American Exceptionalism vs. Socialism

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Ask your neighbors and coworkers whether it’s a privilege to be an American, and nearly all of them will answer with a resounding “yes.” But the rising new leaders of today’s Democratic Party see American privilege as a mass delusion standing in the way of their political ambitions. This was painfully evident last week during President Trump’s State of the Union address (SOTU).

SOTUs have traditionally been positive affairs. American exceptionalism is so everlasting that most presidents can find something in the national condition worth boasting about, and even their political opponents find something in the boasts worth applauding.

Not so this year. Having presided over the strongest economic expansion in generations, President Trump’s speech had no shortage of achievements, and the response of ordinary Americans was electrifying. According to a CBS News poll, 76 percent of Americans who saw the speech approved of it.

However, the response of Democratic lawmakers who attended the speech flew in the face of our political traditions, particularly that of a bloc of congresswomen wearing white from head to toe to commemorate the 100th anniversary of women winning the right to vote.

The “women in white” leered with contempt at the president throughout his speech. They ignored his call for unity and bipartisanship. About half, including newly elected loudmouth Alexandria Ocasio-Cortez, refused to join the rest of the chamber for a standing ovation when President Trump called upon the American people to “embrace the boundless potential of cooperation, compromise, and the common good.”

They sat stone-faced when the president touted the lowest ever unemployment among minorities and the disabled. They ignored his praise of new “right to try” legislation giving terminally ill patients access to experimental medicines. Same thing with America becoming a net exporter of energy for the first time in 65 years.

They remained somber even when President Trump announced his new Women Entrepreneurs Finance Initiative, which promotes the economic empowerment of women in developing countries.

Only when President Trump specifically hailed the achievements of American women — filling 58 percent of new jobs last year and being elected to Congress in record numbers — did members of the group feel obliged to stand en masse, essentially to applaud themselves.

The refusal of Ocasio-Cortez and other “progressive” Democrats to celebrate, or even acknowledge, the success and good works of other Americans, irrespective of ideology or creed, on this time-honored occasion is shameful and unbecoming of servants in public office.

But it’s politically astute. Proponents of the socialist Green New Deal — which now has the support of 70 Democrats in the House, 12 in the Senate, and six presidential candidates — know it’s impossible to get Americans to accept a one-size-fits-all blueprint for centralized planning of their lives and livelihood so long as they think of themselves as privileged.

For all of their divisive rhetoric and mainstream media adoration, Ocasio-Cortez and her ilk aren’t likely to convince a majority of the U.S. public that the American dream is a lie, at least not in time for the 2020 election. But they may convince enough people to enflame the social chaos and division we have been experiencing lately, and that might set a prelude one day for realization of their socialist fantasies.

President Trump is right that the state of our union is strong, at least economically and militarily, and a majority of Americans embrace his call to “step boldly and bravely into the next chapter” of this country’s glorious history. We must not let the ideological radicalism and hunger for power of a few destroy this future.

Zana Nesheiwat is the founder of Brand ZA, Inc., an integrated business solutions and impact-branding firm specializing in financial services, public policy, and technology, and an associate partner with Blackhawk Partners, Inc. a private equity firm based in New York City.

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Blockchain: U.S Regulation and Governance.

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Blockchain technology is far more than a buzzword. Dubbed “the Internet 3.0”, this distributed ledger technology known best as the data documentation for cryptocurrencies is changing our data management and transactions at breakneck speed. Blockchain technology has inaccurately been held as synonymous with Bitcoin. While Blockchain technology developed to create a foolproof transaction and payments system for Bitcoin, Blockchain goes far beyond crypto, and has now extended reach into countless industries, including government transactional systems. The differentiated structure behind this technology has made it a conundrum to most, and its decentralized base brings many questions to the table regarding regulation. Yet, it is absolutely necessary to understand the workings of this technology and so develop the most optimal regulatory dictates to ensure that the U.S. financial system, business and payment transactions swiftly and safely adapt to digital changes in the global marketplace.

BLOCKCHAIN METHODOLOGY

Blockchain technology is revolutionary in its checks and balances for accuracy, transparency and time to completion. While very technical in nature, we explain the basics of Blockchain. The Blockchain distributed ledger has these main attributes:

  • Recorded information is stored and time stamped.
  • The ledger of transactions is public and transparent.
  • The ledger is decentralized. Transactional information inclusive of contracts is sent to separate computers, or nodes in the Blockchain. This is called a peer to peer (P2P) network.
  • The ledger transactions have what is called a hash function that cryptographically maps information, or input, to ensure that there is a unique digital signature for each transaction step. Any minute change in transaction creates a separate hash. This function ensures that there is no deliberate fraudulent duplication of any one transaction.
  • Transactions and processes within the Blockchain need consensus to be sealed. To prevent malicious blackhat processes or unforeseen crashes, the Blockchain system triggers “Byzantine Faults.” Byzantine Fault Tolerance (BFT) mechanisms require repetition of the same data from each transaction in each node until full consensus is reached. Nodes require a “proof-of-work” consensus to validate transactions in the fastest possible time, which is also part of data mining.

The explanation above is deceptively simple, yet very powerful in terms of speed and transparency. We see that while Bitcoin and other crypto currencies appear to be widely speculative, the actual Blockchain technology is purely methodical, and highly useful in shaping failsafe transaction structure. Naturally, the most concerning feature of Blockchain transaction is its decentralized system. While each Blockchain transaction process may be accurate, the players on a P2P decentralized network can be fraudulent. For example, a private Blockchain set up by a drug cartel can have perfectly accurate transaction processes. Regulation and tracking standards are definitely needed when it comes to the Blockchain.

U.S. BLOCKCHAIN REGULATION

Thus far the U.S. Government has shown support for the development of Blockchain regulation and governance within the context of the technology’s growth and expansion. U.S. Congress has created the Congressional Blockchain Caucus to handle legislation pertaining to Digital Ledger Technology (DLT) and cryptocurrencies. In September 2018 co-chair of the Congressional Blockchain Caucus Tom Emmer (R-MN) introduced the “Resolution Supporting Digital Currencies and Blockchain Technology” bill, the “Blockchain Regulatory Certainty Act” and the “Safe Harbor for Taxpayers with Forked Assets Act.” These bills encourage the federal government to monitor Blockchain entities that may or may not need to register as money transmitters. Moreover, the bills provide suggestions for taxation of digital assets via crypto taxation guidance. Thus far under IRS Notice 2014-21, digital currency is treated as property rather than a foreign currency. According to Emmer, the US private sector needs clarity when it comes to Blockchain technology in order to lawfully expand innovation and growth.

Congressman Emmer’s legislation has since been complemented by U.S. Representatives Darren Soto and Ted Budd through the introduction of “The Virtual Currency Consumer Protection Act of 2018” and the “U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018.” These bills provide recommendations to the U.S. Commodity Futures Trading Commission (CFTC). Both bills focus on cryptocurrencies with regards to price manipulation, and examine U.S. Blockchain technology regulation in the global cryptocurrency universe. It is noteworthy that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) delineates virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.” In addition, Representative Warren Davidson (R-OH) has announced his plan to introduce legislation for the development of a new token asset class to facilitate regulation of initial coin offerings (ICOs). Representative Davidson has also offered suggestions for using Blockchain technology for the creation of ‘wall coins’ to fund the border wall between the U.S. and Mexico.

U.S. PUBLIC SECTOR BLOCKCHAIN IMPLEMENTATION

While U.S. Blockchain regulation is still in the infancy stages, Blockchain technology implementation within various public sector departments shows steady growth.
In 2018 the U.S. Food and Drug Administration (FDA) took steps to implement a Blockchain tracking system along the supply chain to increase food safety, especially in light of the nationwide E.coli scare that occurred with Californian romaine lettuce. The U.S. Department of Homeland Security (DHS) has currently employed Blockchain technology in its forensic analysis of criminal activity regarding both public and private cryptocurrencies. The U.S. Customs and Border Protection (CBP) and Transportation Security Administration (TSA) currently have request for proposals regarding Blockchain documentation solutions for accurate identification and fraud prevention. The U.S. Air Force is implementing Blockchain solutions in personnel training to build systems for proper security and logistics. And at the state level, Washington’s Douglas County Department of Commerce is set to pour funds into an entire Blockchain innovation campus.

BLOCKCHAIN OPERATIONAL RISKS

Hossein Kakavand, Bart Chilton and Nicolette Kost de Sevres’ “The Blockchain Revolution: An Analysis of Regulation and Technology Related to Distributed Ledger Technologies” examine the operational risks associated with developing the technology. We highlight the following risks which should be addressed by U.S. regulatory institutions as the Blockchain governance framework takes shape.

Software:

Blockchain software operates in a decentralized fashion. Thus, each owner would have individual transactional access, unlike central clearing software. If a new release of Blockchain software is not evenly installed, the likelihood of immediate consensus transactions may be diminished in reliability as a viable Financial Market Infrastructure (FMI). Bandwidth also may pose a problem when it comes to decentralized Blockchain capacity. With growing number of permissioned and permissionless Blockchains, and heavier transactions both in complexity and volume, there is a question of how to handle both national and global capacity, and which governing entity may be the backup for such capacity.

Cyberattacks:

On January 5, 2019, crypto exchange Gate.io reported a hack of Ethereum Classic worth more than USD$200,000. Oddly enough, the money was returned to the Gate.io by January 12, leading crypto experts to believe the hack was done by an ethical whitehat hacker to delineate consensus and security faults in the Blockchain. The Blockchain is not fully secure, especially due to its decentralized nature. There needs to be more failsafe measures implemented per transaction, and per financial governing entity to safeguard against cyberattacks.

Accountability:

There is an old saying, ‘who will guard the guards?’ This rings true for players in the Blockchain. One of the strengths of the Blockchain prides upon removing intermediaries, thus creating more transparency. However, the players in each transaction need to be savvy in understanding how peer to peer networks operate. Since only a limited percentage of potential users understand the Blockchain, we have systemic operational risk, which can only be mitigated with structured and practical education. In addition, and even more concerning is how to identify a definite entity responsible for ‘crucial repair’ should the Blockchain suffer collapse, as no governing body is formally responsible for maintaining the Blockchain. To date, technology firm R3CEV has lead a sizable consortium of financial institutions for distributed ledger standards, procedures and safety measures. Regulatory bodies may find it highly beneficial to work with such consortiums to form common Blockchain disaster response standards.

Distributed Ledger Technology (DLT) is here to stay, and it bodes well for U.S. industry to steadily adopt the technology in supply chain logistics, transactions and payments, while considering a combination of more traditional transaction methods to ensure diversity and safety in commerce. We are heartened to see such bipartisan support for the development of Blockchain technology for U.S. innovation, and encourage U.S. regulatory bodies to work with private sector institutions to properly formulate Blockchain standards.

SOURCES:

Kakavand et al. “The Blockchain Revolution: An Analysis of Regulation and Technology Related to Distributed Ledger Technologies.” SSRN Online. 2017.

Lanz, Jose Antonio. “U.S. Congressman Tom Emmer to Lead Pro-Blockchain and Crypto Legislation.” Ethereum World News Online. 2018.

Lisk Academy. “Blockchain Basics.” Lisk Academy Online. 2019.

Suberg, William. “Two US Bills Focus on Cryptocurrency Market Manipulation and Improving Regulations.” Cointelegraph Online.

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Nonbank Lenders: The New Risk in the U.S. Mortgage Industry

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The US housing market in the past 10 years has been characterized by unusually long-lasting low interest rates and robust government-backed mortgage programs. These market conditions have allowed nonbank lenders to boom in the last decade. In 2018 there are several proposals brought forth by regulators looking to agree on a final housing finance reform solution – the single largest piece of unfinished business 10 years after the housing crisis. The problem with these proposals is that they put too much emphasis on traditional lenders such as banks and depository institutions, and not enough on the new risk-takers of the U.S. economy: non-bank lenders.

In the aftermath of the 2008 crisis, regulators and lawmakers implemented a myriad of regulations on banks’ lending practices, in an effort to prevent toxic mortgages. As a result, over the past decade most banks decided to either completely exit the mortgage lending business, or severely limit their mortgage lending to only the worthiest borrowers with stellar credit. This created a very large gap in the lending market. Enter the nonbank lenders.

These nonbanks are usually private institutions that offer limited transparency into their lending activities, and don’t fall under the same regulations as banks. Nonbanks are regulated by state financials regulators such as the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators. However, these organizations have not yet established uniform data and reporting standards – it is very much a work in progress. Thus, for the time being, nonbanks have the liberty to provide mortgages to less financially-qualified borrowers without much oversight.

As a result, in 2016, these nonbank lenders originated over half (53%) of all mortgages in the US. However, that 53% is mostly made-up of mortgage borrowers with lower credit scores. Most non-bank borrowers have less income/wealth, are less likely to have college degrees and are more likely to be minorities. They include 85% of all FHA borrowers, 64% of all black and Hispanic borrowers, and 58% of all low-to-moderate income borrowers. These groups tend to require loans with smaller down payments and have less inherited wealth to depend on in case of an economic downturn. The risk of defaulting on their payments is considerably higher.

While these nonbank lenders are filling in the funding gap and provide financing to a very large demographic that is not being serviced by the traditional lenders, they are exposing themselves and the lending industry to huge risks.

Unlike traditional banks, which handled all three main mortgage functions (origination, servicing and funding), nonbanks only handle the origination and servicing part, while using borrowed funds from banks. Nonbank mortgage lenders depend on credit to finance their origination costs and costs of mortgages in default. Most nonbanks are required to continue making payments to investors, insurers and tax authorities even when their borrowers skip or default on their payments. Also, nonbanks’ creditors – the warehouse lenders – can decide to pull or renegotiate their lines of credit, leaving nonbanks illiquid. Declines in house prices, a rise in mortgage defaults, or sustained rises in long-term interest rates, could each prove fatal to the nonbank lending companies. These multiple points of failure make it a very risky business.

While taking most of the risk, unlike banks, non-bank lenders have extremely limited resources available to survive an economic downturn. Only six percent of their assets are cash, while seventy percent of the nonbanks’ assets are mortgages held for sale. This means that they are used as collateral for their lines of credit and cannot be used by the company to cover any losses. To make matters worse, as of end of 2017, eighty-three percent of nonbanks’ debt was in lines of credit with maturities of less than a year. When that year is over, there is a high risk the interest rates will increase. Without the resources available to banks, such as the Federal Reserve and the Federal Home Loan Banks, nonbanks have no liquidity backstop – absolutely no safety net – in the event of an economic downturn. This could prove catastrophic to the U.S. economy.

The Housing Reform Act is currently underway but most of the rules and regulations proposed are focused on the traditional bank lenders and GSEs, while all but ignoring the rapid rise of nonbank lending and the risks that come with it. If nonbanks were to fail, the U.S. government (taxpayers) would still have to financially cover the losses through FHA, VA, GSEs or Ginnie Mae. From our perspective as taxpayers, it would be a similar situation as the 2008 crisis, but instead of bailing out banks, we would have to bail out nonbanks. We cannot let this happen.

The regulators must take a more active role to address the regulations of the nonbank lending sector, similar to the traditional banking regulatory framework. Regulators must find a way to either limit the nonbank’s sector exposure to risk, or ensure nonbanks secure the resources necessary to sustain themselves in an economic downturn, or a combination of both. Regulators must finalize the state prudential minimums for nonbanks. In addition to net worth, capital and liquidity requirements, this new regulation must consider all factors that determine the nonbanks’ risk, such as maturity and capacity of their debt facilities, business model, and their hedging strategies. To do so, regulators must immediately address and correct the lack of access to data (nonbanks are mostly private) and the lack of staff and resources dedicated to the regulation of nonbanks. They pose an enormous risk on the U.S. economy – comparable to that of the 2008 mortgage crisis – and thus, must be treated accordingly.

Sources:

Forbes: Banks Are Not Lending Like They Should

Federal Reserve: The Decline in Lending to Lower Income Borrowers by the Biggest Banks

Brookings Institute: Mapping the Boom in the Nonbank Mortgage Lending

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Regulating Social Media – Yeah or Nay

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social-media-post

How safe do you feel on social media? On the one side, we have huge proponents of social media saying that it should remain unregulated so people can practice their freedom of speech, engage in meaningful conversations, and share opinions. On the other side, there are people who support its regulation claiming that it has become a public menace.

And from a user’s standpoint, it does seem important to be able to share and express yourself freely. However, the recent social media scandals, such as the Cambridge Analytica, banning Alex Jones from social media, spreading fake news, hate speech, and the fact that terrorists use it for recruitment shows us the other side of the coin.

Is social media coarsening public discourse and lowering the quality of journalism? It definitely does.

Social Media Censorship

Is social media censoring us and how? For example, this analysis shows how Google systematically stifled the content by the author Doug Wead from being available in Google search results and on YouTube. Last year, Media Matters issued a memo explaining how social media platforms can collude to eradicate what they feel to be “fake news” or “right-wing propaganda.”

Social media platforms are increasingly accused that the Silicon Valley elite is excluding other people’s views, and these recent scandals show how vulnerable our democratic society can be to the power of social media. Many of us treat them as a part of our daily lives, where we connect, communicate, and share our values and opinions.

Do Tech Companies Consort to Evil for Profit?

In March 2018, Washington Post published an article to remind the public about the relationship between the IBM and Nazi regime. Namely, Thomas J. Watson (IBM president) returned the medal he received from Adolf Hitler himself because the Fuhrer started a war, which was “contrary to the cause which he has been working and for which he received the decoration.” However, he didn’t say that he will terminate the relationship, and actually continued to do business with the Nazi regime.

Mark Zuckerberg resorted to the same type of “ignorance.” Leaving Facebook and Twitter to self-regulate their platforms is dangerous, but should we cede power over private companies to the government? In the digital space, we may sacrifice our liberty by doing that.

Two Dark Sides of Social Media

With no regulatory supervision, companies such as Google and Facebook use techniques common in casino gambling and propaganda (such as rewards and constant notification) to foster psychological addiction. The other side is geopolitical, where social platforms are used to inflict harm on the powerless in commerce, foreign policy, and politics. They can be exploited to undermine democracy.

Saying that the government should regulate social media as alcohol or tobacco may be too harsh, but the fact that private individuals and companies control the flow of information and saturate their platforms with the information they want can be considered as another form of media manipulation and manipulation of an enormous part of the human population. Yes, it is a valuable tool for spreading the right information and the truth, but the truth can easily be lost in a sea of irrelevant news.

We need more than just self-regulation, but content disclaimers and verification systems. We need social media to give liberty to the people and not be used as a weapon that is not held accountable to legal standards. However, we are left to see what will be the rules, and the proponents and opponents need to find common ground.

The Financial Policy Council is there to inform the public about all current fiscal and economic matters. Whatever social media regulations might be introduced in the future, we are here to inform, educate, empower with our accurate research on key policy issues.

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What Does It Take to Be a BIG Disruptor?

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Today, almost every new technology is being called “disruptive,” and it’s mostly because that specific word has been overused for so long. It became a cliché, but there are situations where it fits perfectly. Some revolutionary companies, like Aereo (the television streaming company) and Uber (the ride-sharing app,) have entered the market and used their potential to disrupt the way their industry operates.

These innovations are known as the “big bang disruptors” and were evident in hypercompetitive markets, such as computing, gaming, and electronics. However, they have moved into other industries as well, and now there isn’t an industry that hasn’t experienced an enormous transformation due to these big bang disruptors.

Have you asked yourself what does it take to be a significant disruptor? Here is what you should know about it.

  1. Listen to Visionaries

Who should we consider a visionary? Anyone from your employees who have decided to move from one to another successful startup because they see a more promising future, to industry thought leaders like Elon Musk or Steve Jobs, who are persistent in chasing the dream of the future. They are the truth-tellers because their lives depend on it, and they can show us things that are not so obvious. And besides the truth-telling people, future market demand can be indicated by crowdfunding campaigns and today’s enormous data sets.

  1. Experiment

The most innovative products used to be developed by the companies with the most robust R&D (Research and Development) departments. Today, small tests can be conducted without enormous budgets. Experiments with the potential to grow into disruptive ideas. The risk and cost of experimenting are getting low.

  1. It’s Also about Timing

No, it’s not a matter of luck because luck plays such a small role. Take Amazon’s Kindle for example. Jeff Bezos has decided to avoid all the problems that other e-readers were encountering with the technology, waiting for it to mature. When it hit the market, it wasn’t the first e-reader out there, but it was the best. That’s how the timing was crucial to the success of a big bang disruptor.

  1. Handling the Quick Scaling

Once a disruptive product enters the market, it creates an enormous demand. However, such quick success comes as a challenge because you need to be prepared (logistically) for fast business growth. Consider finding partners or outsource ahead of time to get help when needed.

  1. Stay Competitive

Once you make a disruption, new iancumbents will start flowing into the market, trying to get their piece of the cake. Every product has a saturation point – when the user base peaks and then continue to fall. Give your best to anticipate your product’s saturation point.

  1. Think What You Can Do Next

At one point, things will start slowing down, but you will be prepared. Plan your next move before the fire starts dying down and sell your assets before they turn into liabilities. Use your money to develop the next product or start reducing your expenses early on. Don’t use all your resources to that one breakthrough product.

In the beginning, you were a disruptor. Later, you will also become susceptible to disruption. Anticipate threats to stay alive, and realize that you’re being slowed down by your product that was once a disruptive innovation. Quit while you’re ahead and avoid ending up spending vast chunks of your profits trying to save an industry in decline.

For a peek into the future and getting a clue about emerging industries and markets where you may enter as a disruptive entrepreneur, there is the Financial Policy Council. To us, America is the land of opportunity, and we want to inform, educate, and empower entrepreneurs by helping them understand, support, and recognize the issues and opportunities of their concern.

Come join us and be part of decisions that will shape the country’s future and the world.

August 4, 2018

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