Friday, March 25, 2011

You Die Today; I'll Wait Until Tomorrow

During the Stalin years of the Soviet Union, the nation became so destitute that eye witnesses reported that the bare earth appeared to actually be moving because the mice, rats, and other vermin were frantically searching for anything to eat.  Two men who escaped from the Soviet Union in that period knew that they had crossed the border when they found a discarded paper bag with a few crumbs left from a meal and a couple of used paper items.  Surely no one in Mother Russia would ever toss away such wealth, so they must be have made it to a neighboring country.  Neighbors betrayed neighbors as traitors to the government in order to get their government-issued apartments, since that was often the only way a young couple could hope to get their own place.  And the Soviet people coined saying in Russia which became something of a national motto, "You die today; I'll wait until tomorrow."

The small business community in the United States might want to adopt a similar mantra, considering the overall attack on small businesses taking place right now.  In fact, one of the single biggest attacks ever launched on a single industry happened April 1, and much of the non-real estate world does not even understand the implications.

We have spent weeks talking about the NAMB and NAIHP lawsuits against the Federal Reserve and the negative consequences to the housing industry and to consumers and small business owners involved in real estate. Two weeks ago,  Mike Anderson, government affairs chair of the National Association of Mortgage Brokers, put out a video warning of the potential consequences to all businesses of the Federal Reserve Rule.  I am attaching a link to Mike's video here so that you can see it for yourself.   What Mike is saying here may appear alarmist, but the truth is that the Federal Reserve has set a precedent right now which will reverberate through our entire country. 

First of all, under the guise of protecting consumers from "unfair and deceptive practices" the Federal Reserve and its legislative partner, the Dodd Frank bill, regulate the amount of money that independent self-employed business owners can charge for their services.  Our compensation is not controlled by market conditions, or consumer willingness to pay; it is actually written into law.  Second, the way in which we can be compensated is also regulated.  Dodd Frank is setting specific guidelines determining who can pay us, how we can be compensated and who cannot pay us.  We are not government contractors; we do not receive tax payer funds; we are independent small business owners who took risks and started our own companies with our own overhead and our own expenses, but our ability to set our wages is now being dictated by the government.

Another troublesome point in the Federal Reserve Board's interpretation of Dodd Frank in its new ruling is the animosity towards profitability that is being openly displayed.  In its various "clarifications" of the new Fed Rule, the Federal Reserve board keeps telling us that "profits are problematic."  Branch managers cannot be paid based on the profitability of their branches because "profits are problematic."  Prior to implementation of the Fed Rule, the Federal Reserve Board hosted a webinar which I did not participate in. According to those who did, one of the issues raised during the webinar was the matter of a mortgage broker selling his or her business for a profit.  Apparently the Federal Reserve Board attorneys believe that making a profit from the sale of a small business involved in loan originations is also a deceptive practice.

What is interesting about the FRB's problem with profit is that it is in direct conflict with IRS guidelines for small businesses.  The IRS uses profit to differentiate a business from a hobby.  So while a new business starting out is expected to have tax deductible losses in the beginning, at some point that business is expected to become profitable and that profitability generates taxable revenue.  An enterprise which never shows a profit is classified as a "hobby" and the expenses connected with it are not tax deductible.

The IRS's position is a sensible one--in this matter anyway--because the tax code is written to allow business owners to start their businesses and grow them with the expectation that they will become money-making enterprises which will contribute jobs, and revenue.  In a capitalist society, profit is both good and necessary.

But now, suddenly, profit is problematic, and fees earned by the small business owners are "unfair and deceptive practices."  This is scary language which could, and may, spread to every industry. Someday business owners in every profession may have a government agency telling them how much they are allowed to earn, how much they are allowed to pay their employees and whether they can sell their companies and for how much.  In the meantime, the rest of the country is watching us die today, and waiting for their turn to come tomorrow.

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