ruling: Hobby Horse, One-Trick Pony Or Citizens United 2.0?

The June 30, 2014 decision of the United States Supreme Court in Burwell vs. Hobby Lobby Stores, Inc. has already generated a broad range of commentary for and against, with many predictions. Within the several different opinions issued by the Justices: what will the future hold for ObamaCare, the religious rights of business owners and the rights of women and other groups and individuals to not only reproductive health choices but also to medical care, other governmentally-mandated benefits and even the full participation in American society and citizenship? The opinions, collectively, leave more questions than perhaps anticipated.

Given the Court’s ideological divisions, the literal result was not very surprising: a Hobby Lobby ‘win’ on some basis or another was not unanticipated. But it may have surprised some that that decision was not based on the first Amendment’s ‘free exercise’ clause but on the majority’s interpretation of a 1993 stature, the Religious Freedom Restoration Act (RFRA), passed unanimously by the House and with only three negative votes in the Senate, and signed by President Bill Clinton. The RFRA imposes a two-part test on government rules that are deemed to impose a substantial burden on a person’s exercise of religious beliefs: such a rule must serve a ‘compelling government interest’ and also constitute the ‘least restrictive means’ of serving that interest.

Writing for a plurality of himself and three Justices who joined his opinion and Justice Kennedy who joined via his own concurring opinion (more on that below), Justice Alito held that (i) the term ‘person” in RFRA included corporations (like Hobby Lobby) and not just individuals because of the general definition of the term that applies to all Federal legislation unless specifically negated (the “Definitions Act); (ii) that the ObamaCare mandate to provide certain contraceptives cost-free to women through mandated employer-based insurance indeed imposed a ‘substantial burden’ on Hobby Lobby’s religious exercise; (iii) by way of assumption, that this mandate serves a compelling government interest; but (iv) was not the ‘least restrictive’ means of achieving the compelling goal and thus cannot stand under the RFRA.

Notably, Alito seemed to go out of his way to expand the holding to encompass ‘all FDA approved contraceptives’ even while observing that the government could, by simply paying for the pills directly, provide women equivalent free access to the four ‘particular contraceptives at issue here’ (only those considered by Hobby Lobby to induce abortion by way of destruction of fertilized but non-implanted eggs). Dissenters surprisingly did not note this judicial ‘leap of faith.’ But perhaps some law review articles will. Strict constructionists might well conclude that the broad ‘holding’ shared at the end of Alito’s opinion – that the Affordable Care Act’s ‘contraception mandate’ violates the RFRA – contains more than a little dicta.

While we’re waiting for that light to dawn, however, there are a number of other more pressing question that the Federal courts and the body politic will have to wrestle with in the coming months and years.

1) Is there any reasonable chance that Congress will enact legislation that obviates the Hobby Lobby decision by simply paying the insurance premium directly from taxpayer funds for FDA approved contraceptives for women denied such by their employer’s religious objections? The short answer, to anyone who reads a newspaper or watches TV news or listens to talk radio, is obviously no, since the party that controls the House of Representatives considers the Hobby Lobby decision a major victory. More likely, the Obama Administration will attempt to carve out a similar work-around that they have applied to the objections of non-profit religiously affiliated corporations like schools and hospitals and charities requiring insurance companies or policy administration firms to provide contraceptives for free to women denied insurance by such employers for religious reasons. After all, even Justice Alito cited that carve-out as an example of a less restrictive (of proprietors’ religious exercise) means of achieving the government’s compelling objective.

2) But in turn, this possibility flips us back to the question whether that work- around itself will survive a court test to its viability under the RFRA and the First Amendment free exercise clause. The Little Sisters of the Poor have taken the position that merely requiring them to self-certify to insurance carriers their religious purpose and objecting to providing contraception insurance to employees of their non-profit is a substantial burden because it in effect implicates them by being one necessary step in even the ‘work around’ system of proving such coverage at the end of the day.

3) Justice Alito took sort of a ‘who am I to judge’ perspective on the question of what degree of ‘implication’ constitutes a substantial burden on religious exercise. Perhaps, however, not even he a would have the judicial gall to turn around in less than a year and rule against the very process he cited as a reason why women would not necessarily be disadvantaged by his ruling in Hobby Lobby! More significantly, he might well be influenced by a careful reading of Justice Kennedy’s concurrence, which literally went out of its way to praise the work-around alternative – perhaps sending a message to Alito that he could not count on his vote for a majority in favor of the Little Sisters’ claim, and likewise to the Catholic bishops who otherwise might see the Hobby Lobby holding as assurance that their views of the mandate – that it should be stricken from the Affordable Care Act in its entirety for all employers – will ultimately be endorsed by the High Court. In World Cup terms: Catholics (who vastly support contraception) 2, Bishops 1, on penalty kick by Striker Kennedy – still the swing vote!

That still leaves the many questions raised by Justice Ginsburg in her “respectful and powerful dissent” (quote Justice Kennedy — another hint of his discomfort with a broad interpretation of Hobby Lobby’s holding). What about known religious objections to vaccination, antidepressants, and medicines derived from pigs, or objections of proprietors of health clubs, photographers, and the like, to serving homosexuals and transgender persons? Or ‘closely held’ apartment complexes who may not wish to rent to them on the basis of Biblical interpretations? The majority ruled out using the RFRA as an excuse for racial discrimination, but not for exclusions based on sex or sexual orientation.

Justice Alito’s Hobby Lobby holding applies only to ‘closely held’ corporations, but without defining that term. The IRS definition, however, is quite broad: businesses other than personal services firms having five or fewer owners of 50% of the value of its stock during the latter half of a tax year. As Justice Ginsburg pointed out, this definition includes big companies like Mars (candies) with $23 billion is annual revenue, and Cargill, with 140,000 employees. While such firms account for over 50% of all US businesses, their percentage of all employees is much lower, and 96% of them would not be subject to the ObamaCare mandate as they have fewer than 50 employees each. So Justice Alito’s loose, undefined choice of words probably won’t result in a sort of ‘Citizen’s United’ outbreak of corporate fervor of a religious, not political, nature.

Yet Justice Ginsburg’s unanswered questions haunt the decision: how can a Court that has specifically eschewed judging the relative merits of religious exercise claims choose between objections to inoculations and contraception? And why does the ‘corporate veil’ that generally protects stockholders from claims and obligations beyond their investment that they would be subject to as individual proprietors somehow get shredded when it serves their interests to share a seamless identity with their corporation in order to achieve their own personal religious objectives?

Finally, someone might ask how the five men who decided Hobby Lobby would rule if the corporation’s religious objections were vasectomies. What would be the ‘least restrictive’ alternative – and for whom?
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Recently published on The Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

The Federal Reserve Board –The Adults In The Room

 If you asked the average person – or even the average hedge fund manager (although they all probably think they’re above average in a Lake-Wobegon sort of way) – how they feel about the Federal Reserve’s latest economic projection that trimmed its estimate of 2014  US  GDP growth  to a range of 2.1 – 2.3% ,down from an original  2.8 -3.0% projection, they would probably say that’s not so hot – not a recession, but quite depressing nonetheless.

 On the other hand, if you asked the same person how they would feel if GDP growth were to average just over 3% for the rest of this year, including the figures for the three quarters ending June 30, September 30 and December 31, they would feel a lot better – not a “boom,” but certainly a consistent breakout from the inconsistent pace of recovery from the Great Recession of 2007 – 09.

 Bad news vs. good news? Not really, since both statements are in fact true and reflect the same simple arithmetic. The Fed’s revised projection for GDP growth as of end-December 2014 vs. 2013 takes into account the generally unanticipated 1% decline in first quarter GDP caused by the incessant bad weather over a large swath of the country during that period. Accordingly, to come in at 2.1 – 2.3% for the year, the economy has to pick up steam at an average just slightly above 3% for the final three quarters. Do the math: feel better, be happy.

 The equity markets seemed to understand the arithmetic as the Dow Industrials rose by 98 points and the S&P 500 hit another all-time high after the Fed’s statement and Chair Yellen’s press conference, where she also opined (in answer to a question that implied investors were maybe too complacent about the endurance of Fed low interest rate policy) that current stock prices did not seem to her out of line with historic norms  relative to earnings or dividends.  The point about “complacency’ is an important one. I suspect Chair Yellen knew she was being baited by a question designed to trick her into giving investors cause to dump stocks in a panic induced by an ‘official’ confirmation of a certain market rumor prior to the meeting that the Fed was concerned about an overheated equity market and would do something surprising to tamp down speculation, perhaps with a hint of an earlier than expected interest rate hike.  As CNBC put it the morning of the Fed meeting, the market’s new game of guessing when interest rates would rise would spread like the canary in the coal mine from current speculation about the Bank of England’s intention to the Fed’s.

Such market buzz certainly served the interest of hedge funds stuck thus far in 2014 with decidedly below average returns, either because they bet against bonds or stocks or both. A panic sell off for fear of a Fed “surprise” would give them a chance to cover their shorts, and even buy back into securities they knew would bounce back at cheaper prices. And they had a few grains of sand to throw in the market’s gears just prior to the Fed meeting.

 In the case of the Bank of England, its Chair had expressly hinted that rates there might well rise sooner than the market expected. The Fed’s Yellen, however, had taken steps to walk back her March remarks about a possible six-month gap between the end of bond buying expected this fall and the beginning of US rate increases (an earlier timing than the stock and bond markets expected). But Fed member William Dudley of New York had remarked publicly about his concern that low market volatility meant investors were taking too much comfort, and too much risk, and some commentators linked this complacency to Fed policy stability in terms of keeping rates low — an ironic outcome certainly, as more Fed transparency was seen to be leading the market astray with insufficient concern about recent upticks in inflation measures.

The Fed and Chair Yellen made short shrift of these pre-meeting market perturbations. The Fed’s official statement showed no particular concern as to the recent inflation data, and Yellen referred to it as “noisy’ in her press conference and thus not a cause for the Fed to alter its outlook as to the timing for interest rate adjustment – as to when, she summed it up; “it depends” on developments in the economy.

This of course is what the Fed has been saying all along, while self-interested commentators try to bend or twist Fed-member words into calendarized commitments. Remember the famous “September taper” commencement that wasn’t?  Sure made and lost some market players a lot of money along the way based on completely false assertions that the “Fed said it”– which it didn’t.  In the case of the most recent rumor-mongering about a Fed “surprise” interest rate hike to jack up market volatility and drive down supposed stock speculation (and thereby help traders who are short and wrong), Yellen’s indirect but clearly intended denial of a stock bubble surely took the wind out of the true speculators’ sails.

As one commentator put it right after the Fed meeting: it’s time to stop expecting a surprise from the Fed when it has made two themes perfectly clear. First, it will do what it takes to get employment back to more normal levels and, second, that its timing of eventual interest rate normalization “depends” on a broad range of measures — not just inflation — of how the economy is performing.

Interestingly, Yellen and the Fed may have finally found a way to communicate most transparently about the very uncertainty surrounding its projections and why it will continue to fight efforts to formulize or calendarize the future course of interest rates beyond the principles it has laid out. 

By publicly acknowledging this uncertainty and the diversity of views within the Fed by  revealing the broad range of 2016 interest rate projections (from 0.5% to 4%) among the Committee members around the “central tendency”– which it lowered to below 4% (see my prior blog – If 2% Is The new 4%) — the Fed made clear that the only “surprise” for the markets would come from the economic data, not from the Fed. Moreover, this level of transparency about diverse individual member views may have helped Yellen to achieve unanimity around a consensus policy. Today’s Supreme Court can only dream of speaking with one voice so credibly.

Markets crave certainty, of course; but in the immortal word of the great economist Mick Jagger, “You can’t always get what you want, but if you try sometime, you just might find, you get what you need.” What the Fed speculators got from Yellen was The Big Chill.

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Recently published on The Huffington Post

 By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

 

 

 

 

If 2% Is The New 4%, Where Would The Economy Go From There? Let’s Think It Uber!

 

One of the most provocative articles in the financial media relating the economy in recent weeks was a brief note by CNBC contributor Ron Insana — one of the folks on that network who consistently knows what he is talking about  —  calling attention to the determination of the major central banks to treat the threat of deflation (not inflation) as pubic enemy number one in a battle he concluded would last as long as the decade it took to bring inflation to heel in the 1980’s in the US. And if he is right in his thesis, we probably need to re-examine the conventional premise that, if and when the central banks succeed in bringing economic conditions back to normal, would that really mean a base interest rate of around 4% as in the past, or would a number much closer to 2% be the new normal? And how would that change our perspective on likely economic behavior around three major pillars of US economic activity: housing, autos and finance?

Insana’s point was brought home the same week by the extraordinary policy actions of the European Central Bank (ECB) cutting its base interest rate to .15% from .25%, and reducing the interest it pays on deposits with the Bank to a minus .10 %, as well as a new targeted long term refinancing operation to inject even more liquidity into the system in the face of persistently low inflation to try to stimulate more economic activity to boost Euro Zone GDP out of its near-zero state.  In the words of London’s Financial Times on June 5, this was a “bazooka” move that would reinforce market perceptions that the ECB would actually keep its commitment to fight the real potential of a deflation spiral that has flattened the Japanese economy for over a decade. Markets first reacted skeptically by bidding up the Euro, but that short term move eased off as economic data continued to come in toward negative growth.

Remember: inflation erodes the purchasing power of the country’s currency and tends to favor debts – they pay back their bonds with cheaper money, so lenders demand higher interest rates to compensate. But deflation erodes wages, prices and asset values (like stocks and houses) so it also has a negative effect on purchasing power despite the lower prices that go along with it. Central banks have proven they can whip rampant inflation (at the cost of high interest rates and recessions if necessary), but are only experimenting with how to reverse deflation because they know their tools are limited. There is only so low interest rates can go – even into the negative – while rates can be raised to a theoretical infinity (Paul Volcker in the US got them to 20% for a time, as Insana points out, but he won the battle and the war against severe monetary depreciation.) It’s understandable that central banks would want to nip deflation in the bud. Volcker’s war took ten years; why would we expect a harder battle against deflation to take less time? If so, one begins to consider the possibility, along with Insana, that low rates will be with us a lot longer than most expect.

Eurobond prices have surged to new high, bringing interest rates down to levels not seen since Napoleon’s time as the market has been warning of incipient deflation – and to some degree betting that ECB President Draghi will be forced to a full-blown “quantitative easing” bond buying program as in the US. He signaled again he might be inclined towards this with his “we aren’t finished” statement accompanying the recent rate cut decision. In that event, today’s expensive looking Eurobond purchases will look cheap when the holders sell out to the ECB at even higher prices! So we can see the trap Draghi is caught in — the more he does to combat deflation (which he must lest Europe return to recession), the further he drives down rates with programs that will tend to keep interest rates quite low. In turn, such low rates put a downward pressure on US interest rates as investors pay up marginally for a safer bet on government and corporate debt here. Whatever one’s questions may be about the absolute strength of the US economic recovery, no one seriously argues that it is not far stronger relatively than Europe’s, even with our wintry negative growth in Q1 2014. Europe would pay ransom to get the 3%+ growth now expected for the US in the current quarter.

 Despite this resurgence in growth, the US Federal Reserve is expected to maintain its tapered pace of reductions in bond buying and has insisted that even after that program ends and unemployment is reduced to .5% or better in the coming year, it nevertheless will not quickly move interest rates up to track the growing economy. Even if inflation hits 2%. It stated after its last meeting on April 30 that economic conditions may “for some time” warrant keeping the base interest rate “below levels the Committee views as normal in the longer run”i.e., 4%.

 If CNBC’s  Insana is right that the “longer run” path to vanquishing the threat of deflation could take  at least a decade, then the Fed is only half way there now, and halfway to 4 is indeed 2. Seasoned investment managers like Mohammed El-Erian, late of PIMCO, have begun referring to “lowflation” fears as pressuring bond yields and Central Bank rates down. Although El-Erian said in the Financial Times on June 6 that he believes that the policy moves should ultimately result in a “self-correcting”  move out of bonds riskier assets, thus normalizing rates to the conventionally expected levels, he does allow that the move downward in rates could also become self-reinforcing due to unforeseen events (like Ukraine). If that is the case, the sense that 2% might become the “new” new normal (ironically, a nomenclature first traced to El-Erian and PIMCO) that needs to be taken seriously.

 Here’s what could happen. While mortgages would be cheap, price appreciation expectations for homeowners would be significantly reduced. A long battle with deflationary tendencies would make renting more attractive as an ordinary feature of middle class life, simply because it is economically smarter. Similarly, not owning a car might become more of a new normal, especially when Uber is replacing a taxis and has an $18 billion valuation in just five years of existence. Maybe the millennial generation sees what is coming. Better not to be an owner if deflation threatens the endurance of asset values.

 Finally, financial institutions would have to come to terms with the constraints of the Dodd-Frank law and find new wisdom in Shakespeare’s “neither a borrower nor a lender be” and drift toward Ben Franklin’s “a penny saved is a penny earned.”

Renting a house, snagging a ride on your smart phone, and de-leveraging your balance sheets would truly be a new American way, with tremendous implications for policymakers including the Fed if a geopolitical or natural disaster hit and it was stuck at an already low interest rate.   As noted investor Ray Dalio –- who is very familiar with the roots of the current Euro-deflation crisis – said, this situation would leave the Fed with little leverage  itself to stimulate an economy under attack. Then we could indeed all be Japan! The first clues to whether we are headed in this direction will be to ‘connect the dots’ in the Federal Reserve members’ interest rate projections over the next couple years that will be released as part of their quarterly economic forecasts at the June 18-19 meeting. Here’s a bet there won’t be many 4%ers and more than a few 2%ers.

 

Recently published on The Huffington Post

 

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

 

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

 

 

 

 

 

 

What Will Be Summer 2014’s Big Story? A Top Ten List Of Candidates

As spring warms its way to summer, the seasonal lists just keep coming: the top ten beach reads; the likely best (and worst) of the upcoming summer movies; and even ten great  films about summer!  But all is not frivolity, as recent summers have shown. Every summer has its big story. But at least in 2014 the most serious summertime event will not likely be about a soon-to-come government shutdown, triggered on the last day of summer 2013 by a vote in the House of Representatives to keep funding the US only if ObamaCare was defunded. Nor will it concern the 2012 Presidential nominating conventions and campaign, although the 2016 race has certainly already started and everybody but California Chrome seems to be running. Neither will the Greek-triggered Eurozone sovereign debt crisis that emerged in 2010 repeat itself, although Europe still has its troubles.

The summer of 2014 will have a lead story all its own, and there are already many candidates for top honors. So follows a suggested “top ten” list of the stories most likely to dominate the news (if not the beach reading) this summer. There will always be surprises and sports stories (after all, there will be the World Cup in Brazil and the NBA finals will finally be, final), but let’s leave those matters aside and concentrate on this blog’s sense, in ascending order of likelihood, of the issues and events with the greatest potential impact on world affairs in the coming three months.

#10. The Global Climate Debate: Of course we always have big weather stories in the summer, including the California fire season and the annual hurricane risk prediction  — this year tempered by the expected emergence of a new El Nino that could also bring relief to the California drought. But both drought and storm severity have become entwined in the ongoing debate as to the reality, let alone any possible mitigation, of climate change, so that any particularly acute aberrations in summertime weather will have broader consequences than those inflicted in the ‘cone of uncertainly’ that accompanies them. Moreover, the issue of the reliability and adequacy of government technology resources that has emerged in the case of ObamaCare and even the Veterans Affairs scandals has now also been attached to the Weather Bureau’s IT!  Stay tuned for your local forecast.

 

#9. The Iran Nuclear Negotiations and Sanctions: lately the main event in the sanctions world has regarded those applying to Russian oligarchs and commercial interests in the wake of the Ukrainian crisis. But key decisions on the issue of Iran’s nuclear ambitions and related sanctions are due this July.  Time will tell whether Tehran (or Tel Aviv) will be “Happy Dancing.”

 

#8. Benghazi: Yes, the GOP would like this item higher on the list, and Hillary Clinton would like it off the list, but there will be plenty of theater, if not blood, so this item might just wind up at least on the top ten video list, even if the next hearing doesn’t produce anything new apart from John Kerry’s take on it all.  After his Syria, Mideast and Kiev problems, Secretary Kerry may find a House Committee a relief, although they are not likely to confine themselves to the Benghazi matter in his presence. The temptation will be too great to resist.  

#7. Pope Francis: A son of the Church and a born news maker, can it be that he will also shake up the Middle East as well as his own flock? Don’t bet against it. He is already there, attempting to convert a dying peace process with at least a living prayer process with a meeting at the Vatican with the Israeli and Palestinian presidents.  Camp Francis, perhaps?  Plus he has round one of his own summit of bishops coming up to take on the question of Catholic teaching on the family and sexuality – that ought to make the fall top ten list.

#6. NSA Reforms: No secret that this issue remains front and center at the moment, with the House of Representatives’ recent approval of legislation to rein-in collection and perusal of mass telephone call records by the NSA, requiring a court order to obtain such records from the phone companies (who will now be the ones to keep them) on persons with certain degrees of connection with suspected terrorists. No side of the debate is quite satisfied, so this issue is predicted to be “the fight of the summer” on Capitol Hill. Hopefully, some news anchor or other will ask Edward Snowden how many Presidential daily security briefings he studied before unilaterally deciding to declassify a large part of the NSA. 

 

#5. The Veterans Administration’s Hospital Scandal: The search for accountability goes on, including calls by certain lawmakers to bring the Justice Department into the process, which shows a growing lack of confidence in any internal VA inquiries, and guarantee that this wrenching news will take the summer to ‘get to the bottom.” But meanwhile, why not let vets who can’t get immediate care (both physical and mental) use and bill the government for private doctor and hospital system, which would in effect be an extension of the ObamaCare principle of subsidized private insurance. Perhaps if the GOP could swallow that analogy, the Administration might look more favorably on idea advanced by some politicians to privatize all or part of the VA health care system

 #4. Ukraine and Europe: One might say they deserve each other but will never find happiness. Europe, the feckless sanctioner of Russia; Ukraine the debt-ridden oligarchy in need of US aid to pay its gas bills to Russia. And what of Russia? Putin actually lost effective control of the whole country and has spun this defeat on the Street as somehow a victory over Obama in capturing his own port with masked Special Forces and probably ruining the Black Sea tourist trade in the process. Cry me a river! Sanctions have at least staved off an invasion that spared enough of a Presidential election that even Obama could claim a victory of sorts that the election was accomplished despite Russian provocations (but no invasion – thank you, sanctions)! Meanwhile, just when Europe should be grateful that it has NATO and the EU to keep it from complete subservience to the same Russian gas pipeline that serves Kiev, its voters seemed to take out their economic frustrations on those same EU institutions. Spare us, at least for the summer.

#3. The US Supreme Court: From corporate contraceptive insurance policy to patent trolls, ( where Congress has just punted on reform in the face of divided tech industry), the Justices will hand down over a dozen decisions in June that will involve several high stakes business cases . But the big focus will be on whether family-owned businesses (but not IBM or Apple or other public companies) can claim religious exemptions to ObamaCare rules. By next summer, the big case will be about gay marriage.

#2. Immigration: Put up or shut up time for both the Congressional Republicans and the President. Harry Reid has called the question by offering to delay reform past Obama’s term, and we should know by August whether the House of Representatives will act, and how. For the November polls, this could be bigger than ObamaCare was in 2010. 

#1. But in terms of maximum electoral importance, it’s still The Economy. Will we recover from essentially zero growth in the first quarter to GDP levels that can bring us in at 3% or more for the year as we finished 2013? Or was the Q1 slowdown about more than weather? And will the bond market continue to trade as though another recession may be coming, while stocks trade sideways and even into bear territory for high multiple tech and biotech names (another sign of growth fears)? Certain observers confidently predict a market crash in the next several months; others think the Federal Reserve will flinch from its withdrawal of stimulus  because it’s been wrong about the strengthening path of the economy. Either event would be a big summer story. But the sense here is that the Fed has been right all along despite the market’s misgivings: it’s not going to take a way the punch bowl, it just will finally stop spiking the punch with QE bond buying, and the economy will get back above 3% growth for the rest of the year — the best summer news of all.

Previously published on The Huffington Post

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

 Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The cNew Normal In Higher Education.